Item 2. Management’s Discussion and Analysis of Financial Statements and Results of Operations
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on our management’s beliefs and assumptions and on information currently available to them. For this purpose, any statement contained in this report that is not a statement of historical fact may be deemed to be forward-looking, including statements about our revenue, spending, cash flow, products, new customer acquisitions, trends, actions, intentions, plans, strategies and objectives. Without limiting the foregoing, words such as “may,” “hope,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “project,” “intend,” “budget,” “plan,” “forecast,” “predict,” “could,” “should,” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risk and uncertainty, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to economic conditions generally and in the industry in which we and our customers participate; the impacts of the COVID-19 pandemic and our ability to react to those impacts; cost reduction efforts by our existing and prospective customers; competition within our industry, including competition from much larger competitors; business combinations; legislative requirements or changes which could render our services less competitive or obsolete; our failure to successfully develop new services, and/or products or to anticipate current or prospective customers’ needs; our ability to retain existing customers and to attract new customers; price increases; employee limitations; and delays, reductions, or cancellations of contracts we have previously entered.
Forward-looking statements are predictions and not guarantees of future performance or events. Forward-looking statements are based on current industry, financial and economic information, which we have assessed but which, by its nature, is dynamic and subject to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. We hereby qualify all our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of their dates and should not be relied upon. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise (other than pursuant to reporting obligations imposed on registrants pursuant to the Exchange Act) to reflect subsequent events or circumstances.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes contained elsewhere in this report and in our other filings with the Commission.
Throughout this quarterly report on Form 10-Q, unless the context indicates otherwise, the terms, “we,” “us,” “our” or “the Company” refer to Pacific Health Care Organization, Inc., (“PHCO”) and our wholly-owned subsidiaries Medex Healthcare, Inc. (“Medex”), Industrial Resolutions Coalition, Inc. (“IRC”), Medex Managed Care, Inc. (“MMC”), Medex Medical Management, Inc. (“MMM”) and Medex Legal Support, Inc. (“MLS”) and Pacific Medical Holding Company, Inc. (“PMHC”).
Overview
We incorporated under the laws of the state of Utah in April 1970, under the name Clear Air, Inc. We changed our name to Pacific Health Care Organization, Inc., in January 2001. In February 2001, we acquired Medex Healthcare, Inc. (“Medex”), a California corporation organized in March 1994, in a share for share exchange. Medex is in the business of managing and administering both Health Care Organizations (“HCOs”) and Managed Provider Networks (“MPNs”) in the state of California. In August 2001, we formed Industrial Resolutions Coalition, Inc. (“IRC”), a California corporation, as a wholly-owned subsidiary of PHCO. IRC oversees and manages the Company’s Workers’ Compensation Carve-Outs services. In June 2010, we acquired Medex Legal Support, Inc. (“MLS”), a Nevada corporation incorporated in September 2009. MLS offers lien representation services and Medicare Set-Aside (“MSA”) services. In February 2012, we incorporated Medex Medical Management, Inc., (“MMM”) in the state of Nevada, as a wholly owned subsidiary of the Company. MMM is responsible for overseeing and managing medical case management services. In March 2011, we incorporated Medex Managed Care, Inc. (“MMC”) in the state of Nevada, as a wholly owned subsidiary of the Company. MMC oversees and manages the Company’s utilization review and managed bill review services. In October 2018, we incorporated Pacific Medical Holding Company, Inc. (“PMHC”) to act as a holding company for future potential acquisitions.
Business of the Company
We are workers’ compensation cost containment specialists providing a range of services principally to California employers and claims administrators. Our business objective is to deliver value to our clients that reduces their workers’ compensation related medical claims expense in a manner that will assure that injured employees receive high quality healthcare that allows them to recover from injury and return to gainful employment without undue delay. According to studies conducted by auditing bodies on behalf of the California Division of Workers’ Compensation, (“DWC”) the two most significant cost drivers for workers’ compensation are claims frequency and medical treatment costs.
Our clients include self-administered employers, insurers, third party administrators, municipalities and others. Our principal clients are in the State of California where the high cost of workers’ compensation insurance is a critical problem for employers. We have processed medical bill reviews in 25 states. Our provider networks are composed of experts in treating worker injuries.
Impact of COVID-19 on our Business
In late 2019 the novel coronavirus, COVID-19, was identified. By February 2020, the virus had spread to many countries around the world, including the United States. By late February, authorities in the United States began advising American businesses to prepare for the effects of the outbreak. On March 19, 2020, the governor of California issued a stay-at-home order except for essential services, such as grocery stores, gas stations and banks. In mid-March 2020 we implemented our disaster recovery and business plan addressing how our business operations would be performed by our employees working remotely. As a result, since that time, nearly 100% of our employees have been working remotely and performing approximately 95% of our typical business functions, with the primary exceptions being certain manual, non-critical functions.
Even though we have been able to transition our work force and work flow to address the restrictions designed to “flatten the curve” of the COVID-19 pandemic, the extent of the long-term adverse effect of the COVID-19 pandemic on the economy, our industry and our results of operations and financial condition is unknown and largely dependent on future developments, most of which, including the severity and duration of this pandemic, are beyond our control.
Revenue for our services is derived from our employer customers’ employee counts and workers’ workplace injuries. Several of our employer customers, including some of our largest customers, have had to suspend or significantly modify their operations during the stay-at-home order issued by the governor of California.
The state orders have been modified to allow some categories of businesses to re-open under COVID-19 restrictions, while others, such as bars and restaurants, have been under various orders that have forced closures and re-openings several times. As of August 13, 2020, most client businesses are allowed to operate under COVID-19 restrictions but are continuing to experience drops in business volume and employee counts due to the pandemic.
The governor of California issued an executive order declaring that any employee who becomes ill with COVID-19 was presumed to have contracted the disease in the workplace if the worker worked onsite any time during the fourteen-day period prior to the onset of the illness. The presumption is rebuttable by the employer with sufficient evidence discovered within 30 days, but in many cases places the burden of medical care for COVID-19 cases on employers. The executive order was valid through July 5, 2020. A new California bill is being considered to address employer liability in Workers’ Compensation for COVID-19 cases contracted after the expiration of the Governor’s executive order. The bill is likely to include a requirement that a certain percentage of the employer’s workers be confirmed to have contracted the coronavirus before a rebuttable presumption of industrial origin is applied to individual cases, which may impact the extent to which Workers’ Compensation is used to address its treatment in California.
The Actuary Committee of the California Workers’ Compensation Insurance Rating Bureau is presently attempting to assess the impact of the COVID-19 pandemic on future claims frequency and costs in relation to historically traditional claims frequency during times of severe economic downturn. They are especially focused on post-termination claims, work-at-home arrangements, and the COVID-19 presumption.
For the first two and one-half months of the quarter ended March 31, 2020, the COVID-19 outbreak did not have a significant impact on our business. We began to experience some slowdown in claims in the last two weeks of March, which has continued into the second quarter of 2020. At this time, however, we cannot predict if, how or when our employer customers will be allowed to reopen/ramp up their operations, and when reopened/ramped up, whether those operations, employee counts and workplace injuries will be the same or less than they were before the outbreak of the COVID-19 pandemic. We anticipate that reductions in employee counts and workplace injuries will negatively impact our revenues and have an adverse impact on our results of operations and liquidity position.
On April 21, MEDEX was granted a Payroll Protection Program (“PPP”) loan for parent company Pacific Health Care Organization in an amount of $133,400. On April 30, 2020 and May 11, 2020 subsidiaries MMM and MMC were granted PPP loans of $267,700 and $59,600, respectively. Given the swiftly changing federal and financial policies surrounding the standards for loan payback and forgiveness, we are still analyzing use of the loan for payroll purposes. In the spirit of the PPP loan program policy of protecting the continued economic stability of employees, MEDEX did not consider executing a reduction in staff levels or hours until the PPP loan amounts had been expended in the intended manner.
In late June 2020, the reduction in volume in some areas of our business became clear as a trend. As a result, and after attempts to cut expenses in other areas, it became necessary to institute a business restructuring that included a reduction in force. After conducting an analysis of departmental demand, departmental function, projected business needs, and personnel, we laid off four employees on July 16, 2020.
While we have taken steps to render our business functions remotely, to deploy these measures effectively, and to do our best to ensure data security, there is no guarantee the measures we have taken will be completely effective, that our productivity will not be adversely impacted, or that we will not encounter some of the common risks associated with a remote workforce, including employees accessing company data and systems remotely. As discussed in greater detail in Item 1A Risk Factors of our Annual Report on Form 10-K, our business could be materially and adversely affected by the potential interruptions to our business operations arising from the COVID-19 outbreak.
In addressing the risk of COVID-19 cases and Workers’ Compensation claims within the Company, we have also implemented onsite measures recommended by national, state, and local health authorities to reduce the chances of transmission among our employees. These measures include an office reopening plan, phased policy measures based on local and state orders and our own risk assessment, compliance with ventilation and other building-level recommendations as made possible by the building owner, physical barriers and signage, limited onsite presence, pre-shift symptom screening, and other measures that as of the date of this report are recommended to reduce the risk of transmission of COVID-19 in office spaces.
Results of Operations
Comparison of the three months ended June 30, 2020 and 2019
The following represents selected components of our consolidated results of operations, for the three-month periods ended June 30, 2020 and 2019, respectively, together with changes from period-to-period:
|
|
For three months ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Amount Change
|
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HCO fees
|
|
$
|
325,247
|
|
|
$
|
400,840
|
|
|
$
|
(75,593
|
)
|
|
|
(19
|
%)
|
MPN fees
|
|
|
118,317
|
|
|
|
127,113
|
|
|
|
(8,796
|
)
|
|
|
(7
|
%)
|
Utilization review
|
|
|
251,728
|
|
|
|
286,555
|
|
|
|
(34,827
|
)
|
|
|
(12
|
%)
|
Medical bill review
|
|
|
82,083
|
|
|
|
125,080
|
|
|
|
(42,997
|
)
|
|
|
(34
|
%)
|
Medical case management
|
|
|
587,318
|
|
|
|
799,349
|
|
|
|
(212,031
|
)
|
|
|
(27
|
%)
|
Other
|
|
|
101,813
|
|
|
|
76,382
|
|
|
|
25,431
|
|
|
|
33
|
%
|
Total revenues
|
|
|
1,466,506
|
|
|
|
1,815,319
|
|
|
|
(348,813
|
)
|
|
|
(19
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15,363
|
|
|
|
17,989
|
|
|
|
(2,626
|
)
|
|
|
(15
|
%)
|
Consulting fees
|
|
|
61,664
|
|
|
|
70,007
|
|
|
|
(8,343
|
)
|
|
|
(12
|
%)
|
Salaries and wages
|
|
|
797,738
|
|
|
|
781,836
|
|
|
|
15,902
|
|
|
|
2
|
%
|
Professional fees
|
|
|
67,542
|
|
|
|
101,251
|
|
|
|
(33,709
|
)
|
|
|
(33
|
%)
|
Insurance
|
|
|
88,230
|
|
|
|
86,922
|
|
|
|
1,308
|
|
|
|
2
|
%
|
Outsource service fees
|
|
|
137,679
|
|
|
|
136,671
|
|
|
|
1,008
|
|
|
|
1
|
%
|
Data maintenance
|
|
|
13,084
|
|
|
|
57,319
|
|
|
|
(44,235
|
)
|
|
|
(77
|
%)
|
General and administrative
|
|
|
137,022
|
|
|
|
217,566
|
|
|
|
(80,544
|
)
|
|
|
(37
|
%)
|
Total expenses
|
|
|
1,318,322
|
|
|
|
1,469,561
|
|
|
|
(151,239
|
)
|
|
|
(10
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
148,184
|
|
|
|
345,758
|
|
|
|
(197,574
|
)
|
|
|
(57
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
148,184
|
|
|
|
345,758
|
|
|
|
(197,574
|
)
|
|
|
(57
|
%)
|
Income tax provision
|
|
|
(41,595
|
)
|
|
|
(97,054
|
)
|
|
|
55,459
|
|
|
|
(57
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
106,589
|
|
|
$
|
248,704
|
|
|
$
|
(142,115
|
)
|
|
|
(57
|
%)
|
Revenue
Total revenues during the three-month periods ended June 30, 2020 and 2019 decreased 19% to $1,466,506 from $1,815,319.
During the second quarter 2020, other fees increased 33%, while HCO, MPN, utilization review, medical bill review and medical case management fees decreased by 19%, 7%, 12%, 34%, and 27%, respectively. Other revenues consisted of revenues derived primarily from network access, claims repricing services, lien representation services, legal support services, workers’ compensation carve-out revenues and Medicare set-aside revenues.
In the second quarter of 2020, the State mandated stay-at home orders prompted many of our customers’ to temporarily close their workplaces. Employers that stayed open, did so with a reduction in employees. We generate our revenues on employee counts, workplace injuries and medical provider care and the stay-at-home orders directly impacted our revenues.
HCO Fees
During the three-month periods ended June 30, 2020 and 2019, HCO fee revenues were $325,247 and $400,840, respectively. The decrease was due to the loss of a customer and due to COVID-19 workplace restrictions that caused customers’ workplace closures and restructuring of customers’ workforces. As a result, fees generated to enroll employees into our HCO networks, monthly HCO program administration fees, and claim network fees for workplace injuries decreased, partially offset by an increase in revenue from an existing customer adding a custom provider network. HCO revenue is generated largely from fees charged to our employer customers for access to our HCO networks, per claim fees, notification fees and fees for other ancillary services the employer customers using our HCO networks may select. HCO notifications are mailed out annually and handed out by the employer for all new hires during the month. We prepare the mailings no earlier than three months prior to the end of the previous year’s enrollment so that our employers are able to prepare their employee rosters. Delays in the employer providing accurate and timely employee rosters can delay the notification process causing changes to when we record the revenues.
MPN Fees
MPN fee revenue for the three-month periods ended June 30, 2020 and 2019, were $118,317 and $127,113, respectively, a decrease of 7%. The State mandated stay-at-home orders resulted in fewer claim network fees for reported workplace injuries because customers’ workplace locations were closed. Like HCO revenue, MPN revenue is generated largely from fees charged to our employer customers for access to our MPN networks, per claim fees and fees for other ancillary services the employer customers using our MPN networks may select.
Utilization Review
During the three-month periods ended June 30, 2020 and 2019, utilization review revenue was $251,728 and $286,555, respectively. The decrease of $34,827 in the 2020 period was due to a decrease in utilization reviews submitted by medical providers because non-essential medical visits were halted due to COVID-19 concerns and the loss of a customer in the second quarter of 2020; partially offset by three existing customers adding utilization review in 2020. Our employer customers retain us to review proposals for treatment. Utilization review can provide a safeguard against unnecessary and inappropriate medical treatment from the perspective of medical necessity, quality of care, and appropriateness of decision-making.
Medical Bill Review
During the three-month period ended June 30, 2020, medical bill review revenue decreased by $42,997, when compared to the same period a year earlier. The decreases were due to the loss of a customer and a decrease in hospital and medical bills reviewed due to fewer medical visits during the COVID-19 stay-at-home orders. Medical bill review involves analyzing medical provider services and equipment billing to ascertain proper reimbursement. Such services include, but are not limited to, coding review and rebundling, confirming that the services are customary and reasonable, fee schedule compliance, out-of-network bill review, pharmacy review, and preferred provider organization repricing arrangements. These services can result in significant network savings.
Medical Case Management
During the three-month periods ended June 30, 2020 and 2019, medical case management revenue was $587,318 and $799,349, respectively. The decrease in medical case management revenue of $212,031 was due to a decrease in the number of claims managed with existing customers, coupled with fewer billable hours because of temporary closures of medical offices for non-emergency and non-essential services due to COVID-19 stay-at-home orders, partially offset by increases in medical case management for existing customers to oversee COVID-19 workplace illnesses and two existing customers adding the service. Medical case management keeps medical treatment claims progressing to a resolution and assures treatment plans are aligned from a medical perspective. Medical oversight is a collaborative process that assesses plans, implements, coordinates, monitors and evaluates the options and services required to meet an injured worker’s health needs. Medical case managers act as an ombudsperson between the injured worker, claims adjuster, medical providers and attorneys to achieve optimal results for injured workers and employer/clients.
Other
Other fees consist of revenue derived from network access, lien representation, legal support services, Medicare set-aside and workers’ compensation carve-out services. Other revenue for three-month periods ended June 30, 2020 and 2019, were $101,813 and $76,382 respectively. The increase in other fees of 33% was the result of increases in Medicare set-aside claims processed, partially offset by a customer’s decrease in utilizing our provider network, thus reducing the revenue from network access fees.
Expenses
Total expenses for the three months ended June 30, 2020 and 2019, were $1,318,322 and $1,469,561, respectively. The 10% decrease in expenses was the result of decreases in depreciation and amortization, consulting fees, professional fees, data maintenance, and general and administrative, which were partially offset by increases in salaries and wages, insurance, and outsource service fees.
Depreciation and Amortization
During the three-month period ended June 30, 2020, we recorded depreciation and amortization expense of $15,363 compared to $17,989 during the comparable 2019 period. The decrease in depreciation and amortization was primarily attributable to certain fixed assets being fully depreciated during the three months ended June 30, 2020, partially offset by the purchasing of new fixed assets.
Consulting Fees
During the three months ended June 30, 2020, consulting fees decreased to $61,664 from $70,007 compared to the three months ended June 30, 2019. The 12% decrease was the result of fewer consultant fees to assist with our insurance company acquisition search.
Salaries and Wages
During the three-month period ended June 30, 2020, salaries and wages increased 2% to $797,738 when compared to the same period in 2019. This increase was the result of increases in salaries to retain employees.
Professional Fees
For the three months ended June 30, 2020, professional fees decreased by 33% to $67,542 from $101,251 when compared to the three months ended June 30, 2019. The decrease in professional fees was the result of a decreases in accounting, legal expenses and medical case management fees and other professional fees.
Insurance
During the three-month period ended June 30, 2020, we incurred insurance expenses of $88,230, a 2% increase over the same three-month period in 2019. The increase in insurance expense was primarily attributed to the increases in medical insurance costs for employees for the three-month period 2020 compared to the same period 2019.
Outsource Service Fees
Outsource service fees consist of costs incurred by our subsidiaries in outsourcing some functions of utilization review, medical bill review, Medicare set-aside services and field case management and typically tends to increase and decrease in correspondence with increases and decreases in demand for those services. We incurred $137,679 and $136,671 in outsource service fees during the three-month periods ended June 2020 and 2019, respectively. The increase of 1% was an increase in volume from our customers that required outsource services for Medicare-set-asides partially offset decreases by due to the loss of a utilization review customer in the second quarter and fewer field case management services due to COVID-19 social distancing requirements.
Data Maintenance
During the three-month periods ended June 30, 2020 and 2019, data maintenance fees were $13,084 and $57,319, respectively. The decrease of $44,235 was primarily the result of a customer’s HCO annual renotification processed in the first quarter of 2020 compared to the second quarter of 2019 coupled with fewer new hire notifications because of customers’ temporary workplace closures due to COVID-19 during the three-month period ended June 30, 2020 when compared to the same period in 2019.
General and Administrative
During the three-month period ended June 30, 2020, general and administrative expenses decreased 37% to $137,022 when compared to the three-month period ended June 30, 2019. This decrease of $80,544 was primarily attributable to decreases in advertising, auto expenses, dues and subscriptions, IT enhancement, licenses and permits, office supplies, parking, paid time off, meals and travel expenses and other miscellaneous expenses, partially offset by increases in rent expense - equipment, telephone and rent expenses - office. These changes in general and administrative expenses were largely the result of COVID-19-related changes to how we conducted business during the quarter ended June 30, 2020.
Income from Operations
As a result of the $348,813 decrease in total revenue during the three-month period ended June 30, 2020, and the $151,239 decrease in total expenses during the same period, our income from operations decreased $197,574, or 57%, during the three-month period ended June 30, 2020, when compared to the same period in 2019.
Income Tax Provision
We realized a $55,459, or 57%, decrease in our income tax provision during the three-month period ended June 30, 2020, compared to the three-month period ended June 30, 2019 because of the decrease in net income realized in the 2020 period.
Net Income
During the three-month period ended June 30, 2020, we realized a 19% decrease in total revenues which was only partially offset by a 10% decrease in total expenses and a 57% decrease in our provision for income tax when compared to the same period in 2019. As a result, we realized a net decrease of $142,115, or 57%, in net income during the three-month period ended June 30, 2020 compared to the three-month period ended June 30, 2019.
Comparison of six months ended June 30, 2020 and 2019
The following represents selected components of our consolidated results of operations, for the six-month periods ended June 30, 2020 and 2019, respectively, together with changes from period-to-period:
|
|
For six months ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Amount Change
|
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HCO fees
|
|
$
|
651,912
|
|
|
$
|
771,182
|
|
|
$
|
(119,270
|
)
|
|
|
(15
|
%)
|
MPN fees
|
|
|
239,066
|
|
|
|
250,978
|
|
|
|
(11,912
|
)
|
|
|
(5
|
%)
|
Utilization review
|
|
|
547,783
|
|
|
|
579,238
|
|
|
|
(31,455
|
)
|
|
|
(5
|
%)
|
Medical bill review
|
|
|
165,162
|
|
|
|
260,077
|
|
|
|
(94,915
|
)
|
|
|
(36
|
%)
|
Medical case management
|
|
|
1,264,530
|
|
|
|
1,580,963
|
|
|
|
(316,433
|
)
|
|
|
(20
|
%)
|
Other
|
|
|
150,962
|
|
|
|
156,319
|
|
|
|
(5,357
|
)
|
|
|
(3
|
%)
|
Total revenues
|
|
|
3,019,415
|
|
|
|
3,598,757
|
|
|
|
(579,342
|
)
|
|
|
(16
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
32,594
|
|
|
|
36,873
|
|
|
|
(4,279
|
)
|
|
|
(12
|
%)
|
Bad debt provision
|
|
|
101
|
|
|
|
-
|
|
|
|
101
|
|
|
|
-
|
%
|
Consulting fees
|
|
|
137,357
|
|
|
|
149,642
|
|
|
|
(12,285
|
)
|
|
|
(8
|
%)
|
Salaries and wages
|
|
|
1,543,727
|
|
|
|
1,535,541
|
|
|
|
8,186
|
|
|
|
1
|
%
|
Professional fees
|
|
|
154,768
|
|
|
|
179,216
|
|
|
|
(24,448
|
)
|
|
|
(14
|
%)
|
Insurance
|
|
|
183,023
|
|
|
|
160,305
|
|
|
|
22,718
|
|
|
|
14
|
%
|
Outsource service fees
|
|
|
243,793
|
|
|
|
261,480
|
|
|
|
(17,687
|
)
|
|
|
(7
|
%)
|
Data maintenance
|
|
|
52,812
|
|
|
|
67,619
|
|
|
|
(14,807
|
)
|
|
|
(22
|
%)
|
General and administrative
|
|
|
351,875
|
|
|
|
425,001
|
|
|
|
(73,126
|
)
|
|
|
(17
|
%)
|
Total expenses
|
|
|
2,700,050
|
|
|
|
2,815,677
|
|
|
|
(115,627
|
)
|
|
|
(4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
319,365
|
|
|
|
783,080
|
|
|
|
(463,715
|
)
|
|
|
(59
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
319,365
|
|
|
|
783,080
|
|
|
|
(463,715
|
)
|
|
|
(59
|
%)
|
Income tax provision
|
|
|
(89,648
|
)
|
|
|
(219,813
|
)
|
|
|
130,165
|
|
|
|
(59
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
229,717
|
|
|
$
|
563,267
|
|
|
$
|
(333,550
|
)
|
|
|
(59
|
%)
|
Revenue
Total revenues during the six-month period ended June 30, 2020, decreased 16% to $3,019,415 compared to $3,598,757 during the six-month period ended June 30, 2019.
During the first six months of 2020, HCO, MPN, utilization review, medical bill review, medical case management and other fees decreased 15%, 5%, 5%, 36%, 20%, and 3% respectively. Other revenues consisted of revenues derived primarily from network claims repricing services, lien representation services, legal support services, workers’ compensation carve-out revenues and Medicare set-aside revenues.
HCO Fees
During the six-month periods ended June 30, 2020 and 2019, HCO fee revenues were $651,912 and $771,182 respectively. The 15% decrease in HCO revenue was primarily attributable to the loss of three customers, a decrease in the number of HCO notifications for existing customers due to employee reductions made by our customers in the first quarter, coupled with customers’ reducing their workforce and fewer workplace injuries during the stay-at-home orders, and revenue from HCO employee notifications that was recognized in the first quarter in 2019 being shifted to the second quarter in 2020. These decreases were partially offset by an increase in the number of claims, renegotiation of certain deliverables to an existing customer and the addition of a new customer in the first quarter of 2020.
MPN Fees
MPN fee revenue for the six-month periods ended June 30, 2020 and 2019, was $239,066 and $250,978 respectively, a decrease of 5%, due to fewer claims reported by customers in the first quarter and fewer claim network fees for reported workplace injuries because customers’ workplace locations were closed due to COVID-19 stay-at-home orders.
Utilization Review
During the six-month periods ended June 30, 2020 and 2019, utilization review revenue was $547,783 and $579,238, respectively. The decrease of 5% in the 2020 period was primarily attributable to decreased utilization reviews from the loss of two customers and a decrease in utilization reviews submitted by medical providers because non-essential and non-emergency medical visits were halted due to COVID-19 stay-at-home orders; partially offset by three existing customers adding utilization review in 2020.
Medical Bill Review
During the six-month period ended June 30, 2020, medical bill review revenue decreased by $94,915 from $260,077 when compared to the same period a year earlier. This 36% decrease was due to the loss of two customers, a completion of a project of a backlog of bills from an existing customer in the 2019 period, and a decrease in hospital bills and non-hospital bills reviewed due to fewer medical visits during the COVID-19 stay-at-home orders in the second quarter of 2020.
Medical Case Management
During the six months ended June 30, 2020 and 2019, medical case management revenue was $1,264,530 and $1,580,963, respectively. The 20% decrease in medical case management revenue of was the result of a decrease in the number of claims managed with existing customers, coupled with fewer billable hours because of temporary closures of medical offices due to COVID-19 stay-at-home orders, partially offset by increases in medical case management for existing customers to oversee COVID-19 workplace illnesses and two existing customers adding medical case management services.
Other
Other revenue for six-month periods ended June 30, 2020 and 2019, was $150,962 and $156,319, respectively. The decrease of $5,357 was primarily the result of a customer’s decrease in utilizing our provider network, thus reducing the revenue from network access fees, partially offset due to an increase in Medicare set-aside claims.
Expenses
Total expenses for the six months ended June 30, 2020 and 2019, were $2,700,050 and $2,815,677, respectively. The decrease of $115,627 was the result of decreases in depreciation and amortization, consulting fees, professional fees, outsource service fees, data maintenance, and general and administrative expenses, which were partially offset by increases in salaries and wages and insurance fees.
Depreciation and Amortization
During the six-month period ended June 30, 2020, we recorded depreciation and amortization expense of $32,594 compared to $36,873 during the comparable 2019 period. The decrease in depreciation and amortization was primarily attributable to certain fixed assets being fully depreciated during the second half of 2020.
Consulting Fees
During the six months ended June 30, 2020, consulting fees decreased to $137,357 from $149,642 during the six months ended June 30, 2019. This decrease of $12,285 was due to fewer consulting fees associated with our insurance company acquisition search.
Salaries and Wages
During the six-month period ended June 30, 2020, salaries and wages increased 1% to $1,543,727 compared to $1,535,541 during the same period in 2019. This increase was primarily the result of increases in salaries for employees.
Professional Fees
For the six months ended June 30, 2020, we incurred professional fees of $154,768 compared to $179,216 during the six months ended June 30, 2019. The $24,448 decrease in professional fees was primarily the result of decreases in accounting, legal expenses, and medical case management fees resulting from decreased case management activity.
Insurance
During the six-month period ended June 30, 2020, we incurred insurance expenses of $183,023, a 14% increase over the same six-month period in 2019. The increase in insurance expense was primarily attributed to the increase of costs of medical insurance for existing employees.
Outsource Service Fees
We incurred $243,793 and $261,480 in outsource service fees during the six-month periods ended June 2020 and 2019, respectively. The decrease of $17,687 was primarily the result of decreases in outsource services required for medical bill review, utilization review and field medical case management fees, partially offset by increased outsource services required for Medicare set-aside claims.
Data Maintenance
During the six-month periods ended June 30, 2020 and 2019, data maintenance fees were $52,812 and $67,619, respectively. The decrease of $14,807 was primarily the result of a decrease in the number of employees enrolled in the HCO program with existing customers during the six-month period ended June 30, 2020 when compared to the same period in 2019.
General and Administrative
During the six-month period ended June 30, 2020, general and administrative expenses decreased 17% to $351,875 when compared to the six-month period ended June 30, 2019. This decrease of $73,126 was primarily attributable to decreases in advertising, auto expense, bank charges, dues and subscriptions, IT enhancement, parking, and other miscellaneous general administrative expense, partially offset by increases in telephone, office rent, licenses and permits, and shareholders’ expense. These changes in general and administrative expenses were largely the result of COVID-19-related changes to how we have been conducting business during 2020.
Income from Operations
Total revenue during the six-month period ended June 30, 2020, decreased by $579,342 to $3,019,415 compared to $3,598,757 in the same period in 2019. Our total expenses decreased by $115,627 during the six months ended June 30, 2020, resulting in a decrease in income from operations of $463,715 compared to the six months ended June 30, 2019. This resulted in a 59% decrease in income from operations when compared to the same period in 2019.
Income Tax Provision
We realized a decrease of $130,165 or 59%, in our income tax provision during the six-month period ended June 30, 2020 compared to the six-month period ended June 30, 2019.
Net Income
During the six-month period ended June 30, 2020, total revenues of $3,019,415 decreased 16% and our provision for income tax decreased by 59%. These changes were only partially offset by the 4% decrease in total expenses. As a result, we realized a $333,550, or 59% decrease in net income during the six months ended June 30, 2020 when compared to the six-month period June 30, 2019.
Liquidity and Capital Resources
As of June 30, 2020, we had cash on hand of $8,966,825 compared to $8,104,164 on December 31, 2019. The $862,661 increase was the result of net cash provided by our operating and financing activities, partially offset by cash used in investing activities.
As of the date of this report, we have laid off four employees as a result of COVID-19 related closures of our employer customers. As noted above, we have taken advantage of and may in the future avail ourselves of federal, state or local government programs to protect our workforce as management and our board of directors determine to be in the best interest of the Company and our shareholders.
Historically, we have generally realized positive cash flows from operating activities, which coupled with positive reserves of cash on hand have been used to fund our operating expenses and obligations. Management currently believes that absent any unanticipated COVID-19 impact, including, but not limited to a significant longer-term downturn in the economy or the loss of several major customers within a condensed time period, cash on hand and anticipated revenues from operations will be sufficient to cover our operating expenses over the next twelve months.
As the impact of the COVID-19 pandemic continues to play out throughout our industry and the broader economy, we believe our strong cash position, could allow us to identify and capitalize on potential opportunities to expand our business either through the acquisition of existing businesses that may have insufficient resources to overcome the impacts of the pandemic, including, expansion into the insurance industry or through the creation of new lines of business. Depending upon the nature of the opportunities we identify, such acquisitions or expansion could require greater capital resources than we currently possess. Should we need additional capital resources, we could seek to obtain such through debt and/or equity financing. We do not currently possess an institutional source of financing and there is no assurance that we could be successful in obtaining equity or debt financing when needed on favorable terms, or at all. We could also use shares of our capital stock as consideration for a business acquisition transaction, but there is also no assurance that there would be significant market interest in our capital stock.
Cash Flow
During the six months ended June 30, 2020, cash was primarily used to fund operations. We had a net increase in cash of $862,661 during the six months ended June 30, 2020. See below for additional information.
|
|
For the six months ended June 30,
|
|
|
|
2020
(unaudited)
|
|
|
2019
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
444,538
|
|
|
$
|
495,356
|
|
Net cash used in investing activities
|
|
|
(42,577
|
)
|
|
|
(15,247
|
)
|
Net cash provided by financing activities
|
|
|
460,700
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
862,661
|
|
|
$
|
480,109
|
|
During the six months ended June 30, 2020 and 2019, net cash provided by operating activities was $444,538 and $495,356, respectively. As discussed herein, we realized net income of $229,717 during the six months ended June 30, 2020, compared to net income of $563,267 during the six months ended June 30, 2019.
The decrease in cash flow from operating activities was primarily the result of decreases in net income, deferred rent expense, accrued expenses, offset primarily by increases in allowance for depreciation, accounts payable, unearned revenue and decreases in prepaid expenses, accounts receivable, receivable – other, and prepaid income tax.
Net cash used by investing activities was $42,577 and $15,247 during the six-month periods ended June 30, 2020 and 2019, respectively. During the six-month period ended June 30, 2020 and 2019, net cash was used in investing activities to purchase computers, furniture and equipment.
Net cash provided by financing activities during the six months ended June 30, 2020 was $460,700 in for three PPP loans for PHCO, MMC and MMM in the amounts of $133,400, $59,600, and $267,700 respectively. We didn’t engage in financing activities in 2019.
Contractual Obligations and Contingencies
Smaller reporting companies are not required to provide this information.
Off-Balance Sheet Financing Arrangements
As of June 30, 2020, we had no off-balance sheet financing arrangements.
Inflation
We experience pricing pressures in the form of competitive prices. Insurance carriers and third-party administrators often try to take our clients by offering bundled claims administration services with their own managed care services at a lower rate. We are also impacted by rising costs for certain inflation-sensitive operating expenses such as labor and employee benefits and facility leases. We believe that these impacts may be material to our revenues or net income. Some of our clients are public entities which contract with us at a fixed price for the term of the contract. Increases in labor and employee benefits can reduce our profit margin over the term of these contracts.
Critical Accounting Policies and Estimates
See Note 1 to our condensed consolidated financial statements included elsewhere in this report.