UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
|
For the Quarterly Period Ended June 30, 2020
|
☐
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
|
For the Transition Period From ________ to _________
|
Commission File Number 000-50009
PACIFIC HEALTH CARE ORGANIZATION, INC.
|
(Exact name of registrant as specified in its charter)
|
|
|
Utah
|
87-0285238
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer I.D. No.)
|
|
|
1201 Dove Street, Suite 300
|
|
Newport Beach, California
|
92660
|
(Address of principal executive offices)
|
(Zip Code)
|
(949) 721-8272
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
|
Trading Symbol
|
Name of each exchange on which registered
|
None
|
N/A
|
N/A
|
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for any shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files.)
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. See
definitions of “large accelerated filer,” “accelerated
filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
|
Accelerated filer ☐
|
Non-accelerated filer ☒
|
Smaller reporting company ☒
|
Emerging growth company ☐
|
|
If an emerging growth company, indicate by check mark if the
registrant has elected to use the extended transition period for
complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act.) Yes ☐ No
☒
As of August 12, 2020, the registrant had 12,800,000 shares of
common stock, par value $0.001, issued and outstanding.
PACIFIC HEALTH CARE ORGANIZATION, INC.
FORM 10-Q
TABLE OF
CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial
Information
Pacific Health Care
Organization, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
8,966,825 |
|
|
$ |
8,104,164 |
|
Accounts receivable, net of allowance of $11,427 and $30,525
|
|
|
1,014,845 |
|
|
|
1,114,725 |
|
Deferred tax assets
|
|
|
22,819 |
|
|
|
22,819 |
|
Prepaid income tax
|
|
|
68,993 |
|
|
|
158,641 |
|
Receivable – other
|
|
|
10,400 |
|
|
|
14,900 |
|
Prepaid expenses
|
|
|
126,558 |
|
|
|
128,343 |
|
Total current assets
|
|
|
10,210,440 |
|
|
|
9,543,592 |
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
|
506,828 |
|
|
|
464,388 |
|
Furniture and fixtures
|
|
|
216,097 |
|
|
|
215,960 |
|
Office equipment
|
|
|
9,556 |
|
|
|
9,556 |
|
Total property and equipment
|
|
|
732,481 |
|
|
|
689,904 |
|
Less: accumulated depreciation and amortization
|
|
|
(597,871 |
)
|
|
|
(565,277 |
)
|
Net property and equipment
|
|
|
134,610 |
|
|
|
124,627 |
|
Operating lease right-of-use assets, net
|
|
|
433,481 |
|
|
|
558,945 |
|
Other assets
|
|
|
26,788 |
|
|
|
26,788 |
|
Total Assets
|
|
$ |
10,805,319 |
|
|
$ |
10,253,952 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
82,015 |
|
|
$ |
52,275 |
|
Accrued expenses
|
|
|
216,439 |
|
|
|
249,904 |
|
Deferred rent expense
|
|
|
17,091 |
|
|
|
29,947 |
|
Dividend payable
|
|
|
37,000 |
|
|
|
37,000 |
|
Operating lease liabilities, current portion
|
|
|
250,900 |
|
|
|
266,480 |
|
Paycheck protection program loans, current portion
|
|
|
181,486 |
|
|
|
- |
|
Unearned revenue
|
|
|
49,061 |
|
|
|
46,066 |
|
Total current liabilities
|
|
|
833,992 |
|
|
|
681,672 |
|
|
|
|
|
|
|
|
|
|
Long Term Liabilities
|
|
|
|
|
|
|
|
|
Operating lease liabilities, long-term portion
|
|
|
182,581 |
|
|
|
292,465 |
|
Paycheck protection program loans, long-term portion
|
|
|
279,214 |
|
|
|
- |
|
Total long-term liabilities
|
|
|
461,795 |
|
|
|
292,465 |
|
Total Liabilities
|
|
|
1,295,787 |
|
|
|
974,137 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred stock; 5,000,000 shares authorized at $0.001 par value of
which 40,000 shares are designated as Series A preferred and 16,000
shares issued and outstanding at June 30, 2020 and December 31,
2019
|
|
$ |
16 |
|
|
$ |
16 |
|
Common stock, $0.001 par value, 800,000,000 shares authorized,
12,800,000 shares issued and outstanding at June 30, 2020 and
December 31, 2019
|
|
|
12,800 |
|
|
|
12,800 |
|
Additional paid-in capital
|
|
|
416,057 |
|
|
|
416,057 |
|
Retained earnings
|
|
|
9,080,659 |
|
|
|
8,850,942 |
|
Total Stockholders’ Equity
|
|
|
9,509,532 |
|
|
|
9,279,815 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders’ Equity
|
|
$ |
10,805,319 |
|
|
$ |
10,253,952 |
|
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
Pacific Health
Care Organization, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
For three months ended
June 30,
|
|
|
For six months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HCO fees
|
|
$ |
325,247 |
|
|
$ |
400,840 |
|
|
$ |
651,912 |
|
|
$ |
771,182 |
|
MPN fees
|
|
|
118,317 |
|
|
|
127,113 |
|
|
|
239,066 |
|
|
|
250,978 |
|
Utilization review
|
|
|
251,728 |
|
|
|
286,555 |
|
|
|
547,783 |
|
|
|
579,238 |
|
Medical bill review
|
|
|
82,083 |
|
|
|
125,080 |
|
|
|
165,162 |
|
|
|
260,077 |
|
Medical case management
|
|
|
587,318 |
|
|
|
799,349 |
|
|
|
1,264,530 |
|
|
|
1,580,963 |
|
Other
|
|
|
101,813 |
|
|
|
76,382 |
|
|
|
150,962 |
|
|
|
156,319 |
|
Total revenues
|
|
|
1,466,506 |
|
|
|
1,815,319 |
|
|
|
3,019,415 |
|
|
|
3,598,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15,363 |
|
|
|
17,989 |
|
|
|
32,594 |
|
|
|
36,873 |
|
Bad debt provision
|
|
|
- |
|
|
|
- |
|
|
|
101 |
|
|
|
- |
|
Consulting fees
|
|
|
61,664 |
|
|
|
70,007 |
|
|
|
137,357 |
|
|
|
149,642 |
|
Salaries and wages
|
|
|
797,738 |
|
|
|
781,836 |
|
|
|
1,543,727 |
|
|
|
1,535,541 |
|
Professional fees
|
|
|
67,542 |
|
|
|
101,251 |
|
|
|
154,768 |
|
|
|
179,216 |
|
Insurance
|
|
|
88,230 |
|
|
|
86,922 |
|
|
|
183,023 |
|
|
|
160,305 |
|
Outsource service fees
|
|
|
137,679 |
|
|
|
136,671 |
|
|
|
243,793 |
|
|
|
261,480 |
|
Data maintenance
|
|
|
13,084 |
|
|
|
57,319 |
|
|
|
52,812 |
|
|
|
67,619 |
|
General and administrative
|
|
|
137,022 |
|
|
|
217,566 |
|
|
|
351,875 |
|
|
|
425,001 |
|
Total expenses
|
|
|
1,318,322 |
|
|
|
1,469,561 |
|
|
|
2,700,050 |
|
|
|
2,815,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
148,184 |
|
|
|
345,758 |
|
|
|
319,365 |
|
|
|
783,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
148,184 |
|
|
|
345,758 |
|
|
|
319,365 |
|
|
|
783,080 |
|
Income tax provision
|
|
|
(41,595 |
)
|
|
|
(97,054 |
)
|
|
|
(89,648 |
)
|
|
|
(219,813 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
106,589 |
|
|
$ |
248,704 |
|
|
$ |
229,717 |
|
|
$ |
563,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share amount
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.04 |
|
Weighted average common shares outstanding
|
|
|
12,800,000 |
|
|
|
12,800,000 |
|
|
|
12,800,000 |
|
|
|
12,800,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share amount
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.04 |
|
Weighted average common shares outstanding
|
|
|
12,816,000 |
|
|
|
12,816,000 |
|
|
|
12,816,000 |
|
|
|
12,816,000 |
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Pacific Health Care
Organization, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
|
|
Preferred stock
|
|
|
Common Stock
|
|
|
Additional paid-in
|
|
|
Retained
|
|
|
Total stockholder’s
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
earnings
|
|
|
equity
|
|
Balances at December 31, 2018
|
|
|
16,000 |
|
|
$ |
16 |
|
|
|
12,800,000 |
|
|
$ |
12,800 |
|
|
$ |
416,057 |
|
|
$ |
7,652,882 |
|
|
$ |
8,081,755 |
|
Net Income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
314,563 |
|
|
|
314,563 |
|
Balances at March 31, 2019
|
|
|
16,000 |
|
|
$ |
16 |
|
|
|
12,800,000 |
|
|
$ |
12,800 |
|
|
$ |
416,057 |
|
|
$ |
7,967,445 |
|
|
$ |
8,396,318 |
|
Net Income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
248,704 |
|
|
|
248,704 |
|
Balances at June 30, 2019
|
|
|
16,000 |
|
|
$ |
16 |
|
|
|
12,800,000 |
|
|
$ |
12,800 |
|
|
$ |
416,057 |
|
|
$ |
8,216,149 |
|
|
$ |
8,645,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2019
|
|
|
16,000 |
|
|
$ |
16 |
|
|
|
12,800,000 |
|
|
$ |
12,800 |
|
|
$ |
416,057 |
|
|
$ |
8,850,942 |
|
|
$ |
9,279,815 |
|
Net Income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
123,128 |
|
|
|
123,128 |
|
Balances at March 31, 2020
|
|
|
16,000 |
|
|
$ |
16 |
|
|
|
12,800,000 |
|
|
$ |
12,800 |
|
|
$ |
416,057 |
|
|
$ |
8,974,070 |
|
|
$ |
9,402,943 |
|
Net Income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
106,589 |
|
|
|
106,589 |
|
Balances at June 30, 2020
|
|
|
16,000 |
|
|
$ |
16 |
|
|
|
12,800,000 |
|
|
$ |
12,800 |
|
|
$ |
416,057 |
|
|
$ |
9,080,659 |
|
|
$ |
9,509,532 |
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Pacific Health Care
Organization, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
229,717 |
|
|
$ |
563,267 |
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
32,594 |
|
|
|
36,873 |
|
Bad debt provision
|
|
|
101 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
99,779 |
|
|
|
(141,062 |
)
|
Decrease in prepaid expenses
|
|
|
1,785 |
|
|
|
52,119 |
|
Decrease (increase) in prepaid income tax |
|
|
89,648 |
|
|
|
(9,287 |
) |
Decrease (increase) in receivables other
|
|
|
4,500 |
|
|
|
(3,751 |
)
|
Increase (decrease) in accounts payable
|
|
|
29,740 |
|
|
|
(23,051 |
)
|
(Decrease) increase in deferred rent expense
|
|
|
(12,856 |
)
|
|
|
15,307 |
|
(Decrease) increase in accrued expenses
|
|
|
(33,465 |
)
|
|
|
4,941 |
|
Increase in unearned revenue
|
|
|
2,995 |
|
|
|
- |
|
Net cash provided by operating activities
|
|
|
444,538 |
|
|
|
495,356 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of furniture and office equipment
|
|
|
(42,577 |
)
|
|
|
(15,247 |
)
|
Net cash used in investing activities
|
|
|
(42,577 |
)
|
|
|
(15,247 |
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from paycheck protection program loans
|
|
|
460,700 |
|
|
|
- |
|
Net cash provided by financing activities
|
|
|
460,700 |
|
|
|
- |
|
Increase in cash
|
|
|
862,661 |
|
|
|
480,109 |
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
8,104,164 |
|
|
|
7,072,507 |
|
Cash at end of period
|
|
$ |
8,966,825 |
|
|
$ |
7,552,616 |
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
- |
|
|
$ |
- |
|
Income taxes paid
|
|
$ |
- |
|
|
$ |
229,100 |
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Initial
recognition of operating lease right-of-use assets and operating
lease liabilities
|
|
$ |
- |
|
|
$ |
719,861 |
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Pacific Health
Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2020
(Unaudited)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission (the
“Commission”) and in accordance with accounting principles
generally accepted in the United States
(“GAAP”). Certain information and footnote disclosures
normally included in consolidated financial statements have been
condensed or omitted in accordance with GAAP rules and
regulations. The information furnished in these interim
condensed consolidated financial statements includes normal
recurring adjustments and reflects all adjustments, which, in the
opinion of management, are necessary for a fair presentation of
such financial statements. The preparation of condensed
consolidated financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect both the
recorded values of assets and liabilities at the date of the
condensed consolidated financial statements and the revenues
recognized and expenses incurred during the reporting period. These
estimates and assumptions affect the Company’s recognition of
deferred expenses, bad debts, income taxes, the carrying value of
its long-lived assets and its provision for certain contingencies.
The reasonableness of these estimates and assumptions is evaluated
continually based on a combination of historical and other
information that comes to the Company’s attention that may vary its
outlook for the future. While management believes the disclosures
and information presented are adequate to make the information not
misleading, the Company recommends these interim condensed
consolidated financial statements be read in conjunction with its
audited financial statements and notes thereto included in its
annual report on Form 10-K for the year ended December 31,
2019. Operating results for the six months ended June 30,
2020, are not necessarily indicative of the results to be expected
for the year ending December 31, 2020.
Principles of Consolidation — The accompanying
condensed consolidated financial statements include the accounts of
the Company and its wholly-owned
subsidiaries. Intercompany transactions and balances
have been eliminated in consolidation.
Basis of Accounting — The Company
uses the accrual method of accounting.
Revenue Recognition — The Company follows the
guidance of Accounting Standards Codification (ASC) 606, “Revenue
from Contracts with Customers (Topic 606).”
Topic 606 creates a five-step model to recognize revenue which
includes (i) identifying the contract with the customer, (ii)
identifying the performance obligations in the contract, (iii)
determining the transaction price, including variable consideration
to the extent that it is probable that a significant future
reversal will not occur, (iv) allocating the transaction price to
the respective performance obligations in the contract, and (v)
recognizing revenue when (or as) the Company satisfies the
performance obligation.
The Company derives its revenue from the sale of managed care, bill
review, utilization review and medical case management services.
These services are billed individually as separate components to
our customers. These fees include monthly administration fees,
claim network fees, legal support fees, Medicare set-aside fees,
lien service fees, workers’ compensation carve-outs, flat rate fees
or hourly fees depending on the agreement with the client.
The Company enters into arrangements for bundled managed care which
includes various units of accounting such as network solutions and
patient management, including managed care. Such elements are
considered separate units of accounting due to each element having
value to the customer on a stand-alone basis and are billed
separately. The selling price for each unit of accounting is
determined using the contract price. When the Company’s customers
purchase several products the pricing of the products sold is
generally the same as if the products were sold on an individual
basis. Revenue is recognized as the work is performed in accordance
with the Company’s customer contracts. Based upon the nature of the
Company’s products, bundled managed care elements are generally
delivered in the same accounting period. The Company recognizes
revenue for patient management services ratably over the life of
the customer contract. Based upon prior experience in managed care,
the Company estimates the deferral amount from when the customer’s
claim is received to when the customer contract expires. Advance
payments from subscribers and billings made in advance are recorded
on the balance sheet as deferred revenue.
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2020
(Unaudited)
Accounts Receivables and Bad Debt
Allowance – In the normal course of business
the Company extends credit to its customers on a short-term
basis. Although the credit risk associated with these
customers is minimal, the Company routinely reviews its accounts
receivable balances and makes provisions for doubtful
accounts. The Company ages its receivables by date of
invoice. Management reviews bad debt reserves quarterly
and reserves specific accounts as warranted or sets up a general
reserve based on amounts over 90 days past due. When an
account is deemed uncollectible, the Company charges off the
receivable against the bad debt reserve. A considerable
amount of judgment is required in assessing the realization of
these receivables including the current creditworthiness of each
customer and related aging of the past-due balances, including any
billing disputes. In order to assess the collectability
of these receivables, the Company performs ongoing credit
evaluations of its customers’ financial condition. Through these
evaluations, the Company may become aware of a situation where a
customer may not be able to meet its financial obligations due to
deterioration of its financial viability, credit rating or
bankruptcy. The allowance for doubtful accounts is based
on the best information available to the Company and is reevaluated
and adjusted as additional information is
received. We evaluate the allowance based on
historical write-off experience, the size of the individual
customer balances, past-due amounts and the overall national
economy. At June 30, 2020 and December 31, 2019, bad
debt reserves of $11,427 and $30,525, respectively, was a general
reserve for certain balances over 90 days past due and for accounts
that are potentially uncollectible.
The percentages of the amounts due from major customers to total
accounts receivable as of June 30, 2020 and December 31, 2019, are
as follows:
|
|
6/30/2020
|
|
|
12/31/2019
|
|
Customer A
|
|
|
21 |
%
|
|
|
18 |
%
|
Customer B
|
|
|
12 |
%
|
|
|
8 |
%
|
Significant Customers - We provide services to
insurers, third party administrators, self-administered employers,
municipalities and other industries. We are able to
provide our full range of services to virtually any size employer
in the state of California. We are also able to provide
utilization review, medical bill review and medical case management
services outside the state of California.
During the period ended June 30, 2020 and 2019, we had two
customers that accounted for more than 10% of our total
sales. The following table sets forth details regarding
the percentage of total sales attributable to our significant
customers in the past two years:
|
|
6/30/2020
|
|
|
6/30/2019
|
|
Customer A
|
|
|
22 |
%
|
|
|
29 |
%
|
Customer B
|
|
|
13 |
%
|
|
|
14 |
%
|
Customer C
|
|
|
9 |
%
|
|
|
11 |
%
|
Leases - Effective January 1, 2019, the Company
adopted the guidance of ASC 842, Leases, which requires an entity
to recognize a right-of-use asset and a lease liability for
virtually all leases. The Company adopted ASC 842 using a modified
retrospective approach. The adoption of ASC 842 on January 1,
2019 resulted in the recognition of operating lease right-of-use
assets of $719,861, lease liabilities for operating leases of
$719,861, and a zero cumulative-effect adjustment to accumulated
deficit. The Company elected to exclude from its balance sheets
recognition of leases having a term of 12 months or less
(“short-term leases”). Lease expense is recognized on a
straight-line basis over the lease term. See Note 2 for further
information regarding the impact of the adoption of ASC 842 on the
Company’s financial statements.
NOTE 2 - OPERATING LEASES
In July 2015, the Company entered a 79-month lease to lease
approximately 9,439 square feet of office space that commenced in
September 2015. This office space serves as the Company’s principal
executive offices, as well as, the principal offices of our
operating subsidiaries. In March 2017, the Company entered a
39-month operating lease for an office copy machine with scanner
with monthly payment at $1,723, commencing in April 2017 and ending
in June 2020.
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2020
(Unaudited)
Operating lease right-of-use (“ROU”) assets and liabilities are
recognized at commencement date based on the present value of lease
payments over the lease term. ROU assets represent our right to use
an underlying asset for the lease term and lease liabilities
represent our obligation to make lease payments arising from the
lease. Generally, the implicit rate of interest in arrangements is
not readily determinable and the Company utilizes its incremental
borrowing rate in determining the present value of lease payments.
The Company’s incremental borrowing rate is a hypothetical rate
based on its understanding of what its credit rating would be. The
operating lease ROU asset includes any lease payments made and
excludes lease incentives.
The components of lease expense and supplemental cash flow
information related to leases for the period are as follows:
|
|
Three Months Ended
June 30, 2020
|
|
|
Six Months Ended
June 30, 2020
|
|
Lease Cost
|
|
|
|
|
|
|
|
|
Operating lease cost (included in general and administrative in the
Company’s condensed consolidated statement of operations)
|
|
$ |
77,466 |
|
|
$ |
153,217 |
|
|
|
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease
liabilities for the three and six months ended June 30, 2020
|
|
$ |
77,466 |
|
|
$ |
153,217 |
|
Weighted average remaining lease term – operating leases (in
years)
|
|
1.83 years
|
|
|
1.83 years
|
|
Average discount rate – operating leases
|
|
|
5.75 |
% |
|
|
5.75 |
% |
The supplemental balance sheet information related to leases for
the period is as follows:
|
|
At June 30, 2020
|
|
Operating leases
|
|
|
|
|
Long-term right-of-use assets
|
|
$ |
433,481 |
|
Short-term operating lease liabilities
|
|
$ |
250,900 |
|
Long-term operating lease liabilities
|
|
|
182,581 |
|
Total operating lease liabilities
|
|
$ |
433,481 |
|
Maturities of the Company’s lease liabilities are as follows:
Year Ending
|
|
Operating Leases
|
|
2020 (remaining 6 months)
|
|
$ |
136,488 |
|
2021
|
|
|
257,024 |
|
2022
|
|
|
71,359 |
|
Total lease payments
|
|
|
464,871 |
|
Less: Imputed interest/present value discount
|
|
|
(31,390 |
)
|
Present value of lease liabilities
|
|
$ |
433,481 |
|
Lease expenses were $77,466 and $68,153 during the three months
ended June 30, 2020 and 2019, respectively, and $153,217 and
$159,820 during the six months ended June 30, 2020 and 2019,
respectively.
NOTE 3 - PAYROLL PROTECTION PROGRAM
LOANS
In April and May 2020 Pacific Health Care Organization, Inc.
(“PHCO”), Medex Managed Care, Inc. (“MMC”) and Medex Medical
Management, Inc. (“MMM”) received loans pursuant to the Coronavirus
Aid, Relief and Economic Security (“CARES”) Act Payroll Protection
Program.
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2020
(Unaudited)
PHCO received a loan in the amount of $133,400 (the “PHCO PPP
Loan”) from Pacific Western Bank. The PHCO PPP Loan is in the form
of a Note dated April 21, 2020, issued by PHCO, which matures on
April 21, 2022. The PHCO PPP Loan bears interest at a rate of 1%
per annum and is payable monthly commencing on November 21, 2020.
The monthly principal payment for the PHCO PPP Loan will be
$7,507.
MMM and MMC received loans of $267,700 and $59,600 respectively,
from First Citizens Bank, (collectively the “Medex Companies PPP
Loans”). The Medex Companies PPP Loans are also in the form of
Notes dated April 30, 2020 and May 11, 2020, issued by MMM and MMC
respectively, and mature on April 30, 2022 and May 11, 2022,
respectively. The Medex Companies PPP Loans bear interest at a rate
of 1.0% per annum and are payable monthly commencing on November
30, 2020 for the MMM loan and December 11, 2020 for the MMC loan.
The combined monthly principal payments for the Medex Companies PPP
Loans will be $18,419.
Funds from these loans may be used for payroll, rent, utilities and
costs incurred to continue group health insurance benefits. The
terms of the loans provide that certain amounts may be forgiven if
the funds are used for qualifying expenses as described in the
CARES Act.
NOTE 4 - SUBSEQUENT EVENTS
In accordance with ASC 855-10 Company management reviewed all
material events through the date of issuance and there are no
material subsequent events to report.
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.
Item
3. Quantitative and Qualitative Disclosure about Market
Risk
Smaller reporting companies are not required to provide this
information.
Item
4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, which are
controls and other procedures that are designed to provide
reasonable assurance that information required to be disclosed by a
company in the reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and
principal financial officers, as appropriate to allow timely
decisions regarding required disclosure.
Our management, under the supervision and with the participation of
our principal executive officer and principal financial officer,
conducted an evaluation the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this
quarterly report on Form 10-Q. Based on the evaluation
of our disclosure controls and procedures as of June 30, 2020, the
end of the period covered by this report, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective at a reasonable assurance
level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting during the quarter ended June 30, 2020, that materially
affected or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item
1A. Risk Factors
Management does not believe there have been any material changes to
the risk factors listed in Part I, “Item 1A, Risk Factors” in our
annual report on Form 10-K for the year ended December 31,
2019. These risk factors should be carefully considered
with the information provided elsewhere in this report, which could
materially adversely affect our business, financial condition or
results of operations.
Item
6. Exhibits
Exhibits. The following exhibits are filed or furnished,
as applicable, as part of this report:
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
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PACIFIC HEALTH CARE ORGANIZATION, INC.
|
|
|
|
|
|
|
|
|
Date:
|
August 13, 2020
|
/s/ Tom Kubota
|
|
|
|
Tom Kubota
Chief Executive Officer
|
|
|
|
|
Date:
|
August 13, 2020
|
/s/ Fred Odaka
|
|
|
|
Fred Odaka
Chief Financial Officer
|