Throughout this quarterly report, 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"), Medex Managed Care, Inc.("MMC") and Medex Medical Management, Inc.("MMM"), and, where applicable, our former subsidiaries Industrial Resolutions Coalition("IRC"), Medex Legal Support, Inc.("MLS") and Pacific Medical Holding Company, Inc.("PMHC"). All statements other than statements of historical fact included herein and in the documents incorporated by reference in this quarterly report on Form 10-Q (this "quarterly report"), if any, including without limitation, statements regarding our future financial position or results of operations, business strategy, potential acquisitions, budgets, projected costs, and plans and objectives of management for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by terminology such as "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "foresee," "future," "intend," "likely," "may," "might," "objective," "plan," "potential," "predict," "project," "should," "strategy," "will," "would," and other similar expressions and their negatives. Forward-looking statements are not guarantees of future performance and involve known and unknown risks and uncertainties, many of which may be beyond our control. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, and actual results could differ materially as a result of various factors. The following include some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events: ? economic conditions generally and in the industry in which we and our customers participate, including the effects resulting from economic recessions, international conflicts and rising domestic inflation; ? cost reduction efforts by our existing and prospective customers; ? the loss, ineffective management, malfunction or increased costs of
the technologies and services provided by third parties on which our operations rely;
? competition within our industry, including competition from much larger
? business combinations between our customers or competitors;
? legislative and regulatory requirements or changes that could make our
less competitive or outdated services;
? our inability to successfully develop new services and/or products or
organically or by acquisition, or to anticipate the
? our ability to retain existing customers and attract new customers;
? price increases;
? cybersecurity breaches and software system failures, or the imposition of laws
impose costly cybersecurity and data protection compliance;
? the impacts on our business from COVID-19, including the reduction of our
customer labor due to various causes related to COVID-19, such as
as well as government mandates and impacts on the workers’ compensation industry,
our clients’ businesses and the economy in general;
? reduction in workers’ compensation claims or demand for our services,
from any source; and
? delays, reductions or cancellations of contracts we have previously entered into.
For more detailed information about particular risk factors related to us and our business, see Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended
December 31, 2021, filed with the Securities and Exchange Commission(the "Commission") on April 14, 2022(the "annual report"). We operate in a competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. You should not place undue reliance on forward-looking statements. The forward-looking statements are based on the beliefs of management as well as assumptions made by and information currently available to management and apply only as of the date of this report or the respective dates of the documents which it incorporates by reference. Neither we nor any other person assumes any responsibility for the accuracy or completeness of forward-looking statements. Further, except to the extent required by law, we undertake no obligations to update or revise any forward-looking statements, whether as a result of new information, future events, or a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, made by us or on our behalf, are also expressly qualified by these cautionary statements. 10
The following discussion should be read in conjunction with our unaudited information
condensed consolidated financial statements and the notes thereto contained
elsewhere in this quarterly report and in our other filings with the Commission.
Overview We incorporated under the laws of the state of
Utahin 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, a Californiacorporation 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 Medical Provider Networks ("MPNs") in the state of California. In August 2001we formed IRC, a Californiacorporation, as a wholly owned subsidiary of PHCO. Prior to closing IRC, IRC oversaw and managed our Workers' Compensation carve-outs services. In June 2010, we acquired MLS, a Nevadacorporation incorporated in September 2009. Prior to closing MLS, MLS offered lien representation services and Medicare set-aside services ("MSA"). In February 2012, we incorporated MMM, a Nevadacorporation, as a wholly owned subsidiary of the Company. MMM is responsible for overseeing and managing medical case management services. In March 2011, we incorporated MMC, a Nevadacorporation, as a wholly owned subsidiary of the Company. MMC oversees and manages the Company's utilization review and bill review services. In October 2018, we incorporated PMHC, a Nevadacorporation, as a wholly owned subsidiary of the Company to act as a holding company for future potential acquisitions. In October 2021, to simplify business procedures, bookkeeping and administrative structure; and eliminate duplicative functions and reduce costs; we terminated the existence of IRC, MLS and PMHC and wound up those subsidiaries. The business, assets, liabilities, and services of those entities were transferred to PHCO or its other subsidiaries. Medex now offers our Workers' Compensation carve-out services previously provided by IRC and Medicare-set asides previously managed by MLS. MMC oversees the lien representation services previously offered by MLS. Business of the Company We offer an integrated and layered array of complimentary business solutions that enable our customers to better manage their employee Workers' Compensation-related healthcare administration costs. We are constantly looking for ways to expand the suite of services we can provide our customers, either through strategic acquisitions or organic development. Our business objective is to deliver value to our customers by reducing their Workers' Compensation-related medical claims expense in a manner that will assure 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 services focus on containing medical treatment costs.
We offer our customers access to our HCOs and MPNs. We also provide medical services
case management, field medical case management, network access, use
examination, review of medical bills, exclusions from workers’ compensation and health insurance
reserved services. Additionally, we offer lien and expert representation
the testimony of witnesses, ancillary to our services. We offer our services as
bundled solution, as stand-alone services or as add-on services.
Our core services focus on reducing medical treatment costs by enabling our customers to share control over the medical treatment process. This control is primarily obtained by participation in one of our medical treatment networks. We hold several government-issued licenses to operate medical treatment networks. Through Medex we hold two of a total of seven licenses issued by the state of
Californiato establish and manage HCOs within the state of California. We also hold approvals issued by the state of Californiato act as an MPN and currently administer 26 MPNs. Our HCO and MPN programs provide our customers with provider networks within which our customers have some ability to direct the administration of employee claims. This is designed to decrease the incidence of fraudulent claims and disability awards and ensure injured employees receive the necessary back-to-work rehabilitation and training they need. Our medical bill and utilization review services provide oversight of medical billing and treatment requests, along with medical case management, which keeps medical treatment claims progressing to a resolution and assures treatment plans are aligned from a medical perspective. Our customers include self-administered employers, insurers, third party administrators, municipalities, and others. Our principal customers are companies with operations located in the state of Californiawhere the cost of Workers' Compensation insurance is a critical problem for employers, though we are able to process medical bills nationally. Our provider networks, which are located only in California, are composed of providers experienced in treating worker injuries. Our business generally has a long sales cycle, typically eight months or more. Once we have established a customer relationship and enrolled employees of our employer customers, we anticipate our revenue to adjust with the growth or retraction of our customers' employee headcount. Throughout the year, we expect new employees and employer customers to be added while others terminate for a variety of reasons. 11
Impact of COVID-19 on our business
February 2022, Californiapassed another COVID-19 Supplemental Paid Sick Leave law ("CSPSL"). It provides employees paid leave for COVID-19 related reasons such as caring for themselves, family members, or for vaccine related appointments or illnesses caused by COVID-19 or the vaccine from January 1, 2022through September 30, 2022. The CSPSL allows employees to retroactively request reimbursement for qualifying leave or to use it towards future requests through September 30, 2022. Employers whose employees utilize CSPSL are ineligible for federal tax credits to offset the costs of providing the CSPSL. On September 29, 2022, Californiapassed a bill that extended the CSPSL leave through December 31, 2022and provides a supplemental paid sick leave relief grant program for employers to be reimbursed for the CSPSL. We will continue to offer COVID-19-specific paid leave benefits to our employees until the expiration of CSPSL. Family, medical, and other types of leave remain available to employees under existing Company policy. As of September 30, 2022, we have incurred negligible payroll, benefits, administrative, and liability costs related to CSPSL. However, we could incur some significant costs if additional booster shots are recommended or required later in 2022, or if another spike in COVID-19 results in increased usage of the CSPSL benefit by employees.
Key Trends Affecting Operating Results
As noted throughout this quarterly report, during the three and nine months ended
September 30, 2022and 2021, COVID-19 has impacted the businesses of our customers, our business and our results of operations. Most of our customers, and their employees are located in California. During the three and nine months ended September 30, 2021, Californiahad in place COVID-19 restrictions on businesses which resulted in many of our customers reducing their workforces and caused a decrease in the number of new workers' compensation claims, as a result of fewer workers in the labor force. Allowable medical treatment for workers' compensation claims were also limited to help ease the burden of COVID-19 on medical facilities. During the three and nine months ended September 30, 2022, Californiabusinesses were able to operate without these COVID-19 restrictions and restrictions on allowable medical treatments for workers' compensation claims were lifted. As identified in more detail in our discussion of result of operations below, during the three and nine months ended September 30, 2022, the lifting of these restrictions has generally led to increased demand from existing customers for our services, as their employees returned to the workforce and correlated workplace injuries increased, along with medical facilities and providers having the capacity to begin treating the backlog of workplace injuries that occurred when allowable treatment restrictions due to COVID-19 were in place. We anticipate the foregoing trends will continue at decreasing rates over future periods as the remaining workforces that return to in-person work levels off and the backlog of untreated workers' compensation cases normalizes. These trends have also contributed to increased claims-related expenses for services provided to us by third parties, as certain such expenses increase in correlation with the demand for our services. Californiahas in place legislation to address employer liability in Workers' Compensation for COVID-19 cases. The law presumes that COVID-19 illnesses contracted by employees are work related and therefore eligible for workers' compensation coverage, subject to certain rebuttable presumptions. Our customers experienced an increase in COVID-19 related workers' compensation claims throughout 2021 and during the first quarter of 2022 but saw declines in COVID-19 related claims in the second and third quarters of 2022. For the nine months ended September 30, 2022, approximately 8% of all claims we processed have been COVID-19 related, with 53% of those claims occurring in the first quarter of 2022. During the twelve months ended December 31, 2021, approximately 5% of all claims processed were COVID-19 related. Revenue generated from COVID-19 workers' compensation claims may become seasonal and as the frequency of contracting COVID-19 increases and the severity of cases decreases, it is possible that in the future COVID-19 will no longer be classified as a workers' compensation illness in California. A portion of our revenue is generated from fees from our customers when a workers' compensation claim is opened. If the change of classification for COVID-19 related claims no longer requires employers to report it as a workers' compensation injury, there would be a decrease in our COVID-19 related revenues, but we would anticipate this decrease would be offset by an increase in other workers' compensation injuries as more employees return to the labor pool. Some of our customers' industries have been impacted by the recent national trend of workforce resignations and difficulties in hiring. If our customers cannot attract new workers, it is possible that some jobs will be replaced with technology. If technology replaces workers, and/or workplace injuries continue at lower rates because there are more employees working from home and fewer employees suffering injuries in the workplace, the increases in revenues we are beginning to see could flatten or decline. Our revenues for medical case management were also impacted because there was a smaller labor pool which resulted in fewer new workers' compensation claims. We believe this trend will be temporary, as the economy recovers from the effects of COVID-19, but if the trend to smaller labor pools continues, or if an economic recovery is slowed as a result of higher inflation or economic recession, medical case management reviews and resulting revenues could continue to remain lower in the future. 12
Table of Contents Revenue
We derive our revenue primarily from fees charged for access to our provider
networks, registration of customer employees in the HCO or MPN program,
usage reviews, medical bill reviews and medical case management services.
HCO HCO revenue is generated largely from fees charged to our employer customers for claim network fees to access our HCO networks, employee enrollment into our HCO program, program administration, custom network fees, annual and new hire notifications and fees for other ancillary services they may select. HCO notifications are mailed out annually and handed out by the employer for all new hires. MPN Like HCO revenue, MPN revenue is generated largely from fees charged to our employer customers for claim network fees to access our MPN networks, custom network fees, employee enrollment into our MPN program, program administration, and fees for other services our MPN customers may select. Unlike the HCO, MPNs do not require annual and new hire notifications, MPNs are only required to provide a notice to an injured worker at the time the employer is notified by the injured worker that an injury occurred. Utilization review Utilization review is the review of medical treatment requests by providers to provide a safeguard for employers and injured workers against unnecessary and inappropriate medical treatment from the perspective of medical necessity, quality of care, appropriateness of decision-making, and timeliness of treatment. Its purpose is to reduce employer liability for medical costs that are not medically appropriate or approved by the relevant medical and legal authorities and the payor. Medical bill review
Californiaand many other states have established fee schedules for the maximum allowable fees payable under workers' compensation for a variety of procedures performed by medical providers. Many procedures, however, are not covered under the fee schedules, such as hospital bills, which still require review and negotiation. 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 re-bundling, confirming that the services are customary and reasonable, fee schedule compliance, out-of-network bill review, pharmacy review, and preferred provider organization repricing arrangements. Our medical bill review services can result in significant savings for our customers. Medical case management 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, evaluates, coordinates, implements and monitors medical treatment plans and the options and services required to meet an injured worker's health needs. A medical case manager acts as a liaison between the injured worker, claims adjuster, medical providers, and attorneys to achieve optimal results for injured workers and our employer customers. We work to manage the number of nurses in our program to maintain our ratio of claims per nurse at a level that ensures timely and appropriate medical care is given to the injured worker and facilitates faster claims closures for our customers. Other Other revenue consists of revenue derived from network access fees charged to non-HCO, non-MPN customers to access our network of medical providers, network access for preferred provider organizations, lien representation, legal support services, Medicare set-aside and Workers' Compensation carve-out services. 13
The following table sets forth, for the three and nine months ended
September 30, 2022and 2021, the percentage each revenue item identified in our unaudited condensed consolidated financial statements contributed to total revenue during the respective period. For the three months ended For the nine months ended September 30, September 30 2022 2021 2022 2021 HCO 24 % 22 % 23 % 24 % MPN 9 % 11 % 10 % 10 % Utilization review 31 % 20 % 29 % 20 % Medical bill review 7 % 9 % 8 % 7 % Medical case management 26 % 33 % 28 % 35 % Other 3 % 5 % 2 % 4 % Expense Consulting fees
Consulting fees include fees we pay to third parties for IT, marketing and
in-house legal advice for the various services we offer.
Salaries and wages
Wages and salaries reflect the employment-related compensation we pay to our
employees, payroll processing, payroll taxes and commissions.
Professional fees include fees we pay to third parties to provide medical care
consulting, medical case management and board fees for counseling
meetings, as well as legal and accounting fees.
Insurance expenses mainly include health insurance benefits offered to
civil liability insurance for our employees, directors and officers,
Indemnity Coverage and Professional Liability Coverage.
Outsource service fees Outsource service fees consist of costs incurred by our subsidiaries in partially outsourcing utilization review, medical bill review, administrative services for medical case management and Medicare set-aside services and typically tend to increase and decrease in correlation with customer demand for those services. Data maintenance fees Data maintenance fees includes fees we pay to a third party to process HCO and MPN employee enrollment and HCO/MPN notifications. These fees fluctuate throughout the year because of the varied timing of customer enrollment into our HCO or MPN programs and the number of employees our customers have in their workforce. General and administrative General and administrative expenses consist primarily of office rent, advertising, dues and subscriptions, equipment/repairs, IT enhancement, licenses and permits, telephone, office supplies, parking, postage, printing and reproduction, rent expense for equipment, miscellaneous expenses, shareholders' expense, charity - cash contribution, auto expenses, bank charges, education, travel and entertainment, and vacation expense. 14
The following table sets forth, for the three and nine-months ended
September 30, 2022and 2021, the percentage each expense item identified in our unaudited consolidated financial statements contributed to total expense during the respective period. For the three months ended For the nine months ended September 30, September 30 2022 2021 2022 2021 Depreciation 1 % 1 % 1 % 1 % Bad debt provision - % - % - % - % Consulting fees 5 % 5 % 4 % 5 % Salaries and wages 59 % 57 % 56 % 57 % Professional fees 6 % 6 % 6 % 6 % Insurance 7 % 7 % 7 % 7 % Outsource service fees 13 % 9 % 12 % 8 % Data maintenance fees - % 1 % 2 % 2 % General and administrative 9 % 14 % 12 % 14 % Results of Operations
Comparison of the three months ended
The following items represent certain items of our consolidated results of
transactions for the three-month periods ended
respectively, as well as period-to-period variations:
For three months ended September 30, 2022 2021 Amount Change % Change Revenues: HCO
$ 354,913 $ 289,117 $ 65,79623 % MPN 128,297 137,834 (9,537 ) (7 %) Utilization review 443,049 258,251 184,798 72 % Medical bill review 99,418 117,685 (18,267 ) (16 %) Medical case management 384,657 439,073 (54,416 ) (12 %) Other 43,663 68,658 (24,995 ) (36 %) Total revenues 1,453,997 1,310,618 143,379 11 % Expense: Depreciation 9,661 12,657 (2,996 ) (24 %) Bad debt provision (5,520 ) - (5,520 ) - % Consulting fees 56,148 58,275 (2,127 ) (4 %) Salaries and wages 699,026 679,530 19,496 3 % Professional fees 76,065 76,014 51 - % Insurance 79,974 86,527 (6,553 ) (8 %) Outsource service fees 156,677 109,926 46,751 43 % Data maintenance 2,898 11,917 (9,019 ) (76 %) General and administrative 112,135 168,939 (56,804 ) (34 %) Total expenses 1,187,064 1,203,785 (16,721 ) (1 %) Income from operations 266,933 106,833 160,100 150 % Income before taxes 266,933 106,833 160,100 150 % Income tax provision 74,928 29,987 44,941 150 % Net income $ 192,005 $ 76,846 $ 115,159150 % 15
Table of Contents Revenue HCO During the three-month period ended
September 30, 2022, HCO revenue increased 23%, compared to the same period in the prior year. The increase was attributable to a renegotiation of certain deliverables to an existing customer and an increase in claims activity from existing customers which generated fees for notifications and claim network fees. These increases were partially offset by the loss of two customers in the fourth quarter of 2021, which decreased revenues from HCO enrollment. Part of the revenue generated in HCO fees is for the opening of workers' compensation claims. During the three-month period ended September 30, 2022, 4% of HCO claims were COVID-19 related, compared to 5% in the same period in the prior year. If Californialegislation declassifies COVID-19 as a workers' compensation claim, we expect HCO revenues to decrease. MPN MPN revenue for the three-month period ended September 30, 2022, decreased by 7%, compared to the same period in the prior year. The decrease in MPN revenue was due to a decrease in the number claims reported due to the loss of a customer in the fourth quarter of 2021 that resulted in lower claims activity. Part of the revenue generated in MPN fees is for the opening of workers' compensation claims. The decrease in MPN revenue was partially offset by increases in claims activity by existing customers due to higher COVID-19 related claims. During the three-month period ended September 30, 2022, 30% of MPN claims were COVID-19 related, compared to 28% in the same period in the prior year. If Californialegislation declassifies COVID-19 as a workers' compensation claim, we expect MPN revenues to decrease. Utilization review During the three-month period ended September 30, 2022, utilization review revenue increased 72%, compared to the same period in the prior year due to an increase in utilization reviews from existing customers and the addition of a new customer in the fourth quarter of 2021. These increases were partially offset by decreases due to the loss of a customer in the third quarter of 2021. Medical bill review During the three-month period ended September 30, 2022, medical bill review revenue decreased by 16%, compared to the same period in the prior year. The decrease was mainly due to processing fewer hospital bills from existing customers and the percentage of saving we earned on hospital bills processed was lower. Medical bill reviews are billed at a flat rate, while hospital bills are billed at a percentage of savings and fluctuate during the year. Medical case management During the three-month period ended September 30, 2022, medical case management revenue decreased 12%, compared to the same period in the prior year. The decrease in medical case management revenue was primarily due to customers electing not to apply medical case management to all of their COVID related claims in the 2022 period as they had done in the 2021 period and a decrease in the number of new referred claims managed with existing customers as a result of fewer workplace injuries during 2020 and 2021 due to COVID related workforce restrictions. Other Other revenue for the three-month period ended September 30, 2022, decreased 36%, compared to the same period in the prior year. The decrease in other revenue was the result of fewer Medicare set-aside claims and the discontinuation of our network referral access for non-HCO, non-MPN customers after the loss of our last customer who utilized the service in the fourth quarter of 2021. We do not anticipate future revenues from network referral fees generated from referrals to non-HCO, non-MPN customers, as we no longer offer this service. The decrease was partially offset by increases in fees for network access for preferred provider organizations, we expect other revenue to be lower in future periods. Expenses Total expenses for the three month period ended September 30, 2022, decreased 1%, compared to the same period in the prior year. The decrease was attributable to decreases in depreciation, bad debt provision, consulting fees, insurance, data maintenance, and general and administrative partially offset by increases in salaries and wages and outsource service fees. 16
Table of Contents Insurance During the three-month period ended
September 30, 2022, insurance expenses decreased 8%, compared to the same period in the prior year. The decrease in insurance expenses was primarily attributed to decreases in medical insurance premiums as a result of us having fewer employees in 2022, compared to 2021. Outsource service fees
During the three-month period ended
services increased by 43% compared to the same period of the previous year. The
the increase was due to increased demand for our services primarily from
customers for usage review, a service that we partially outsource.
General and administrative During the three-month period ended
September 30, 2022, general and administrative expenses decreased 34%, compared to the same period in the prior year. The decrease was primarily attributable to decreases in rent - office, auto expense, bank charges, charity - cash contributions, licenses and permits, travel, office supplies, postage, telephone, and vacation expenses. The largest decrease was in rent - office as we moved into a smaller office. The other various expenses that are part of maintaining a larger office such as postage, telephone, and office supplies were also lower as we adjusted our operations to take advantage of cloud based solutions. The decreases were partially offset by increases in advertising, dues and subscriptions, education, IT enhancement, meals, miscellaneous expenses, and parking. Due to moving most of our office operations to cloud or software services, dues and subscriptions for these services increased along with increases in IT security education for our employees and additional IT enhancements. Income from operations As a result of the $143,379increase in total revenue during the three-month period ended September 30, 2022, and the $16,721decrease in total expenses during the same period, our income from operations increased $160,100, or 150%, during the three-month period ended September 30, 2022, when compared to the same period in the prior year. Income tax provision We realized an increase in our income tax provision of $44,941, or 150%, during the three-month period ended September 30, 2022, compared to the same period in the prior year, because of the increase in income before taxes realized. Net income During the three-month period ended September 30, 2022, we realized an 11% increase in total revenues, a 1% decrease in total expenses, and a 150% increase in our provision for income tax when compared to the same period in the prior year. As a result, we realized a net increase of $115,159, or 150%, in net income during the three-month period ended September 30, 2022, compared to the same period in the prior year. 17
Comparison of the nine months ended
The following items represent certain items of our consolidated results of
operations, for the nine-month periods ended
respectively, as well as period-to-period variations:
For nine months ended September 30, 2022 2021 Amount Change % Change Revenues: HCO
$ 985,192 $ 936,382 $ 48,8105 % MPN 422,227 396,497 25,730 6 % Utilization review 1,220,941 796,927 424,014 53 % Medical bill review 333,310 292,445 40,865 14 % Medical case management 1,218,077 1,381,929 (163,852 ) (12 %) Other 102,084 174,251 (72,167 ) (41 %) Total revenues 4,281,831 3,978,431 303,400 8 % Expense: Depreciation 23,153 35,964 (12,811 ) (36 %) Bad debt provision (737 ) 494 (1,231 ) (249 %) Consulting fees 166,309 173,796 (7,487 ) (4 %) Salaries and wages 2,018,638 2,073,133 (54,495 ) (3 %) Professional fees 222,703 221,970 733 - % Insurance 238,851 242,334 (3,483 ) (2 %) Outsource service fees 433,275 304,085 129,190 42 % Data maintenance 59,400 75,293 (15,893 ) (21 %) General and administrative 418,079 492,264 (74,185 ) (15 %) Total expenses 3,579,671 3,619,333 (39,662 ) (1 %) Income from operations 702,160 359,098 343,062 96 % Other income (expense) Paycheck protection program loan forgiveness income - 464,386 (464,386 ) (100 %) Paycheck protection program loan interest expense - (3,686 ) 3,686 (100 %) Total other income (expense) - 460,700 (460,700 ) (100 %) Income before taxes 702,160 819,798 (117,638 ) (14 %) Income tax provision 197,096 140,956 56,140 40 % Net income $ 505,064 $ 678,842 $ (173,778 )(26 %) Revenue HCO During the nine-month period ended September 30, 2022, HCO revenue increased 5%, compared to the same period the prior year. The increase in HCO revenue was primarily attributable to an increase in claims from existing customers and renegotiation of certain deliverables to an existing customer. If Californialegislation declassifies COVID-19 as a workers' compensation claim, we expect HCO revenues to decrease. 18
Table of Contents MPN MPN revenue for the nine-month period ended
September 30, 2022, increased 6%, compared to the same period in the prior year. The increase was attributable to an increase in the number of claims reported by existing customers in the first quarter due to an increase in COVID-19 related claims, partially offset by the loss of a customer in the fourth quarter of 2021. 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. If Californialegislation declassifies COVID-19 as a workers' compensation claim, we expect MPN revenues to decrease. Utilization review
During the nine-month period ended
revenues increased by 53% compared to the same period of the previous year. The
the increase is mainly due to an increase in usage revisions
submitted by existing customers and a new customer added in Q4
Medical bill review During the nine-month period ended
September 30, 2022, medical bill review revenue increased by 14%, when compared to the same period in the prior year. This increase was primarily due to an increase in hospital and non-hospital bills reviewed as injured workers began seeking medical treatment for injuries suffered during the pandemic when medical treatment for workers' compensation claims were subject to restrictions. Medical case management During the nine-month period ended September 30, 2022, medical case management revenue decreased by 12%, compared to the same period in the prior year. The decrease in medical case management revenue was primarily due to customers electing not to apply medical case management to all of their COVID related claims in the 2022 period as they had done in the 2021 period and a decrease in the number of new referred claims managed with existing customers as a result of fewer workplace injuries during 2020 and 2021 due to COVID related workforce restrictions. Other Other revenue for the nine-month period ended September 30, 2022, decreased 41%, compared to the same period in the prior year. The decrease was primarily the result of fewer Medicare set-aside claims, fewer fees for network access for preferred provider organizations and the discontinuation of our network referral access for non-HCO, non-MPN customers after the loss of our last customer who utilized the service in the fourth quarter of 2021. As noted above, since the fourth quarter of 2021 we discontinued network referral access for non-HCO, non-MPN customers as this type of service is no longer offered in the marketplace, we expect other revenue to be lower in future periods. Expenses Total expenses for the nine-month period ended September 30, 2022, decreased 1%, compared to the same period in the prior year. The decrease was the result of decreases in depreciation, bad debt provision, consulting fees, salaries and wages, insurance, data maintenance, and general and administrative, which was partially offset by an increase in professional fees and outsource service fees. Outsource service fees During the nine-month period ended September 30, 2022, outsource service fees increased 42%, compared to the same period the prior year. The increase was primarily the result of an increase in the volume of utilization reviews and medical bill reviews, partially offset by fewer Medicare set-aside claims. The increase in the volume of utilization review and medical bill review is due to injured workers now seeking medical treatment for injuries that occurred during the pandemic when treatments for workplace injuries were restricted, as well as for our customers' employees returning to the workforce and getting injured on the job. The increased volume in these services required us to increase our usage of these outsourced services. Data maintenance During the nine-month period ended September 30, 2022, data maintenance fees decreased 21%, compared the same period the prior year. The decrease was primarily the result of decreases in the number of claims from the loss of an MPN customer in the fourth quarter of 2021 that generates fees for MPN notifications, partially offset by increases in our customers' employee counts for enrollment into our HCO and MPN programs. 19
Table of Contents General and administrative During the nine-month period ended
September 30, 2022, general and administrative expenses decreased by 15%, compared to the same period the prior year. This decrease was primarily attributable to decreases in auto expenses, bank charges, licenses and permits, office supplies, postage and delivery, printing and reproduction, rent expense - equipment, rent expense - office, shareholders' expense, telephone, and vacation expense. Rent expense - office, telephone, and vacation expense, were 61%, 11%, and 16%, respectively of the overall decreases in expenses. Rent expense for office and telephone decreased in May 2022, when we moved office locations to a much smaller location and moved to a cloud based phone system. The decreases were partially offset by increases in advertising, dues and subscriptions, education, equipment - repairs, IT enhancement/internet, meals, travel, miscellaneous expenses, and parking. IT enhancement, dues and subscriptions and miscellaneous expenses increased due to the office move, making changes to our IT systems and transitioning office software and phones to subscription based services. Income from operations
Total revenue increased by
which led to an increase in operating income of
Other income (expense) In
February 2021, the principal and interest on the PPP loans issued to PHCO, MMC and MMM in April and May 2020, was forgiven in full. As a result, we realized income from paycheck protection loan forgiveness of $464,386and loan interest expense from paycheck protection loans of $3,686during the nine months ended September 30, 2021, resulting in total other income during the period of $460,700. During the corresponding period ended September 30, 2022, we realized no other income (expense). Income tax provision We realized a 40% increase in our income tax provision during the nine-month period ended September 30, 2022, compared to the same period in the prior year. During the nine-month period ended September 30, 2022, we realized $343,062more in income from operations than during the same period in the prior year. During the nine-month period ended September 30, 2021, we realized net other income of income of $460,700PPP loan forgiveness. The other income realized from the PPP loan forgiveness in the 2021 period was exempt from federal income taxation, but not state income taxation, which was the primary contributing factor to why our income tax provision was higher in the 2022 period than the 2021 period despite the fact that our income before taxes was actually higher in the 2021 period. Net income As noted in the preceding paragraph, during the nine-month period ended September 30, 2022, we realized a $343,062increase in income from operations compared to the prior year period. However, during the nine-month period ended September 30, 2021, we realized $460,700in other income as a result of PPP loan forgiveness. We realized no other income during the nine-month period ended September 30, 2022. As a result, we realized a $173,778, or 26% decrease in net income during the nine-month period ended September 30, 2022, compared to the same period in the prior year.
Cash and capital resources
Liquidity is a measurement of our ability to meet our potential cash requirements for general business purposes. We consistently monitor our liquidity and financial position and take actions management believes are in the best interest of our Company and our shareholders to ensure the long-term financial viability of our Company. Historically, we have 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. We have not historically used, nor do we currently possess, a credit facility or other institutional source of financing. As a result of the pandemic subsiding, restrictions being removed and employees returning to work, coupled with our efforts to transition the Company to a remote working environment, and reductions in overhead expenses, during the nine-month period ended
September 30, 2022, we saw an increase in revenues and a decrease in expenses. We have continued to realize net income and net cash from operations and have increased our net cash position. Management currently believes that absent (i) any unanticipated further COVID-19 impacts, (ii) economic recession or a longer-term downturn in the general economy, (iii) further impacts related to rising or sustained inflation or the sanctions, countermeasures and other actions in response to the Russia- Ukraineconflict, or (iv) the loss of several major customers within a condensed period, cash on hand and anticipated revenues from operations will be sufficient to cover our operating expenses for at least the next twelve months, as well as for the longer term. 20
cash flows generated by our operating activities, partially offset by cash flows
We took advantage of both the First Draw and Second Draw Paycheck Protection Programs. Because the funds were used as designated under those programs, we received full forgiveness of all PPP loans received. In the future we may further 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. We have planned certain capital expenditures, including changing our operational software, the process of which we are currently undergoing. We anticipate the cost to change operational software will result in significantly higher capital expenditures than in previous years. We encountered difficulties with the first software vendor in this transition and have had to seek another software vendor, the result of which has delayed this transition and increased capital expenditures for this project. If we encounter further issues or delays with the transition capital expenditures could be higher than anticipated, but we believe we have adequate capital on hand to cover these expenses. We do not anticipate these expenditures will require us to seek outside sources of funding. We believe our strong cash position could allow us to identify and capitalize on potential opportunities to expand our business through the acquisition of existing businesses that may have insufficient resources to overcome the impacts of the COVID-19 pandemic or current uncertain economic conditions. Such expansion could occur through accretion to existing business lines or expansion into new business lines and related industries, including, but not limited to, the insurance industry. We may also seek growth through organic development of new lines of business or expansion of existing offerings. 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 interest in our capital stock by a potential seller or the market. As a result of the unique nature of the COVID-19 pandemic and its impacts on our operations, the operations of our customers and the broader economy, coupled with uncertainty surrounding the potential impacts of rising inflation or economic recession, we cannot provide any assurance that the assumptions management has used to estimate our liquidity requirements will remain accurate in either the short-term or the longer-term. The ultimate duration and impact of these events on our business, results of operations, financial condition and cash flows is dependent on future developments, which are uncertain, largely beyond our control and cannot be predicted with any degree of certainty at this time. We expect that our results of operations, including revenues, in future periods will be partially impacted by the COVID-19 pandemic due to the possibility that as COVID-19 becomes more common and less severe that COVID-19 workers' compensation claims may no longer be classified as a workers' compensation illness. We expect that with rising inflation profit margins will be impacted due to fixed pricing for some of our public entity customers and the increasing costs in salaries and wages as we compete to recruit and retain employees. Cash flow During the nine months ended
September 30, 2022, cash was primarily used to fund operations. We had a net increase in cash of $554,691during the nine months ended September 30, 2022. See below for additional information. For the nine months ended September 30, 20222021 (unaudited) (unaudited)
Net cash flow generated by operating activities
Net cash used in investing activities
(17,619 ) (12,199 ) Net cash provided by financing activities - 218,900 Net increase in cash
$ 554,691 $ 656,69421
During the nine months ended
September 30, 2022and 2021, net cash provided by operating activities was $572,310and $449,993, respectively, an increase of $122,317. This increase was primarily the result of decreases in accounts receivable, deferred rent asset, income tax receivable, other assets, accrued expenses, partially offset by increases in allowance for bad debt, prepaid expenses, accounts payable, income tax payable, and unearned revenue. We realized higher net income during the nine months ended September 30, 2021, than the same period 2022, as a result of receiving PPP loan forgiveness in the amount of $460,700during the 2021 period.
Net cash used in investing activities was
nine-month periods ended
nine-month periods ended
investing activities for the purchase of new software and other computer improvements.
During the nine months ended
September 30, 2022, we did not engage in any financing activities. Net cash provided by financing activities during the nine months ended September 30, 2022, was $218,900. In April 2021, MMM received a Second Draw PPP loan in the amount of $218,900, that was fully forgiven with accrued interest in December of 2021.
Off-balance sheet financing arrangements
Inflation We experience pricing pressures in the form of competitive pricing. Insurance carriers and third-party administrators compete against us for customers 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 can be material to our revenues or net income. Some of our customers 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. See also "Effects of inflation" of Item 1A Risk Factor of our Annual Report on Form 10-K filed with the Commission on
April 14, 2022.
Significant Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in our consolidated financial statements and accompanying notes. We continually evaluate our accounting policies, estimates, and judgments and base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Because of the inherent uncertainty in making estimates and judgments, actual results could differ from our estimates and judgments. We consider (i) revenue recognition, (ii) leases, (iii) allowance for uncollectible accounts, and (iv) income taxes to be the most critical accounting policies because they relate to accounting areas that require the most subjective or complex judgments by us, and, as such, could be most subject to revision as new information becomes available. Revenue recognition: We recognize revenue when control of the promised services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services. As we complete our performance obligations which are identified below, we have an unconditional right to consideration as outlined in our contracts with our customers. Generally, our accounts receivables are expected to be collected in 30 days in accordance with the underlying payment terms. We offer multiple services under our managed care and network solutions service lines, which the customer may choose to purchase. These services are billed individually as separate components to our customers. Revenue is recognized as the work is performed in accordance with our customer contracts. Based upon the nature of our products, bundled managed care elements are generally delivered in the same accounting period. Advance payments from subscribers and billings made in advance are recorded on the balance sheet as unearned revenue. Leases: We determine if an arrangement includes a lease at inception. Right-of-use 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. Right-of-use assets and lease liabilities are recognized at the commencement date of the lease, renewal date of the lease or significant remodeling of the lease space based on the present value of the remaining future minimum lease payments. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable. 22
Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. The interest rate implicit in lease contracts is typically not readily determinable. As a result, we utilize our incremental borrowing rate to discount lease payments, which reflects the fixed rate at which we could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. Our leases may include options to extend or terminate the lease which are included in the lease term when it is reasonably certain that we will exercise any such options. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Allowance for uncollectible accounts: We determine our allowance for uncollectible accounts by considering several factors, including the length of time trade accounts receivables are past due, our previous loss history, the customers' current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole. We write off accounts receivables when they become uncollectible. We must make significant judgments and estimates in determining contractual and bad debt allowances in any accounting period. One significant uncertainty inherent in our analysis is whether our experience will be indicative of future periods. Although we consider future projections when estimating contractual and bad debt allowances, we ultimately make our decisions based on the best information available to us at the time the decision is made. Adverse changes in general economic conditions or trends in reimbursement amounts for our services could affect our contractual and bad debt allowance estimates, collection of accounts receivables, cash flows, and results of operations. Two customers accounted for 10% or more of accounts receivable at
September 30, 2022and 2021, respectively. Accounting for income taxes: We record a tax provision for the anticipated tax consequences of our reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance, if necessary, to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. In the event we determine all, or part of the net deferred tax assets are not realizable in the future, we will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management's expectations could have a material impact on our financial condition and operating results. The significant assumptions and estimates described above are important contributors to our ultimate effective tax rate in each year. 23