PACIFIC HEALTH CARE ORGANIZATION INC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our financial condition and results of
operations for the years ended
that are expected to affect our prospective financial condition. The following
discussion and analysis should be read together with our audited consolidated
financial statements and related notes included in Item 8 Financial Statements
and Supplementary Data of this annual report.
Some of the statements set forth in this section are forward-looking statements
relating to our future results of operations, financial condition, liquidity and
capital resources. Our actual results, financial condition, liquidity and
capital resources may vary from the results anticipated by these statements. We
disclaim any obligation to update or revise any forward-looking statements based
on the occurrence of future events, the receipt of new information, or
otherwise. Actual future results may differ materially from those expressed in
the forward-looking statements as a result of risks, uncertainties and
assumptions. Please see " Cautionary Statement Regarding Forward-Looking
Statements " and Item 1A Risk Factors of this annual report.
Overview
We are workers' compensation cost containment specialists. Our business
objective is to deliver value to our customers that reduces 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. Our customers
include self-administered employers, insurers, third party administrators,
municipalities and others. While we process medical bill reviews in several
states, our customers are based principally in
workers' compensation insurance is a critical problem.
Our core services focus on reducing medical treatment costs by enabling our
customers to share control over the medical treatment process of their injured
workers. This control is obtained by participation in one of our medical
treatment networks. We realize revenues from enrollment of the employees of our
customers into our various networks. We also provide claims-related services
including utilization review, medical case management, medical bill review, lien
representation, workers' compensation carve-outs, legal support and Medicare
set-aside services that bring efficiencies to claims processing and management
that reduce the overall burden of workers' compensation claims resolution.
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 customers, our revenue adjusts with the growth or retraction of our
customers' managed headcount. Throughout the year, new employees and customers
are added while others terminate for a variety of reasons.
As discussed in this annual report, COVID-19 has had and will likely continue to
have an impact on our business. Even after work restrictions and social
distancing mandates were lifted some of our customers have not fully returned to
pre-pandemic work force levels or have transitioned some of their workforce to
be remote. We have noticed that while customers have a reduced workforce, there
was an increase in COVID-19 related claims during the fourth quarter of 2021
through the beginning of 2022. We anticipate that we will continue to see
seasonal fluctuations in COVID-19 related claims, but fewer severe claims. The
reduction in our customers' workforce and remote working, could lead to lower
incidences of workplace injuries. Notwithstanding such reductions, this does not
eliminate an employer's obligation to provide workers compensation coverage to
employees working remotely.
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We expect businesses will continue to seek ways to control their workers'
compensation program costs. While our HCO and MPN programs have been shown to
create a favorable return on investment for our customers, (as our services are
a significant component of our customers' loss prevention programs), from time
to time we experience customer volatility in the form of existing customers
terminating or seeking to renegotiate the scope and terms of existing services,
switching to a third party administrator or insurance company that provides the
same services as ours, or seeking to reduce costs by managing their workers'
compensation care services in-house.
Impact of COVID-19 on our Business
We have been able to adapt our business operations to a primarily remote
workforce, with no material interruptions in service, data breaches, technology
failures, or inability to complete mission-critical functions. We have been able
to effectively maintain contact with employees, partners, customers, and other
related parties using technological solutions such as virtual meetings and
enhanced collaboration programs and have developed policies and protocols to
ensure department and employee performance quality is maintained despite the
change in work setting. This has resulted in a shift from in-person office
related costs to costs associated with maintaining a remote workforce, including
reimbursing employees for internet, phone, and office supply expenses;
additional computer hardware costs; and some administrative burdens in complying
with
coming to the office, we have fewer costs related to sanitizing, cleaning, and
providing PPE supplies to the office to prevent potential COVID-19 exposure.
Revenue for our services is derived from our customers' employee headcount and
workers' workplace injuries. During the periods covered by this report, several
of our customers, including some of our largest customers, had to suspend or
significantly modify their operations during much or all of the pandemic. Since
experience lower than normal business volume and employee counts due to the
pandemic. Until the impacts of COVID-19 on our customers' businesses lessen,
employees return to more normal workloads and the occurrence of workplace
injuries returns to more traditional levels, we anticipate our revenues will
continue to be negatively affected.
Compensation for COVID-19 cases. The law creates two rebuttable presumptions
that COVID-19 illnesses contracted by specific categories of employees are work
related and therefore eligible for workers' compensation. The first presumption
applies to COVID-19 workers' compensation claims filed by peace officers,
firefighters, first responders, and health care workers, and does not apply to
our employees, though it may apply to our customers' claims. The second
presumption, for employers with five or more employees, applies to employees who
test positive for COVID-19 during an outbreak at the employee's specific place
of employment. An outbreak occurs when a set number of employees - depending on
the number of employees at the workplace - test positive for COVID-19 during a
continuous 14-day period. This presumption applies to the Company. However, no
Workers' Compensation cases related to COVID-19 and/or via this
have been filed against the Company to date.
In
Families First Coronavirus Response Act ("FFCRA") which provided employees paid
leave for COVID-19 related illness for themselves and/or a family member and
provided employers with tax credits. The FFRCA expired on
made tax credits available to employers with fewer than 500 employees who
voluntarily chose to grant employees paid leave under the FFCRA through
chose to extend the FFCRA paid leave to our employees through its expiration on
ceased to offer COVID-19-specific paid leave benefits to our employees. Family,
medical, and other types of leave remain available to employees under existing
company policy.
In
law ("CA SPSL"). It provided 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
through
request reimbursement for qualifying leave or to use it towards future requests
through
eligible for federal tax credits to offset the costs of providing the CA SPSL.
On
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In
into place the Stay Home Order and Blueprint for a Safer Economy. This removed
restrictions on physical distancing, capacity limits on businesses, and the
county tiers system. We have elected to allow employees to continue working
remotely and made arrangements to reduce our office space to an executive and
shared office for other employees to come in periodically in 2022.
In
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
through
reimbursement for qualifying leave or to use it towards future requests through
utilize CSPSL are ineligible for federal tax credits to offset the costs of
providing 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
incurred negligible payroll, benefits, administrative, and liability costs
related to CSPSL. However, we could incur some significant costs if a second
booster shot is recommended or required later in 2022, or if another spike in
COVID-19 results in increased usage of the CSPSL benefit by employees.
Unlike much of the
recruitment and retention. Our maintenance of a successful remote environment,
including high employee morale and cohesive culture via technology, has also
allowed us to seek candidates in a wider range of locations, some of which have
lower costs of living and lower wage norms, as well as increasing the quantity
of qualified applicants. While we cannot predict or control future trends in
labor in our industry, we believe that our solid recruitment practices and the
opportunities presented by remote work options will help us adapt to a changing
workforce environment.
In response to COVID-19 and transitioning to a remote workforce, we have taken
measures to ensure data security, but there is no guarantee that these measures
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 this
annual report, our business has been and could continue to be materially and
adversely affected by the potential interruptions to our business operations
resulting from changes to our business model in response to COVID-19.
Summary of Fiscal 2021
During the year ended
from HCO remained flat while MPN and medical bill review revenue increased by 4%
and 21%, respectively. Revenue from utilization review, medical case management,
and other fees decreased 4%, 26%, 16%, respectively.
During fiscal 2021, operating expenses decreased by 6%, primarily as a result of
decreases in depreciation, bad debt provision, consulting fees, salaries and
wages, insurance, outsource service fees, and general and administration
expenses. These decreases were partially offset by an increase in data
maintenance, while professional fees remained flat. As a result, our income from
operations was
Our provision for income tax expense decreased 26% during fiscal 2021, from
operations.
Our net income also increased 81% from
primarily as a result of the Paycheck Protection Program loan forgiveness
income. Basic and fully diluted earnings per share during fiscal 2021 was
and
2020.
Revenue
We derive revenue primarily from fees charged for access to our provider
networks, and for review and medical case management services.
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Table of Contents HCO
HCO revenue is generated largely from fees charged to our employer customers for
claim network fees to access to 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.
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
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.
The following table sets forth, for the years ended
the percentage each revenue item identified in our audited consolidated
financial statements contributed to total revenue during the respective period.
2021 2020
HCO 27 % 24 %
MPN 10 % 8 %
Utilization review 20 % 19 %
Medical bill review 7 % 5 %
Medical case management 33 % 40 %
Other 3 % 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
Salaries and wages reflect employment-related compensation we pay to our
employee, payroll processing, payroll taxes and commission.
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Table of Contents Professional fees
Professional fees include fees we pay to third parties to provide medical
consulting, medical case management, and board of director's fees for board
meetings, as well as, legal and accounting fees.
Insurance
Insurance expense is comprised primarily of health insurance benefits offered to
our employees, directors' and officers' liability insurance, Workers'
Compensation coverage and business liability coverage.
Data maintenance fees
Data maintenance fees includes fees we pay to a third party to process HCO and
MPN employee enrollment. These fees fluctuate throughout the year because of the
varied timing of customer enrollment into the HCO or MPN program and the number
of employees they have in their workforce.
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 tends to increase and decrease in correlation with the demand for
those services.
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.
The following table sets forth, for the years ended
the percentage each expense item identified in our audited consolidated
financial statements contributed to total expense during the respective period.
2021 2020
Depreciation 1 % 1 %
Bad debt provision 0 % 0 %
Consulting fees 5 % 5 %
Salaries and wages 56 % 56 %
Professional fees 6 % 6 %
Insurance 7 % 7 %
Outsource service fees 7 % 9 %
Data maintenance 4 % 3 %
General and administrative 14 % 13 %
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Table of Contents Results of Operations
Comparison of the fiscal years ended
The following represents selected components of our consolidated results of
operations, for the years ended
together with changes from year-to-year:
Year Ended December 31
Amount of
2021 2020 Change % of Change
Revenues
HCO $ 1,449,345 $ 1,453,365 $ (4,020 ) - %
MPN 524,148 502,590 21,558 4 %
Utilization review 1,091,792 1,142,796 (51,004 ) (4 %)
Medical bill review 368,721 305,510 63,211 21 %
Medical case management 1,771,718 2,404,148 (632,430 ) (26 %)
Other 197,386 234,309 (36,923 ) (16 %)
Total revenues 5,403,110 6,042,718 (639,608 ) (11 %)
Expense
Depreciation 48,887 55,428 (6,541 ) (12 %)
Bad debt provision 15,656 20,101 (4,445 ) (22 %)
Consulting fees 237,582 253,181 (15,599 ) (6 %)
Salaries and wages 2,740,806 2,916,576 (175,770 ) (6 %)
Professional fees 293,936 295,358 (1,422 ) - %
Insurance 321,690 351,122 (29,432 ) (8 %)
Outsource service fees 364,951 449,836 (84,885 ) (19 %)
Data maintenance 204,725 184,946 19,779 11 %
General and administrative 658,402 695,899 (37,497 ) (5 %)
Total expenses 4,886,635 5,222,447 (335,812 ) (6 %)
Income from operations 516,475 820,271 (303,796 ) (37 %)
Other income (expense)
Paycheck protection loan
forgiveness income 684,785 - 684,785 100 %
Paycheck protection loan
interest expense (5,185 ) - (5,185 ) 100 %
Total other income (expense) 679,600 - 679,600 100 %
Income before taxes 1,196,075 820,271 375,804 46 %
Income tax provision 201,055 270,701 (69,646 ) (26 %)
Net income $ 995,020 $ 549,570 $ 445,450 81 %
Key trends affecting results of operations
As noted throughout this annual report, during the years ended
and 2020, COVID-19 has impacted the businesses of our customers, our business
and our results of operations. Most of our clients, and their employees are
located in
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 working. Allowable
medical treatment for workers' compensation claims were also limited to help
ease the burden of COVID-19 on medical facilities. We are beginning to see
revenues for HCO and MPN enrollment increase as restrictions lift and employers
begin hiring, but 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.
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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, medical case
management reviews could continue to remain lower in the future.
Revenue HCO
During the years ended
flat. The slight decrease in HCO revenue was attributable to the loss of four
customers in 2021 and fewer claim network fees from existing customers,
partially offset by increases in claim network fees from other existing
customers.
MPN
The 4% increase in MPN revenue for 2021 compared to 2020, resulted primarily
from increases in the number of claims reported by existing customers which led
to in an increase in the number of MPN claim network fees.
Utilization review
During the year ended
4%. The decrease in utilization review revenue was due to the loss of three
customers, partially offset by increases in utilization review referrals from
other customers and the addition of a new customer in 2021.
Medical bill review
The 21% increase in medical bill review revenue during 2021 was primarily due to
an increase in hospital and non-hospital bills reviewed, partially offset by the
loss of three customers in 2021.
Medical case management
During the twelve-month periods ended
medical case management decreased 26% principally as a result of the loss of two
customers, a decrease in the number of new claims, and pauses in work on open
claims due to medical treatment delays in 2021. In 2020 and 2021, the decrease
in the number of new claims was due to the reduction in our customers' workforce
and COVID-19 business and medical office restrictions. Medical offices were slow
to resume full capacity and our medical management nurses could not work on the
open claims until medical treatment was provided or was in progress. We believe
that as the economy recovers, that medical case management will return to
pre-pandemic levels.
Other
Other fees consist of revenue from network access fees derived from out of
network referrals to our network of physicians, claims fees, expert witness
testimony, lien representation, legal support services, Medicare set-aside, and
workers' compensation carve-out services. Other fee revenue for the year ended
earlier. The decrease was the result of a loss of a customer which reduced our
claims fees for accessing our network. The claims fees generated by this type of
service is no longer offered in the current marketplace. Since losing the
customer, we have chosen to discontinue this service in 2021.
Expense Salaries and wages
Salaries and wages decreased by 6% in 2021 compared to 2020. This decrease was
the result of a reduction in our workforce in 2021 due to a decline in demand
for our services caused by the effects of COVID-19 restrictions on our
customers.
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Table of Contents Professional fees
Professional fees decreased marginally during 2021. The decrease in professional
fees was primarily the result of fewer fees incurred for board of director's
fees and medical management services as a result of decreased medical case
management activity, partially offset by increases in accounting and legal
professional fees.
Insurance
During 2021 we decreased insurance expenses by 8% compared to 2020. The decrease
in insurance expenses was primarily attributed to a decrease in medical
insurance premiums as a result of our lower employee count and lower insurance
expense for business, directors' and officers' liability, and Workers'
Compensation coverage.
Outsource service fees
Outsource service fees decreased 19% during the twelve-month period ended
of utilization review referrals, medical bill reviews, referrals sent out for
Medicare set-aside arrangements, partially offset by increases in medical case
management administrative services. We anticipate our outsource service fees
will continue to move in correspondence with the level of utilization review,
medical bill review, certain medical case management services and Medicare
set-aside services we provide in the future.
Data maintenance
During the year ended
primarily as a result of an increase in the number of customers' employees
enrolled in our HCO and MPN programs. In 2021, we saw an increase in the number
of MPN enrollees as our customers began hiring employees. We anticipate that as
businesses recover from the pandemic that data maintenance fees will increase
and then level off to a modest growth.
General and administrative
During 2021, we were able to reduce our general and administrative expenses by
5%. This decrease was the result of decreases in advertising, dues and
subscriptions, equipment/repairs, IT enhancement, licenses and permits, office
supplies, parking, postage, printing and reproduction, rent expense for
equipment, miscellaneous expenses, and shareholders' expense, partially offset
by increases in charity - cash contribution, auto expenses, bank charges,
education, telephone, office rent, travel and entertainment, and vacation
expense. These changes in general and administrative expenses were largely
attributable to changes in how we conducted our business in response to
COVID-19. While we anticipate certain general and administrative expenses will
remain lower in the long-term, such as office rent, internet and phone, as a
result of changes to our business operations in response to COVID-19, we expect
other general and administrative expenses, such as IT enhancements, hardware and
other technology-related expenses will remain at higher than historic levels in
future periods.
Income from Operations
The 6% decrease in total expenses we achieved during fiscal 2021 was not
sufficient to fully offset the 11% decrease in total revenues during the same
period, resulting in a 37% decrease in income from operations during the fiscal
year ended
Other Income (Expense)
In
("PPP") loans in the aggregate amount of
issued to PHCO, MMC and MMM in April and
Act Paycheck Protection Program Second Draw Loans in the amount of
"second draw PPP loan") issued to MMM in
As a result, we realized income from paycheck protection loan forgiveness of
during the year ended
2021 of
income (expense). We do not expect there to be further similar forgivable loans
in future periods and as a result, we expect other income (expense) to be
significantly less in future periods than during the year ended
2021
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Table of Contents Income Tax Provision
Our income tax provision for the year ended
a result of a 37% decrease in income from operations during 2021, compared to
2020.
Net Income
Despite the fact that declines in our total revenues outpaced reductions in our
total expenses during 2021, as a result of the recognition in 2021 of PPP loan
forgiveness we realized an 81% increase in net income during the year ended
this to recur in future periods and expect net income will be lower in future
periods until revenues increase.
Liquidity 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 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.
During the past two fiscal years we have experienced declining revenues as a
result of the impacts of the COVID-19 pandemic on our business, the businesses
of our customers and the overall economy. In April and
MMC received first draw PPP loans in the aggregate amount of
spirit of the PPP loan program policy of protecting the continued economic
stability of employees, we put virtually all of the PPP loan amounts toward
payroll and employee benefit expenses. In
received full forgiveness of their first draw PPP loans including accrued
interest. In
such as payroll, group health benefits, rent and utilities. In
MMM received full forgiveness of the second draw PPP loan including accrued
interest. In addition to availing the Company of the benefits of these
government sponsored programs, we have also focused on reducing other operating
expenses while maintaining our ability to provide the high-quality care to which
our customers are accustomed. Since the outbreak of the pandemic in early 2020,
we have realized a net reduction in our workforce of six employees. At the end
of
expire. We have moved towards operating remotely and have taken this opportunity
to reduce our office rent expense. We are currently in the process of
relocating to a smaller office. The office lease on this new space commenced on
less in the new office space. Some of those savings will be incorporated to
enhance our IT security and new internet phone system.
Despite the fact that, net of the effects of PPP loan forgiveness, we have
realized reduced revenues and lower net cash from operating activities, and the
fact that we have incurred expense in transitioning our employees to remote
work, 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 impact, (ii) a longer-term downturn in
the general economy as a result of inflation and the sanctions, countermeasures
and other actions in response to the
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 of
primarily the result of net cash provided by our operating and financing
activities, partially offset by cash used in investing activities.
We currently have planned certain capital expenditures including moving our
corporate offices to a new location and the decommissioning of certain IT
systems, implementation of new internet phone services and a move to a new
software platform. We do not anticipate these costs to be significant and have
adequate capital on hand to cover these expenses. We do not anticipate these
expenditures will require us to seek outside sources of funding.
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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 COVID-19 pandemic, including accretion of 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 rising inflation and 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 our uncertain, largely beyond our control and cannot be predicted with any
degree of certainty at this time. However, we expect that our results of
operations, including revenues, in future periods will continue to be adversely
impacted by the COVID-19 pandemic and potentially by rising inflation and the
Cash Flow
During the year ended
operations. We had net increases in cash of
years ended
discussion and analysis of cash flow.
Year Ended December 31,
2021 2020
Net cash provided by operating activities
Net cash used in investing activities
(18,376 ) (53,848 )
Net cash provided by financing activities 218,900 460,700
Net increase in cash
$ 586,915 $ 1,394,293
Net cash provided by operating activities was
2020, respectively. The decrease of
activities was the result of realizing lower net income coupled with decreases
in accounts receivable, bad debt provision, prepaid income tax, receivable -
other, deferred taxes, accounts payable, income tax payable, and deferred rent
expense, partially offset by increases in taxes receivable, deferred rent asset,
prepaid expenses, accrued expenses, and unearned revenue.
Net cash used in investing activities was
respectively. Net cash used in investing activities was less by
because of a decrease in purchases of computers, furniture and equipment.
In 2021, net cash provided by financing activities was
draw PPP loan issued to MMM compared to
MMC and MMM, respectively, in 2020.
Off-Balance Sheet Financing Arrangements
As of
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Table of Contents Inflation
We experience pricing pressures in the form of competitive pricing. Insurance
carriers and third-party administrators often try to take our 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 this annual report.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting
principle generally accepted in
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
expected 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 receivable 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 deferred 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.
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 a number of factors, including the length
of time trade accounts receivable are past due, our previous loss history, the
customers' current ability to pay its obligation to us, and the condition of the
general economy and the industry as a whole. We write off accounts receivable
when they become uncollectible.
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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 past 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 receivable, cash flows, and results of operations. Three
customers accounted for 10% or more of accounts receivable at
and 2020.
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.
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