PACIFIC HEALTH CARE ORGANIZATION, INC. The following is a discussion of our financial condition and results of
operations for the years ended
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
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
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
In
In
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In
In
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
Unlike much of the
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
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
Our net income also increased 81% from
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
The following table sets forth, for the years ended
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
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
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
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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
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
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
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
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
Data maintenance
During the year ended
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
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Table of Contents Income Tax Provision
Our income tax provision for the year ended
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
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
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
As of
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
Cash Flow
During the year ended
Year Ended December 31,
2021 2020
Net cash provided by operating 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
Net cash used in investing activities was
In 2021, net cash provided by financing activities was
Off-Balance Sheet Financing Arrangements
As of
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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
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
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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