PACIFIC HEALTH CARE ORGANIZATION, INC.
This quarterly report on Form 10-Q ("quarterly report") contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended, (the "Exchange Act") that are based on management's beliefs
and assumptions and on information currently available to management. For this
purpose any statement contained in this annual report that is not a statement of
historical fact may be deemed to be forward-looking, including, but not limited
to statements about future demand for the products and services we offer,
changes in the composition of the products and services we offer, the impact of
the loss of one or more major customers, our ability to add new customers to
replace the loss of current customers, the regulatory environment in which we
operate, future revenues, expenses, results of operations, liquidity, capital
resources or cash flows, or our actions, intentions, plans, strategies and
objectives and other risks and uncertainties detailed elsewhere in this annual
report. Without limiting the foregoing, words such as "believe," "expect,"
"project," "intend," "estimate," "plan," "objective," "future," "forecast,"
"predict," "may," "will," "likely," "could," "should," or "anticipate" or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve known and unknown risks, uncertainties,
and other factors that may cause our actual results, performance or achievements
or the industry to be materially different from any future results, performance
or achievements or industry outcomes expressed or implied by such
forward-looking statements. Such factors include, but are not limited to:
? the impact on our business of COVID-19, including the ability of our workforce
to meet the needs of our customers while complying with federal and state
social distancing, workplace restrictions and other mandates, as well as its
impacts on the workers' compensation industry, the businesses of our customers
and on the economy generally;
? cost reduction efforts by our existing and prospective customers;
? competition within our industry, including competition from much larger
competitors;
? business combinations among our customers or competitors;
? legislative and regulatory requirements or changes which could render our
services less competitive or obsolete;
? our failure to successfully develop new services and/or products eitherorganically or through acquisition, or to anticipate current or prospective
customers' needs;
? our ability to retain existing customers and to attract new customers;
? price increases;
? cybersecurity and software system failures and breaches;
? reductions in worker's compensation claims or the demand for our services,
from whatever source; and
? delays, reductions, non-payment or cancellations of contracts we have
previously entered.
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, 2020 , filed the Securities and Exchange Commission (the
"Commission") on March 31, 2021 (the "Annual Report").
Forward-looking statements are predictions and not guarantees of future
performance or events. Forward-looking statements are based on current industry,
financial and economic information, which management has assessed but which by
its nature, is dynamic and subject to rapid and possibly abrupt change. Our
actual results could differ materially from those stated or implied by such
forward-looking statements. We hereby qualify all our forward-looking statements
by these cautionary statements. These forward-looking statements speak only as
of the date of this quarterly report, unless otherwise indicated, and should not
be unduly relied upon in making investment or voting decisions. We undertake no
obligation to publicly update or revise any forward-looking statement whether as
a result of new information, future events or otherwise (other than pursuant to
reporting obligations imposed on registrants pursuant to the Exchange Act) to
reflect subsequent events or circumstances.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes contained elsewhere in this report and in our other filings with the Commission.
11--------------------------------------------------------------------------------
Table of Contents
Throughout this quarterly report, unless the context indicates otherwise, the terms, "we," "us," "our" or "the Company" refer toPacific Health Care Organization, Inc. , ("PHCO") and our wholly owned subsidiariesMedex Healthcare, Inc. ("Medex"),Industrial Resolutions Coalition, Inc. ("IRC"),Medex Managed Care, Inc. ("MMC"),Medex Medical Management, Inc. ("MMM"),Medex Legal Support, Inc. , ("MLS") andPacific Medical Holding Company, Inc. ("PMHC"). Overview We incorporated under the laws of the state ofUtah inApril 1970 under the nameClear Air, Inc. We changed our name toPacific Health Care Organization, Inc. , inJanuary 2001 . InFebruary 2001 we acquiredMedex Healthcare, Inc. ("Medex"), aCalifornia corporation organized inMarch 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 ofCalifornia . InAugust 2001 we formedIndustrial Resolutions Coalition, Inc. ("IRC"), aCalifornia corporation, as a wholly owned subsidiary of PHCO. IRC oversees and manages our Workers' Compensation carve-outs services. InJune 2010 we acquiredMedex Legal Support, Inc. ("MLS"), aNevada corporation incorporated inSeptember 2009 . MLS offers lien representation services and Medicare Set-aside services ("MSA"). InFebruary 2012 we incorporatedMedex Medical Management, Inc. , ("MMM") in the state ofNevada , as a wholly owned subsidiary of the Company. MMM is responsible for overseeing and managing medical case management services. InMarch 2011 we incorporatedMedex Managed Care, Inc. ("MMC") in the state ofNevada , as a wholly owned subsidiary of the Company. MMC oversees and manages the Company's utilization review and bill review services. InOctober 2018 we incorporatedPacific Medical Holding Company, Inc. ("PMHC") to act as a holding company for future potential acquisitions. In order to simplify business procedures, bookkeeping and administrative structure; and eliminate duplicative functions and reduce costs; we plan to terminate the existence of IRC, MLS and PMHC and wind up those subsidiaries during 2021. The business, assets and liabilities of those entities will be transferred to PHCO or its other subsidiaries. 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 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. According to studies conducted by auditing bodies on behalf of theCalifornia 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 health care organizations ("HCOs") and our medical provider networks ("MPNs"). We also provide medical case management, utilization review, medical bill review, workers' compensation carve-outs and Medicare set-aside services. Additionally, we offer lien representation and expert witness testimony, ancillary to our services. We provide our services as a bundled solution, as standalone 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 valuable government-issued licenses to operate medical treatment networks. Through Medex we hold two of the total of seven licenses issued by the state ofCalifornia to establish and manage HCOs within the state ofCalifornia . We also hold approvals issued by the state ofCalifornia to act as an MPN and currently administer 30 MPNs. Our HCO and MPN programs provide our customers with provider networks within which the customer has some ability to direct the administration of the claim. 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. 12
--------------------------------------------------------------------------------
Table of Contents
Our customers include self-administered employers, insurers, third party administrators, municipalities, and others. Our principal customers are companies with operations located in the state ofCalifornia where the high cost of workers' compensation insurance is a critical problem for employers, though we have processed medical bill reviews in 17 states. Our provider networks, which are located only inCalifornia , are composed of providers experienced in treating worker injuries. Our business generally has a long sales cycle, typically more than one year. Once we have established a customer relationship and enrolled employees of our customers, we anticipate our revenue to adjust with the growth or retraction of our customers' managed headcount. Throughout the year, we expect new employees and customers to be added while others terminate for a variety of reasons.
Impact of COVID-19 on our Business
To date, 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 ability to complete mission-critical functions. So far, we have been able to effectively maintain contact with employees, partners, clients, and other related parties using technological solutions such as virtual meetings, 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 costs associated with maintaining a remote workforce, including reimbursing employees for internet, phone, and office supply expenses; costs of sanitizing and cleaning the office after potential COVID-19 exposure events; costs of cleaning and PPE supplies; additional computer hardware costs; and some administrative burdens in complying withCalifornia laws and regulations related to COVID-19 safety. Revenue for our services is derived from our customers' employee counts and workers' workplace injuries. Several of our customers, including some of our largest customers, have had to suspend or significantly modify their operations during 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. As of the date of this report,California's modified state orders allow businesses, including businesses operated by our customers, to operate under COVID-19 restrictions, such as limited capacity. Under theCalifornia state orders, the determination of which businesses are affected will be on a county by county-basis as COVID-19 cases reach certain thresholds. Despite the modified state orders, we anticipate that our affected customers will continue to experience lower than normal business volume and employee counts due to the pandemic.
OnApril 1, 2020 , theDepartment of Labor issued regulations to implement the 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 onDecember 31, 2020 . OnMarch 11, 2021 , the American Rescue Plan Act ("ARPA") was signed into law. The ARPA makes tax credits available to employers with fewer than 500 employees who voluntarily choose to grant employees paid leave under the FFCRA throughSeptember 30, 2021 , and updates certain FFCRA leave provisions. We voluntarily chose to extend the FFCRA paid leave throughSeptember 30, 2021 to employees for qualifying reasons and take the tax credits. OnMarch 19, 2021 ,California passed its own COVID-19 Supplemental Paid Sick Leave law ("CA SPSL"). 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 fromJanuary 1, 2021 throughSeptember 30, 2021 . The CA SPSL allows for employees to retroactively request reimbursement for qualifying leave or to use it towards future requests throughSeptember 30, 2021 . 13
--------------------------------------------------------------------------------
Table of Contents
OnApril 21, 2020 , PHCO was granted a Paycheck Protection Program ("PPP") loan for an amount of$133,400 . OnApril 30, 2020 andMay 11, 2020 subsidiaries MMM and MMC were granted PPP loans of$267,700 and$59,600 , respectively. In the spirit of the PPP loan program policy of protecting the continued economic stability of employees, the majority of the PPP loan amounts went towards payroll and employee benefit expenses. InFebruary 2021 PHCO, MMC, and MMM received full forgiveness of their PPP loans including interest. MMM was eligible for and received a Second Draw PPP Loan in the amount of$218,900 onApril 1, 2021 . This Second Draw PPP Loan can qualify for full loan forgiveness if the disbursements meet the required forgiveness criteria. We have taken measures to ensure data security in our transition to remote work during the pandemic, but there is no guarantee that they will be completely effective, that our productivity will not be adversely impacted, or that we will not encounter some of the common risks associated with a remote workforce, including employees accessing company data and systems remotely. As discussed in greater detail in Item 1A Risk Factors of our Annual Report, our business has been and could continue to be materially and adversely affected by the potential interruptions to our business operations arising from the COVID-19 outbreak. Results of Operations
The following represents selected components of our consolidated results of
operations, for the three-month periods ended
For three months ended
March 31, Amount of
2021 2020 Change % Change
Revenues:
HCO $ 291,254 $ 326,665 $ (35,411 ) (11 %)
MPN 131,878 120,749 11,129 9 %
Utilization review 265,604 296,055 (30,451 ) (10 %)
Medical bill review 96,667 83,079 13,588 16 %
Medical case management 484,433 677,212 (192,779 ) (28 %)
Other 54,526 49,149 5,377 11 %
Total revenues 1,324,362 1,552,909 (228,547 ) (15 %)
Expense:
Depreciation 12,619 17,231 (4,612 ) (27 %)
Bad debt provision - 101 (101 ) (100 %)
Consulting fees 57,123 75,693 (18,570 ) (25 %)
Salaries and wages 694,618 745,989 (51,371 ) (7 %)
Professional fees 65,829 87,226 (21,397 ) (25 %)
Insurance 86,696 94,793 (8,097 ) (9 %)
Outsource service fees 101,803 106,114 (4,311 ) (4 %)
Data maintenance 13,296 39,728 (26,432 ) (67 %)
General and administrative 171,785 214,853 (43,068 ) (20 %)
Total expenses 1,203,769 1,381,728 (177,959 ) (13 %)
Income from operations 120,593 171,181 (50,588 ) (30 %)
Other income (expense)
Paycheck protection program loan
forgiveness income 464,386 - 464,386 100 %
Paycheck protection program loan
interest income (expense) (3,686 ) - (3,686 ) (100 %)
Total other income (expense) 460,700 - 460,700 100 %
Income before taxes 581,293 171,181 410,112 240 %
Income tax provision (74,008 ) (48,053 ) (25,955 ) 54 %
Net income $ 507,285 $ 123,128 $ 384,157 312 %
14--------------------------------------------------------------------------------
Table of Contents Revenue HCO During the three-month periods endedMarch 31, 2021 and 2020, HCO fee revenues were$291,254 and$326,665 , respectively. The 11% decrease in HCO revenue was primarily attributable to three HCO customers terminating HCO enrollment and fewer custom networks fees paid by customers to maintain custom provider lists. These decreases were partially offset by an increase in claims network fees, a fee to access our network for each worker injury claim, resulting from an increase in the number of worker injury claims from a customer. HCO revenue is generated largely from fees charged to our customers for access to our HCO networks, per claim fees, notification fees and fees for other services our HCO customers select. HCO notifications are mailed out annually and handed out by the employers for all their new hires during the month. MPN MPN fee revenue for the three-month periods endedMarch 31, 2021 and 2020, was$131,878 and$120,749 , respectively, an increase of 9% resulting from an increase in the number of claims reported by two customers. Like HCO revenue, MPN revenue is generated largely from fees charged to our customers for access to our MPN networks, per claim fees and fees for other services our MPN customers select. Unlike the HCO, MPNs do not require annual notifications. MPNs only require a notice be given to an injured worker at the time the employer is notified by the injured worker that an injury has occurred. Utilization review During the three-month periods endedMarch 31, 2021 and 2020, utilization review revenue was$265,604 and$296,055 , respectively. The decrease of 10% in the 2021 period was primarily attributable to the loss of one customer and decreased activity from several others due to COVID-19. These decreases were partially offset by the addition of a new customer and increased activities from another customer. Our customers retain us to review proposals for medical treatment. 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
During the three-month period ended
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 During the three months endedMarch 31, 2021 and 2020, medical case management revenue was$484,433 and$677,212 , respectively. The decrease was primarily the result of the loss of two customers and a decrease in the number and amount of time spent on claims managed with existing customers. The decrease was partially offset by the addition of a new customer. 15
--------------------------------------------------------------------------------
Table of Contents
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 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 fees consist of revenue derived from network access, lien representation, legal support services, Medicare-set-aside and workers' compensation carve-outs services. Other fee revenue for three-month periods endedMarch 31, 2021 and 2020, was$54,526 and$49,149 , respectively. The increase was due to an increase in Medicare-set-asides processed and fewer claims accessing our network. Expenses Total expenses for the three months endedMarch 31, 2021 and 2020, were$1,203,769 and$1,381,728 , respectively. The 13% decrease was primarily due to decreases in depreciation, bad debt provision, consulting fees, salaries and wages, professional fees, insurance, outsource service fees, data maintenance and general and administrative. Depreciation During the three-month period endedMarch 31, 2021 , we recorded depreciation expense of$12,619 compared to$17,231 during the comparable 2020 period. The decrease in depreciation was due to equipment that had fully depreciated prior to the quarter endedMarch 31, 2021 . Consulting fees Consulting fees decreased from$75,693 during the three months endedMarch 31, 2020 , to$57,123 during the three months endedMarch 31, 2021 . This decrease was the result of terminating a consultant and fewer consultant fees to assist with our insurance company acquisition search. Salaries and wages During the three-month period endedMarch 31, 2021 , salaries and wages decreased 7% to$694,618 compared to$745,989 during the same period in 2020. Salaries and wages were lower during the first quarter 2021 because we had fewer full-time employees. Professional fees For the three months endedMarch 31, 2021 , we incurred professional fees of$65,829 compared to$87,226 during the three months endedMarch 31, 2020 . The decrease in professional fees was mainly the result of fewer fees paid for outsourced medical case management services and lower fees paid to board members as a result of fewer board meetings being held during the three months endedMarch 31, 2021 . These reductions were partially offset by increased professional fees paid for outsourced accounting services. Insurance During the three-month period endedMarch 31, 2021 , we incurred insurance expenses of$86,696 , a 9% decrease over the same three-month period in 2020. The decrease in insurance expense was primarily attributable to decreases in our group health insurance premiums as we had fewer full-time employees in the first quarter of 2021. This decrease was partially offset by the increases in insurance expenses for business, director and officer liability, and workers' compensation. We expect insurance fees to increase in May andAugust 2021 , when our business insurances and current group health insurance plan are up for renewals, respectively. 16
--------------------------------------------------------------------------------
Table of Contents Outsource service fees Outsource service fees consist of costs incurred by our subsidiaries in outsourcing general administrative tasks, utilization review, medical bill review, medical case management and Medicare set-aside services, and typically tend to increase and decrease in correspondence with increases and decreases in demand for those services. We incurred$101,803 and$106,114 in outsource service fees during the three-month periods endedMarch 31, 2021 and 2020, respectively. The decrease of$4,311 was the result of decreases in outsourced services fees due to several factors including timing differences on re-enrollment notice deliveries and changes in enrollment. We anticipate our outsource service fees will continue to move correspondingly with the levels of client claims. Data maintenance During the three-month period endedMarch 31, 2021 and 2020, data maintenance fees were$13,296 and$39,728 , respectively. The decrease of 67% was primarily the result of recording the costs of notification associated with a customer's annual HCO and MPN renotifications during the three-month period endedMarch 31, 2021 when compared to the same period in 2020. Data maintenance fees tend to fluctuate from month to month depending on when new customers are enrolled, when the annual renewal of existing customer notification is due, and how many new employees our customers enroll in our HCO or MPN program. General and administrative During the three-month period endedMarch 31, 2021 , general and administrative expenses decreased 20% compared to the three-month period endedMarch 31, 2020 . This decrease was primarily attributable to decreases in dues and subscriptions, equipment and repairs, IT enhancements, licenses and permits, office supplies, parking, postage and delivery, rent expense - equipment, shareholders' expenses, travel and entertainment, vacation, and miscellaneous expenses, partially offset by increases in auto expenses, bank charges, telephone, and rent. These changes in general and administrative expenses are largely the result of COVID-19-related changes to how we have conducted business sinceMarch 2020 . Income from Operations Income from operations decreased 30% during the three-month period endedMarch 31, 2021 , when compared to the same period in 2020, as the result of the 15% decrease in revenue, which was only partially offset by the 13% decrease in expenses. Other Income (Expense) InFebruary 2021 , the principal and interest on the PPP loans issued to PHCO, MMC and MMM in April andMay 2020 , were forgiven in full. As a result, we realized total other income of$460,700 during the quarter endedMarch 31, 2021 . During the corresponding period endedMarch 31, 2020 , we realized no other income (expense). Income Tax Provision We realized income before taxes of$581,293 and$171,181 during the three-month periods endedMarch 31, 2021 and 2020, respectively. The increase in income before taxes was the result of income realized from forgiveness of Paycheck Protection Program loans, which totaled$460,700 , partially offset by lower income from operations. The 54% increase of income tax provision was the combination of decreases in federal and state taxes on operating income and no federal taxation on Paycheck Protection Program loan forgiveness income, partially offset by increases in state income tax provision as it applies to Paycheck Protection Program loan income. Net Income During the three-month period endedMarch 31, 2021 , net income was$507,285 compared to$123,128 for the same period in 2020. This increase of$384,157 , was the result of other income realized from the forgiveness of Paycheck Protection Program loans and interest in the amount of$464,386 , partially offset by a$50,588 decrease in income from operations. 17
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
As ofMarch 31, 2021 , we had cash on hand of$9,909,751 compared to$9,498,457 as ofDecember 31, 2020 . The$411,294 increase was primarily the result of net cash provided by our operating activities, partially offset by cash used in investing activities. Net cash provided by our operating activities was the result of a decrease in income from operations coupled with increases in deferred rent asset, accounts payable, accrued expenses, income tax payable, and unearned revenue and decreases in accounts receivable, receivable - other, deferred rent expense and prepaid expense.
We used
InFebruary 2021 , we received full loan and interest forgiveness of the three Paycheck Protection Program loans received by PHCO, MMC and MMM in the amounts of$134,467 ,$60,077 , and$269,842 , respectively. SinceJuly 2020 , we have not laid off or otherwise reduced our workforce because of COVID-19. As noted above, we have taken advantage of and may in the future avail ourselves of federal, state or local government programs to protect our workforce as management and our board of directors determine to be in the best interest of the Company and our shareholders. Historically, we have generally realized positive cash flows from operating activities, which, coupled with positive reserves of cash on hand have been used to fund our operating expenses and obligations. Management currently believes that absent any unanticipated COVID-19 impact, including, but not limited to a significant longer-term downturn in the economy or the loss of several major customers within a condensed period, cash on hand and anticipated revenues from operations will be sufficient to cover our operating expenses over the next twelve months. As the impact of the COVID-19 pandemic continues to play out in our industry and the broader economy, we believe our strong cash position, could allow us to identify and capitalize on potential opportunities to expand our current businesses or enter into new industries, such as the insurance industry. The opportunities are anticipated to emerge through the acquisition of existing businesses that may have insufficient resources to overcome the impacts of the pandemic or through the creation of new lines of business by the Company. Depending upon the nature of the opportunities we identify, such acquisitions or expansion could require greater capital resources than we currently possess. Should we need additional capital resources, we could seek to obtain such through debt and/or equity financing. We do not currently possess an institutional source of financing and there is no assurance that we could be successful in obtaining equity or debt financing when needed on favorable terms, or at all. We could also use shares of our capital stock as consideration for a business acquisition transaction, but there is also no assurance that there would be significant market interest in our capital stock. Cash Flow During the three months endedMarch 31, 2021 , cash was primarily used to fund operations. We had a net increase in cash of$411,294 during the three months endedMarch 31, 2021 , compared to a net increase of$385,117 during the three months endedMarch 31, 2020 . See below for additional information. For the three months endedMarch 31, 2021 2020 (unaudited) (unaudited)
Net cash provided by operating activities $ 414,528 $
404,754
Net cash used in investing activities (3,234 ) (19,637 )
Net cash provided by financing activities - -
Net increase in cash $ 411,294 $ 385,117
18--------------------------------------------------------------------------------
Table of Contents
During the three months endedMarch 31, 2021 and 2020, net cash provided by operating activities was$414,528 and$404,754 , respectively. As discussed herein, we realized net income of$507,285 during the three months endedMarch 31, 2021 , compared to net income of$123,128 during the three months endedMarch 31, 2020 . The increase of$9,774 in cash flow from operating activities was primarily the result of a decrease in income from operations together with increases in deferred rent asset, accounts payable, accrued expenses, income tax payable, and unearned revenue and decreases in accounts receivable, receivable - other, deferred rent expense, and prepaid expenses. Net cash used in investing activities was$3,234 and$19,637 during the three-month periods endedMarch 31, 2021 and 2020, respectively. Net cash used in investing activities was lower by$16,403 during the three-month period endedMarch 31, 2021 , because of a decrease in expenditures for computers, furniture, and equipment.
Contractual Obligations and Contingencies
Smaller reporting companies are not required to provide this information.
Off-Balance Sheet Financing Arrangements
As of
Inflation We experience pricing pressures in the form of competitive prices. Insurance carriers and third-party administrators often try to take our clients by offering bundled claims administration services with their own managed care services at a lower rate. We are also impacted by rising costs for certain inflation-sensitive operating expenses such as labor and employee benefits and facility leases. We believe that these impacts are material to our revenues or net income. Some of our clients are public entities which contract with us at a fixed price for the term of the contract. Increases in labor and employee benefits can reduce our profit margin over the term of these contracts.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principle generally accepted inthe United States ("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 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 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. 19
--------------------------------------------------------------------------------
Table of Contents
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 receivables 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 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 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 receivables, cash flows, and results of operations. Two customers accounted for 10% or more of accounts receivable atMarch 31, 2021 and 2020, 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. 20
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
