PACIFIC HEALTH CARE ORGANIZATION, INC.
Certain information included in this quarterly report on Form 10-Q ("quarterly
report") and the documents incorporated by reference herein, if any, contain
statements within the meaning of the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995. All statements other than statements
of historical fact are statements that could be forward-looking. You can
recognize these statements through our use of words such as "anticipate,"
"believe," "continue," "could," "estimate," "expect," "forecast," "future,"
"intend," "likely," "may," "might," "objective," "plan," "potential," "predict,"
"project," "should," "strategy," "will," "would," other similar expressions and
their negatives.
Forward-looking statements are subject to known and unknown risks, uncertainties
and other factors, many of which may be beyond our control, that could cause
actual results to differ materially from any future results, expressed or
implied, in forward looking statements. Such factors include, but are not
limited to:
? the impact on our business of COVID-19, 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").
We operate in a very competitive and rapidly changing environment. New risk
factors emerge from time to time, and it is not possible for our management to
predict all risk factors, nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.
You should not place undue reliance on forward-looking statements. The
forward-looking statements are based on the beliefs of management as well as
assumptions made by and information currently available to management and apply
only as of the date of this report or the respective dates of the documents from
which they incorporate by reference. Neither we nor any other person assumes any
responsibility for the accuracy or completeness of forward-looking statements.
Further, except to the extent required by law, we undertake no obligations to
update or revise any forward-looking statements, whether as a result of new
information, future events, a change in events, conditions, circumstances or
assumptions underlying such statements, or otherwise.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes contained elsewhere in this report and in our other filings with the Commission.
Throughout this quarterly report, 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"). 11
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Table of Contents 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 acquired 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 formed IRC, aCalifornia corporation, as a wholly owned subsidiary of PHCO. Prior to closing IRC, IRC oversaw and managed our Workers' Compensation carve-outs services. InJune 2010 , we acquired MLS, aNevada corporation incorporated inSeptember 2009 . Prior to closing MLS, MLS offered lien representation services and Medicare Set-aside services ("MSA"). InFebruary 2012 , we incorporated MMM, aNevada corporation, as a wholly owned subsidiary of the Company. MMM is responsible for overseeing and managing medical case management services. InMarch 2011 , we incorporated MMC, aNevada corporation, as a wholly owned subsidiary of the Company. MMC oversees and manages the Company's utilization review and bill review services. InOctober 2018 , we incorporated PMHC, aNevada corporation, as a wholly owned subsidiary of the Company to act as a holding company for future potential acquisitions. InOctober 2021 , to simplify business procedures, bookkeeping and administrative structure; and eliminate duplicative functions and reduce costs; we terminated the existence of IRC, MLS and PMHC and wound up those subsidiaries. The business, assets, liabilities, and services of those entities have been transferred to PHCO or its other subsidiaries. Medex will now offer our Workers' Compensation carve-out services previously provided by IRC and Medicare-set asides previously managed by MLS and MMC will oversee the lien representation services previously offered by MLS. Business of the Company We offer an integrated and layered array of complimentary business solutions that enable our customers to better manage their employee Workers' Compensation-related healthcare administration costs. We are constantly looking for ways to expand the suite of services we can provide our customers, either through strategic acquisitions or organic development. Our business objective is to deliver value to our customers 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, field medical case management, network access, 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 government-issued licenses to operate medical treatment networks. Through Medex we hold two of a 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 26 MPNs. Our HCO and MPN programs provide our customers with provider networks within which our customers have some ability to direct the administration of employee claims. This is designed to decrease the incidence of fraudulent claims and disability awards and ensure injured employees receive the necessary back-to-work rehabilitation and training they need. Our medical bill and utilization review services provide oversight of medical billing and treatment requests, along with medical case management, which keeps medical treatment claims progressing to a resolution and assures treatment plans are aligned from a medical perspective. Our customers include self-administered employers, insurers, third party administrators, municipalities, and others. Our principal customers are companies with operations located in the state ofCalifornia where the high cost of Workers' Compensation insurance is a critical problem for employers, though we are able to process medical bills nationally. Our provider networks, which are located only inCalifornia , are composed of providers experienced in treating worker injuries. Our business generally has a long sales cycle, typically eight months or more. Once we have established a customer relationship and enrolled employees of our customers, we anticipate our revenue to adjust with the growth or retraction of our customers' employee headcount. Throughout the year, we expect new employees and customers to be added while others terminate for a variety of reasons. 12
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Table of Contents
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 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 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. 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, have had to suspend or significantly modify their operations during much or all of the pandemic. WhileCalifornia has lifted many of its restrictions, it is still trying to slow the spread of COVID-19 and certain counties and businesses have continued or reinstated masking and now have vaccine requirements. Despite the lifting of COVID-19 restrictions for most businesses, some of our customers continue to 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.California has passed legislation to address employer liability in Workers' 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 thisCalifornia law have been filed against the Company to date. InApril 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 . InMarch 2021 , the American Rescue Plan Act ("ARPA") was signed into law. The ARPA made tax credits available to employers with fewer than 500 employees who voluntarily chose to grant employees paid leave under the FFCRA throughSeptember 30, 2021 and updated certain FFCRA leave provisions. We voluntarily chose to extend the FFCRA paid leave to our employees through its expiration onSeptember 30, 2021 and take the tax credits. Since its expiration, the company has ceased to offer COVID-19-specific paid leave benefits to its employees. Since its expiration, we have ceased to offer COVID-19-specific paid leave benefits to its employees. Family, medical, and other types of leave remain available to employees under existing company policy. InMarch 2021 ,California passed its own COVID-19 Supplemental Paid Sick Leave 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 fromJanuary 1, 2021 throughSeptember 30, 2021 . The CA SPSL allowed employees to retroactively request reimbursement for qualifying leave or to use it towards future requests throughSeptember 30, 2021 . Employers whose employees utilized CA SPSL are eligible for federal tax credits to offset the costs of providing the CA SPSL. As ofSeptember 30, 2021 , the CA SPSL paid leave expired. Therefore, we have ceased offering 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 April andMay 2020 , PHCO, MMM and MMC were granted Paycheck Protection Program ("PPP") loans in the aggregate amount of$460,700 . In the spirit of the PPP loan program policy, which was to protect the continued economic stability of employees, most 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. InJune 2021 , the Governor ofCalifornia terminated the executive order that put 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 as a safety precaution, and currently anticipate maintaining a significant portion of our workforce fully remote after the pandemic. 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. 13
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Table of Contents Results of Operations
Comparison of the three months ended
The following represents selected components of our consolidated results of
operations for the three-month periods ended
For three months ended
September 30,
2021 2020 Amount Change % Change
Revenues:
HCO $ 289,117 $ 264,781 $ 24,336 9 %
MPN 137,834 124,836 12,998 10 %
Utilization review 258,251 307,139 (48,888 ) (16 %)
Medical bill review 117,685 77,075 40,610 53 %
Medical case management 439,073 590,784 (151,711 ) (26 %)
Other 68,658 51,139 17,519 34 %
Total revenues 1,310,618 1,415,754 (105,136 ) (7 %)
Expense:
Depreciation 12,657 14,122 (1,465 ) (10 %)
Bad debt provision - 11,000 (11,000 ) (100 %)
Consulting fees 58,275 58,621 (346 ) (1 %)
Salaries and wages 679,530 694,352 (14,822 ) (2 %)
Professional fees 76,014 68,979 7,035 10 %
Insurance 86,527 91,951 (5,424 ) (6 %)
Outsource service fees 109,926 115,803 (5,877 ) (5 %)
Data maintenance 11,917 6,603 5,314 80 %
General and administrative 168,939 163,863 5,076 3 %
Total expenses 1,203,785 1,225,294 (21,509 ) (2 %)
Income from operations 106,833 190,460 (83,627 ) (44 %)
Income before taxes 106,833 190,460 (83,627 ) (44 %) Income tax provision 29,987 53,463 (23,476 ) (44 %) Net income$ 76,846 $ 136,997 $ (60,151 ) (44 %) Revenue HCO During the three-month periods endedSeptember 30, 2021 and 2020, HCO revenue was$289,117 and$264,781 , respectively. The 9% increase was due to an increase in claims activity and renegotiation of certain deliverables to an existing customer, partially offset by the loss of one customer in the third quarter of 2021. HCO revenue is generated largely from fees charged to our employer customers for access to our HCO networks, per claim fees, notification fees and fees for other ancillary services the employer customers using our HCO networks may select. HCO notifications are mailed out annually and handed out by the employer for all new hires. MPN MPN revenue for the three-month periods endedSeptember 30, 2021 and 2020, was$137,834 and$124,836 , respectively, an increase of 10%. The increase in MPN revenue was due to an increase in the number claims reported by existing customers which resulted in more claim network fees. Like HCO revenue, MPN revenue is generated largely from fees charged to our employer customers for access to our MPN networks, per claim fees and fees for other ancillary services the employer customers using our MPN networks may select. Unlike HCOs, MPNs do not require annual notifications. MPNs require a notice be given to an injured worker only at the time the employer is notified by the injured worker that an injury has occurred. 14
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Table of Contents Utilization Review During the three-month periods endedSeptember 30, 2021 and 2020, utilization review revenue was$258,251 and$307,139 , respectively. The decrease of$48,888 in the 2021 period was due to a decrease in utilization reviews from existing customers and the loss of two customers in 2021. 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 endedSeptember 30, 2021 , medical bill review revenue increased by$40,610 , to$117,685 , compared to$77,075 during the same period a year earlier. The increase was mainly due to processing more medical and hospital bills from existing customers, partially offset by the loss of a customer in the third quarter of 2021. 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-month periods endedSeptember 30, 2021 and 2020, medical case management revenue was$439,073 and$590,784 , respectively. The decrease in medical case management revenue of$151,711 was primarily due to a decrease in the number of claims managed with existing customers. 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 revenue consists of revenue derived from network access fees charged to non-HCO, non-MPN customers to access our network of medical providers, lien representation, legal support services, Medicare set-aside and Workers' Compensation carve-out services. Other revenue for three-month periods endedSeptember 30, 2021 and 2020, was$68,658 and$51,139 , respectively. The increase in other revenue of 34% was the result of increases in network access and Medicare set-aside claims processed. Expenses Total expenses for the three months endedSeptember 30, 2021 and 2020, were$1,203,785 and$1,225,294 , respectively. The 2% decrease in expenses was the result of decreases in depreciation, bad debt provision, consulting fees, salaries and wages, insurance, and outsource service fees, partially offset by increases in professional fees, data maintenance, and general and administrative. Depreciation During the three-month period endedSeptember 30, 2021 , we recorded depreciation expense of$12,657 compared to$14,122 during the comparable 2020 period. The decrease in depreciation was primarily attributable to certain fixed assets being fully depreciated, partially offset by the purchasing of new fixed assets. 15
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Table of Contents Bad Debt Provision
During the three-month period ended
Consulting Fees During the three months endedSeptember 30, 2021 , consulting fees decreased to$58,275 from$58,621 compared to the three months endedSeptember 30, 2020 . The 1% decrease was the result of a reduction in the number of information systems consultants retained as compared to the third quarter of 2020. Salaries and Wages During the three-month period endedSeptember 30, 2021 , salaries and wages decreased by 2% when compared to the same period in 2020. This decrease was the result of the layoff of two employees inJuly 2021 because of the COVID-19 pandemic. As a result of the layoff, we expect salaries and wages to continue to be lower throughout the remainder of 2021 than they were in 2020. Professional Fees For the three months endedSeptember 30, 2021 , professional fees increased by 10% from$68,979 to$76,014 when compared to the three months endedSeptember 30, 2020 . The increase in professional fees was the result of increases in accounting, legal, and medical management fees, partially offset by decreases in other professional fees. Insurance During the three-month period endedSeptember 30, 2021 , we incurred insurance expenses of$86,527 , a 6% decrease over the same three-month period of 2020. The decrease in insurance expenses was primarily attributed to lower medical insurance premiums and Workers' Compensation coverage as a result of our reduced workforce, partially offset by increases in insurance expenses for business, and directors' and officers' liability for the three-month period of 2021 compared to the same period of 2020. Outsource Service Fees Outsource service fees consist of costs incurred by our subsidiaries in outsourcing some functions of utilization review, medical bill review, Medicare set-aside services and field medical case management and typically fluctuates with the demand for those services. We incurred$109,926 and$115,803 in outsource service fees during the three-month periods endedSeptember 2021 and 2020, respectively. The decrease of 5% was due to a decrease in volume from our customers which resulted in fewer outsource services fees for Medicare-set-asides, utilization review, and field medical case management assignments, partially offset by incurring more outsource service fees for medical bill review due to an increase in the number of bills reviewed and a$15,000 penalty paid toState of California Department of Industrial Relations for errors found during our regularly scheduled utilization review audit. We have since made the required corrections to our system and process. Data Maintenance During the three-month periods endedSeptember 30, 2021 and 2020, data maintenance fees were$11,917 and$6,603 , respectively. The increase of$5,314 was the result of an increase in volume of HCO, MPN, and new hire notifications for existing customers during the three-month period endedSeptember 30, 2021 , when compared to the same period in 2020. Data maintenance fees tend to fluctuate monthly depending on when new customers are enrolled, annual renewals for existing customers, and the number of new employees our customers enroll in our HCO or MPN programs.
General and Administrative
During the three-month period endedSeptember 30, 2021 , general and administrative expenses increased 3% to$168,939 when compared to the three-month period endedSeptember 30, 2020 . This increase of$5,076 was primarily attributable to increases in charity - cash contribution, dues and subscriptions, education, IT enhancement, licenses and permits, parking, printing and reproduction, office rent, shareholders' expense, and travel and entertainment, partially offset by decreases in auto expenses, bank charges, equipment/repairs, office supplies, postage, rent expense for equipment, telephone, miscellaneous expenses, and vacation expenses. 16
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Table of Contents Income from Operations As a result of the$105,136 decrease in total revenue during the three-month period endedSeptember 30, 2021 , and the$21,509 decrease in total expenses during the same period, our income from operations decreased$83,627 , or 44%, during the three-month period endedSeptember 30, 2021 , when compared to the same period in 2020. Income Tax Provision We realized a$23,476 , or 44%, decrease in our income tax provision during the three-month period endedSeptember 30, 2021 , compared to the three-month period endedSeptember 30, 2020 , because of the decrease in income before taxes realized in the 2021 period. Net Income During the three-month period endedSeptember 30, 2021 , we realized a 7% decrease in total revenues, a 2% decrease in total expenses, and a 44% decrease in our provision for income tax when compared to the same period in 2020. As a result, we realized a net decrease of$60,151 , or 44%, in net income during the three-month period endedSeptember 30, 2021 , compared to the three-month period endedSeptember 30, 2020 .
Comparison of nine months ended
The following represents selected components of our consolidated results of
operations, for the nine-month periods ended
For nine months ended
September 30,
2021 2020 Amount Change % Change
Revenues:
HCO $ 936,382 $ 916,693 $ 19,689 2 %
MPN 396,497 363,902 32,595 9 %
Utilization review 796,927 854,922 (57,995 ) (7 %)
Medical bill review 292,445 242,237 50,208 21 %
Medical case management 1,381,929 1,855,314 (473,385 ) (26 %)
Other 174,251 202,101 (27,850 ) (14 %)
Total revenues 3,978,431 4,435,169 (456,738 ) (10 %)
Expense:
Depreciation 35,964 46,716 (10,752 ) (23 %)
Bad debt provision 494 11,101 (10,607 ) (96 %)
Consulting fees 173,796 195,978 (22,182 ) (11 %)
Salaries and wages 2,073,133 2,238,079 (164,946 ) (7 %)
Professional fees 221,970 223,747 (1,777 ) (1 %)
Insurance 242,334 274,974 (32,640 ) (12 %)
Outsource service fees 304,085 359,596 (55,511 ) (15 %)
Data maintenance 75,293 59,415 15,878 27 %
General and administrative 492,264 515,738 (23,474 ) (5 %)
Total expenses 3,619,333 3,925,344 (306,011 ) (8 %)
Income from operations 359,098 509,825 (150,727 ) (30 %)
Other income (expense)
Paycheck protection program loan
forgiveness income 464,386 - 464,386 -
Paycheck protection program loan
interest expense (3,686 ) - (3,686 ) -
Total other income (expense) 460,700 - 460,700 -
Income before taxes 819,798 509,825 309,973 61 %
Income tax provision 140,956 143,111 (2,155 ) (2 %)
Net income $ 678,842 $ 366,714 $ 312,128 85 %
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Table of Contents Revenue HCO During the nine-month periods endedSeptember 30, 2021 and 2020, HCO revenue was$936,382 and$916,693 , respectively. The 2% increase in HCO revenue was primarily attributable to an increase in claims from existing customers and renegotiation of certain deliverables to an existing customer, partially offset by the loss of three HCO customers and fewer custom network fees paid by customers to maintain custom provider lists. MPN MPN revenue for the nine-month periods endedSeptember 30, 2021 and 2020, was$396,497 and$363,902 , respectively, an increase of 9%, due to an increase in the number of claims reported by two customers. Like HCO revenue, MPN revenue is generated largely from fees charged to our employer customers for access to our MPN networks, per claim fees and fees for other ancillary services. Utilization Review During the nine-month periods endedSeptember 30, 2021 and 2020, utilization review revenue was$796,927 and$854,922 , respectively. The decrease of 7% in the 2021 period was primarily attributable to decreased utilization reviews from the loss of two customers and fewer utilization reviews submitted by other customers. Medical Bill Review During the nine-month period endedSeptember 30, 2021 , medical bill review revenue increased by 21% to$292,445 from$242,237 when compared to the same period a year earlier. This increase was due to an increase in hospital and non-hospital bills reviewed, partially offset by the loss of two customers in 2021. Medical Case Management During the nine months endedSeptember 30, 2021 and 2020, medical case management revenue was$1,381,929 and$1,855,314 , respectively. The 26% decrease in medical case management revenue was primarily due to the loss of two customers and a decrease in the number of claims and amount of time spent on claims managed with existing customers. The decrease was partially offset by the addition of a new customer during the first quarter of 2021. Other Other revenue for the nine-month periods endedSeptember 30, 2021 and 2020, was$174,251 and$202,101 , respectively. The decrease of$27,850 was primarily the result of fewer Medicare set-aside claims, partially offset by an increase in network access fee revenue from an existing customer increasing its utilization of our provider network. Expenses Total expenses for the nine months endedSeptember 30, 2021 and 2020, were$3,619,333 and$3,925,344 , respectively. The decrease of$306,011 was the result of decreases in depreciation, bad debt provision, consulting fees, salaries and wages, professional fees, insurance, outsource service fees, and general and administrative expenses, which was partially offset by an increase in data maintenance fees. Depreciation During the nine-month period endedSeptember 30, 2021 , we recorded depreciation expense of$35,964 compared to$46,716 during the comparable 2020 period. The decrease in depreciation was primarily attributable to certain fixed assets being fully depreciated prior to the quarter endedSeptember 30, 2021 , partially offset by the purchasing of new fixed assets. 18
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Table of Contents Bad Debt Provision
During the nine-month period ended
Consulting Fees During the nine months endedSeptember 30, 2021 , consulting fees decreased 11% to$173,796 from$195,978 during the nine months endedSeptember 30, 2020 . This decrease of$22,182 was because we had fewer information systems consulting and consultant fees related to our insurance company acquisition search. Salaries and Wages
During the nine-month period ended
Professional Fees For the nine months endedSeptember 30, 2021 , we incurred professional fees of$221,970 compared to$223,747 during the nine months endedSeptember 30, 2020 . The$1,777 decrease in professional fees was primarily the result of fewer fees incurred for other professional 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 the nine-month period endedSeptember 30, 2021 , we incurred insurance expenses of$242,334 , a 12% decrease over the same period in 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 We incurred$304,085 and$359,596 in outsource service fees during the nine-month periods endedSeptember 2021 and 2020, respectively. The decrease of$55,511 was primarily the result of fewer Medicare set-aside claims, medical bills reviewed, and utilization reviews processed partially offset by an increase in outsource service fees for field medical case management and a$15,000 penalty paid toState of California Department of Industrial Relations for errors found during our regularly scheduled utilization review audit. As noted above, we have since made the required corrections to our system and process. Data Maintenance During the nine-month periods endedSeptember 30, 2021 and 2020, data maintenance fees were$75,293 and$59,415 , respectively. The increase of$15,878 was primarily the result of an increase in the number of employees enrolled in our HCO and MPN programs with our existing customers and an increase in customers' new hire notifications. General and Administrative During the nine-month period endedSeptember 30, 2021 , general and administrative expenses decreased 5% to$492,264 when compared to the nine-month period endedSeptember 30, 2020 . This decrease of$23,474 was primarily attributable to 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 charge, education, telephone, office rent, travel and entertainment, and vacation expense. 19
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Table of Contents Income from Operations Total revenue during the nine-month period endedSeptember 30, 2021 , decreased by$456,738 to$3,978,431 compared to$4,435,169 in the same period in 2020. Our total expenses decreased by$306,011 during the nine months endedSeptember 30, 2021 , compared to the same period in 2020. This led to a decrease in income from operations of$150,727 , or 30%, during the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . Other Income (Expense) InFebruary 2021 , the principal and interest on the PPP loans issued to PHCO, MMC and MMM in April andMay 2020 , was forgiven in full. As a result, we realized income from paycheck protection loan forgiveness of$464,386 and loan interest expense from paycheck protection loans of$3,686 during the nine months endedSeptember 30, 2021 , resulting in total other income during the period of$460,700 . During the corresponding period endedSeptember 30, 2020 , we realized no other income (expense). Income Tax Provision We realized a decrease of$2,155 or 2%, in our income tax provision during the nine-month period endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . The income realized from the PPP loan forgiveness is exempt from federal income taxation, but not state income taxation. Net Income During the nine-month period endedSeptember 30, 2021 , total revenues was$3,978,431 , a decrease of 10%, our provision for income tax decreased 2% and our total expenses decreased 8% compared to the same period of 2020. These decreases were offset by the recognition of$460,700 in total other income as a result of PPP loan forgiveness by PHCO, MMM and MMC. As a result, we realized a$312,128 , or 85%, increase in net income during the nine months endedSeptember 30, 2021 , when compared to the nine months endedSeptember 30, 2020 .
Liquidity and Capital Resources
As ofSeptember 30, 2021 , we had cash on hand of$10,155,151 compared to$9,498,457 as ofDecember 31, 2020 . The$656,694 increase was the result of net cash provided by our operating activities and financing activities, partially offset by cash used in investing activities. As of the date of this report, we have laid off six employees, including four inJuly 2020 , and two inJuly 2021 , as a result of the COVID-19 pandemic and loss of customers. As noted above, we have taken advantage of and may in the future further avail ourselves of federal, state, or local government programs to protect our workforce as management and our board of directors determine to be in the best interest of the Company and our shareholders. We have focused on using our Second Draw PPP Loan for qualifying expenses, such as payroll, and currently plan to apply for forgiveness of the Second Draw PPP Loan when appropriate. We currently have planned certain capital expenditures during the remainder of 2021 to decommission certain IT systems and move to another platform. We believe we have adequate capital on hand to cover these expenses and do not anticipate this will require us to seek outside sources of funding. 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 foreseeable future. As the impact of the COVID-19 pandemic continues to play out throughout our industry and the broader economy, we believe our strong cash position, could allow us to identify and capitalize on potential opportunities to expand our business either through the acquisition of existing businesses that may have insufficient resources to overcome the impacts of the pandemic, including, expansion into the insurance industry or through the creation of new lines of business. Depending upon the nature of the opportunities we identify, such acquisitions or expansion could require greater capital resources than we currently possess. Should we need additional capital resources, we could seek to obtain such through debt and/or equity financing. We do not currently possess an institutional source of financing and there is no assurance that we could be successful in obtaining equity or debt financing when needed on favorable terms, or at all. We could also use shares of our capital stock as consideration for a business acquisition transaction, but there is also no assurance that there would be significant market interest in our capital stock. 20
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Table of Contents Cash Flow During the nine months endedSeptember 30, 2021 , cash was primarily used to fund operations. We had a net increase in cash of$656,694 during the nine months endedSeptember 30, 2021 . See below for additional information. For the nine months ended September 30, 2021 2020 (unaudited) (unaudited) Net cash provided by operating activities $ 449,993$ 700,538 Net cash used in investing activities (12,199 ) (52,803 ) Net cash provided by financing activities 218,900 460,700 Net increase in cash $ 656,694$ 1,108,435 During the nine months endedSeptember 30, 2021 and 2020, net cash provided by operating activities was$449,993 and$700,538 , respectively, a decrease of$250,545 . This decrease was primarily the result of decreases in total revenue, allowance for bad debt, prepaid expenses, accounts receivable, receivable - other, accounts payable, accrued expenses, income tax payable, and deferred rent expense, partially offset by increases in deferred rent assets and unearned revenue. As a result of applying the PPP loan forgiveness we realized an increase in net income.
Net cash used in investing activities was
Net cash provided by financing activities during the nine months endedSeptember 30, 2021 and 2020, was$218,900 and$460,700 , respectively. During 2020 we received three PPP loans for PHCO, MMC and MMM in the amounts of$133,400 ,$59,600 , and$267,700 , respectively. These loans were forgiven inFebruary 2021 . InApril 2021 , MMM received a Second Draw PPP loan in the amount of$218,900 . We have focused on using these funds for qualifying expenses and plan to apply for loan forgiveness in the future.
Off-Balance Sheet Financing Arrangements
As of
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP.
Application of these principles requires us to make estimates, assumptions, and
judgments that affect the amounts reported in our consolidated financial
statements and accompanying notes. We continually evaluate our accounting
policies, estimates, and judgments and base our estimates and judgments on
historical experience and various other factors that we believe to be reasonable
under the circumstances. Because of the inherent uncertainty in making estimates
and judgments, actual results could differ from our estimates and judgments. We
consider (i) revenue recognition, (ii) leases, (iii) allowance for uncollectible
accounts, and (iv) income taxes to be the most critical accounting policies
because they relate to accounting areas that require the most subjective or
complex judgments by us, and, as such, could be most subject to revision as new
information becomes available.
Revenue Recognition: We recognize revenue when control of the promised services
is transferred to our customers in an amount that reflects the consideration we
expect to be entitled to in exchange for those services. As we complete our
performance obligations which are identified below, we have an unconditional
right to consideration as outlined in our contracts with our customers.
Generally, our accounts receivables are expected to be collected in 30 days in
accordance with the underlying payment terms.
We offer multiple services under our managed care and network solutions service
lines, which the customer may choose to purchase. These services are billed
individually as separate components to our customers. Revenue is recognized as
the work is performed in accordance with our customer contracts. Based upon the
nature of our products, bundled managed care elements are generally delivered in
the same accounting period. Advance payments from subscribers and billings made
in advance are recorded on the balance sheet as unearned revenue.
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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 several factors, including the length of time trade accounts receivables are past due, our previous loss history, the customers' current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole. We write off accounts receivables when they become uncollectible. We must make significant judgments and estimates in determining contractual and bad debt allowances in any accounting period. One significant uncertainty inherent in our analysis is whether our experience will be indicative of future periods. Although we consider future projections when estimating contractual and bad debt allowances, we ultimately make our decisions based on the best information available to us at the time the decision is made. Adverse changes in general economic conditions or trends in reimbursement amounts for our services could affect our contractual and bad debt allowance estimates, collection of accounts receivables, cash flows, and results of operations. Two customers accounted for 10% or more of accounts receivable atSeptember 30, 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. 22
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