PACIFIC HEALTH CARE ORGANIZATION, INC. The following is a discussion of our financial condition and results of operations for the years endedDecember 31, 2022 and 2021, and other factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read together with our audited consolidated financial statements and related notes included in Item 8 Financial Statements and Supplementary Data of this annual report. Some of the statements set forth in this section are forward-looking statements relating to our future results of operations, financial condition, liquidity and capital resources. Our actual results, financial condition, liquidity and capital resources may vary from the results anticipated by these statements. We disclaim any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Actual future results may differ materially from those expressed in the forward-looking statements as a result of risks, uncertainties and assumptions. Please see "Cautionary Statement Regarding Forward-Looking Statements" and Item 1A Risk Factors of this annual report. Overview We are workers' compensation cost containment specialists. Our business objective is to deliver value to our customers that reduces their workers' compensation related medical claims expense in a manner that will assure injured employees receive high quality healthcare that allows them to recover from injury and return to gainful employment without undue delay. Our customers include self-administered employers, insurers, third party administrators, municipalities, and others. Our principal customers are companies with operations located in the state ofCalifornia where the cost of workers' compensation insurance is a critical problem for employers, though we process medical bill reviews, utilization reviews and provide medical case management in several other states. Our core services focus on reducing medical treatment costs by enabling our customers to share control over the medical treatment process of their injured employees. This control is obtained by participation in one of our medical provider 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, expert witness testimony 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' employee headcount and their number of workers' compensation claims. Throughout the year, customers' employee headcount and number of claims fluctuate due to seasonal or operational reasons. New customers are added while others terminate for a variety of reasons, such as changing workers' compensation insurance carriers, third party administrators, or their contract term with us ends. Some of our customers are municipalities and local governmental entities which are required to go out for bid when their contract with us ends, which affects the ability for us to negotiation with and retain these types of customers. As discussed in this annual report, COVID-19 has had and may continue to have an impact on our business. There was an increase in COVID-19 related claims during the fourth quarter of 2021 through the beginning of 2022 as businesses reopened to full capacity. As vaccines have become widely available and herd immunity increased, the number of COVID-19 related claims decreased through the end of 2022. While the economy recovers from the impacts of COVID-19, long term changes in workforce trends such as downsizing and remote work, along with the effects of recent economic downtrends, could continue to adversely affect the number of workers' compensation claims and could materially affect our results of operations. 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. 23
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Impact of COVID-19 on our Business
InFebruary 2022 ,California passed another COVID-19 Supplemental Paid Sick Leave law ("CSPSL"). 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, 2022 throughSeptember 30, 2022 . The CSPSL allowed employees to retroactively request reimbursement for qualifying leave or to use it towards future requests throughSeptember 30, 2022 . Employers whose employees utilized CSPSL are ineligible for federal tax credits to offset the costs of providing the CSPSL. OnSeptember 29, 2022 ,California passed a bill that extended the CSPSL leave throughDecember 31, 2022 and provides a supplemental paid sick leave relief grant program for employers for reimbursement of CSPSL. As of the date this report is released, the CSPSL relief grant program is still in development and unavailable to apply for. When it becomes available, we intend to apply for the reimbursement of CSPSL. We continued to offer COVID-19-specific paid leave benefits to our employees until the expiration of CSPSL onDecember 31, 2022 , although we continue to have family, medical, and other types of leave available to employees under pre-existing Company policy. As ofDecember 31, 2022 , we have incurred negligible payroll, benefits, administrative, and liability costs related to CSPSL. As of the date of this report,California has not passed additional COVID-19 related sick leave laws. Unlike much of theU.S. economy, we have maintained relatively steady employee recruitment and retention. Our maintenance of a successful remote environment, including high employee morale and cohesive culture via technology, has also allowed us to seek candidates in a wider range of locations, some of which have lower costs of living and lower wage norms, as well as increasing the quantity of qualified applicants. While we cannot predict or control future trends in labor in our industry, we believe that our solid recruitment practices and the opportunities presented by remote work options will help us adapt to a changing workforce environment. In response to COVID-19 and transitioning to a remote workforce, we have taken measures to ensure data security, but there is no guarantee that these measures will be completely effective, that our productivity will not be adversely impacted, or that we will not encounter other risks associated with a remote workforce, such as increased loss of direct control of and reliance on third party information systems required for us to run our business. 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 2022 During the year endedDecember 31, 2022 , total revenues increased 6%. Revenue from HCO, MPN, medical bill review and utilization review revenue increased by 4%, 2%, 12% and 50%, respectively. Revenue from medical case management and other fees decreased 15% and 25%, respectively. During the first quarter of fiscal 2022, we saw an increase in revenue from HCO, MPN, medical bill review, and utilization review. Some of the increases were due to increases in COVID-19 related claims in the first quarter of 2022, but they declined throughout the remainder of fiscal 2022. We expect that as COVID-19 related claims and any backlogs of medical treatment for which we would perform medical bill review, utilization review, and medical case management will decrease, but will level out to pre-pandemic levels as the economy recovers. During fiscal 2022, operating expenses increased by 4%, primarily as a result of increases in professional fees, outsource service fees, and general and administration expenses. The increases were partially offset by decreases in depreciation, bad debt provision, consulting fees, salaries and wages, insurance, and data maintenance expenses. As a result, our income from operations increased 29% to$666,124 in fiscal 2022 compared to$516,475 during fiscal 2021.
Our provision for income tax expense remained flat during fiscal 2022, from
Our net income decreased 50% from$995,020 in fiscal 2021 to$492,886 in fiscal 2022, primarily as a result of the Paycheck Protection Program loan forgiveness income we received in 2021, partially offset by a 6% increase in total revenues. Basic and fully diluted earnings per share during fiscal 2022 was$0.04 and$0.04 , respectively, compared to$0.08 and$0.08 , respectively, during fiscal 2021. 24
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Table of Contents Revenue
We derive revenue primarily from fees charged for access to our HCO and MPN provider networks, claim network fees, HCO/MPN network administration, medical bill review, utilization review, medical case management services, Medicare set-asides, and network access.
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, and program administration. Unlike HCOs, MPNs do not require annual and new hire notifications, MPNs are only required to provide a notice to an injured employee at the time the employer is notified by the injured employee that an injury occurred. Medical bill reviewCalifornia and many other states have established fee schedules for the maximum allowable fees payable under workers' compensation for a variety of procedures performed by medical providers. Many procedures, however, are not covered under the fee schedules, such as hospital bills, which still require review and negotiation. Medical bill review involves analyzing medical provider services and equipment billing to ascertain proper reimbursement. Such services include, but are not limited to, coding review and re-bundling, confirming that the services are customary and reasonable, fee schedule compliance, out-of-network bill review, pharmacy review, and preferred provider organization repricing arrangements. Our medical bill review services can result in significant savings for our customers. Revenue for medical bill reviews is generated based on a set fee per medical bill reviewed. Hospital bills generate revenue on a percentage of savings off the original amount, usually with a cap on the max amount we can charge for a hospital bill. Utilization review Utilization review is the review of medical treatment requests by providers to provide a safeguard for employers and injured employees 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. We generate revenue when we receive a request for authorization of treatment from a claims adjuster. We bill by the number of treatment requests or by referral and the level of reviewer required to approve, modify, or deny the request. The following table sets forth, for the years endedDecember 31, 2022 and 2021, the percentage each revenue item identified in our audited consolidated financial statements contributed to total revenue during the respective period. 2022 2021 HCO 26 % 27 % MPN 9 % 10 % Medical bill review 7 % 7 % Utilization review 29 % 20 % Medical case management 26 % 33 % Other 3 % 3 % 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.
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Table of Contents Salaries and wages
Salaries and wages reflect employment-related compensation we pay to our employee, payroll processing, payroll taxes and commission.
Professional fees
Professional fees include fees we pay to third parties to provide medical consulting, field 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, cyber security, 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 and host our HCO and MPN provider networks. HCO and MPN employee enrollment fees fluctuate throughout the year because of the varied timing of customer enrollment into the HCO or MPN program, the number of employees they have in their workforce, and the number of new hires throughout the year. Outsource service fees Outsource service fees consist of costs incurred by our subsidiaries in partially outsourcing utilization review, medical bill review, administrative services for medical case management and Medicare set-aside services and typically tend to increase and decrease in correlation with customer demand for those services. 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 endedDecember 31, 2022 and 2021, the percentage each expense item identified in our audited consolidated financial statements contributed to total expense during the respective period. 2022 2021 Depreciation 1 % 1 % Bad debt provision - % - % Consulting fees 4 % 5 % Salaries and wages 53 % 56 % Professional fees 6 % 6 % Insurance 6 % 7 % Outsource service fees 12 % 7 % Data maintenance 4 % 4 % General and administrative 14 % 14 % 26
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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
2022 2021 Change % of Change
Revenues:
HCO $ 1,500,363 $ 1,449,345 $ 51,018 4 %
MPN 534,447 524,148 10,299 2 %
Medical bill review 412,015 368,721 43,294 12 %
Utilization review 1,636,632 1,091,792 544,840 50 %
Medical case management 1,513,659 1,771,718 (258,059 ) (15 %)
Other 147,841 197,386 (49,545 ) (25 %)
Total revenues 5,744,957 5,403,110 341,847 6 %
Expenses:
Depreciation 33,998 48,887 (14,889 ) (30 %)
Bad debt provision (626 ) 15,656 (16,282 ) (104 %)
Consulting fees 227,406 237,582 (10,176 ) (4 %)
Salaries and wages 2,689,842 2,740,806 (50,964 ) (2 %)
Professional fees 314,013 293,936 20,077 7 %
Insurance 315,919 321,690 (5,771 ) (2 %)
Outsource service fees 610,277 364,951 245,326 67 %
Data maintenance 182,437 204,725 (22,288 ) (11 %)
General and administrative 705,567 658,402 47,165 7 %
Total expenses 5,078,833 4,886,635 192,198 4 %
Income from operations 666,124 516,475 149,649 29 %
Other income (expense):
Paycheck Protection Program loan
forgiveness income - 684,785 (684,785 ) (100 %)
Paycheck Protection Program loan
interest expense - (5,185 ) 5,185 (100 %)
Interest income 27,199 - 27,199 100 %
Total other income (expense) 27,199 679,600 (652,401 ) (96 %)
Income before taxes 693,323 1,196,075 (502,752 ) (42 %)
Income tax provision 200,437 201,055 (618 ) - %
Net income $ 492,886 $ 995,020 $ (502,134 ) (50 %)
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Key trends affecting results of operations
As noted throughout this annual report, during the years endedDecember 31, 2022 and 2021, COVID-19 has impacted the businesses of our customers, our business, and our results of operations. Most of our clients, and their employees are located inCalifornia . Throughout 2020 and for periods of 2021,California had in place COVID-19 restrictions on businesses which resulted in many of our customers reducing their workforces and caused a decrease in the number of new workers' compensation claims, as a result of fewer workers working. Allowable medical treatment for workers' compensation claims were also limited to help ease the burden of COVID-19 on medical facilities. During the first nine months of 2022, as the economy reopened, employers began hiring, but given the recent economic downturn, some employers reduced their workforce in the fourth quarter of 2022. If the economy continues a downward trend and our customers reduce their workforce, revenues would be adversely affected. Our revenues for medical case management were also impacted since the start of the pandemic in 2020 through 2022. Workers' compensation claims that require medical case management are usually severe or litigated and may take anywhere from a few days up to years to come to resolution. As a result of COVID-19 related business and office closures, there were fewer workers' compensation claims during those years, which would have potentially generated revenues in the following years. If the trend to smaller labor pools continues, medical case management reviews could continue to remain lower in the future. During the fourth quarter of 2022, we experienced difficulties when transitioning to a new software vendor for our utilization review and medical case management services. The initial new software platform was not fully functional, which resulted in us terminating that agreement and contracting with another software vendor. Throughout these software transitions, our automated processes had to be performed manually, which caused delays in providing services and invoicing our customers, reduced productivity and resulted in additional outsourcing costs. Our revenues were adversely impacted in the fourth quarter of 2022 as a result of the interruptions and costs associated with these software transition difficulties. While the new software is now near fully functional, certain functionalities are still being developed and we continue to experience delays in invoicing several of our customers, which has resulted in an increase in our outstanding accounts receivable. We anticipate the software to become fully functional, but expect some degree of continued delays in invoicing customers. We were recently notified thatFortra, LLC , the third-party vendor that provides the GoAnywhere managed file transfer as a service system (MFTaaS), experienced a data security incident that affected many of Fortra's customers, including the Company. The Company uses GoAnywhere as a means by which our customers electronically share certain data regarding their employees and other third parties with the Company. Based on the information we have obtained from Fortra and our own diligence, we understand that this activity only affected Fortra's systems, and did not involve unauthorized access into the Company's information systems. Our current understanding is that this activity was the result of the threat actor's exploit of a zero-day vulnerability in Fortra's systems. Through this exploit, the threat actor created unauthorized user accounts for certain customer MFTaaS, including that of the Company. Upon receiving notification of this incident, we began an investigation with the assistance of outside experts. Through our investigation, we have learned that this incident included the unauthorized access to and exfiltration of data in the Company's GoAnywhere account. While the investigation is ongoing, early indications are that the threat actor accessed certain of our customers' employees' and other third parties' data fromJanuary 28 to January 31, 2023 . Such data likely includes protected health information, as defined by the Health Insurance Portability and Accountability Act ("PHI"), and personal information ("PI"). Our current understanding is that the threat actor exfiltrated approximately 900 gigabytes of data. We are continuing our investigation to determine the contents of the exfiltrated data and the individuals to whom the PI/PHI, if any, belongs. As of the date of this annual report, this incident has not caused a material interruption of our business operations. To the extent we discover further details of this incident and data accessed, we will provide the appropriate notifications to any individuals affected by the incident, as well as to government and regulatory agencies as required by federal and state law. Because of the preliminary nature of our investigation into this incident and current unknowns, an estimate of the impacts on our business, results of operations and other potential liabilities, cannot be made. Revenue HCO During the year endedDecember 31, 2022 , HCO revenue increased by 4%. The increase in HCO revenue was attributable to increases in the number of new claims and employees enrolled in our HCO program with existing customers, but was partially offset by decreases in the number of new claims and monthly program administration fees from the loss of two customers in the fourth quarter of 2021. In the first quarter of 2022, we had an increase in the number of COVID-19 related claims; however, if the use of vaccines and herd immunity continues to increase, or if state and federal legislation declassifies COVID-19 as a workers' compensation claim, we expect the number of COVID-19 related claims to decrease. 28
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Table of Contents MPN There was a 2% increase in MPN revenue for fiscal 2022 compared to fiscal 2021, primarily from increases in the number of new claims and increases in our customers' employee headcount by existing customers, which led to in an increase in the number of MPN claim network fees and monthly program administration fees. In the first quarter of 2022, we had an increase in the number of COVID-19 related claims; however, if the use of vaccines and herd immunity continues to increase, or if state and federal legislation declassifies COVID-19 as a workers' compensation claim, we expect the number of COVID-19 related claims to decrease. Medical bill review
There was a 12% increase in medical bill review revenue during fiscal 2022 compared fiscal 2021. The increase was due to an increase in hospital and non-hospital bills reviewed and the addition of a new customer in the fourth quarter of 2022, but was partially offset by the loss of two customers in 2021.
Utilization review During the year endedDecember 31, 2022 , utilization review revenue increased 50%. The increase in utilization review revenue was due to the addition of a new customer in each of the fourth quarter of 2021 and the fourth quarter of 2022, but was partially offset by the loss of a customer in the fourth quarter of 2021, and delays in providing such services and invoicing stemming the software transition problems in the fourth quarter of 2022. We expect that the growth in utilization review due to the addition of the new customer will continue in the future but may decrease to the degree that utilization reviews were due to the pause on medical treatment during the COVID-19 shutdown. Additionally, as we resolve the disruptions stemming from difficulties and inefficiencies in transitioning to new operational software, we anticipate we will be able to increase our productivity in conducting and invoicing for utilization review services. Medical case management During the twelve-month period endedDecember 31, 2022 , revenue from medical case management decreased 15% primarily due to disruptions stemming from difficulties and inefficiencies in transitioning to new operational software, the loss of a customer in the fourth quarter of 2022, a decrease in the number of new claims, and fewer claims from the prior years which may have carried over into 2021 and 2022. In 2021 and 2022, the decrease in the number of new claims was largely due to the reduction in our customers' workforce and other effects of COVID-19 business restrictions that reduced the number of new workplace injuries. With fewer employees in the workforce, it led to a decrease in the number of new workplace injuries. Claims that occur in one year may continue to be open for several months to years due to the severity of the injury and litigation, and the resulting medical case management revenues can carry over to subsequent fiscal periods. Conversely, a reduction in claims revenues in one period can result in a reduction of related revenues in the following period. As such, the reduction in the number of claims in 2021, resulted in a decrease in medical case management revenue in 2022. Further, the ability for us to provide medical case management services was interrupted by the software transition problems we experienced in the fourth quarter of 2022, which adversely affected our medical case management revenues during the fourth quarter of fiscal 2022. However, we anticipate an increase of productivity in conducting and invoicing for medical case management services, as we continue to resolve problems stemming from the software transition. Other Other fees consist of revenue from network access fees derived from out of network referrals to our network of providers, 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 endedDecember 31, 2022 , decreased 25% when compared to the same period a year earlier. The decrease was the result of a loss of a customer which reduced our claims fees for accessing our network, as well as decreases in the number of referrals for Medicare set-aside. The claims fees generated by accessing our network are no longer offered in the current marketplace and we discontinued this service in 2021, and as a result we expect other revenues to continue to be adversely impacted. Expense Depreciation
Depreciation expense decreased 30% during fiscal 2022 due to our disposing of fully depreciated fixed assets when we moved office locations.
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Table of Contents Professional fees Professional fees increased 7% during fiscal 2022. The increase in professional fees was primarily the result of fees incurred for board of director's fees and field medical case management services, as well as increases for accounting, legal, and medical consultants. Outsource service fees Outsource service fees increased 67% during the twelve-month period endedDecember 31, 2022 . The increase was primarily the result of increases in the number of utilization review referrals and medical bill reviews, as the provision of those services requires outsourcing. The increases in the volume of utilization review and medical bill reviews were partially due to injured employees seeking delayed medical treatment for injuries that occurred during the pandemic when medical treatment was restricted, the addition of new customers, as well new workplace injuries. The increased volume in these services required us to increase our usage of these outsourced services. The increase of outsourced service fees was partially offset by decreases stemming from decreased medical case management administrative services and referrals sent out for Medicare set-aside arrangements, the provision of which also involves outsourcing. We anticipate our outsource service fees will continue to move in correspondence with the level of medical bill review, utilization review, certain medical case management services and Medicare set-aside services we provide in the future. Salaries and wages Salaries and wages decreased 2% during the fiscal 2022 compared to fiscal 2021. The decrease was due to the loss of a management level employee in the third quarter of 2022, which was partially offset by increases in wages and salaries for existing employees. Given the current increased wage inflation trends, we expect salaries and wages will increase in future periods from our efforts to attract and retain employees. Data maintenance During the year endedDecember 31, 2022 data maintenance fees decreased 11% compared to fiscal 2021. The data maintenance fees decrease was due to decreases in our customers' employee counts for enrollment into our HCO, which resulted in decreases to correlated data maintenance fees. The decrease was offset by increases in our customers' employee counts for their monthly program administration fees. General and administrative During fiscal 2022, general and administrative expenses increased by 7% compared to fiscal 2021. This increase was the result of increases in advertising and marketing, dues and subscriptions, education, equipment/repairs, IT enhancement, miscellaneous expenses, parking, and travel and entertainment. The increases were partially offset by decreases in charity - cash contribution, auto expenses, bank charges, licenses and permits, office supplies, postage, printing and reproduction, rent expense for equipment, shareholders' expense, office rent, telephone 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% increase in revenue during fiscal 2022 was partially offset by a 4%
increase in total expenses during the same period, resulting in a 29% increase
in income from operations during the fiscal year ended
Other Income (Expense) InFebruary 2021 , the principal and interest on the Paycheck Protection Program ("PPP") loans in the aggregate amount of$460,700 (the "first draw PPP loans") issued to PHCO, MMC and MMM in April andMay 2020 were forgiven in full. InDecember 2021 , the principal and interest on the section 311 of the Economic Aid Act Paycheck Protection Program Second Draw Loans in the amount of$218,900 (the "second draw PPP loan") issued to MMM inApril 2021 , were also forgiven in full. As a result, we realized income from Paycheck Protection Program loan forgiveness of$684,785 and loan interest expense from the Paycheck Protection Program loans of$5,185 during the year endedDecember 31, 2021 , resulting in total other income during 2021 of$679,600 . 30
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OnDecember 8, 2022 , the Company purchased$8,721,310 ofU.S. Treasury bills and atDecember 31, 2022 , we had interest income of$27,199 compared to$0 during fiscal year 2021. We do not expect there to be further similar forgivable loans in future periods and as a result, we expect other income (expense) to continue to be significantly less in future periods than during the year endedDecember 31, 2021 . Income Tax Provision Our income tax provision for the year endedDecember 31, 2022 , remained flat compared to the same period in 2021. In 2021, the Paycheck Protection Program income of$679,600 was allowed to be excluded from state and federal income tax. Net Income Our total revenues increased 6% during 2022, which was partially offset by a 4% increase in expenses. Total other income and expenses decreased 96%, as a result of the recognition in 2021 of PPP loan forgiveness income. The decrease in other income resulted in a 50% decrease in net income during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . We do not expect this to recur in future periods and expect net income to increase or decrease in future periods largely in correlation with our income from operations.
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 our shareholders to ensure the long-term financial viability of our Company. Historically, we have realized positive cash flows from operating activities, which, coupled with positive reserves of cash on hand, have been used to fund our operating expenses and obligations. In prior years, the company has not engaged in financing activities, but onDecember 8, 2022 , we purchased$8,721,310 inU.S. Treasury bills with a maturity date ofJune 8, 2023 , to obtain a better rate on our cash reserves. As ofDecember 31, 2022 , we had$2,036,432 in cash available, which we believe is enough to support normal operating expenses and meet our obligations until the bills mature. However, we cannot assure that we will not encounter circumstances prior to the bills maturing that require additional cash or related financing, such as acquisition opportunities. During fiscal 2021, we 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 andMay 2020 , PHCO, MMM and MMC received first draw PPP loans in the aggregate amount of$460,700 . In the spirit of the PPP loan program policy of protecting the continued economic stability of employees, we put virtually all of the PPP loan amounts toward payroll and employee benefit expenses. InFebruary 2021 , PHCO, MMC, and MMM received full forgiveness of their first draw PPP loans including accrued interest. InApril 2021 , MMM received the second draw PPP loan in the amount of$218,900 . The second draw PPP loan was also used to pay for qualifying expenses, such as payroll, group health benefits, rent and utilities. InDecember 2021 , MMM received full forgiveness of the second draw PPP loan including accrued interest. In addition to availing the Company of the benefits of these government sponsored programs, we have focused on reducing other operating expenses while maintaining our ability to provide the high-quality services to which our customers are accustomed. InApril 2022 , our office lease inNewport Beach, California expired and we entered into a 12-month lease onApril 1, 2022 inIrvine, California . InDecember 2022 , we renewed our office lease for an additional 12-month period which will expireMarch 31, 2024 . As a result of relocating to a smaller office and continuing to have our employees work remotely, we have decreased the operating costs for office expenses, but have utilized some of those savings to enhance our IT security as well as other IT enhancements. We realized a net gain of$492,886 as a result of an increase in revenues. As ofDecember 31, 2022 , we had$2,036,432 cash on hand compared to$10,085,372 atDecember 31, 2021 . The$8,048,940 decrease in cash on hand was the result of net cash used in investing activities, partially offset by net cash provided by operating activities. InDecember 2022 , we purchased$8,721,310 ofU.S. Treasury bills, which mature onJune 8, 2023 . 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 theRussia -Ukraine conflict, or (iii) the loss of several major customers within a condensed period, cash on hand and anticipated revenues from operations will be sufficient to cover our operating expenses for at least the next twelve months. We currently have planned certain capital expenditures to replace our laptops due to their age and as part of our ongoing continuity plan. We anticipate investing activities will continue throughout 2022 as we replace aging software, computer equipment, and further enhance our IT security. We anticipate these costs to be significant, but believe we have adequate capital on hand to cover these expenses. We do not anticipate these expenditures will require us to seek outside sources of funding. 31
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We had a decrease in cash on hand in fiscal 2022 from our investment inU.S. Treasury bills that will mature onJune 8, 2023 . We intend to continue to pursue potential acquisition transactions that, if additional cash on hand were needed for such transaction, we would either need to condition closing upon maturity of the bills or seek alternate financing, or a combination of those approaches. 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 theRussia -Ukraine conflict could have, we cannot provide any assurance that the assumptions management has used to estimate our liquidity requirements will remain accurate in either the short-term or the longer-term. The ultimate duration and impact of these events on our business, results of operations, financial condition and cash flows is dependent on future developments, which are uncertain, largely beyond our control and cannot be predicted with any degree of certainty at this time. However, we expect that our results of operations, including revenues, in future periods will continue to be adversely impacted by the COVID-19 pandemic and potentially by rising inflation and theRussia -Ukraine conflict, and their negative effects on economic conditions. Cash Flow During the year endedDecember 31, 2022 , cash was primarily used to fund operations. We had a net decrease in cash of$8,048,940 and net increase of cash of$586,915 during the years endedDecember 31, 2022 and 2021, respectively. See below for additional, discussion and analysis of cash flow. Year EndedDecember 31, 2022 2021
Net cash provided by operating activities
(8,760,177 ) (18,376 )
Net cash provided by financing activities - 218,900
Net (decrease) increase in cash $ (8,048,940 ) $ 586,915
Net cash provided by operating activities was $711,237 and $386,391 in fiscal
2022 and fiscal 2021, respectively. The increase of $324,846 in net cash
provided by operating activities was the result of realizing an increase in net
income coupled with increases in accounts receivable, prepaid expenses, deferred
taxes, accounts payable, accrued expenses, and income tax payable. The increases
were partially offset with decreases in income tax receivable, deferred rent
assets, bad debt provision and other assets.
Net cash used in investing activities was $8,760,177 and $18,376 in fiscal 2022
and fiscal 2021, respectively. Net cash used in investing activities increased
by $8,741,801 in 2022 because of an increase in purchases of computers and
equipment and the purchase of U.S. Treasury bills with a maturity date of June
8, 2023 .
In fiscal 2022, net cash used in financing activities was $0 , compared to net
cash provided by financing activities of $218,900 in fiscal 2021, stemming from
a second draw PPP loan issued to MMM in the amount.
Off-Balance Sheet Financing Arrangements
As of
Inflation
We experience pricing pressures in the form of competitive pricing. Insurance
carriers and third-party administrators often try to take our customers by
offering bundled claims administration services with their own managed care
services at a lower rate. We are also impacted by rising costs for certain
inflation-sensitive operating expenses such as labor and employee benefits and
facility leases. We believe that these impacts can be material to our revenues
or net income. Some of our customers are public entities which contract with us
at a fixed price for the term of the contract. Increases in labor and employee
benefits can reduce our profit margin over the term of these contracts. See also
"the effects of inflation may have a disproportionate impact on our business" of
Item 1A Risk Factor of this annual report.
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Table of Contents
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. 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. 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. AtDecember 31, 2022 , two customers accounted for 10% or more of accounts receivable compared to three customers atDecember 31, 2021 . 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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