PACIFIC HEALTH CARE ORGANIZATION, INC. 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"),Medex Managed Care, Inc. ("MMC") andMedex Medical Management, Inc. ("MMM"), and, where applicable, our former subsidiariesIndustrial Resolutions Coalition ("IRC")Medex Legal Support, Inc. ("MLS") andPacific Medical Holding Company, Inc. ("PMHC"). All statements other than statements of historical fact included herein and in the documents incorporated by reference in this quarterly report on Form 10-Q (this "quarterly report"), if any, including without limitation, statements regarding our future financial position, business strategy, potential acquisitions, budgets, projected costs, and plans and objectives of management for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.. In some cases, forward-looking statements can be identified by terminology such as "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "future," "intend," "likely," "may," "might," "objective," "plan," "potential," "predict," "project," "should," "strategy," "will," "would," and other similar expressions and their negatives. Forward-looking statements are not guarantees of future performance and involve known and unknown risks and uncertainties, many of which may be beyond our control. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, and actual results could differ materially as a result of various factors. The following include some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events:
? economic conditions generally and in the industry in which we and our
customers participate, including the effects resulting from international
conflicts and rising domestic inflation;
? the impact on our business of COVID-19, including the reduction of our
customer's workforces as a result of a variety of COVID-19-related causes,
as well as government mandates and 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 either
organically 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 breaches and software system failures, or the imposition of
laws imposing costly cybersecurity and data protection compliance;
? disruptive technologies that could render our services less competitive or
obsolete;
? reductions in worker's compensation claims or the demand for our services,
from whatever source; and
? delays, reductions 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 endedDecember 31, 2021 , filed theSecurities and Exchange Commission (the "Commission") onApril 14, 2022 (the "Annual Report"). We operate in a 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. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, made by us or on our behalf, are also expressly qualified by these cautionary statements. 10
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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.
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 now offers our Workers' Compensation carve-out services previously provided by IRC and Medicare-set asides previously managed by MLS. MMC oversees 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 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 employer 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 employer customers to be added while others terminate for a variety of reasons. 11
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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 provides employees paid leave for COVID-19 related reasons such as caring for themselves, family members, or for vaccine related appointments or illnesses caused by COVID-19 or the vaccine fromJanuary 1, 2022 throughSeptember 30, 2022 . The CSPSL allows employees to retroactively request reimbursement for qualifying leave or to use it towards future requests throughSeptember 30, 2022 . Unlike the CA SPSL from 2021, employers whose employees utilize CSPSL are ineligible for federal tax credits to offset the costs of providing the CSPSL. We will continue to offer COVID-19-specific paid leave benefits to our employees until the expiration of CSPSL. Family, medical, and other types of leave remain available to employees under existing Company policy. As ofJune 2022 , we have incurred negligible payroll, benefits, administrative, and liability costs related to CSPSL. However, we could incur some significant costs if a second booster shot is recommended or required later in 2022, or if another spike in COVID-19 results in increased usage of the CSPSL benefit by employees.
Key trends affecting results of operations
As noted throughout this quarterly report, during the three and six months endedJune 30, 2022 and 2021, COVID-19 has impacted the businesses of our customers, our business and our results of operations. Most of our customers, and their employees are located inCalifornia . During the three and six months endedJune 30, 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 in the labor force. Allowable medical treatment for workers' compensation claims were also limited to help ease the burden of COVID-19 on medical facilities. During the three and six months endedJune 30, 2022 ,California businesses were able to operate without COVID-19 restrictions. Our customers had an increase in COVID-19 related workers' compensation claims during the first quarter of 2022 but saw a decline in the second quarter of 2022. Revenue generated from COVID-19 workers' compensation claims may become seasonal and as the frequency of contracting COVID-19 increases and the severity of cases decreases, it is possible that in the future COVID-19 will no longer be classified as a workers' compensation illness. If the change of classification for COVID-19 related claims no longer subjects the employer to report it as a workers' compensation injury, there would be a decrease in our revenues. As employers begin hiring, some of our customers' industries have been impacted by the recent national trend of workforce resignations and difficulties in hiring. If our customers cannot attract new workers, it is possible that some jobs will be replaced with technology. If technology replaces workers, and/or workplace injuries continue at lower rates because there are more employees working from home and fewer employees suffering injuries in the workplace, the increases in revenues we are beginning to see could flatten or decline. Our revenues for medical case management were also impacted because there was a smaller labor pool which resulted in fewer new workers' compensation claims. We believe this trend will be temporary, as the economy recovers from the effects of COVID-19, but if the trend to smaller labor pools continues, medical case management reviews could continue to remain lower in the future. Revenue
We derive revenue primarily from fees charged for access to our provider networks, enrollment of customers' employees into the HCO or MPN program, utilization reviews, medical bill reviews, and medical case management services.
HCO
HCO revenue is generated largely from fees charged to our employer customers for
claim network fees to access 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.
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Table of Contents MPN Like HCO revenue, MPN revenue is generated largely from fees charged to our employer customers for claim network fees to access our MPN networks, custom network fees, employee enrollment into our MPN program, program administration, and fees for other services our MPN customers may select. Unlike the HCO, MPNs do not require annual and new hire notifications, MPNs are only required to provide a notice to an injured worker at the time the employer is notified by the injured worker that an injury occurred. Utilization review Utilization review is the review of medical treatment requests by providers to provide a safeguard for employers and injured workers against unnecessary and inappropriate medical treatment from the perspective of medical necessity, quality of care, appropriateness of decision-making, and timeliness of treatment. Its purpose is to reduce employer liability for medical costs that are not medically appropriate or approved by the relevant medical and legal authorities and the payor. Medical bill 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. The following table sets forth, for the quarters endedJune 30, 2022 and 2021, the percentage each revenue item identified in our unaudited condensed consolidated financial statements contributed to total revenue during the respective period. 2022 2021 HCO 19 % 27 % MPN 10 % 9 % Utilization review 30 % 20 % Medical bill review 8 % 6 % Medical case management 30 % 34 % Other 3 % 4 % Expense Consulting fees
Consulting fees include fees we pay to third parties for IT, marketing, and in-house legal advice for the various services we offer.
Salaries and wages
Salaries and wages reflect employment-related compensation we pay to our employees, payroll processing, payroll taxes and commissions.
Professional fees
Professional fees include fees we pay to third parties to provide medical consulting, medical case management, and board of director's fees for board meetings, as well as, legal and accounting fees.
Insurance
Insurance expense is comprised primarily of health insurance benefits offered to our employees, directors' and officers' liability insurance, Workers' Compensation coverage and business liability coverage.
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Table of Contents 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 the demand for those services. Data maintenance fees Data maintenance fees includes fees we pay to a third party to process HCO and MPN employee enrollment. These fees fluctuate throughout the year because of the varied timing of customer enrollment into our HCO or MPN programs and the number of employees our customers have in their workforce. 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 quarters endedJune 30, 2022 and 2021, the percentage each expense item identified in our unaudited consolidated financial statements contributed to total expense during the respective period. 2022 2021 Depreciation 1 % 1 % Bad debt provision - % - % Consulting fees 5 % 5 % Salaries and wages 56 % 58 % Professional fees 6 % 7 % Insurance 6 % 6 % Outsource service fees 4 % 4 % Data maintenance fees 11 % 7 % General and administrative 11 % 12 % 14
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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
June 30,
2022 2021 Amount Change % Change
Revenues:
HCO $ 269,311 $ 356,011 $ (86,700 ) (24 %)
MPN 145,319 126,785 18,534 15 %
Utilization review 422,936 273,072 149,864 55 %
Medical bill review 113,555 78,093 35,462 45 %
Medical case management 414,658 458,423 (43,765 ) (10 %)
Other 34,672 51,067 (16,395 ) (32 %)
Total revenues 1,400,451 1,343,451 57,000 4 %
Expense:
Depreciation 9,297 10,688 (1,391 ) (13 %)
Bad debt provision - 494 (494 ) (100 %)
Consulting fees 56,206 58,399 (2,193 ) (4 %)
Salaries and wages 686,240 698,985 (12,745 ) (2 %)
Professional fees 79,774 80,127 (353 ) - %
Insurance 75,211 69,111 6,100 9 %
Outsource service fees 132,820 92,355 40,465 44 %
Data maintenance 46,313 50,080 (3,767 ) (8 %)
General and administrative 141,472 151,540 (10,068 ) (7 %)
Total expenses 1,227,333 1,211,779 15,554 1 %
Income from operations 173,118 131,672 41,446 31 %
Income before taxes 173,118 131,672 41,466 31 %
Income tax provision 48,594 36,961 11,633 31 %
Net income $ 124,524 $ 94,711 $ 29,813 31 %
Revenue
HCO
During the three-month period ended June 30, 2022 , HCO revenue decreased 24%,
compared to the same period in the prior year. The decrease in HCO revenue was
attributable to a decrease in the number of claims, which resulted in a decrease
in HCO claim network fees, as well as a decrease in new employees enrolled in
the HCO and lower annual HCO renewals of employees into the program.
MPN
During the three-month period ended June 30, 2022 , MPN revenue increased 15%,
compared to the same period in the prior year. The increase in MPN revenue was
attributable to an increase in the number of claims reported by existing
customers which led to an increase of MPN claim network fees.
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Table of Contents Utilization review During the three-month period endedJune 30, 2022 , utilization review revenue increased 55%, compared to the same period in the prior year. The increase in utilization review revenue was due to the addition of a new customer in the fourth quarter of 2021, and increases in utilization reviews referrals for existing customers, partially offset by the loss of a customer in 2021. Medical bill review During the three-month period endedJune 30, 2022 , medical bill review revenue increased by 45%, compared to the same period in the prior year. The increase was due to processing more medical and hospital bills from existing customers, partially offset by the loss of a customer in 2021. Medical case management During the three-month period endedJune 30, 2022 , revenue from medical case management decreased 10%, compared to the same period in the prior year. The decrease was due to fewer new claims from existing customers. Other Other fees consist of revenue from network access fees derived from out of network referrals to our network of physicians, claims fees, expert witness testimony, lien representation, legal support services, Medicare set-aside, and workers' compensation carve-out services. Other fee revenue for the three-month period endedJune 30, 2022 , decreased 32% when compared to the same period a year earlier. The decrease was the result of fewer Medicare set-aside claims and the loss of a customer which reduced our claims fees for accessing our network. Due to the loss of this customer, we discontinued this service in 2021. The claims fees generated by this type of service is no longer offered in the current marketplace. Expenses Depreciation During the three-month period endedJune 30, 2022 , depreciation decreased 13% compared to the three-month period endedJune 30, 2021 . The decrease was primarily attributable to certain furniture, fixtures, and computer equipment being fully depreciated. Insurance
During the three-month period ended
Outsource service fees Outsource service fees increased 44% during the three-month period endedJune 30, 2022 . The increase was primarily the result of increases in the number of utilization review referrals and medical bill reviews, partially offset by decreases in medical case management administrative services and referrals sent out for Medicare set-aside arrangements. We anticipate our outsource service fees will continue to move in correspondence with the level of utilization review, medical bill review, certain medical case management services and Medicare set-aside services we provide in the future. Data maintenance
During the three-month period ended
General and administrative During the three-month period endedJune 30, 2022 , general and administrative expense decreased by 7% when compared to the same period in 2021. The decreases were due to decreases in auto expenses, bank charges, licenses and permits, office supplies, postage and delivery, rent expense - equipment, rent, telephone, and vacation expense, partially offset by increases in advertising, dues and subscriptions, IT enhancement, education, meals and travel, miscellaneous, and parking. 16
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Table of Contents Income from Operations As a result of the$57,000 increase in total revenue during the three-month period endedJune 30, 2022 , and the$15,554 increase in total expenses during the same period, our income from operations increased$41,446 , or 31%, during the three-month period endedJune 30, 2022 , when compared to the same period in 2021. Income Tax Provision We realized a$11,633 , or 31%, increase in our income tax provision during the three-month period endedJune 30, 2022 , compared to the three-month period endedJune 30, 2021 , because of the increase in net income realized in the 2022 period. Net Income During the three-month period endedJune 30, 2022 , we realized a 4% increase in total revenues, a 1% increase in total expenses and a 31% increase in our provision for income tax when compared to the same period in 2021. As a result, we realized a net increase of$29,813 , or 31%, in net income during the three-month period endedJune 30, 2022 , compared to the three-month period endedJune 30, 2021 .
Comparison of six months ended
The following represents selected components of our consolidated results of
operations, for the six-month periods ended
For six months ended
June 30,
2022 2021 Amount Change % Change
Revenues:
HCO $ 630,279 $ 647,265 $ (16,986 ) (3 %)
MPN 293,930 258,663 35,267 14 %
Utilization review 777,892 538,676 239,216 44 %
Medical bill review 233,892 174,760 59,132 34 %
Medical case management 833,420 942,856 (109,436 ) (12 %)
Other 58,421 105,593 (47,172 ) (45 %)
Total revenues 2,827,834 2,667,813 160,021 6 %
Expense:
Depreciation 13,492 23,307 (9,815 ) (42 %)
Bad debt provision 4,783 494 4,289 868 %
Consulting fees 110,161 115,522 (5,361 ) (5 %)
Salaries and wages 1,319,612 1,393,603 (73,991 ) (5 %)
Professional fees 146,638 145,956 682 - %
Insurance 158,877 155,807 3,070 2 %
Outsource service fees 276,598 194,158 82,440 42 %
Data maintenance 56,502 63,376 (6,874 ) (11 %)
General and administrative 305,944 323,325 (17,381 ) (5 %)
Total expenses 2,392,607 2,415,548 (22,941 ) (1 %)
Income from operations 435,227 252,265 182,962 73 %
Other income (expense)
Paycheck protection program loan
forgiveness income - 464,386 (464,386 ) (100 %)
Paycheck protection program loan
interest expense - (3,686 ) 3,686 (100 %)
Total other income (expense) - 460,700 (460,700 ) (100 %)
Income before taxes 435,227 712,965 (277,738 ) (39 %)
Income tax provision (122,168 ) (110,969 ) (11,199 ) 10 %
Net income $ 313,059 $ 601,996 $ (288,937 ) (48 %)
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The following table sets forth, for the six months endedJune 30, 2022 and 2021, the percentage each revenue item identified in our unaudited condensed consolidated financial statements contributed to total revenue during the respective period. 2022 2021 HCO 22 % 24 % MPN 10 % 10 % Utilization review 28 % 20 % Medical bill review 8 % 7 % Medical case management 30 % 35 % Other 2 % 4 % HCO During the six-month period endedJune 30, 2022 , HCO revenue decreased 3%, compared to the same period in the prior year. The decrease in HCO revenue was attributable to decreases in new employees enrolled in the HCO and lower annual HCO renewals of employees into the program partially offset by increases in the number of claims, which resulted in an increase in HCO claim network fees. MPN
During the six-month period ended
Utilization review
During the six-month period ended
Medical bill review During the six-month period endedJune 30, 2022 , medical bill review revenue increased by 34%, compared to the same period in the prior year. The increase was due to processing more medical and hospital bills from existing customers, partially offset by the loss of a customer in 2021. Medical case management
During the six-month period ended
Other Other fee revenue for the six-month period endedJune 30, 2022 , decreased 45% when compared to the same period a year earlier. The decrease was the result of fewer Medicare set-aside claims and the loss of a customer which reduced our claims fees for accessing our network. Due to the loss of this customer, we discontinued this service in 2021. The claims fees generated by this type of service is no longer offered in the current marketplace. 18
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Table of Contents Expenses The following table sets forth, for the six months endedJune 30, 2022 and 2021, the percentage each expense item identified in our unaudited consolidated financial statements contributed to total expense during the respective period. 2022 2021 Depreciation 1 % 1 % Bad debt provision - % - % Consulting fees 5 % 5 % Salaries and wages 55 % 58 % Professional fees 6 % 6 % Insurance 6 % 6 % Outsource service fees 12 % 8 % Data maintenance fees 2 % 3 % General and administrative 13 % 13 % Depreciation
During the six-month period ended
Bad debt During the six-month period endedJune 30, 2022 , bad debt provisions increased by$4,289 compared to the six-month period endedJune 30, 2021 . AtJune 30, 2022 and 2021, our allowances for bad debt were$13,217 and$23,083 , respectively. The accrual for bad debt provision was to increase our allowance for bad debt accounts receivable over 90-days. Consulting fees During the six-month period endedJune 30, 2022 , consulting fees decreased 5% compared to the six-month period endedJune 30, 2021 . The decrease was the result of a reduction in the number of information systems consultants retained as compared to the six-month period endedJune 30, 2021 . Salaries and wages During the six-month period endedJune 30, 2022 , salaries and wages decreased by 5% when compared to the same period in 2021. This decrease was the result of the fewer employees in the six-month period endedJune 30, 2022 compared to the same period in 2021. Outsource service fees Outsource service fees increased 42% during the six-month period endedJune 30, 2022 . The increase was primarily the result of increases in the number of utilization review referrals and medical bill reviews, partially offset by decreases in medical case management administrative services and referrals sent out for Medicare set-aside arrangements. We anticipate our outsource service fees will continue to move in correspondence with the level of utilization review, medical bill review, certain medical case management services and Medicare set-aside services we provide in the future. Data maintenance During the six-month period endedJune 30, 2022 , data maintenance fees decreased 11% primarily as a result of a decrease in the number of customers' employees enrolled in our HCO program.
General and administrative
During the six-month period endedJune 30, 2022 , general and administrative expense decreased by 5% when compared to the same period in 2021. The decreases were due to decreases in auto expenses, bank charges, licenses and permits, office supplies, postage and delivery, rent expense - equipment, rent, telephone, and vacation expense, partially offset by increases in advertising, dues and subscriptions, education, IT enhancement, meals and travel, miscellaneous, and parking. 19
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Table of Contents Income from Operations Total revenue during the six-month period endedJune 30, 2022 , increased by$160,021 , to$2,827,834 compared to$2,667,813 in the same period in 2021. Our total expenses decreased by$22,941 during the six months endedJune 30, 2022 , compared to the same period in 2021. This led to an increase in income from operations of$182,962 , or 73%, during the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 . Other Income (Expense) During the six-month period endedJune 30, 2022 , we realized no other income (expense). During the same period in 2021, we realized a total of$460,700 in other income and expense due to the PPP loans. InFebruary 2021 , the principal and interest on the PPP loans issued to PHCO, MMC and MMM in April andMay 2020 , were forgiven in full. As a result, we realized total other income of$464,386 and other expense in the form of interest expense for the PPP loans of$3,686 in the six months endedJune 30, 2021 . Income Tax Provision We realized an increase of$11,199 or 10%, in our income tax provision during the six-month period endedJune 30, 2022 , compared to the six months endedJune 30, 2021 , as a result of the increase of income from operations. Net Income During the six-month period endedJune 30, 2022 , total revenues increased 6% and total expense decreased 1%. During the period we also realized a 10% increase in our provision for income tax and our net income decreased$288,937 , or 48%, when compared to the six months endedJune 30, 2021 , because we realized income from PPP loan principal and interest forgiveness in the amount of$460,700 during the six-month period endedJune 30, 2021 .
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet our potential cash requirements for general business purposes. We consistently monitor our liquidity and financial position and take actions management believes are in the best interest of our Company and shareholders to ensure the long-term financial viability of our Company. Historically, we have realized positive cash flows from operating activities, which coupled with positive reserves of cash on hand, have been used to fund our operating expenses and obligations. We have not historically used, nor do we currently possess a credit facility or other institutional source of financing. As a result of the pandemic subsiding, restrictions being removed and employees returning to work, coupled with our efforts to transition the Company to be remote, and reductions in overhead expenses, during the six-month period endedJune 30, 2022 we saw an increase in revenues and a decrease in expenses. We have continued to realize net income and net cash from operations and have increased our net cash position. Management currently believes that absent (i) any unanticipated further COVID-19 impact, (ii) a longer-term downturn in the general economy as a result of inflation and the sanctions, countermeasures and other actions in response to 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, as well as for the longer term. As ofJune 30, 2022 , we had cash on hand of$10,408,658 compared to$10,085,372 as ofDecember 31, 2021 . The$323,286 increase was the result of net cash provided by our operating activities, partially offset by cash used in investing activities. We had no change in net cash provided by/used in financing activities during the six-month period endedJune 30, 2022 . We took advantage of both the First Draw and Second Draw Paycheck Protection Programs. Because the funds were used as designated under those programs, we received full forgiveness of all PPP loans received. In the future we may 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 currently have planned certain capital expenditures including changing operational software. We anticipate the costs to change operational software to be significantly higher than in previous years starting in 2022, but 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. 20
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We believe our strong cash position could allow us to identify and capitalize on potential opportunities to expand our business either through the acquisition of existing businesses that may have insufficient resources to overcome the impacts of the COVID-19 pandemic, including accretion of existing business lines or expansion into new business lines and related industries, including, but not limited to, the insurance industry. We may also seek growth through organic development of new lines of business or expansion of existing offerings. Depending upon the nature of the opportunities we identify, such acquisitions or expansion could require greater capital resources than we currently possess. Should we need additional capital resources, we could seek to obtain such through debt and/or equity financing. We do not currently possess an institutional source of financing and there is no assurance that we could be successful in obtaining equity or debt financing when needed on favorable terms, or at all. We could also use shares of our capital stock as consideration for a business acquisition transaction, but there is also no assurance that there would be significant interest in our capital stock by a potential seller or the market. As a result of the unique nature of the COVID-19 pandemic and its impacts on our operations, the operations of our customers and the broader economy, coupled with uncertainty surrounding the potential impacts of rising inflation, 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. We expect that our results of operations, including revenues, in future periods will be partially impacted by the COVID-19 pandemic due to the possibility that as COVID-19 becomes more common and less severe that COVID-19 workers' compensation claims may no longer be classified as a workers' compensation illness. We expect that with rising inflation profit margins will be impacted due to locked in pricing for some of our public entity customers and the increasing costs in salaries and wages as we compete to recruit and retain employees. Cash Flow
During the six months ended
For the six months ended June 30,
2022 2021
(unaudited) (unaudited)
Net cash provided by operating activities
(17,166 ) (5,434 )
Net cash provided by financing activities - 218,900
Net increase in cash $ 323,286 $ 602,179
During the six months ended June 30, 2022 and 2021, net cash provided by
operating activities was $340,452 and $388,713 , respectively, a decrease of
$48,261 . This decrease was primarily the result of decreases in net income,
deferred rent assets and accrued expenses, partially offset by increases in
allowance for bad debt, accounts receivable, prepaid expenses, taxes receivable,
prepaid income tax, other assets, accounts payable, unearned revenue, and income
tax payable.
Net cash used in investing activities was
During the six months endedJune 30, 2022 , the Company did not engage in any financing activities. Net cash provided by financing activities during the six months endedJune 30, 2021 , was$218,900 . InApril 2021 , MMM received a Second Draw PPP loan in the amount of$218,900 , that was fully forgiven with accrued interest in December of 2021.
Off-Balance Sheet Financing Arrangements
As of
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Table of Contents Inflation We experience pricing pressures in the form of competitive pricing. Insurance carriers and third-party administrators often try to take our customers by offering bundled claims administration services with their own managed care services at a lower rate. We are also impacted by rising costs for certain inflation-sensitive operating expenses such as labor and employee benefits and facility leases. We believe that these impacts can be material to our revenues or net income. Some of our customers are public entities which contract with us at a fixed price for the term of the contract. Increases in labor and employee benefits can reduce our profit margin over the term of these contracts. See also "Effects of inflation" of Item 1A Risk Factor of our Annual Report on Form 10-K filed with the Commission onApril 14, 2022 .
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. 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 atJune 30, 2022 and 2021, respectively. 22
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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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