CORVEL CORP 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2023, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is (i) recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining a system of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America; providing reasonable assurance that our receipts and expenditures are made in accordance with authorizations of our management and directors; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control—Integrated Framework . Based on this assessment, our management concluded that our internal control over financial reporting was effective as of March 31, 2023 to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. 23 Our independent registered public accounting firm, Haskell & White LLP, has audited our consolidated financial statements included in this annual report and has issued an attestation report on the effectiveness of our internal control over financial reporting as of March 31, 2023 as stated in their report that is included in Part II, Item 8 herein. Changes to Internal Control over Financial Reporting During the quarter ended March 31, 2023, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. None. 24 PART III Item 10. Directors, Executive Of ficers and Corporate Governance. The information required by this item will be disclosed in our definitive proxy statement on Schedule 14A (Proxy Statement) for our 2023 annual meeting of stockholders and is incorporated herein by reference. Our Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2023, pursuant to Regulation 14A under the Exchange Act. The Board of Directors has adopted a code of ethics and business conduct that applies to all of the Company’s employees, officers and directors. The full text of the Company’s code of ethics and business conduct is posted on the Company’s website at www.corvel.com. The Company intends to disclose future amendments to certain provisions of the Company’s code of ethics and business conduct, or waivers of such provisions, applicable to the Company’s directors and executive officers, at the same location on the Company’s website identified above. The inclusion of the Company’s website address in this annual report does not include or incorporate by reference the information on the Company’s website into this annual report. Item 11. Executi ve Compensation. The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Ow ners and Management and Related Stockholder Matters. The information in the sections titled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” and “Equity Compensation Plan Information” appearing in the Company’s definitive proxy statement for the 2023 Annual Meeting is incorporated herein by reference. Item 13. Certain Relationships and Related P arty Transactions, and Director Independence. The information in the sections titled “Certain Relationships and Related-Person Transactions,” “Proposal One: Election of Directors,” “Information Regarding Director Nominees,” and “Corporate Governance, Board Composition and Board Committees” appearing in the Company’s definitive proxy statement for the 2023 Annual Meeting is incorporated herein by reference. Item 14. Principal Accou ntant Fees and Services. The information under the captions “Principal Accountant Fees and Services,” “Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm” and “Proposal Two: Ratification of Appointment of Independent Registered Public Accounting Firm” appearing in the Company’s definitive proxy statement for the 2023 Annual Meeting is incorporated herein by reference. 25 PART IV Item 15. Exhibit and Financial State ment Schedules. (a)(1) Financial Statements: The Company’s financial statements appear in a separate section of this annual report, beginning on the pages referenced below: Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 200 ) 43 Consolidated Balance Sheets as of March 31, 2023 and 2022 46 Consolidated Statements of Income for the Fiscal Years Ended March 31, 2023, 2022 and 2021 47 Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended March 31, 2023, 2022 and 2021 48 Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2023, 2022 and 2021 49 Notes to Consolidated Financial Statements 50 (a)(2) Financial Statement Schedule: The Company’s consolidated financial statements, as listed under Item 15(a)(1), appear in a separate section of this annual report and are incorporated herein by this reference. The Company’s financial statement schedule is as follows: Schedule II — Valuation and Qualifying Accounts Balance at Beginning of Year Additions Charged to Cost and Expenses Deductions Balance at End of Year Allowance for doubtful accounts: Fiscal Year Ended March 31, 2023: $ 2,562,000 $ 1,216,000 $ ( 955,000 ) $ 2,823,000 Fiscal Year Ended March 31, 2022: 3,274,000 158,000 ( 870,000 ) 2,562,000 Fiscal Year Ended March 31, 2021: 5,133,000 2,021,000 ( 3,880,000 ) 3,274,000 26 (a)(3) E xhibits: EXHIBITS Exhibit No. Title Method of Filing 3.1 Fourth Amended and Restated Certificate of Incorporation of CorVel Corporation. Incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020 filed on August 6, 2020 (File No. 000-19291). 3.2 Second Amended and Restated Bylaws of CorVel Corporation. Incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020 filed on August 6, 2020 (File No. 000-19291). 4.1 Description of Securities Filed herewith. 10.1* Restated Omnibus Incentive Plan (Formerly The Restated 1988 Executive Stock Option Plan) Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 4, 2020 (File No. 000-19291). 10.2* Forms of Notice of Grant of Stock Option, Stock Option Agreement and Notice of Exercise Under the Restated Omnibus Incentive Plan (Formerly The Restated 1988 Executive Stock Option) Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 8, 2018 (File No. 000-19291), Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006 filed on November 9, 2006 (File No. 000-19291), Exhibits 10.7, 10.8 and 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1994 filed on June 29, 1994 (File No. 000-19291), Exhibits 99.2, 99.3, 99.4, 99.5, 99.6, 99.7 and 99.8 to the Company’s Registration Statement on Form S-8 (File No. 333-94440) filed on July 10, 1995, and Exhibits 99.3 and 99.5 to the Company’s Registration Statement on Form S-8 (File No. 333-58455) filed on July 2, 1998. 10.3* Restated 1991 Employee Stock Purchase Plan, as amended Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 11, 2021 (File No. 000-19291). 10.4 Fidelity Master Plan for Savings and Investment, and amendments (P) Paper filing Incorporated herein by reference to Exhibits 10.16 and 10.16A to the Company’s Registration Statement on Form S-1 Registration No. 33-40629 initially filed on May 16, 1991. 10.5*† Stock Option Agreement, dated November 2, 2017, by and between CorVel Corporation and Michael G. Combs, providing for performance vesting. Incorporated herein by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed on June 10, 2020 (File No. 000-19291). 10.6*† Stock Option Agreement, dated November 2, 2017, by and between CorVel Corporation and Diane J. Blaha, providing for performance vesting. Incorporated herein by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed on June 10, 2020 (File No. 000-19291). 10.7*† Stock Option Agreement, dated November 2, 2017, by and between CorVel Corporation and Michael Saverien, providing for performance vesting. Incorporated herein by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed on June 10, 2020 (File No. 000-19291). 10.8*† Stock Option Agreement, dated November 2, 2017, by and between CorVel and Corporation and Maxim Shishin, providing for performance vesting. Incorporated herein by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed on June 10, 2020 (File No. 000-19291). 27 10.9*† Stock Option Agreement, dated November 1, 2018, by and between CorVel Corporation and Michael G. Combs, providing for performance vesting. Incorporated herein by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed on June 10, 2020 (File No. 000-19291). 10.10*† Stock Option Agreement, dated November 1, 2018, by and between CorVel Corporation and Diane J. Blaha, providing for performance vesting. Incorporated herein by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed on June 10, 2020 (File No. 000-19291). 10.11*† Stock Option Agreement, dated November 1, 2018, by and between CorVel Corporation and Michael Saverien, providing for performance vesting. Incorporated herein by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed on June 10, 2020 (File No. 000-19291). 10.12*† Stock Option Agreement, dated November 1, 2018, by and between CorVel aCorporation and Maxim Shishin, providing for performance vesting. Incorporated herein by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed on June 10, 2020 (File No. 000-19291). 10.13*† Stock Option Agreement, dated November 1, 2018, by and between CorVel Corporation and Brandon O’Brien, providing for performance vesting. Incorporated herein by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed on June 10, 2020 (File No. 000-19291). 10.14*† Stock Option Agreement, dated November 1, 2018, by and between CorVel Corporation and Jennifer Yoss, providing for performance vesting. Incorporated herein by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed on June 10, 2020 (File No. 000-19291). 10.15*† Stock Option Agreement, dated November 5, 2019, by and between CorVel Corporation and Michael Combs, providing for performance vesting. Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on December 31, 2019 (File No. 000-19291). 10.16*† Stock Option Agreement, dated November 5, 2019, by and between CorVel Corporation and Brandon O’Brien, providing for performance vesting. Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed on December 31, 2019 (File No. 000-19291). 10.17*† Stock Option Agreement, dated November 5, 2019, by and between CorVel Corporation and Diane J. Blaha, providing for performance vesting. Incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K/A filed on December 31, 2019 (File No. 000-19291). 10.18*† Stock Option Agreement, dated November 5, 2019, by and between CorVel Corporation and Michael Saverien, providing for performance vesting. Incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K/A filed on December 31, 2019 (File No. 000-19291). 10.19*† Stock Option Agreement, dated November 5, 2019, by and between CorVel Corporation and Maxim Shishin, providing for performance vesting. Incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K/A filed on December 31, 2019 (File No. 000-19291). 10.20*† Stock Option Agreement, dated November 5, 2019, by and between CorVel Corporation and Jennifer Yoss, providing for performance vesting. Incorporated herein by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K/A filed on December 31, 2019 (File No. 000-19291). 10.21*† Stock Option Agreement, dated November 5, 2020, by and between CorVel Corporation and Michael Combs, providing for performance vesting. Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 12, 2020 (File No. 000-19291). 10.22*† Stock Option Agreement, dated November 5, 2020, by and between CorVel Corporation and Brandon O’Brien, providing for performance vesting. Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 12, 2020 (File No. 000-19291). 28 10.23*† Stock Option Agreement, dated November 5, 2020, by and between CorVel Corporation and Diane J. Blaha, providing for performance vesting. Incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 12, 2020 (File No. 000-19291). 10.24*† Stock Option Agreement, dated November 5, 2020, by and between CorVel Corporation and Maxim Shishin, providing for performance vesting. Incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on November 12, 2020 (File No. 000-19291). 10.25*† Stock Option Agreement, dated November 5, 2020, by and between CorVel Corporation and Jennifer Yoss, providing for performance vesting. Incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on November 12, 2020 (File No. 000-19291). 10.26*† Stock Option Agreement, dated December 8, 2021, by and between CorVel Corporation and Michael Combs, providing for performance vesting. Incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2021 filed on February 3, 2022 (File No. 000-19291). 10.27*† Stock Option Agreement, dated December 8, 2021, by and between CorVel Corporation and Brandon O’Brien, providing for performance vesting. Incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2021 filed on February 3, 2022 (File No. 000-19291). 10.28*† Stock Option Agreement, dated December 8, 2021, by and between CorVel Corporation and Diane J. Blaha, providing for performance vesting. Incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2021 filed on February 3, 2022 (File No. 000-19291). 10.29*† Stock Option Agreement, dated December 8, 2021, by and between CorVel Corporation and Maxim Shishin, providing for performance vesting. Incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2021 filed on February 3, 2022 (File No. 000-19291). 10.30*† Stock Option Agreement, dated December 8, 2021, by and between CorVel Corporation and Jennifer Yoss, providing for performance vesting. Incorporated herein by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2021 filed on February 3, 2022 (File No. 000-19291). 21.1 Subsidiaries of the Company. Filed herewith. 23.1 Consent of Independent Registered Public Accounting Firm, Haskell & White LLP. Filed herewith. 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. 29 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. 101.INS Inline XBRL Instance Document Furnished herewith. 101.SCH Inline XBRL Taxonomy Extension Schema Document Furnished herewith. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document Furnished herewith. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document Furnished herewith. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document Furnished herewith. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document Furnished herewith. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) Furnished herewith. * - Denotes management contract or compensatory plan or arrangement. † - Certain confidential information contained in this exhibit has been omitted by means of redacting a portion of the text and replacing it with empty brackets indicated by [ ], pursuant to Regulation S-K Item 601(b)(10)(iv) of the Securities Act of 1933, as amended. Certain confidential information has been excluded from the exhibit because it (i) is not material and (ii) would likely cause competitive harm to CorVel if publicly disclosed. An unredacted copy of the exhibit will be provided on a supplemental basis to the SEC upon request. (P) – Previously filed only in paper. (b) Exhibits The exhibits filed as part of this annual report are listed under Item 15(a)(3) of this annual report. (c) Financial Statement Schedule The Financial Statement Schedule required by Regulation S-X and Item 8 of Form 10-K is listed under Item 15(a)(2) of this annual report. Item 16. Form 10-K Summary. None. 30 SIGNAT URES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. CorVel Corporation By: /s/ Michael G. Combs Michael G. Combs Chief Executive Officer and President Date: May 26, 2023 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ V. Gordon Clemons Chairman of the Board May 26, 2023 V. Gordon Clemons /s/ Michael G. Combs Chief Executive Officer and President May 26, 2023 Michael G. Combs (Principal Executive Officer) /s/ Brandon T. O’Brien Chief Financial Officer May 26, 2023 Brandon T. O’Brien (Principal Financial Officer) /s/ Jennifer L. Yoss Vice President, Accounting May 26, 2023 Jennifer L. Yoss (Principal Accounting Officer) /s/ A lan R. Hoops Director May 26, 2023 Alan R. Hoops /s/ Steven J. Hamerslag Director May 26, 2023 Steven J. Hamerslag /s/ R. Judd Jessup Director May 26, 2023 R. Judd Jessup /s/ Jean H. Macino Director May 26, 2023 Jean H. Macino /s/ J effrey J. Michael Director May 26, 2023 Jeffrey J. Michael 31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management’s Discussion and Analysis of Financial Condition and Results of Operations may include certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including (without limitation) statements with respect to anticipated future operating and financial performance, including the impact of COVID-19, growth and acquisition opportunities and other similar forecasts and statements of expectation. Words such as “expects,” “anticipates,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “potential,” “continue,” “strive,” “ongoing,” “may,” “will,” “would,” “could,” “should,” as well as variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligations to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of these factors include (without limitation) the impact of global pandemics, such as COVID-19; general industry and economic conditions, including a decreasing number of national claims due to a decreasing number of injured workers; competition from other managed care companies and third party administrators; the ability to expand certain areas of the Company’s business; growth in the Company’s sale of TPA services; shifts in customer demands; the ability of the Company to produce market-competitive software; changes in operating expenses including employee wages, benefits, and medical inflation; cost of capital and capital requirements; dependence on key personnel; the impact of possible cybersecurity incidents; existing and possible litigation and legal liability in the course of operations and the Company’s ability to resolve such litigation; governmental and public policy changes, including but not limited to legislative and administrative law and rule implementation or change; the impact of recently issued accounting standards on the Company’s consolidated financial statements; the continued availability of financing in the amounts and at the terms necessary to support the Company’s future business and the other risks identified in Part I, Item 1A of this annual report, “Risk Factors.” Overview The Company is an independent nationwide provider of medical cost containment and managed care services designed to address the escalating medical costs of workers’ compensation benefits, automobile insurance claims, and group health insurance benefits. The Company’s services are provided to insurance companies, TPAs, governmental entities, and self-administered employers to assist them in managing the medical costs and monitoring the quality of care associated with healthcare claims. Network Solutions Services The Company’s network solutions services are designed to reduce the price paid by its customers for medical services rendered in workers’ compensation cases, automobile insurance policies, and group health insurance policies. The network solutions services offered by the Company include automated medical fee auditing, preferred provider management and reimbursement services, retrospective utilization review, facility claim review, professional review, pharmacy services, directed care services, Medicare solutions, clearinghouse services, independent medical examinations, and inpatient medical bill review. Network solutions services also includes revenue from the Company’s directed care network (known as CareIQ), including imaging, physical therapy, durable medical equipment, and translation and transportation. Patient Management Services In addition to its network solutions services, the Company offers a range of patient management services, which involve working one-on-one with injured employees and their various healthcare professionals, employers and insurance company adjusters. Patient management services include claims management and all services sold to claims management customers, case management, 24/7 nurse triage, utilization management, vocational rehabilitation, and life care planning. The services are designed to monitor the medical necessity and appropriateness of healthcare services provided to workers’ compensation and other healthcare claimants and to expedite return to work. The Company offers these services on a stand-alone basis, or as an integrated component of its medical cost containment services. Patient management services include the processing of claims for self-insured payors with respect to property and casualty insurance. 32 Organizational Structure The Company’s management is structured geographically with regional vice presidents who are responsible for all services provided by the Company in his or her particular region and responsible for the operating results of the Company in multiple states. These regional vice presidents have area and district managers who are also responsible for all services provided by the Company in their given area and district. Business Enterprise Segments The Company operates in one reportable operating segment, managed care. The Company’s services are delivered to its customers through its local offices in each region and financial information for the Company’s operations follows this service delivery model. All regions provide the Company’s patient management and network solutions services to customers. Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 280-10, “Segment Reporting”, establishes standards for the way that public business enterprises report information about operating segments in annual and interim consolidated financial statements. The Company’s internal financial reporting is segmented geographically, as discussed above, and managed on a geographic rather than service line basis, with virtually all of the Company’s operating revenue generated within the United States. Under FASB ASC 280-10, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas: (i) the nature of products and services; (ii) the nature of the production processes; (iii) the type or class of customer for their products and services; and (iv) the methods used to distribute their products or provide their services. The Company believes each of its regions meet these criteria as each provides similar services and products to similar customers using similar methods of production and distribution. Because we believe we meet each of the criteria set forth above and each of our regions have similar economic characteristics, we aggregate our results of operations in one reportable operating segment, managed care. Number of Working Days We are affected by the change in working days in a given quarter. There are generally fewer working days for our employees to generate revenue in the third fiscal quarter due to employee vacations, inclement weather and holidays. Summary of Fiscal 2023 Annual Results The Company had revenues of $719 million in fiscal 2023, an increase of $72 million, or 11%, compared to $646 million for fiscal 2022. This increase was due to an increase in revenues from both patient management and network solutions activity with existing customers, and to a lesser extent, an increase in new customers. During fiscal 2023, the Company’s gross profit increased to $158 million from $152 million in fiscal 2022, an increase of $6 million, or 4%. This increase was primarily due to the increase of 11% in revenue mentioned above. Additionally, there was an increase in salaries of 14.5% resulting from increased average headcount of 10% in field operations and growth in average annual salary increases due to wage inflation. During fiscal 2023, the Company’s general and administrative expenses increased to $73.7 million from $67.6 million in fiscal 2022, an increase of $6.1 million, or 9%. This increase was primarily due to an increase in legal expenses and corporate system costs. During fiscal 2023, the Company’s net income before tax increased to $84.6 million from $84.5 million in fiscal 2022. The increase in revenues was offset by a decrease in gross profit margin. During fiscal 2023, the Company’s income tax expense increased to $18.2 million from $18.1 million in fiscal 2022, an increase of $0.1 million, or 0.5%. The increase was due to an increase in income before income taxes. The Company’s effective income tax rate was 22% for fiscal year 2023 and 21% for fiscal year 2022. Diluted weighted average shares were 17.6 million shares in fiscal 2023 and 18.1 million shares in fiscal 2022, with a decrease of 535,000 shares, or 3.0%. This decrease was primarily due to the repurchase of 598,241 shares of common stock in fiscal 2023 offset by stock issuances to employees. Since commencing this program in the fall of 1996, the Company has repurchased 37,817,866 shares of its common stock through March 31, 2023, at a cost of $748 million. These repurchases were funded primarily from the Company’s operating cash flows. 33 Diluted earnings per share increased to $3.77 per share in fiscal 2023 from $3.66 per share in fiscal 2022, an increase of $0.11 per share, or 3.0%. This was primarily due to a decrease in diluted weighted average shares. Results of Operations The Company derives its revenues from providing patient management and network solutions services to payors of workers’ compensation benefits, automobile insurance claims, and group health insurance benefits. Patient management services include claims management and all services sold to claims management customers, case management, 24/7 nurse triage, utilization management, vocational rehabilitation, and life care planning. Network solutions services include fee schedule auditing, hospital bill auditing, pharmacy, independent medical examinations, directed care services, diagnostic imaging review services and preferred provider referral services. The percentages of total revenues attributable to patient management and network solutions services for the fiscal years ended March 31, 2023, 2022 and 2021 are listed below. 2023 2022 2021 Patient management services 66.6 % 65.6 % 66.7 % Network solutions services 33.4 % 34.4 % 33.3 % 100.0 % 100.0 % 100.0 % As noted in the table above, patient management services and network solutions services have grown at the same rate, from fiscal 2021 to fiscal 2023. The following table shows the consolidated statements of income for the fiscal years ended March 31, 2023, 2022 and 2021 and the dollar changes, as well as the percentage changes for each fiscal year. The following amounts are in thousands, except per share data and percentages. Fiscal 2023 Fiscal 2022 Fiscal 2021 Amount Change from Fiscal 2022 to 2023 Amount Change from Fiscal 2021 to 2022 Percent Change from Fiscal 2022 to 2023 Percent Change from Fiscal 2021 to 2022 Revenues $ 718,562 $ 646,230 $ 552,644 $ 72,332 $ 93,586 11.2 % 16.9 % Cost of revenues 560,303 494,116 429,020 66,187 65,096 13.4 15.2 Gross profit 158,259 152,114 123,624 6,145 28,490 4.0 23.0 General and administrative 73,705 67,602 64,449 6,103 3,153 9.0 4.9 Income before income taxes 84,554 84,512 59,175 42 25,337 0.0 42.8 Income tax provision 18,189 18,102 12,819 87 5,283 0.5 41.2 Net income $ 66,365 $ 66,410 $ 46,356 $ (45 ) $ 20,054 (0.1 %) 43.3 % Net income per share: Basic $ 3.83 $ 3.74 $ 2.59 $ 0.09 $ 1.15 2.4 % 44.4 % Diluted $ 3.77 $ 3.66 $ 2.55 $ 0.11 $ 1.11 3.0 % 43.5 % Weighted average shares used in net income per share: Basic 17,328 17,753 17,930 (425 ) (177 ) (2.4 %) (1.0 %) Diluted 17,592 18,127 18,166 (535 ) (39 ) (3.0 %) (0.2 %) As previously identified in Part I, Item 1A of this annual report, “Risk Factors,” the Company’s ability to maintain or grow revenues is subject to several risks including, but not limited to, the COVID-19 pandemic, changes in government regulations, exposure to litigation and the ability to add or retain customers. Any of these, or a combination of all of them, could have a material and adverse effect on the Company’s results of operations going forward. The following table sets forth, for the periods indicated, the percentage of revenues represented by certain items reflected in the Company’s consolidated statements of income. The Company’s past operating results are not necessarily indicative of future operating results. The percentages for the fiscal years ended March 31, 2023, 2022 and 2021 are as follows: Income Statement Percentages 2023 2022 2021 Revenues 100.0 % 100.0 % 100.0 % Cost of revenues 78.0 % 76.5 % 77.6 % Gross profit 22.0 % 23.5 % 22.4 % General and administrative 10.3 % 10.5 % 11.7 % Income before income taxes 11.7 % 13.0 % 10.7 % Income tax provision 2.5 % 2.8 % 2.3 % Net income 9.2 % 10.2 % 8.4 % 34 Revenue The Company derives its revenues from providing patient management and network solutions services to payors of workers’ compensation benefits, automobile insurance claims, and group health insurance benefits. Change in Revenue Fiscal 2023 Compared to Fiscal 2022 Revenues increased to $719 million in fiscal 2023 from $646 million in fiscal 2022, an increase of $72 million, or 11%. Patient management services increased to $479 million from $424 million, an increase of 13%. This increase is primarily due to higher revenue from the Company’s TPA and related services. Total new claims increased by 5% during fiscal 2023 compared to fiscal 2022. Network solutions services revenues increased to $240 million from $222 million, an increase of 8%. This increase is primarily due to increases in enhanced bill review programs services, which resulted in higher revenue per bill. Most of the increase in revenues resulted from an increase in activity and services provided for existing customers and, to a lesser extent, an increase in new customers. Fiscal 2022 Compared to Fiscal 2021 Revenues increased to $646 million in fiscal 2022 from $553 million in fiscal 2021, an increase of $94 million, or 17%. Patient management services increased to $424 million from $369 million, an increase of 15%. This increase is primarily due to higher revenue from the Company’s TPA and related services. Total new claims increased by 17% during fiscal 2022 compared to fiscal 2021. Network solutions services revenues increased to $222 million from $184 million, an increase of 21%. This increase is primarily due to increases in enhanced bill review programs services, which resulted in higher revenue per bill. Most of the increase in revenues resulted from an increase in activity and services provided for existing customers and, to a lesser extent, an increase in new customers. Cost of Revenue The Company’s cost of revenues consists of direct expenses, costs directly attributable to the generation of revenue, and indirect costs which are incurred to support the operations in the field offices which generate the revenue. Direct expenses primarily include (i) case manager and bill review analysts’ salaries, along with related payroll taxes and fringe benefits, and (ii) costs associated with independent medical examinations (known as IME), prescription drugs, and MRI, physical therapy, and durable medical equipment providers. Most of the Company’s revenues are generated in offices which provide both patient management services and network solutions services. The largest of the field indirect costs are (i) manager salaries and bonuses, (ii) account executive base pay and commissions, (iii) salaries of administrative and clerical support, field systems personnel and PPO network developers, along with related payroll taxes and fringe benefits, and (iv) office rent. During fiscal 2023 and 2022, approximately 35% and 36%, respectively, of the costs incurred in the field were considered field indirect costs, which support both the patient management services and network solutions services operations of the Company’s field operations. 35 Change in Cost of Revenue Fiscal 2023 Compared to Fiscal 2022 The Company’s cost of revenues increased to $560 million in fiscal 2023 from $494 million in fiscal 2022, an increase of $66 million, or 13%. The increase in cost of revenues was primarily due to the increase in total revenues of 11%. Just over half the Company's cost of revenue is labor cost. There was an increase in salaries of 15% resulting from increased average headcount of 10% in field operations and growth in average annual salary increases due to wage inflation. Headcount has increased due to an increase in new business and volume of business. Fiscal 2022 Compared to Fiscal 2021 The Company’s cost of revenues increased to $494 million in fiscal 2022 from $429 million in fiscal 2021, an increase of $65 million, or 15%. The increase in cost of revenues was primarily due to the increase in total revenues of 17%. Additionally, there was an increase in salaries resulting from increased headcount of 15% in field operations. Headcount has increased due to an increase in new business and volume of business. General and Administrative Expense During fiscal years 2023, 2022 and 2021, approximately 49%, 51%, and 51%, respectively, of general and administrative costs consisted of corporate systems costs, which include the corporate systems support, implementation and training, rules engine development, national IT strategy and planning, depreciation of hardware costs in the Company’s corporate offices and backup data center, the Company’s nationwide area network, and other systems related costs. The Company includes all IT-related costs managed by the corporate office in general and administrative whereas the field IT-related costs are included in the cost of revenues. The remaining general and administrative costs consist of national marketing, national sales support, corporate legal, corporate insurance, human resources, accounting, product management, new business development, and other general corporate expenses. Change in General and Administrative Expense Fiscal 2023 Compared to Fiscal 2022 General and administrative expenses increased to $73.7 million in fiscal 2023 from $67.6 million in fiscal 2022, an increase of $6.1 million, or 9%. This increase was primarily due to an increase in legal costs related to data privacy compliance. Additionally, there was an increase in corporate system costs due to an increase spending on developed software. Fiscal 2022 Compared to Fiscal 2021 General and administrative expenses increased to $67.6 million in fiscal 2022 from $64.4 million in fiscal 2021, an increase of $3.2 million, or 4.9%. This increase was primarily due to an increase in advertising and corporate marketing events which started to occurring again in calendar year 2021 after being cancelled in 2020 due to the COVID-19 pandemic. Additionally, software development costs also increased due to an increase in headcount and consulting expenses. Income Tax Provision Fiscal 2023 Compared to Fiscal 2022 The Company’s income tax expense increased to $18.2 million for fiscal 2023 from $18.1 million for fiscal 2022, an increase of $0.1 million. Income before income tax provision increased to $84.6 million in fiscal 2023 from $84.5 million in fiscal 2022, an increase of $0.1 million. The Company’s effective income tax rate was 22% for fiscal 2023 and 21% for fiscal 2022. The effective tax rate is less than the statutory tax rate primarily due to the impact of stock option exercises for both periods. Fiscal 2022 Compared to Fiscal 2021 The Company’s income tax expense increased to $18.1 million for fiscal 2022 from $12.8 million for fiscal 2021, an increase of $5.3 million. Income before income tax provision increased to $84.5 million in fiscal 2022 from $59.2 million in fiscal 2021, an increase of $25.3 million, or 42.8%. The Company’s effective income tax rate was 21% for fiscal 2022 and 22% for fiscal 2021. The effective tax rate is less than the statutory tax rate primarily due to the impact of stock option exercises for both periods. 36 Net Income Fiscal 2023 Compared to Fiscal 2022 The Company’s net income was $66.4 million in fiscal 2023 and 2022. The increase in revenues was offset by a decrease in gross profit margin. The increase in cost of revenue is due to an increase in labor rates and headcount. Fiscal 2022 Compared to Fiscal 2021 The Company’s net income increased to $66.4 million in fiscal 2022 from $46.4 million in fiscal 2021, an increase of $20.1 million, or 43.3%. This increase was primarily due to an increase in pretax margin, which increased to 13.1% from 10.7%, and a 17% increase in revenues. Earnings per Share Fiscal 2023 Compared to Fiscal 2022 The Company’s diluted earnings per share increased to $3.77 per share in fiscal 2023 from $3.66 per share in fiscal 2022, an increase of $0.11 per share, or 3.0%. This was primarily due to a decrease in diluted weighted average shares. Fiscal 2022 Compared to Fiscal 2021 The Company’s diluted earnings per share increased to $3.66 per share in fiscal 2022 from $2.55 per share in fiscal 2021, an increase of $1.11 per share, or 43.5%. This was primarily due to an increase in net income. Liquidity and Capital Resources The Company manages its liquidity and financial position in the context of its overall business strategy. The Company continually forecasts and manages its cash, investments, working capital balances and capital structure to meet the short- and long-term obligations of its businesses while seeking to maintain liquidity and financial flexibility. Cash flows generated from operating activities are principally from earnings before non-cash expenses. The risk of decreased operating cash flow from a decline in earnings is partially mitigated by the diversity of the Company’s services, geographies and customers, and the Company has had virtually no interest-bearing debt for the past 32 years. The Company has historically funded its operations and capital expenditures primarily from cash flow from operations, and to a lesser extent, stock option exercises. The Company’s net accounts receivables have ranged from 39 to 44 days of average sales for the fiscal years ended March 31, 2023, 2022 and 2021. The Company expects days sales outstanding (known as DSO) to remain in the low to mid 40-day range. The Company’s historical profit margins and historical ratio of investments in assets used in the business has allowed the Company to generate sufficient cash flow to repurchase $748 million of its common stock during the past 27 fiscal years, on inception-to-date net earnings of $732 million. The Company repurchases shares during periods of excess liquidity, which has occurred in all 32 years that the Company has been public. Should the Company have lower income or cash flows, it could reduce or eliminate repurchases under the stock repurchase program until earnings and cash flow improved. Working capital decreased to $75.9 million at March 31, 2023 from $93.6 million at March 31, 2022. This is primarily due to the increase in spending to repurchase shares of the Company’s common stock. The Company deferred a total of $10.4 million in payroll tax deposits related to the CARES Act, half of which was paid during the December 31, 2021 quarter, and the other half of which was paid during the December 31, 2022 quarter. 37 The Company is not a party to off-balance sheet arrangements as defined by the SEC. However, from time to time the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. The contracts primarily relate to: (i) certain contracts to perform services, under which the Company may provide customary indemnification for the purchases of such services, (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises, and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of certain actions taken by such persons, acting in their respective capacities within the Company. The terms of such customary obligations vary by contract and in most instances a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, no liabilities have been recorded for these obligations on the Company’s balance sheets for any of the periods presented. The Company believes that cash from operations and funds from exercises of stock options granted to employees are adequate to fund existing obligations, repurchase shares of the Company’s common stock under its current stock repurchase program, introduce new services, and continue to develop the Company’s healthcare related services for at least the next twelve months. Should the Company have lower income or cash flows, it could reduce or eliminate repurchases under the stock repurchase program until earnings and cash flow have returned to comfortable levels. The Company regularly evaluates cash requirements for current operations, commitments, capital acquisitions, and other strategic transactions. The Company may elect to raise additional funds for these purposes, through debt or equity financings or otherwise, as appropriate. However, additional equity or debt financing may not be available when needed, with terms favorable to the Company or at all. As of March 31, 2023, the Company had $71.3 million in cash and cash equivalents, invested primarily in short-term, interest-bearing, highly-liquid, investment-grade securities with maturities of 90 days or less. The Company believes that the cash balance at March 31, 2023 along with anticipated internally-generated funds will be sufficient to meet the Company’s expected cash requirements for at least the next twelve months. Operating Cash Flows Fiscal 2023 Compared to Fiscal 2022 Net cash provided by operating activities increased to $82.3 million in fiscal 2023 from $67.2 million in fiscal 2022, an increase of $15.1 million. The increase in cash flow from operating activities was primarily due to the fact that during fiscal 2023, revenues increased while accounts receivable remained flat due to strong collections. During fiscal 2022, accounts receivable increased which caused a decrease in operating cash flow. Fiscal 2022 Compared to Fiscal 2021 Net cash provided by operating activities decreased to $67.2 million in fiscal 2022 from $94.4 million in fiscal 2021, a decrease of $27.2 million. The decrease in cash flow from operating activities was primarily due to the fact that the Company had a prior year deferral of payroll taxes provided by the CARES Act in 2020 that was no longer available during the same period in 2021. The Company paid back half of the deferral of payroll taxes during the December 31, 2021 quarter. There was an increase in accounts receivable due to an increase in revenues. Additionally, annual bonuses for calendar years 2021 and 2022 were paid in fiscal 2022. Investing Activities Fiscal 2023 Compared to Fiscal 2022 Net cash flow used in investing activities decreased to $26.3 million in fiscal 2023 from $29.8 million in fiscal 2022, a decrease of $3.5 million. The Company reduced its spending on furniture and leasehold improvements as the Company reduced its lease footprint. Fiscal 2022 Compared to Fiscal 2021 Net cash flow used in investing activities increased to $29.8 million in fiscal 2022 from $17.2 million in fiscal 2021, an increase of $12.6 million. The Company increased its spending primarily on developed software and reduced its spending on furniture and leasehold improvements as the Company reduces its lease footprint. 38 Financing Activities Fiscal 2023 Compared to Fiscal 2022 Net cash flow used in financing activities increased to $82.1 million in fiscal 2023 from $79.6 million in fiscal 2022, an increase of $2.5 million. During fiscal 2023, the Company spent $93.7 million to repurchase 598,241 shares of its common stock (at an average price of $156.58 per share). During fiscal 2022, the Company spent $90 million to repurchase 566,073 shares of its common stock (at an average price of $159.14 per share). If the Company continues to generate cash flow from operating activities, the Company may continue to repurchase shares of its common stock on the open market, if authorized by the Company’s Board of Directors pursuant to the Company's stock repurchase program, or seek to identify other businesses to acquire. The Company has historically used cash provided by operating activities and from the exercise of stock options to repurchase stock. The Company expects that it may use some of the cash on the balance sheet at March 31, 2023 to repurchase additional shares of its common stock in the future. Fiscal 2022 Compared to Fiscal 2021 Net cash flow used in financing activities increased to $79.6 million in fiscal 2022 from $20.6 million in fiscal 2021, an increase of $59.0 million. During fiscal 2022, the Company spent $90 million to repurchase 566,073 shares of its common stock (at an average price of $159.14 per share). During fiscal 2021, the Company spent $33 million to repurchase 367,961 shares of its common stock (at an average price of $88.79 per share). Litigation The Company is involved in litigation arising in the ordinary course of business. Management believes that resolution of these matters will not result in any payment that, in the aggregate, would be material to the consolidated financial position or results of operations of the Company. Inflation The Company experiences pricing pressures in the form of competitive prices. The Company is also impacted by rising costs for certain inflation-sensitive operating expenses such as labor, employee benefits, and facility leases. The Company does not believe these impacts were material to its revenues or net income in fiscal 2023; however, the Company believes inflation could have a material impact to pricing and operating expenses in future years due to the state of the economy and current inflation rates. Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”), which require management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses, and the disclosure of contingent assets and liabilities at the date of our consolidated financial statements. We periodically evaluate our estimates and assumptions, including those relating to revenue recognition, leases, allowance for uncollectible accounts, goodwill and long-lived assets, accrual for self-insured costs, accounting for income taxes, legal and other contingencies, share-based compensation, and software development costs. We base our estimates on historical experience and various assumptions that we believe to be reasonable based on specific circumstances. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. We believe the following significant accounting estimates may involve a higher degree of judgment and complexity. The following is not intended to be a comprehensive list of our accounting policies. See Note 1, “Summary of Significant Accounting Policies” in the notes to our consolidated financial statements for other significant accounting policies. Revenue Recognition : Revenue is recognized when control of the promised services is transferred to the Company’s customers in an amount that reflects the consideration expected to be entitled to in exchange for those services. As the Company completes its performance obligations which are identified below, it has an unconditional right to consideration as outlined in the Company’s contracts. Generally, the Company’s billed accounts receivable are expected to be collected in 30 days in accordance with the underlying payment terms. For many of the Company’s services, the Company typically has one performance obligation; however, it also provides the customer with an option to acquire additional services. The Company offers multiple services under its patient management and network solutions service lines. The Company typically provides a menu of offerings from which the customer may choose to purchase. The price of each service is separate and distinct and provides a separate and distinct value to the customer. Pricing is generally consistent for each service irrespective of the other services or quantities requested by the customer. 39 In transactions related to third-party service revenue, which includes pharmacy, directed care services and other services provided by the Company’s integrated network solutions services, the Company is considered the principal, as it directs the third party, controls the specified service, performs program utilization review, directs payment to the provider, accepts the financial risk of loss associated with services rendered and combines the services provided into an integrated solution, as specified within the Company’s customer contracts. The Company has the ability to influence contractual fees with customers and possesses the financial risk of loss in certain contractual obligations. These factors indicate the Company is the principal and, as such, it is required to recognize revenue gross and service partner vendor fees in the cost of revenue in the Company’s consolidated income statements. Leases: The Company determines if an arrangement includes a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term; and lease liabilities represent the Company’s 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 and financing 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. The Company’s 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 : The Company determines its allowance for uncollectible accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customers’ current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible. The Company must make significant judgments and estimates in determining contractual and bad debt allowances in any accounting period. One significant uncertainty inherent in the Company’s analysis is whether its past experience will be indicative of future periods. Although the Company considers future projections when estimating contractual and bad debt allowances, the Company ultimately makes its decisions based on the best information available to it at the time the decision is made. Adverse changes in general economic conditions or trends in reimbursement amounts for the Company’s services could affect the Company’s contractual and bad debt allowance estimates, collection of accounts receivable, cash flows, and results of operations. One customer accounted for 10% or more of accounts receivable at March 31, 2023 and 2022. Goodwill and Long-Lived Assets : Goodwill arising from business combinations represents the excess of the purchase price over the estimated fair value of the net assets of the acquired business. Pursuant to ASC 350-10 through ASC 350-30, “Goodwill and Other Intangible Assets,” goodwill is tested annually for impairment or more frequently if circumstances indicate the potential for impairment. Also, management tests for impairment of its amortizable intangible assets and long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The impairment test is conducted at the company level. The measurement of fair value is based on an evaluation of market capitalization and is further tested using a multiple of earnings approach. In projecting the Company’s cash flows, management considers industry growth rates and trends and cost structure changes. Based on the Company’s tests and reviews, no impairment of its goodwill, intangible assets, or other long-lived assets existed at March 31, 2023 or March 31, 2022. However, future events or changes in current circumstances could affect the recoverability of the carrying value of goodwill and long-lived assets. 40 Accrual for Self-insurance Costs : The Company accrues for the group medical costs and workers’ compensation costs of its employees based on claims filed and an estimate of claims incurred but not reported as of each balance sheet date. The Company determines its estimated self-insurance reserves based upon historical trends along with outstanding claims information provided by its claims paying agents. However, it is possible that recorded accruals may not be adequate to cover the future payment of claims. Adjustments, if any, to estimated accruals resulting from ultimate claim payments will be reflected in earnings during the periods in which such adjustments are determined. The Company’s self-insured liabilities contain uncertainties because management is required to make assumptions and judgments to estimate the ultimate cost to settle reported claims and claims incurred but not reported at the balance sheet date. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate its self-insured liabilities. However, if actual results are not consistent with these estimates or assumptions, the Company may be exposed to losses or gains that could be material. Accounting for Income Taxes : The Company records a tax provision for the anticipated tax consequences of its 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. The Company records a valuation allowance, if necessary, to reduce deferred tax assets to the amount that is believed more likely than not to be realized. The Company recognizes 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 that the Company determines all or part of the net deferred tax assets are not realizable in the future, the Company 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 the Company’s financial condition and operating results. The significant assumptions and estimates described above are important contributors to our ultimate effective tax rate in each year. Legal and Other Contingencies : As discussed in Part I, Item 3 of this annual report, “Legal Proceedings” and in Note 10, “Contingencies and Legal Proceedings” in the notes to our consolidated financial statements, the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. The outcomes of legal proceedings and claims brought against the Company are subject to significant uncertainty. Share-Based Compensation : The Company accounts for share-based compensation in accordance with the provisions of ASC Topic 718 “Compensation – Stock Compensation”. Under ASC 718, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). For the fiscal year ended March 31, 2023, the Company recorded share-based compensation expense of $5,559,000. The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s term, and the Company’s expected annual dividend yield. The Company issues performance-based stock options which vest only upon the Company’s achievement of certain earnings per share targets on a calendar year basis, as determined by the Company’s Board of Directors. These options were valued in the same manner as the time-based options. However, the Company only recognizes stock compensation expense to the extent that the targets are determined to be probable of being achieved, which triggers the vesting of the performance options. The Company’s management believes that this valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted in fiscal 2023. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards. 41 The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in stock-based compensation expense that could be material. Software Development Costs : Development costs incurred in the research and development of new software products and enhancements to existing software products for internal use are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional external software development costs are capitalized and amortized on a straight-line basis over the estimated economic life of the related product, which is typically five years. The Company performs an annual review of the estimated economic life and the recoverability of such capitalized software costs. If a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software, any remaining capitalized amounts are written off. Although the Company believes that its approach to estimates and judgments as described herein is reasonable, actual results could differ and the Company may be exposed to increases or decreases in revenue that could be material. Recently Issued Accounting Standards Management has evaluated recent accounting pronouncements through the date the financial statements were issued and filed with the SEC and believes that there are none that will have a material impact on the Company’s financial statements. 42 REPORT OF INDEPENDENT REGIS TERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders CorVel Corporation Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of CorVel Corporation (the “Company”) as of March 31, 2023 and 2022, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2023, and the related notes and financial statement schedule (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. Basis for Opinion The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. 43 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued) Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate. 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued) Revenue Recognition - Refer to Note 2 to the Consolidated Financial Statements Critical Audit Matter Description: The Company recognizes revenue upon transfer of control of promised services or products to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services or products. Certain services and products involve estimation of the related transaction price that, in turn, led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s judgments. Revenues that are most significantly impacted by management’s estimates and judgments include (i) bill review services that contain contractual provisions that allow the customer to compensate the Company only for services that it utilizes and (ii) directed care services at period-end for which the Company has not been billed by the related providers. How the Critical Matter was Addressed in the Audit: The primary procedures we performed to address this critical audit matter included the following, among others: ▪ We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s process to estimate the most likely amount of consideration to which the Company will be entitled in exchange for transferring the promised services or products to a customer. We tested the effectiveness of certain controls over revenue recognition, including management’s controls over the methodology used to determine estimated revenues. ▪ We tested the underlying data used by the Company to determine related bill review revenue estimates by examining customer contracts and analyzing historical utilization analyses completed by the Company. We also examined subsequent period invoicing and cash collection activities to evaluate the reasonableness of management’s estimates. ▪ We tested significant assumptions used in management’s calculations of period-end directed care revenues by analyzing historical time lag patterns between the provision of service and provider invoicing. We also examined trends associated with the number of period-end provider referrals and performed gross margin reasonableness analyses to evaluate management’s estimates. ▪ We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the consolidated financial statements. /s/ HASKELL & WHITE LLP We have served as the Company’s auditor since 2006. Irvine, California May 26, 2023 45 CORVEL CORPORATION CONSOLIDATED B ALANCE SHEETS March 31, 2023 2022 ASSETS Current Assets Cash and cash equivalents $ 71,329,000 $ 97,504,000 Customer deposits 80,022,000 69,781,000 Accounts receivable (less allowance for doubtful accounts of $ 2,823,000 at March 31, 2023 and $ 2,562,000 at March 31, 2022) 81,034,000 82,586,000 Prepaid expenses and income taxes 11,385,000 15,123,000 Total current assets 243,770,000 264,994,000 Property and equipment, net 82,770,000 76,268,000 Goodwill 36,814,000 36,814,000 Other intangible assets, net 1,244,000 1,669,000 Right-of-use asset, net 27,721,000 35,020,000 Deferred tax asset, net 224,000 — Other assets 1,380,000 481,000 Total assets $ 393,923,000 $ 415,246,000 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts and income taxes payable $ 15,309,000 $ 14,431,000 Accrued liabilities 152,578,000 156,939,000 Total current liabilities 167,887,000 171,370,000 Deferred income taxes, net — 1,689,000 Long-term lease liabilities 23,860,000 29,792,000 Total liabilities 191,747,000 202,851,000 Commitments and contingencies Stockholders' Equity Common stock, $ .0001 par value: 120,000,000 shares authorized at March 31, 2023 and 2022; 54,987,366 shares issued ( 17,169,500 shares outstanding, net of treasury shares) and 54,788,712 shares issued ( 17,569,087 shares outstanding, net of treasury shares) at March 31, 2023 and March 31, 2022, respectively 3,000 3,000 Paid-in-capital 218,700,000 201,609,000 Treasury stock, at cost ( 37,817,866 and 37,219,625 shares at March 31, 2023 and 2022, respectively) ( 748,195,000 ) ( 654,520,000 ) Retained earnings 731,668,000 665,303,000 Total stockholders' equity 202,176,000 212,395,000 Total liabilities and stockholders' equity $ 393,923,000 $ 415,246,000 See accompanying notes to consolidated financial statements. 46 CORVEL CORPORATION CONSOLIDATED STAT EMENTS OF INCOME Fiscal Years Ended March 31, 2023 2022 2021 Revenues $ 718,562,000 $ 646,230,000 $ 552,644,000 Cost of revenues 560,303,000 494,116,000 429,020,000 Gross profit 158,259,000 152,114,000 123,624,000 General and administrative 73,705,000 67,602,000 64,449,000 Income before income taxes 84,554,000 84,512,000 59,175,000 Income tax provision 18,189,000 18,102,000 12,819,000 Net income $ 66,365,000 $ 66,410,000 $ 46,356,000 Net income per share: Basic $ 3.83 $ 3.74 $ 2.59 Diluted $ 3.77 $ 3.66 $ 2.55 Weighted average shares outstanding: Basic 17,328,000 17,753,000 17,930,000 Diluted 17,592,000 18,127,000 18,166,000 See accompanying notes to consolidated financial statements. 47 CORVEL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Fiscal Years Ended March 31, 2023, 2022 and 2021 Common Shares Stock Amount Paid-in-Capital Treasury Shares Treasury Stock Retained Earnings Total Stockholders' Equity Balance – March 31, 2020 54,254,557 $ 3,000 $ 168,935,000 ( 36,285,591 ) $ ( 531,764,000 ) $ 552,537,000 $ 189,711,000 Stock issued under employee stock purchase plan 6,007 — 534,000 — — — 534,000 Stock issued under stock option plan, net of shares repurchased 269,078 — 11,494,000 — — — 11,494,000 Stock-based compensation expense — — 4,978,000 — — — 4,978,000 Purchase of treasury stock — — — ( 367,961 ) ( 32,671,000 ) — ( 32,671,000 ) Net income — — — — — 46,356,000 46,356,000 Balance – March 31, 2021 54,529,642 3,000 185,941,000 ( 36,653,552 ) ( 564,435,000 ) 598,893,000 220,402,000 Stock issued under employee stock purchase plan 3,363 — 564,000 — — — 564,000 Stock issued under stock option plan, net of shares repurchased 255,707 — 9,906,000 — — — 9,906,000 Stock-based compensation expense — — 5,198,000 — — — 5,198,000 Purchase of treasury stock — — — ( 566,073 ) ( 90,085,000 ) — ( 90,085,000 ) Net income — — — — — 66,410,000 66,410,000 Balance – March 31, 2022 54,788,712 3,000 201,609,000 ( 37,219,625 ) ( 654,520,000 ) 665,303,000 212,395,000 Stock issued under employee stock purchase plan 4,457 — 676,000 — — — 676,000 Stock issued under stock option plan, net of shares repurchased 194,197 — 10,856,000 — — — 10,856,000 Stock-based compensation expense — — 5,559,000 — — — 5,559,000 Purchase of treasury stock — — — ( 598,241 ) ( 93,675,000 ) — ( 93,675,000 ) Net income — — — — — 66,365,000 66,365,000 Balance – March 31, 2023 54,987,366 $ 3,000 $ 218,700,000 ( 37,817,866 ) $ ( 748,195,000 ) $ 731,668,000 $ 202,176,000 See accompanying notes to consolidated financial statements. 48 CORVEL CORPORATION CONSOLIDATED STATEM ENTS OF CASH FLOWS Fiscal Years Ended March 31, 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 66,365,000 $ 66,410,000 $ 46,356,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,121,000 23,916,000 23,436,000 Loss on write down or disposal of property, capitalized software or investment 415,000 122,000 590,000 Stock compensation expense 5,559,000 5,198,000 4,978,000 Provision for doubtful accounts 1,216,000 158,000 2,021,000 Deferred income taxes ( 1,913,000 ) 2,302,000 ( 8,376,000 ) Changes in operating assets and liabilities: Accounts receivable 336,000 ( 18,022,000 ) ( 976,000 ) Customer deposits ( 10,241,000 ) ( 13,284,000 ) ( 7,507,000 ) Prepaid expenses and income taxes 3,738,000 ( 7,116,000 ) 3,003,000 Other assets ( 919,000 ) ( 135,000 ) 504,000 Accounts and income taxes payable ( 4,395,000 ) 1,423,000 ( 3,355,000 ) Accrued liabilities ( 4,361,000 ) 8,052,000 31,561,000 Operating lease liabilities 1,367,000 ( 1,802,000 ) 2,144,000 Net cash provided by operating activities 82,288,000 67,222,000 94,379,000 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment ( 26,320,000 ) ( 29,819,000 ) ( 17,243,000 ) Net cash used in investing activities ( 26,320,000 ) ( 29,819,000 ) ( 17,243,000 ) CASH FLOWS FROM FINANCING ACTIVITIES Exercise of employee stock purchase options 676,000 564,000 534,000 Exercise of common stock options 10,856,000 9,906,000 11,494,000 Purchase of treasury stock ( 93,675,000 ) ( 90,085,000 ) ( 32,671,000 ) Net cash used in financing activities ( 82,143,000 ) ( 79,615,000 ) ( 20,643,000 ) Net (decrease) increase in cash and cash equivalents ( 26,175,000 ) ( 42,212,000 ) 56,493,000 Cash and cash equivalents at beginning of year 97,504,000 139,716,000 83,223,000 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 71,329,000 $ 97,504,000 $ 139,716,000 Supplemental cash flow information Income taxes paid $ 19,993,000 $ 19,405,000 $ 20,760,000 Accrual of software license purchase $ 5,273,000 $ — $ — See accompanying notes to consolidated financial statements. 49 CORVEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal Years Ended March 31, 2023, 2022 and 2021 Note 1 — Summary of Significant Accounting Policies Organization: CorVel Corporation (“CorVel” or “the Company”), incorporated in Delaware in 1987, is an independent nationwide provider of medical cost containment and managed care services designed to address the escalating medical costs of workers’ compensation benefits, automobile insurance claims, and group health insurance benefits. The Company’s services are provided to insurance companies, TPAs, governmental entities, and self-administered employers to assist them in managing the medical costs and monitoring the quality of care associated with healthcare claims. Basis of Presentation: The consolidated financial statements include the accounts of CorVel and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. These changes had no impact on previously-reported results of operations or shareholders’ equity. The Company evaluated all subsequent events and transactions through the date of this filing. Use of Estimates: The preparation of financial statements in compliance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements. Actual results could differ from those estimates. Significant estimates include the values assigned to intangible assets, capitalized software development, the allowance for doubtful accounts, work in process, accrual for income taxes, share-based payments related to performance-based awards, loss contingencies, estimated lives of claims for claims administration revenue recognition, estimates used in stock options valuations, and accrual for self-insurance reserves. Cash and Cash Equivalents: Cash and cash equivalents consist of short-term, interest-bearing highly-liquid investment-grade securities with maturities of 90 days or less when purchased. The carrying amounts of the Company’s financial instruments approximate their fair values at March 31, 2023 and 2022 due to the short-term nature of those instruments. Customer deposits represent cash that is expected to be returned or applied towards payment within one year through the Company’s provider reimbursement services. Fair Value of Financial Instruments: The Company applies ASC 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for measuring fair value, and provides for disclosures about fair value measurements, with respect to fair value measurements of (i) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s consolidated financial statements on a recurring basis (at least annually) and (ii) all financial assets and liabilities. ASC 820 prioritizes the inputs used in measuring fair value into the following hierarchy: Level 1 Quoted market prices in active markets for identical assets or liabilities; Level 2 Observable inputs other than those included in Level 1 (for example, quoted prices for similar assets in active markets or quoted prices for identical assets in inactive markets); and Level 3 Unobservable inputs reflecting management’s own assumptions about the inputs used in estimating the value of the asset. The carrying amount of the Company’s financial instruments (i.e. cash and cash equivalents, accounts receivable, accounts payable, etc.) approximates their fair values at March 31, 2023 and 2022 due to the short-term nature of those instruments. The Company has no financial instruments that are measured at fair value on a recurring basis. Revenue Recognition: Revenue is recognized when control of the promised services is transferred to the Company’s customers in an amount that reflects the consideration expected to be entitled to in exchange for those services. As the Company completes its performance obligations which are identified in Note 2, it has an unconditional right to consideration as outlined in the Company’s contracts. Generally, the Company’s billed accounts receivable are expected to be collected in 30 days in accordance with the underlying payment terms. For many of the Company’s services, the Company typically has one performance obligation; however, it also provides the customer with an option to acquire additional services. The Company offers multiple services under its patient management and network solutions service lines. The Company typically provides a menu of offerings from which the customer may choose to purchase. The price of each service is separate and distinct and provides a separate and distinct value to the customer. Pricing is generally consistent for each service irrespective of the other services or quantities requested by the customer. 50 In transactions related to third-party service revenue, which includes pharmacy, directed care services and other services provided by the Company’s integrated network solutions services, the Company is considered the principal, as it directs the third party, controls the specified service, performs program utilization review, directs payment to the provider, accepts the financial risk of loss associated with services rendered and combines the services provided into an integrated solution, as specified within the Company’s customer contracts. The Company has the ability to influence contractual fees with customers and possesses the financial risk of loss in certain contractual obligations. These factors indicate the Company is the principal and, as such, it is required to recognize revenue gross and service partner vendor fees in the cost of revenue in the Company’s consolidated income statements. Accounts Receivable: The majority of the Company’s accounts receivable are due from companies in the property and casualty insurance industries, self-insured employers and governmental entities. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Those accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable against the reserve when they become uncollectible. Accounts receivable includes $ 26,639,000 , and $ 27,307,000 of unbilled receivables at March 31, 2023 and 2022 , respectively. Unbilled receivables represent the amounts expected to be collected for work performed which has not yet been invoiced to the customer. Unbilled receivables are generally invoiced within one year. Concentrations of Credit Risk: Substantially all of the Company’s customers are payors of workers’ compensation benefits and property and casualty insurance, which include insurance companies, third party administrators, self-insured employers and government entities. Credit losses consistently have been within management’s expectations. Virtually all of the Company’s cash is invested at financial institutions in amounts which exceed the FDIC insurance levels. No customer accounte d for 10 % or more of revenue for fiscal 2023, 2022 or 2021 . One customer accounted for 10 % or more of accounts receivable at March 31, 2023 and 2022 . Property and Equipment: Additions to property and equipment are recorded at cost. The Company provides for depreciation on property and equipment using the straight-line method by charges to operations in amounts that allocate the cost of depreciable assets over their estimated lives as follows: Asset Classification Building Building Improvements Land Improvements Estimated Useful Life 40 years 20 years 20 years Leasehold Improvements Shorter of 5 years or the life of lease Furniture and Equipment 5 to 7 years Computer Hardware 2 to 5 years Computer Software 3 to 5 years The Company accounts for internally-developed software costs in accordance with ASC 350-40, “Internal Use Software”. Capitalized software development costs, intended for internal use, totaled $ 33,695,000 (net of $ 143,329,000 in accumulated amortization) and $ 29,806,000 (net of $ 131,907,000 in accumulated amortization), as of March 31, 2023 and 2022 , respectively. These costs are included in computer software in property and equipment and are amortized over a period of five years . Long-Lived Assets: The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets and the projected, undiscounted cash flows of the operations in which the long-lived assets are deployed. 51 Leases: The Company determines if an arrangement includes a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term; and lease liabilities represent the Company’s 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 and financing 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. The Company’s 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. Opearting lease expense for lease payments is recognized on a straight-line basis over the lease term. Goodwill and Indefinite Lived Long-Lived Assets: The Company accounts for its business combinations in accordance with the ASC 805-10 through ASC 805-50, “Business Combinations,” which (i) requires that the purchase method of accounting be applied to all business combinations and (ii) addresses the criteria for initial recognition of intangible assets and goodwill. In accordance with ASC 350-10 through ASC 350-30, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually, or more frequently if circumstances indicate the possibility of impairment. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss will be recognized. Based on the Company’s tests and reviews, no impairment of its goodwill, intangible assets or other long-lived assets existed at March 31, 2023 and 2022 . However, future events or changes in current circumstances could affect the recoverability of the carrying value of goodwill and long-lived assets. Goodwill amounted to $ 36,814,000 (net of accumulated amortization of $ 2,069,000 ) at March 31, 2023 and at March 31, 2022 . Cost of Revenues: Cost of services consists primarily of the compensation and fringe benefits of field personnel, including managers, medical bill analysts, field case managers, telephonic case managers, systems support, administrative support, account managers and account executives, and related facility costs including rent, telephone and office supplies. Historically, the costs associated with these additional personnel and facilities have been the most significant factor driving increases in the Company’s cost of services. Income Taxes: The Company provides for income taxes in accordance with provisions specified in ASC 740, “Accounting for Income Taxes”. Accordingly, deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities. These differences will result in taxable or deductible amounts in the future, based on tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. In making an assessment regarding the probability of realizing a benefit from these deductible differences, management considers the Company’s current and past performance, the market environment in which the Company operates, tax-planning strategies and the length of carry-forward periods for loss carry-forwards, if any. Valuation allowances are established when necessary to reduce deferred tax assets to amounts that are more likely than not to be realized. Further, the Company accrues for income tax issues not yet resolved with federal, state and local tax authorities, when it appears more likely than not that a tax liability has been incurred. Share-Based Compensation: The Company accounts for share-based compensation in accordance with the provisions of ASC Topic 718 “Compensation – Stock Compensation.” Under ASC 718, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). The Company issues performance-based stock options which vest only upon the Company’s achievement of certain earnings per share targets on a calendar year basis, as determined by the Company’s Board of Directors. These options were valued in the same manner as the time-based options. However, the Company only recognizes stock compensation expense to the extent that the targets are determined to be probable of being achieved, which triggers the vesting of the performance options. Accrual for Self-insurance Costs: The Company self-insures for the group medical costs and workers’ compensation costs of its employees. Management believes that the self-insurance reserves are appropriate; however, actual claims costs may differ from the original estimates requiring adjustments to the reserves. The Company determines its estimated self-insurance reserves based upon historical trends along with outstanding claims information provided by its claims paying agents. Earnings per Share: Earnings per common share-basic is based on the weighted average number of common shares outstanding during the period. Earnings per common shares-diluted is based on the weighted average number of common shares and common share equivalents outstanding during the period. In calculating earnings per share, earnings are the same for the basic and diluted calculations. Weighted average shares outstanding is greater for diluted earnings per share due to the effect of stock options. 52 The difference between the basic weighted average shares and the diluted weighted average shares for each of the fiscal years ended March 31, 2023, 2022 and 2021 is as follows: Fiscal 2023 Fiscal 2022 Fiscal 2021 Basic weighted average shares 17,328,000 17,753,000 17,930,000 Treasury stock impact of stock options 264,000 374,000 236,000 Diluted weighted average shares 17,592,000 18,127,000 18,166,000 Recently Issued Accounting Standards Management has evaluated recent accounting pronouncements through the date the financial statements were issued and filed with the SEC and believes that there are none that will have a material impact on the Company’s financial statements. Note 2 – Revenue Recognition Revenue from Contracts with Customers Revenue is recognized when control of the promised services is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. As the Company completes its performance obligations, which are identified below, it has an unconditional right to consideration as outlined in the Company’s contracts. Generally, the Company’s accounts receivable are expected to be collected in 30 days in accordance with the underlying payment terms. The Company generates revenue through its patient management and network solutions service lines. The Company operates in one reportable operating segment, managed care. Patient Management Service Line The patient management service line provides services primarily related to workers’ compensation claims management and case management. This service line also includes additional services such as accident and health claims programs. Each claim referred by the customer is considered an additional optional purchase of claims management services under the agreement with the customer. The transaction price is readily available from the contract and is fixed for each service. Revenue is recognized over time as services are provided as the performance obligations are satisfied through the effort expended to research, investigate, evaluate, document, and report the claim and control of these services is transferred to the customer. Revenue is recognized based on historical claim closure rates and claim type applied utilizing a portfolio approach based on time elapsed for these claims, generally between three and fifteen months . The Company believes this approach reasonably reflects the transfer of the claims management services to its customer. The Company’s obligation to manage claims and cases under the patient management service line can range from less than one year to multi-year contracts. They are generally one year under the terms of the contract; however, many of these contracts contain auto-renewal provisions and the Company’s customer relationships can span multiple years. Under certain claims management agreements, the Company receives consideration from a customer at contract inception prior to transferring services to the customer, however, the Company would begin performing services immediately. The period between a customer’s payment of consideration and the completion of the promised services is generally less than one year. There is no difference between the amount of promised consideration and the cash selling price of the promised services. The fee is billed upfront by the Company in order to provide customers with simplified and predictable ways of purchasing the Company’s services. The patient management service line also offers the services of case managers who provide administration services by proactively managing medical treatment for claimants while facilitating an understanding of and participation in their rehabilitation process. Revenue for case management services is recognized over time as the performance obligations are satisfied through the effort expended to manage the medical treatment for claimants and control of these services is transferred to the customer. Case management services are generally billed based on time incurred, are considered variable consideration, and revenue is recognized at the amount in which the Company has the right to invoice for services performed. The Company believes this approach reasonably reflects the transfer of the case management service to the customer. Network Solutions Service Line The network solutions service line consists primarily of medical bill review and third-party services. Medical bill review services provide an analysis of medical charges for customers’ claims to identify opportunities for savings. Medical bill review services revenues are recognized at a point in time when control of the service is transferred to the customer. Revenue is recognized based upon the transfer 53 of the results of the medical bill review service to the customer as this is the most accurate depiction of the transfer of the service to the customer. Medical bill review revenues are variable, generally based on performance metrics set forth in the underlying contracts. Each period, the Company bases its estimates on a contract-by-contract basis. The Company makes its best estimate of amounts the Company has earned and expects to be collected using historical averages and other factors to project such revenues. Variable consideration is recognized in the amount that the Company concludes is probable that a significant revenue reversal will not occur in future periods. Third-party services revenue includes pharmacy, directed care services and other services, and includes amounts received from customers compensating the Company for certain third-party costs associated with providing its integrated network solutions services. The Company is considered the principal in these transactions as it directs the third party, controls the specified service and its pricing, performs program utilization review, directs payment to the provider, accepts the financial risk of loss associated with services rendered and combines the services provided into an integrated solution, as specified within the Company’s customer contracts. The Company has the ability to influence contractual fees with customers and possesses the financial risk of loss in certain contractual obligations. These factors indicate the Company is the principal and, as such, it is required to recognize revenue gross and service partner vendor fees in the operating expense in the Company’s consolidated statements of income. The following table presents revenues disaggregated by service line for the fiscal years ended March 31, 2023, 2022 and 2021: 2023 2022 2021 Patient management services $ 478,751,000 $ 424,050,000 $ 368,853,000 Network solutions services 239,811,000 222,180,000 183,791,000 Total services $ 718,562,000 $ 646,230,000 $ 552,644,000 Arrangements with Multiple Performance Obligations For many of the Company’s services, the Company typically has one performance obligation; however, the Company also provides the customer with an option to acquire additional services. The Company offers multiple services under its patient management and network solutions service lines. The Company typically provides a menu of offerings from which the customer may choose to purchase. The price of each service is separate and distinct and provides a separate and distinct value to the customer. Pricing is generally consistent for each service irrespective of the other services or quantities requested by the customer. Contract Balances The timing of revenue recognition, billings and cash collections results in billed accounts receivables, unbilled receivables, and contract liabilities (reported as deferred revenues) on the Company’s consolidated balance sheets. Unbilled receivables are due to the Company unconditionally for services already rendered except for physical invoicing and the passage of time. Invoicing requirements vary by customer contract, but substantially all unbilled revenues are billed within one year . March 31, 2023 March 31, 2022 Billed receivables $ 57,218,000 $ 57,841,000 Allowance for doubtful accounts ( 2,823,000 ) ( 2,562,000 ) Unbilled receivables 26,639,000 27,307,000 Accounts receivable, net $ 81,034,000 $ 82,586,000 When the Company receives consideration from a customer prior to transferring services to the customer under the terms of certain claims management agreements, it records deferred revenues on the Company’s consolidated balance sheets, which represents a contract liability. Certain services, such as claims management, are provided under fixed-fee service agreements and require the Company to manage claims over a contract period, typically for one year with the option for auto renewal, with the fixed fee renewing on the anniversary date of such contracts. The Company recognizes deferred revenues as revenues when it performs services and transfers control of the services to the customer and satisfies the performance obligation which it determines utilizing a portfolio approach. For all fixed fee service agreements, revenues are recognized over the expected service periods by type of claim. 54 The table below presents the deferred revenues balance and the significant activity affecting deferred revenues during the fiscal year ended March 31, 2023: March 31, 2023 Beginning balance at April 1, 2022 $ 25,796,000 Additions 46,098,000 Revenue recognized from beginning of period ( 21,486,000 ) Revenue recognized from additions ( 23,430,000 ) Ending balance at March 31, 2023 $ 26,978,000 Remaining Performance Obligations As of March 31, 2023 , the Company had $ 27.0 million of remaining performance obligations related to claims and non-claims services for which the price is fixed. Remaining performance obligations consist of deferred revenues. The Company expects to recognize approximately 96 % of its remaining performance obligations as revenues within one year and the remaining balance thereafter. See the discussion below regarding the practical expedients elected for the disclosure of remaining performance obligations. Costs to Obtain a Contract The Company has an internal sales force compensation program where remuneration is based solely on the revenues recognized in the period and does not represent an incremental cost to the Company which provides a future benefit expected to be longer than one year and would meet the criteria to be capitalized and presented on the Company’s consolidated balance sheets . Practical Expedients Elected As a practical expedient, the Company does not adjust the consideration in a contract for the effects of a significant financing component. It expects, at contract inception, that the period between a customer’s payment of consideration and the transfer of promised services to the customer will be one year or less . For patient management services that are billed on a time-and-expense incurred or per unit basis and for which revenue is recognized over time, the Company recognizes revenue at the amount to which it has the right to invoice for services performed. The Company does not disclose the value of remaining performance obligations for (i) contracts for which it recognizes revenue at the amount to which it has the right to invoice for services performed, and (ii) contracts with variable consideration allocated entirely to a single performance obligation. Note 3 — Stock Options and Stock-Based Compensation Under the Company’s Restated Omnibus Incentive Plan (formerly the Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at March 31, 2023 , options exercisable for up to 20,615,000 shares of the Company’s common stock may be granted over the life of the Plan to key employees, non-employee directors, and consultants at exercise prices not less than the fair market value of the common stock on the date of grant. Options granted under the Plan are non-statutory stock options and generally vest 25 % one year from the date of grant, with the remaining 75 % vesting ratably each month for the next 36 months. The options granted to employees and the Company’s Board of Directors expire at the end of five years and ten years from date of grant, respectively. All options granted in fiscal 2023 and 2022 were granted with an exercise price equal to the fair value of the Company’s common stock on the grant date. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data, among other factors, to estimate the expected volatility, the expected dividend yield, and the expected option life. The Company accounts for forfeitures as they occur, rather than estimate expected forfeitures. The risk-free rate is based on the interest rate paid on a U.S. Treasury issue with a term similar to the estimated life of the option. 55 The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for the fiscal years ended March 31, 2023, 2022 and 2021: Fiscal 2023 Fiscal 2022 Fiscal 2021 Expected volatility 36 % 36 % 34 % Risk free interest rate 2.73 % to 4.36 % 0.71 % to 1.66 % 0.21 % to 0.46 % Dividend yield 0.0 % 0.0 % 0.0 % Weighted average option life 4.2 to 4.3 years 4.3 to 4.4 years 4.4 to 4.5 years For the fiscal years ended March 31, 2023, 2022 and 2021 , the Company recorded share-based compensation expense of $ 5,559,000 , $ 5,198,000 , and $ 4,978,000 , respectively. The table below shows the amounts recognized in the financial statements for the fiscal years ended March 31, 2023, 2022 and 2021. Fiscal 2023 Fiscal 2022 Fiscal 2021 Cost of revenue $ 2,566,000 $ 2,063,000 $ 2,020,000 General and administrative 2,993,000 3,135,000 2,958,000 Total cost of stock-based compensation included in income before income taxes 5,559,000 5,198,000 4,978,000 Amount of income tax benefit recognized ( 1,210,000 ) ( 1,119,000 ) ( 1,057,000 ) Amount charged to net income $ 4,349,000 $ 4,079,000 $ 3,921,000 Effect on basic earnings per share $ 0.25 $ 0.23 $ 0.22 Effect on diluted earnings per share $ 0.25 $ 0.23 $ 0.22 The following table summarizes information for all stock options for the fiscal years March 31, 2023, 2022 and 2021: Fiscal 2023 Fiscal 2022 Fiscal 2021 Options outstanding – beginning of fiscal year 723,876 937,158 1,029,103 Options granted 168,300 130,200 234,175 Options exercised ( 209,301 ) ( 298,570 ) ( 278,094 ) Options cancelled/forfeited ( 31,018 ) ( 44,912 ) ( 48,026 ) Options outstanding – end of fiscal year 651,857 723,876 937,158 During the fiscal year, weighted average exercise price of: Options granted $ 159.43 $ 161.95 $ 81.12 Options exercised $ 63.21 $ 55.44 $ 44.17 Options cancelled/forfeited $ 140.38 $ 79.30 $ 61.26 At the end of fiscal year: Price range of outstanding options $ 33.16 -$ 197.16 $ 22.07 -$ 197.16 $ 21.87 -$ 103.31 Weighted average exercise price per share $ 108.10 $ 84.55 $ 64.28 Options available for future grants 657,972 805,097 880,542 Exercisable options 319,703 354,460 421,964 The following table summarizes the status of stock options outstanding and exercisable at March 31, 2023: Range of Exercise Prices Number of Outstanding Options Weighted Average Remaining Contractual Life Outstanding Options – Weighted Average Exercise Price Exercisable Options – Number of Exercisable Options Exercisable Options – Weighted Average Exercise Price $ 33.16 to $ 77.93 204,418 2.04 $ 56.62 190,336 $ 56.45 $ 77.94 to $ 103.31 176,918 3.13 87.79 100,705 87.48 $ 103.32 to $ 155.99 167,067 4.44 148.05 16,347 135.37 $ 156.00 to $ 197.16 103,454 4.72 180.05 12,315 184.96 Total 651,857 3.38 $ 108.10 319,703 $ 75.21 56 The following table summarizes the status of all outstanding options at March 31, 2023, and changes during the fiscal year then ended: Number of Options Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value as of March 31, 2023 Options outstanding, March 31, 2022 723,876 $ 84.55 Granted 168,300 159.43 Exercised ( 209,301 ) 63.21 Cancelled – forfeited ( 30,935 ) 140.48 Cancelled – expired ( 83 ) 100.82 Options outstanding, March 31, 2023 651,857 $ 108.10 3.38 $ 53,831,845 Options vested and expected to vest 611,405 $ 105.53 3.35 $ 50,678,980 Ending exercisable 319,703 $ 75.21 2.55 $ 36,847,079 The weighted average fair value of options granted during fiscal 2023, 2022 and 2021 was $ 56.34 , $ 50.29 , and $ 23.24 , respectively. The total intrinsic value of options exercised during fiscal years 2023, 2022 and 2021 was $ 21,094,000 , $ 27,615,000 , and $ 12,272,000 respectively. Included in the above-noted stock option grants and stock compensation expense are performance-based stock options which vest only upon the Company’s achievement of certain earnings per share targets on a calendar year basis, as determined by the Company’s Board of Directors. These options were valued in the same manner as the time-based options. However, the Company only recognizes stock compensation expense to the extent that the targets are determined to be probable of being achieved, which triggers the vesting of the performance options. During the fiscal years ended March 31, 2023, 2022 and 2021 , the Company recognized stock compensation expense for performance-based options in the amount of $ 1,961,000 , $ 2,280,000 , and $ 2,080,000 , respectively. The Company received $ 10,856,000 , $ 9,906,000 , and $ 11,494,000 of cash receipts from the exercise of stock options during fiscal 2023, 2022 and 2021, respectively. As of March 31, 2023 , $ 9,637,000 of total unrecognized compensation costs related to stock options is expected to be recognized over a weighted average period of 3 years. Note 4 — Property and Equipment Property and equipment, net consisted of the following at March 31, 2023 and 2022: 2023 2022 Computer software $ 202,095,000 $ 177,150,000 Office equipment and computers 68,253,000 77,380,000 Land, building and improvements 11,081,000 11,081,000 Leasehold improvements 18,295,000 18,582,000 299,724,000 284,193,000 Less: accumulated depreciation and amortization ( 216,954,000 ) ( 207,925,000 ) $ 82,770,000 $ 76,268,000 Depreciation expense totaled $ 24,696,000 , $ 23,481,000 and $ 23,001,000 for the fiscal years ended March 31, 2023, 2022 and 2021 , respectively. 57 Note 5 — Accounts and Income Taxes Payable and Accrued Liabilities Accounts and income taxes payable consisted of the following at March 31, 2023 and 2022: 2023 2022 Accounts payable $ 15,058,000 $ 14,080,000 Income taxes payable 251,000 351,000 $ 15,309,000 $ 14,431,000 Accrued liabilities consisted of the following at March 31, 2023 and 2022: 2023 2022 Payroll, payroll taxes and employee benefits $ 22,170,000 $ 36,066,000 Customer deposits 80,022,000 69,781,000 Accrued professional service fees 8,601,000 8,073,000 Self-insurance accruals 3,563,000 2,798,000 Deferred revenue 26,978,000 25,796,000 Operating lease liabilities 9,900,000 13,348,000 Other 1,344,000 1,077,000 $ 152,578,000 $ 156,939,000 Note 6 — Income Taxes The income tax provision consisted of the following for the fiscal years ended March 31, 2023, 2022 and 2021: 2023 2022 2021 Current — Federal $ 14,745,000 $ 11,977,000 $ 16,608,000 Current — State 5,357,000 3,823,000 4,587,000 Subtotal 20,102,000 15,800,000 21,195,000 Deferred — Federal ( 1,321,000 ) 1,784,000 ( 6,809,000 ) Deferred — State ( 592,000 ) 518,000 ( 1,567,000 ) Subtotal ( 1,913,000 ) 2,302,000 ( 8,376,000 ) $ 18,189,000 $ 18,102,000 $ 12,819,000 The following is a reconciliation of the income tax provision from the statutory federal income tax rate to the effective rate for the fiscal years ended March 31, 2023, 2022 and 2021: 2023 2022 2021 Income taxes at federal statutory rate $ 17,757,000 $ 17,748,000 $ 12,427,000 State income taxes, net of federal benefit 3,890,000 3,658,000 3,102,000 Uncertain tax positions ( 77,000 ) ( 222,000 ) ( 693,000 ) Stock-based compensation and §162(m) limitation ( 3,098,000 ) ( 2,697,000 ) ( 1,654,000 ) Permanent items and tax credits ( 384,000 ) ( 465,000 ) ( 364,000 ) Adjustments to returns as filed 163,000 176,000 192,000 Valuation allowance ( 62,000 ) ( 96,000 ) ( 191,000 ) $ 18,189,000 $ 18,102,000 $ 12,819,000 58 Deferred tax assets and liabilities at March 31, 2023 and 2022 are, as follows: 2023 2022 Deferred tax assets: Accrued liabilities not currently deductible $ 6,885,000 $ 6,277,000 Allowance for doubtful accounts 736,000 658,000 Stock-based compensation 2,423,000 2,090,000 Deferred lease liability 8,740,000 11,002,000 Deferred payroll taxes — 1,332,000 Capitalized research and development expenditures 2,495,000 — Other 536,000 675,000 Deferred tax assets 21,815,000 22,034,000 Deferred tax liabilities: Excess of book over tax basis of fixed assets ( 6,654,000 ) ( 7,313,000 ) Intangible assets ( 5,057,000 ) ( 4,937,000 ) Right-of-use asset ( 7,190,000 ) ( 8,939,000 ) Accrued revenue ( 1,851,000 ) ( 1,665,000 ) Other ( 508,000 ) ( 476,000 ) Total deferred tax liabilities ( 21,260,000 ) ( 23,330,000 ) Valuation allowance ( 331,000 ) ( 393,000 ) Deferred tax liabilities ( 21,591,000 ) ( 23,723,000 ) Net deferred tax assets (liabilities) $ 224,000 $ ( 1,689,000 ) Prepaid income taxes are $ 1,816,000 at March 31, 2023, and $ 2,367,000 at March 31, 2022. A reconciliation of the financial statement recognition and measurement of uncertain tax positions during the current fiscal year is as follows: Balance as of March 31, 2022 $ 217,000 Additions based on tax positions related to the current year — Additions for tax positions of prior years — Reductions for tax positions related to the current year — Reductions for tax positions of prior years ( 64,000 ) Balance as of March 31, 2023 $ 153,000 The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. During the fiscal years ended March 31, 2023, 2022 and 2021 , the Company recognized approximately $( 13,000 ), $( 40,000 ) and $( 99,000 ) in interest and penalties, respectively. As of March 31, 2023, 2022 and 2021 , accrued interest and penalties related to uncertain tax positions were $ 54,000 , $ 67,000 and $ 107,000 , respectively. The tax fiscal years from 2017 - 2022 remain open to examination by the major taxing jurisdictions to which the Company is subject. Note 7 — Employee Stock Purchase Plan The Company maintains an Employee Stock Purchase Plan (as amended, “ESPP”) which allows employees of the Company and its subsidiaries to purchase shares of common stock on the last day of two six-month purchase periods (i.e. March 31 and September 30) at a purchase price which is 95 % of the closing sale price of shares as quoted on NASDAQ on the last day of such purchase period. Employees are allowed to contribute up to 20 % of their gross pay. A maximum of 2,850,000 shares have been authorized for issuance under the ESPP. As of March 31, 2023 , 2,500,392 shares had been issued pursuant to the ESPP. Summarized ESPP information is as follows: 2023 2022 2021 Employee contributions $ 676,000 $ 564,000 $ 534,000 Shares acquired 4,457 3,363 6,007 Average purchase price $ 151.63 $ 167.71 $ 88.85 59 Note 8 — Treasury Stock During each of the three fiscal years ended March 31, 2023 , the Company continued to repurchase shares of its common stock under a program originally approved by the Company’s Board of Directors in 1996. Including a 1,000,000 share expansion authorized in November 2022 by the Company’s Board of Directors, the total number of shares of common stock authorized to be repurchased over the life of the program is 39,000,000 shares of common stock. Purchases may be made from time to time depending on market conditions and other relevant factors. The share repurchases for the fiscal years ended March 31, 2023, 2022 and 2021 and cumulatively since inception of the authorization, are as follows: 2023 2022 2021 Cumulative Shares repurchased 598,241 566,073 367,961 37,817,866 Cost $ 93,675,000 $ 90,085,000 $ 32,671,000 $ 748,195,000 Average price $ 156.58 $ 159.14 $ 88.79 $ 19.78 During the period subsequent to March 31, 2023, through the date of filing this annual report, the Company repurchased 53,167 shares for $ 10.8 million, or an average of $ 203.05 per share. The repurchased shares were recorded as treasury stock, at cost, and are available for general corporate purposes. The repurchases were primarily financed from cash generated from operations and from cash proceeds from the exercise of stock options. Note 9 – Leases The Company determines if an arrangement is or contains a lease at contract inception. These lease agreements have remaining lease terms of 1 to 5 years . The Company recognizes a right-of-use (“ROU”) asset and a lease liability at the lease commencement date. The lease liability is initially measured at the present value of the unpaid lease payments as of the lease commencement date. Key estimates and judgments include how the Company determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) the lease term, and (3) lease payments. ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, the Company generally uses its incremental borrowing rate as the discount rate for the lease. The Company's incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because the Company does not generally borrow on a collateralized basis, it uses quoted interest rates obtained from financial institutions as an input to derive an appropriate incremental borrowing rate, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. The Company’s lease agreements may include options to extend the lease following the initial term. At the time of adopting ASC 842, the Company determined that it was reasonably certain it would exercise the option to renew; accordingly, these options were considered in determining the initial lease term. The Company elected the practical expedient of hindsight in determining the option to renew. The Company has since reassessed the assumption of the renewal term and determined that due to the COVID-19 pandemic, the Company is now expecting more of its workforce to be working from home permanently. Therefore, expecting a reduction in overall square footage of office space needs, the Company no longer believes it is reasonably certain it will exercise most of its options to renew, and therefore, has removed the renewal term of several lease obligations. The subsequent re-measurement reduced the right-of-use asset and related lease liability on the consolidated balance sheet, but had an immaterial impact on the income statement. For lease agreements entered into or reassessed after the adoption of ASC 842, the Company has elected the practical expedient to account for the lease and non-lease components as a single lease component. Therefore, for those leases, the lease payments used to measure the lease liability include all of the fixed consideration in the contract. Variable lease payments associated with the Company’s leases are recognized upon occurrence of the event, activity, or circumstance in the lease agreement on which those payments are assessed. 60 Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The components of lease expenses are as follows: March 31, 2023 March 31, 2022 March 31, 2021 Operating lease expense $ 12,259,000 $ 13,768,000 $ 15,591,000 Finance lease expense 92,000 98,000 77,000 Short-term lease expense 16,000 13,000 174,000 Variable lease expense 555,000 495,000 328,000 Total lease expenses $ 12,922,000 $ 14,374,000 $ 16,170,000 The following table presents assets and liabilities recorded on the Company’s consolidated balance sheets related to its operating leases: March 31, 2023 March 31, 2022 Right-of-use asset, net $ 27,721,000 $ 35,020,000 Short-term lease liability $ 9,900,000 $ 13,348,000 Long-term lease liability 23,860,000 29,792,000 Total lease liabilities $ 33,760,000 $ 43,140,000 Weighted average remaining lease term 4.07 years 4.32 years Weighted average finance lease term 2.25 years 3.25 years Weighted average discount rate 2.8 % 2.6 % Supplemental cash flow information related to operating leases for fiscal years ended March 31, 2023 and 2022 were as follows: March 31, 2023 March 31, 2022 Cash paid for amounts included in the measurement of operating lease liabilities $ 14,348,000 $ 15,001,000 Operating lease liabilities arising from obtaining ROU assets $ 55,269,000 $ 54,311,000 Finance lease liabilities arising from obtaining ROU assets $ 358,000 $ 358,000 Reductions to ROU assets resulting from reductions to operating lease liabilities $ ( 4,912,000 ) $ 1,550,000 As of March 31, 2023, maturities of operating and financing lease liabilities for each of the next five years and thereafter are as follows: 2024 $ 10,638,000 2025 8,579,000 2026 6,195,000 2027 4,472,000 2028 3,464,000 Thereafter 2,660,000 Total lease payments 36,008,000 Less interest ( 2,248,000 ) Total lease liabilities $ 33,760,000 As of March 31, 2023 , the Company has approximately $ 5.0 million of additional operating lease commitments that have not yet commenced. These leases commence in 2023 and have lease terms between 3 years and 5 years. 61 Note 10 — Contingencies and Legal Proceedings The Company is involved in litigation arising in the ordinary course of business. Management believes that resolution of these matters will not result in any payment that, in the aggregate, would be material to the consolidated financial position or results of operations of the Company. Note 11 — Retirement Savings Plan The Company maintains a retirement savings plan for its employees, which is a qualified plan under Section 401(k) of the Internal Revenue Code. Full-time employees that meet certain requirements are eligible to participate in the plan. Employer contributions are made annually, primarily at the discretion of the Company’s Board of Directors. Contributions of $ 1,315,000 , $ 1,088,000 and $ 853,000 were charged to operations for the fiscal years ended March 31, 2023, 2022 and 2021 , respectively. Note 12 — Segment Reporting The Company derives the majority of its revenues from providing patient management and network solutions services to payors of workers’ compensation benefits, automobile insurance claims and group health insurance benefits. Patient management services include claims administration, utilization review, medical case management, and vocational rehabilitation. Network solutions services include fee schedule auditing, hospital bill auditing, coordination of independent medical examinations, diagnostic imaging review services and preferred provider referral services. The percentages of revenues attributable to patient management and network solutions services for the fiscal years ended March 31, 2023, 2022 and 2021 are listed below. 2023 2022 2021 Patient management services 66.6 % 65.6 % 66.7 % Network solutions services 33.4 % 34.4 % 33.3 % 100.0 % 100.0 % 100.0 % The Company’s management is structured geographically with regional vice presidents who are responsible for all services provided by the Company in his or her particular region and responsible for the operating results of the Company in multiple states. These regional vice presidents have area and district managers who are also responsible for all services provided by the Company in their given area and district. Under ASC 280-10, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas: (i) the nature of products and services, (ii) the nature of the production processes, (iii) the type or class of customer for their products and services, and (iv) the methods used to distribute their products or provide their services. The Company believes each of the Company’s regions meet these criteria as they provide similar managed care services to similar customers using similar methods of production and distribution. All of the Company’s regions perform both patient management and network solutions services. Because the Company believes it meets each of the criteria set forth above and each of the Company’s regions has similar economic characteristics, the Company aggregates its results of operations in one reportable operating segment. 62 Note 13 — Other Intangible Assets Other intangible assets consisted of the following at March 31, 2023: Item Life Cost Fiscal 2023 Amortization Expense Accumulated Amortization at March 31, 2023 Cost, Net of Accumulated Amortization at March 31, 2023 Covenant Not to Compete 5 years $ 775,000 $ — $ 775,000 $ — Customer Relationships 18 - 20 years 7,922,000 421,000 6,678,000 1,244,000 Third Party Administrator Licenses 15 years 204,000 4,000 204,000 — Total $ 8,901,000 $ 425,000 $ 7,657,000 $ 1,244,000 Other intangible assets consisted of the following at March 31, 2022: Item Life Cost Fiscal 2022 Amortization Expense Accumulated Amortization at March 31, 2022 Cost, Net of Accumulated Amortization at March 31, 2022 Covenant Not to Compete 5 years $ 775,000 $ — $ 775,000 $ — Customer Relationships 18 - 20 years 7,922,000 422,000 6,258,000 1,664,000 Third Party Administrator Licenses 15 years 204,000 13,000 199,000 5,000 Total $ 8,901,000 $ 435,000 $ 7,232,000 $ 1,669,000 Amortization expense is expected to be $ 423,000 in fiscal 2024, $ 384,000 in fiscal 2025, $ 175,000 in fiscal 2026, $ 174,000 in fiscal 2027, $ 42,000 in fiscal 2028, and $ 46,000 thereafter. Note 14 — Quarterly Results (Unaudited) The following is a summary of unaudited quarterly results of operations for each of the quarters in the fiscal years ended March 31, 2023 and 2022: Revenues Gross Profit Net Income Net Income per Basic Common Share Net Income per Diluted Common Share Fiscal Year Ended March 31, 2023: First Quarter $ 176,307,000 $ 39,869,000 $ 16,691,000 $ 0.95 $ 0.94 Second Quarter 177,426,000 36,094,000 14,656,000 0.84 0.83 Third Quarter 179,386,000 40,345,000 16,849,000 0.98 0.96 Fourth Quarter 185,443,000 41,951,000 18,169,000 1.06 1.04 Fiscal Year Ended March 31, 2022: First Quarter $ 152,620,000 $ 37,213,000 $ 16,843,000 $ 0.94 $ 0.92 Second Quarter 157,743,000 36,661,000 16,072,000 0.90 0.88 Third Quarter 164,508,000 35,188,000 13,858,000 0.78 0.76 Fourth Quarter 171,359,000 43,052,000 19,637,000 1.11 1.09 63