CORVEL CORP 10-Q

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations This report 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,” and 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; cost of capital and capital requirements; the ability to expand certain areas of the Company’s business; competition from other managed care companies; 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; the ability to renew and/or maintain contracts with customers on favorable terms or at all; 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; governmental and public policy changes, including but not limited to legislative and administrative law and rule implementation or change; dependence on key personnel; the continued availability of financing in the amounts and at the terms necessary to support the Company’s future business; the impact of recently issued accounting standards on the Company’s consolidated financial statements; growth in the Company’s sale of TPA services and the other risks identified in Part II, Item 1A of this report. Overview CorVel Corporation is an independent nationwide provider of medical cost containment and managed care services designed to address the escalating medical costs of workers’ compensation benefits, mobile insurance claims, and group health insurance benefits. The Company’s services are provided to insurance companies, third party administrators, or (TPA’s), governmental entities, and self-administered employers to assist them in managing the medical costs and monitoring the quality of care associated with healthcare claims. In November 2019, the Bureau of Labor Statistics reported that the occupational injury and illness incidence rate for 2018 remained unchanged from the prior year. This is the first year since 2012 that the rate did not decline. Patient Management 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 also include the processing of claims for self-insured payors with respect to property and casualty insurance. 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. Page 18 Organizational Structure The Company’s management is structured geographically with regional vice presidents who are responsible for all services provided by the Company within 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. Seasonality While we are not directly impacted by seasonal shifts, 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. COVID-19 Pandemic The economies of the United States and other countries around the world have rapidly contracted as a result of the COVID-19 pandemic. The decreased level of economic activity is leading to, and is likely to continue to lead to, a decline in exposure units and rising unemployment. While the full impact of the COVID-19 pandemic cannot be fully assessed at this time, the Company expects that the ongoing global economic slowdown resulting from the COVID-19 pandemic could have a material adverse effect on its business, results of operations, financial condition, and cash flows in one or more future quarters. Through the September 2020 quarter, the COVID-19 pandemic continues to impact our business, however the impact is not as significant as it was during the June 2020 quarter. We implemented a 10% reduction in headcount that began in the March 2020 quarter and continued through the June 2020 quarter. We took actions intended to protect our employees and our customers that adversely affected our results. We reduced discretionary spending, including but not limited to cutting spending in planned capital expenditures, travel, recruiting, consulting and temporary help expenses. During the September 2020 quarter, we continued to monitor expenses. Additionally, we temporarily suspended share repurchases under our stock repurchase program, from March 21 through June 14, 2020. We do not intend to apply for governmental loans to support our operations, but we have evaluated the CARES Act and are taking advantage of certain aspects of the CARES Act such as the deferral of payroll tax deposits. The majority of our workforce continues to work from home, while being able to maintain productivity and responsiveness. Some of our customers either closed their locations or operated at significantly diminished capacity as a result of local and national actions taken, such as stay-at-home mandates, which reduced business activity and negatively impacted sales through the September 2020 quarter. The Company cannot provide any assurance that the assumptions used to estimate its liquidity requirements will remain accurate due to the unprecedented nature of the disruption to operations and the unpredictability of the COVID-19 global pandemic. As a consequence, estimates of the duration of the pandemic and the severity of the impact on future earnings and cash flows could change and have a material impact on our results of operations and financial condition. The ultimate duration and impact of the COVID-19 pandemic on the Company’s business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic, including repeat or cyclical outbreaks, and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. Furthermore, the extent to which the Company’s Page 19 mitigation efforts are successful, if at all, is not presently ascertainable. However, the Company expects that its results of operations, including revenues, in future periods will continue to be adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions, which include a global recession. Summary of Quarterly Results The Company’s revenues decreased to $136.0 million in the quarter ended September 30, 2020 from $147.0 million in the quarter ended September 30, 2019, a decrease of $10.9 million, or 7.4%. This decrease was due to a decline in revenues in patient management and network solutions services, primarily due to the economic impact of the COVID-19 pandemic in the United States. Cost of revenues decreased to $105.5 million in the quarter ended September 30, 2020 from $114.1 million in the quarter ended September 30, 2019, a decrease of $8.6 million, or 7.5%. This decrease was primarily due to the decrease of 7.4% in revenue mentioned above, in connection with which there was a decrease in salaries resulting from decreased headcount of 9% in field operations. General and administrative expense decreased to $15.6 million in the quarter ended September 30, 2020 from $16.6 million in the quarter ended September 30, 2019, a decrease of $1.0 million, or 6.2%. This decrease was primarily due to a decrease in information technology and marketing costs offset by minor increases in other areas within general and administrative expenses. Income tax expense decreased to $3.1 million in the quarter ended September 30, 2020 from $3.4 million in the quarter ended September 30, 2019, a decrease of $0.3 million, or 8.9%. Income before income tax provision decreased to $14.9 million in the quarter ended September 30, 2020 from $16.3 million in the quarter ended September 30, 2019, a decrease of $1.3 million, or 8.0%. The effective tax rate was 20.6% for the quarter ended September 30, 2020 compared to 20.8% in the quarter ended September 30, 2019. Diluted weighted shares decreased to 18.2 million shares in the quarter ended September 30, 2020 from 18.8 million shares in the quarter ended September 30, 2019, a decrease of 597,000 shares, or 3.2%, due to the weighted impact of options exercised partially offset by the weighted impact of shares repurchased. Diluted earnings per share decreased to $0.65 per share in the quarter ended September 30, 2020 from $0.69 per share in the quarter ended September 30, 2019, a decrease of $0.04 per share, or 5.8%. The decrease in diluted earnings per share was primarily due to a decrease in net income. Results of Operations for the three months ended September 30, 2020 and 2019 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. The percentages of total revenues attributable to patient management and network solutions services for the quarters ended September 30, 2020 and 2019 are as follows: September 30, 2020 September 30, 2019 Patient management services 66.1 % 65.7 % Network solutions services 33.9 % 34.3 % Page 20 The following table sets forth, for the periods indicated, the dollar amounts, dollar and percent changes, share changes, and the percentage of revenues represented by certain items reflected in the Company’s unaudited consolidated income statements for the three months ended September 30, 2020 and 2019 . The Company’s past operating results are not necessarily indicative of future operating results. Three Months Ended Three Months Ended Percentage September 30, 2020 September 30, 2019 Change Change Revenue $ 136,028,000 $ 146,970,000 $ (10,942,000 ) (7.4 %) Cost of revenues 105,525,000 114,127,000 (8,602,000 ) (7.5 %) Gross profit 30,503,000 32,843,000 (2,340,000 ) (7.1 %) Gross profit as percentage of revenue 22.4 % 22.3 % General and administrative 15,560,000 16,593,000 (1,033,000 ) (6.2 %) General and administrative as percentage of revenue 11.4 % 11.3 % Income before income tax provision 14,943,000 16,250,000 (1,307,000 ) (8.0 %) Income before income tax provision as percentage of revenue 11.0 % 11.1 % Income tax provision 3,078,000 3,379,000 (301,000 ) (8.9 %) Net income $ 11,865,000 $ 12,871,000 $ (1,006,000 ) (7.8 %) Weighted Shares Basic 17,937,000 18,452,000 (515,000 ) (2.8 %) Diluted 18,174,000 18,771,000 (597,000 ) (3.2 %) Earnings Per Share Basic $ 0.66 $ 0.70 $ (0.04 ) (5.7 %) Diluted $ 0.65 $ 0.69 $ (0.04 ) (5.8 %) Revenues Change in revenue to the quarter ended September 30, 2020 from the quarter ended September 30, 2019 Revenues decreased to $136.0 million in the quarter ended September 30, 2020 from $147.0 million in the quarter ended September 30, 2019, a decrease of $10.9 million, or 7.4%. The decrease in revenues was primarily due to the economic impact of the COVID-19 pandemic in the United States. Patient management services revenues decreased to $90.3 million from $95.7 million, a decrease of 5.7%. Network solutions services revenues decreased to $45.8 million from $51.3 million, a decrease of 10.7%. Due to the COVID-19 pandemic and economic shutdown, an increase in the number of employees working remotely and fewer people leaving the house to seek medical care, the Company saw a decrease in the number of claims in both patient management and network solutions services. The number of new claims decreased by 10.2%. Cost of Revenues 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. Approximately 37% of the costs incurred in the field are considered field indirect costs, which support both the patient management services and network solutions operations of the Company’s field operations. Change in cost of revenues to the quarter ended September 30, 2020 from the quarter ended September 30, 2019 Cost of revenues decreased to $105.5 million in the quarter ended September 30, 2020 from $114.1 million in the quarter ended September 30, 2019, a decrease of $8.6 million, or 7.5%. The decrease in cost of revenues was primarily due to the decrease in total revenues of 7.4%, in connection with which there was a decrease in salaries resulting from decreased headcount of 9% in field operations, due to a reduction in headcount of 10% during the June 2020 quarter, that was slightly offset by hiring employees during the September 2020 quarter due to customer needs. Page 21 General and Administrative Expense For the quarter ended September 30, 2020, general and administrative expense consisted of approximately 51% 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 expense 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 to the quarter ended September 30, 2020 from the quarter ended September 30, 2019 General and administrative expense decreased to $15.6 million in the quarter ended September 30, 2020 from $16.6 million in the quarter ended September 30, 2019, a decrease of $1.0 million, or 6.2%. This decrease was primarily due to a decrease in information technology and marketing costs offset by minor increases in other areas within general and administrative expenses. Income Tax Provision Change in income tax expense to the quarter ended September 30, 2020 from the quarter ended September 30, 2019 Income tax expense decreased to $3.1 million in the quarter ended September 30, 2020 from $3.4 million in the quarter ended September 30, 2019, a decrease of $0.3 million, or 8.9%. Income before income tax provision decreased to $14.9 million in the quarter ended September 30, 2020 from $16.3 million in the quarter ended September 30, 2019, a decrease of $1.3 million, or 8.0%. The effective tax rate was 20.6% for the quarter ended September 30, 2020 compared to 20.8% in the quarter ended September 30, 2019. The effective tax rate is less than the statutory tax rate primarily because of the impact of the stock option exercises. Results of Operations for the six months ended September 30, 2020 and 2019 The following table sets forth, for the periods indicated, the dollar amounts, dollar and percent changes, share changes, and the percentage of revenues represented by certain items reflected in the Company’s consolidated income statements for the six months ended September 30, 2020 and 2019. The Company’s past operating results are not necessarily indicative of future operating results. Six Months Ended Six Months Ended Percentage September 30, 2020 September 30, 2019 Change Change Revenue $ 265,628,000 $ 297,109,000 $ (31,481,000 ) (10.6 %) Cost of revenues 208,616,000 231,132,000 (22,516,000 ) (9.7 %) Gross profit 57,012,000 65,977,000 (8,965,000 ) (13.6 %) Gross profit as percentage of revenue 21.5 % 22.2 % General and administrative 31,145,000 32,345,000 (1,200,000 ) (3.7 %) General and administrative as percentage of revenue 11.7 % 10.9 % Income before income tax provision 25,867,000 33,632,000 (7,765,000 ) (23.1 %) Income before income tax provision as percentage of revenue 9.7 % 11.3 % Income tax provision 5,700,000 7,354,000 (1,654,000 ) (22.5 %) Net income $ 20,167,000 $ 26,278,000 $ (6,111,000 ) (23.3 %) Weighted Shares Basic 17,960,000 18,488,000 (528,000 ) (2.9 %) Diluted 18,144,000 18,779,000 (635,000 ) (3.4 %) Earnings Per Share Basic $ 1.12 $ 1.42 $ (0.30 ) (21.1 %) Diluted $ 1.11 $ 1.40 $ (0.29 ) (20.7 %) Page 22 Revenues Change in revenue to the six months ended September 30, 2020 from the six months ended September 30, 2019 Revenues decreased to $265.6 million for the six months ended September 30, 2020 from $297.1 million for the six months ended September 30, 2019, a decrease of $31.5 million, or 10.6%. The decrease in revenues was primarily due to the economic impact of the COVID-19 pandemic in the United States. Patient management services revenues decreased to $175.5 million from $195.2 million, a decrease of 10.1%. Network solutions services revenues decreased to $90.2 million from $101.9 million, a decrease of 11.5%. Due to the COVID-19 pandemic and economic shutdown, an increase in the number of employees working remotely and fewer people leaving the house to seek medical care, the Company saw a decrease in the number of claims in both patient management and network solutions services. The number of new claims decreased by 16.4%. Cost of Revenues Change in cost of revenues to the six months ended September 30, 2020 from the six months ended September 30, 2019 Cost of revenues decreased to $208.6 million in the six months ended September 30, 2020 from $231.1 million in the six months ended September 30, 2019, a decrease of $22.5 million, or 9.7%. The decrease in cost of revenues was primarily due to the decrease in total revenues of 10.6%, in connection with which there was a decrease in salaries resulting from decreased headcount of 9% in field operations, due to a reduction in headcount of 10% during the June 2020 quarter, that was slightly offset by hiring employees during the September 2020 quarter due to customer needs. General and Administrative Expense Change in general and administrative expense to the six months ended September 30, 2020 from the six months ended September 30, 2019 General and administrative expense decreased to $31.1 million in the six months ended September 30, 2020 from $32.3 million in the six months ended September 30, 2019, a decrease of $1.2 million, or 3.7%. The decrease in general and administrative expense was primarily due to a decrease in corporate systems costs. Income Tax Provision Change in income tax expense to the six months ended September 30, 2020 from the six months ended September 30, 2019 Income tax expense decreased to $5.7 million for the six months ended September 30, 2020 from $7.4 million for the six months ended September 30, 2019, a decrease of $1.7 million, or 22.5%. Income before income tax provision decreased to $25.9 million in the six months ended September 30, 2020 from $33.6 million in the six months ended September 30, 2019, a decrease of $7.8 million, or 23.1%. The income tax expense as a percentage of income before income taxes, also known as the effective tax rate, was 22.3% for the six months ended September 30, 2020 and 21.8% for the six months ended September 30, 2019. The effective tax rate is less than the statutory tax rate primarily because of the impact of the stock option exercises. Liquidity and Capital Resources The Company has historically funded its operations and capital expenditures primarily from cash flow from operations, and to a lesser extent, proceeds from stock option exercises. Working capital increased to $93.2 million as of September 30, 2020 from $75.3 million as of March 31, 2020, an increase of $17.9 million primarily due to an increase in cash and cash equivalents. Cash increased to $106.1 million as of September 30, 2020 from $83.2 million as of March 31, 2020, an increase of $22.9 million. This is primarily due to steps the Company took in response to the COVID-19 pandemic, which included reducing its planned capital expenditures and reducing its work force. Additionally, the Company temporarily suspended share repurchases under its stock repurchase program, from March 21 through June 14, 2020. The Company does not intend to apply for governmental loans to support the Company’s operations, but has evaluated the CARES Act and is taking advantage of certain aspects of the CARES Act such as the deferral of payroll tax deposits. The Company believes that, after the steps it took in response to the COVID-19 pandemic described above, 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 Page 23 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 September 30, 2020, the Company had $106.1 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 September 30, 2020 along with anticipated internally-generated funds will be sufficient to meet the Company’s expected cash requirements for at least the next twelve months. The Company cannot provide any assurance that the assumptions used to estimate its liquidity requirements will remain accurate due to the unprecedented nature of the disruption to operations and the unpredictability of the COVID-19 global pandemic. As a consequence, estimates of the duration of the pandemic and the severity of the impact on future earnings and cash flows could change and have a material impact on our results of operations and financial condition. The ultimate duration and impact of the COVID-19 pandemic on the Company’s business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic, including repeat or cyclical outbreaks, and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. Furthermore, the extent to which the Company’s mitigation efforts are successful, if at all, is not presently ascertainable. However, the Company expects that its results of operations, including revenues, in future periods will continue to be adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions, which include a global recession. Operating Activities Six months ended September 30, 2020 compared to three months ended September 30, 2019 Net cash provided by operating activities decreased to $39.5 million in the six months ended September 30, 2020 from $46.4 million in the six months ended September 30, 2019, a decrease of $6.9 million. The decrease in cash flow from operating activities was primarily due to a decrease in net income of $6.1 million. Investing Activities Six months ended September 30, 2020 compared to three months ended September 30, 2019 Net cash flow used in investing activities decreased to $6.9 million in the six months ended September 30, 2020 from $17.5 million in the six months ended September 30, 2019, a decrease of $10.6 million. Capital purchases were $6.9 million for the six months ended September 30, 2020 and $17.5 million for the six months ended September 30, 2019. This decrease was due to the Company reducing its planned capital expenditures due to the COVID-19 pandemic. The Company expects to see its office space, and the associated capital expenditures, decrease over time due to more employees switching to working remotely. Financing Activities Six months ended September 30, 2020 compared to three months ended September 30, 2019 Net cash flow used in financing activities decreased to $9.7 million for the six months ended September 30, 2020 from $22.7 million for the six months ended September 30, 2019, a decrease of $13.0 million. The decrease in net cash used in financing activities was primarily due to a decrease in spending on share repurchases to $14.4 million for the six months ended September 30, 2020, when we temporarily suspended share repurchases under our stock repurchase program, from $28.3 million for the six months ended September 30, 2019. Contractual Obligations The following table summarizes the Company’s contractual obligations outstanding as of September 30, 2020: Payments Due by Period Within One Between One and Between Three and More than Total Year Three Years Five Years Five Years Operating and finance leases $ 122,680,000 $ 7,806,000 $ 29,334,000 $ 27,011,000 $ 58,529,000 Software licenses 3,125,000 1,230,000 1,895,000 — — Total $ 125,805,000 $ 9,036,000 $ 31,229,000 $ 27,011,000 $ 58,529,000 Operating leases are rents for the Company’s physical locations. Page 24 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, individually or in the aggregate, would be material to the 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. However, the Company generally does not believe these impacts are material to its revenues or net income. Off-Balance Sheet Arrangements The Company is not a party to off-balance sheet arrangements as defined by the rules of 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 material liabilities have been recorded for these obligations on the Company’s balance sheets for any of the periods presented. Critical Accounting Policies The SEC defines critical accounting policies as those that require application of management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The Company’s significant accounting policies which have the greatest potential impact on its financial statements are more fully described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of its Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed with the SEC on June 10, 2020. No changes in critical accounting policies have been made since the filing of that Annual Report on Form 10-K. Additional information related to adoption of accounting standards is provided in Note 1 to the accompanying unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America (“GAAP”), with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting an available alternative would not produce a materially different result. Actual results could differ from the estimates we use in applying our critical accounting policies. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. Recent Accounting Standards Update See Note 1 – Summary of Significant Accounting Policies to the accompanying unaudited financial statements contained elsewhere in this report for a description of recently issued and adopted accounting pronouncements.