The Company through its wholly-owned subsidiary Pharmacy Value Management Solutions, Inc. administers and operates a program known as SleepMaster Solutions™ (“SMS”) SMS is the largest provider of these services in the USA. We are in all 50 states and provide a turnkey solution that effectively keeps drivers on the road with no down time, compliant with DOT regulations, improves their health, and significantly decreases liability risk for the employer. We are vertically integrated, and we provide a “Program” of services that addresses all the needs of a corporate transportation system, union or other driver related organizations. We believe we are the only company capable of providing the full range of needed services in a timely manner.
Our services start with the identification of the target population and the potential risk the client currently has. We do this through a screening of every driver to identify if signs and symptoms of sleep apnea are present. We take this data and provide the employer with a list of those drivers that should be tested and the statistical likelihood of the percentage of those drivers who will test positive for Obstructive Sleep Apnea (OSA). Together with the employer/union, SMS provides a realistic time frame, actual total cost, and process for testing all drivers who need to be tested. For those drivers testing positive for OSA, we then provide the appropriate treatment such that the driver will meet the DOT requirements and remain on the road. We monitor 365 days per year driver’s usage of the treatment device according to DOT standards and we report that usage to all stakeholders as required/permitted. We have developed algorithms to determine if the driver is predicatively meeting the annual DOT requirements for usage. Using those predictive algorithms, we reach out to those drivers and provide case management, encouragement and solve problems such that the driver increases usage, if necessary, and remains compliant.
SMS constructed its model based upon the foregoing principles. The SMS Program includes all processes attended in sleep apnea screening, testing, treatment, monitoring and overall management of commercial drivers’ as well as their employers’ needs. We have successfully established relationships with national health care clinic providers, all with certified medical examiner (“CME”) status. These clinics total almost 1,000 throughout the U.S. We also have both formal and informal relationships with employers; municipalities; a significant veteran’s group; union and non-union driving organizations; suppliers of home sleep testing equipment and a variety of OSA treatment devices; and, a national network of telemedicine sleep specialists covering all 50 states. We have an internal medical team for governance and protocol purposes and a customer service department that interfaces directly with our drivers. We also have a marketing team that regularly interfaces with our existing accounts and markets our services to potential new accounts. Our services are performed utilizing a best medical practices model and an efficient, cost-effective delivery system. We obtain the required equipment on a per order basis from a durable medical equipment distributor.
In 2017, substantially all of our revenue was derived from our relationship with national health care clinic providers as the other potential sources of revenue are relatively recent. We expect all sources to produce revenue going forward.
We evaluate selling, general and administrative expenses at the Parent company level as well as at our PVMS subsidiary. Selling, general, and administrative expenses at the Parent company level include overhead, the cost of being a public entity and the remnants of our ASO business. Selling, general, and administrative expenses at PVMS are solely related to the OSA services segment. A breakdown of these expenses is as follows:
Professional Fees increased $138,801. Approximately $90,000 of the increase was due to increased accounting expenses, and $45,000 was due to increased legal fees. Legal fees increased due to increased litigation expenses. See Item 3 in Part I for more detail.
Insurance Expense in 2016 had a credit due to a reimbursement for overbilling in 2015. Due to the elimination of ASO operations, there was no insurance expense in 2017.
Travel expense was $431,482 higher due to the fact that the sales force is constantly traveling to trade shows and to visit existing and potential customers. The sales force and supporting forces were not fully intact during 2016.
Advertising increased $82,919 due to attendance at trade shows and magazine product placements in trade journals.
OSA-related revenue increased to $70,899 in 2016 from $50,470 in 2015. This product line was still in its beginning stages in both years.
Cost of revenues sold rose from $10,366 in 2015 to $47,017 in 2016. Gross margin percentage decreased from 79% in 2015 to 34% in 2016.
We evaluate selling, general and administrative expenses at the Parent company level as well as at our PVMS subsidiary. Selling, general and administrative expenses at the Parent company level include overhead, the cost of being a public entity and the remnants of our ASO business. selling, general and administrative expenses at PVMS are solely related to the OSA services segment. A breakdown of these expenses is as follows:
Executive compensation and payroll related expenses decreased $102,910. Accruals in 2015 were slightly higher due to payment of salary past due.
Travel expense decreased $186,718 due to the phasing out of the ASO product line. Most travel was done at the subsidiary level.
Rent Expense was higher due to an escalation clause at the Tampa facility.
Insurance Expense had been overcharged in 2015. A credit was received for the 2016 period.
Operations at PVMS as a separate subsidiary had not really begun until 2016.
Increases were due to issuances of new debt throughout 2015 and 2016 at our PVMS subsidiary.
Legal settlement was a gain of $339,900 in 2016 primarily due to a legal settlement. See Note 13 to the financial statements for explanations of this gain. There was no comparable gain in 2015.
During the years ended December 31, 2017, 2016 and 2015, we funded our operations from revenues and private borrowings. We will continue to fund our operations from these sources until we are able to produce operating revenue sufficient to cover our cost structure. In the event we are not able to secure such funding, our operations will be adversely affected.
Revenue recognition. Revenue under our contractual agreements to provide pharmacy management services to subscribing members is earned regardless of services actually provided and, therefore, recognized monthly based on the number of qualified members. The information regarding qualified members is supplied by our clients subject to our periodic review of their member eligibility records and other reported information to verify its accuracy and determine the amount of revenue to be recognized.
Income taxes. Computing our provision for income taxes involves significant judgement and estimates particularly in relation to the determination of a valuation allowance for deferred tax assets (primarily from net operating loss carry forwards). See Note 15 to the consolidated financial statements.
ASU 2016-08 - Clarifies the implementation guidance of principal versus agent considerations.
ASU 2016-10 - Clarifies the identifying of a performance obligation and the licensing implementation guidance.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which significantly changes the accounting for a lessee. Under previous guidance, lessees did not have to record a lease it designated as operating on its balance sheet. Under the new guidance, a lessee must record a liability for lease payments (referred to as the lease liability) and an asset for the right to use the leased asset during the lease term (referred to as the right of use asset) for all leases, regardless of whether they are designated as finance or operating leases. If a lessee has a lease with a term of 12 months of less, it may make an accounting policy election (by leased asset class) not to recognize lease assets or lease liabilities. This election generally requires the lessee to recognize lease expense on a straight-line basis over the lease term. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 for public entities, not-for-profit entities that have issued (including conduit bond obligors) securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and employee benefit plans that file financial statements with the United States Securities and Exchange Commission (SEC). All other entities must apply the ASU to annual periods beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Any entity may early adopt the ASU. Management has determined that when this guidance is adopted the impact will be properly reflected in the financial statements and notes thereto. Management has determined that the adoption of this guidance will not have any impact on the financial statements and notes thereto.