UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

or

Commission File Number 000-50009

(949) 721-8272

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for any shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large“large accelerated filer,,” “accelerated“accelerated filer,,” “smaller“smaller reporting company”company” and “emerging“emerging growth company”company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒

As of May 13,November 11, 2022, the registrant had 12,800,000 shares of common stock, par value $0.001, issued and outstanding.

PACIFIC HEALTH CARE ORGANIZATION, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Information

Pacific Health Care Organization, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the ThreeNine Months Ended March 31,September 30, 2022

(Unaudited)

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”) and in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain information and footnote disclosures normally included in consolidated financial statements have been condensed or omitted in accordance with GAAP rules and regulations. The information furnished in these interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect both the recorded values of assets and liabilities at the date of the condensed consolidated financial statements and the revenues recognized and expenses incurred during the reporting period. These estimates and assumptions affect the Company’s recognition of deferred expenses, bad debts, income taxes, the carrying value of its long-lived assets and its provision for certain contingencies. The reasonableness of these estimates and assumptions is evaluated continually based on a combination of historical and other information that comes to the Company’s attention that may vary its outlook for the future. While management believes the disclosures and information presented are adequate to make the information not misleading, the Company recommends these interim condensed consolidated financial statements be read in conjunction with its audited financial statements and notes thereto included in its annual report on Form 10-K for the year ended December 31, 2021. Operating results for the quarternine months ended March 31,September 30, 2022, are not necessarily indicative of the results to be expected for the year ending December 31, 2022.

Principles of Consolidation — The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Basis of Accounting — The Company uses the accrual method of accounting in accordance with accounting principles generally accepted in the United States for the periods ended March 31,September 30, 2022 and 2021.

Revenue Recognition — The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers.” The core principle underlying ASC 606 is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer.

The core principle underlying ASC 606 is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer.

ASC 606 requires the use of a five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenues are generated as services are provided to the customer based on the sales price agreed and collected. The Company recognizes revenue as the time is worked or as units of production are completed, which is when the revenue is earned and realized. Labor costs are recognized as the costs are incurred.

The Company derives its revenue from the sale of services offered through its HCOs, MPNs, utilization review, medical bill review, medical case management services, lien defense, carve-outs, Medicare set-aside. These services are billed individually as separate components to our customers. These fees include monthly and/or annual HCO and/or MPN administration fees, claim and network access fees, medical bill review fees, legal support fees, Medicare set-aside fees, lien service fees, workers’ compensation carve-outs, utilization review fees, medical case management flat rate fees or hourly fees depending on the agreement with the customer.

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the ThreeNine Months Ended March 31,September 30, 2022

(Unaudited)

The Company enters into arrangements for bundled managed care, standalone services, or add-on ancillary services which includes various units of accounting such as network solutions and patient management, including managed care. Such elements are considered separate units of accounting due to each element having value to the customer on a stand-alone basis and are billed separately. The selling price for each unit of accounting is determined using the contract price. When the Company’s customers purchase several products the pricing of the products sold is generally the same as if the products were sold on an individual basis. Revenue is recognized as the work is performed in accordance with the Company’s customer contracts. Based upon the nature of the Company’s products, bundled managed care elements are generally delivered in the same accounting period. The Company recognizes revenue for patient management services ratably over the life of the customer contract. Based upon prior experience in managed care, the Company estimates the deferral amount from when the customer’s claim is received to when the customer contract expires. Advance payments from subscribers and billings made in advance are recorded on the balance sheet as deferred revenue.

Accounts Receivables and Bad Debt Allowance – In the normal course of business the Company extends credit to its customers on a short-term basis. Although the credit risk associated with these customers is minimal, the Company routinely reviews its accounts receivable balances and makes provisions for doubtful accounts. The Company ages its receivables by dates of invoices. Management reviews bad debt reserves quarterly and reserves specific accounts as warranted or sets up a general reserve based on amounts over 90 days past due. When an account is deemed uncollectible, the Company charges off the receivable against the bad debt reserve. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances, including any billing disputes. To assess the collectability of these receivables, the Company performs ongoing credit evaluations of its customers’ financial condition. Through these evaluations, the Company may become aware of situations where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit rating or bankruptcy. The allowance for doubtful accounts is based on the best information available to the Company and is reevaluated and adjusted as additional information is received. The Company evaluates the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts, and the overall national economy. At March 31,September 30, 2022 and December 31, 2021, bad debt reserves of $13,217$7,696 and $23,083, respectively, were maintained in a general reserve for certain balances over 90 days past due and for accounts that are potentially uncollectible.

The percentages of the amounts due from major customers to total accounts receivable as of March 31,September 30, 2022 and December 31, 2021, are as follows:

Significant Customers - The Company provides services to insurers, third party administrators, self-administered employers, municipalities, and other industries. The Company is able to provide its full range of services to virtually any size employer in the state of California. Outside the state of California, the Company is able to provide utilization review, medical bill review and medical case management services.

During the periodsperiod ended March 31,September 30, 2022 and 2021, the Company had 2two customers, respectively, that individually accounted for more than 10% of its total sales. The following table sets forth details regarding the percentages of total sales attributable to the Company’s significant customers in the past two years:

Leases - The Company follows the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company elected to exclude from its balance sheets recognition of leases having a term of 12 months or less (“short-term leases”). Lease expense is recognized on a straight-line basis over the lease term. See Note 2 for further information regarding the Company’s leases.

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2022

(Unaudited)

NOTE 2 - OPERATING LEASES

In July 2015, the Company entered a 79-month lease for approximately 9,439 square feet of office space, which lease commenced in September 2015. This2015 and ended in April 2022. That office space served as the Company’s principal executive offices, as well as the principal offices of its operating subsidiaries until April 2022.subsidiaries.

The Company entered a new 12-month office lease that commenced on April 1, 2022 with a monthly rent of $3,301. The lease provides 320 square feet of office space that includes shared space for other business needs and expires March 31, 2023. This office space now serves as the principal executive offices of the Company, as well as the principal offices of the Company’s operating subsidiaries. The Company has reduced its office space as the majority of its workforce will continue working remotely. The new office space will be for the executive team and shared office space for key employees to use as needed.

Operating lease right-of-use (“ROU”) assetsLease expenses were $9,903 and liabilities are recognized at commencement date based on$80,246 during the present value of lease payments over the lease term. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in such arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.

The components of lease expense and supplemental cash flow information related to leases for the periods are as follows:

The prior lease at 1201 Dove Street, in Newport Beach, CAthree months ended AprilSeptember 30, 2022 withand 2021, respectively, and $19,806 and $204,651 during the last month of free rent which resulted in no operating lease liabilities at March 31, 2022.nine months ended September 30, 2022 and 2021, respectively.

The supplemental balance sheet information related to leases for the period is as follows:

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the ThreeNine Months Ended March 31,September 30, 2022

(Unaudited)

Lease expensesNOTE 3 - PAYCHECK PROTECTION PROGRAM LOANS

In February 2021 the principal and interest on the Paycheck Protection Program (“PPP”) loans in the aggregate amount of $460,700 (the “first draw PPP loans”) issued to PHCO, MMC and MMM in April and May 2020 were $75,584forgiven in full.

Economic Aid Act

In December 2021 the principal and $72,946 duringinterest on section 311 of the three months ended March 31, 2022 andEconomic Aid Act Paycheck Protection Program Second Draw Loans in the amount of $218,900 (the “second draw PPP loan”) issued to MMM in April 2021 respectively.were forgiven in full.

NOTE 34 - SUBSEQUENT EVENTS

In accordance with ASC 855-10 Company management reviewed all material events through the date of issuance and except as disclosed below, there are no material subsequent events to report.

The Company entered into a new 12-month office lease commencing on April 1, 2022 with a monthly rent of $3,301. The lease for our prior office space expired on April 30, 2022.

Item 2. Management’s Discussion and Analysis of Financial Statements and Results of Operations

Throughout this quarterly report, unless the context indicates otherwise, the terms, “we,” “us,” “our” or the “Company” refer to Pacific Health Care Organization, Inc., (“PHCO”) and our wholly-owned subsidiaries Medex Healthcare, Inc. (“Medex”), Medex Managed Care, Inc. (“MMC”) and Medex Medical Management, Inc. (“MMM”), and, where applicable, our former subsidiaries Industrial Resolutions Coalition (“IRC”), Medex Legal Support, Inc. (“MLS”) and Pacific Medical Holding Company, Inc. (“PMHC”).

All statements other than statements of historical fact included herein and in the documents incorporated by reference in this quarterly report on Form 10-Q (“quarterly(this “quarterly report”), if any, including without limitation, statements regarding our future financial position or results of operations, business strategy, potential acquisitions, budgets, projected costs, and plans and objectives of management for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.. I1995. In some cases, forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “foresee,” “future,” “intend,” “likely,” “may,” “might,” “objective,” “plan,” “potential,” “predict,” “project,” “should,” “strategy,” “will,” “would,” and other similar expressions and their negatives.

Forward-looking statements are not guarantees of future performance and involve known and unknown risks and uncertainties, many of which may be beyond our control. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, and actual results could differ materially as a result of various factors. The following include some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events:

For more detailed information about particular risk factors related to us and our business, see Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “Commission”) on April 14, 2022 (the “Annual Report”“annual report”).

Moreover, weWe operate in a competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

You should not place undue reliance on forward-looking statements. The forward-looking statements are based on the beliefs of management as well as assumptions made by and information currently available to management and apply only as of the date of this report or the respective dates of the documents from which they incorporateit incorporates by reference. Neither we nor any other person assumes any responsibility for the accuracy or completeness of forward-looking statements. Further, except to the extent required by law, we undertake no obligations to update or revise any forward-looking statements, whether as a result of new information, future events, or a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, made by us or on our behalf, are also expressly qualified by these cautionary statements.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes contained elsewhere in this quarterly report and in our other filings with the Commission.

Throughout this quarterly report, unless the context indicates otherwise, the terms, “we,” “us,” “our” or “the Company” refer to Pacific Health Care Organization, Inc., (“PHCO”) and our wholly-owned subsidiaries Medex Healthcare, Inc. (“Medex”), Medex Managed Care, Inc. (“MMC”) and Medex Medical Management, Inc. (“MMM”), and, where applicable, former subsidiaries Industrial Resolutions Coalition (“IRC”) Medex Legal Support, Inc. (“MLS”) and Pacific Medical Holding Company, Inc. (“PMHC”).

Overview

We incorporated under the laws of the state of Utah in April 1970, under the name Clear Air, Inc. We changed our name to Pacific Health Care Organization, Inc., in January 2001. In February 2001, we acquired Medex, a California corporation organized in March 1994, in a share for share exchange. Medex is in the business of managing and administering both Health Care Organizations (“HCOs”) and Medical Provider Networks (“MPNs”) in the state of California. In August 2001 we formed IRC, a California corporation, as a wholly owned subsidiary of PHCO. Prior to closing IRC, IRC oversaw and managed our Workers’ Compensation carve-outs services. In June 2010, we acquired MLS, a Nevada corporation incorporated in September 2009. Prior to closing MLS, MLS offered lien representation services and Medicare Set-asideset-aside services (“MSA”). In February 2012, we incorporated MMM, a Nevada corporation, as a wholly owned subsidiary of the Company. MMM is responsible for overseeing and managing medical case management services. In March 2011, we incorporated MMC, a Nevada corporation, as a wholly owned subsidiary of the Company. MMC oversees and manages the Company’s utilization review and bill review services. In October 2018, we incorporated PMHC, a Nevada corporation, as a wholly owned subsidiary of the Company to act as a holding company for future potential acquisitions.

In October 2021, to simplify business procedures, bookkeeping and administrative structure; and eliminate duplicative functions and reduce costs; we terminated the existence of IRC, MLS and PMHC and wound up those subsidiaries. The business, assets, liabilities, and services of those entities have beenwere transferred to PHCO or its other subsidiaries. Medex now offeroffers our Workers’ Compensation carve-out services previously provided by IRC and Medicare-set asides previously managed by MLS andMLS. MMC oversees the lien representation services previously offered by MLS.

Business of the Company

We offer an integrated and layered array of complimentary business solutions that enable our customers to better manage their employee Workers’ Compensation-related healthcare administration costs. We are constantly looking for ways to expand the suite of services we can provide our customers, either through strategic acquisitions or organic development.

Our business objective is to deliver value to our customers that reducesby reducing their Workers’ Compensation-related medical claims expense in a manner that will assure injured employees receive high quality healthcare that allows them to recover from injury and return to gainful employment without undue delay. According to studies conducted by auditing bodies on behalf of the California Division of Workers’ Compensation, (“DWC”) the two most significant cost drivers for Workers’ Compensation are claims frequency and medical treatment costs. Our services focus on containing medical treatment costs.

We offer our customers access to our health care organizations (“HCOs”)HCOs and our medical provider networks (“MPNs”).MPNs. We also provide medical case management, field medical case management, network access, utilization review, medical bill review, Workers’ Compensation carve-outs and Medicare set-aside services. Additionally, we offer lien representation and expert witness testimony, ancillary to our services. We provide our services as a bundled solution, as standalone services, or as add-on services.

Our core services focus on reducing medical treatment costs by enabling our customers to share control over the medical treatment process. This control is primarily obtained by participation in one of our medical treatment networks. We hold several government-issued licenses to operate medical treatment networks. Through Medex we hold two of a total of seven licenses issued by the state of California to establish and manage HCOs within the state of California. We also hold approvals issued by the state of California to act as an MPN and currently administer 26 MPNs. Our HCO and MPN programs provide our customers with provider networks within which our customers have some ability to direct the administration of employee claims. This is designed to decrease the incidence of fraudulent claims and disability awards and ensure injured employees receive the necessary back-to-work rehabilitation and training they need. Our medical bill and utilization review services provide oversight of medical billing and treatment requests, along with medical case management, which keeps medical treatment claims progressing to a resolution and assures treatment plans are aligned from a medical perspective.

Our customers include self-administered employers, insurers, third party administrators, municipalities, and others. Our principal customers are companies with operations located in the state of California where the cost of Workers’ Compensation insurance is a critical problem for employers, though we are able to process medical bills nationally. Our provider networks, which are located only in California, are composed of providers experienced in treating worker injuries.

Our business generally has a long sales cycle, typically eight months or more. Once we have established a customer relationship and enrolled employees of our employer customers, we anticipate our revenue to adjust with the growth or retraction of our customers’ employee headcount. Throughout the year, we expect new employees and employer customers to be added while others terminate for a variety of reasons.

Impact of COVID-19 on our Business

We have been able to adapt our business operations to a primarily remote workforce, with no material interruptions in service, data breaches, technology failures, or inability to complete mission-critical functions. We have been able to effectively maintain contact with employees, partners, customers, and other related parties using technological solutions such as virtual meetings and enhanced collaboration programs and have developed policies and protocols to ensure department and employee performance quality is maintained despite the change in work setting. This has resulted in a shift from in-person office related costs to costs associated with maintaining a remote workforce, including reimbursing employees for internet, phone, and office supply expenses; additional computer hardware costs; and some administrative burdens in complying with California laws and regulations related to COVID-19. With fewer employees coming to the office, we have fewer costs related to sanitizing, cleaning, and providing PPE supplies to the office to prevent potential COVID-19 exposure.

Revenue for our services is derived from our customers’ employee headcount and workers’ workplace injuries. During the periods covered by this report, several of our customers, including some of our largest customers, had to suspend or significantly modify their operations during much or all of the pandemic. Since California lifted its COVID-19 restrictions, some of our customers continue to experience lower than normal business volume and employee counts due to the pandemic. Until the impacts of COVID-19 on our customers’ businesses lessen, employees return to more normal workloads and the occurrence of workplace injuries returns to more traditional levels, we anticipate our revenues will continue to be negatively affected.

California has passed legislation to address employer liability in Workers’ Compensation for COVID-19 cases. The law creates two rebuttable presumptions that COVID-19 illnesses contracted by specific categories of employees are work related and therefore eligible for workers’ compensation. The first presumption applies to COVID-19 workers’ compensation claims filed by peace officers, firefighters, first responders, and health care workers, and does not apply to our employees, though it may apply to our customers’ claims. The second presumption, for employers with five or more employees, applies to employees who test positive for COVID-19 during an outbreak at the employee’s specific place of employment. An outbreak occurs when a set number of employees – depending on the number of employees at the workplace – test positive for COVID-19 during a continuous 14-day period. This presumption applies to the Company. However, no Workers’ Compensation cases related to COVID-19 and/or via this California law have been filed against the Company to date.

In April 2020, the Department of Labor issued regulations to implement the Families First Coronavirus Response Act (“FFCRA”) which provided employees paid leave for COVID-19 related illness for themselves and/or a family member and provided employers with tax credits. The FFRCA expired on December 31, 2020. In March 2021, the American Rescue Plan Act (“ARPA”) was signed into law. The ARPA made tax credits available to employers with fewer than 500 employees who voluntarily chose to grant employees paid leave under the FFCRA through September 30, 2021 and updated certain FFCRA leave provisions. We voluntarily chose to extend the FFCRA paid leave to our employees through its expiration on September 30, 2021, and take the tax credits. Since its expiration, we have ceased to offer COVID-19-specific paid leave benefits to our employees. Family, medical, and other types of leave remain available to employees under existing company policy.

In March 2021, California passed its own COVID-19 Supplemental Paid Sick Leave law (“CA SPSL”). It provided employees paid leave for COVID-19 related reasons such as caring for themselves, family members, or for vaccine related appointments or illnesses caused by COVID-19 or the vaccine from January 1, 2021 through September 30, 2021. The CA SPSL allowed employees to retroactively request reimbursement for qualifying leave or to use it towards future requests through September 30, 2021. Employers whose employees utilized CA SPSL are eligible for federal tax credits to offset the costs of providing the CA SPSL. On September 30, 2021, the CA SPSL paid leave expired.

In June 2021, the GovernorImpact of California terminated the executive order that put into place the Stay Home Order and Blueprint for a Safer Economy. This removed restrictionsCOVID-19 on physical distancing, capacity limits on businesses, and the county tiers system. We have elected to allow employees to continue working remotely and made arrangements to reduce our office space to an executive and shared office for other employees to come in periodically in 2022.Business

In February 2022, California passed another COVID-19 Supplemental Paid Sick Leave law (“CSPSL”). It provides employees paid leave for COVID-19 related reasons such as caring for themselves, family members, or for vaccine related appointments or illnesses caused by COVID-19 or the vaccine from January 1, 2022 through September 30, 2022. The CSPSL allows employees to retroactively request reimbursement for qualifying leave or to use it towards future requests through September 30, 2022. Unlike the CA SPSL from 2021, employersEmployers whose employees utilize CSPSL are ineligible for federal tax credits to offset the costs of providing the CSPSL. On September 29, 2022, California passed a bill that extended the CSPSL leave through December 31, 2022 and provides a supplemental paid sick leave relief grant program for employers to be reimbursed for the CSPSL.

We will continue to offer COVID-19-specific paid leave benefits to our employees until the expiration of CSPSL. Family, medical, and other types of leave remain available to employees under existing Company policy. As of AprilSeptember 30, 2022, we have incurred negligible payroll, benefits, administrative, and liability costs related to CSPSL. However, we could incur some significant costs if a secondadditional booster shot isshots are recommended or required later in 2022, or if another spike in COVID-19 results in increased usage of the CSPSL benefit by employees.

Unlike muchKey trends affecting results of the U.S. economy, we have maintained relatively steady employee recruitment and retention. Our maintenance of a successful remote environment, including high employee morale and cohesive culture via technology, has also allowed us to seek candidates in a wider range of locations, some of which have lower costs of living and lower wage norms, as well as increasing the quantity of qualified applicants. While we cannot predict or control future trends in labor in our industry, we believe that our solid recruitment practices and the opportunities presented by remote work options will help us adapt to a changing workforce environment.operations

In responseAs noted throughout this quarterly report, during the three and nine months ended September 30, 2022 and 2021, COVID-19 has impacted the businesses of our customers, our business and our results of operations. Most of our customers, and their employees are located in California. During the three and nine months ended September 30, 2021, California had in place COVID-19 restrictions on businesses which resulted in many of our customers reducing their workforces and caused a decrease in the number of new workers’ compensation claims, as a result of fewer workers in the labor force. Allowable medical treatment for workers’ compensation claims were also limited to help ease the burden of COVID-19 on medical facilities. During the three and nine months ended September 30, 2022, California businesses were able to operate without these COVID-19 restrictions and restrictions on allowable medical treatments for workers’ compensation claims were lifted. As identified in more detail in our discussion of result of operations below, during the three and nine months ended September 30, 2022, the lifting of these restrictions has generally led to increased demand from existing customers for our services, as their employees returned to the workforce and correlated workplace injuries increased, along with medical facilities and providers having the capacity to begin treating the backlog of workplace injuries that occurred when allowable treatment restrictions due to COVID-19 were in place. We anticipate the foregoing trends will continue at decreasing rates over future periods as the remaining workforces that return to in-person work levels off and transitioningthe backlog of untreated workers’ compensation cases normalizes. These trends have also contributed to a remote workforce, we have taken measuresincreased claims-related expenses for services provided to ensure data security, but there is no guarantee that these measures will be completely effective, thatus by third parties, as certain such expenses increase in correlation with the demand for our productivity will not be adversely impacted, or that we will not encounter some of the common risks associated with a remote workforce, including employees accessing company data and systems remotely. As discussed in greater detail in Item 1A Risk Factors of this annual report, our business has been and could continue to be materially and adversely affected by the potential interruptions to our business operations resulting from changes to our business model in response to COVID-19.services.

SummaryCalifornia has in place legislation to address employer liability in Workers’ Compensation for COVID-19 cases. The law presumes that COVID-19 illnesses contracted by employees are work related and therefore eligible for workers’ compensation coverage, subject to certain rebuttable presumptions. Our customers experienced an increase in COVID-19 related workers’ compensation claims throughout 2021 and during the first quarter of 2022 but saw declines in COVID-19 related claims in the Quartersecond and third quarters of 2022. For the nine months ended MarchSeptember 30, 2022, approximately 8% of all claims we processed have been COVID-19 related, with 53% of those claims occurring in the first quarter of 2022. During the twelve months ended December 31, 20222021, approximately 5% of all claims processed were COVID-19 related.

DuringRevenue generated from COVID-19 workers’ compensation claims may become seasonal and as the quarter ended March 31, 2022, totalfrequency of contracting COVID-19 increases and the severity of cases decreases, it is possible that in the future COVID-19 will no longer be classified as a workers’ compensation illness in California. A portion of our revenue is generated from fees from our customers when a workers’ compensation claim is opened. If the change of classification for COVID-19 related claims no longer requires employers to report it as a workers’ compensation injury, there would be a decrease in our COVID-19 related revenues, increased 8% comparedbut we would anticipate this decrease would be offset by an increase in other workers’ compensation injuries as more employees return to the quarter ended March 31, 2021. Revenue from HCO, MPN, utilization review and medical bill review increased 24%, 13%, 34%, 25%, respectively; revenue from medical case management and other fees decreased 14% and 56%, respectively, as compared to the quarter ended March 31, 2021.labor pool.

DuringSome of our customers’ industries have been impacted by the quarter ended March 31, 2022, operating expenses decreased by 3%, primarily as a resultrecent national trend of decreasesworkforce resignations and difficulties in depreciation, consulting fees, salarieshiring. If our customers cannot attract new workers, it is possible that some jobs will be replaced with technology. If technology replaces workers, and/or workplace injuries continue at lower rates because there are more employees working from home and wages, insurance, data maintenance and general and administration expenses compared tofewer employees suffering injuries in the quarter ended March 31, 2021. These decreases were partially offset byworkplace, the increases in bad debt provision, professional fees and outsource service fees. As a result, our income from operations during the quarter ended March 31, 2022 was $262,109 comparedrevenues we are beginning to $120,593 during the quarter ended March 31, 2021.see could flatten or decline.

Our provisionrevenues for income tax expense decreased 1% duringmedical case management were also impacted because there was a smaller labor pool which resulted in fewer new workers’ compensation claims. We believe this trend will be temporary, as the first fiscal quarter 2022,economy recovers from $74,008 in 2021the effects of COVID-19, but if the trend to $73,574 in 2022 due to a reduction in income from operations.

Our net income also decreased 63% from $507,285 in 2021 to $188,535 in 2022 primarilysmaller labor pools continues, or if an economic recovery is slowed as a result of the Paycheck Protection Program loan,higher inflation or economic recession, medical case management reviews and resulting revenues could continue to remain lower in the amount of $460,700, being forgiven in the quarter ending March 31, 2021.  Basic and fully diluted earnings per share during fiscal 2022 was $0.01 and $0.01, respectively compared to $0.04 and $0.04, respectively during fiscal 2021.future.

Revenue

We derive revenue primarily from fees charged for access to our provider networks, enrollment of customers’ employees into the HCO or MPN program, utilization reviews, medical bill reviews, and medical case management services.

HCO

HCO revenue is generated largely from fees charged to our employer customers for claim network fees to access our HCO networks, employee enrollment into our HCO program, program administration, custom network fees, annual and new hire notifications and fees for other ancillary services they may select. HCO notifications are mailed out annually and handed out by the employer for all new hires.

MPN

Like HCO revenue, MPN revenue is generated largely from fees charged to our employer customers for claim network fees to access our MPN networks, custom network fees, employee enrollment into our MPN program, program administration, and fees for other services our MPN customers may select. Unlike the HCO, MPNs do not require annual and new hire notifications, MPNs are only required to provide a notice to an injured worker at the time the employer is notified by the injured worker that an injury occurred.

Utilization review

Utilization review is the review of medical treatment requests by providers to provide a safeguard for employers and injured workers against unnecessary and inappropriate medical treatment from the perspective of medical necessity, quality of care, appropriateness of decision-making, and timeliness of treatment. Its purpose is to reduce employer liability for medical costs that are not medically appropriate or approved by the relevant medical and legal authorities and the payor.

Medical bill review

California and many other states have established fee schedules for the maximum allowable fees payable under workers’ compensation for a variety of procedures performed by medical providers. Many procedures, however, are not covered under the fee schedules, such as hospital bills, which still require review and negotiation. Medical bill review involves analyzing medical provider services and equipment billing to ascertain proper reimbursement. Such services include, but are not limited to, coding review and re-bundling, confirming that the services are customary and reasonable, fee schedule compliance, out-of-network bill review, pharmacy review, and preferred provider organization repricing arrangements. Our medical bill review services can result in significant savings for our customers.

Medical case management

Medical case management keeps medical treatment claims progressing to a resolution and assures treatment plans are aligned from a medical perspective. Medical oversight is a collaborative process that assesses, evaluates, coordinates, implements and monitors medical treatment plans and the options and services required to meet an injured worker’s health needs. A medical case manager acts as a liaison between the injured worker, claims adjuster, medical providers, and attorneys to achieve optimal results for injured workers and our employer customers. We work to manage the number of nurses in our program to maintain our ratio of claims per nurse at a level that ensures timely and appropriate medical care is given to the injured worker and facilitates faster claims closures for our customers.

Other

Other revenue consists of revenue derived from network access fees charged to non-HCO, non-MPN customers to access our network of medical providers, network access for preferred provider organizations, lien representation, legal support services, Medicare set-aside and Workers’ Compensation carve-out services.

The following table sets forth, for the quartersthree and nine months ended March 31,September 30, 2022 and 2021, the percentage each revenue item identified in our unaudited condensed consolidated financial statements contributed to total revenue during the respective period.

Expense

Consulting fees

Consulting fees include fees we pay to third parties for IT, marketing, and in-house legal advice for the various services we offer.

Salaries and wages

Salaries and wages reflect employment-related compensation we pay to our employees, payroll processing, payroll taxes and commissions.

Professional fees

Professional fees include fees we pay to third parties to provide medical consulting, medical case management, and board of director’s fees for board meetings, as well as, legal and accounting fees.

Insurance

Insurance expense is comprised primarily of health insurance benefits offered to our employees, directors’ and officers’ liability insurance, Workers’ Compensation coverage and business liability coverage.

Outsource service fees

Outsource service fees consist of costs incurred by our subsidiaries in partially outsourcing utilization review, medical bill review, administrative services for medical case management and Medicare set-aside services and typically tend to increase and decrease in correlation with thecustomer demand for those services.

Data maintenance fees

Data maintenance fees includes fees we pay to a third party to process HCO and MPN employee enrollment.enrollment and HCO/MPN notifications. These fees fluctuate throughout the year because of the varied timing of customer enrollment into theour HCO or MPN programprograms and the number of employees our customers have in their workforce.

General and administrative

General and administrative expenses consist primarily of office rent, advertising, dues and subscriptions, equipment/repairs, IT enhancement, licenses and permits, telephone, office supplies, parking, postage, printing and reproduction, rent expense for equipment, miscellaneous expenses, shareholders’ expense, charity – cash contribution, auto expenses, bank charges, education, travel and entertainment, and vacation expense.

The following table sets forth, for the quartersthree and nine-months ended March 31,September 30, 2022 and 2021, the percentage each expense item identified in our unaudited consolidated financial statements contributed to total expense during the respective period.

Results of Operations

Comparison of the three months ended March 31,September 30, 2022 and 2021

The following represents selected components of our consolidated results of operations for the three-month periods ended March 31,September 30, 2022 and 2021, respectively, together with changes from period-to-period:

Key trends affecting results of operations

As noted throughout this quarterly report, during the three months ended March 31, 2022 and 2021, COVID-19 has impacted the businesses of our customers, our business and our results of operations. Most of our clients, and their employees are located in California. During the three months ended March 31, 2021, California had in place COVID-19 restrictions on businesses which resulted in many of our customers reducing their workforces and caused a decrease in the number of new workers’ compensation claims, as a result of fewer workers in the labor force. Allowable medical treatment for workers’ compensation claims were also limited to help ease the burden of COVID-19 on medical facilities. During the three months ended March 31, 2022, the last of the COVID-19-related restrictions have been lifted in California. While revenues for HCO and MPN enrollment are steadily increasing as employers begin hiring, some of our customers’ industries have been impacted by the recent national trend of workforce resignations and difficulties in hiring. If our customers cannot attract new workers, it is possible that some jobs will be replaced with technology. If technology replaces workers, and/or workplace injuries continue at lower rates because there are more employees working from home and fewer employees suffering injuries in the workplace, the increases in revenues we are beginning to see could flatten or decline.

Our revenues for medical case management were also impacted because there was a smaller labor pool which resulted in fewer new workers’ compensation claims. We believe this trend will be temporary, as the economy recovers from the effects of COVID-19, but if the trend to smaller labor pools continues, medical case management reviews could continue to remain lower in the future.

Revenue

HCO

During the three-month periodsperiod ended March 31,September 30, 2022, HCO revenue increased 24%23%, compared to the same period in the prior year. The increase in HCO revenue was attributable to a renegotiation of certain deliverables to an increased number of claims, which resulted inexisting customer and an increase in HCOclaims activity from existing customers which generated fees for notifications and claim network fees, as well as an increase in new employees enrolled in the HCO,fees. These increases were partially offset by the loss of two customers in 2021.the fourth quarter of 2021, which decreased revenues from HCO enrollment. Part of the revenue generated in HCO fees is for the opening of workers’ compensation claims. During the three-month period ended September 30, 2022, 4% of HCO claims were COVID-19 related, compared to 5% in the same period in the prior year. If California legislation declassifies COVID-19 as a workers’ compensation claim, we expect HCO revenues to decrease.

MPN

DuringMPN revenue for the three-month periodsperiod ended March 31,September 30, 2022, MPN revenue increased 13%decreased by 7%, compared to the same period in the prior year. The increasedecrease in MPN revenue was attributabledue to an increasea decrease in the number of claims reported due to the loss of a customer in the fourth quarter of 2021 that resulted in lower claims activity. Part of the revenue generated in MPN fees is for the opening of workers’ compensation claims. The decrease in MPN revenue was partially offset by increases in claims activity by existing customers that leddue to an increasehigher COVID-19 related claims. During the three-month period ended September 30, 2022, 30% of MPN claims were COVID-19 related, compared to 28% in the same period in the prior year. If California legislation declassifies COVID-19 as a workers’ compensation claim, network fees.we expect MPN revenues to decrease.

Utilization review

During the three-month periodsperiod ended March 31,September 30, 2022, utilization review revenue increased 34%72%, compared to the same period in the prior year. Theyear due to an increase in utilization review revenue was due toreviews from existing customers and the addition of a new clientcustomer in the fourth quarter of 2021 and2021. These increases in utilization reviews referrals for existing customers,were partially offset by decreases due to the loss of a customer in the third quarter of 2021.

Medical bill review

During the three-month periodsperiod ended March 31,September 30, 2022, medical bill review revenue increaseddecreased by 25%16%, compared to the same period in the prior year. The increasedecrease was mainly due to processing more medical andfewer hospital bills from existing customers partially offset byand the losspercentage of saving we earned on hospital bills processed was lower. Medical bill reviews are billed at a customer in 2021.flat rate, while hospital bills are billed at a percentage of savings and fluctuate during the year.

Medical case management

During the three-month periodsperiod ended March 31,September 30, 2022, revenue from medical case management revenue decreased 14%12%, compared to the same period in the prior year. The decrease in medical case management revenue was primarily due to customers electing not to apply medical case management to all of their COVID related claims in the 2022 period as they had done in the 2021 period and a decrease in the number of new referred claims managed with existing customers as a result of fewer workplace injuries during 2020 and 2021 due to COVID related workforce restrictions.

Other

Other revenue for the three-month period ended September 30, 2022, decreased 36%, compared to the same period in the prior year. The decrease in other revenue was the result of fewer Medicare set-aside claims and the discontinuation of our network referral access for non-HCO, non-MPN customers after the loss of our last customer who utilized the service in the fourth quarter of 2021. We do not anticipate future revenues from network referral fees generated from referrals to non-HCO, non-MPN customers, as we no longer offer this service. The decrease was partially offset by increases in fees for network access for preferred provider organizations, we expect other revenue to be lower in future periods.

Expenses

Total expenses for the three month period ended September 30, 2022, decreased 1%, compared to the same period in the prior year. The decrease was dueattributable to fewer new claims from existing customers.decreases in depreciation, bad debt provision, consulting fees, insurance, data maintenance, and general and administrative partially offset by increases in salaries and wages and outsource service fees.

Other

Other fees consist of revenue from network access fees derived from out of network referrals to our network of physicians, claims fees, expert witness testimony, lien representation, legal support services, Medicare set-aside, and workers’ compensation carve-out services. Other fee revenue for the three-month period ended March 31, 2022, decreased 56% when compared to the same period a year earlier. The decrease was the result of fewer Medicare set-aside claims and the loss of a customer which reduced our claims fees for accessing our network. The claims fees generated by this type of service is no longer offered in the current marketplace. Since losing the customer, we have chosen to discontinue this service in 2021.

Expenses

DepreciationInsurance

During the three monththree-month period ended March 31,September 30, 2022, depreciationinsurance expenses decreased 67%8%, compared to the three monthsame period ended March 31, 2021.in the prior year. The decrease in insurance expenses was primarily due attributableattributed to certain furniture, fixtures, and computer equipment being fully depreciated.decreases in medical insurance premiums as a result of us having fewer employees in 2022, compared to 2021.

Bad debtOutsource service fees

During the three monththree-month period ended March 31,September 30, 2022, bad debt provisionsfees for outsourced services increased by $4,783,43%, compared to the three monthsame period in the prior year. The increase was due to an increased demand for our services primarily from existing clients for utilization review, a service which we partially outsource.

General and administrative

During the three-month period ended March 31, 2021. At March 31,September 30, 2022, general and administrative expenses decreased 34%, compared to the same period in the prior year. The decrease was primarily attributable to decreases in rent – office, auto expense, bank charges, charity – cash contributions, licenses and permits, travel, office supplies, postage, telephone, and vacation expenses. The largest decrease was in rent – office as we moved into a smaller office. The other various expenses that are part of maintaining a larger office such as postage, telephone, and office supplies were also lower as we adjusted our operations to take advantage of cloud based solutions. The decreases were partially offset by increases in advertising, dues and subscriptions, education, IT enhancement, meals, miscellaneous expenses, and parking. Due to moving most of our office operations to cloud or software services, dues and subscriptions for these services increased along with increases in IT security education for our employees and additional IT enhancements.

Income from operations

As a result of the $143,379 increase in total revenue during the three-month period ended September 30, 2022, and the $16,721 decrease in total expenses during the same period, our income from operations increased $160,100, or 150%, during the three-month period ended September 30, 2022, when compared to the same period in the prior year.

Income tax provision

We realized an increase in our income tax provision of $44,941, or 150%, during the three-month period ended September 30, 2022, compared to the same period in the prior year, because of the increase in income before taxes realized.

Net income

During the three-month period ended September 30, 2022, we realized an 11% increase in total revenues, a 1% decrease in total expenses, and a 150% increase in our provision for income tax when compared to the same period in the prior year. As a result, we realized a net increase of $115,159, or 150%, in net income during the three-month period ended September 30, 2022, compared to the same period in the prior year.

Comparison of nine months ended September 30, 2022 and 2021

The following represents selected components of our consolidated results of operations, for the nine-month periods ended September 30, 2022 and 2021, our allowances for bad debt were $13,217respectively, together with changes from period-to-period: