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 November 11, 2022,May 18, 2023, 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 the Condensed Consolidated Financial Statements

For the NineThree Months Ended September 30, 2022March 31, 2023

(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 interimunaudited 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 interimunaudited 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, 2021.2022. Operating results for the ninethree months ended September 30, 2022,March 31, 2023, are not necessarily indicative of the results to be expected for the year ending December 31, 2022.2023.

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 September 30, 2022March 31, 2023 and 2021.2022.

Revenue Recognition — The Company recognizes revenue in accordance with ASC 606,ASU 2014-09, “Revenue from Contracts with Customers.Customers (Topic 606).” The core principle underlying ASCTopic 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,representation, 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 the Condensed Consolidated Financial Statements

For the NineThree Months Ended September 30, 2022March 31, 2023

(Unaudited)

The Company enters arrangements for bundled managed care, standalone services, or add-on ancillary services which include 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 September 30, 2022March 31, 2023 and December 31, 2021,2022, bad debt reserves of $7,696$8,037 and $23,083,$7,807, 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 September 30, 2022March 31, 2023 and December 31, 2021,2022, 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 periodperiods ended September 30,March 31, 2023 and 2022, and 2021, the Company had two 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”).less. 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 the Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2023

(Unaudited)

NOTE 2 - OPERATING LEASES

In July 2015,On April 1, 2022, the Company enteredmoved office locations from 1201 Dove Street, Suite 300 in Newport Beach, California to 19800 MacArthur Boulevard, Suite 300, in Irvine, California. This lease expires as of March 31, 2023, but was renewed on December 10, 2022, for an additional 12-month lease, with a 79-monthnew expiration of March 31, 2024. The Company elected to exclude from its balance sheets recognition of leases having a term of 12 months or less. Lease expense is recognized on a straight-line basis over the lease term. If a Company lease does not provide an implicit rate, the Company develops an estimated incremental borrowing rate at the commencement date based on the estimated rate at which it would borrow, in the current economic environment, in an amount equal to the lease payments over a similar term on a collateralized basis, which is used to determine the present value of lease payments. The Company had no finance leases at December 31, 2022 and 2021.

Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for approximately 9,439 square feetthe lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of office space, whichinterest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease commenced in September 2015payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The ROU assets include any lease payments made 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.exclude lease incentives.

The Company entered a new 12-month officecomponents of lease that commenced on April 1, 2022 with a monthly rent of $3,301. expense and supplemental cash flow information related to leases for the period are as follows:

The lease provides 320 square feet of office space that includes shared spacesupplemental balance sheet information related to leases for other business needs and expires March 31, 2023. This office space now servesthe period is as the principal executive offices of the Company, as well as the principal officesfollows:

Maturities of the Company’s operating subsidiaries. The Company has reduced its office spaceundiscounted lease liabilities are 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.follows:

Lease expenses were $9,903$9,963 and $80,246$75,584 during the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $19,806 and $204,651 during the nine months ended September 30, 2022 and 2021, respectively.

Pacific Health Care Organization, Inc.

Notes to the Condensed Consolidated Financial Statements

For the NineThree Months Ended September 30, 2022March 31, 2023

(Unaudited)

NOTE 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 forgiven in full.

Economic Aid Act

In December 2021 the principal and interest on section 311 of the Economic 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 were forgiven in full.

NOTE 43 - SUBSEQUENT EVENTS

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

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 (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. 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:

         ●         the impacts on our business of COVID-19, including the reduction of our customers’ workforces as a result of a variety of COVID-19-related causes, as well as government mandates and impacts on the workers’ compensation industry, the businesses of our customers and on the economy generally;

         ●         economic and labor market conditions generally and in the industry in which we and our customers participate, including the effects resulting from economic recessions, financial sector turmoil, international conflicts, and rising domestic inflation and related economic policy responses;

         ●         the loss, ineffective management, malfunction (including those resulting from cybersecurity breaches), or increased costs of third-party-provided technologies and services on which our operations rely;

         ●         cybersecurity incidences and breaches, and other software system failures, and the imposition of laws imposing costly cybersecurity and data protection compliance;

         ●         reductions in worker’s compensation claims or the demand for our services, from whatever source;

         ●         cost reduction efforts by our existing and prospective customers;

         ●         price increases to the technologies and other services we rely on for our business;

         ●         business combinations among our customers or competitors;

         ●         the loss of or inability to obtain adequate insurance coverage;

         ●         competition within our industry, including competition from much larger competitors;

         ●         our ability to retain existing customers and to attract new customers;

         ●         delays, reductions, or cancellations of contracts we have previously entered;

         ●         legislative and regulatory requirements or changes which could render our services less competitive or obsolete; and

         ●         our failure to successfully develop new services and/or products either organically or through acquisition, or to anticipate current or prospective customers’ needs.

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, 2021,2022, filed with the Securities and Exchange Commission (the “Commission”) on April 14, 2022March 31, 2023 (the “annual report”“Annual Report”).

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

You should not place undue reliance on forward-looking statements. The forward-lookingForward-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 it 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 suchAny 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.

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-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 were transferred to PHCO or its other subsidiaries. Medex now offers our Workers’ Compensation carve-out services previously provided by IRC and Medicare-set asides previously managed by MLS. MMC oversees the lien representation services previously offered by MLS.

Business of the Company

We offer an integrated and layered array of complimentarycomplementary business solutions that enable our customers to better manage their employee Workers’ Compensation-relatedworkers’ 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 by reducing their Workers’ Compensation-relatedworkers’ compensation-related medical claims expense in a manner that will assure that 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’ Compensationworkers’ compensation are claims frequency and medicallonger than average treatment costs.duration. Our services focus on containingensuring timely medical treatment to reduce the claim duration and medical treatment costs.

We offer our

Our services include providing customers access to our HCOs and our MPNs. We also provide medical case management, field medical case management, network access, utilization review, medical bill review, Workers’ Compensationutilization review, workers’ compensation carve-outs and Medicare set-aside services. Additionally,Complementary to these services, we offeralso provide lien representation and expert witness testimony, ancillary to our services.testimony. We provideoffer 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 sharehave control overand oversight of the medical treatment process.of their injured employees to ensure treatment is timely and appropriate. This control is primarily obtained by participation in one of our medical treatmentprovider networks. We hold several government-issued licenses to operate medical treatmentprovider networks. Through Medex, we hold two of athe total of sevenfour 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 2627 MPNs. Our HCO and MPN programs provide our customers with provider networks within which our customers havethe customer has some ability to direct the administration of employee claims.the claim. 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 withand our medical case management which keeps medical treatmentworkers’ compensation 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’ Compensationworkers’ compensation insurance is a critical problem for employers, though we are able to process medical bills nationally.bill reviews, utilization reviews and provide medical case management in several other states. 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 also expect to add new employees and employer customers to be added while others terminate for a variety of reasons. The reasons for termination vary but include when a customer switches to an insurance carrier or third party administrator that uses a different workers’ compensation administration vendor, or when our contract ends with state and local governments.

Impact of COVID-19 on our Business

In February 2022, California passed anotherthe COVID-19 Supplemental Paid Sick Leave law (“CSPSL”). It providesprovided 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 allowsallowed employees to retroactively request reimbursement for qualifying leave or to use it towards future requests through September 30, 2022. Employers whose employees utilizeutilized 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 for reimbursement of CSPSL. As of the date of this report, the CSPSL relief grant program is still in development and unavailable to be reimbursedapply for. When it becomes available, we intend to apply for the CSPSL.reimbursement of CSPSL leave.

We willWhile the CSPSL leave expired on December 31, 2022, we continue to offer COVID-19-specific paid leave benefits to our employees until the expiration of CSPSL. Family,have family, medical, and other types of leave remain available to employees under existingpre-existing Company policy. As of September 30, 2022,the date of this report, California has not passed additional COVID-19 related sick leave laws.

Unlike much of the U.S. economy, we have incurred negligible payroll, benefits, administrative,maintained relatively steady employee recruitment and liabilityretention. 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 relatedof 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 CSPSL. However,a changing workforce environment.

We have opted to keep the majority of our workforce remote and we have taken measures to ensure data security, but there is no guarantee that these measures will be completely effective, that our productivity will not be adversely impacted, or that we will not encounter other risks associated with a remote workforce, such as increased loss of direct control of and reliance on third party information systems required for us to run our business. As discussed in greater detail in Item 1A Risk Factors of our Annual Report, our business has been and could incur some significant costs if additional booster shots are recommendedcontinue to be materially and adversely affected by the interruptions and changes to our business operations resulting from or required later in 2022, or if another spike in COVID-19 results in increased usageresponse to COVID-19.

Key trends affecting results of operations

As noted throughout this quarterly report, duringDuring the three and nine months ended September 30,March 31, 2023 and 2022, and 2021, COVID-19 has impactedcontinued to impact 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 ofMarch 31, 2022, 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 the backlog of untreated workers’ compensation cases normalizes. These trends have also contributed to increased claims-related expenses for services provided to us by third parties, as certain such expenses increase in correlation with the demand for our services.

California 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 experiencedhad an increase in COVID-19 related workers’ compensation claims throughout 2021as the economy opened back up and duringpeople returned to their offices, but as immunity and use of vaccines increased, COVID-19 related workers’ compensation claims has decreased through the first quarter of 2023. The decline in COVID-19 related workers’ compensation claims since the end of the first quarter of 2022 butthrough the first quarter of 2023 has adversely affected the revenues generated from claim network fees when a claim is opened, as well as fees generated when a medical case manager is assigned to the claim.

During the first quarter of 2023, we saw a slight increase in the number of employees enrolled in our HCO and MPN programs; however, given the current economic outlook we could see declines in COVID-19 related claimsenrollees for future periods. The enrollment numbers in our HCO and MPN programs generally correlate with general economic conditions and the size and activities of our customers’ workforce. If economic conditions continue to be challenging, including from the effects of inflationary pressures, elevated interest rates, and challenging labor market conditions, our customers may reduce their workforce, in which case we would expect a decline in the secondnumber of employees enrolled in our HCO and third quartersMPN programs in future periods and in related revenues.

During the fourth quarter of 2022. For2022 and through the nine months ended September 30, 2022, approximately 8%first quarter of all claims2023, we processed have been COVID-19 related, with 53% of those claims occurringexperienced difficulties when transitioning between new software vendors for our utilization review and medical case management services. Throughout these software transitions, our automated processes had to be performed manually, which caused delays in providing services and invoicing our customers, reduced productivity and resulted in additional outsourcing costs. Our revenues continued to be adversely impacted in the first quarter of 2022. During2023 as a result of the twelve months ended December 31, 2021, approximately 5%interruptions and costs associated with these software transition difficulties. While the new software is now nearly functional, certain functionalities are still being developed. As of all claims processed were COVID-19 related.the date of this report, we believe the delayed invoicing problems have been addressed and we expect that the outstanding accounts receivable will decrease, and utilization review and medical case management productivity will increase.

Revenue generated from COVID-19 workers’ compensation claimsAs previously disclosed in our Annual Report, Fortra, LLC, the third-party vendor that provides the GoAnywhere managed file transfer as a service system (MFTaaS), experienced a data security incident that affected many of Fortra’s customers, including the Company. As of the date of this report, this incident has not caused a material interruption of our business operations. Our investigation into the details of this incident is ongoing, but to the extent we discover further details of the data accessed, we will provide the appropriate notifications to any individuals affected by the incident, as well as to government and regulatory agencies as required by federal and state law. We have incurred expenses, and may become seasonal and as the frequency of contracting COVID-19 increases and the severity of cases decreases, it is possible thatincur in the future COVID-19 will no longerexpenses and losses, related to this incident, some of which may not be classified as a workers’ compensation illness in California. A portioncovered by cyber liability insurance. Further, because of the ongoing nature of our revenue is generated from fees frominvestigation into this incident and current unknowns, an estimate of the impacts on our customers when a workers’ compensation claim is opened. If the changebusiness, results of classification for COVID-19 related claims no longer requires employers to report it as a workers’ compensation injury, there wouldoperations and other potential liabilities cannot be a decrease in our COVID-19 related revenues, but we would anticipate this decrease would be offset by an increase in other workers’ compensation injuries as more employees return to the labor pool.made.

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, or if an economic recovery is slowed as a result of higher inflation or economic recession, medical case management reviews and resulting revenues could continue to remain lower in the future.

Revenue

We derive revenue primarily from fees charged for access to our HCO and MPN provider networks, enrollment of customers’ employees into the HCO or claim network fees, HCO/MPN program, utilization reviews,network administration, medical bill reviews, andreview, utilization review, medical case management services.services, Medicare set-asides, and network access.

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 MPNand program program administration, and fees for other services our MPN customers may select.administration. Unlike the HCO,HCOs, MPNs do not require annual and new hire notifications, MPNs are only required to provide a notice to an injured workeremployee at the time the employer is notified by the injured workeremployee that an injury occurred.

Utilization review