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 accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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 12, 2021,May 13, 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 NineThree Months Ended September 30, 2021March 31, 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, 2020.2021. Operating results for the nine monthsquarter ended September 30, 2021,March 31, 2022, are not necessarily indicative of the results to be expected for the year ending December 31, 2021.2022.

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.accounting in accordance with accounting principles generally accepted in the United States for the periods ended March 31, 2022 and 2021.

Revenue Recognition— The Company follows the guidance of Accounting Standards Codification (ASC)recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers (Topic 606).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.

TopicThe core principle underlying ASC 606 createsis 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 which includesfrom customer contracts. The five-step model requires that the Company (i) identifyingidentify the contract with the customer, (ii) identifyingidentify the performance obligations in the contract, (iii) determiningdetermine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocatingallocate the transaction price to the respective performance obligations in the contract, and (v) recognizingrecognize 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 managed care,services offered through its HCOs, MPNs, utilization review, medical bill review, utilization review and medical case management services.services, lien defense, carve-outs, Medicare set-aside. These services are billed individually as separate components to the Company’sour 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’ Compensationworkers’ 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 Three Months Ended March 31, 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 unearneddeferred revenue.

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2021

(Unaudited)

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, 2021March 31, 2022 and December 31, 2020,2021, bad debt reserves of $8,433$13,217 and $19,404,$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 September 30, 2021March 31, 2022 and December 31, 2020,2021, 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 periodperiods ended September 30,March 31, 2022 and 2021, and 2020, the Company had 2 and 3 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. This office space servesserved as the Company’s principal executive offices, as well as the principal offices of its operating subsidiaries until April 2022.

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”) assets and liabilities are recognized at commencement date based on 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, CA ended April 30, 2022, with the last month of free rent which resulted in no operating lease liabilities at March 31, 2022.

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 NineThree Months Ended September 30, 2021March 31, 2022

(Unaudited)

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

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

Maturities of the Company’s lease liabilities are as follows:

Lease expenses were $80,246$75,584 and $72,687$72,946 during the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively, and $204,651 and $225,903 during the nine months ended September 30, 2021 and 2020, respectively.

NOTE 3 - PAYCHECK PROTECTION PROGRAM LOANS

In April and May 2020, Pacific Health Care Organization, Inc. (“PHCO”), Medex Managed Care, Inc. (“MMC”) and Medex Medical Management, Inc. (“MMM”) received loans pursuant to the Coronavirus Aid, Relief and Economic Security (“CARES”) Act Paycheck Protection Program. PHCO received a loan in the amount of $133,400 (the “PHCO PPP Loan”). The PHCO PPP Loan interest rate was 1.0% per annum. MMM and MMC received loans of $267,700 and $59,600, respectively (collectively the “Medex Companies PPP Loans”). The Medex Companies PPP Loans interest rate was also 1.0% per annum.

In February 2021, the principal and interest on the PHCO PPP Loan and the Medex Companies PPP Loans were forgiven in full. The total amount of the loan and interest forgiven for PHCO was $133,400 and $1,067, respectively. The total amount of the principal and interest forgiven for MMM was $267,700 and $2,142, respectively. The total amount of the principal and interest forgiven for MMC was $59,600 and $477, respectively. The funds were used for qualifying expenses as described in the CARES Act, namely payroll, rent, utilities and group health insurance benefits.

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2021

(Unaudited)

Economic Aid Act

On April 1, 2021, MMM received a loan pursuant to section 311 of the Economic Aid Act Paycheck Protection Program Second Draw Loans in the amount of $218,900 from First Citizens Bank (the “Second Draw PPP Loan”). The Second Draw PPP Loan bears interest at a rate of 1.0% per annum and is payable monthly commencing on February 28, 2022, if loan forgiveness is not requested by that date. The loan funds are eligible for full forgiveness if used for qualifying expenses, such as payroll, group health benefits, rent and utilities.

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, there are no material subsequent events to report.

On October 19, 2021, the Company completed short-form mergers with its wholly owned subsidiaries Medex Legal Support, Inc. (“MLS”), and Pacific Medical Holding Company (“PMHC”) and Industrial Resolutions Coalition (“IRC”). As a result of the short-form mergers the separate existence of MLS, PMHC and IRC terminated and the business, assets and liabilities of those entities have been transferred to PHCO and, as appropriate were transferred to the Company’s other subsidiaries. The Company continues to offer the servicesentered into a new 12-month office lease commencing on April 1, 2022 with a monthly rent of IRC and MLS through its other subsidiaries. In addition to the services they currently offer, Medex Healthcare, Inc. (“Medex”) will now offer carve-out services and Medicare-set asides and Medex Managed Care, Inc. (“MMC”) will offer lien representation services.$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

Certain informationAll 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 report”) and the documents incorporated by reference herein,, if any, containincluding without limitation, statements regarding our future financial position, 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 safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. All1995.. I some cases, forward-looking statements other than statements of historical fact are statements that couldcan be forward-looking. You can recognize these statements through our use of wordsidentified by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “likely,” “may,” “might,” “objective,” “plan,” “potential,” “predict,” “project,” “should,” “strategy,” “will,” “would,” other similar expressions and their negatives.

Forward-looking statements are subject tonot guarantees of future performance and involve known and unknown risks uncertainties and other factors,uncertainties, many of which may be beyond our control,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 any futureanticipated results expressed or implied, in forward looking statements. Such factors include, but are not limited to: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, 2020,2021, filed the Securities and Exchange Commission (the “Commission”) on March 31, 2021April 14, 2022 (the “Annual Report”).

WeMoreover, we operate in a very 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 incorporate 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, 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 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”), Industrial Resolutions Coalition, Inc. (“IRC”), 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-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 been transferred to PHCO or its other subsidiaries. Medex will now offer our Workers’ Compensation carve-out services previously provided by IRC and Medicare-set asides previously managed by MLS and MMC will overseeoversees 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 reduces 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”) and our medical provider networks (“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 high 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 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 customers to be added while others terminate for a variety of reasons.

Impact of COVID-19 on our Business

To date, weWe 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; costs of sanitizing and cleaning the office after potential COVID-19 exposure events; costs of cleaning and PPE supplies; 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, have had to suspend or significantly modify their operations during much or all of the pandemic. WhileSince California has lifted many of its restrictions, it is still trying to slow the spread of COVID-19 and certain counties and businesses have continued or reinstated masking and now have vaccine requirements. Despite the lifting of COVID-19 restrictions, for most businesses, 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, the company has ceased to offer COVID-19-specific paid leave benefits to its employees. Since its expiration, we have ceased to offer COVID-19-specific paid leave benefits to itsour 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. As ofOn September 30, 2021, the CA SPSL paid leave expired. Therefore, we have ceased offering 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 April and May 2020, PHCO, MMM and MMC were granted Paycheck Protection Program (“PPP”) loans in the aggregate amount

In June 2021, the Governor of California terminated the executive order that put into place the Stay Home Order and Blueprint for a Safer Economy. This removed restrictions 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.

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 a safety precaution, and currently anticipate maintaining a significant portioncaring 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, employers whose employees utilize CSPSL are ineligible for federal tax credits to offset the costs of our workforce fully remote afterproviding the pandemic.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 April 2022, we have incurred negligible payroll, benefits, administrative, and liability costs related to CSPSL. However, we could incur some significant costs if a second booster shot is recommended or required later in 2022, or if another spike in COVID-19 results in increased usage of the CSPSL benefit by employees.

Unlike much 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.

In response to COVID-19 and transitioning to a remote workforce, we have taken measures to ensure data security, in our transition to remote work during the pandemic, but there is no guarantee that theythese measures will be completely effective, that 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 Factorsof our Annual Report,this annual report, our business has been and could continue to be materially and adversely affected by the potential interruptions to our business operations arisingresulting from the COVID-19 outbreak.

Results of Operationschanges to our business model in response to COVID-19.

ComparisonSummary of the three monthsQuarter ended September 30, 2021 and 2020March 31, 2022

The following represents selected components of our consolidated results of operations for the three-month periods ended September 30, 2021 and 2020, respectively, together with changes from period-to-period:

Revenue

HCO

During the three-month periodsquarter ended September 30, 2021March 31, 2022, total revenues increased 8% compared to the quarter ended March 31, 2021. Revenue from HCO, MPN, utilization review and 2020, HCOmedical bill review increased 24%, 13%, 34%, 25%, respectively; revenue was $289,117from medical case management and $264,781, respectively. The 9% increase was dueother fees decreased 14% and 56%, respectively, as compared to an increase in claims activity and renegotiation of certain deliverables to an existing customer, partially offset by the loss of one customer in the third quarter ofended March 31, 2021. HCO revenue is generated largely from fees charged to our employer customers for access to our HCO networks, per claim fees, notification fees and fees for other ancillary services the employer customers using our HCO networks may select. HCO notifications are mailed out annually and handed out by the employer for all new hires.

MPNDuring the quarter ended March 31, 2022, operating expenses decreased by 3%, primarily as a result of decreases in depreciation, consulting fees, salaries and wages, insurance, data maintenance and general and administration expenses compared to the quarter ended March 31, 2021. These decreases were partially offset by 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 compared to $120,593 during the quarter ended March 31, 2021.

MPN revenueOur provision for income tax expense decreased 1% during the three-month periods ended September 30,first fiscal quarter 2022, from $74,008 in 2021 and 2020, was $137,834 and $124,836, respectively, an increase of 10%. The increaseto $73,574 in MPN revenue was2022 due to an increasea reduction in income from operations.

Our net income also decreased 63% from $507,285 in 2021 to $188,535 in 2022 primarily as a result of the Paycheck Protection Program loan, in the number claims reported by existing customers which resultedamount of $460,700, being forgiven in more claim network fees. Like HCO revenue, MPN revenue is generated largely from fees chargedthe quarter ending March 31, 2021.  Basic and fully diluted earnings per share during fiscal 2022 was $0.01 and $0.01, respectively compared to our employer customers for access to our MPN networks, per claim fees$0.04 and fees for other ancillary services the employer customers using our MPN networks may select. Unlike HCOs, MPNs do not require annual notifications. MPNs require a notice be given to an injured worker only at the time the employer is notified by the injured worker that an injury has occurred.$0.04, respectively during fiscal 2021.

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.

Utilization ReviewHCO

DuringHCO 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.

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 three-month periods ended September 30, 2021HCO, MPNs do not require annual and 2020, utilizationnew 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 revenue was $258,251 and $307,139, respectively. The decrease of $48,888 in the 2021 period was due to a decrease in utilization reviews from existing customers and the loss of two customers in 2021.

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 Reviewbill review

DuringCalifornia and many other states have established fee schedules for the three-month period ended September 30, 2021,maximum allowable fees payable under workers’ compensation for a variety of procedures performed by medical bill review revenue increased by $40,610, to $117,685, compared to $77,075 duringproviders. Many procedures, however, are not covered under the same period a year earlier. The increase was mainly due to processing more medical andfee schedules, such as hospital bills, from existing customers, partially offset by the loss of a customer in the third quarter of 2021.

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

During the three-month periods ended September 30, 2021 and 2020, medical case management revenue was $439,073 and $590,784, respectively. The decrease in medical case management revenue of $151,711 was primarily due to a decrease in the number of claims managed with existing customers.

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 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, lien representation, legal support services, Medicare set-aside and Workers’ Compensation carve-out services. Other revenue for three-month periods ended September 30, 2021 and 2020, was $68,658 and $51,139, respectively. The increase in other revenue of 34% was the result of increases in network access and Medicare set-aside claims processed.

Expenses

Total expenses for the three months ended September 30, 2021 and 2020, were $1,203,785 and $1,225,294, respectively. The 2% decrease in expenses was the result of decreases in depreciation, bad debt provision, consulting fees, salaries and wages, insurance, and outsource service fees, partially offset by increases in professional fees, data maintenance, and general and administrative.

Depreciation

During the three-month period ended September 30, 2021, we recorded depreciation expense of $12,657 compared to $14,122 during the comparable 2020 period. The decrease in depreciation was primarily attributable to certain fixed assets being fully depreciated, partially offset by the purchasing of new fixed assets.

Expense

Bad Debt ProvisionConsulting 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 the 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. These fees fluctuate throughout the year because of the varied timing of customer enrollment into the HCO or MPN program 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 quarters ended March 31, 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, 2022 and 2021

The following represents selected components of our consolidated results of operations for the three-month periods ended March 31, 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 periodperiods ended September 30, 2021, bad debt provision decreased by $11,000 or 100%March 31, 2022, HCO revenue increased 24%, compared to the same period in 2020.the prior year. The increase in HCO revenue was attributable to an increased number of claims, which resulted in an increase in HCO claim network fees, as well as an increase in new employees enrolled in the HCO, partially offset by the loss of two customers in 2021.

MPN

During the three-month periods ended March 31, 2022, MPN revenue increased 13%, compared to the same period in the prior year. The increase in MPN revenue was attributable to an increase in the number of claims reported by existing customers that led to an increase of MPN claim network fees.

Utilization review

During the three-month periods ended March 31, 2022, utilization review revenue increased 34%, compared to the same period in the prior year. The increase in utilization review revenue was due to the addition of a new client in the fourth quarter of 2021 and increases in utilization reviews referrals for existing customers, partially offset by the loss of a customer in 2021.

Medical bill review

During the three-month periods ended March 31, 2022, medical bill review revenue increased by 25%, compared to the same period in the prior year. The increase was mainly due to processing more medical and hospital bills from existing customers, partially offset by the loss of a customer in 2021.

Medical case management

During the three-month periods ended March 31, 2022, revenue from medical case management decreased 14%, compared to the same period in the prior year. The decrease was due to delinquent customers resolving outstanding past-due balancesfewer new claims from existing customers.

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 stayingworkers’ 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 their payment obligations.2021.

Expenses

Depreciation

During the three month period ended March 31, 2022, depreciation decreased 67% compared to the three month period ended March 31, 2021. The decrease was primarily due attributable to certain furniture, fixtures, and computer equipment being fully depreciated.

Bad debt

During the three month period ended March 31, 2022, bad debt provisions increased by $4,783, compared to the three month period ended March 31, 2021. At March 31, 2022 and 2021, our allowances for bad debt were $13,217 and $23,083, respectively. The accrual for bad debt provision was to increase our allowance for bad debt accounts receivable over 90-days.

Consulting Feesfees

During the three months ended September 30, 2021,March 31, 2022, consulting fees decreased to $58,275 from $58,6216% compared to the three months ended September 30, 2020.March 31, 2021. The 1% decrease was the result of a reduction in the number of information systems consultants retained as compared to the thirdfirst quarter of 2020.2021.

Salaries and Wageswages

During the three-month period ended September 30, 2021,March 31, 2022, salaries and wages decreased by 2%9% when compared to the same period in 2020.2021. This decrease was the result of the layoff of twofewer employees in July 2021 becausethe first quarter of the COVID-19 pandemic. As a result of the layoff, we expect salaries and wages2022 compared to continue to be lower throughout the remainder of 2021 than they were in 2020.2021.

Professional FeesOutsource service fees

For the three months ended September 30, 2021, professionalOutsource service fees increased by 10% from $68,979 to $76,014 when compared to41% during the three monthsthree-month period ended September 30, 2020.March 31, 2022. The increase in professional fees was primarily the result of increases in accounting, legal,the number of utilization review referrals and medical management fees,bill reviews, partially offset by decreases in other professional fees.medical case management administrative services and referrals sent out for Medicare set-aside arrangements. We anticipate our outsource service fees will continue to move in correspondence with the level of utilization review, medical bill review, certain medical case management services and Medicare set-aside services we provide in the future.

InsuranceData maintenance

During the three-month period ended September 30, 2021, we incurred insurance expenses of $86,527, a 6% decrease over the same three-month period of 2020. The decrease in insurance expenses wasMarch 31, 2022, data maintenance fees decreased 23% primarily attributed to lower medical insurance premiums and Workers’ Compensation coverage as a result of our reduced workforce, partially offset by increases in insurance expenses for business, and directors’ and officers’ liability for the three-month period of 2021 compared to the same period of 2020.

Outsource Service Fees

Outsource service fees consist of costs incurred by our subsidiaries in outsourcing some functions of utilization review, medical bill review, Medicare set-aside services and field medical case management and typically fluctuates with the demand for those services. We incurred $109,926 and $115,803 in outsource service fees during the three-month periods ended September 2021 and 2020, respectively. The decrease of 5% was due to a decrease in volume from our customers which resulted in fewer outsource services fees for Medicare-set-asides, utilization review, and field medical case management assignments, partially offset by incurring more outsource service fees for medical bill review due to an increase in the number of bills reviewed and a $15,000 penalty paid to State of California Department of Industrial Relations for errors found duringcustomers’ employees enrolled in our regularly scheduled utilization review audit.HCO program. We have since madeanticipate that as businesses recover from the required corrections to our system and process.

Data Maintenance

During the three-month periods ended September 30, 2021 and 2020,pandemic that data maintenance fees were $11,917 and $6,603, respectively. The increasewill move in correspondence with the level of $5,314 wasenrollment of customers’ employees into the result of an increase in volume of HCO MPN, and new hire notifications for existing customers during the three-month period ended September 30, 2021, when compared to the same period in 2020. Data maintenance fees tend to fluctuate monthly depending on when new customers are enrolled, annual renewals for existing customers, and the number of new employees our customers enroll in our HCO or MPN programs.program.

General and Administrative

During the three-month period ended September 30, 2021, general and administrative expenses increased 3% to $168,939 when compared to the three-month period ended September 30, 2020. This increase of $5,076 was primarily attributable to increases in charity – cash contribution, dues and subscriptions, education, IT enhancement, licenses and permits, parking, printing and reproduction, office rent, shareholders’ expense, and travel and entertainment, partially offset by decreases in auto expenses, bank charges, equipment/repairs, office supplies, postage, rent expense for equipment, telephone, miscellaneous expenses, and vacation expenses.

Income from Operations

As a result of the $105,136 decrease in total revenueTotal revenues during the three-month period ended September 30, 2021,March 31, 2022 increased by 8% and the $21,509 decrease in total expenses during the same period, ourdecreased by 3%, resulting in an increase of 117% in income from operations decreased $83,627, or 44%, duringwhen compared to the three-month period ended September 30, 2021, when compared to the same period in 2020. March 31, 2021.

Income Tax Provision

We realized a $23,476, or 44%,1% decrease in our income tax provision during the three-month period ended September 30, 2021,March 31, 2022, compared to the three-month period ended September 30, 2020, becauseMarch 31, 2021. In 2021, the Paycheck Protection Program loans were subject to state income tax, but not federal income tax. In the first quarter of the decrease in2022, all our income before taxes realized in the 2021 period.was generated by operations and subject to state and federal income tax.

Net Income

During the three-month period ended September 30, 2021,March 31, 2022, we realized a 7% decreasean 8% increase in total revenues, a 2%3% decrease in total expenses, and a 44%1% decrease in our provision for income tax when compared to the same period in 2020.2021. In the three-month period ended March 31, 2021, three of our Paycheck Protection Program loans of $460,700 with interest of $3,686 were forgiven. The net income in 2021 of $507,285 was primarily due to the income recognized as a result of the Paycheck Protection Program loans being forgiven. As a result, we realized a net decrease of $60,151,$318,780, or 44%63%, in net income during the three-month period ended September 30, 2021,March 31, 2022, compared to the three-month period ended September 30, 2020.