PFHO Pacific Health Care Organization Inc (QB)

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 August 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. Condensed Consolidated Financial Statements

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 Six Months Ended June 30, 2023

(Unaudited)

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2023

(Unaudited)

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2023

(Unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition 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,” “plan,” “potential,” “predict,” “project,” “should,” “strategy,” “will,” “would,” and other similar expressions and their negatives.

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

For more detailed information about particular risk factors related to us and our business, see Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the “Commission”) on March 31, 2023 (our “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.

One should not place undue reliance on forward-looking statements. 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 quarterly 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. Any 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 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 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 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, we terminated the existence of IRC, MLS and PMHC and wound up those subsidiaries in an effort to simplify business procedures, bookkeeping and administrative structure, eliminate duplicative functions, and reduce costs. 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 complementary 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 by reducing their workers’ 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’ compensation are claims frequency and longer than average treatment duration. Our services focus on ensuring timely medical treatment to reduce the claim duration and medical treatment costs.

Our services include providing customers access to our HCOs and MPNs. We also provide medical case management, medical bill review, utilization review, workers’ compensation carve-outs and Medicare set-aside services. Complementary to these services, we also provide lien representation and expert witness testimony. We offer 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 have control and oversight of the medical treatment of their injured employees to ensure treatment is timely and appropriate. This control is primarily obtained by participation in one of our medical provider networks. We hold several government-issued licenses to operate medical provider networks. Through Medex, we hold two of the total of four 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 27 MPNs. Our HCO and MPN programs provide our customers with provider networks within which the customer has some ability to direct the administration of the claim. This is designed to decrease the incidence of fraudulent claims and disability awards and ensure injured employees receive necessary back-to-work rehabilitation and training. Our medical bill and utilization review services provide oversight of medical billing and treatment requests, and our medical case management keeps workers’ 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’ compensation insurance is a critical problem for employers, though we process medical 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 customers 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 the COVID-19 Supplemental Paid Sick Leave law (“CSPSL”). 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, 2022 through September 30, 2022. The CSPSL allowed employees to retroactively request reimbursement for qualifying leave or to use it towards future requests through September 30, 2022. Employers whose employees utilized 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 quarterly report, the CSPSL relief grant program is still in development and unavailable to apply for. When it becomes available, we intend to apply for reimbursement of CSPSL leave under the grant program.

While the CSPSL leave expired on December 31, 2022, we continue to have family, medical, and other types of leave available to employees under pre-existing Company policy. As of the date of this quarterly report, California has not passed additional COVID-19 related sick leave laws.

During the COVID-19 pandemic we largely converted to a remote working environment, which unlike much of the U.S. economy, has helped us maintain relatively steady employee recruitment and retention. Our maintenance of a successful remote environment has enabled us to keep relatively high employee morale and cohesive culture via technology. Our remote work environment 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, and, in turn, increase the quantity of qualified applicants available to us. While we cannot predict or control future labor trends in our industry, we believe that our solid recruitment practices and the opportunities presented by remote work will help us adapt to 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 continue to be materially and adversely affected by the interruptions and changes to our business operations resulting from or in response to COVID-19.

Key trends affecting results of operations

During the six months ended June 30, 2023 and 2022, COVID-19 continued to impact the businesses of our customers and our results of operations. For example, in the first quarter of 2022, our customers had a relatively large increase in COVID-19 related workers’ compensation claims due to the seasonality of the illness and as the economy opened back up and employees returned to their workplaces. Our HCO customers’ industries generally have a higher risk of exposure to COVID-19 and thus reported a greater number of COVID-19 related claims. As a result, HCO COVID-19 related claims remained elevated in the first nine months of 2022. Our MPN customers, whose industries were at a relatively lower risk for COVID-19 exposure had a large increase in reported COVID-19 related claims in the first quarter of 2022 but declined again during the second quarter of 2022. During the first two quarters of 2023, COVID-19 related claims have remained low, and we have realized minimal related revenues, as a result. We anticipate that revenues related to COVID-19 related claims will remain low through the remainder of 2023.

During 2022, the increased volume of COVID-19 related workers’ compensation claims resulted in temporary increases in our revenues generated from claim network and medical case manager fees, particularly during the first quarter of 2022. However, that trend began reversing during the second quarter of 2022, as the severity and frequency of the illness declined and California Sick Paid Leave “CSPSL” ended paid time off for COVID-19 related illnesses, which we believe also has contributed to lower reporting of COVID-19 related illnesses.

COVID-19 related workers’ compensation claims have generally remained minimal since the fourth quarter of 2022. The relative declines in COVID-19 related workers’ compensation claims have resulted in lower revenues generated from claim network and medical case management fees when comparing the three and six month periods of 2023 with 2022. Because we believe COVID-19 related workers’ compensation claims have stabilized at their current minimal levels, we do not expect further material declines in COVID-19 related workers’ compensation claims and related revenues.

During the second quarter of 2023, we saw an increase in the number of employees enrolled in our HCO and MPN programs. 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 become 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 number of employees enrolled in our HCO and MPN programs in future periods and in related revenues.

During the fourth quarter of 2022 and through the first quarter of 2023, we experienced 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 net income was adversely impacted in the first quarter of 2023 as a result of the interruptions and costs associated with these software transition difficulties. However, during the second quarter of 2023 some of the issues were resolved and we expect the remaining issues will be resolved with further planned enhancements. As a result of the recent software resolutions, as of the date of this quarterly report, the delayed invoicing problems have been addressed, much of the related outstanding accounts receivable has decreased, and there has been an increase in utilization review and medical case management productivity.

As 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 quarterly 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 incur in the future expenses and losses, related to this incident, some of which may not be covered by cyber liability insurance. Further, because of the ongoing nature of our investigation into this incident and current unknown, an estimate of the impact on our business, results of operations and other potential liabilities cannot be made.

Revenue

We derive revenue from fees charged for access to our HCO and MPN provider networks, claim network fees, HCO/MPN network administration, medical bill review, utilization review, medical case management, Medicare set-asides, and network access.

HCO

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

Medical bill review

California and many other states have established fee schedules for the maximum allowable fees payable under workers’ compensation for a variety of procedures performed by medical providers. Many procedures, however, are not covered under the fee schedules, such as hospital bills, which still require review and negotiation. Medical bill review involves analyzing medical provider services and equipment billing to ascertain proper reimbursement. Our medical bill review services include 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. Revenue for medical bill reviews is generated based on a set fee per medical bill reviewed and a percentage of savings. Hospital bill review services generate revenue on a percentage of savings off the official medical fee schedule (OMFS) set by the California Department of Industrial Relations, usually with a negotiated cap on the maximum amount we can charge for a hospital bill review.

Medical case management

Medical case management oversees the injured employees’ medical treatment to ensure that it progresses 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. Our medical case management services are performed by nurses who are credentialed by the state and have expertise in various clinical areas and backgrounds in workers’ compensation matters. 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 claim closures for our customers. We also offer employee advocate services, which is similar to medical case management in that it utilizes our medical case managers who provide similar services; however, the medical case manager is an advocate of the employee. We generate revenue from these services when we receive a workers’ compensation claim and a medical case manager is assigned to oversee the injured workers’ medical treatment, with billing based on the number of hours a medical case manager works on the claim.

Utilization review

Utilization review is the review of medical treatment requests by providers to provide a safeguard for employers and injured employees against unnecessary or 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. We generate revenue when we receive a request for authorization of treatment from a claims adjuster. We bill by the number of treatment requests and the level of expertise of the reviewer required to approve, modify, or deny the request.

Other

Other revenue consists of revenue derived from network access fees charged for network access for preferred provider organizations, lien representation, ancillary legal support services, Medicare set-aside and Workers’ Compensation carve-out services.

The following table sets forth, for the quarters ended June 30, 2023 and 2022, the percentage each revenue item identified in our unaudited condensed consolidated financial statements contributed to total revenue during the respective period.

Expense

Consulting fees

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

Salaries and wages

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

Professional fees

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

Insurance

Insurance expenses are comprised primarily of health insurance benefits offered to our employees, directors’ and officers’ liability insurance, cyber security, Workers’ Compensation coverage and business liability coverage.

Outsource service fees

Outsource service fees consist of costs incurred by our subsidiaries by 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 customer demand for those services.

Data maintenance fees

Data maintenance fees include fees we pay to a third party to process HCO and MPN employee enrollments and host our HCO and MPN provider networks. HCO and MPN employee enrollment fees fluctuate throughout the year because of the varied timing of customer enrollment into our HCO or MPN programs, the number of employees our customers have in their workforce, and the number of new hires throughout the year.

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 June 30, 2023 and 2022, the percentage each expense item identified in our unaudited condensed consolidated financial statements contributed to total expense during the respective period.

Results of Operations

Comparison of the three months ended June 30, 2023 and 2022

The following represents selected components of our consolidated results of operations for the three-month periods ended June 30, 2023 and 2022, respectively, together with changes from period-to-period:

Revenue

HCO

During the three-month period ended June 30, 2023, HCO revenue increased 9%, compared to the same period in the prior year. The increase in HCO revenue was from an increased number of monthly and annual HCO enrollees and related administration and notification fees. The increase was partially offset by decreases in claim network fees due to fewer COVID-19 and other non-COVID-19 related workers’ compensation claims compared with the second quarter of 2022, when we were experiencing a temporary increase in COVID-19 related claims. Because we believe COVID-19 related claims have stabilized at a minimal level, we expect HCO revenues from COVID-19 related claims to remain low.

MPN

MPN revenue for the three-month period ended June 30, 2023, decreased by 10%, compared to the same period in the prior year. The decrease in revenue was largely attributable to a decrease in the number of COVID-19 and non-COVID-19 related workers’ compensation claims from which we generated claim network fee revenue when comparing the second quarters of 2022 and 2023, as well as a loss of a customer in the second quarter of 2023. During the second quarter of 2022, COVID-19 related claims accounted for 11% of the quarter’s revenues for MPN claim network fees. Since then, COVID-19 related claims have stabilized at minimal levels, and as a result we expect MPN revenues from COVID-19 related claims to remain low. The decrease in MPN revenue was partially offset by increases in the number of enrollees into our monthly MPN program.

Medical bill review

During the three-month period ended June 30, 2023, medical bill review revenue decreased by 25%, compared to the same period in the prior year. The decrease was primarily due to fewer hospital and non-hospital bills reviewed and the loss of two customers in the second quarter of 2023. The decrease was partially offset by the addition of a new customer in the fourth quarter of 2022.

Medical case management

During the three-month period ended June 30, 2023, medical case management revenue decreased 28%, compared to the same period in the prior year. The decrease was attributable to a decline in COVID-19 related claims in relation to the same period of 2022 and a decline in non-COVID-19 related claims from existing customers. During the pandemic, some of our customers opted to have COVID-19 related claims assigned a medical case manager regardless of severity of the illness, and the trend continued into the third quarter of 2022. Due largely to the severity and frequency of COVID-19 claims declining since the third quarter of 2022, our customers have stopped requiring a medical case manager to be assigned to those claims, which has adversely impacted medical case management revenues. The decrease was partially offset by increases in revenue generated from our employee advocate program. We expect medical case management revenues from COVID-19 related claims to remain low as fewer COVID-19 related claims are being reported and the severity of the illness does not require a medical case manager.

Utilization review

During the three-month period ended June 30, 2023, utilization review revenue increased 10%, compared to the same period in the prior year. The increase in utilization review revenue was due to the addition of a new customer in the fourth quarter of 2022 and increases in utilization reviews referrals for existing customers, partially offset by a decrease due to the loss of a customer in the second quarter of 2023.

Other

Other revenue for the three-month period ended June 30, 2023, decreased 24%, compared to the same period in the prior year. The decrease was mainly attributable to decreases in the number of referrals for Medicare set-aside and network access fees.

Expenses

Total expenses for the three-month period ended June 30, 2023, decreased 6%, compared to the same period in the prior year. Salaries and wages decreased $59,708, general and administrative decreased $53,553, data maintenance decreased $15,561, and insurance decreased $10,096. Outsource service fees increased $38,703, professional fees increased $21,327, as well as increases in other expenses.

Consulting fees

During the three months ended June 30, 2023, consulting expenses increased 8%, compared to the three-month period ended June 30, 2022, due to increased information systems and marketing expenses.

Salaries and wages

During the three months ended June 30, 2023, salaries and wages decreased 9%, compared to the three months ended June 30, 2022. The decrease was due to a decrease in the number of our employees, partially offset by increases in wages and salaries for our existing employees.

Professional fees

During the three months ended June 30, 2023, professional fees increased 27%, compared to the three months ended June 30, 2022. The increase in professional fees was primarily the result of fees incurred in legal and field medical case management fees, partially offset by decreases in other professional fees.

Insurance

During the three months ended June 30, 2023, insurance expenses decreased 13%, compared to the same period the prior year due to decreases in business insurance related to our move to a smaller office, partially offset by increases in health insurance costs for employees.

Outsource service fees

During the three months ended June 30, 2023, outsource service fees increased 29%, compared to the three months ended June 30, 2022. The increase in outsource service fees was attributable to an increased demand for our services for our HCO program, Medicare set-asides, utilization review, and field medical case management. The increase was partially offset by decreases in the outsourced services for medical bill review due to fewer medical bills reviewed and the completion of an HCO project in the first quarter of 2023. We anticipate outsource service fees will decrease due to the completion of the HCO project, and further decrease once our operational software for utilization review and medical case management is fully operational. Our outsourcing and related fees will continue to correspond with the level of medical bill review, utilization review, enrollees in our HCO program, certain field medical case management and Medicare set-aside services we provide in the future.

Data maintenance

During the three months ended June 30, 2023, data maintenance fees decreased 34%, compared to the three months ended June 30, 2022. The decrease in data maintenance fees was due to the expenses booked in the first quarter of 2023 instead of the second quarter of 2023 due to a customer delay in providing their employee data. We do not expect data maintenance fees to decrease in future quarters due to this issue.

General and administrative

General and administrative expenses decreased by 38% during the three months ended June 30, 2023, compared to the same period in 2022. The decrease was primarily due to decreases in IT enhancement, office rent, licenses and permits, telephone, meals/travel, as well as decreases in other expenses related to moving to a smaller office at the end of the first quarter in 2022. The decrease in IT enhancement was due to a one-time credit for IT enhancement as a result of a resolution to a bill dispute. The decrease was partially offset by increases in vacation expenses, dues and subscriptions, miscellaneous, and advertising and marketing expenses.

While we anticipate certain general and administrative expenses will remain lower in the long-term, such as office rent, internet, and telephone, as a result of changes to our business operations in response to COVID-19, we expect other general and administrative expenses, such as IT enhancements, hardware and other technology-related expenses will remain at higher than historic levels in future periods.

Income from Operations

During the three-month period ended June 30, 2023, income from operations was $145,118, compared to $173,118 during the same period in 2022. As a result of the $101,557 decrease in revenues and $73,557 decrease in expenses, our income from operations decreased $28,000, or 16% during the three-month period ended June 30, 2023, when compared to the same period in 2022.

Other Income (Expense)

In the second quarter of 2023, we had interest income of $100,158 from our investment in U.S. Treasury bills which matured on June 8, 2023, compared to $0 in interest income in the same period in 2022. On June 9, 2023, we reinvested $7,642,981 into U.S. Treasury bills that will mature on December 7, 2023. The total interest earned in U.S. Treasury bills that matured on June 8, 2023, was $229,818, of which $202,693 was recognized during the current period. Noncash interest earned on the U.S. Treasury bills which were purchased on June 9, 2023, was $24,405. We anticipate continued net income from the interest earned on our current investment in U.S. Treasury bills.

Income Tax Provision

We realized a $68,849, or 42%, increase in our income tax provision during the three-month period ended June 30, 2023, compared to the three-month period ended June 30, 2022. The increase in income tax provision was attributable to the interest income from our investment in U.S. Treasury bills that matured on June 8, 2023.

Net Income

During the three-month period ended June 30, 2023, we realized a 7% decrease in total revenues, a 6% decrease in total expenses, a 100% increase in interest income, and a 42% increase in our provision for income tax when compared to the same period in 2022. The increase in interest income of $100,158 was the result of interest earned on our U.S. Treasury bill investments during the three-month period ended June 30, 2023, whereas we had no interest income during the same period of 2022. Due in large part to the increase in interest income, we realized a net increase of $51,903, or 42%, in net income during the three-month period ended June 30, 2023, compared to the three-month period ended June 30, 2022. We expect to have continued lower revenues for the remaining quarters of 2023 when compared to the same periods in 2022, due to the continued effects of our loss of customers and the decline in COVID-19 related revenues from their peak in 2022. This trend will continue to materially impact our net income during the balance of fiscal 2023 and potentially into 2024, although we anticipate that the losses will be partially offset by the expansion of our employee advocate program, increases in our utilization review demand, and interest earned on our investments. Generally, new customers are added throughout the year and other customers terminate our services for a variety of reasons. We have no assurances that we will continue to add new customers.

Comparison of six months ended June 30, 2023 and 2022

The following represents selected components of our consolidated results of operations for the six-month periods ended June 30, 2023 and 2022, respectively, together with changes from period-to-period:

The following table sets forth, for the six months ended June 30, 2023 and 2022, the percentage each revenue item identified in our unaudited condensed consolidated financial statements contributed to total revenue during the respective period.

HCO

During the six-month period ended June 30, 2023, HCO revenue decreased 9%, compared to the same period in the prior year. The decrease in HCO revenue was due to a reduction in HCO claim network fees from fewer COVID-19 related workers’ compensation claims when compared to the same six-month period of 2022. During the six-month period ended June 30, 2022, claim network revenue accounted for 51% of the HCO revenues; of which COVID-19 related claims accounted for 29% of the claim network revenue due to a temporary increase in reported COVID-19 related claims. During the first three quarters of 2022, our HCO customers had an increased frequency of COVID-19 related claims due to the nature of their industries, and as a result related revenue remained higher through the end of the third quarter of 2022. Since the fourth quarter of 2022, COVID-19 related claims have been minimal and stable; thus revenues for COVID-19 related claim network fees have had little impact on the results of the six-month period ending June 30, 2023. As such, we expect HCO revenues from COVID-19 related claims to remain low. The HCO revenue decrease during this period was offset by increases in HCO enrollment and notification fees related to an increase in the number of enrolled employees.

MPN

During the six-month period ended June 30, 2023, MPN revenue decreased by 11%, compared to the same period in the prior year. During the first quarter of 2022, 50% of MPN claim network fees were from COVID-19 related claims and accounted for 35% of MPN claim network fees for the six-month period ended June 30, 2022. Since the second quarter of 2022, MPN claim network fees for COVID-19 related claims have been minimal, as the amount of COVID-19 related claims has stabilized at a low level. Therefore, the decrease in MPN revenue comparing the sixth-month periods ended June 30, 2023 and 2022, was primarily attributable to the decrease in COVID-19 related MPN claim network fees since the first quarter of 2022. With the stabilization of COVID-19 related claims at a minimal level, we expect MPN revenues from COVID-19 related claims to remain low. The decrease in MPN revenue during the sixth-month period ended June 30, 2023, was partially offset by increases in the number of enrollees into our monthly MPN program.

Medical bill review

During the six-month period ended June 30, 2023, medical bill review revenue decreased by 25%, compared to the same period in the prior year. The decrease was due to fewer hospital and non-hospital bills reviewed for customers and the loss of two customers in the second quarter of 2023. The decrease was partially offset by the addition of a new customer in the fourth quarter of 2022.

Medical case management

During the six-month period ended June 30, 2023, medical case management revenue decreased 24%, compared to the same period in the prior year. The decrease was attributable to a decline in COVID-19 related claims in relation to the same period of 2022 and fewer medical case management claims from existing customers. During the pandemic, some of our customers opted to have COVID-19 related claims assigned a medical case manager regardless of severity of the illness, which was a trend that continued into the third quarter of 2022. Due largely to the severity and frequency of COVID-19 claims declining since the third quarter of 2022, our customers have stopped requiring a medical case manager to be assigned to those claims, which has adversely impacted medical case management revenues. The decrease in medical case management was partially offset by increases in revenue generated from our employee advocate program. We expect medical case management revenues from COVID-19 related claims to remain low as fewer COVID-19 related claims are being reported and the severity of the illness often does not require a medical case manager.

Utilization review

During the six-month period ended June 30, 2023, utilization review revenue increased 17%, compared to the same period in the prior year. The increase in utilization review revenue was due to more referrals for utilization reviews from existing customers and the addition of a new customer in the fourth quarter of 2022, partially offset by decreases due to the loss of a customer in the second quarter of 2023.

Other

Other revenue for the six-month period ended June 30, 2023, increased 9%, compared to the same period in the prior year. The increase was attributable to receiving more referrals for Medicare set-aside and network access fees.

Expenses

Total expenses for the six-month period ended June 30, 2023 had no material change compared to the same period in the prior year. General and administrative expenses decreased $84,269 and salaries and wages decreased $30,856, which were partially offset by increases in outsource service fees of $72,684, professional fees of $27,565 and other expenses.

The following table sets forth, for the six months ended June 30, 2023 and 2022, the percentage each expense item identified in our unaudited condensed consolidated financial statements contributed to total expense during the respective period.

Depreciation

During the six-month period ended June 30, 2023, depreciation expenses increased 39%, compared to the six-month period ended June 30, 2022. The increase was primarily due to depreciating fixed assets that were purchased in the last twelve months.

Bad debt provision

During the six-month period ended June 30, 2023, bad debt provision expenses decreased 76%, as a result of our customers making timely payments.

Consulting fees

During the six-month period ended June 30, 2023, consulting expenses increased 6%, compared to the six-month period ended June 30, 2022, due to additional consulting services for information systems and marketing.

Professional fees

During the six-month period ended June 30, 2023, professional fees increased 19%, compared to the six-month period ended June 30, 2022. The increase was the result of fees incurred in providing our field medical case management service and additional legal fees, partially offset by decreases in other professional fees.

Insurance

During the six-month period ended June 30, 2023, insurance expenses decreased 6%, due to decreases in business insurance as a result of moving to a smaller office, partially offset by increases in health insurance costs for employees.

Outsource service fees

During the six months ended June 30, 2023, outsource service fees increased 26%, compared to the six months ended June 30, 2022. The increase in outsource service fees was attributable to a project in our HCO department, increased demand for HCO services, and outsourcing certain functions normally performed by our operational software during transition of that software, which primarily affected the first quarter of 2023, as well as increased demand for our Medicare set-aside, utilization review, and field medical case management services. The increase was partially offset by decreases in outsourced services for medical bill review due to fewer medical bills reviewed. We anticipate outsource service fees will decrease due to the completion of the HCO project, and further decrease once our operational software for utilization review and medical case management is fully operational. Our outsourcing and related fees will continue to correspond with the level of medical bill review, utilization review, certain field medical case management services and Medicare set-aside services.

Data maintenance

During the six months ended June 30, 2023, data maintenance fees increased 15%, compared to the six months ended June 30, 2022. The increase in data maintenance fees was due to increases in our customers’ employee counts for enrollment into our HCO, which resulted in increases in correlated data maintenance fees.

General and administrative

General and administrative expenses decreased by 28% during the six-month period ended June 30, 2023, compared to the same period of 2022. The decrease was primarily due to decreases in office rent, a one-time credit for IT enhancement as a result of a resolution to a bill dispute, decreases in telephone, licenses and permits, meals/travel, and miscellaneous expenses relating to moving to a smaller office at the end of the first quarter in 2022. The decrease was partially offset by increases in dues and subscriptions, vacation expenses, advertising and marketing, auto expenses, parking, and postage and delivery.

While we anticipate certain general and administrative expenses will remain lower in the long-term, such as office rent, internet and phone, as a result of changes to our business operations in response to COVID-19, we expect other general and administrative expenses, such as IT enhancements, hardware and other technology-related expenses will remain at higher than historic levels in future periods.

Income from Operations

As a result of the 8% decrease in total revenue during the six-month period ended June 30, 2023 and no material change in total expenses during the same period, our income from operations decreased $207,653, or 48%, during the six-month period ended June 30, 2023, when compared to the same period in the prior year.

Other Income (Expense)

During the six-month period ended June 30, 2023, we had interest income of $199,974 from our investment in U.S. Treasury bills which matured on June 8, 2023. The total interest earned in U.S. Treasury bills that matured on June 8, 2023, was $229,818, of which $202,693 was recognized during the current period. On June 9, 2023, we reinvested $7,642,981 in U.S. Treasury bills with a maturity date of December 7, 2023. The noncash interest earned on the U.S. Treasury bills purchased on June 9, 2023, was $24,405. We anticipate continued net income from the interest earned on our current investment in U.S. Treasury bills.

Income Tax Provision

We realized a decrease in our income tax provision of $2,156, or 2%, during the six-month period ended June 30, 2023, compared to the same period in the prior year, because of the decrease in income before taxes realized.

Net Income

During the six-month period ended June 30, 2023, we realized an 8% decrease in total revenues, no material change in total expenses, 100% increase in interest income and a 2% decrease in our provision for income tax when compared to the same period in the prior year. Due in large part to the increase in interest income, we realized net income of $307,536, a 2% decrease in net income during the six-month period ended June 30, 2023, compared to the same period in the prior year. Decreases in revenues were offset by interest income of $199,974 from the interest earned on our U.S. Treasury bill investments during the six-month period ended June 30, 2023. We expect continued lower revenues for the remaining quarters of 2023 when compared to the same periods in 2022, but also that interest income from our investments will continue to partially offset any decreases in revenue. We expect that the loss of customers and the decline in COVID-19 related revenues will substantially impact our net income during the balance of fiscal 2023 and potentially into 2024, but that the losses will be partially offset by the expansion of our employee advocate program, increases in our utilization review demand, and interest earned on our investments. Generally, new customers are added throughout the year and other customers terminate from the program for a variety of reasons. We have no assurances that we will continue to add new customers.

Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet our potential cash requirements for general business purposes. We consistently monitor our liquidity and financial position and take actions management believes are in the best interest of the Company and its shareholders to ensure the long-term financial viability of the Company. Historically, we have realized positive cash flows from operating activities, which, coupled with positive reserves of cash on hand, have been used to fund our operating expenses and obligations.

We have focused on reducing other operating expenses while maintaining our ability to provide the high-quality services to which our customers are accustomed. For example, in April 2022 our office lease in Newport Beach, California expired, and we entered into a 12-month lease for a smaller office space in Irvine, California. In December 2022, we renewed the new office space lease for an additional 12-month period which will expire March 31, 2024. As a result of relocating to a smaller office and continuing to have our employees work remotely, we have decreased the operating costs for office expenses, but have utilized some of those savings to enhance our IT security as well as other IT enhancements.

We currently have planned certain capital expenditures to replace our laptops and ancillary devices due to their age and as part of our ongoing continuity plan. We anticipate investing activities will continue throughout 2023 as we replace aging software, computer equipment, and further enhance our IT security. We anticipate these costs will be significant, but believe we have adequate capital on hand to cover these expenses. We do not anticipate these expenditures will require us to seek outside sources of funding.

During the six months ended June 30, 2023, we realized net income of $307,536, as a result of interest income from our investment in U.S. Treasury bills and income from operations during that period. As of June 30, 2023, we had $2,296,207 cash on hand compared to $2,036,432 at December 31, 2022. The $259,775 increase in cash on hand was largely due to decreases in accounts receivable and decreases in accounts payable, related to our utilization review and medical case management services software transition problems and the resolution of a bill dispute with a vendor, respectively. Management currently believes that absent (i) additional software issues, (ii) the loss of a major customer, (iii) increases in or sustained inflation, (iv) an increased or longer-term downturn in the general economy, or (v) any unanticipated further adverse impacts related to COVID-19, cash on hand and anticipated revenues from operations will be sufficient to cover our operating expenses for at least the next twelve months.

As a result of the unique nature of the COVID-19 pandemic and its impacts on our operations, the operations of our customers and the broader economy, coupled with continued challenging economic conditions such as rising inflation, elevated interest rates and challenging labor market conditions, we cannot provide any assurance that the assumptions management has used to estimate our liquidity requirements will remain accurate in either the short-term or the longer-term. The ultimate duration and impact of these events on our business, results of operations, financial condition and cash flows is dependent on future developments, which are uncertain, largely beyond our control and cannot be predicted with any degree of certainty at this time. However, we expect that our results of operations, including revenues, in future periods will continue to be adversely impacted by the COVID-19 pandemic and continued challenging economic conditions, and their negative effects on our business and the businesses of our customers.

Cash Flow

For the six months ended June 30, 2023, cash was primarily used for the issuance of the one-time cash dividend in June 2023, and to fund operations. During the six months ended June 30, 2023, cash used in financing activities consisted of a one-time cash dividend paid in June 2023. We had a net increase in cash of $259,775 and $323,286, during the six-month period ended June 30, 2023 and 2022, respectively. See below for additional discussion and analysis of cash flow.

During the six months ended June 30, 2023, net cash provided by operating activities was $266,778 and $340,452 in the same period of 2022. The decrease in cash flow from operations during the first two quarters of 2023 was the result of realizing lower net income coupled with increases in income tax payable, prepaid income tax, accrued expenses, unearned revenue, and other assets, partially offset by decreases in accounts payable, accounts receivable, and prepaid expenses. A large portion of the decrease in accounts receivable was due to customers paying the outstanding invoices stemming from the problems in transitioning our operational software for utilization review and medical case management.

Net cash provided by investing activities was $1,103,981 during the six-month period ended June 30, 2023, and $17,166 used by investing activities during the six-month period ended June 30, 2022. The increase in net cash provided by investing activities was due to the U.S. Treasury bills maturing partially offset by the investment in new U.S. Treasury bills. We recognized interest of $202,693 for interest earned on our investments during the six months ended June 30, 2023. We expect net cash used in investing activities to increase through 2023 and 2024 as we plan to update our current computer equipment.

During the six months ended June 30, 2023 net cash used in financing activities was $1,110,984, which was the net amount of the declaration of the one-time cash dividend paid in June 2023 of the $1,281,600 and $170,616 in dividend payables. We did not engage in any financing activities during the six months ended June 30, 2022.

Off-Balance Sheet Financing Arrangements

As of June 30, 2023, we had no off-balance sheet financing arrangements.

Inflation

We experience pricing pressures in the form of competitive pricing. Insurance carriers and third-party administrators compete against us for customers by offering bundled claims administration services with their own managed care services at a lower rate. We are also impacted by rising costs for certain inflation-sensitive operating expenses such as labor and employee benefits and facility leases. We believe that these impacts can be material to our revenues or net income. Some of our customers are public entities which contract with us at a fixed price for the term of the contract. Increases in labor and employee benefits can reduce our profit margin over the term of these contracts. See also “the effects of inflation may have a disproportionate impact on our business” of Item 1A Risk Factor of our Annual Report.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in our consolidated financial statements and accompanying notes. Because of the inherent uncertainty in making estimates and judgments, actual results could differ from our estimates and judgments. Our critical accounting policies are disclosed in Note 2, Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our Annual Report and Note 1 and Note 2 to the Notes to the Condensed Consolidated Financial Statements in this quarterly report.

We continually evaluate our accounting estimates and judgments and base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Our critical accounting estimates include leases, allowance for uncollectible accounts, and income taxes, and are discussed in more detail below. Such accounting estimates require the most subjective or complex judgments by us, often as a result of the need to make assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these estimates.

Leases: We determine if an arrangement includes a lease at inception. Right-of-use assets represent our right to use an underlying asset for the lease term; and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date of the lease, renewal date of the lease or significant remodeling of the lease space based on the present value of the remaining future minimum lease payments. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable.

Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. The interest rate implicit in lease contracts is typically not readily determinable. As a result, we utilize our incremental borrowing rate to discount lease payments, which reflects the fixed rate at which we could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. Our leases may include options to extend or terminate the lease which are included in the lease term when it is reasonably certain that we will exercise any such options. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Allowance for Uncollectible Accounts: We determine our allowance for uncollectible accounts by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customers’ current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible.

We must make significant judgments and estimates in determining contractual and bad debt allowances in any accounting period. One significant uncertainty inherent in our analysis is whether our past experience will be indicative of future periods. Although we consider future projections when estimating contractual and bad debt allowances, we ultimately make our decisions based on the best information available to us at the time the decision is made. Adverse changes in general economic conditions or trends in reimbursement amounts for our services could affect our contractual and bad debt allowance estimates, collection of accounts receivable, cash flows, and results of operations. At June 30, 2023, two customers accounted for 10% or more of accounts receivable compared to two customers at June 30, 2022.

Accounting for Income Taxes: We record a tax provision for the anticipated tax consequences of our reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance, if necessary, to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. In the event we determine all, or part of the net deferred tax assets are not realizable in the future, we will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results. The significant assumptions and estimates described above are important contributors to our ultimate effective tax rate each year.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Smaller reporting companies are not required to provide this information.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, which are controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on the evaluation of our disclosure controls and procedures as of June 30, 2023, the end of the period covered by this quarterly report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2023, that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

Management does not believe there have been any material changes to the risk factors listed in Part I, Item 1A, Risk Factors in our Annual Report.

Item 6. Exhibits

Exhibits. The following exhibits are filed or furnished, as applicable, as part of this quarterly report:

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.