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PHYHEALTH CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements. The purpose of this discussion is to provide an understanding of the financial results and condition of Phyhealth Corporation and to also describe the plans for future growth and expansion. The Company was dormant during 2008, 2009 and most of 2010. The Company was...

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The following discussion should be read in conjunction with our financial statements.

The purpose of this discussion is to provide an understanding of the financial results and condition of Phyhealth Corporation (Company) and to also describe the plans for future growth and expansion.

Forward-Looking Statements

This Management's Discussion and Analysis and other parts of this report contain forward-looking statements that involve risks and uncertainties, as well as current expectations and assumptions. From time to time, the Company may publish forward-looking statements, including those that are contained in this report, relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, but are not limited to, its ability to maintain sufficient working capital, adverse changes in the economy, the ability to attract and maintain key personnel, its ability to identify or complete an acceptable merger or acquisition, and future results related to acquisition, merger or investment activities. The Company's actual results could differ materially from those anticipated in these forward-looking statements, including those set forth elsewhere in this report. The Company assumes no obligation to update any such forward-looking statements.

Operational Overview:

The Company was dormant during 2008, 2009 and most of 2010. The Company was created to receive the business, operating assets and liabilities of Physician Healthcare Management Group, Inc. (PHMG) under a spinoff where shares of the Company are distributed to the stockholders of PHMG and both PHMG and the Company became independent publicly traded companies. That spinoff occurred on November 10, 2010.

During 2011, the Company received its first revenues from services provided by its wholly owned subsidiary Phyhealth Sleep Care Corporation as more fully described below. The receipt of these revenues means that the Company is no longer a "development stage enterprise" for financial accounting purposes. Although several portions of the business plan are still to be implemented, it is now considered to be an operating entity.

The Company's intended core product is the development of community health plans-based on a health maintenance organization (HMO) license-that is owned and operated in partnership with the participating physicians. The Company's community health plans are structured to integrate all the financial and reimbursement components of healthcare delivery; align the financial incentives of all participants; and empower physicians to assume end-to-end management of healthcare for their patients. The Phyhealth community health plan model is built on the foundation of the physician-patient relationship and rewards physicians for proactively providing the preventative care necessary to keep their patients healthy and for closely managing the ongoing care necessary for patients who suffer from chronic disorders to stabilize their health status.

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Through its community health plan operations, the Company intends to expand its product offerings to include ownership and operation of local healthcare facilities and other products and services designed to support its goal to increase physicians' income, reduce their expenses and add to their net worth. Part of this plan was initiated in October 2010 when the Company incorporated a wholly owned subsidiary named Phyhealth Sleep Care Corporation (Sleep Care) and entered into an agreement with an individual operator to open a series of sleep care centers over the next year. In November 2010, Sleep Care initiated the development of a 2-bed diagnostic sleep center in Longmont, Colorado and purchased the assets and assumed certain liabilities of an existing 2-bed diagnostic sleep care center in Denver, Colorado. In January 2011, the Denver facility was expanded to 4 beds. In June 2011, Sleep Care opened a 4-bed diagnostic sleep center in Virginia. In December 2011, the Company closed the Denver facility coincident with the expiration of the leases for this facility, and in January 2012, the Company purchased a 2-bed facility in Brighton, Colorado.

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Results of Operations for the three months ending March 31, 2012 compared to the three months ending March 31, 2011

Sleep care operations:

The sleep care services revenue recognized for the three months ended March 31, 2012 included three sleep centers: one four-bed facility and one two-bed facility, a total of six beds, that were fully operational and one two-bed facility that was only marginally operational during the three months ended March 31, 2012. This is compared to sleep care service revenue resulting from two facilities with a total of six beds for the three months ended March 31, 2011. Revenue increased from $53,243 to $107,253 for the three months ended March 31, 2011 to the same time period in 2012.

The sleep care operating expenses increased from $109,521 to $191,434 for the three months ended March 31, 2011 compared to the three months ended March 31, 2012, respectively. The medical professional fees included in these amounts increased from $82,908 to $155,864 during these same time periods, respectively. Also included in sleep care operating expenses was rent expense that increased from $17,878 to $31,249 during the three months ended March 31, 2011 to March 31, 2012, respectively.

Corporate expenses:

Officer and director compensation of $85,415 and $79,901 for the three months ended March 31, 2012 and 2011, respectively, was incurred in accordance with the employment contracts of the two executive officers of the Company. However, of the $85,415 compensation for the three months ended March 31, 2012, the Company still owes two executives $62,500 because there was not sufficient cash to pay their compensation under their contracts. As of March 31, 2012, the Company owes the two executives a total of $131,013 in unpaid compensation.

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Consulting and professional fees totaled $47,311 and $100,206 for the three months ended March 31, 2012 and 2011 and consisted mostly of legal, audit and accounting fees incurred in the completion of the Company's Form 10K and other day to day operating matters.

Bad debt expense of $29,917 for the three months ended March 31, 2011 was a result of recording the allowance for doubtful accounts for all costs due to the Company by Physhield Insurance Exchange, a Risk Retention Group. Since the Physhield Risk Retention Group was terminated, the Company will not be reimbursed for these costs.

The Company's general and administrative expenses totaling $106,344 and $80,591 for the three months ended March 31, 2012 and 2011, respectively. The increase is due to an increase in depreciation on leased equipment and amortization of intangible assets.

Liquidity and Capital Resources

The Company's cash and liquidity resources have been provided by the assets received in the November 10, 2010 spin-off. As of the date of the spin-off, the Company received $118,127 in cash and $1,061,000 of marketable equity securities and a surplus note receivable. During the year ended December 31, 2011, management sold a portion of the marketable equity securities for $436,462 and liquidated the surplus note receivable for $427,875. Additionally, the President, Chief Executive Officer and Chairman of the Board (CEO) and his spouse have loaned the company $300,000 in convertible notes payable and $25,000 in short-term loans in the year-ended December 31, 2011. These funds have been used to fund the startup of Phyhealth Sleep Centers and to meet general corporate expenses.

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Subsequent to 2011, the President, Chief Executive Officer and Chairman of the Board (CEO) and his spouse have loaned the Company an additional $170,000 in short-term unsecured loans with 12% interest to fund the operations of the Company. These loans are due on demand.

The Company is currently out of funds and is looking for additional financing in order to support the sleep care business as well as administrative expenses. On April 2, 2012, in order to raise funds the Company has entered into a transaction that would sell its common stock that is approximately 95% of its fully diluted ownership interest for $425,000. (See subsequent events, Note 8) However, there is no guarantee that this, or any other, funding can be finalized.

Off-Balance Sheet Arrangements

None

Debt and Contractual Obligations

As a result of the spin-off on November 10, 2010, the Company assumed the two employment agreements, one with its President/Chief Executive Officer/Chairman of the Board (CEO), the other with its Vice President, Chief Operating Officer and Corporate Director (COO). Both agreements are effective upon signing and expire on December 31, 2012. The base salary of the two agreements total $270,000, with combined escalation clauses up to $900,000 if certain revenue, equity and profit milestones are met.

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The Company has lease commitments for corporate office space and three sleep
care operational facilities. The minimum operating lease payments under all four
facility leases total:

                         Year ended March 31:    Amount
                         2013                   $ 139,900
                         2014                     144,200
                         2015                      29,200
                           Total                $ 313,300

The Company is also obligated to monthly payments under three year equipment capital leases are as follows:

                         Year ended March 31:    Amount
                         2013                   $  88,200
                         2014                      69,100
                         2015                      14,000
                           Total                $ 171,300

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. On an ongoing basis we re-evaluate our judgments and estimates including those related to bad debts, investments and income taxes. We base our estimates and judgments on our historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. Our estimates are guided by observing the following critical accounting policies.

Patient Revenues:

The Company recognizes revenues in the period in which services are performed and billed to the patient or third party insurer. Amounts the Company receives for treatment of patients is generally covered by third party insurers and is generally less than the Company's established billing rates. Accordingly, the revenues and related accounts receivable reported in the Company's unaudited consolidated financial statements are recorded at the net amount expected to be received.

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The Company derives a significant portion of its revenues from third party insurers that receive discounts from our standard charges. The Company must estimate the total amount of these discounts to prepare its consolidated financial statements. The various managed care contracts under which these discounts must be calculated are complex and are subject to interpretation and adjustment. The Company estimates the allowance for contractual discounts on a payor-specific basis given its interpretation of the applicable regulations or contract terms. These interpretations sometimes result in payments that differ from the Company's estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management. Changes in estimates related to the allowance for contractual discounts affect revenues reported in the Company's unaudited consolidated statements of operations in the period of the change.

Allowance for loans:

Phyhealth's predecessor loaned funds to several companies and have subsequently recorded a 100% allowance on those investments because the uncertainty regarding the investee's ability to repay the loan. However, if those investees are able to repay the loan it would create material expense recovery to the Company's financial statements. In one such investment, Phyhealth, as the successor, is entitled to 20% of the company for $100 and could gain much more than the original investment by having a 20% ownership interest in the company along with the intellectual property it possesses.

Income taxes

Phyhealth accounts for income taxes using the liability method, which requires the determination of deferred tax assets and liabilities based on the differences between the financial and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which differences are expected to reverse. Deferred tax assets are adjusted by a valuation allowance, if based on the weight of available evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized. Currently 100% of the deferred tax asset is reserved. If in fact Phyhealth does become profitable post spin-off, income will be charged to the statement of operations resulting from a reversal of that allowance. That allowance totals approximately $2.8 million as of December 31, 2011.

Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by the Company.

In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS")." The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRS. The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early application is not permitted. The Company does not expect that the adoption of ASU 2011-04 will have a material impact on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income." Specifically, the new guidance allows an entity to present components of net income or other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2011 and is to be applied retrospectively. The Company does not expect that the adoption of ASU 2011-05 will have a material impact on its consolidated financial statements.

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