PACIFIC HEALTH CARE ORGANIZATION INC – 10-Q – Management's Discussion and Analysis of Financial Statements and Results of Operations

Certain information included in this quarterly report on Form 10-Q ("quarterly
report") and the documents incorporated by reference herein, if any, contain
statements within the meaning of the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995. All statements other than statements
of historical fact are statements that could be forward-looking. You can
recognize these statements through our use of words 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 to known and unknown risks, uncertainties
and other factors, many of which may be beyond our control, that could cause
actual results to differ materially from any future results, expressed or
implied, in forward looking statements. Such factors include, but are not
limited to:

? the impact on our business of COVID-19, as well as its impacts on the

Workers' Compensation industry, the businesses of our customers and on the

    economy generally;


  ? cost reduction efforts by our existing and prospective customers;


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


  ? business combinations among our customers or competitors;

? legislative and regulatory requirements or changes which could render our

    services less competitive or obsolete;


  ? our failure to successfully develop new services and/or products either

organically or through acquisition, or to anticipate current or prospective

    customers' needs;


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


  ? price increases;


  ? cybersecurity and software system failures and breaches;

? reductions in worker's compensation claims or the demand for our services,

    from whatever source; and


  ? delays, reductions, non-payment, or cancellations of contracts we have
    previously entered.




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, filed the Securities and Exchange Commission (the
"Commission") on March 31, 2021 (the "Annual Report").



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.

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"), Medex Medical Management, Inc. ("MMM"), Medex Legal Support,
Inc. ("MLS") and Pacific Medical Holding Company, Inc. ("PMHC").



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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 oversee 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.



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Impact of COVID-19 on our Business

To date, we have been able to adapt our business operations to a primarily
remote workforce, with no material interruptions in service, data breaches,
technology failures, or inability to complete mission-critical functions. We
have been able to effectively maintain contact with employees, partners,
customers, and other related parties using technological solutions such as
virtual meetings and enhanced collaboration programs and have developed policies
and protocols to ensure department and employee performance quality is
maintained despite the change in work setting. This has resulted in 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.



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.
While 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 its 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 of 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 of $460,700. In the spirit of the
PPP loan program policy, which was to protect the continued economic stability
of employees, most of the PPP loan amounts went towards payroll and employee
benefit expenses. In February 2021, PHCO, MMC, and MMM received full forgiveness
of their PPP loans including interest. MMM was eligible for and received a
Second Draw PPP Loan in the amount of $218,900 on April 1, 2021. This Second
Draw PPP Loan can qualify for full loan forgiveness if the disbursements meet
the required forgiveness criteria.



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 as a safety precaution, and currently anticipate maintaining a
significant portion of our workforce fully remote after the pandemic.



We have taken measures to ensure data security in our transition to remote work
during the pandemic, but there is no guarantee that they 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 Factors of our Annual Report, our business has
been and could continue to be materially and adversely affected by the potential
interruptions to our business operations arising from the COVID-19 outbreak.



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Results of Operations

Comparison of the three months ended September 30, 2021 and 2020

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:

                               For three months ended
                                    September 30,
                                2021            2020          Amount Change       % Change
Revenues:
HCO                          $   289,117     $   264,781     $        24,336              9 %
MPN                              137,834         124,836              12,998             10 %
Utilization review               258,251         307,139             (48,888 )          (16 %)
Medical bill review              117,685          77,075              40,610             53 %
Medical case management          439,073         590,784            (151,711 )          (26 %)
Other                             68,658          51,139              17,519             34 %
   Total revenues              1,310,618       1,415,754            (105,136 )           (7 %)

Expense:
Depreciation                      12,657          14,122              (1,465 )          (10 %)
Bad debt provision                     -          11,000             (11,000 )         (100 %)
Consulting fees                   58,275          58,621                (346 )           (1 %)
Salaries and wages               679,530         694,352             (14,822 )           (2 %)
Professional fees                 76,014          68,979               7,035             10 %
Insurance                         86,527          91,951              (5,424 )           (6 %)
Outsource service fees           109,926         115,803              (5,877 )           (5 %)
Data maintenance                  11,917           6,603               5,314             80 %
General and administrative       168,939         163,863               5,076              3 %
   Total expenses              1,203,785       1,225,294             (21,509 )           (2 %)

Income from operations           106,833         190,460             

(83,627 ) (44 %)

Income before taxes              106,833         190,460             (83,627 )          (44 %)
Income tax provision              29,987          53,463             (23,476 )          (44 %)

Net income                   $    76,846     $   136,997     $       (60,151 )          (44 %)




Revenue



HCO



During the three-month periods ended September 30, 2021 and 2020, HCO
revenue was $289,117 and $264,781, respectively. The 9% increase was due 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 of 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.



MPN



MPN revenue for the three-month periods ended September 30, 2021 and 2020, was
$137,834 and $124,836, respectively, an increase of 10%. The increase in MPN
revenue was due to an increase in the number claims reported by existing
customers which resulted in more claim network fees. Like HCO revenue, MPN
revenue is generated largely from fees charged to our employer customers for
access to our MPN networks, per claim fees 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.



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Utilization Review



During the three-month periods ended September 30, 2021 and 2020, 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 Review



During the three-month period ended September 30, 2021, medical bill review
revenue increased by $40,610, to $117,685, compared to $77,075 during the same
period a year earlier. The increase was mainly due to processing more medical
and hospital bills from existing customers, partially offset by the loss of a
customer in the third quarter of 2021.



Medical bill review involves analyzing medical provider services and equipment
billing to ascertain proper reimbursement. Such services include, but are not
limited to, coding review and re-bundling, confirming that the services are
customary and reasonable, fee schedule compliance, out-of-network bill review,
pharmacy review, and preferred provider organization repricing arrangements. Our
medical bill review services can result in significant savings for our
customers.



Medical Case Management



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.



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Bad Debt Provision

During the three-month period ended September 30, 2021, bad debt provision
decreased by $11,000 or 100% compared to the same period in 2020. The decrease
was due to delinquent customers resolving outstanding past-due balances and
staying current in their payment obligations.

Consulting Fees



During the three months ended September 30, 2021, consulting fees decreased to
$58,275 from $58,621 compared to the three months ended September 30, 2020. The
1% decrease was the result of a reduction in the number of information systems
consultants retained as compared to the third quarter of 2020.



Salaries and Wages



During the three-month period ended September 30, 2021, salaries and wages
decreased by 2% when compared to the same period in 2020. This decrease was the
result of the layoff of two employees in July 2021 because of the COVID-19
pandemic. As a result of the layoff, we expect salaries and wages to continue to
be lower throughout the remainder of 2021 than they were in 2020.



Professional Fees



For the three months ended September 30, 2021, professional fees increased by
10% from $68,979 to $76,014 when compared to the three months ended September
30, 2020. The increase in professional fees was the result of increases in
accounting, legal, and medical management fees, partially offset by decreases in
other professional fees.



Insurance



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 was 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 during our regularly scheduled utilization review audit. We
have since made the required corrections to our system and process.



Data Maintenance



During the three-month periods ended September 30, 2021 and 2020, data
maintenance fees were $11,917 and $6,603, respectively. The increase of $5,314
was 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.

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.



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Income from Operations



As a result of the $105,136 decrease in total revenue during the three-month
period ended September 30, 2021, and the $21,509 decrease in total expenses
during the same period, our income from operations decreased $83,627, or 44%,
during the three-month period ended September 30, 2021, when compared to the
same period in 2020.



Income Tax Provision



We realized a $23,476, or 44%, decrease in our income tax provision during the
three-month period ended September 30, 2021, compared to the three-month period
ended September 30, 2020, because of the decrease in income before taxes
realized in the 2021 period.



Net Income



During the three-month period ended September 30, 2021, we realized a 7%
decrease in total revenues, a 2% decrease in total expenses, and a 44% decrease
in our provision for income tax when compared to the same period in 2020. As a
result, we realized a net decrease of $60,151, or 44%, in net income during the
three-month period ended September 30, 2021, compared to the three-month period
ended September 30, 2020.

Comparison of nine months ended September 30, 2021 and 2020

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

                                              For nine months ended
                                                  September 30,
                                              2021            2020          Amount Change       % Change
Revenues:
HCO                                        $   936,382     $   916,693     $        19,689              2 %
MPN                                            396,497         363,902              32,595              9 %
Utilization review                             796,927         854,922             (57,995 )           (7 %)
Medical bill review                            292,445         242,237              50,208             21 %
Medical case management                      1,381,929       1,855,314            (473,385 )          (26 %)
Other                                          174,251         202,101             (27,850 )          (14 %)
Total revenues                               3,978,431       4,435,169            (456,738 )          (10 %)

Expense:
Depreciation                                    35,964          46,716             (10,752 )          (23 %)
Bad debt provision                                 494          11,101             (10,607 )          (96 %)
Consulting fees                                173,796         195,978             (22,182 )          (11 %)
Salaries and wages                           2,073,133       2,238,079            (164,946 )           (7 %)
Professional fees                              221,970         223,747              (1,777 )           (1 %)
Insurance                                      242,334         274,974             (32,640 )          (12 %)
Outsource service fees                         304,085         359,596             (55,511 )          (15 %)
Data maintenance                                75,293          59,415              15,878             27 %
General and administrative                     492,264         515,738             (23,474 )           (5 %)
Total expenses                               3,619,333       3,925,344            (306,011 )           (8 %)

Income from operations                         359,098         509,825            (150,727 )          (30 %)

Other income (expense)
Paycheck protection program loan
forgiveness income                             464,386               -             464,386              -
Paycheck protection program loan
interest expense                                (3,686 )             -              (3,686 )            -
Total other income (expense)                   460,700               -             460,700              -

Income before taxes                            819,798         509,825             309,973             61 %
Income tax provision                           140,956         143,111              (2,155 )           (2 %)

Net income                                 $   678,842     $   366,714     $       312,128             85 %




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Revenue



HCO



During the nine-month periods ended September 30, 2021 and 2020, HCO revenue was
$936,382 and $916,693, respectively. The 2% increase in HCO revenue was
primarily attributable to an increase in claims from existing customers and
renegotiation of certain deliverables to an existing customer, partially offset
by the loss of three HCO customers and fewer custom network fees paid by
customers to maintain custom provider lists.



MPN



MPN revenue for the nine-month periods ended September 30, 2021 and 2020, was
$396,497 and $363,902, respectively, an increase of 9%, due to an increase in
the number of claims reported by two customers. Like HCO revenue, MPN revenue is
generated largely from fees charged to our employer customers for access to our
MPN networks, per claim fees and fees for other ancillary services.



Utilization Review



During the nine-month periods ended September 30, 2021 and 2020, utilization
review revenue was $796,927 and $854,922, respectively. The decrease of 7% in
the 2021 period was primarily attributable to decreased utilization reviews from
the loss of two customers and fewer utilization reviews submitted by other
customers.



Medical Bill Review



During the nine-month period ended September 30, 2021, medical bill review
revenue increased by 21% to $292,445 from $242,237 when compared to the same
period a year earlier. This increase was due to an increase in hospital and
non-hospital bills reviewed, partially offset by the loss of two customers in
2021.



Medical Case Management



During the nine months ended September 30, 2021 and 2020, medical case
management revenue was $1,381,929 and $1,855,314, respectively. The 26% decrease
in medical case management revenue was primarily due to the loss of two
customers and a decrease in the number of claims and amount of time spent on
claims managed with existing customers. The decrease was partially offset by the
addition of a new customer during the first quarter of 2021.



Other



Other revenue for the nine-month periods ended September 30, 2021 and 2020, was
$174,251 and $202,101, respectively. The decrease of $27,850 was primarily the
result of fewer Medicare set-aside claims, partially offset by an increase in
network access fee revenue from an existing customer increasing its utilization
of our provider network.



Expenses



Total expenses for the nine months ended September 30, 2021 and 2020, were
$3,619,333 and $3,925,344, respectively. The decrease of $306,011 was the result
of decreases in depreciation, bad debt provision, consulting fees, salaries and
wages, professional fees, insurance, outsource service fees, and general and
administrative expenses, which was partially offset by an increase in data
maintenance fees.



Depreciation



During the nine-month period ended September 30, 2021, we recorded depreciation
expense of $35,964 compared to $46,716 during the comparable 2020 period. The
decrease in depreciation was primarily attributable to certain fixed assets
being fully depreciated prior to the quarter ended September 30, 2021, partially
offset by the purchasing of new fixed assets.



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Bad Debt Provision

During the nine-month period ended September 30, 2021, bad debt provision
decreased by $10,607 or 96% compared to the same period in 2020. The decrease
was due to delinquent customers resolving outstanding past-due balances and
staying current on their payment obligations.

Consulting Fees



During the nine months ended September 30, 2021, consulting fees decreased 11%
to $173,796 from $195,978 during the nine months ended September 30, 2020. This
decrease of $22,182 was because we had fewer information systems consulting and
consultant fees related to our insurance company acquisition search.



Salaries and Wages

During the nine-month period ended September 30, 2021, salaries and wages
decreased 7% to $2,073,133 compared to $2,238,079 during the same period in
2020. The decrease was primarily the result of the layoff of two employees in
the third quarter of 2021. As noted above, we expect salaries and wages to
continue to be lower throughout the remainder of 2021 than they were in 2020.

Professional Fees



For the nine months ended September 30, 2021, we incurred professional fees of
$221,970 compared to $223,747 during the nine months ended September 30, 2020.
The $1,777 decrease in professional fees was primarily the result of fewer fees
incurred for other professional and medical management services as a result of
decreased medical case management activity, partially offset by increases in
accounting and legal professional fees.



Insurance



During the nine-month period ended September 30, 2021, we incurred insurance
expenses of $242,334, a 12% decrease over the same period in 2020. The decrease
in insurance expenses was primarily attributed to a decrease in medical
insurance premiums as a result of our lower employee count and lower insurance
expense for business, directors' and officers' liability, and Workers'
Compensation coverage.



Outsource Service Fees



We incurred $304,085 and $359,596 in outsource service fees during the
nine-month periods ended September 2021 and 2020, respectively. The decrease of
$55,511 was primarily the result of fewer Medicare set-aside claims, medical
bills reviewed, and utilization reviews processed partially offset by an
increase in outsource service fees for field medical case management and a
$15,000 penalty paid to State of California Department of Industrial Relations
for errors found during our regularly scheduled utilization review audit. As
noted above, we have since made the required corrections to our system and
process.



Data Maintenance



During the nine-month periods ended September 30, 2021 and 2020, data
maintenance fees were $75,293 and $59,415, respectively. The increase of $15,878
was primarily the result of an increase in the number of employees enrolled in
our HCO and MPN programs with our existing customers and an increase in
customers' new hire notifications.



General and Administrative



During the nine-month period ended September 30, 2021, general and
administrative expenses decreased 5% to $492,264 when compared to the nine-month
period ended September 30, 2020. This decrease of $23,474 was primarily
attributable to decreases in advertising, dues and subscriptions,
equipment/repairs, IT enhancement, licenses and permits, office supplies,
parking, postage, printing and reproduction, rent expense for equipment,
miscellaneous expenses, and shareholders' expense, partially offset by increases
in charity - cash contribution, auto expenses, bank charge, education,
telephone, office rent, travel and entertainment, and vacation expense.



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Income from Operations



Total revenue during the nine-month period ended September 30, 2021, decreased
by $456,738 to $3,978,431 compared to $4,435,169 in the same period in 2020. Our
total expenses decreased by $306,011 during the nine months ended September 30,
2021, compared to the same period in 2020. This led to a decrease in income from
operations of $150,727, or 30%, during the nine months ended September 30, 2021,
compared to the nine months ended September 30, 2020.



Other Income (Expense)



In February 2021, the principal and interest on the PPP loans issued to PHCO,
MMC and MMM in April and May 2020, was forgiven in full. As a result, we
realized income from paycheck protection loan forgiveness of $464,386 and loan
interest expense from paycheck protection loans of $3,686 during the nine months
ended September 30, 2021, resulting in total other income during the period of
$460,700. During the corresponding period ended September 30, 2020, we realized
no other income (expense).



Income Tax Provision



We realized a decrease of $2,155 or 2%, in our income tax provision during the
nine-month period ended September 30, 2021, compared to the nine months ended
September 30, 2020. The income realized from the PPP loan forgiveness is exempt
from federal income taxation, but not state income taxation.



Net Income



During the nine-month period ended September 30, 2021, total revenues was
$3,978,431, a decrease of 10%, our provision for income tax decreased 2% and our
total expenses decreased 8% compared to the same period of 2020. These decreases
were offset by the recognition of $460,700 in total other income as a result of
PPP loan forgiveness by PHCO, MMM and MMC. As a result, we realized a $312,128,
or 85%, increase in net income during the nine months ended September 30, 2021,
when compared to the nine months ended September 30, 2020.

Liquidity and Capital Resources

As of September 30, 2021, we had cash on hand of $10,155,151 compared to
$9,498,457 as of December 31, 2020. The $656,694 increase was the result of net
cash provided by our operating activities and financing activities, partially
offset by cash used in investing activities.



As of the date of this report, we have laid off six employees, including four in
July 2020, and two in July 2021, as a result of the COVID-19 pandemic and loss
of customers. As noted above, we have taken advantage of and may in the future
further avail ourselves of federal, state, or local government programs to
protect our workforce as management and our board of directors determine to be
in the best interest of the Company and our shareholders. We have focused on
using our Second Draw PPP Loan for qualifying expenses, such as payroll, and
currently plan to apply for forgiveness of the Second Draw PPP Loan when
appropriate.



We currently have planned certain capital expenditures during the remainder of
2021 to decommission certain IT systems and move to another platform. We believe
we have adequate capital on hand to cover these expenses and do not anticipate
this will require us to seek outside sources of funding.



Historically, we have generally 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. Management currently believes
that absent any unanticipated COVID-19 impact, including, but not limited to a
significant longer-term downturn in the economy or the loss of several major
customers within a condensed period, cash on hand and anticipated revenues from
operations will be sufficient to cover our operating expenses over the
foreseeable future.



As the impact of the COVID-19 pandemic continues to play out throughout our
industry and the broader economy, we believe our strong cash position, could
allow us to identify and capitalize on potential opportunities to expand our
business either through the acquisition of existing businesses that may have
insufficient resources to overcome the impacts of the pandemic, including,
expansion into the insurance industry or through the creation of new lines of
business. Depending upon the nature of the opportunities we identify, such
acquisitions or expansion could require greater capital resources than we
currently possess. Should we need additional capital resources, we could seek to
obtain such through debt and/or equity financing. We do not currently possess an
institutional source of financing and there is no assurance that we could be
successful in obtaining equity or debt financing when needed on favorable terms,
or at all. We could also use shares of our capital stock as consideration for a
business acquisition transaction, but there is also no assurance that there
would be significant market interest in our capital stock.



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Cash Flow



During the nine months ended September 30, 2021, cash was primarily used to fund
operations. We had a net increase in cash of $656,694 during the nine months
ended September 30, 2021. See below for additional information.



                                                    For the nine months ended September 30,
                                                          2021                   2020
                                                       (unaudited)            (unaudited)

Net cash provided by operating activities           $         449,993       $       700,538
Net cash used in investing activities                         (12,199 )             (52,803 )
Net cash provided by financing activities                     218,900               460,700

Net increase in cash                                $         656,694       $     1,108,435




During the nine months ended September 30, 2021 and 2020, net cash provided by
operating activities was $449,993 and $700,538, respectively, a decrease of
$250,545. This decrease was primarily the result of decreases in total revenue,
allowance for bad debt, prepaid expenses, accounts receivable, receivable -
other, accounts payable, accrued expenses, income tax payable, and deferred rent
expense, partially offset by increases in deferred rent assets and unearned
revenue. As a result of applying the PPP loan forgiveness we realized an
increase in net income.

Net cash used in investing activities was $12,199 and $52,803 during the
nine-month periods ended September 30, 2021 and 2020, respectively. During the
nine-month periods ended September 30, 2021 and 2020, net cash was used in
investing activities to purchase computers and equipment.

Net cash provided by financing activities during the nine months ended September
30, 2021 and 2020, was $218,900 and $460,700, respectively. During 2020 we
received three PPP loans for PHCO, MMC and MMM in the amounts of $133,400,
$59,600, and $267,700, respectively. These loans were forgiven in February 2021.
In April 2021, MMM received a Second Draw PPP loan in the amount of $218,900. We
have focused on using these funds for qualifying expenses and plan to apply for
loan forgiveness in the future.

Off-Balance Sheet Financing Arrangements

As of September 30, 2021, we had no off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with 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. We continually evaluate our accounting
policies, 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. Because of the inherent uncertainty in making estimates
and judgments, actual results could differ from our estimates and judgments. We
consider (i) revenue recognition, (ii) leases, (iii) allowance for uncollectible
accounts, and (iv) income taxes to be the most critical accounting policies
because they relate to accounting areas that require the most subjective or
complex judgments by us, and, as such, could be most subject to revision as new
information becomes available.



Revenue Recognition: We recognize revenue when control of the promised services
is transferred to our customers in an amount that reflects the consideration we
expect to be entitled to in exchange for those services. As we complete our
performance obligations which are identified below, we have an unconditional
right to consideration as outlined in our contracts with our customers.
Generally, our accounts receivables are expected to be collected in 30 days in
accordance with the underlying payment terms.



We offer multiple services under our managed care and network solutions service
lines, which the customer may choose to purchase. These services are billed
individually as separate components to our customers. Revenue is recognized as
the work is performed in accordance with our customer contracts. Based upon the
nature of our products, bundled managed care elements are generally delivered in
the same accounting period. Advance payments from subscribers and billings made
in advance are recorded on the balance sheet as unearned revenue.



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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 several factors, including the length of
time trade accounts receivables are past due, our previous loss history, the
customers' current ability to pay their obligations to us, and the condition of
the general economy and the industry as a whole. We write off accounts
receivables 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 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 receivables, cash flows, and results of operations. Two customers
accounted for 10% or more of accounts receivable at September 30, 2021 and 2020,
respectively.



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 in each year.



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