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

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
("quarterly report"), if any, including without limitation, statements regarding
our future financial position, business strategy, potential acquisitions,
budgets, projected costs, and plans and objectives of management for future
operations, are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995.. I some cases, forward-looking
statements can be identified by terminology such as "anticipate," "believe,"
"continue," "could," "estimate," "expect," "forecast," "future," "intend,"
"likely," "may," "might," "objective," "plan," "potential," "predict,"
"project," "should," "strategy," "will," "would," other similar expressions and
their negatives.



Forward-looking statements are 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:

? economic conditions generally and in the industry in which we and our

customers participate, including the effects resulting from international

    conflicts and rising domestic inflation;


  ? the impact on our business of COVID-19, including the reduction of our

customer's workforces as a result of a variety of COVID-19-related causes, as

well as government mandates and impacts on the workers' compensation industry,

    the businesses of our customers and on the economy generally;


  ? 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 and breaches, or the

    imposition of laws imposing costly cybersecurity and data protection
    compliance;

? disruptive technologies that could render our services less competitive or

obsolete;

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

from whatever source; and

? delays, reductions 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, 2021, filed the Securities and Exchange Commission (the
"Commission") on April 14, 2022 (the "Annual Report").



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



You should not place undue reliance on forward-looking statements. The
forward-looking statements are based on the beliefs of management as well as
assumptions made by and information currently available to management and apply
only as of the date of this report or the respective dates of the documents from
which they incorporate by reference. Neither we nor any other person assumes any
responsibility for the accuracy or completeness of forward-looking statements.
Further, except to the extent required by law, we undertake no obligations to
update or revise any forward-looking statements, whether as a result of new
information, future events, a change in events, conditions, circumstances or
assumptions underlying such statements, or otherwise. We may also make
additional forward-looking statements from time to time. All such subsequent
forward-looking statements, whether written or oral, made by us or on our
behalf, are also expressly qualified by these cautionary statements.



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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"), Medex Managed Care, Inc. ("MMC") and Medex Medical Management,
Inc. ("MMM"), and, where applicable, former subsidiaries Industrial Resolutions
Coalition ("IRC") Medex Legal Support, Inc. ("MLS") and Pacific Medical Holding
Company, Inc. ("PMHC").



Overview



We incorporated under the laws of the state of Utah in April 1970, under the
name Clear Air, Inc. We changed our name to Pacific Health Care Organization,
Inc., in January 2001. In February 2001, we acquired Medex, a California
corporation organized in March 1994, in a share for share exchange. Medex is in
the business of managing and administering both Health Care Organizations
("HCOs") and Medical Provider Networks ("MPNs") in the state of California. In
August 2001 we formed IRC, a California corporation, as a wholly owned
subsidiary of PHCO. Prior to closing IRC, IRC oversaw and managed our Workers'
Compensation carve-outs services. In June 2010, we acquired MLS, a Nevada
corporation incorporated in September 2009. Prior to closing MLS, MLS offered
lien representation services and Medicare Set-aside services ("MSA"). In
February 2012, we incorporated MMM, a Nevada corporation, as a wholly owned
subsidiary of the Company. MMM is responsible for overseeing and managing
medical case management services. In March 2011, we incorporated MMC, a Nevada
corporation, as a wholly owned subsidiary of the Company. MMC oversees and
manages the Company's utilization review and bill review services. In October
2018, we incorporated PMHC, a Nevada corporation, as a wholly owned subsidiary
of the Company to act as a holding company for future potential acquisitions.



In October 2021, to simplify business procedures, bookkeeping and administrative
structure; and eliminate duplicative functions and reduce costs; we terminated
the existence of IRC, MLS and PMHC and wound up those subsidiaries. The
business, assets, liabilities, and services of those entities have been
transferred to PHCO or its other subsidiaries. Medex now offer our Workers'
Compensation carve-out services previously provided by IRC and Medicare-set
asides previously managed by MLS and MMC oversees 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.



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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 of
Workers' Compensation insurance is a critical problem for employers, though we
are able to process medical bills nationally. Our provider networks, which are
located only in California, are composed of providers experienced in treating
worker injuries.



Our business generally has a long sales cycle, typically eight months or more.
Once we have established a customer relationship and enrolled employees of our
customers, we anticipate our revenue to adjust with the growth or retraction of
our customers' employee headcount. Throughout the year, we expect new employees
and customers to be added while others terminate for a variety of reasons.

Impact of COVID-19 on our Business

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 a shift from in-person office
related costs to costs associated with maintaining a remote workforce, including
reimbursing employees for internet, phone, and office supply expenses;
additional computer hardware costs; and some administrative burdens in complying
with California laws and regulations related to COVID-19. With fewer employees
coming to the office, we have fewer costs related to sanitizing, cleaning, and
providing PPE supplies to the office to prevent potential COVID-19 exposure.



Revenue for our services is derived from our customers' employee headcount and
workers' workplace injuries. During the periods covered by this report, several
of our customers, including some of our largest customers, had to suspend or
significantly modify their operations during much or all of the pandemic. Since
California lifted its COVID-19 restrictions, 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, we have
ceased to offer 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 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.
On September 30, 2021, the CA SPSL paid leave expired.



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In June 2021, the Governor of California terminated the executive order that put
into place the Stay Home Order and Blueprint for a Safer Economy. This removed
restrictions on physical distancing, capacity limits on businesses, and the
county tiers system. We have elected to allow employees to continue working
remotely and made arrangements to reduce our office space to an executive and
shared office for other employees to come in periodically in 2022.



In February 2022, California passed another COVID-19 Supplemental Paid Sick
Leave law ("CSPSL"). It provides employees paid leave for COVID-19 related
reasons such as 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 allows employees to retroactively request
reimbursement for qualifying leave or to use it towards future requests through
September 30, 2022. Unlike the CA SPSL from 2021, employers whose employees
utilize CSPSL are ineligible for federal tax credits to offset the costs of
providing the CSPSL.



We will continue to offer COVID-19-specific paid leave benefits to our employees
until the expiration of CSPSL. Family, medical, and other types of leave remain
available to employees under existing Company policy. As of April 2022, we have
incurred negligible payroll, benefits, administrative, and liability costs
related to CSPSL. However, we could incur some significant costs if a second
booster shot is recommended or required later in 2022, or if another spike in
COVID-19 results in increased usage of the CSPSL benefit by employees.



Unlike much of the U.S. economy, we have maintained relatively steady employee
recruitment and retention. Our maintenance of a successful remote environment,
including high employee morale and cohesive culture via technology, has also
allowed us to seek candidates in a wider range of locations, some of which have
lower costs of living and lower wage norms, as well as increasing the quantity
of qualified applicants. While we cannot predict or control future trends in
labor in our industry, we believe that our solid recruitment practices and the
opportunities presented by remote work options will help us adapt to a changing
workforce environment.



In response to COVID-19 and transitioning to a remote workforce, we have taken
measures to ensure data security, 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 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 this annual
report, our business has been and could continue to be materially and adversely
affected by the potential interruptions to our business operations resulting
from changes to our business model in response to COVID-19.

Summary of the Quarter ended March 31, 2022

During the quarter ended March 31, 2022, total revenues increased 8% compared to
the quarter ended March 31, 2021. Revenue from HCO, MPN, utilization review and
medical bill review increased 24%, 13%, 34%, 25%, respectively; revenue from
medical case management and other fees decreased 14% and 56%, respectively, as
compared to the quarter ended March 31, 2021.



During the quarter ended March 31, 2022, operating expenses decreased by 3%,
primarily as a result of decreases in depreciation, consulting fees, salaries
and wages, insurance, data maintenance and general and administration expenses
compared to the quarter ended March 31, 2021. These decreases were partially
offset by increases in bad debt provision, professional fees and outsource
service fees. As a result, our income from operations during the quarter ended
March 31, 2022 was $262,109 compared to $120,593 during the quarter ended March
31, 2021.

Our provision for income tax expense decreased 1% during the first fiscal
quarter 2022, from $74,008 in 2021 to $73,574 in 2022 due to a reduction in
income from operations.

Our net income also decreased 63% from $507,285 in 2021 to $188,535 in 2022
primarily as a result of the Paycheck Protection Program loan, in the amount of
$460,700, being forgiven in the quarter ending March 31, 2021.  Basic and fully
diluted earnings per share during fiscal 2022 was $0.01 and $0.01, respectively
compared to $0.04 and $0.04, respectively during fiscal 2021.



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Revenue

We derive revenue primarily from fees charged for access to our provider
networks, enrollment of customers' employees into the HCO or MPN program,
utilization reviews, medical bill reviews, and medical case management services.

HCO



HCO revenue is generated largely from fees charged to our employer customers for
claim network fees to access our HCO networks, employee enrollment into our HCO
program, program administration, custom network fees, annual and new hire
notifications and fees for other ancillary services they may select.



MPN



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



Utilization review



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



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. 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.



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



                          2022      2021
HCO                          25 %      22 %
MPN                          10 %      10 %
Utilization review           25 %      20 %
Medical bill review           9 %       7 %
Medical case management      29 %      37 %
Other                         2 %       4 %




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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, medical case management, and board of director's fees for board
meetings, as well as, legal and accounting fees.

Insurance

Insurance expense is comprised primarily of health insurance benefits offered to
our employees, directors' and officers' liability insurance, Workers'
Compensation coverage and business liability coverage.

Outsource service fees



Outsource service fees consist of costs incurred by our subsidiaries in
partially outsourcing utilization review, medical bill review, administrative
services for medical case management and Medicare set-aside services and
typically tend to increase and decrease in correlation with the demand for those
services.



Data maintenance fees



Data maintenance fees includes fees we pay to a third party to process HCO and
MPN employee enrollment. These fees fluctuate throughout the year because of the
varied timing of customer enrollment into the HCO or MPN program and the number
of employees our customers have in their workforce.



General and administrative



General and administrative expenses consist primarily of office rent,
advertising, dues and subscriptions, equipment/repairs, IT enhancement, licenses
and permits, telephone, office supplies, parking, postage, printing and
reproduction, rent expense for equipment, miscellaneous expenses, shareholders'
expense, charity - cash contribution, auto expenses, bank charges, education,
travel and entertainment, and vacation expense.



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



                             2022      2021
Depreciation                     - %       1 %
Bad debt provision               1 %       - %
Consulting fees                  5 %       5 %
Salaries and wages              54 %      58 %
Professional fees                6 %       5 %
Insurance                        7 %       7 %
Outsource service fees          12 %       1 %
Data maintenance fees            1 %       9 %
General and administrative      14 %      14 %




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Results of Operations

Comparison of the three months ended March 31, 2022 and 2021

The following represents selected components of our consolidated results of
operations for the three-month periods ended March 31, 2022 and 2021,
respectively, together with changes from period-to-period:

                                            For three months ended March 31,
                                              2022                    2021             Amount Change       % Change
Revenues:
HCO                                     $         360,968       $         291,254     $        69,714              24 %
MPN                                               148,611                 131,878              16,733              13 %
Utilization review                                354,956                 265,604              89,352              34 %
Medical bill review                               120,337                  96,667              23,670              25 %
Medical case management                           418,762                 484,433             (65,671 )           (14 %)
Other                                              23,749                  54,526             (30,777 )           (56 %)
Total revenues                                  1,427,383               1,324,362             103,021               8 %

Expense:
Depreciation                                        4,195                  12,619              (8,424 )           (67 %)
Bad debt provision                                  4,783                       -               4,783             100 %
Consulting fees                                    53,955                  57,123              (3,168 )            (6 %)
Salaries and wages                                633,372                 694,618             (61,246 )            (9 %)
Professional fees                                  66,864                  65,829               1,035               2 %
Insurance                                          83,666                  86,696              (3,030 )            (4 %)
Outsource service fees                            143,778                 101,803              41,975              41 %
Data maintenance                                   10,189                  13,296              (3,107 )           (23 %)
General and administrative                        164,472                 171,785              (7,313 )            (4 %)
Total expenses                                  1,165,274               1,203,769             (38,495 )            (3 %)

Income from operations                            262,109                 120,593             141,516             117 %

Other income (expense)
Paycheck protection program loan
forgiveness income (expense)                            -                 464,386            (464,386 )          (100 %)
Paycheck protection program loan
interest income (expense)                               -                  (3,686 )             3,686            (100 %)
Total other income (expense)                            -                 460,700            (460,700 )          (100 %)

Income before taxes                               262,109                 581,293            (319,184 )           (55 %)
Income tax provision                              (73,574 )               (74,008 )               434              (1 %)

Net income                              $         188,535       $         507,285     $      (318,750 )           (63 %)

Key trends affecting results of operations

As noted throughout this quarterly report, during the three months ended March
31, 2022 and 2021, COVID-19 has impacted the businesses of our customers, our
business and our results of operations. Most of our clients, and their employees
are located in California. During the three months ended March 31, 2021,
California had in place COVID-19 restrictions on businesses which resulted in
many of our customers reducing their workforces and caused a decrease in the
number of new workers' compensation claims, as a result of fewer workers in the
labor force. Allowable medical treatment for workers' compensation claims were
also limited to help ease the burden of COVID-19 on medical facilities. During
the three months ended March 31, 2022, the last of the COVID-19-related
restrictions have been lifted in California. While revenues for HCO and MPN
enrollment are steadily increasing as employers begin hiring, some of our
customers' industries have been impacted by the recent national trend of
workforce resignations and difficulties in hiring. If our customers cannot
attract new workers, it is possible that some jobs will be replaced with
technology. If technology replaces workers, and/or workplace injuries continue
at lower rates because there are more employees working from home and fewer
employees suffering injuries in the workplace, the increases in revenues we are
beginning to see could flatten or decline.



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Our revenues for medical case management were also impacted because there was a
smaller labor pool which resulted in fewer new workers' compensation claims. We
believe this trend will be temporary, as the economy recovers from the effects
of COVID-19, but if the trend to smaller labor pools continues, medical case
management reviews could continue to remain lower in the future.



Revenue



HCO



During the three-month periods ended March 31, 2022, HCO revenue increased 24%,
compared to the same period in the prior year. The increase in HCO revenue was
attributable to an increased number of claims, which resulted in an increase in
HCO claim network fees, as well as an increase in new employees enrolled in the
HCO, partially offset by the loss of two customers in 2021.



MPN



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



Utilization review



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



Medical bill review



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



Medical case management



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



Other



Other fees consist of revenue from network access fees derived from out of
network referrals to our network of physicians, claims fees, expert witness
testimony, lien representation, legal support services, Medicare set-aside, and
workers' compensation carve-out services. Other fee revenue for the three-month
period ended March 31, 2022, decreased 56% when compared to the same period a
year earlier. The decrease was the result of fewer Medicare set-aside claims and
the loss of a customer which reduced our claims fees for accessing our network.
The claims fees generated by this type of service is no longer offered in the
current marketplace. Since losing the customer, we have chosen to discontinue
this service in 2021.



Expenses



Depreciation

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

Bad debt



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



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Consulting fees



During the three months ended March 31, 2022, consulting fees decreased to 6%
compared to the three months ended March 31, 2021. The decrease was the result
of a reduction in the number of information systems consultants retained as
compared to the first quarter of 2021.



Salaries and wages



During the three-month period ended March 31, 2022, salaries and wages decreased
by 9% when compared to the same period in 2021. This decrease was the result of
the fewer employees in the first quarter of 2022 compared to 2021.



Outsource service fees



Outsource service fees increased 41% during the three-month period ended March
31, 2022. The increase was primarily the result of increases in the number of
utilization review referrals and medical bill reviews, partially offset by
decreases in medical case management administrative services and referrals sent
out for Medicare set-aside arrangements. We anticipate our outsource service
fees will continue to move in correspondence with the level of utilization
review, medical bill review, certain medical case management services and
Medicare set-aside services we provide in the future.



Data maintenance



During the three-month period ended March 31, 2022, data maintenance fees
decreased 23% primarily as a result of a decrease in the number of customers'
employees enrolled in our HCO program. We anticipate that as businesses recover
from the pandemic that data maintenance fees will move in correspondence with
the level of enrollment of customers' employees into the HCO program.



Income from Operations



Total revenues during the three-month period ended March 31, 2022 increased by
8% and total expenses decreased by 3%, resulting in an increase of 117% in
income from operations when compared to the three-month period ended March 31,
2021.



Income Tax Provision



We realized a 1% decrease in our income tax provision during the three-month
period ended March 31, 2022, compared to the three-month period ended March 31,
2021. In 2021, the Paycheck Protection Program loans were subject to state
income tax, but not federal income tax. In the first quarter of 2022, all our
income was generated by operations and subject to state and federal income tax.



Net Income



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

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 our Company and shareholders to ensure the long-term financial
viability of our 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 not
historically used, nor do we currently possess a credit facility or other
institutional source of financing.



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During the past two fiscal years we have experienced declining revenues as a
result of the impacts of the COVID-19 pandemic on our business, the businesses
of our customers and the overall economy, although we did experience an uptick
in total revenue during the three-month period ended March 31, 2022.  In April
and May 2020, PHCO, MMM and MMC received first draw PPP loans in the aggregate
amount of $460,700.  In the spirit of the PPP loan program policy of protecting
the continued economic stability of employees, we put virtually all of the PPP
loan amounts toward payroll and employee benefit expenses. In February 2021
PHCO, MMC, and MMM received full forgiveness of their first draw PPP loans
including accrued interest. In April 2021 MMM received the second draw PPP loan
in the amount of $218,900. The second draw PPP loan was also used to pay for
qualifying expenses, such as payroll, group health benefits, rent and utilities.
In December 2021 MMM received full forgiveness of the second draw PPP loan
including accrued interest. In addition to availing the Company of the benefits
of these government sponsored programs, we have also focused on reducing other
operating expenses while maintaining our ability to provide the high-quality
care to which our customers are accustomed. Since the outbreak of the pandemic
in early 2020, we have realized a net reduction in our workforce of six
employees. As of the end of April 2022 the office lease on the business space we
occupied at 1201 Dove Street in Newport Beach, California expired. Since the
beginning of the pandemic, we have moved towards operating remotely and have
taken this opportunity to reduce our office rent expense. We relocated to a
smaller office with the office lease on this new space commencing on April 1,
2022. The operating costs for internet and phone and office rent will be less in
the new office space. Some of those savings will be incorporated to enhance our
IT security and new internet phone system.



As a result of the pandemic subsiding, restrictions being removed and employees
returning to work, coupled with our efforts to transition the Company to be
remote, and reductions in overhead expenses, during the first quarter of 2022 we
saw an increase in revenues and a decrease in expenses. We have continued to
realize net income and net cash from operations and have increased our net cash
position. Management currently believes that absent (i) any unanticipated
further COVID-19 impact, (ii) a longer-term downturn in the general economy as a
result of inflation and the sanctions, countermeasures and other actions in
response to the Russia-Ukraine conflict, or (iii) 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 for at least the
next twelve months.



As of March 31, 2022, we had cash on hand of $10,538,609 compared to $10,085,372
as of December 31, 2021. The $453,237 increase was the result of net cash
provided by our operating activities, partially offset by cash used in investing
activities. We had no change in net cash provided by/used in financing
activities during the first quarter of 2022.



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 currently have planned certain capital expenditures including changing
operational software and phone systems. We anticipate the costs to change
operational software to be significantly higher than in previous years starting
in 2022, but 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.



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 COVID-19 pandemic, including accretion of existing business lines or
expansion into new business lines and related industries, including, but not
limited to, the insurance industry. We may also seek growth through organic
development of new lines of business or expansion of existing offerings.
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 interest in our capital stock by a potential seller or the
market.



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 uncertainty surrounding the potential impacts rising inflation, 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 potentially by rising inflation
and their negative effects on economic conditions.



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Cash Flow

During the quarter ended March 31, 2022, cash was primarily used to fund
operations. We had a net increase in cash of $453,237 during the quarter ended
March 31, 2022. See below for additional information.

                                              For the three months ended March 31,
                                                  2022                    2021
                                               (unaudited)             (unaudited)

Net cash provided by operating activities $ 459,370 $

414,528

Net cash used in investing activities                  (6,133 )                (3,234 )
Net cash provided by financing activities                   -                       -

Net increase in cash                        $         453,237       $         411,294




Net cash provided by operating activities was $459,370 and $414,528 during the
quarters ended March 31, 2022 and 2021, respectively. The increase of $44,842 in
cash flow provided by operating activities was the result of realizing lower net
income coupled with decreases in accounts receivable, depreciation, and prepaid
expenses, partially offset by increases in bad debt provision, deferred rent
assets, taxes receivable, other assets, accounts payable, accrued expenses,
unearned revenue, and income tax payable.

Net cash used in investing activities was $6,133 and $3,234 during the quarters
ended March 31, 2022 and 2021, respectively. Net cash used in investing
activities was $2,899 more in 2022 because of an increase in purchases of
computers, furniture, and equipment.

During the quarters ended March 31, 2022 and 2021, we did not engage in any
financing activities.

Off-Balance Sheet Financing Arrangements

As of March 31, 2022, 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 often try to take our 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
"Effects of inflation" of Item 1A Risk Factor of our Annual Report on Form 10-K
filed with the Commission on April 14, 2022.

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.



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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.



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 March 31, 2022 and 2021,
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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