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

Throughout this quarterly report, unless the context indicates otherwise, the
terms, "we," "us," "our" or the "Company" refer to Pacific Health Care
Organization, Inc., ("PHCO") and our wholly-owned subsidiaries Medex Healthcare,
Inc. ("Medex"), Medex Managed Care, Inc. ("MMC") and Medex Medical Management,
Inc. ("MMM"), and, where applicable, our former subsidiaries Industrial
Resolutions Coalition ("IRC"), Medex Legal Support, Inc. ("MLS") and Pacific
Medical Holding Company, Inc. ("PMHC").



All statements other than statements of historical fact included herein and in
the documents incorporated by reference in this quarterly report on Form 10-Q
(this "quarterly report"), if any, including without limitation, statements
regarding our future financial position or results of operations, business
strategy, potential acquisitions, budgets, projected costs, and plans and
objectives of management for future operations, are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. In
some cases, forward-looking statements can be identified by terminology such as
"anticipate," "believe," "continue," "could," "estimate," "expect," "forecast,"
"foresee," "future," "intend," "likely," "may," "might," "objective," "plan,"
"potential," "predict," "project," "should," "strategy," "will," "would," and
other similar expressions and their negatives.



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



  ? economic conditions generally and in the industry in which we and our
    customers participate, including the effects resulting from economic
    recessions, international conflicts and rising domestic inflation;
  ? cost reduction efforts by our existing and prospective customers;
  ? the loss, ineffective management, malfunction or increased costs of

third-party-provided technologies and services on which our operations rely;

? 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 breaches and software system failures, or the imposition of laws

imposing costly cybersecurity and data protection compliance;

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

customers' 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;

? 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 with the Securities and Exchange Commission
(the "Commission") on April 14, 2022 (the "annual report").



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



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
which it incorporates by reference. Neither we nor any other person assumes any
responsibility for the accuracy or completeness of forward-looking statements.
Further, except to the extent required by law, we undertake no obligations to
update or revise any forward-looking statements, whether as a result of new
information, future events, or a change in events, conditions, circumstances or
assumptions underlying such statements, or otherwise. We may also make
additional forward-looking statements from time to time. 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.



                                       10

--------------------------------------------------------------------------------

Table of Contents

The following discussion should be read in conjunction with our unaudited
condensed consolidated financial statements and the related notes contained
elsewhere in this quarterly report and in our other filings with the Commission.

Overview



We incorporated under the laws of the state of Utah in April 1970, under the
name Clear Air, Inc. We changed our name to Pacific Health Care Organization,
Inc., in January 2001. In February 2001, we acquired Medex, a California
corporation organized in March 1994, in a share for share exchange. Medex is in
the business of managing and administering both Health Care Organizations
("HCOs") and Medical Provider Networks ("MPNs") in the state of California. In
August 2001 we formed IRC, a California corporation, as a wholly owned
subsidiary of PHCO. Prior to closing IRC, IRC oversaw and managed our Workers'
Compensation carve-outs services. In June 2010, we acquired MLS, a Nevada
corporation incorporated in September 2009. Prior to closing MLS, MLS offered
lien representation services and Medicare set-aside services ("MSA"). In
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 were transferred
to PHCO or its other subsidiaries. Medex now offers our Workers' Compensation
carve-out services previously provided by IRC and Medicare-set asides previously
managed by MLS. MMC oversees the lien representation services previously offered
by MLS.



Business of the Company



We offer an integrated and layered array of 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 by reducing 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 HCOs and our 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 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
employer 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 employer customers to be added while others terminate for a
variety of reasons.



                                       11

--------------------------------------------------------------------------------

Table of Contents

Impact of COVID-19 on our Business

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. Employers whose employees utilize CSPSL are ineligible for
federal tax credits to offset the costs of providing the CSPSL. On September 29,
2022, California passed a bill that extended the CSPSL leave through December
31, 2022 and provides a supplemental paid sick leave relief grant program for
employers to be reimbursed for 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 September 30, 2022,
we have incurred negligible payroll, benefits, administrative, and liability
costs related to CSPSL. However, we could incur some significant costs if
additional booster shots are recommended or required later in 2022, or if
another spike in COVID-19 results in increased usage of the CSPSL benefit by
employees.

Key trends affecting results of operations

As noted throughout this quarterly report, during the three and nine months
ended September 30, 2022 and 2021, COVID-19 has impacted the businesses of our
customers, our business and our results of operations. Most of our customers,
and their employees are located in California. During the three and nine months
ended September 30, 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 and nine months ended September 30, 2022,
California businesses were able to operate without these COVID-19 restrictions
and restrictions on allowable medical treatments for workers' compensation
claims were lifted. As identified in more detail in our discussion of result of
operations below, during the three and nine months ended September 30, 2022, the
lifting of these restrictions has generally led to increased demand from
existing customers for our services, as their employees returned to the
workforce and correlated workplace injuries increased, along with medical
facilities and providers having the capacity to begin treating the backlog of
workplace injuries that occurred when allowable treatment restrictions due to
COVID-19 were in place. We anticipate the foregoing trends will continue at
decreasing rates over future periods as the remaining workforces that return to
in-person work levels off and the backlog of untreated workers' compensation
cases normalizes. These trends have also contributed to increased claims-related
expenses for services provided to us by third parties, as certain such expenses
increase in correlation with the demand for our services.



California has in place legislation to address employer liability in Workers'
Compensation for COVID-19 cases. The law presumes that COVID-19 illnesses
contracted by employees are work related and therefore eligible for workers'
compensation coverage, subject to certain rebuttable presumptions. Our customers
experienced an increase in COVID-19 related workers' compensation claims
throughout 2021 and during the first quarter of 2022 but saw declines in
COVID-19 related claims in the second and third quarters of 2022. For the nine
months ended September 30, 2022, approximately 8% of all claims we processed
have been COVID-19 related, with 53% of those claims occurring in the first
quarter of 2022. During the twelve months ended December 31, 2021, approximately
5% of all claims processed were COVID-19 related.



Revenue generated from COVID-19 workers' compensation claims may become seasonal
and as the frequency of contracting COVID-19 increases and the severity of cases
decreases, it is possible that in the future COVID-19 will no longer be
classified as a workers' compensation illness in California. A portion of our
revenue is generated from fees from our customers when a workers' compensation
claim is opened. If the change of classification for COVID-19 related claims no
longer requires employers to report it as a workers' compensation injury, there
would be a decrease in our COVID-19 related revenues, but we would anticipate
this decrease would be offset by an increase in other workers' compensation
injuries as more employees return to the labor pool.



Some of our customers' industries have been impacted by the recent national
trend of workforce resignations and difficulties in hiring. If our customers
cannot attract new workers, it is possible that some jobs will be replaced with
technology. If technology replaces workers, and/or workplace injuries continue
at lower rates because there are more employees working from home and fewer
employees suffering injuries in the workplace, the increases in revenues we are
beginning to see could flatten or decline.



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



                                       12

--------------------------------------------------------------------------------

  Table of Contents



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. HCO
notifications are mailed out annually and handed out by the employer for all new
hires.



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.



Medical case management



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 our
employer 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, network
access for preferred provider organizations, lien representation, legal support
services, Medicare set-aside and Workers' Compensation carve-out services.



                                       13

--------------------------------------------------------------------------------

Table of Contents

The following table sets forth, for the three and nine months ended September
30, 2022 and 2021, the percentage each revenue item identified in our unaudited
condensed consolidated financial statements contributed to total revenue during
the respective period.



                                               For the three months ended               For the nine months ended
                                                      September 30,                           September 30
                                               2022                   2021             2022                   2021
HCO                                                  24 %                   22 %             23 %                   24 %
MPN                                                   9 %                   11 %             10 %                   10 %
Utilization review                                   31 %                   20 %             29 %                   20 %
Medical bill review                                   7 %                    9 %              8 %                    7 %
Medical case management                              26 %                   33 %             28 %                   35 %
Other                                                 3 %                    5 %              2 %                    4 %




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 customer 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 and HCO/MPN notifications. These fees fluctuate
throughout the year because of the varied timing of customer enrollment into our
HCO or MPN programs 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.



                                       14

--------------------------------------------------------------------------------

Table of Contents

The following table sets forth, for the three and nine-months ended September
30, 2022 and 2021, the percentage each expense item identified in our unaudited
consolidated financial statements contributed to total expense during the
respective period.



                                               For the three months ended               For the nine months ended
                                                      September 30,                           September 30
                                               2022                   2021             2022                   2021
Depreciation                                          1 %                    1 %              1 %                    1 %
Bad debt provision                                    - %                    - %              - %                    - %
Consulting fees                                       5 %                    5 %              4 %                    5 %
Salaries and wages                                   59 %                   57 %             56 %                   57 %
Professional fees                                     6 %                    6 %              6 %                    6 %
Insurance                                             7 %                    7 %              7 %                    7 %
Outsource service fees                               13 %                    9 %             12 %                    8 %
Data maintenance fees                                 - %                    1 %              2 %                    2 %
General and administrative                            9 %                   14 %             12 %                   14 %




Results of Operations

Comparison of the three months ended September 30, 2022 and 2021

The following represents selected components of our consolidated results of
operations for the three-month periods ended September 30, 2022 and 2021,
respectively, together with changes from period-to-period:

                               For three months ended
                                    September 30,
                                2022            2021          Amount Change      % Change
Revenues:
HCO                          $   354,913     $   289,117     $        65,796            23 %
MPN                              128,297         137,834              (9,537 )          (7 %)
Utilization review               443,049         258,251             184,798            72 %
Medical bill review               99,418         117,685             (18,267 )         (16 %)
Medical case management          384,657         439,073             (54,416 )         (12 %)
Other                             43,663          68,658             (24,995 )         (36 %)
Total revenues                 1,453,997       1,310,618             143,379            11 %

Expense:
Depreciation                       9,661          12,657              (2,996 )         (24 %)
Bad debt provision                (5,520 )             -              (5,520 )           - %
Consulting fees                   56,148          58,275              (2,127 )          (4 %)
Salaries and wages               699,026         679,530              19,496             3 %
Professional fees                 76,065          76,014                  51             - %
Insurance                         79,974          86,527              (6,553 )          (8 %)
Outsource service fees           156,677         109,926              46,751            43 %
Data maintenance                   2,898          11,917              (9,019 )         (76 %)
General and administrative       112,135         168,939             (56,804 )         (34 %)
Total expenses                 1,187,064       1,203,785             (16,721 )          (1 %)

Income from operations           266,933         106,833             160,100           150 %

Income before taxes              266,933         106,833             160,100           150 %
Income tax provision              74,928          29,987              44,941           150 %

Net income                   $   192,005     $    76,846     $       115,159           150 %




                                       15

--------------------------------------------------------------------------------

  Table of Contents



Revenue



HCO



During the three-month period ended September 30, 2022, HCO revenue increased
23%, compared to the same period in the prior year. The increase was
attributable to a renegotiation of certain deliverables to an existing customer
and an increase in claims activity from existing customers which generated fees
for notifications and claim network fees. These increases were partially offset
by the loss of two customers in the fourth quarter of 2021, which decreased
revenues from HCO enrollment. Part of the revenue generated in HCO fees is for
the opening of workers' compensation claims. During the three-month period ended
September 30, 2022, 4% of HCO claims were COVID-19 related, compared to 5% in
the same period in the prior year. If California legislation declassifies
COVID-19 as a workers' compensation claim, we expect HCO revenues to decrease.



MPN



MPN revenue for the three-month period ended September 30, 2022, decreased by
7%, compared to the same period in the prior year. The decrease in MPN revenue
was due to a decrease in the number claims reported due to the loss of a
customer in the fourth quarter of 2021 that resulted in lower claims activity.
Part of the revenue generated in MPN fees is for the opening of workers'
compensation claims. The decrease in MPN revenue was partially offset by
increases in claims activity by existing customers due to higher COVID-19
related claims. During the three-month period ended September 30, 2022, 30% of
MPN claims were COVID-19 related, compared to 28% in the same period in the
prior year. If California legislation declassifies COVID-19 as a workers'
compensation claim, we expect MPN revenues to decrease.



Utilization review



During the three-month period ended September 30, 2022, utilization review
revenue increased 72%, compared to the same period in the prior year due to an
increase in utilization reviews from existing customers and the addition of a
new customer in the fourth quarter of 2021. These increases were partially
offset by decreases due to the loss of a customer in the third quarter of 2021.



Medical bill review



During the three-month period ended September 30, 2022, medical bill review
revenue decreased by 16%, compared to the same period in the prior year. The
decrease was mainly due to processing fewer hospital bills from existing
customers and the percentage of saving we earned on hospital bills processed was
lower. Medical bill reviews are billed at a flat rate, while hospital bills are
billed at a percentage of savings and fluctuate during the year.



Medical case management



During the three-month period ended September 30, 2022, medical case management
revenue decreased 12%, compared to the same period in the prior year. The
decrease in medical case management revenue was primarily due to customers
electing not to apply medical case management to all of their COVID related
claims in the 2022 period as they had done in the 2021 period and a decrease in
the number of new referred claims managed with existing customers as a result of
fewer workplace injuries during 2020 and 2021 due to COVID related workforce
restrictions.



Other



Other revenue for the three-month period ended September 30, 2022, decreased
36%, compared to the same period in the prior year. The decrease in other
revenue was the result of fewer Medicare set-aside claims and the
discontinuation of our network referral access for non-HCO, non-MPN customers
after the loss of our last customer who utilized the service in the fourth
quarter of 2021. We do not anticipate future revenues from network referral fees
generated from referrals to non-HCO, non-MPN customers, as we no longer offer
this service. The decrease was partially offset by increases in fees for network
access for preferred provider organizations, we expect other revenue to be lower
in future periods.



Expenses



Total expenses for the three month period ended September 30, 2022, decreased
1%, compared to the same period in the prior year. The decrease was attributable
to decreases in depreciation, bad debt provision, consulting fees, insurance,
data maintenance, and general and administrative partially offset by increases
in salaries and wages and outsource service fees.



                                       16

--------------------------------------------------------------------------------

  Table of Contents



Insurance



During the three-month period ended September 30, 2022, insurance expenses
decreased 8%, compared to the same period in the prior year. The decrease in
insurance expenses was primarily attributed to decreases in medical insurance
premiums as a result of us having fewer employees in 2022, compared to 2021.



Outsource service fees

During the three-month period ended September 30, 2022, fees for outsourced
services increased 43%, compared to the same period in the prior year. The
increase was due to an increased demand for our services primarily from existing
clients for utilization review, a service which we partially outsource.

General and administrative



During the three-month period ended September 30, 2022, general and
administrative expenses decreased 34%, compared to the same period in the prior
year. The decrease was primarily attributable to decreases in rent - office,
auto expense, bank charges, charity - cash contributions, licenses and permits,
travel, office supplies, postage, telephone, and vacation expenses. The largest
decrease was in rent - office as we moved into a smaller office. The other
various expenses that are part of maintaining a larger office such as postage,
telephone, and office supplies were also lower as we adjusted our operations to
take advantage of cloud based solutions. The decreases were partially offset by
increases in advertising, dues and subscriptions, education, IT enhancement,
meals, miscellaneous expenses, and parking. Due to moving most of our office
operations to cloud or software services, dues and subscriptions for these
services increased along with increases in IT security education for our
employees and additional IT enhancements.



Income from operations



As a result of the $143,379 increase in total revenue during the three-month
period ended September 30, 2022, and the $16,721 decrease in total expenses
during the same period, our income from operations increased $160,100, or 150%,
during the three-month period ended September 30, 2022, when compared to the
same period in the prior year.



Income tax provision



We realized an increase in our income tax provision of $44,941, or 150%, during
the three-month period ended September 30, 2022, compared to the same period in
the prior year, because of the increase in income before taxes realized.



Net income



During the three-month period ended September 30, 2022, we realized an 11%
increase in total revenues, a 1% decrease in total expenses, and a 150% increase
in our provision for income tax when compared to the same period in the prior
year. As a result, we realized a net increase of $115,159, or 150%, in net
income during the three-month period ended September 30, 2022, compared to the
same period in the prior year.



                                       17

--------------------------------------------------------------------------------

Table of Contents

Comparison of nine months ended September 30, 2022 and 2021

The following represents selected components of our consolidated results of
operations, for the nine-month periods ended September 30, 2022 and 2021,
respectively, together with changes from period-to-period:

                                              For nine months ended
                                                  September 30,
                                              2022            2021          Amount Change       % Change
Revenues:
HCO                                        $   985,192     $   936,382     $        48,810              5 %
MPN                                            422,227         396,497              25,730              6 %
Utilization review                           1,220,941         796,927             424,014             53 %
Medical bill review                            333,310         292,445              40,865             14 %
Medical case management                      1,218,077       1,381,929            (163,852 )          (12 %)
Other                                          102,084         174,251             (72,167 )          (41 %)
Total revenues                               4,281,831       3,978,431             303,400              8 %

Expense:
Depreciation                                    23,153          35,964             (12,811 )          (36 %)
Bad debt provision                                (737 )           494              (1,231 )         (249 %)
Consulting fees                                166,309         173,796              (7,487 )           (4 %)
Salaries and wages                           2,018,638       2,073,133             (54,495 )           (3 %)
Professional fees                              222,703         221,970                 733              - %
Insurance                                      238,851         242,334              (3,483 )           (2 %)
Outsource service fees                         433,275         304,085             129,190             42 %
Data maintenance                                59,400          75,293             (15,893 )          (21 %)
General and administrative                     418,079         492,264             (74,185 )          (15 %)
Total expenses                               3,579,671       3,619,333             (39,662 )           (1 %)

Income from operations                         702,160         359,098             343,062             96 %

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

Income before taxes                            702,160         819,798            (117,638 )          (14 %)
Income tax provision                           197,096         140,956              56,140             40 %

Net income                                 $   505,064     $   678,842     $      (173,778 )          (26 %)




Revenue



HCO



During the nine-month period ended September 30, 2022, HCO revenue increased 5%,
compared to the same period the prior year. The increase in HCO revenue was
primarily attributable to an increase in claims from existing customers and
renegotiation of certain deliverables to an existing customer. If California
legislation declassifies COVID-19 as a workers' compensation claim, we expect
HCO revenues to decrease.



                                       18

--------------------------------------------------------------------------------

  Table of Contents



MPN



MPN revenue for the nine-month period ended September 30, 2022, increased 6%,
compared to the same period in the prior year. The increase was attributable to
an increase in the number of claims reported by existing customers in the first
quarter due to an increase in COVID-19 related claims, partially offset by the
loss of a customer in the fourth quarter of 2021. 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. If
California legislation declassifies COVID-19 as a workers' compensation claim,
we expect MPN revenues to decrease.



Utilization review

During the nine-month period ended September 30, 2022, utilization review
revenue increased 53%, compared to the same period in the prior year. The
increase was primarily attributable to an increase in utilization reviews
submitted by existing customers and a new customer added in the fourth quarter
of 2021.

Medical bill review



During the nine-month period ended September 30, 2022, medical bill review
revenue increased by 14%, when compared to the same period in the prior year.
This increase was primarily due to an increase in hospital and non-hospital
bills reviewed as injured workers began seeking medical treatment for injuries
suffered during the pandemic when medical treatment for workers' compensation
claims were subject to restrictions.



Medical case management



During the nine-month period ended September 30, 2022, medical case management
revenue decreased by 12%, compared to the same period in the prior year. The
decrease in medical case management revenue was primarily due to customers
electing not to apply medical case management to all of their COVID related
claims in the 2022 period as they had done in the 2021 period and a decrease in
the number of new referred claims managed with existing customers as a result of
fewer workplace injuries during 2020 and 2021 due to COVID related workforce
restrictions.



Other



Other revenue for the nine-month period ended September 30, 2022, decreased 41%,
compared to the same period in the prior year. The decrease was primarily the
result of fewer Medicare set-aside claims, fewer fees for network access for
preferred provider organizations and the discontinuation of our network referral
access for non-HCO, non-MPN customers after the loss of our last customer who
utilized the service in the fourth quarter of 2021. As noted above, since the
fourth quarter of 2021 we discontinued network referral access for non-HCO,
non-MPN customers as this type of service is no longer offered in the
marketplace, we expect other revenue to be lower in future periods.



Expenses



Total expenses for the nine-month period ended September 30, 2022, decreased 1%,
compared to the same period in the prior year. The decrease was the result of
decreases in depreciation, bad debt provision, consulting fees, salaries and
wages, insurance, data maintenance, and general and administrative, which was
partially offset by an increase in professional fees and outsource service fees.



Outsource service fees



During the nine-month period ended September 30, 2022, outsource service fees
increased 42%, compared to the same period the prior year. The increase was
primarily the result of an increase in the volume of utilization reviews and
medical bill reviews, partially offset by fewer Medicare set-aside claims. The
increase in the volume of utilization review and medical bill review is due to
injured workers now seeking medical treatment for injuries that occurred during
the pandemic when treatments for workplace injuries were restricted, as well as
for our customers' employees returning to the workforce and getting injured on
the job. The increased volume in these services required us to increase our
usage of these outsourced services.



Data maintenance



During the nine-month period ended September 30, 2022, data maintenance fees
decreased 21%, compared the same period the prior year. The decrease was
primarily the result of decreases in the number of claims from the loss of an
MPN customer in the fourth quarter of 2021 that generates fees for MPN
notifications, partially offset by increases in our customers' employee counts
for enrollment into our HCO and MPN programs.



                                       19

--------------------------------------------------------------------------------

  Table of Contents



General and administrative



During the nine-month period ended September 30, 2022, general and
administrative expenses decreased by 15%, compared to the same period the prior
year. This decrease was primarily attributable to decreases in auto expenses,
bank charges, licenses and permits, office supplies, postage and delivery,
printing and reproduction, rent expense - equipment, rent expense - office,
shareholders' expense, telephone, and vacation expense. Rent expense - office,
telephone, and vacation expense, were 61%, 11%, and 16%, respectively of the
overall decreases in expenses. Rent expense for office and telephone decreased
in May 2022, when we moved office locations to a much smaller location and moved
to a cloud based phone system. The decreases were partially offset by increases
in advertising, dues and subscriptions, education, equipment - repairs, IT
enhancement/internet, meals, travel, miscellaneous expenses, and parking. IT
enhancement, dues and subscriptions and miscellaneous expenses increased due to
the office move, making changes to our IT systems and transitioning office
software and phones to subscription based services.



Income from operations

Total revenues increased by $303,400 and total expenses decreased by $39,662,
which led to an increase in income from operations of $343,062.

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, 2022, we realized
no other income (expense).



Income tax provision



We realized a 40% increase in our income tax provision during the nine-month
period ended September 30, 2022, compared to the same period in the prior year.
During the nine-month period ended September 30, 2022, we realized $343,062 more
in income from operations than during the same period in the prior year. During
the nine-month period ended September 30, 2021, we realized net other income of
income of $460,700 PPP loan forgiveness. The other income realized from the PPP
loan forgiveness in the 2021 period was exempt from federal income taxation, but
not state income taxation, which was the primary contributing factor to why our
income tax provision was higher in the 2022 period than the 2021 period despite
the fact that our income before taxes was actually higher in the 2021 period.



Net income



As noted in the preceding paragraph, during the nine-month period ended
September 30, 2022, we realized a $343,062 increase in income from operations
compared to the prior year period. However, during the nine-month period ended
September 30, 2021, we realized $460,700 in other income as a result of PPP loan
forgiveness. We realized no other income during the nine-month period ended
September 30, 2022. As a result, we realized a $173,778, or 26% decrease in net
income during the nine-month period ended September 30, 2022, compared to the
same period in the prior year.

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 our 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.



As a result of the pandemic subsiding, restrictions being removed and employees
returning to work, coupled with our efforts to transition the Company to a
remote working environment, and reductions in overhead expenses, during the
nine-month period ended September 30, 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 impacts, (ii)
economic recession or a longer-term downturn in the general economy, (iii)
further impacts related to rising or sustained inflation or the sanctions,
countermeasures and other actions in response to the Russia-Ukraine conflict, or
(iv) 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 well as for the
longer term.



                                       20

--------------------------------------------------------------------------------

Table of Contents

As of September 30, 2022, we had cash on hand of $10,640,063 compared to
$10,085,372 as of December 31, 2021. The $554,691 increase was the result of net
cash provided by our operating activities, partially offset by cash used in
investing activities.

We took advantage of both the First Draw and Second Draw Paycheck Protection
Programs. Because the funds were used as designated under those programs, we
received full forgiveness of all PPP loans received. In the future we may
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 planned certain capital expenditures, including changing our operational
software, the process of which we are currently undergoing. We anticipate the
cost to change operational software will result in significantly higher capital
expenditures than in previous years. We encountered difficulties with the first
software vendor in this transition and have had to seek another software vendor,
the result of which has delayed this transition and increased capital
expenditures for this project. If we encounter further issues or delays with the
transition capital expenditures could be higher than anticipated, but we believe
we have adequate capital on hand to cover these expenses. We do not anticipate
these expenditures will require us to seek outside sources of funding.



We believe our strong cash position could allow us to identify and capitalize on
potential opportunities to expand our business through the acquisition of
existing businesses that may have insufficient resources to overcome the impacts
of the COVID-19 pandemic or current uncertain economic conditions. Such
expansion could occur through accretion to 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 of rising inflation or
economic recession, 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. We expect that our results of operations, including revenues, in future
periods will be partially impacted by the COVID-19 pandemic due to the
possibility that as COVID-19 becomes more common and less severe that COVID-19
workers' compensation claims may no longer be classified as a workers'
compensation illness. We expect that with rising inflation profit margins will
be impacted due to fixed pricing for some of our public entity customers and the
increasing costs in salaries and wages as we compete to recruit and retain
employees.



Cash flow



During the nine months ended September 30, 2022, cash was primarily used to fund
operations. We had a net increase in cash of $554,691 during the nine months
ended September 30, 2022. See below for additional information.



                                                For the nine months ended
                                                      September 30,
                                                2022                2021
                                             (unaudited)         (unaudited)

Net cash provided by operating activities $ 572,310 $ 449,993
Net cash used in investing activities

             (17,619 )           (12,199 )
Net cash provided by financing activities               -             218,900

Net increase in cash                        $     554,691       $     656,694




                                       21

--------------------------------------------------------------------------------

Table of Contents

During the nine months ended September 30, 2022 and 2021, net cash provided by
operating activities was $572,310 and $449,993, respectively, an increase of
$122,317. This increase was primarily the result of decreases in accounts
receivable, deferred rent asset, income tax receivable, other assets, accrued
expenses, partially offset by increases in allowance for bad debt, prepaid
expenses, accounts payable, income tax payable, and unearned revenue. We
realized higher net income during the nine months ended September 30, 2021, than
the same period 2022, as a result of receiving PPP loan forgiveness in the
amount of $460,700 during the 2021 period.

Net cash used in investing activities was $17,619 and $12,199 during the
nine-month periods ended September 30, 2022 and 2021, respectively. During the
nine-month periods ended September 30, 2022 and 2021, net cash was used in
investing activities to purchase new software and other IT enhancements.

During the nine months ended September 30, 2022, we did not engage in any
financing activities. Net cash provided by financing activities during the nine
months ended September 30, 2022, was $218,900. In April 2021, MMM received a
Second Draw PPP loan in the amount of $218,900, that was fully forgiven with
accrued interest in December of 2021.

Off-balance Sheet Financing Arrangements

As of September 30, 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 compete against us for customers by
offering bundled claims administration services with their own managed care
services at a lower rate. We are also impacted by rising costs for certain
inflation-sensitive operating expenses such as labor and employee benefits and
facility leases. We believe that these impacts can be material to our revenues
or net income. Some of our customers are public entities which contract with us
at a fixed price for the term of the contract. Increases in labor and employee
benefits can reduce our profit margin over the term of these contracts. See also
"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.



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.



                                       22

--------------------------------------------------------------------------------

Table of Contents

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, 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.



                                       23

--------------------------------------------------------------------------------

Table of Contents