UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, ~~2017~~

2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ________ to _________

Commission File Number 000-50009

PACIFIC HEALTH CARE ORGANIZATION, INC.
~~(Exact~~ (Exact name of registrant as specified in its charter)

Utah	87-0285238
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer I.D. No.)

1201 Dove Street, Suite 300
Newport Beach, California	92660
(Address of principal executive offices)	(Zip Code)

(949) 721-8272

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading symbol		Name of each exchange on which registered
None		N/A		N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for any shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files.) Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ~~(Do not check if a smaller reporting company)~~ ☐ ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected ~~not~~ to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒

As of November ~~10, 2017,~~12, 2021, the registrant had ~~800,000~~12,800,000 shares of common stock, par value $0.001, issued and outstanding.

PACIFIC HEALTH CARE ORGANIZATION, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

	(Unaudited) Balance Sheets as of September 30, ~~2017~~2021 and December 31, ~~2016~~2020	3

	(Unaudited) Statements of Operations for the Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020	4

	(Unaudited) Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020	5

	(Unaudited) Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020	5 6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	6 7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		8 11

Item 3. Quantitative and Qualitative Disclosure about Market Risk		19 23

Item 4. Controls and Procedures		19 23

PART II — OTHER INFORMATION

Item 1A. Risk Factors		20 24

Item 6. Exhibits		20 24

Signatures		21 25

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

Item 1. Financial Information

Pacific Health Care Organization, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

~~(Unaudited)~~

							September 30,			December 31,
							2021			2020
ASSETS
	September 30, 2017			December 31, 2016
Current Assets
Cash	$	5,613,412		$	5,005,617		$	10,155,151		$	9,498,457
Accounts receivable, net of allowance of $60,150 and $64,150		985,787			849,648
Deferred tax asset		11,661			11,661
Accounts receivable, net of allowance of $8,433 and $19,404								786,112			1,063,090
Deferred rent assets								607			-
Receivable – other								3,000			4,000
Prepaid expenses		142,950			136,862			74,212			82,499
Total current assets		6,753,810			6,003,788			11,019,082			10,648,046

Property and Equipment, net
Computer equipment		363,402			349,955			520,072			507,873
Furniture and fixtures		212,823			206,785			226,323			226,323
Office equipment		9,556			15,595			9,556			9,556
Total property and equipment		585,781			572,335			755,951			743,752
Less: accumulated depreciation		(405,154	)		(346,295	)
Less: accumulated depreciation and amortization								(656,669	)		(620,705	)
Net property and equipment		180,627			226,040			99,282			123,047
Operating lease right-of-use assets, net								138,600			309,282
Other assets								26,788			26,788
Total Assets							$	11,283,752		$	11,107,163

Other Assets		26,788			26,788
Total assets	$	6,961,225		$	6,256,616

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts payable	$	62,924		$	101,294		$	59,005		$	80,134
Accrued expenses		278,903			253,367			255,509			275,152
Income tax payable								9,783			61,828
Deferred rent expense		39,358			17,485			-			2,725
Income tax payable		21,115			31,226
Deferred tax liabilities								19,413			19,413
Dividend payable		56,923			56,923			37,000			37,000
Operating lease liabilities, current portion								138,600			243,049
Paycheck protection program loans, current portion								35,024			311,118
Unearned revenue		37,763			38,748			37,315			31,544
Total current liabilities		496,986			499,043			591,649			1,061,963

Total liabilities		496,986			499,043
Long Term Liabilities
Operating lease liabilities, long-term portion								-			66,233
Paycheck protection program loans, long-term portion								183,876			149,582
Total Liabilities								775,525			1,277,778

Commitments and Contingencies		-			-

Stockholders’ Equity
Preferred stock, 5,000,000 shares authorized at $0.001 par value of which 10,000 shares designated as Series A preferred and 1,000 shares issued and outstanding at September 30, 2017 and December 31, 2016		1			1
Common stock, $0.001 par value: 50,000,000 shares authorized; 800,000 shares issued and outstanding at September 30, 2017 and December 31, 2016		800			800
Stockholders’ Equity
Preferred stock; 5,000,000 shares authorized at $0.001 par value of which 40,000 shares designated as Series A preferred and 16,000 shares issued and outstanding							$	16		$	16
Common stock, $0.001 par value, 2,000,000,000 shares authorized, 12,800,000 shares issued and outstanding								12,800			12,800
Additional paid-in capital		428,072			428,072			416,057			416,057
Retained earnings		6,035,366			5,328,700			10,079,354			9,400,512
Total stockholders’ equity		6,464,239			5,757,573
Total liabilities and stockholders’ equity	$	6,961,225		$	6,256,616
Total Stockholders’ Equity								10,508,227			9,829,385

Total Liabilities and Stockholders’ Equity							$	11,283,752		$	11,107,163

The accompanying notes are an integral part of these unaudited condensed consolidated financial ~~statements~~statements.

Table of Contents

Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

~~(Unaudited)~~

	For three months ended September 30,				For nine months ended September 30,
	2017		2016		2017		2016			For three months ended September 30,				For nine months ended September 30,
										2021		2020		2021			2020
Revenues
HCO fees	$	377,923	$	276,951	$	1,041,328	$	965,768
MPN fees		142,257		146,836		427,228		436,893
UR fees		277,886		221,176		788,229		596,205
MBR fees		147,094		187,829		481,352		517,893
NCM fees		582,544		499,118		1,824,121		1,176,447
HCO										$	289,117	$	264,781	$	936,382		$	916,693
MPN											137,834		124,836		396,497			363,902
Utilization review											258,251		307,139		796,927			854,922
Medical bill review											117,685		77,075		292,445			242,237
Medical case management											439,073		590,784		1,381,929			1,855,314
Other		73,203		111,686		255,542		309,260			68,658		51,139		174,251			202,101
Total revenues		1,600,907		1,443,596		4,817,800		4,002,466			1,310,618		1,415,754		3,978,431			4,435,169

Expenses
Depreciation and amortization		19,462		20,925		58,859		63,247
Depreciation											12,657		14,122		35,964			46,716
Bad debt provision		15,750		4,500		30,500		13,500			-		11,000		494			11,101
Consulting fees		90,079		75,228		246,073		265,296			58,275		58,621		173,796			195,978
Salaries and wages		547,963		574,100		1,734,321		1,717,148			679,530		694,352		2,073,133			2,238,079
Professional fees		109,064		82,105		308,295		224,368			76,014		68,979		221,970			223,747
Insurance		79,489		81,452		257,495		243,307			86,527		91,951		242,334			274,974
Outsource service fees		146,287		113,017		404,538		288,225	��		109,926		115,803		304,085			359,596
Data maintenance		12,160		30,160		71,261		113,175			11,917		6,603		75,293			59,415
General and administrative		162,164		157,894		495,474		475,230			168,939		163,863		492,264			515,738
Total expenses		1,182,418		1,139,381		3,606,816		3,403,496			1,203,785		1,225,294		3,619,333			3,925,344

Income from operations		418,489		304,215		1,210,984		598,970			106,833		190,460		359,098			509,825

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

Income before taxes		418,489		304,215		1,210,984		598,970			106,833		190,460		819,798			509,825
Income tax provision		174,560		126,882		504,318		249,529			29,987		53,463		140,956			143,111

Net income	$	243,929	$	177,333	$	706,666	$	349,441		$	76,846	$	136,997	$	678,842		$	366,714

Basic and fully diluted earnings per share:
Basic earnings per share:
Earnings per share amount	$	.30	$	.22	$	.88	$	.44		$	0.01	$	0.01	$	0.05		$	0.03
Weighted average common shares outstanding		800,000		800,000		800,000		800,000
Basic common shares outstanding											12,800,000		12,800,000		12,800,000			12,800,000

Fully diluted earnings per share:
Earnings per share amount										$	0.01	$	0.01	$	0.05		$	0.03
Fully diluted common shares outstanding											12,816,000		12,816,000		12,816,000			12,816,000

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of ~~Cash Flows~~Stockholders' Equity

(Unaudited)

~~(Unaudited)~~

Nine Months Ended
September 30,

2017 2016
Cash flows from operating activities:
Net income $ 706,666 $ 349,441
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 58,859 63,247
Changes in operating assets and liabilities:
   (Decrease) increase in bad debt provision (4,000 ) 12,260
   (Increase) decrease in accounts receivable (132,139 ) 303,051
   (Increase) in prepaid expenses (6,088 ) (58,530 )
   Decrease in prepaid income tax - 238,805
   (Decrease) in accounts payable (38,370 ) (22,914 )
   Increase in deferred rent expense 21,873 10,131
   Increase in accrued expenses 25,536 111,343
   (Decrease) increase in income tax payable (10,111 ) 10,424
   (Decrease) in unearned revenue (985 ) (4,692 )
   Decrease in deferred compensation - 37,124
      Net cash provided from operating activities 621,241 1,049,690

Cash flows from investing activities:
Purchase of computer equipment, furniture and office equipment (13,446 ) (33,556 )
Net cash used in investing activities (13,446 ) (33,556 )

Cash flows from financing activities:
Issuance of cash dividend - (2,063 )
Net cash used in financing activities - (2,063 )

Increase in cash 607,795 1,014,071
Cash at beginning of period 5,005,617 3,834,924
Cash at end of period $ 5,613,412 $ 4,848,995

Supplemental cash flow information
Cash paid for:
Interest $ - $ -
Income taxes paid $ 514,429 $ 300

	Preferred Stock				Common Stock				Additional Paid-in		Retained		Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Earnings		Equity

Balances at December 31, 2019		16,000	$	16		12,800,000	$	12,800	$	416,057	$	8,850,942	$	9,279,815
Net Income		-		-		-		-		-		123,128		123,128
Balances at March 31, 2020		16,000	$	16		12,800,000	$	12,800	$	416,057	$	8,974,070	$	9,402,943
Net Income		-		-		-		-		-		106,589		106,589
Balances at June 30, 2020		16,000	$	16		12,800,000	$	12,800	$	416,057	$	9,080,659	$	9,509,532
Net Income		-		-		-		-		-		136,997		136,997
Balances at September 30, 2020		16,000	$	16		12,800,000	$	12,800	$	416,057	$	9,217,656	$	9,646,529

Balances at December 31, 2020		16,000	$	16		12,800,000	$	12,800	$	416,057	$	9,400,512	$	9,829,385
Net Income		-		-		-		-		-		507,285		507,285
Balances at March 31, 2021		16,000	$	16		12,800,000	$	12,800	$	416,057	$	9,907,797	$	10,336,670
Net Income		-		-		-		-		-		94,711		94,711
Balances at June 30, 2021		16,000	$	16		12,800,000	$	12,800	$	416,057	$	10,002,508	$	10,431,381
Net Income		-		-		-		-		-		76,846		76,846
Balances at September 30, 2021		16,000	$	16		12,800,000	$	12,800	$	416,057	$	10,079,354	$	10,508,227

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2021			2020
Cash flows from operating activities:
Net income	$	678,842		$	366,714
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		35,964			46,716
Bad debt provision		494			11,101
Paycheck protection program loan forgiveness		(460,700	)		-

Changes in operating assets and liabilities:
Decrease in accounts receivable		276,484			79,375
Decrease in receivable – other		1,000			4,454
Decrease in prepaid expenses		8,287			51,865
Decrease in accounts payable		(21,129	)		(4,515	)
Decrease in deferred rent expense		(2,725	)		(20,039	)
(Decrease) increase in accrued expenses		(19,643	)		43,507
Decrease in income tax payable		(52,045	)		-
Increase in deferred rent assets		(607	)		-
Decrease in prepaid income tax		-			135,111
Increase (decrease) in unearned revenue		5,771			(13,751	)
Net cash provided by operating activities		449,993			700,538

Cash flows from investing activities:
Purchase of furniture and office equipment		(12,199	)		(52,803	)
Net cash used in investing activities		(12,199	)		(52,803	)

Cash flows from financing activities:
Proceeds from paycheck protection program loans		218,900			460,700
Net cash provided by financing activities		218,900			460,700
Increase in cash		656,694			1,108,435

Cash at beginning of period		9,498,457			8,104,164
Cash at end of period	$	10,155,151		$	9,212,599

Supplemental cash flow information
Cash paid for:
Interest	$	(3,686	)	$	-
Income taxes	$	69,000		$	-

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, ~~2017~~2021

(Unaudited)

~~(Unaudited)~~

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”) and in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain information and footnote disclosures normally included in consolidated financial statements have been condensed or omitted in accordance with GAAP rules and regulations. The information furnished in these interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect both the recorded values of assets and liabilities at the date of the condensed consolidated financial statements and the revenues recognized and expenses incurred during the reporting period. These estimates and assumptions affect the Company’s recognition of deferred expenses, bad debts, income taxes, the carrying value of its long-lived assets and its provision for certain contingencies. The reasonableness of these estimates and assumptions is evaluated continually based on a combination of historical ~~information~~ and other information that comes to the Company’s attention that may vary its outlook for the future. While management believes the disclosures and information presented are adequate to make the information not misleading, ~~it is suggested that~~the Company recommends these interim condensed consolidated financial statements be read in conjunction with ~~the Company’s~~its audited financial statements and notes thereto included in its annual report on Form 10-K for the year ended December 31, ~~2016.~~2020. Operating results for the nine months ended September 30, ~~2017,~~2021, are not necessarily indicative of the results to be expected for the year ending December 31, ~~2017.~~2021.

Principles of Consolidation — The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Basis of Accounting—The Company uses the accrual method of accounting.

Revenue Recognition — ~~In general,~~The Company follows the guidance of Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers (Topic 606).”

Topic 606 creates a five-step model to recognize revenue which includes (i) identifying the contract with the customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocating the transaction price to the respective performance obligations in the contract, and (v) recognizing revenue when (or as) the Company ~~recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii)~~satisfies the fee is fixed or determinable and (iv) collectability is reasonably assured. Revenues are generated as services are provided to the customer based on the sales price agreed and collected. The Company recognizes revenue as the time is worked or as units of production are completed, which is when the revenue is earned and realized. Labor costs are recognized as the costs are incurred. performance obligation.

The Company derives its revenue from the sale of ~~Managed Care Services, Review Services~~managed care, bill review, utilization review and ~~Case Management Services.~~medical case management services. These services are billed individually as separate components to ~~our~~the Company’s customers.

These fees include monthly administration fees, claim network fees, legal support fees, Medicare ~~set aside~~set-aside fees, lien service fees, ~~workers’ compensation~~Workers’ Compensation carve-outs, flat rate fees or hourly fees depending on the agreement with the ~~client. Such revenue is recognized at the end of each month~~customer.

The Company enters arrangements for ~~which services are performed.~~

~~Management reviews each agreement in accordance with the provisions of revenue recognition topic ASC 605. Arrangements entered into in such agreements consist of~~ bundled managed care which includes various units of accounting such as network solutions and patient management, including managed care. Such elements are considered separate units of accounting due to each element having value to the customer on a stand-alone basis and are billed separately. The selling price for each unit of accounting is determined using the contract price. When the Company’s customers purchase several products the pricing of the products sold is generally the same as if the products were sold on an individual basis. Revenue is recognized as the work is performed in accordance with the Company’s customer contracts. Based upon the nature of the Company’s products, bundled managed care elements are generally delivered in the same accounting period. The Company recognizes revenue for patient management services ratably over the life of the customer contract. Based upon prior experience in managed care, the Company estimates the deferral amount from when the customer’s claim is received to when the customer contract expires. Advance payments from subscribers and billings made in advance are recorded on the balance sheet as ~~deferred~~unearned revenue.

Table of Contents

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2021

(Unaudited)

Accounts Receivables and Bad Debt Allowance – In the normal course of business the Company extends credit to its customers on a short-term basis. Although the credit risk associated with these customers is minimal, the Company routinely reviews its accounts receivable balances and makes provisions for doubtful accounts. The Company ages its receivables by ~~date~~dates of ~~invoice.~~invoices. Management reviews bad debt reserves quarterly and reserves specific accounts as warranted or sets up a general reserve based on amounts over 90 days past due. When an account is deemed uncollectible, the Company charges off the receivable against the bad debt reserve. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances, including any billing disputes. ~~In order to~~To assess the collectability of these receivables, the Company performs ongoing credit evaluations of its customers’ financial condition. Through these evaluations, the Company may become aware of ~~a situation~~situations where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit rating or bankruptcy. The allowance for doubtful accounts is based on the best information available to the Company and is reevaluated and adjusted as additional information is received. ~~We evaluate~~The Company evaluates the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts, and the overall national economy. At September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, bad debt reserves of ~~$60,150~~$8,433 and ~~$64,150,~~$19,404, respectively, ~~was~~were maintained in a general reserve for certain balances over 90 days past due and for accounts that are potentially uncollectible.

The percentages of the amounts due from major customers to total accounts receivable as of September 30, ~~2017~~2021 and ~~September 30, 2016,~~December 31, 2020, are as follows:

9/30/2017 9/30/2016
Customer A 9 % 18 %
Customer B 3 % 10 %
Customer C - % 12 %
Customer D 1 % 10 %
Customer E 14 % 11 %
Customer F 32 % - %

	9/30/2021			12/31/2020
Customer A		25	%		21	%
Customer B		10	%		12	%

Significant Customers - ~~We provide~~The Company provides services to insurers, third party administrators, self-administered employers, municipalities, and other industries. ~~We are~~The Company is able to provide ~~our~~its full range of services to virtually any size employer in the state of California. ~~We are also~~Outside the state of California, the Company is able to provide ~~UR, MBR~~utilization review, medical bill review and ~~NCM services outside the state of California.~~ medical case management services.

During the period ended September 30, ~~2017~~2021 and ~~2016, we~~2020, the Company had ~~three~~2 and ~~four~~3 customers, respectively, that accounted for more than 10% of ~~our~~its total sales. The following table sets forth details regarding the ~~percentage~~percentages of total sales attributable to ~~our~~the Company’s significant customers in the past two years:

	9/30/2017			9/30/2016			9/30/2021			9/30/2020
Customer A		20	%		0	%		25	%		21	%
Customer B		13	%		15	%		11	%		12	%
Customer C		11	%		10	%		8	%		10	%
Customer D		7	%		13	%
Customer E		7	%		10	%

Leases - The Company follows the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company elected to exclude from its balance sheets recognition of leases having a term of 12 months or less (“short-term leases”). Lease expense is recognized on a straight-line basis over the lease term. See Note 2 for further information regarding the Company’s leases.

NOTE 2 - OPERATING LEASES

In July 2015, the Company entered a 79-month lease for approximately 9,439 square feet of office space, which lease commenced in September 2015. This office space serves as the Company’s principal executive offices, as well as the principal offices of its operating subsidiaries.

Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in such arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.

Table of Contents

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2021

(Unaudited)

The components of lease expense and supplemental cash flow information related to leases for the periods are as follows:

	Three Months Ended September 30, 2021			Nine Months Ended September 30, 2021
Lease Cost
Operating lease cost (included in general and administrative in the Company’s condensed consolidated statement of operations)	$	80,246		$	204,651

Other Information
Cash paid for amounts included in the measurement of lease liabilities for the three and nine months ended September 30, 2021	$	80,246		$	204,651
Weighted average remaining lease term – operating leases (in years)	0.58 years			0.58 years
Average discount rate – operating leases		5.75	%		5.75	%

The supplemental balance sheet information related to leases for the period is as follows:

	At September 30, 2021		At December 31, 2020
Operating leases
Operating lease right-of-use assets, net	$	138,600	$	309,282
Short-term operating lease liabilities	$	138,600	$	243,049
Long-term operating lease liabilities		-		66,233
Total operating lease liabilities	$	138,600	$	309,282

Maturities of the Company’s lease liabilities are as follows:

Year Ending	Operating Leases
2021 (remaining 3 months)	$	70,509
2022		71,359
Total lease payments		141,868
Less: Imputed interest/present value discount		(3,268	)
Present value of lease liabilities	$	138,600

Lease expenses were $80,246 and $72,687 during the three months ended September 30, 2021 and 2020, respectively, and $204,651 and $225,903 during the nine months ended September 30, 2021 and 2020, respectively.

NOTE 3 - PAYCHECK PROTECTION PROGRAM LOANS

In April and May 2020, Pacific Health Care Organization, Inc. (“PHCO”), Medex Managed Care, Inc. (“MMC”) and Medex Medical Management, Inc. (“MMM”) received loans pursuant to the Coronavirus Aid, Relief and Economic Security (“CARES”) Act Paycheck Protection Program. PHCO received a loan in the amount of $133,400 (the “PHCO PPP Loan”). The PHCO PPP Loan interest rate was 1.0% per annum. MMM and MMC received loans of $267,700 and $59,600, respectively (collectively the “Medex Companies PPP Loans”). The Medex Companies PPP Loans interest rate was also 1.0% per annum.

In February 2021, the principal and interest on the PHCO PPP Loan and the Medex Companies PPP Loans were forgiven in full. The total amount of the loan and interest forgiven for PHCO was $133,400 and $1,067, respectively. The total amount of the principal and interest forgiven for MMM was $267,700 and $2,142, respectively. The total amount of the principal and interest forgiven for MMC was $59,600 and $477, respectively. The funds were used for qualifying expenses as described in the CARES Act, namely payroll, rent, utilities and group health insurance benefits.

Table of Contents

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2021

(Unaudited)

Economic Aid Act

On April 1, 2021, MMM received a loan pursuant to section 311 of the Economic Aid Act Paycheck Protection Program Second Draw Loans in the amount of $218,900 from First Citizens Bank (the “Second Draw PPP Loan”). The Second Draw PPP Loan bears interest at a rate of 1.0% per annum and is payable monthly commencing on February 28, 2022, if loan forgiveness is not requested by that date. The loan funds are eligible for full forgiveness if used for qualifying expenses, such as payroll, group health benefits, rent and utilities.

NOTE 24 - SUBSEQUENT EVENTS

In accordance with ASC 855-10 Company management reviewed all material events through the date of issuance and except as disclosed below, there are no material subsequent events to report.

On October 19, 2021, the Company completed short-form mergers with its wholly owned subsidiaries Medex Legal Support, Inc. (“MLS”), and Pacific Medical Holding Company (“PMHC”) and Industrial Resolutions Coalition (“IRC”). As a result of the short-form mergers the separate existence of MLS, PMHC and IRC terminated and the business, assets and liabilities of those entities have been transferred to PHCO and, as appropriate were transferred to the Company’s other subsidiaries. The Company continues to offer the services of IRC and MLS through its other subsidiaries. In addition to the services they currently offer, Medex Healthcare, Inc. (“Medex”) will now offer carve-out services and Medicare-set asides and Medex Managed Care, Inc. (“MMC”) will offer lien representation services.

Table of Contents

Item 2. ~~Management’s~~Management’s Discussion and Analysis of Financial Statements and Results of Operations

~~This~~

Certain information included in this quarterly report on Form 10-Q ~~contains forward-looking~~(“quarterly report”) and the documents incorporated by reference herein, if any, contain statements within the meaning of ~~Section 27A~~the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on our management’s beliefs and assumptions and on information currently available to them. For this purpose any statement contained in this report that is not a statement1995. All statements other than statements of historical fact ~~may~~are statements that could be ~~deemed to be forward-looking, including~~forward-looking. You can recognize these statements ~~about~~through our ~~revenue, spending, cash flow, products, new customer acquisitions, trends, actions, intentions, plans, strategies and objectives. Without limiting the foregoing,~~use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “likely,” “may,” ~~“hope,~~“might,” “objective,” “plan,” “potential,” “predict,” “project,” “should,” “strategy,” “will,” ~~“expect,~~“would,” “believe,” “anticipate,” “estimate,” “project,” “intend,” “budget,” “plan,” “forecast,” “predict,” “could,” “should,” or “continue” or comparable terminologyother similar expressions and their negatives.

Forward-looking statements are ~~intended~~subject to ~~identify forward-looking statements. These statements by their nature involve substantial risk~~known and ~~uncertainty,~~unknown risks, uncertainties and ~~actual results may differ materially depending on a variety of~~other factors, many of which ~~are not within~~may be beyond our ~~control. These~~control, that could cause actual results to differ materially from any future results, expressed or implied, in forward looking statements. Such factors include, but are not limited to:

●

the impact on our business of COVID-19, as well as its impacts on the Workers’ Compensation industry, the businesses of our customers and on the economy generally;

●

cost reduction efforts by our existing and prospective customers;

●

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

●

business combinations among our customers or competitors;

●

legislative and regulatory requirements or changes which could render our services less competitive or obsolete;

●

our failure to successfully develop new services and/or products either organically or through acquisition, or to anticipate current or prospective customers’ needs;

●

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

●

price increases;

●

cybersecurity and software system failures and breaches;

●

reductions in worker’s compensation claims or the demand for our services, from whatever source; and

●

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

For more detailed information about particular risk factors related to ~~economic conditions generally and in the industry in which we~~us and our ~~customers participate; cost reduction efforts by~~business, see Item 1A Risk Factors of our ~~existing~~Annual Report on Form 10-K for the year ended December 31, 2020, filed the Securities and ~~prospective customers; competition within~~Exchange Commission (the “Commission”) on March 31, 2021 (the “Annual Report”).

We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our ~~industry, including competition~~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 much larger competitors; business combinations; legislative requirements or changes which could render our services less competitive or obsolete; our failure to successfully develop new services, and/or products or to anticipate current or prospective customers’ needs; our ability to retain existing customers and to attract new customers; price increases; employee limitations; and delays, reductions, or cancellations of contracts we have previously entered.those contained in any forward-looking statements.

~~Forward-looking statements are predictions and~~

You should not ~~guarantees of future performance or events. Forward-looking~~place undue reliance on forward-looking statements. The forward-looking statements are based on ~~current industry, financial~~the beliefs of management as well as assumptions made by and ~~economic~~ information ~~which we have assessed but which, by its nature, is dynamic~~currently available to management and subject to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. We hereby qualify all our forward-looking statements by these cautionary statements. These forward-looking statements speakapply only as of ~~their~~the date of this report or the respective dates ~~and should not be relied upon. We~~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 ~~obligation~~obligations to ~~publicly~~ update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or ~~otherwise (other than pursuant to reporting obligations imposed on registrants pursuant to the Exchange Act) to reflect subsequent events~~assumptions underlying such statements, or ~~circumstances.~~otherwise.

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

Throughout this quarterly report, ~~on Form 10-Q,~~ unless the context indicates otherwise, the terms, “we,” “us,” “our” or “the Company” refer to Pacific Health Care Organization, Inc., (“PHCO”) and our wholly-owned subsidiaries Medex Healthcare, Inc. (“Medex”), Industrial Resolutions Coalition, Inc. (“IRC”), Medex Managed Care, Inc. (“MMC”), Medex Medical Management, Inc. (“MMM”) ~~and~~, Medex Legal Support, Inc. (“MLS”) and Pacific Medical Holding Company, Inc. (“PMHC”).

Table of Contents

Overview

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

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

Business of the Company

We offer an integrated and layered array of complimentary business solutions that enable our customers to better manage their employee Workers’ Compensation-related healthcare administration costs. We are ~~workers’ compensation cost containment specialists.~~ 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 ~~clients~~customers that reduces their ~~workers’ compensation related~~Workers’ Compensation-related medical claims expense in a manner that will assure ~~that~~ injured employees receive high quality healthcare that allows them to recover from injury and return to gainful employment without undue delay. According to studies conducted by auditing bodies on behalf of the California Division of Workers’ Compensation, (“DWC”) the two most significant cost drivers for ~~workers’ compensation~~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.

~~Table of Contents~~

Our core ~~service focuses~~services focus on ~~the reduction of~~reducing medical treatment costs by enabling our ~~client/employers~~customers to share ~~the~~ control over the medical treatment process. This control is primarily obtained by participation in one of our medical treatment networks. We hold several ~~valuable~~ government-issued licenses to operate medical treatment networks. Through Medex we hold two of ~~the~~a total of ~~nine~~seven licenses issued by the ~~State~~state of California to establish and manage ~~a Health Care Organization (“HCO”)~~HCOs within the state of California. We also hold approvals issued by the ~~State~~state of California to act as ~~a Medical Provider Network (“MPN”).~~an MPN and currently administer 26 MPNs. Our HCO and MPN programs provide our ~~client/employers~~customers with provider networks within which ~~the client/employer has~~our customers have some ability to direct the administration of ~~the claim.~~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. ~~We also offer a Nurse Case Management program that~~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. ~~Nurse oversight is a collaborative process that assesses plans, implements, coordinates, monitors and evaluates the options and services required to meet an injured worker’s health needs.~~

Our ~~clients~~customers include self-administered employers, insurers, third party administrators, municipalities, and others. Our principal ~~clients~~customers are companies with operations located in the ~~State~~state of California where the high cost of ~~workers’ compensation~~Workers’ Compensation insurance is a critical problem for ~~employers. Our networks have contracted with approximately 3,900 individual~~employers, though we are able to process medical ~~providers and clinics, as well as hospitals, pharmacies, rehabilitation centers and other ancillary services enabling our networks to provide comprehensive medical services throughout California.~~bills nationally. Our provider networks, which are located only in California, are composed of ~~experts~~providers experienced in treating worker injuries.

~~Beyond the core services~~

Our business generally has a long sales cycle, typically eight months or more. Once we ~~provide to facilitate client/employer involvement in employee medical treatment claims administration~~have established a customer relationship and patient treatment options, we also provide to our HCO and MPN clients a number of claims-related services that bring efficiencies to claim processing and management that further reduce the overall burden of workers’ compensation claims resolution. These services include various back office type functions that assure cost efficiency and accuracy in claim processing, claim reimbursement and claim dispute resolution.

~~Recent Developments~~

~~MPN Enrollment Count~~

~~Changes to the MPN regulations in August 2014 eliminated the notice requirements to~~enrolled employees ~~covered under an MPN program. This change eliminated the need for our MPN clients to submit employee rosters for MPN notice mailings. As a result, over the past several years, many~~ of our ~~MPN client/employers have stopped sending us employee rosters which~~customers, we ~~have historically used~~anticipate our revenue to ~~determine employee/enrollee headcount information. Enough~~adjust with the growth or retraction of our ~~MPN client/employers have stopped submitting to us such information that we can no longer accurately track~~customers’ employee headcount. Throughout the ~~overall number of MPN participants. Therefore, beginning in the first quarter 2017, we ceased tracking the overall number of MPN participants of all client/employers in our MPN program.~~

~~HCO Enrollment Count~~

Historically, the HCO employee/enrollee headcount was directly related to the amount of revenue generated by HCO clients. We were, however, at risk of losing several clients under this pricing model. To remain competitive in the marketplace, we developed a new pricing model, which includes both a fixed monthly flat rate pricing option that is negotiated per client and/or a per claim incurred pricing model. Under the per claim model, our client/employers do not incur this cost as an out of pocket cost, but rather apply the cost directly to the insured or self-insured claim. As a result of moving from our fixed fee per number of employee/enrollees per customer model, beginning in the first quarter 2017 we have discontinued reporting the direct relationship between the number of HCO employee/enrollees and total HCO revenues because that historical relationship has become distorted as a result of the implementation of our new pricing model. This change in our pricing model had no significant impact to our current level of HCO revenues andyear, we expect ~~the same level~~new employees and customers to be added while others terminate for a variety of ~~impact over the remaining months of 2017.~~reasons.

Table of Contents

Impact of COVID-19 on our Business

To date, we have been able to adapt our business operations to a primarily remote workforce, with no material interruptions in service, data breaches, technology failures, or inability to complete mission-critical functions. We have been able to effectively maintain contact with employees, partners, customers, and other related parties using technological solutions such as virtual meetings and enhanced collaboration programs and have developed policies and protocols to ensure department and employee performance quality is maintained despite the change in work setting. This has resulted in costs associated with maintaining a remote workforce, including reimbursing employees for internet, phone, and office supply expenses; costs of sanitizing and cleaning the office after potential COVID-19 exposure events; costs of cleaning and PPE supplies; additional computer hardware costs; and some administrative burdens in complying with California laws and regulations related to COVID-19.

Revenue for our services is derived from our customers’ employee headcount and workers’ workplace injuries. During the periods covered by this report, several of our customers, including some of our largest customers, have had to suspend or significantly modify their operations during much or all of the pandemic. While California has lifted many of its restrictions, it is still trying to slow the spread of COVID-19 and certain counties and businesses have continued or reinstated masking and now have vaccine requirements. Despite the lifting of COVID-19 restrictions for most businesses, some of our customers continue to experience lower than normal business volume and employee counts due to the pandemic. Until the impacts of COVID-19 on our customers’ businesses lessen, employees return to more normal workloads and the occurrence of workplace injuries returns to more traditional levels, we anticipate our revenues will continue to be negatively affected.

California has passed legislation to address employer liability in Workers’ Compensation for COVID-19 cases. The law creates two rebuttable presumptions that COVID-19 illnesses contracted by specific categories of employees are work related and therefore eligible for workers’ compensation. The first presumption applies to COVID-19 workers’ compensation claims filed by peace officers, firefighters, first responders, and health care workers, and does not apply to our employees, though it may apply to our customers’ claims. The second presumption, for employers with five or more employees, applies to employees who test positive for COVID-19 during an outbreak at the employee’s specific place of employment. An outbreak occurs when a set number of employees – depending on the number of employees at the workplace – test positive for COVID-19 during a continuous 14-day period. This presumption applies to the Company. However, no Workers’ Compensation cases related to COVID-19 and/or via this California law have been filed against the Company to date.

In April 2020, the Department of Labor issued regulations to implement the Families First Coronavirus Response Act (“FFCRA”) which provided employees paid leave for COVID-19 related illness for themselves and/or a family member and provided employers with tax credits. The FFRCA expired on December 31, 2020. In March 2021, the American Rescue Plan Act (“ARPA”) was signed into law. The ARPA made tax credits available to employers with fewer than 500 employees who voluntarily chose to grant employees paid leave under the FFCRA through September 30, 2021 and updated certain FFCRA leave provisions. We voluntarily chose to extend the FFCRA paid leave to our employees through its expiration on September 30, 2021 and take the tax credits. Since its expiration, the company has ceased to offer COVID-19-specific paid leave benefits to its employees. Since its expiration, we have ceased to offer COVID-19-specific paid leave benefits to its employees. Family, medical, and other types of leave remain available to employees under existing company policy.

In March 2021, California passed its own COVID-19 Supplemental Paid Sick Leave law (“CA SPSL”). It provided employees paid leave for COVID-19 related reasons such as caring for themselves, family members, or for vaccine related appointments or illnesses caused by COVID-19 or the vaccine from January 1, 2021 through September 30, 2021. The CA SPSL allowed employees to retroactively request reimbursement for qualifying leave or to use it towards future requests through September 30, 2021. Employers whose employees utilized CA SPSL are eligible for federal tax credits to offset the costs of providing the CA SPSL. As of September 30, 2021, the CA SPSL paid leave expired. Therefore, we have ceased offering COVID-19-specific paid leave benefits to our employees. Family, medical, and other types of leave remain available to employees under existing Company policy.

In April and May 2020, PHCO, MMM and MMC were granted Paycheck Protection Program (“PPP”) loans in the aggregate amount of $460,700. In the spirit of the PPP loan program policy, which was to protect the continued economic stability of employees, most of the PPP loan amounts went towards payroll and employee benefit expenses. In February 2021, PHCO, MMC, and MMM received full forgiveness of their PPP loans including interest. MMM was eligible for and received a Second Draw PPP Loan in the amount of $218,900 on April 1, 2021. This Second Draw PPP Loan can qualify for full loan forgiveness if the disbursements meet the required forgiveness criteria.

In June 2021, the Governor of California terminated the executive order that put into place the Stay Home Order and Blueprint for a Safer Economy. This removed restrictions on physical distancing, capacity limits on businesses, and the county tiers system. We have elected to allow employees to continue working remotely as a safety precaution, and currently anticipate maintaining a significant portion of our workforce fully remote after the pandemic.

We have taken measures to ensure data security in our transition to remote work during the pandemic, but there is no guarantee that they will be completely effective, that our productivity will not be adversely impacted, or that we will not encounter some of the common risks associated with a remote workforce, including employees accessing company data and systems remotely. As discussed in greater detail in Item 1A Risk Factorsof our Annual Report, our business has been and could continue to be materially and adversely affected by the potential interruptions to our business operations arising from the COVID-19 outbreak.

Table of Contents

Results of Operations

Comparison of the three months ended September 30, ~~2017~~2021 and ~~2016~~2020

The following represents selected components of our consolidated results of operations for the three-month periods ended September 30, ~~2017~~2021 and ~~2016,~~2020, respectively, together with changes from period-to-period:

											For three months ended
	For three months ended September 30,										September 30,
	2017		2016		Amount Change			% Change			2021		2020		Amount Change			% Change
Revenues:
HCO fees	$	377,923	$	276,951	$	100,972			36	%
MPN fees		142,257		146,836		(4,579	)		(3	%)
NCM fees		582,544		499,118		83,426			17	%
UR fees		277,886		221,176		56,710			26	%
MBR fees		147,094		187,829		(40,735	)		(22	%)
HCO											$	289,117	$	264,781	$	24,336			9	%
MPN												137,834		124,836		12,998			10	%
Utilization review												258,251		307,139		(48,888	)		(16	%)
Medical bill review												117,685		77,075		40,610			53	%
Medical case management												439,073		590,784		(151,711	)		(26	%)
Other		73,203		111,686		(38,483	)		(34	%)		68,658		51,139		17,519			34	%
Total revenues		1,600,907		1,443,596		157,311			11	%		1,310,618		1,415,754		(105,136	)		(7	%)

Expense:
Depreciation and amortization		19,462		20,925		(1,463	)		(7	%)
Depreciation												12,657		14,122		(1,465	)		(10	%)
Bad debt provision		15,750		4,500		11,250			250	%		-		11,000		(11,000	)		(100	%)
Consulting fees		90,079		75,228		14,851			20	%		58,275		58,621		(346	)		(1	%)
Salaries and wages		547,963		574,100		(26,137	)		(5	%)		679,530		694,352		(14,822	)		(2	%)
Professional fees		109,064		82,105		26,959			33	%		76,014		68,979		7,035			10	%
Insurance		79,489		81,452		(1,963	)		(2	%)		86,527		91,951		(5,424	)		(6	%)
Outsource service fees		146,287		113,017		33,270			29	%		109,926		115,803		(5,877	)		(5	%)
Data maintenance		12,160		30,160		(18,000	)		(60	%)		11,917		6,603		5,314			80	%
General and administrative		162,164		157,894		4,270			3	%		168,939		163,863		5,076			3	%
Total expenses		1,182,418		1,139,381		43,037			4	%		1,203,785		1,225,294		(21,509	)		(2	%)

Income from operations		418,489		304,215		114,274			38	%		106,833		190,460		(83,627	)		(44	%)

Income before taxes		418,489		304,215		114,274			38	%		106,833		190,460		(83,627	)		(44	%)
Income tax provision		174,560		126,882		47,678			38	%		29,987		53,463		(23,476	)		(44	%)

Net income	$	243,929	$	177,333	$	66,596			38	%	$	76,846	$	136,997	$	(60,151	)		(44	%)

Revenue

HCO

~~Total revenues during the three-month period ended September 30, 2017, increased 11% to 1,600,907 compared to $1,443,596 during the three-month period ended September 30, 2016.~~

During the third quarter 2017, HCO, nurse case management, and utilization review increased 36%, 17%, and 26% respectively, while MPN, Medical Bill Review and other fees decreased by 3%, 22% and 34%, respectively. Other revenues consisted of revenues derived primarily from network claims repricing services, lien representation services, legal support services, workers’ compensation carve out revenues and Medicare set aside revenues.

~~HCO fees~~

During the three-month periods ended September 30, ~~2017~~2021 and ~~2016, HCO fee revenues were $377,923 and $276,951, respectively. The 36% increase in~~2020, HCO revenue was ~~primarily attributable~~$289,117 and $264,781, respectively. The 9% increase was due to ~~increased revenues derived from~~an increase in claims activity and renegotiation of certain deliverables to an existing customer, partially offset by the loss of one ~~major client during~~customer in the third quarter of ~~2017, coupled with increased~~2021. HCO revenue is generated largely from fees ~~primarily from three~~charged to our employer customers for access to our HCO networks, per claim fees, notification fees and fees for other ~~existing customers.~~

ancillary services the employer customers using our HCO networks may select. HCO notifications are mailed out annually and handed out by the employer for all new hires.

MPN

~~Table of Contents~~

MPN ~~fees~~

~~MPN fee~~ revenue for the three-month periods ended September 30, ~~2017~~2021 and ~~2016, were $142,257~~2020, was $137,834 and ~~$146,836,~~$124,836, respectively, ~~a decrease~~an increase of ~~3%, resulting mainly from lower revenues from one existing customer.~~

~~NCM fees~~

~~During the three months ended September 30, 2017 and 2016, nurse case management revenue was $582,544 and $499,118, respectively.~~10%. The increase in ~~nurse case management~~MPN revenue ~~of $83,426~~ was ~~primarily from increased revenues from five~~due to an increase in the number claims reported by existing customers ~~when compared~~which resulted in more claim network fees. Like HCO revenue, MPN revenue is generated largely from fees charged to our employer customers for access to our MPN networks, per claim fees and fees for other ancillary services the ~~same period in 2016. There is no assurance that nurse case management revenue will continue~~employer customers using our MPN networks may select. Unlike HCOs, MPNs do not require annual notifications. MPNs require a notice be given to ~~grow~~an injured worker only at the ~~rate realized in~~time the ~~quarter ended September 30, 2017 for~~employer is notified by the ~~remaining months~~injured worker that an injury has occurred.

Table of ~~fiscal 2017.~~Contents

~~UR fees~~

Utilization Review

During the three-month periods ended September 30, ~~2017~~2021 and ~~2016,~~2020, utilization review revenue was ~~$277,886~~$258,251 and ~~$221,176~~$307,139, respectively. The ~~increase~~decrease of ~~$56,710~~$48,888 in the ~~2017~~2021 period was ~~primarily attributable~~due to ~~adding~~a decrease in utilization reviews from existing customers and the loss of two ~~new clients~~customers in ~~the fourth quarter of fiscal 2016 and increases in revenues from other existing customers.~~ 2021.

Utilization review ~~can~~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, ~~etc. Through our skilled staff~~ and ~~automated review system, we~~timeliness of treatment. Its purpose is to reduce employer liability for medical costs that are ~~able to deliver utilization review services that cut overhead costs for~~not medically appropriate or approved by the ~~self-insured clients, insurance companies~~relevant medical and legal authorities and the ~~public entities we service.~~ payor.

Medical Bill Review

~~MBR fees~~

During the three-month period ended September 30, ~~2017,~~2021, medical bill review revenue ~~decreased $40,735~~increased by $40,610, to ~~$147,094 when~~$117,685, compared to $77,075 during the same period a year earlier. ~~This decrease~~The increase was mainly ~~caused by~~due to processing ~~fewer~~more medical and hospital bills from existing customers. 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 rebundling, confirming that the services are customary and reasonable, fee schedule compliance, out-of-network bill review, pharmacy review, and preferred provider organization repricing arrangements. These services can result in significant network savings.

~~Other~~

Other fees consist of revenue derived from network access and claims repricing, lien representation, legal support services, Medicare set aside and worker’s compensation carve-out services. Other fee revenue for three-month periods ended September 30, 2017 and 2016, were $73,203 and $111,686 respectively. The decrease of $38,483 was mainly the result of decreased network access fees from one customer having realized lower levels of savings from using our PPO network. We expect this downward trend for this customer to continue for the remainder of 2017.

~~Expenses~~

Total expenses for the three months ended September 30, 2017 and 2016, were $1,182,418 and $1,139,381, respectively. The increase of $43,037 was the result of increases in bad debt provision, consulting fees, professional fees, outsource service fees, and general and administrative expense partially offset by decreases in depreciation and amortization, salaries and wages, and data maintenance expense.

~~Table of Contents~~

~~Depreciation and Amortization~~

During the three-month period ended September 30, 2017, we recorded depreciation and amortization expense of $19,462 compared to $20,925 during the comparable 2016 period. The decrease in depreciation and amortization was primarily attributable to certain fixed assets being fully depreciated during the fourth quarter of 2016.

~~Bad Debt~~

During the three-month period ended September 30, 2017, bad debt provision increased by $11,250 compared to the three-month period ended September 30, 2016. This increase was primarily the result of recording additional bad debt provision for one existing uncollectable account.

~~Consulting Fees~~

During the three months ended September 30, 2017, consulting fees increased to $90,079 from $75,228 during the three months ended September 30, 2016. This increase was primarily the result on hiring a consultant as Director of Medical Management in August 2017.

~~Salaries and Wages~~

During the three-month period ended September 30, 2017, salaries and wages decreased 5% to $547,963 compared to $574,100 during the same period in 2016. The decrease in salaries and wages of $26,137 was primarily the result of lower deferred compensation expense, payroll related taxes, commission expense and lower levels of other salaries and wages in Medex and PHCO.

~~Professional Fees~~

For the three months ended September 30, 2017, we incurred professional fees of $109,064 compared to $82,105 during the three months ended September 30, 2016. The $26,959 increase in professional fees was primarily the result of higher accounting expense, legal expenses, medical consultant fees and professional fees paid for nurse case management services resulting from increased numbers of cases processed.

~~Insurance~~

During the three-month period ended September 30, 2017, we incurred insurance expenses of $79,489, a 2% decrease over the same three-month period in 2016. This decrease in insurance expense was primarily attributable to lower group health insurance premiums resulting from a decreased number of employees when compared to the same period in 2016. We do not expect current insurance fees to increase significantly over the remaining months of 2017.

~~Outsource Service Fees~~

Outsource service fees consist of costs incurred by our subsidiaries in outsourcing utilization review, medical bill review, Medicare set aside services and field case management fees and typically tends to increase and decrease in correspondence with increases and decreases in demand for those services. We incurred $146,287 and $113,017 in outsource service fees during the three-month periods ended September 30, 2017 and 2016, respectively. The increase of $33,270 was primarily the result of increases in outsource services required for utilization review, Medicare set aside services and nurse case management. We anticipate our outsource service fees will continue to move in correspondence with the level of utilization review, medical bill review and certain nurse case management services we provide in the future.

~~Table of Contents~~

~~Data Maintenance~~

During the three-month periods ended September 30, 2017 and 2016, data maintenance fees were $12,160 and $30,160, respectively. The decrease of $18,000 was primarily the result of lower levels of customer notifications fees realized for new and existing customers, during the three-month period ended September 30, 2017 when compared to the same period in 2016. Data maintenance fees tend to fluctuate from month to month depending on when new customers are enrolled and when the annual renewal of existing customer notification are due.

~~General and Administrative~~

During the three-month period ended September 30, 2017, general and administrative expenses increased 3% to $162,164 when compared to the three-month period ended September 30, 2016. This increase of $4,270 was primarily attributable to increases in auto expense, dues and subscriptions, employment agency fees, IT enhancements, rental equipment, telephone expense and travel and entertainment expense, partially offset by decreases in office rent expense, office supplies, postage expense, paid time off expense and miscellaneous expenses. We do not expect current levels of general and administrative expenses to materially increase during the remaining months of 2017.

~~Income from Operations~~

~~As a result of the 11% increase in total revenue during the three-month period ended September 30, 2017, which was~~ partially offset by the ~~4% increase in total expenses during the same period, our income from operations increased by 38% during the three-month period ended September 30, 2017, when compared to the same period in 2016.~~

~~Income Tax Provision~~

~~Because we realized income before taxes~~loss of ~~$418,489 and $304,215 during the three-month periods ended September 30, 2017 and 2016, respectively, we realized~~ a ~~$47,678, or 38%, increase in our income tax provision.~~

~~Net Income~~

During the three-month period ended September 30, 2017, total revenues of $1,600,907 was 11% higher when compared to the same period in 2016. This increase in total revenues was partially offset by a 4% increase in total expenses, resulting in a 38% increase in income from operations compared to the three months ended September 30, 2016. Correspondingly, we realized net income of $243,929 for the three-month period ended September 30, 2017, also a 38% increase compared to the three-month period ended September 30, 2016.

~~Table of Contents~~

~~Comparison of nine months ended September 30, 2017 and 2016~~

The following represents selected components of our consolidated results of operations, for the nine-month periods ended September 30, 2017 and 2016, respectively, together with changes from period-to-period:

For nine months ended September 30,
2017 2016 Amount Change % Change
Revenues:
HCO fees $ 1,041,328 $ 965,768 $ 75,560 8 %
MPN fees 427,228 436,893 (9,665 ) (2 %)
NCM fees 1,824,121 1,176,447 647,674 55 %
UR fees 788,229 596,205 192,024 32 %
MBR fees 481,352 517,893 (36,541 ) (7 %)
Other 255,542 309,260 (53,718 ) (17 %)
Total revenues 4,817,800 4,002,466 815,334 20 %

Expense:
Depreciation and amortization 58,859 63,247 (4,388 ) (7 %)
Bad debt provision 30,500 13,500 17,000 126 %
Consulting fees 246,073 265,296 (19,223 ) (7 %)
Salaries and wages 1,734,321 1,717,148 17,173 1 %
Professional fees 308,295 224,368 83,927 37 %
Insurance 257,495 243,307 14,188 6 %
Outsource service fees 404,538 288,225 116,313 40 %
Data maintenance 71,261 113,175 (41,914 ) (37 %)
General and administrative 495,474 475,230 20,244 4 %
Total expenses 3,606,816 3,403,496 203,320 6 %

Income from operations 1,210,984 598,970 612,014 102 %

Income before taxes 1,210,984 598,970 612,014 102 %
Income tax provision 504,318 249,529 254,789 102 %

Net income $ 706,666 $ 349,441 $ 357,225 102 %

~~Revenue~~

~~Total revenues during the nine-month period ended September 30, 2017, increased 20% to 4,817,800 compared to $4,002,466 during the nine-month period ended September 30, 2016.~~

During the first nine-months of 2017, HCO, nurse case management, and utilization review, increased 8%, 55% and 32% respectively, while MPN, MBR and other fees decreased by 2%, 7%, and 17%, respectively. Other revenues consisted of revenues derived primarily from network claims repricing services, lien representation services, legal support services, workers’ compensation carve out revenues and Medicare set aside revenues.

~~HCO fees~~

During the nine-month periods ended September30, 2017 and 2016, HCO fee revenues were $1,041,328 and $965,768 respectively. The 8% increase in HCO revenue was primarily attributable to the addition of one major customer ~~in January 2017, partially offset by lower revenues from several existing HCO customers when compared to the same period in 2016~~

~~Table of Contents~~

~~MPN fees~~

~~MPN fee revenue for the nine-month periods ended September 30, 2017 and 2016, was $427,228 and $436,893 respectively, a decrease of 2%, resulting from lower revenues from one existing customer.~~

~~NCM fees~~

During the nine-months ended September 30, 2017 and 2016, nurse case management revenue was $1,824,121 and $1,176,447, respectively. The increase in nurse case management revenue of $647,674 was primarily the result of adding new customers during the third and fourth quarters of 2016, and increases in revenues from existing customers. As a result of losing a significant customer in October 2017, we do not expect nurse case management revenue to increase at the rate realized during the nine months ended September 30, 2017, for the remainder of fiscal 2017.

~~UR fees~~

During the nine-month periods ended September 30, 2017 and 2016, utilization review revenue was $788,229 and $596,205, respectively. The increase of $192,024 in the 2017 period was attributable to adding new clients in the third ~~and fourth quarters~~quarter of fiscal 2016. Utilization review can provide a safeguard against unnecessary and inappropriate medical treatment from the perspective of medical necessity, quality of care, appropriateness of decision-making, etc. Through our skilled staff and automated review system, we are able to deliver utilization review services that cut overhead costs for the self-insured clients, insurance companies and the public entities we service. 2021.

~~MBR fees~~

During the nine-month period ended September 30, 2017, medical bill review revenue decreased $36,541 to $481,352 when compared to the same period a year earlier. This 7% decrease was mainly caused by processing fewer hospital claims from existing customers.

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. ~~These~~Our medical bill review services can result in significant ~~network savings.~~ savings for our customers.

Medical Case Management

During the three-month periods ended September 30, 2021 and 2020, medical case management revenue was $439,073 and $590,784, respectively. The decrease in medical case management revenue of $151,711 was primarily due to a decrease in the number of claims managed with existing customers.

Medical case management keeps medical treatment claims progressing to a resolution and assures treatment plans are aligned from a medical perspective. Medical oversight is a collaborative process that assesses, evaluates, coordinates, implements and monitors medical treatment plans and the options and services required to meet an injured worker’s health needs. A medical case manager acts as a liaison between the injured worker, claims adjuster, medical providers, and attorneys to achieve optimal results for injured workers and customers. We work to manage the number of nurses in our program to maintain our ratio of claims per nurse at a level that ensures timely and appropriate medical care is given to the injured worker and facilitates faster claims closures for our customers.

Other

Other ~~fees consist~~revenue consists of revenue derived from network access ~~and claims repricing,~~fees charged to non-HCO, non-MPN customers to access our network of medical providers, lien representation, legal support services, Medicare ~~set aside~~set-aside and ~~worker’s compensation carve-outs~~Workers’ Compensation carve-out services. Other ~~fee~~ revenue for ~~nine-month~~three-month periods ended September 30, ~~2017~~2021 and ~~2016,~~2020, was ~~$255,542~~$68,658 and $309,260, respectively. The decrease of $53,718 was mainly the result of decreased network access fees from one customer having realized lower savings from using our PPO network. We expect this downward trend for this customer to continue for the remainder of 2017.

~~Expenses~~

~~Total expenses for the nine-months ended September 30, 2017 and 2016, were $3,606,816 and $3,403,496,~~$51,139, respectively. The increase in other revenue of ~~$203,320~~34% was the result of increases in network access and Medicare set-aside claims processed.

Expenses

Total expenses for the three months ended September 30, 2021 and 2020, were $1,203,785 and $1,225,294, respectively. The 2% decrease in expenses was the result of decreases in depreciation, bad debt provision, consulting fees, salaries and wages, insurance, and outsource service fees, partially offset by increases in professional fees, data maintenance, and general and administrative.

Depreciation

During the three-month period ended September 30, 2021, we recorded depreciation expense of $12,657 compared to $14,122 during the comparable 2020 period. The decrease in depreciation was primarily attributable to certain fixed assets being fully depreciated, partially offset by the purchasing of new fixed assets.

Table of Contents

Bad Debt Provision

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

Consulting Fees

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

Salaries and Wages

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

Professional Fees

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

Insurance

During the three-month period ended September 30, 2021, we incurred insurance expenses of $86,527, a 6% decrease over the same three-month period of 2020. The decrease in insurance expenses was primarily attributed to lower medical insurance premiums and Workers’ Compensation coverage as a result of our reduced workforce, partially offset by increases in insurance expenses for business, and directors’ and officers’ liability for the three-month period of 2021 compared to the same period of 2020.

Outsource Service Fees

Outsource service fees consist of costs incurred by our subsidiaries in outsourcing some functions of utilization review, medical bill review, Medicare set-aside services and field medical case management and typically fluctuates with the demand for those services. We incurred $109,926 and $115,803 in outsource service fees during the three-month periods ended September 2021 and 2020, respectively. The decrease of 5% was due to a decrease in volume from our customers which resulted in fewer outsource services fees for Medicare-set-asides, utilization review, and field medical case management assignments, partially offset by incurring more outsource service fees for medical bill review due to an increase in the number of bills reviewed and a $15,000 penalty paid to State of California Department of Industrial Relations for errors found during our regularly scheduled utilization review audit. We have since made the required corrections to our system and process.

Data Maintenance

During the three-month periods ended September 30, 2021 and 2020, data maintenance fees were $11,917 and $6,603, respectively. The increase of $5,314 was the result of an increase in volume of HCO, MPN, and new hire notifications for existing customers during the three-month period ended September 30, 2021, when compared to the same period in 2020. Data maintenance fees tend to fluctuate monthly depending on when new customers are enrolled, annual renewals for existing customers, and the number of new employees our customers enroll in our HCO or MPN programs.

General and Administrative

During the three-month period ended September 30, 2021, general and administrative expenses increased 3% to $168,939 when compared to the three-month period ended September 30, 2020. This increase of $5,076 was primarily attributable to increases in charity – cash contribution, dues and subscriptions, education, IT enhancement, licenses and permits, parking, printing and reproduction, office rent, shareholders’ expense, and travel and entertainment, partially offset by decreases in auto expenses, bank charges, equipment/repairs, office supplies, postage, rent expense for equipment, telephone, miscellaneous expenses, and vacation expenses.

Table of Contents

Income from Operations

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

Income Tax Provision

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

Net Income

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

Comparison of nine months ended September 30, 2021 and 2020

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

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

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

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

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

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

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

Table of Contents

Revenue

HCO

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

MPN

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

Utilization Review

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

Medical Bill Review

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

Medical Case Management

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

Other

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

Expenses

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

fees.

Depreciation

~~Table of Contents~~

~~Depreciation and Amortization~~

During the nine-month period ended September 30, ~~2017,~~2021, we recorded depreciation ~~and amortization~~ expense of ~~$58,859~~$35,964 compared to ~~$63,247~~$46,716 during the comparable ~~2016~~2020 period. The decrease in depreciation ~~and amortization~~ was primarily attributable to certain fixed assets being fully depreciated ~~during~~prior to the ~~fourth~~ quarter ended September 30, 2021, partially offset by the purchasing of ~~2016.~~new fixed assets.

Table of Contents

Bad Debt Provision

During the nine-month period ended September 30, ~~2017,~~2021, bad debt provision ~~increased~~decreased by ~~$17,000~~$10,607 or 96% compared to the ~~nine-month~~same period ~~ended September 30, 2016. This increase~~in 2020. The decrease was ~~primarily the result of additional provisions required for one potential uncollectable account.~~due to delinquent customers resolving outstanding past-due balances and staying current on their payment obligations.

Consulting Fees

During ~~the nine-months ended September 30, 2017, consulting fees decreased to $246,073 from $265,296, when compared~~ the nine months ended September 30, ~~2016.~~2021, consulting fees decreased 11% to $173,796 from $195,978 during the nine months ended September 30, 2020. This 7% decrease of $22,182 was ~~mainly the result of a reduction in~~because we had fewer information systems consulting and consultant fees ~~paid~~related to ~~two consultants commencing in June 2016 and converting a consultant to an employee in March 2016.~~our insurance company acquisition search.

Salaries and Wages

During the nine-month period ended September 30, ~~2017,~~2021, salaries and wages ~~increased 1%~~decreased 7% to ~~$1,734,321~~$2,073,133 compared to ~~$1,717,148~~$2,238,079 during the same period in ~~2016. This increase~~2020. The decrease was primarily the result of ~~additional staffing~~the layoff of two employees in ~~nurse case management~~the third quarter of 2021. As noted above, we expect salaries and ~~higher levels~~wages to continue to be lower throughout the remainder of ~~commissions, partially offset by salary reductions of 10% by several senior executives~~2021 than they were in ~~June 2016.~~2020.

Professional Fees

For the ~~nine-months~~nine months ended September 30, ~~2017,~~2021, we incurred professional fees of ~~$308,295~~$221,970 compared to ~~$224,368~~$223,747 during the nine months ended September 30, ~~2016.~~2020. The ~~$83,927 increase~~$1,777 decrease in professional fees was primarily the result of ~~higher~~fewer fees incurred for other professional ~~fees paid for nurse~~and medical management services as a result of decreased medical case management ~~services resulting from increased numbers of cases processed.~~activity, partially offset by increases in accounting and legal professional fees.

Insurance

~~Insurance~~

During the nine-month period ended September 30, ~~2017,~~2021, we incurred insurance expenses of ~~$257,495,~~$242,334, a ~~6% increase~~12% decrease over the same ~~nine-month~~ period in ~~2016.~~2020. The ~~increase~~decrease in insurance ~~expense~~expenses was primarily attributed to ~~higher workers’ compensation~~a decrease in medical insurance premiums as a result of our lower employee count and lower insurance expense for ~~our employees and~~business, directors’ and officers’ insurance premiums during the nine months period ended September 30, 2017 compared to the same period in 2016. We do not expect current insurance fees to increase significantly over the remaining months of 2017.liability, and Workers’ Compensation coverage.

Outsource Service Fees

Outsource service fees consist of costs incurred by our subsidiaries in outsourcing utilization review, medical bill review, Medicare set aside services, nurse case management services, and typically tends to increase and decrease in correspondence with increases and decreases in demand for those services.

We incurred ~~$404,538~~$304,085 and ~~$288,225~~$359,596 in outsource service fees during the nine-month periods ended September ~~2017~~2021 and ~~2016,~~2020, respectively. The ~~increase~~decrease of ~~$116,313~~$55,511 was primarily the result of ~~increases~~fewer Medicare set-aside claims, medical bills reviewed, and utilization reviews processed partially offset by an increase in ~~outsource services required for utilization review, Medicare set aside fees and field case management fees. We anticipate our~~ outsource service fees ~~will continue~~for field medical case management and a $15,000 penalty paid to ~~move in correspondence with the level~~State of California Department of Industrial Relations for errors found during our regularly scheduled utilization review ~~medical bill review~~audit. As noted above, we have since made the required corrections to our system and ~~certain nurse case management services we provide~~process.

Data Maintenance

During the nine-month periods ended September 30, 2021 and 2020, data maintenance fees were $75,293 and $59,415, respectively. The increase of $15,878 was primarily the result of an increase in the ~~future.~~

number of employees enrolled in our HCO and MPN programs with our existing customers and an increase in customers’ new hire notifications.

General and Administrative

~~Table of Contents~~

~~Data Maintenance~~

During the nine-month period ended September 30, 2017 and 2016, data maintenance fees were $71,261 and $113,175, respectively. The decrease of $41,914 was primarily the result of recording notification fees associated with the addition of a major HCO customer in the first quarter 2016, with a lower level of notification fees recorded for this same customer during the nine-month period ended September 30, 2017.

~~General and Administrative~~

~~During the nine-month period ended September 30, 2017,~~2021, general and administrative expenses ~~increased 4%~~decreased 5% to ~~$495,474~~$492,264 when compared to the nine-month period ended September 30, ~~2016.~~2020. This ~~increase~~decrease of ~~$20,244~~$23,474 was primarily attributable to ~~increases~~decreases in advertising, dues and subscriptions, ~~employment agency fees,~~equipment/repairs, IT enhancement, ~~license~~licenses and permits, ~~telephone expense,~~office supplies, parking, postage, printing and reproduction, rent expense ~~travel~~for equipment, miscellaneous expenses, and ~~entertainment expense and miscellaneous~~shareholders’ expense, partially offset by ~~decreases~~increases in ~~charitable contributions,~~charity – cash contribution, auto ~~expense, postage expense,~~expenses, bank charge, education, telephone, office ~~supplies~~rent, travel and ~~paid time off~~entertainment, and vacation expense. ~~We do not expect current levels~~

Table of ~~general and administrative expenses to materially increase during the remaining months of 2017.~~Contents

Income from Operations

~~As a result of the 20% increase in total~~

Total revenue during the nine-month period ended September 30, ~~2017, which was partially offset~~2021, decreased by $456,738 to $3,978,431 compared to $4,435,169 in the ~~6% increase~~same period in 2020. Our total expenses ~~our income from operations before taxes increased to $1,210,984, a 102% increase~~decreased by $306,011 during the nine months ended September 30, 2021, compared to the same period in ~~2016.~~ 2020. This led to a decrease in income from operations of $150,727, or 30%, during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.

Other Income ~~Tax Provision~~(Expense)

~~Because~~

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 ~~before taxes~~from paycheck protection loan forgiveness of ~~$1,210,984~~$464,386 and ~~$598,970~~loan interest expense from paycheck protection loans of $3,686 during the ~~nine-month periods~~nine months ended September 30, ~~2017 and 2016, respectively,~~2021, resulting in total other income during the period of $460,700. During the corresponding period ended September 30, 2020, we realized no other income (expense).

Income Tax Provision

We realized a ~~$254,789~~decrease of $2,155 or ~~102%~~2%, ~~increase~~ in our income tax ~~provision.~~ provision during the nine-month period ended September 30, 2021, compared to the nine months ended September 30, 2020. The income realized from the PPP loan forgiveness is exempt from federal income taxation, but not state income taxation.

Net Income

During the nine-month period ended September 30, ~~2017,~~2021, total revenues was $3,978,431, a decrease of ~~$4,817,800 was 20% higher when~~10%, our provision for income tax decreased 2% and our total expenses decreased 8% compared to the same period of 2020. These decreases were offset by the recognition of $460,700 in ~~2016. This~~total other income as a result of PPP loan forgiveness by PHCO, MMM and MMC. As a result, we realized a $312,128, or 85%, increase in ~~total revenues was partially offset by a 6% increase in total expenses, resulting in a 102% increase in income from operations. Correspondingly, we realized~~ net income ~~of $706,666 for~~during the ~~nine-month period~~nine months ended September 30, ~~2017, also a 102% increase~~2021, when compared to the ~~nine-month period~~nine months ended September 30, ~~2016.~~ 2020.

Liquidity and Capital Resources

As of September 30, ~~2017,~~2021, we had cash on hand of ~~$5,613,412~~$10,155,151 compared to ~~$5,005,617 at~~$9,498,457 as of December 31, ~~2016.~~2020. The ~~$607,795~~$656,694 increase was ~~primarily~~ the result of net cash provided by our operating activities and financing activities, partially offset by cash used in investing activities. ~~Net~~

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

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

Historically, we have generally realized positive cash ~~provided by~~flows from operating activities, which coupled with positive reserves of cash on hand, have been used to fund our operating ~~activities was the result of realizing net income with increases in accumulated depreciation, accrued~~ expenses and deferred rent expense, partially offset by decreases in our bad debt, prepaid expense, accounts payable, income tax payable, unearned revenues and increases in our accounts receivable. We used $13,446 in investing activities for purchases of computers, furniture and equipment. Barringobligations. Management currently believes that absent any unanticipated COVID-19 impact, including, but not limited to a significant longer-term downturn in the economy or the loss of several major customers ~~we believe that~~within a condensed period, cash on hand and anticipated revenues from operations will be sufficient to cover our operating expenses over the ~~next twelve months.~~

foreseeable future.

~~Table~~

As the impact of ~~Contents~~

~~We currently have planned certain capital expenditures during fiscal 2017~~the COVID-19 pandemic continues to ~~support potential new customers’ software requirements. We do not expect these software expenditures to be material. We do not anticipate this will require~~play out throughout our industry and the broader economy, we believe our strong cash position, could allow us to ~~seek outside sources of funding. We do, however, from time to time, investigate~~identify and capitalize on potential opportunities to expand our business either through the acquisition of existing businesses that may have insufficient resources to overcome the impacts of the pandemic, including, expansion into the insurance industry or through the creation of new ~~business~~ lines of business. Depending upon the nature of the opportunities we identify, such acquisitions or the acquisition of existing businesses. We are taking steps to look at acquisition candidates to vertically grow our Company. In October 2017, we announced that we had retained a west-coast based investment banking firm to assist us in identifying potential merger and acquisition opportunities, as well as, to explore sources of institutional source of financing. We have not found any suitable candidate at the current time. Weexpansion could ~~use cash or stock of our Company or some combination of both in any expansion or acquisition. An expansion or acquisition may~~ require greater capital resources than we currently possess. Should we need additional capital resources, we ~~most likely would~~could seek to obtain such through ~~equity~~debt and/or ~~debt~~equity financing. ~~There~~We do not currently possess an institutional source of financing and there is no assurance that we could be successful in obtaining equity or debt financing when needed on favorable terms, or at all. We could also use shares of our capital stock as consideration for a business acquisition transaction, but there is also no assurance that there would be significant market interest in our capital stock.

Table of Contents

Cash Flow

During the nine months ended September 30, ~~2017,~~2021, cash was primarily used to fund operations. We had a net increase in cash of ~~$607,795~~$656,694 during the nine months ended September 30, ~~2017.~~2021. See below for additional information.

	For the nine months ended September								For the nine months ended September 30,
	2017 (unaudited)				2016 (unaudited)				2021 (unaudited)			2020 (unaudited)

Net cash provided from operating activities		$	621,241			$	1,049,690
Net cash provided by operating activities									$	449,993		$	700,538
Net cash used in investing activities			(13,446	)			(33,556	)		(12,199	)		(52,803	)
Net cash used in financing activities			-				(2,063	)
Net cash provided by financing activities										218,900			460,700

Net increase in cash		$	607,795			$	1,014,071		$	656,694		$	1,108,435

During the nine months ended September 30, ~~2017~~2021 and ~~2016,~~2020, net cash provided by operating activities was ~~$621,241~~$449,993 and ~~$1,049,690, respectively.~~$700,538, respectively, a decrease of $250,545. This decrease was primarily the result of decreases in total revenue, allowance for bad debt, prepaid expenses, accounts receivable, receivable – other, accounts payable, accrued expenses, income tax payable, and deferred rent expense, partially offset by increases in deferred rent assets and unearned revenue. As ~~discussed herein,~~a result of applying the PPP loan forgiveness we realized an increase in net ~~income of $706,666 during the nine months ended September 30, 2017, compared to net income of $349,441 during the nine months ended September 30, 2016.~~ income.

Net cash used in investing activities was ~~$13,446~~$12,199 and ~~$33,556~~$52,803 during the nine-month periods ended September 30, ~~2017~~2021 and ~~2016,~~2020, respectively. During the nine-month periods ended September 30, ~~2017~~2021 and ~~2016,~~2020, net cash was used in investing activities ~~was used~~ to purchase ~~computer equipment, furniture~~computers and ~~office~~ equipment.

Net cash ~~used in~~provided by financing activities during the ~~nine-month periods~~nine months ended September 30, ~~2017~~2021 and ~~2016~~2020, was $0$218,900 and ~~$2,063, respectively, resulting~~$460,700, respectively. During 2020 we received three PPP loans for PHCO, MMC and MMM in the amounts of $133,400, $59,600, and $267,700, respectively. These loans were forgiven in February 2021. In April 2021, MMM received a Second Draw PPP loan in the amount of $218,900. We have focused on using these funds for qualifying expenses and plan to apply for loan forgiveness in the future.

Off-Balance Sheet Financing Arrangements

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

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in our consolidated financial statements and accompanying notes. We continually evaluate our accounting policies, estimates, and judgments and base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Because of the inherent uncertainty in making estimates and judgments, actual results could differ from ~~lower cash dividends paid.~~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.

Table of Contents

~~Summary~~

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 ~~Material Contractual Commitments~~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 ~~following~~interest rate implicit in lease contracts is typically not readily determinable. As a ~~summary~~result, we utilize our incremental borrowing rate to discount lease payments, which reflects the fixed rate at which we could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. Our leases may include options to extend or terminate the lease which are included in the lease term when it is reasonably certain that we will exercise any such options. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

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

We must make significant judgments and estimates in determining contractual and bad debt allowances in any accounting period. One significant uncertainty inherent in our analysis is whether our experience will be indicative of future periods. Although we consider future projections when estimating contractual and bad debt allowances, we ultimately make our decisions based on the best information available to us at the time the decision is made. Adverse changes in general economic conditions or trends in reimbursement amounts for our services could affect our contractual and bad debt allowance estimates, collection of accounts receivables, cash flows, and results of operations. Two customers accounted for 10% or more of accounts receivable at September 30, 2021 and 2020, respectively.

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

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

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

Table of ~~September 30, 2017.~~Contents

Payments Due By Period
Total Less than 1 year 1-3 years 3-5 years More than 5 years
Operating Leases:
Operating Leases – Equipment $ 56,857 $ 20,675 $ 36,182 $ - $ -
Office Leases $ 1,177,515 255,608 775,791 146,116 -
Total Operating Leases $ 1,234,372 $ 276,283 $ 811,973 $ 146,116 $ -

Item 3. Quantitative and Qualitative Disclosure about Market Risk

~~This information is~~

Smaller reporting companies are not required ~~for smaller reporting companies.~~to provide this information.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on the evaluation of our disclosure controls and procedures as of September 30, ~~2017,~~2021, the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, ~~2017,~~2021, that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

Item 1A. Risk Factors

Management does not believe there have been any material changes to the risk factors listed in Part I, ~~“Item~~Item 1A, Risk ~~Factors”~~Factors in our ~~annual report on Form 10-K for the year ended December 31, 2016.~~Annual Report. These risk factors should be carefully considered with the information provided elsewhere in this report, which could materially adversely affect our business, financial condition, or results of operations.

Item 6. Exhibits

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

	Exhibit Number		Title of Document

	Exhibit 31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 32.1		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	Exhibit 101		The following materials from Pacific Health Care Organization, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, ~~2017,~~2021, formatted in XBRL (eXtensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows, and (iv) Notes to the Unaudited Condensed Consolidated Financial Statements.

Exhibit 104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

Table of Contents

SIGNATURES

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

		PACIFIC HEALTH CARE ORGANIZATION, INC.


Date:	November ~~14, 2017~~12, 2021	/s/ Tom Kubota
		Tom Kubota Chief Executive Officer


Date:	November ~~14, 2017~~12, 2021	/s/ ~~Fred Odaka~~Kristina Kubota
		~~Fred Odaka~~ Kristina Kubota Chief Financial Officer

iso4217:USD xbrli:shares

	For nine months ended September 30,
	2017		2016		Amount Change			% Change
Revenues:
HCO fees	$	1,041,328	$	965,768	$	75,560			8	%
MPN fees		427,228		436,893		(9,665	)		(2	%)
NCM fees		1,824,121		1,176,447		647,674			55	%
UR fees		788,229		596,205		192,024			32	%
MBR fees		481,352		517,893		(36,541	)		(7	%)
Other		255,542		309,260		(53,718	)		(17	%)
Total revenues		4,817,800		4,002,466		815,334			20	%

Expense:
Depreciation and amortization		58,859		63,247		(4,388	)		(7	%)
Bad debt provision		30,500		13,500		17,000			126	%
Consulting fees		246,073		265,296		(19,223	)		(7	%)
Salaries and wages		1,734,321		1,717,148		17,173			1	%
Professional fees		308,295		224,368		83,927			37	%
Insurance		257,495		243,307		14,188			6	%
Outsource service fees		404,538		288,225		116,313			40	%
Data maintenance		71,261		113,175		(41,914	)		(37	%)
General and administrative		495,474		475,230		20,244			4	%
Total expenses		3,606,816		3,403,496		203,320			6	%

Income from operations		1,210,984		598,970		612,014			102	%

Income before taxes		1,210,984		598,970		612,014			102	%
Income tax provision		504,318		249,529		254,789			102	%

Net income	$	706,666	$	349,441	$	357,225			102	%

	Payments Due By Period
	Total			Less than 1 year			1-3 years			3-5 years			More than 5 years
Operating Leases:
Operating Leases – Equipment		$	56,857		$	20,675		$	36,182		$	-		$	-
Office Leases		$	1,177,515			255,608			775,791			146,116			-
Total Operating Leases		$	1,234,372		$	276,283		$	811,973		$	146,116		$	-