5429 LYNDON B. JOHNSON FREEWAY
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 such 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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer”,” large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Non-Accelerated Filer o |
Accelerated Filer o (do not check if a smaller reporting company) | Smaller Reporting Company x |
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
The number of shares of common stock of registrant outstanding on August 14, 2008 was 15,093,171.
TABLE OF CONTENTS
AMERICAN CARESOURCE HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2008
| Part I | Financial Information | 1 |
| Item 1. | Financial Statements | 1 |
| | Consolidated Statements of Operations (unaudited) | 1 |
| | Consolidated Balance Sheets (unaudited) | 2 |
| | Consolidated Statements of Stockholders’ Equity (unaudited) | 3 |
| | Consolidated Statements of Cash Flows (unaudited) | 4 |
| | Notes to Unaudited Consolidated Financial Statements | 5 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 9 |
| Item 4. | Controls and Procedures | 13 |
| Part II | Other Information | 14 |
| Item 1A. | Risk Factors | 14 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 14 |
| Item 6. | Exhibits | 14 |
| Signatures | | 15 |
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
AMERICAN CARESOURCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | Three months ended | | | Six months ended | |
| | | June 30, | | | June 30, | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
| Net revenues | | $ | 13,012,528 | | | $ | 4,008,288 | | | $ | 24,518,203 | | | $ | 6,274,857 | |
| Cost of revenues | | | 11,110,593 | | | | 3,478,292 | | | | 20,911,715 | | | | 5,579,935 | |
| Contribution margin | | | 1,901,935 | | | | 529,996 | | | | 3,606,488 | | | | 694,922 | |
| | | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 1,194,504 | | | | 1,209,740 | | | | 2,307,358 | | | | 1,911,272 | |
| Depreciation and amortization | | | 96,606 | | | | 83,642 | | | | 188,672 | | | | 161,715 | |
| Total operating expenses | | | 1,291,110 | | | | 1,293,382 | | | | 2,496,030 | | | | 2,072,987 | |
| Operating income (loss) | | | 610,825 | | | | (763,386 | ) | | | 1,110,458 | | | | (1,378,065 | ) |
| Interest income | | | (31,240 | ) | | | (49,758 | ) | | | (71,908 | ) | | | (103,632 | ) |
| Interest expense | | | 1,606 | | | | 2,488 | | | | 3,444 | | | | 6,449 | |
| Debt issuance costs | | | - | | | | - | | | | - | | | | 46,300 | |
| Total interest (income) expense, net | | | (29,634 | ) | | | (47,270 | ) | | | (68,464 | ) | | | (50,883 | ) |
| Income (loss) before income taxes | | | 640,459 | | | | (716,116 | ) | | | 1,178,922 | | | | (1,327,182 | ) |
| Income tax provision | | | 19,019 | | | | - | | | | 36,064 | | | | - | |
| Net income (loss) | | $ | 621,440 | | | $ | (716,116 | ) | | $ | 1,142,858 | | | $ | (1,327,182 | ) |
| | | | | | | | | | | | | | | | | |
| Earnings (loss) per common share: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.04 | | | $ | (0.05 | ) | | $ | 0.08 | | | $ | (0.09 | ) |
| Diluted | | $ | 0.04 | | | $ | (0.05 | ) | | $ | 0.07 | | | $ | (0.09 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Basic weighted average common shares outstanding | | | 15,069,007 | | | | 14,492,863 | | | | 14,973,213 | | | | 14,489,806 | |
| Diluted weighted average common shares | | | | | | | | | | | | | | | | |
| outstanding | | | 17,435,365 | | | | 14,492,863 | | | | 17,343,860 | | | | 14,489,806 | |
See accompanying notes.
AMERICAN CARESOURCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
| | | June 30, | | | | |
| | | 2008 | | | December 31, | |
| | | (Unaudited) | | | 2007 | |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 6,077,395 | | | $ | 4,272,498 | |
| Accounts receivable, net | | | 4,421,223 | | | | 3,651,203 | |
| Prepaid expenses and other current assets | | | 561,066 | | | | 403,559 | |
| Deferred income taxes | | | 5,886 | | | | 5,886 | |
| Total current assets | | | 11,065,570 | | | | 8,333,146 | |
| | | | | | | | | |
| Property and equipment, net | | | 640,115 | | | | 332,450 | |
| | | | | | | | | |
| Other assets: | | | | | | | | |
| Certificate of deposit, restricted | | | 145,000 | | | | 145,000 | |
| Deferred income taxes | | | 255,731 | | | | 255,731 | |
| Other non-current assets | | | 200,739 | | | | 237,246 | |
| Intangible assets, net | | | 1,387,447 | | | | 1,494,238 | |
| Goodwill | | | 4,361,299 | | | | 4,361,299 | |
| | | $ | 18,055,901 | | | $ | 15,159,110 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Due to service providers | | $ | 4,225,359 | | | $ | 3,344,278 | |
| Accounts payable and accrued liabilities | | | 1,605,439 | | | | 1,320,036 | |
| Current maturities of long-term debt | | | 57,718 | | | | 55,697 | |
| Total current liabilities | | | 5,888,516 | | | | 4,720,011 | |
| | | | | | | | | |
| Long-term debt | | | 20,967 | | | | 50,348 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Shareholders' equity: | | | | | | | | |
| Preferred stock, $0.01 par value; 10,000,000 shares authorized, | | | | | | | | |
| none issued | | | - | | | | - | |
| Common stock, $0.01 par value; 40,000,000 shares authorized; | | | | | | | | |
| 15,087,855 and 14,668,416 shares issued and outstanding in | | | | | | | | |
| 2008 and 2007, respectively | | | 150,879 | | | | 146,684 | |
| Additional paid-in capital | | | 18,224,494 | | | | 17,613,880 | |
| Accumulated deficit | | | (6,228,955 | ) | | | (7,371,813 | ) |
| Total shareholders' equity | | | 12,146,418 | | | | 10,388,751 | |
| | | $ | 18,055,901 | | | $ | 15,159,110 | |
See accompanying notes.
AMERICAN CARESOURCE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
| | | | | | | | | Additional | | | | | | Total | |
| | | Common Stock | | | Paid-in | | | Accumulated | | | Stockholders' | |
| | | Shares | | | Amount | | | Capital | | | Deficit | | | Equity | |
| | | | | | | | | | | | | | | | |
| Balance at December 31, 2007 | | | 14,668,416 | | | $ | 146,684 | | | $ | 17,613,880 | | | $ | (7,371,813 | ) | | $ | 10,388,751 | |
| Net income | | | - | | | | - | | | | - | | | | 1,142,858 | | | | 1,142,858 | |
| Stock-based compensation expense | | | - | | | | - | | | | 316,147 | | | | - | | | | 316,147 | |
| Exercise of stock options | | | 419,439 | | | | 4,195 | | | | 133,136 | | | | - | | | | 137,331 | |
| Issuance of common stock warrants for | | | | | | | | | | | | | | | | | | | | |
| payment of client management fees | | | - | | | | - | | | | 161,331 | | | | - | | | | 161,331 | |
| Balance at June 30, 2008 | | | 15,087,855 | | | $ | 150,879 | | | $ | 18,224,494 | | | $ | (6,228,955 | ) | | $ | 12,146,418 | |
See accompanying notes.
AMERICAN CARESOURCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Six months ended June 30, | |
| | | 2008 | | | 2007 | |
| Cash flows from operating activities: | | | | | | |
| Net income (loss) | | $ | 1,142,858 | | | $ | (1,327,182 | ) |
| Adjustments to reconcile net income (loss) to net cash | | | | | | | | |
| provided by (used in) operations: | | | | | | | | |
| Stock-based compensation expense | | | 316,147 | | | | 206,032 | |
| Depreciation and amortization | | | 188,672 | | | | 161,715 | |
| Amortization of debt issuance costs | | | - | | | | 46,300 | |
| Client management fee expense related to warrants | | | 26,455 | | | | 8,812 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (770,020 | ) | | | (325,268 | ) |
| Prepaid expenses and other assets | | | 13,876 | | | | (366,038 | ) |
| Accounts payable and accrued liabilities | | | 285,403 | | | | 370,967 | |
| Due to service providers | | | 881,081 | | | | 112,983 | |
| Net cash provided by (used in) operating activities | | | 2,084,472 | | | | (1,111,679 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Investment in software development costs | | | (284,085 | ) | | | - | |
| Additions to property and equipment | | | (105,461 | ) | | | (69,606 | ) |
| Net cash used in investing activities | | | (389,546 | ) | | | (69,606 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Payments on long-term debt | | | (27,360 | ) | | | (322,572 | ) |
| Proceeds from exercise of stock options | | | 137,331 | | | | 2,391 | |
| Net cash provided by (used in) financing activities | | | 109,971 | | | | (320,181 | ) |
| | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 1,804,897 | | | | (1,501,466 | ) |
| Cash and cash equivalents at beginning of period | | | 4,272,498 | | | | 5,025,380 | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 6,077,395 | | | $ | 3,523,914 | |
| | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | |
| Cash paid for interest | | $ | 3,444 | | | $ | 25,310 | |
| | | | | | | | | |
| Supplemental non-cash financing activity: | | | | | | | | |
| Warrants issued as payment of client management fees | | $ | 161,331 | | | $ | 52,913 | |
See accompanying notes.
American CareSource Holdngs, Inc.
Notes to Condensed Financial Statements
(Unaudited)
| (1) | Description of Business and Basis of Presentation |
American CareSource Holdings, Inc., a Delaware corporation (the “Company,” “American CareSource Holdings,” “ACS,” “we,” “our,” “us,” or the “Registrant”), is in the business of delivering ancillary healthcare services for employment groups through its national network of ancillary care providers. The Company markets its products to insurance companies, third-party administrators and preferred provider organizations. American CareSource Holdings has one wholly owned subsidiary, Ancillary Care Services, Inc. (“Care Services”).
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) interim reporting requirements of Form 10-Q and Rule 8-03 of Regulation S-X of the rules and regulations of the Securities and Exchange Commission (“SEC”). Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with GAAP have been condensed or omitted. Balance sheet amounts are as of June 30, 2008 and December 31, 2007 and operating result amounts are for the three months and six months ended June 30, 2008 and 2007, and include all normal and recurring adjustments that we consider necessary for the fair summarized presentation of our financial position and operating results. As these are condensed financial statements, readers of this report should, therefore, refer to the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed with the SEC on March 31, 2008.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures About Segments of an Enterprise and Related Information,” the Company uses the “management approach” for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggregates a company. Based on the “management approach” model, the Company has determined that its business is comprised of a single operating segment.
Our interim results of operations are not necessarily indicative of results of operations that will be realized for the full fiscal year.
The Company evaluates its service provider contracts using the indicators of EITF No. 99-19 “Reporting Gross Revenue as a Principal vs. Net as an Agent” (“EITF 99-19”) to determine whether the Company is acting as a principal or an agent in the fulfillment of services to be rendered.
Revenues are recorded gross when services by providers have been authorized and performed and collections from third-party payors are reasonably assured. The Company acts as principal under EITF 99-19 when settling claims for service providers through its contracted service provider network for the following reasons:
| | · | The Company negotiates a contract with the service provider and also negotiates separate contracts with the payor. Neither the service provider nor the payor can look through the Company and claim directly against the other party. Each service provider contracts with the Company only, and not with the payor. Likewise, each payor contracts with the Company only, and not with the service provider. Each party deals directly with the Company and does not deal directly with each other. |
| | · | The Company determines through negotiations which service providers will be included in or excluded from the network to be offered to the client payor based on, among other things, price and access. |
| | · | The Company does not earn a fixed dollar amount per client transaction regardless of the amount billed to clients or earn a stated percentage of the amount billed to its clients. |
| | · | The Company is responsible to the service provider for processing claims and managing the claims its adjustors process. |
| | · | The Company sets prices to be settled with payors and separately negotiates the prices to be settled with the service providers. |
| | · | The Company may realize a positive or negative margin represented by the difference between the negotiated fees received from the payor and the negotiated amount paid to service providers. |
When claims are recorded gross, the payor’s payment to the Company is recorded as revenue and the Company’s payment to the service provider is recorded as cost of revenue in the statement of operations.
The Company does not have responsibility for collecting co-payments to be made or co-insurance claims to be received. Accordingly, co-payments or co-insurance claims collected are not recorded as either revenue or cost of revenues.
The Company records an allowance on all sales reported as gross to arrive at a net revenue amount. Co-payments, deductibles and co-insurance can all affect the collectability of each individual claim. While the Company is able to re-price a claim and accurately estimate what should be paid for the service, the presence of co-pays, deductibles and co-insurance can all affect the ultimate collectability of the claim. In addition, the Company’s collection experience with each payor varies. The Company records an allowance against gross revenue to better estimate collectability. This allowance is applied specifically for each payor and is adjusted to reflect the Company’s collection experience each quarter.
During the six months ended June 30, 2008, two of the Company’s customers comprised a significant portion of the Company’s revenues. The following is a summary of the approximate amounts of the Company’s revenue and accounts receivable contributed by each of those customers as of the dates presented:
| | | Six months ended June 30, | |
| | | 2008 | | | 2007 | |
| | | Accounts | | | | | | % of Total | | | Accounts | | | | | | % of Total | |
| | | receivable | | | Revenue | | | Revenues | | | receivable | | | Revenue | | | Revenues | |
| Customer A | | $ | 2,183,000 | | | $ | 14,947,000 | | | | 61% | | | $ | 791,000 | | | $ | 4,449,000 | | | | 71% | |
| Customer B | | | 2,183,000 | | | | 9,040,000 | | | | 37% | | | | 710,000 | | | | 998,000 | | | | 16% | |
| Others | | | 55,000 | | | | 531,000 | | | | 2% | | | | 159,000 | | | | 828,000 | | | | 13% | |
| | | $ | 4,421,000 | | | $ | 24,518,000 | | | | 100% | | | $ | 1,660,000 | | | $ | 6,275,000 | | | | 100% | |
The following table details the reconciliation of basic earnings per share to diluted earnings per share:
| | | Three months ended | | | Six months ended | |
| | | June 30, | | | June 30, | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| Numerator for basic and diluted earnings per share: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net income (loss) | | $ | 621,440 | | | $ | (716,116 | ) | | $ | 1,142,858 | | | $ | (1,327,182 | ) |
| | | | | | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Weighted-average basic common shares outstanding | | | 15,069,007 | | | | 14,492,863 | | | | 14,973,213 | | | | 14,489,806 | |
| Assumed conversion of dilutive securities: | | | | | | | | | | | | | | | | |
| Stock options | | | 805,761 | | | | - | | | | 832,779 | | | | - | |
| Warrants | | | 1,560,597 | | | | - | | | | 1,537,868 | | | | - | |
| Potentially dilutive common shares | | | 2,366,358 | | | | - | | | | 2,370,647 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Denominator for diluted earnings | | | | | | | | | | | | | | | | |
| per share - Adjusted weighted - average shares | | | 17,435,365 | | | | 14,492,863 | | | | 17,343,860 | | | | 14,489,806 | |
| | | | | | | | | | | | | | | | | |
| Earnings per common share: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.04 | | | $ | (0.05 | ) | | $ | 0.08 | | | $ | (0.09 | ) |
| Diluted | | $ | 0.04 | | | $ | (0.05 | ) | | $ | 0.07 | | | $ | (0.09 | ) |
Long-term debt consists of the following as of the dates presented:
| | | June 30, | | | December 31, | |
| | | 2008 | | | 2007 | |
| Notes payable to Capital One Bank, $135,000 due | | | | | | |
| September 2009, due in monthly installments of | | | | | | |
| approximately $4,143, including interest at 6.5% | | $ | 59,470 | | | $ | 81,939 | |
| | | | | | | | | |
| Capital lease obligations | | | 19,215 | | | | 24,106 | |
| | | | 78,685 | | | | 106,045 | |
| Less current maturities | | | (57,718 | ) | | | (55,697 | ) |
| Long-term debt, less current maturities | | $ | 20,967 | | | $ | 50,348 | |
On July 2, 2007, the Company announced that it had signed an Ancillary Care Services Network Access Agreement (“the agreement”) effective May 21, 2007 with a new customer, Texas True Choice, Inc. (“TTC”). As partial compensation under the agreement, the Company issued to an affiliate of TTC, warrants to purchase a total of 225,000 shares of the Company’s common stock at an exercise price of $1.84, the closing price of our stock on May 21, 2007. 25% of the shares vested on May 21, 2007 and May 21, 2008, and 25% vest on May 21 on each of the two subsequent years. As of June 30, 2008, 25%, or 56,250 warrants had vested. According to the agreement, TTC must provide two years notice in the event of termination. Since the measurement date for the third traunch of warrants had been reached as of June 30, 2008, we recorded the fair value of 25% of the warrants, or 56,250 warrants, which were recorded as other non-current assets and will be amortized over the related contract period. The total fair value of the warrants was $161,331, which was recorded based on the Black-Scholes-Merton method.
| (6) | Recent Accounting Pronouncements |
In December 2007, the Financial Accounting Standards Board issued SFAS No. 141(R) “Business Combinations.” SFAS No. 141(R) changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. We are currently evaluating the impact of the pending adoption of SFAS 141(R) on our financial statements.
FORWARD-LOOKING STATEMENTS
This discussion includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend”, “anticipate,” “believe,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future operating results or of our financial condition or state other “forward-looking” information.
We believe it is important to communicate to our stockholders and potential investors not only the Company’s current condition, but management’s forecasts about the Company’s future opportunities, performance and results, including, for example, information with respect to potential margin expansion, cash reserves and other financial items, and our strategies and prospects. However, forward-looking statements are based on current expectations and assumptions and are subject to substantial risks and uncertainties, including, but not limited to, risks of market acceptance of, or preference for, the Company’s systems and services, competitive forces, the impact of geopolitical events and changes in government regulations, general economic conditions and economic factors in the country and the healthcare industry, and other risk factors as may be listed from time to time in the Company’s filings with the SEC. In evaluating such forward-looking statements, investors should specifically consider the matters set forth under the caption “Risk Factors” appearing in our Annual Report on Form 10-K for the year ended December 31, 2007 which was filed with the SEC on March 31, 2008, as well as any other cautionary language contained in this quarterly report, any of which could cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Except to the extent required by applicable securities laws and regulations, we disclaim any obligation to update or revise information contained in any forward-looking statement contained herein to reflect events or circumstances occurring after the date of this quarterly report.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
Management’s discussion and analysis provides a review of the Company’s operating results for the three and six months ended June 30, 2008 and its financial condition at June 30, 2008. The focus of this review is on the underlying business reasons for significant changes and trends affecting the revenues, net income or loss and financial condition of the Company. This review should be read in conjunction with the accompanying unaudited consolidated financial statements and the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.
OVERVIEW
ACS provides ancillary healthcare services through its proprietary network of ancillary healthcare service providers for the benefit of its healthcare payor clients. Clients route healthcare claims to ACS after service has been performed by providers who participate in the ACS network. ACS re-prices those claims according to its contractual rate with the service provider. In the process of re-pricing the claim, ACS is paid directly by the client or the insurer for the provider’s service. ACS then pays the service provider according to its contractual rate. ACS assumes the risk of generating positive margin, the difference between the payment it receives for the service and the amount it is obligated to pay the original service provider or member of its proprietary network.
The Company recognizes revenues for ancillary healthcare services when services by providers have been authorized and performed and collections from payors are reasonably assured. Cost of revenues for ancillary healthcare services consist of amounts due to providers for providing patient services, client administration fees paid to client payors to reimburse them for the cost of implementing and managing claims submissions, and the Company’s related direct labor and overhead of processing invoices, collections and payments. The Company is not liable for costs incurred by independent contract service providers until the Company receives payment from the payors. The Company recognizes actual or estimated liabilities to independent contract service providers as the related revenues are recognized. The Company markets its products to insurance companies, third-party administrators and preferred provider organizations. Although we have never reported a profit for a full fiscal year, we realized positive net income of $506,953 during the second half of 2007, which ended December 31, 2007. Our improved performance during this period was attributable to the addition of five new clients during our fiscal year 2007 and the expansion of services performed for existing clients. The Company is seeking continuing growth in the number of client payor and service provider relationships by focusing on providing in-network services for its payors and aggressively pursuing additional preferred provider organizations and third-party administrators as its primary sales targets. The Company believes that this strategy should increase the volume of claims the Company can adjudicate as well as the volume of patients it can direct through its service provider network. No assurances can be given that the Company can expand its service provider network or payor relationships, nor that any such expansion will result in an improvement in the results of operations of the Company.
RECENT EVENTS
On June 30, 2008, the Company announced that it signed an agreement with Viant Holdings, Inc. (“Viant”) to provide ancillary care services to the payor client base of an affiliate of Viant. The affiliate offers comprehensive healthcare management services and custom healthcare cost containment solutions for clients across the United States.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of our financial condition and results of operations is based upon our condensed financial statements. These condensed financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (“GAAP”) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and amortization and potential impairment of intangible assets and goodwill and stock-based compensation expense. As these are condensed financial statements, one should also read expanded information about our critical accounting policies and estimates provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Critical Accounting Policies,” included in our Annual Report on Form 10-K for the year ended December 31, 2007. There have been no material changes to our critical accounting policies and estimates from the information provided in our Form 10-K for the year ended December 31, 2007.
ANALYSIS OF RESULTS OF OPERATIONS
The following table sets forth a comparison of our revenues for the periods presented ending June 30:
| | | Second Quarter | | | Six Months | |
| | | | | | | | | Change | | | | | | | | | Change | |
| ($ in thousands) | | 2008 | | | 2007 | | | $ | | | | % | | | 2008 | | | 2007 | | | $ | | | | % | |
| Net revenues | | $ | 13,013 | | | $ | 4,008 | | | $ | 9,005 | | | | 225 | % | | $ | 24,518 | | | $ | 6,275 | | | $ | 18,243 | | | | 291 | % |
The Company’s net revenues are generated from ancillary healthcare service claims. For the three and six months ended June 30, 2008, approximately $5.9 million and $12.1 million, respectively, of the increases in net revenues was due to the addition of five new clients with which we entered into agreements in 2007. In addition, revenue from established clients increased approximately $3.1 million and $6.1 million, respectively, for the three and six months ended June 30, 2008 compared to the corresponding prior year periods. Those increases were the result of expansion of services to those existing clients.
The Company will continue to attempt to increase the number of client payors and service provider relationships by focusing on providing in-network services for its payors and aggressively pursuing preferred provider organizations and third party administrators as its primary sales targets. The Company believes that this strategy should increase the volume of claims the Company can adjudicate as well as the volume of patients it can direct through its service provider network. No assurances can be given that the Company can expand its service provider network or payor relationships, nor that any such expansion will result in an improvement in the results of operations of the Company.
Cost of Revenues and Contribution Margins
The following table sets forth a comparison of the components of our cost of revenues, for the periods presented ending June 30:
| | | Second Quarter | | | Six Months | |
| | | | | | | | | Change | | | | | | | | | Change | |
| ($ in thousands) | | 2008 | | | 2007 | | | $ | | | | % | | | 2008 | | | 2007 | | | $ | | | | % | |
| Provider payments | | $ | 9,555 | | | $ | 2,793 | | | $ | 6,762 | | | | 242% | | | $ | 17,946 | | | $ | 4,337 | | | $ | 13,609 | | | | 314% | |
| Administrative fees | | | 751 | | | | 166 | | | | 585 | | | | 352% | | | | 1,453 | | | | 253 | | | | 1,200 | | | | 474% | |
| Fixed costs | | | 805 | | | | 519 | | | | 286 | | | | 55% | | | | 1,513 | | | | 990 | | | | 523 | | | | 53% | |
| Total cost of revenues | | $ | 11,111 | | | $ | 3,478 | | | $ | 7,633 | | | | 219% | | | $ | 20,912 | | | $ | 5,580 | | | $ | 15,332 | | | | 275% | |
Cost of revenues is comprised of payments to our providers, administration fees paid to our client payors for converting claims to electronic data interchange and routing them to both the Company for processing and to their payors for payment, and the fixed costs of our network development and claims administration organizations. For the three and six month periods ended June 30, 2008, the increases in total cost of revenues compared to the corresponding prior year periods, reflect increased amounts paid to providers for their services as a result of our increased revenues, and the fluctuation in the mix of types of services provided by the Company. The increase in administration fees was due to the addition of five new clients and expanded relationships with existing clients. Fixed costs increased due to increased costs and expenses related to increased volume of claims processing.
The following table sets forth a comparison of contribution margin percentage for the periods presented ending June 30:
| | | Second Quarter | | | Six Months | |
| | | | | | | | | Change | | | | | | | | | Change | |
| ($ in thousands) | | 2008 | | | 2007 | | | % pts | | | 2008 | | | 2007 | | | % pts | |
| Contribution margin | | | 14.6% | | | | 13.2% | | | | 1.4% | | | | 14.7% | | | | $11.1% | | | | 3.6% | |
Contribution margin is calculated by dividing the difference between net revenues and total costs of revenues by net revenues. The increase in contribution margin reflected in the above table is attributable primarily to the increase in net revenues, offset by a variety of factors, including more aggressive pricing by the Company, fluctuations in the mix of services provided by the Company, and increased administration fees payable to clients. The Company anticipates that it will continue to experience margin expansion as the rate of client volume increases over time as a result of leveraging its fixed cost infrastructure.
Selling, General and Administrative Expenses
The following table sets forth a comparison of our selling, general and administrative (“SG&A”) expenses for the periods presented ending June 30:
| | | Second Quarter | | | Six Months | |
| | | | | | | | | Change | | | | | | | | | Change | |
| ($ in thousands) | | 2008 | | | 2007 | | | $ | | | | % | | | 2008 | | | 2007 | | | $ | | | | % | |
Selling, general and administrative expenses | | $ | 1,195 | | | $ | 1,210 | | | $ | (15 | ) | | | (1)% | | | $ | 2,307 | | | $ | 1,911 | | | $ | 396 | | | | 17% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Percentage of total net revenues | | | 9.2% | | | | 30.2% | | | | | | | | | | | | 9.4% | | | | 30.5% | | | | | | | | | |
Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and related benefits, travel costs, sales commissions, sales materials, other marketing related expenses, costs of corporate operations, finance and accounting, human resources and other general operating expenses of the Company. The increase in SG&A reflected in the above table is primarily related to increased professional expenses, specifically accounting, legal and consulting fees, accrued bonuses related to improved operating results compared to the prior year periods, increased stock-based compensation expense and sales commissions commensurate with our increased sales. Those increases were offset by the effect of the severance costs incurred during the three months ended June 30, 2007 related to our former Chief Executive Officer, who resigned effective June 30, 2007. Those costs were approximately $330,000.
SG&A expenses as a percentage of net revenues decreased over the prior year periods as a result of the disproportionately greater increase in our net revenues.
Depreciation and Amortization
The following table sets forth a comparison of depreciation and amortization for the periods presented ending June 30:
| | | Second Quarter | | | Change | | | Six Months | | | Change | |
| ($ in thousands) | | 2008 | | | 2007 | | | $ | | | | % | | | 2008 | | | 2007 | | | $ | | | | % | |
| Depreciation | | $ | 44 | | | $ | 31 | | | $ | 13 | | | | 42% | | | $ | 83 | | | $ | 56 | | | $ | 27 | | | | 48 % | |
| Amortization | | | 53 | | | | 53 | | | | - | | | | - % | | | | 106 | | | | 106 | | | | - | | | | - % | |
| Total Depreciation and amortization | | $ | 97 | | | $ | 84 | | | $ | 13 | | | | 15% | | | $ | 189 | | | $ | 162 | | | $ | 27 | | | | 17% | |
Amortization of intangibles consists of $21,000 of amortization of certain software development costs and $32,000 in amortization of the capitalized value of provider contracts that were acquired in the 2003 acquisition of American CareSource Corporation’s assets by Patient Infosystems (now CareGuide, Inc.).
Interest (Income) Expense, net
The following table sets forth a comparison of the components of interest (income) expense, net for the periods presented ending June 30:
| | | Second Quarter | | | Change | | | Six Months | | | Change | |
| ($ in thousands) | | 2008 | | | 2007 | | | $ | | | | % | | | 2008 | | | 2007 | | | $ | | | | % | |
| Interest income | | $ | (32 | ) | | $ | (50 | ) | | $ | 18 | | | | (36)% | | | $ | (72 | ) | | $ | (103 | ) | | $ | 31 | | | | (30)% | |
| Interest expense | | | 2 | | | | 3 | | | | (1 | ) | | | (33)% | | | | 4 | | | | 6 | | | | (2 | ) | | | (33)% | |
| Debt issuance costs | | | - | | | | - | | | | - | | | | - % | | | | - | | | | 46 | | | | (46 | ) | | | (100)% | |
Total interest (income) expense, net | | $ | (30 | ) | | $ | (47 | ) | | $ | 17 | | | | (36)% | | | $ | (68 | ) | | $ | (51 | ) | | $ | (17 | ) | | | 33 % | |
For the six months ended June 30, 2008, interest (income) expense, net increased compared to the prior year period due to the amortization of debt issuance costs of $46,300, which was incurred during the first quarter of 2007. Those costs were fully amortized as of December 31, 2007.
For the three and six months ended June 30, 2008, a provision for income taxes of $19,019 and $36,064 was recorded, respectively, as compared to no income tax provision being recorded in the prior year periods. The provision amounts for the aforementioned periods in 2008 represents our estimated margin tax liability in the State of Texas.
FINANCIAL CONDITION AND LIQUIDITY
As of June 30, 2008, the Company had a working capital surplus of $5.2 million as compared to a working capital surplus of $3.6 million at December 31, 2007. The increase in working capital is primarily the result of net cash provided by operating activities of $2.1 million during the six months ended June 30, 2008. That increase was partially offset by capital expenditures of approximately $390,000 during the same period.
For the six months ended June 30, 2008, operating activities provided net cash of $2.1 million, the primary components of which were net income of $1.1 million, adjusted for non-cash charges of share-based compensation expense of $316,147 and depreciation and amortization of $188,672, and a net decrease in operating assets and liabilities of $410,340. Net operating assets and liabilities declined due to the timing of collection of claims paid to us by our clients and payments made by us to the service providers in our network and the accrual made for performance related bonuses during the six months ended June 30, 2008.
Investing activities in the quarter ended June 30, 2008 were comprised of investments in software development costs of $284,085 and in property and equipment of $105,461. The software development costs relate primarily to enhancements to our internal reporting capabilities.
Financing activities in the quarter ended June 30, 2008 produced cash of $109,971, compared to cash used of $320,181 in the corresponding period in 2007. Cash generated in financing activities was primarily comprised of proceeds of $137,331, from the exercise of employee stock options, $129,725 of which was received from the exercise of 399,007 stock options by the former Chief Executive Officer of the Company. Those proceeds were offset by payment made under capital leases of $27,360.
During the six months ended June 30, 2008, the Company’s net income was $1.1 million and cash flows from operating activities were $2.1 million. Historically, we have relied on external sources of capital, including indebtedness or issuance of equity securities. We believe our current cash balance ($6.1 million as of June 30, 2008) and expected future cash flows from operations will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities through the next twelve months. If operating cash flows are not sufficient to meet our needs, we believe that credit or access to capital through issuance of equity would be available to us.
INFLATION
Inflation did not have a significant impact on the Company’s costs during the quarters ended March 31, 2008 and March 31, 2007, respectively. The Company continues to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any material off-balance sheet arrangements at June 30, 2008 or June 30, 2007 or for the periods then ended.
ITEM 4. Evaluation of Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2008. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective for the recording, processing, summarizing and reporting of the information that the Company is required to disclose in the reports it files under the Exchange Act, within the time periods specified in the SEC’s rules and forms.
Changes in Internal Controls Over Financial Reporting. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has concluded that there were no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended June 30, 2008 that have materially affected the Company’s internal controls over financial reporting or are reasonably likely to materially affect internal controls over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses.
Part II. OTHER INFORMATION
ITEM 1A. Risk Factors
In addition to the other information set forth in this report, one should carefully consider the discussion of various risks and uncertainties contained in Part I, “Item 1A. Risk Factors” in our 2007 Annual Report on Form 10-K. We believe those risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us. Please note, however, that those are not the only risk factors facing us. Additional risks that we do not consider material, or of which we are not currently aware, may also have an adverse impact on us. Our business, financial condition and results of operations could be seriously harmed if any of these risks or uncertainties actually occurs or materializes. In that event, the market price for our common stock could decline, and our shareholders may lose all or part of their investment. During the first three months of 2008, there were no material changes in the information regarding risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2007.
ITEM 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders on May 20, 2008. The results of the matters voted on at the meeting are as follows:
With respect to the election of directors, shares were voted as follows:
| | | Number of | | Number of Votes |
| Nominee | | Votes For | | Withheld |
| Edward B. Berger | | | 9,919,376 | | | | 539,883 | |
| John W. Colloton | | | 10,397,259 | | | | 62,000 | |
| Kenneth S. George | | | 10,397,259 | | | | 62,000 | |
| John N. Hatsopoulos | | | 10,397,259 | | | | 62,000 | |
| John Pappajohn | | | 9,919,334 | | | | 539,925 | |
| Derace L. Schaffer, MD | | | 9,919,376 | | | | 539,883 | |
With respect to the ratification of McGladrey & Pullen LLP as our independent auditors for fiscal year 2008, votes were as follows:
| For | Against | Abstain |
| 10,418,758 | 9,800 | 30,701 |
ITEM 6. Exhibits
| Exhibit 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Exhibit 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Exhibit 32.1 | Certifications Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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.
| | AMERICAN CARESOURCE HOLDINGS, INC. | |
| | | | |
| | By: | /s/ David S. Boone | |
| | | David S. Boone | |
| | | President and Chief Executive Officer (principal executive officer and an authorized signatory) |
| | | | |
| | | |
| | | | |
| | By: | /s/ Steven J. Armond | |
| | | Steven J. Armond | |
| | | Chief Financial Officer (principal financial officer and an authorized signatory) |
| | | | |
| | | |
| | | | |
| | By: | /s/ Matthew D. Thompson | |
| | | Matthew D. Thompson | |
| | | Controller (principal accounting officer and an authorized signatory) |
| | | | |
Date: August 14, 2008
