Bpo Management Services (HAXS) 10-Q 2007 Q1 Quarterly report

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended. . . . . . . . . . .March 31, 2007

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from. . . . . . . . . . .. to. . . . . . . . . . .

Commission file number. . . . . . . . . . .0-13591

HEALTHAXIS INC.

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2214195
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

7301 N. State Highway 161, Suite 300, Irving, Texas 75039

(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: (972) 443-5000

Former name, former address and former fiscal year, if changed since last report:  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 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.  x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,617,711 shares of common stock, par value $.10, outstanding as of May 4, 2007.

Healthaxis Inc.

Table of Contents

		Page
PART I Financial Information
Item 1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12
Item 4.	Controls and Procedures	12
PART II Other Information
Items 1-5		13
Item 6		14
Signatures		15
Exhibit Index		16

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PART I. FINANCIAL INFORMATION

Item 1.   Consolidated Financial Statements

Healthaxis Inc. and Subsidiaries
Consolidated Balance Sheets

(In thousands except share and per share data) (Unaudited)

	March 31,			December 31,
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	3,095		$	3,362
Accounts and note receivable, net of allowance for doubtful accounts of $9 and 7, respectively	2,869			2,943
Prepaid expenses	605			544
Total current assets	6,569			6,849
Property, equipment and software, less accumulated depreciation and amortization of $6,718 and $6,554, respectively	1,435			1,550
Contract start-up costs, less accumulated amortization of $2,131 and $2,026, respectively	1,498			1,340
Goodwill	11,276			11,276
Other assets	236			303
Total assets	$	21,014		$	21,318
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,462		$	1,498
Accounts payable to related parties	182			89
Accrued liabilities	440			509
Deferred revenues	1,559			1,612
Notes payable, current portion	660			750
Working capital and equipment lines of credit, current portion	103			655
Current portion, post retirement and employment liabilities	124			124
Current portion, capital lease obligations	—			57
Total current liabilities	4,530			5,294
Note payable	—			93
Post retirement and employment liabilities	754			768
Working capital and equipment lines of credit	912			361
Deferred rent	345			306
Other liabilities	174			174
Total liabilities	6,715			6,996
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, par value $1.00: authorized 100,000,000 shares:
Series A Convertible 740,401 shares issued and outstanding, for both periods (no liquidation preference)	740			740
Common stock, par value $.10: authorized 1,900,000,000 shares, issued and outstanding 8,188,336 and 8,172,112 shares, respectively	819			817
Note receivable from employees	(5		)	(23		)
Additional paid-in capital	450,435			450,416
Accumulated deficit	(437,690		)	(437,628		)
Total stockholders’ equity	14,299			14,322
Total liabilities and stockholders’ equity	$	21,014		$	21,318

See notes to unaudited consolidated financial statements.

3

Healthaxis Inc. and Subsidiaries
Consolidated Statements of Operations

(In thousands, except share and per share data) (Unaudited)

	Three Months Ended
	March 31, 2007			March 31, 2006
Revenue	$	4,211		$	3,918
Expenses:
Cost of revenues	3,438			3,376
Sales and marketing	248			374
General and administrative	559			609
Total expenses	4,245			4,359
Operating loss	(34		)	(441		)
Interest and other income, net	33			28
Interest expense	(58		)	(49		)
Loss before income taxes	(59		)	(462		)
Provision for income taxes	(3		)	—
Net loss	$	(62	)	$	(462	)
Net loss per share of common stock (basic and diluted)	$	(0.01	)	$	(0.08	)
Weighted average common shares and equivalents used in computing basic and diluted loss per share	8,171,551			6,088,855

See notes to unaudited consolidated financial statements.

4

Healthaxis Inc. and Subsidiaries
Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

	Three Months Ended
	March 31, 2007			March 31, 2006
Cash flows from operating activities
Net loss	$	(62	)	$	(462	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	276			259
Issuance of restricted stock	31			—
Other	(2		)	2
Change in:
Accounts and note receivable	(99		)	(642		)
Prepaid expenses and other current assets	(61		)	(38		)
Accounts payable and accrued liabilities	27			203
Deferred revenues	(53		)	369
Other assets and liabilities	(4		)	(54		)
Net cash provided by (used in) operating activities	53			(363		)
Cash flows from investing activities
Investment in capitalized software and contract start-up costs	(287		)	(396		)
Purchases of property, equipment and software	(33		)	(108		)
Net cash used in investing activities	(320		)	(504		)
Cash flows from financing activities	—			—
Decrease in cash and cash equivalents	(267		)	(867		)
Cash and cash equivalents, beginning of period	3,362			4,729
Cash and cash equivalents, end of period	$	3,095		$	3,862
Non-cash financing activities
Accounts receivable applied to note and interest payable in lieu of cash	$	195		$	195
Interest paid	$	25		$	—

See notes to unaudited consolidated financial statements.

5

Healthaxis Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

March 31, 2007

Note A — Description of business and basis of presentation

Unaudited Financial Information

The unaudited consolidated financial statements have been prepared by Healthaxis Inc. and its subsidiaries (“Healthaxis” or the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments consisting of normal recurring entries, which, in the opinion of the Company, are necessary to present fairly the results for the interim periods. The interim financial statements do not include all disclosures provided in fiscal year end financial statements prepared in accordance with accounting principles generally accepted in the United States of America, although the Company believes that the accompanying disclosures are adequate to make the information presented not misleading.  Results of operations for the three-month period ended March 31, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006

Equity Compensation

The Company accounts for equity compensation in accordance with Statement of Financial Standards No. 123R, “Share Based Payment” (SFAS 123R).  On January 16, 2007, the Company granted 92,500 shares of restricted stock to its directors.  The restricted stock has been valued at approximately $127,000, which represents the trading value of the stock as quoted on NASDAQ January 16, 2007.  The shares of stock granted to directors vest over the calendar year of service, thus one-fourth of the shares vested in the quarter ended March 31, 2007, and the Company recognized compensation expense of approximately $31,000.  No stock options were granted or vested in 2006 or during the first three months of 2007.

Earnings Per Share

Basic loss per share is computed using only the weighted average number of common shares outstanding during the respective periods.  Diluted earnings per share is computed to show the dilutive effect, if any, of convertible preferred stock, stock options and warrants using the treasury stock method based on the average market price of the stock during the respective periods.  The effect of including the convertible preferred stock, restricted stock, stock options and warrants in the computation of diluted earnings per share would be anti-dilutive for each of the periods presented, thus these items have not been included in the computation.  Following is a summary of these potentially dilutive securities:

	As of March 31,
	2007	2006
Options	1,181,248	1,299,328
Restricted stock	219,375	—
Warrants	7,229,186	7,229,186
Preferred stock	740,401	2,751,658
Total common shares if converted	9,370,310	11,280,172

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Note B — Significant Customer Concentrations

For the three months ended March 31, 2007 and 2006, three customers accounted for $2.7 million (64%) and $2.4 million (61%), respectively, of the Company’s total revenues.  At March 31, 2007 and December 31, 2006, three customers individually accounted for more than 10% of the Company’s accounts receivable as shown in the table below.  These customers are making payments in accordance with the terms of their contracts.

	Percent of accounts and notes receivable
	March 31, 2007		Dec. 31, 2006
Customer A	33	%	30	%
Customer B	22	%	28	%
Customer C	11	%	10	%

Note  C — Related Party Transactions

The Company is a party to a Remote Resourcing Agreement with Healthcare BPO Partners L.P., a company affiliated with a significant shareholder.  Healthcare BPO Partners, based in Jaipur, India, provides personnel and infrastructure that is utilized by the Company to provide business process outsourcing services and other software development and technical support services to support the Company’s operations.  The resources provided by Healthcare BPO Partners supplement the Company’s existing wholly-owned operations in Utah, Texas and Jamaica.  As a part of the Resourcing Agreement, Healthcare BPO Partners also provides data center hosting services, at a Vienna Virginia facility, to Healthaxis.  For the three months ended March 31, 2007, the Company incurred costs of approximately $269,000 related to the Resourcing Agreement and at March 31, 2007, the Company had accounts payable to Healthcare BPO Partners of approximately $182,000.

Note D — Recent Accounting Pronouncements

                In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.”  FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities.  A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.  The Company is subject to the provisions of FIN 48 as of January 1, 2007.  The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position.  Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48.

          In September 2006, FASB Statement 157, “Fair Value Measurements” (“SFAS 157”) was issued.  SFAS 157 establishes a framework for measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities.  SFAS 157, which does not require any new fair value measurements, clarifies the application of other accounting pronouncements that require or permit fair value measurements.  The effective date for the Company is January 1, 2008.  The adoption of SFAS 157 is not anticipated to have a material impact on our Consolidated Financial Statements.

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Note E - Subsequent Event

On April 16, 2007, the Company entered into an amendment to its Loan and Security Agreement (“LSA”) with Silicon Valley Bank.  Under the original LSA, the revolving line would have expired in August 2007.  As a result of the amendment, 1) the expiration of the revolving line is extended to April 2009, 2) the available borrowing limit and the draw period under the equipment line were increased, and 3) certain covenants were modified.  The Company elected to reduce the maximum amount available under the revolving line to avoid paying higher unused revolving line facility fees.  The classification of the lines of credit on the March 31, 2007 balance sheet as current or non-current is based on the amended maturity date.  Based on the calculation of the borrowing base as of March 31, 2007, we would have been eligible to draw up to approximately $2.3 million under the revolving line, of which $500,000 had been drawn as of that date.

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

Forward-Looking Statements

All statements other than statements of historical fact contained in this report, including statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” concerning the Company’s financial position and liquidity, results of operations, prospects for future growth, and other matters are forward-looking statements.  These statements may be identified with words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “could,” “goal,” “target,” “designed,” “on track,” “comfortable with,” “optimistic” and other similar expressions, and constitute 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. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those contemplated by the forward-looking statements.  Such factors include the risks and uncertainties identified in Healthaxis documents filed with, or furnished to, the Securities and Exchange Commission, including without limitation those identified under the caption “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2006.  The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  Readers are cautioned not to place undue reliance on forward-looking statements.

Overview

Healthaxis Inc. is a Pennsylvania corporation, which was organized in 1982. Healthaxis’ common stock trades on the NASDAQ Capital Market under the symbol “HAXS.”  The operations of Healthaxis are conducted through its subsidiary, Healthaxis, Ltd.  Unless otherwise indicated, or the context otherwise requires, all references in this document to the “Company,” “Healthaxis,” “we,” “our” or “us” include Healthaxis Inc. and all of its subsidiaries.  Healthaxis maintains a website at www.healthaxis.com.  The Healthaxis Code of Conduct can be found on the Healthaxis website.  Information found on the Healthaxis website is not a part of this report.

    The Company reported revenue of $4.2 million and an operating loss of $34,000 in the first quarter of 2007.  Revenue was approximately $293,000 more than the first quarter of 2006 and the operating loss for the first quarter of 2007 improved approximately $407,000 as compared to the first quarter of 2006.  The Company is completing a large-scale customer implementation that has added a significant number of revenue-generating lives to our systems and we are implementing or have implemented three additional new customers that we have announced so far this year.  Due to the subscription nature of our business, these customer wins do not immediately impact operating results, but are expected to provide additional revenue in future periods.

Critical Accounting Policies

Critical accounting policies are those which are most important to the financial statement presentation and that require the most difficult, subjective complex judgments.  There have been no changes in the Company’s critical accounting policies as described in the Company’s Form 10-K for the year ended December 31, 2006, other than as described in Note D to the Consolidated Financial Statements.

9

Results of Operations

Three months ended March 31, 2007 compared to three months ended March 31, 2006

	Three Months Ended March 31,
	2007			2006			Change
	(Table in thousands)
Revenues	$	4,211		$	3,918		$	293
Cost of revenues	3,438			3,376			(62		)
Gross profit	$	773		$	542		$	231
% of revenue	18		%	14		%

Revenues were approximately $293,000 (7%) higher in the three months ended March 31, 2007 compared to the same period in 2006.  Revenue from transaction fees, ASP license fees, and professional services are higher as we have added a significant number of participant lives to our systems as the result of new customer Insur-Admin© and Insur-Claims© implementations.   In addition to the major implementation over the past year, we are implementing or have implemented three additional new customers that we have announced so far this year.  BPO services revenues increased six percent due to the additional participant lives on our systems combined with the addition of two BPO services-only customers in 2006.

Cost of revenues includes all expenses directly associated with the production of revenue, and consists primarily of salaries and related benefits, rent, amortization and depreciation, system expenses such as maintenance and repair, as well as other related consumables.  Cost of revenues increased $62,000 (2%) in the three months ended March 31, 2007 compared to the same period in 2006.  Cost of revenues was 82% of revenues in the 2007 period compared to 86% in the 2006 period.  The increase in cost resulted primarily from higher transaction processing costs from vendor partners related to the increase in transaction fee revenue.

	Three Months Ended March 31,
	2007			2006			Change
	(Table in thousands)
Sales and marketing expense	$	248		$	374		(126	)
General and administrative expense	559			609			(50	)
Interest and other income, net	33			28			5
Interest expense	(58		)	(49		)	(9	)
Provision for income taxes	(3		)	—			(3	)

Sales and marketing expenses consist primarily of employee salaries and related benefits, as well as promotional costs such as direct mailing campaigns, trade shows and media advertising.   Sales and marketing expenses decreased $126,000 (34%) in the three months ended March 31, 2007 compared to the same quarter of 2006.  This decrease was due to reduced personnel related to a transition in the sales and marketing team in the first half of 2006.

General and administrative expenses include executive management, accounting, legal and human resources compensation and related benefits, as well as expenditures for applicable overhead costs.  These expenses decreased $50,000 (8%) in the three months ended March 31, 2007 compared to the same quarter of 2006.  The majority of the decrease is related to a decrease in professional fees, but was partially offset by non-cash equity compensation expense of $31,000.

10

Interest and other income, net increased $5,000 (18%) in the three months ended March 31, 2007 compared to the same quarter of 2006 due primarily to higher interest rates on depository accounts after the Company changed banks in the third quarter of 2006.

Interest expense increased slightly in the three months ended March 31, 2007 compared to the same quarter of 2006.  Interest on the lines of capital and working capital borrowings were partially offset by reduced interest expense on the note payable to HealthMarkets due to the declining principal balance.

Provision for income taxes was $3,000 for the three months ended March 31, 2007 compared to zero in the same quarter of 2006.  Effective January 1, 2007, the Company is accruing an estimate of the tax due under the new margin tax enacted by the State of Texas.

Liquidity and Capital Resources

Overview of Cash Resources

At March 31, 2007, our cash and cash equivalents amounted to $3.1 million compared to $3.4 million at December 31, 2006.  The sources and uses of cash during the first quarter of 2007 are described more fully in “Analysis of Cash Flows” below.  We believe that the Company will maintain sufficient liquidity to fund operations for at least the next 12 months.

On April 16, 2007, the Company entered into an amendment to its Loan and Security Agreement (“LSA”) with Silicon Valley Bank.  Under the original LSA, the revolving line would have expired in August 2007.  As a result of the amendment, 1) the expiration of the revolving line is extended to April 2009, 2) the available borrowing limit and the draw period under the equipment line were increased, and 3) certain covenants were modified.  The Company elected to reduce the maximum amount available under the revolving line to avoid paying higher unused revolving line facility fees.

Analysis of Cash Flows

Cash provided by operating activities for the three months ended March 31, 2007 was approximately $53,000 as compared to a use of $363,000 for the same period in 2006.  The improvement was primarily the result of the reduced net loss in 2007 and changes in various working capital accounts, primarily accounts and notes receivable.

Cash used in investing activities for the three months ended March 31, 2007 was $320,000 as compared to $504,000 for the same period in 2006.  The Company’s investing activities continue to be primarily in the areas of developing software enhancements, contract start-up activities and acquisition of property, equipment and software.

Cash used in financing activities for the three months ended March 31, 2007 and March 31, 2006 were both zero.

Recently Adopted Accounting Pronouncements

See Note D to the Consolidated Financial Statements herein for a discussion of the impact on the Company’s financial statements of new accounting standards.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 Exposure to market risk for changes in interest rates relate primarily to short-term investments. The Company does not use derivative financial instruments. The primary objective of its investment activities is to preserve principal while maximizing yields without significantly increasing risk. Due to the nature of the Company’s investments, we believe that there is no material risk exposure.

Our cash equivalents and other investment instruments are exposed to financial market risk due to fluctuation in interest rates, which may affect our interest income. These instruments are not entered into for trading purposes.  We do not expect our interest income to be significantly affected by a sudden change in market interest rates.

The dividend rate on our preferred stock is fixed at a nominal rate of $0.0001 per share of preferred stock, payable semi-annually (aggregating less than $1,000 in dividend payments to the preferred shareholder(s) annually).  The interest rate on our note payable to HealthMarkets is fixed at 6%.    The fair value of these instruments is therefore subject to fluctuation as market interest rates change.  Advances under the Company’s lines of credit bear interest at the lender’s prime rate plus 1.0% for revolving advances or 1.5% for equipment advances.

Item 4. Controls and Procedures

As of the end of the period covered by this quarterly report, the Company carried out an evaluation, under the supervision and with the participation of the Company management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15.  Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of the end of the period covered by this report.  There has been no change in the Company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.          Legal Proceedings.

We are not currently a party to any material legal proceedings and we are not aware of any pending or threatened litigation that would have a material adverse effect on us or our business.

Item 1A.       Risk Factors

We face a number of significant risks and uncertainties in our business, which are detailed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006.  These risks and uncertainties may affect our current position and future prospects, and should be considered carefully in evaluating us and an investment in our common stock.  We have not identified any material changes to the Risk Factors detailed in our most recent Annual Report on Form 10-K.

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds.

(c)  First Quarter 2007 Issuer Purchases of Equity Securities

Period	(a) Total Number of Shares Purchased(1)	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
January 2007	—	—		—	—
February 2007	901	$	1.78	—	—
March 2007	—	—		—	—

(1)           These purchases were not made pursuant to a publicly announced repurchase plan or program.  Represents 901 shares of common stock surrendered to Healthaxis to pay withholding taxes on shares of restricted stock vesting under the 2005 Stock Incentive Plan.

Item 3.	Defaults Upon Senior Securities.
	None.
Item 4.	Submission of Matters to a Vote of Security Holders.
	None.
Item 5.	Other Information.
	None.

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Item 6.	Exhibits
	(31.1)	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
	(31.2)	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
	(32.1)	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.

14

Signature

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.

	Healthaxis Inc.
Date: May 9, 2007	By:	/s/ John M. Carradine
		John M. Carradine, President and Chief Executive Officer (Principal Executive Officer)
	By:	/s/ Ronald K. Herbert
		Ronald K. Herbert, Chief Financial Officer (Principal Financial Officer)

15

Exhibit Index

(31.1)	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002, filed herewith.
(31.2)	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002, filed herewith.
(32.1)	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002, furnished herewith.

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