There is no impact to the Company’s Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004, and there is no impact to the Consolidated Statements of Operations for the three-month periods ended March 31, 2005 and 2004 for the restatement described above.
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 “Business — Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2004, and under the caption “Risk Factors” in the Company’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on June 27, 2005. 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 is a technology-enhanced provider of fully integrated solutions and services for health benefit administrators and health insurance claim processors. These solutions, which are comprised of software products and related business process services, are designed to assist health insurance payers, third party administrators (“TPA”) and preferred provider organizations (“PPO”) provide enhanced claims related services to members, employees, employers and providers at lower cost. These services are provided through the application of Healthaxis’ flexible technology on an Application Service Provider (“ASP”) basis. These technology solutions are complemented by Healthaxis’ web-based capabilities and Business Process Outsourcing (“BPO”) services, which are offered to the Company’s ASP clients and on a stand-alone basis. BPO solutions include the automated capture, imaging, storage and retrieval of electronic claims, attachments, and related correspondence, in addition to rules-based claims pre-adjudication and editing and automated PPO routing (via electronic data interchange or “EDI”) and repricing. Healthaxis uses its deep domain expertise in health insurance operations to surround the payment of a health insurance claim, to customize services to meet the specific needs of its customers and to produce value for those customers by tapping unrealized potential in the customers’ operations to achieve best results.
Healthaxis Inc. is a Pennsylvania corporation, which was organized in 1982. Healthaxis’ common stock trades on the NASDAQ SmallCap 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.
Revenue Model
The Company’s revenues consist primarily of application service provider (ASP) fees, transaction fees and professional service fees, as further described below. The ASP services are substantially dependent on the Company’s proprietary software, and agreements with customers contain a license for the use of the relevant software. However, the customer does not have the contractual right to take possession of the software. The
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customer’s access to the Company’s hosted software is through dedicated data lines or the Internet. With some exceptions, the Company has not historically licensed its benefits administration and claims processing software for installation on customers’ systems. No new such licenses have been granted in 2005 or 2004.
A significant portion of the Company’s revenue is based on providing ASP services to our health insurance company, third-party administrator and self-insured plan customers. The ASP service includes a license to use our benefits administration and claims processing software, including hosting, maintenance and support, which is typically charged on a per-employee-per-month (PEPM), or per-member-per-month (PMPM) basis. In addition, the Company surrounds these hosted software-use rights with such BPO services as imaging, data capture and retrieval, EDI and print and mail services, as well as PPO routing and repricing services, and claims editing services. These services are typically charged on a transaction fee basis, such as per claim, per image and per document. Due to the long-term nature of the ASP arrangement and because all revenue elements included in the collective services are typically not sold separately, the ASP and BPO service revenues are recognized ratably over the term of the agreement and/or as transaction services are provided.
In preparation for providing services under these multi-year ASP contracts, the Company also usually agrees to perform certain start-up activities directly related to customizing and configuring the licensed software and loading insurance plan data for performance under the contract. The Company defers costs and revenues relating to these start-up activities and recognizes such costs and revenues ratably over the term of the ASP contract.
Periodically, while an ASP contract is in place, the Company also performs professional services upon request and recognizes the related revenue on a time and materials basis as services are performed. Such professional services are not sold in conjunction with a software license included in the original ASP contract or other revenue elements and, therefore, are accounted for separately from the ASP contact.
The Company uses contract accounting for contracts where significant software modification is performed or where services are performed that are essential to the functionality of the delivered software. Generally, contracts that include significant software modification are accounted for using the percentage of completion method with progress measured based on the cost-to-cost method. Contracts with significant customer acceptance provisions are recognized using the completed contract method upon achieving customer acceptance of the completed project. The Company currently has no contracts in progress for which contract accounting is being applied.
Financing Transaction:
Following approval by the Company’s common shareholders, on May 13, 2005 the Company closed a financing transaction with Tak Investments, Inc. (the “Investor”), a Delaware corporation owned by Mr. Sharad Tak. Under the terms and conditions of the Stock and Warrant Purchase Agreement with the Investor (the “Purchase Agreement”), the Company issued to the Investor 2,222,222 shares of common stock at a per share purchase price of $2.25 for an aggregate initial investment of $5.0 million. The Investor also received at the Closing three warrants (the “Warrants”). The first Warrant, which provides for an exercise price of $2.25 per share of common stock and a term of two years, permits the Company to call the exercise of up to 3,333,333 shares of common stock (for an aggregate of up to $7.5 million) under certain conditions, but only permits the Investor to exercise the Warrant for up to 2,222,222 shares of common stock (for an aggregate of $5.0 million). The Company’s ability to call the exercise of the first Warrant is subject to the satisfaction of certain conditions, including unanimous approval of such action by the Company’s Board of Directors (which requires the approval of the Investor’s designees to the Board, as referenced below). The Investor also received two additional warrants representing the right to purchase additional shares of common stock at prices of $2.70 and $3.15 per share. The number of shares of common stock subject to these two additional Warrants is dependent upon the amount ultimately
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invested under the first Warrant, but could total up to an additional 2,777,778 shares of common stock and could provide an additional cash investment in the Company of up to $8.1 million.
In connection with the Closing, the Company and the Investor entered into a number of related agreements. Under the terms of an Investor Rights Agreement, the securities purchased by the Investor are subject to limited transfer restrictions, and the Investor has the right to approve certain fundamental corporate activities, the right to participate in other Healthaxis equity financings and, depending upon the size of the Company’s Board of Directors and the Investor’s continuing ownership position in the Company, the right to designate one to three nominees for election to the Company’s Board of Directors. The Company expects that the Investor will be electing to invoke its right to initially designate up to two additional members to the Board of Directors, at which point the Company will be obligated to expand its Board and add the Investor’s designees to the Board. The parties also entered into a Registration Rights Agreement under which the Company agrees to file a registration statement covering the resale of the shares of common stock purchased under the Purchase Agreement or through exercise of the Warrants.
As a part of the Closing, the Company also entered into a five year Remote Resourcing Agreement (the “Resourcing Agreement”) with Healthcare BPO Partners L.P., a company affiliated with the Investor and owned by Mr. Tak . Healthcare BPO Partners will provide India-based personnel and infrastructure that will be 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 Indian operations, which will be dedicated for the Company’s exclusive use, will be managed by the Company and based in Jaipur, India. These new Indian operations will supplement the Company’s existing operations in Utah, Texas and Jamaica.
Preferred Stock:
On June 30, 2004, Healthaxis consummated a transaction modifying the terms of its Series A Convertible preferred stock and providing for the issuance to its preferred shareholders of warrants to purchase shares of the Company’s common stock. Under the terms of the agreements with the preferred shareholders, shares of the preferred stock are convertible into shares of the Company’s common stock on a one-for-one basis. The preferred shareholders also received warrants with a term of five years entitling them to purchase shares of common stock, on a one-for-one basis, at an exercise price of $5.50 per share (subject to a cashless exercise feature that applies under some circumstances). As of May 16, 2005, there are 2,851,658 preferred shares and 1,000,000 warrants outstanding. The shares of common stock into which the shares of preferred stock are convertible and with respect to which the warrants are exercisable represent approximately 23% of our common stock on a fully diluted basis as of that date. Holders of the preferred stock have no liquidation preference, no voting rights except as required by law, the right to receive a nominal dividend of $0.0001 per share semi-annually (aggregating less than $1,000 per year in total) and otherwise on a pro-rata basis to the extent that dividends are paid to holders of common stock, limited anti-dilution rights in the context of stock splits, stock dividends and similar transactions, and no redemption rights.
The shares of preferred stock are convertible into shares of common stock at the option of a preferred shareholder at any time, and in any amount, on or after June 30, 2005, but prior to that date may only be converted if the preferred shareholder desiring to effect the conversion will not hold as a result of the conversion more than 750,000 shares of common stock, or if the common stock is trading on a national stock market and has had a closing price of $8.00 or more for 20 out of the 30 trading days immediately preceding the conversion date (in which case, any number of shares may be converted). Notwithstanding the foregoing, in the event of the transfer of shares of preferred stock in accordance with the terms of the agreements with the preferred shareholders, the preferred stock automatically converts into shares of common stock. Healthaxis may compel conversion of the preferred stock or exercise of the warrants granted to the preferred shareholders under some circumstances.
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Under the agreements with the preferred shareholders, Healthaxis agreed that it will not issue any equity securities in a transaction implying a pre-money valuation of Healthaxis of less than $14.5 million or at a per share price of less than $2.15 (these restrictions do not apply to the grant of stock options to Healthaxis employees or directors in most circumstances). Further, until June 30, 2005, the preferred shareholders have a right of first refusal to match the terms upon which any third party proposes to purchase from Healthaxis any equity securities having an aggregate purchase price of at least $1.0 million and to match the terms upon which Healthaxis proposes an offering of its common stock. The preferred shareholders waived this right of first refusal with respect to the financing transaction with the Investor described above.
As required by the agreements with the preferred shareholders, Healthaxis has registered for resale the shares of common stock issuable upon conversion of the preferred stock or exercise of the warrants. However, these agreements also place certain restrictions on the private sale or transferability of the securities held by the preferred shareholders, and restrict the number of shares of common stock that may be sold in the public markets below a price of $3.50 per share. These stock transfer restrictions lapse on June 30, 2005.
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, 2004.
Results of Operations
Three months ended March 31, 2005 compared to three months ended March 31, 2004
| | | | (Table in thousands)
Three Months Ended March 31,
| |
|---|
| | | | 2005
| | | 2004
| | Change
|
|---|
| Revenues | | | | $ | 4,126 | | | $ | 4,249 | | | $ | (123 | ) |
| Cost of revenues | | | | | 4,096 | | | | 4,353 | | | | (257 | ) |
| Gross profit | | | | $ | 30 | | | $ | (104 | ) | | $ | 134 | |
| % of revenue | | | | | 1 | % | | | (2 | %) | | | | |
Revenues were down approximately $123,000 (3%) in the three months ended March 31, 2005 compared to the same period in 2004. Data capture service revenue declined $194,000 primarily as a result of two customers in a run-off stage. This reduction was partially offset by an increase of $71,000 in recurring PEPM license fees due to ordinary rate increases with certain existing customers, as well as the migration of more business onto our claims system by certain other customers. Smaller changes in professional services, transaction and other revenue were offset each other.
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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 declined $257,000 (6%) in the three months ended March 31, 2005 compared to the same period in 2004. Cost of revenues was 99% of revenues in the 2005 period compared to 102% in the 2004 period. Approximately $181,000 of the decrease in costs was due to lower personnel and contractor costs resulting from staff reductions. An additional $47,000 of the decline in costs was due to reduced costs of travel and entertainment, supplies and other costs related to the staff reductions.
| | | | (Table in thousands)
Three Months Ended March 31,
| |
|---|
| | | | 2005
| | 2004
| | Change
|
|---|
| Sales and marketing expense | | | | $ | 213 | | | $ | 293 | | | $ | (80 | ) |
| General and administrative expense | | | | | 644 | | | | 968 | | | | (324 | ) |
| Amortization of intangibles | | | | | 84 | | | | 276 | | | | (192 | ) |
| Interest and other income, net | | | | | 8 | | | | 27 | | | | (19 | ) |
| Interest expense | | | | | 55 | | | | 64 | | | | (9 | ) |
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 $80,000 (27%) in the three months ended March 31, 2005 compared to the same quarter of 2004. Approximately $30,000 of the decrease was due to reduced consulting fees paid for product and market analysis and sales leads. The remaining decrease in expenses was the result of lower personnel costs and the related decrease in benefits, travel and collateral material.
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 $324,000 (33%) in the three months ended March 31, 2005 compared to the same quarter of 2004. Professional fees for accounting, legal and consulting services were reduced by $255,000 and personnel costs were reduced by $68,000. Other savings in insurance and travel expenses were offset by increased property taxes.
Amortization of intangibles includes the amortization of developed software and customer base acquired in the January 2001 Healthaxis merger. These expenses were reduced $192,000 (70%) in the three months ended March 31, 2005 compared to the same quarter of 2004, as these intangible assets were fully amortized in January 2005.
Interest and other income, net decreased $19,000 (70%) in the three months ended March 31, 2005 compared to the same quarter of 2004 due primarily to lower balances of cash and interest bearing notes receivable.
Interest expense decreased slightly in the three months ended March 31, 2005 compared to the same quarter of 2004. Interest payments on the note payable to UICI were lower due to the declining principal balance.
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Liquidity and Capital Resources
Overview of Cash Resources
At March 31, 2005, our cash and cash equivalents amounted to $2.6 million compared to $3.9 million at December 31, 2004. The sources and uses of cash during the first quarter of 2005 are described more fully in “ — Analysis of Cash Flows” below. We have experienced repeated losses, with the result that our cash resources have declined. The Company’s focus is on positive cash generation. We have been taking measures to address our liquidity needs, including increasing our marketing and sales efforts, implementing further productivity improvements and seeking new sources of capital. To this end, the Company entered into a Purchase Agreement with Tak Investments, Inc., which closed on May 13, 2005, and which provided the Company with an additional source of liquidity as more fully described in “— Overview — Financing Transaction” above. Upon closing, the Company received $5.0 million in gross proceeds in exchange for 2,222,222 shares of the Company’s common stock. We believe that the Company will maintain sufficient liquidity to fund operations for at least the next 12 months.
Analysis of Cash Flows
Cash used in operating activities for the three months ended March 31, 2005 was approximately $1.2 million as compared to $723,000 for the same period in 2004. The reduced net loss in 2005 was offset by changes in various working capital accounts, primarily accounts receivable and prepaid expenses. Changes in working capital accounted for a $700,000 use of cash in the 2005 period as opposed to $245,000 cash generated for the comparable period in 2004.
Cash used in investing activities for the three months ended March 31, 2005 was $168,000 as compared to $149,000 for the same period in 2004. 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, 2005 was $0 as compared to $221,000 for the same period in 2004. The decreased use of cash was due primarily to $223,000 payments on preferred stock dividends made in January of 2004. In June 2004, the terms of the preferred stock were amended and now contain only a nominal dividend aggregating to less than $1,000 per year. See “-Overview — Preferred Stock” above. Principle and interest payments on our note payable to UICI of $197,000 during 2005 and $195,000 in the comparable period in 2004 were netted against accounts receivable from UICI and are therefore reflected as non-cash financing transactions in the Consolidated Statements of Cash Flows for all periods presented. See “— Note Payable to UICI” below and Note H to the Consolidated Financial Statements.
Note Payable to UICI
On September 30, 2003, the Company purchased all Healthaxis securities held by UICI for $3.9 million. The UICI holdings included 2,585,769 shares of Healthaxis common stock, or 48.3% of the Company’s then outstanding common stock; 1,424 shares of Series A Convertible preferred stock, or 6.1% of the then outstanding preferred stock; and warrants to purchase 22,240 shares of common stock. The repurchased securities were retired. The total purchase price of $3.9 million included $500,000 cash at closing, and a $3.4 million promissory note, which is due over three years and bears interest at 6%. The promissory note will be paid through deductions from the monthly invoices for services provided by the Company to certain UICI subsidiaries. The amount of the monthly payment is equal to the greater of one half of the invoice amount for such services or $65,000. A balloon principal payment is due at the maturity of the note if the note has not been paid through the monthly payments.
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During the three-month period ended March 31, 2005, the Company netted against accounts receivable an aggregate of $197,000 under the promissory note, of which $158,000 was principal and $39,000 was interest. This is reflected as a non-cash financing transaction in the Company’s Consolidated Statements of Cash Flows. As of March 31, 2005, the balance due under the promissory note is $2.5 million (of which $646, 000 is classified as short-term).
Lease and Other Commitments
Healthaxis has certain capital and operating lease commitments over the next five years. These leases are primarily for office space and data processing equipment. In April 2005, the Company entered into a lease for approximately 20,000 square feet of office space located at 7301 North State Highway 161, Irving, Texas. The new lease was entered into with the intent of relocating the corporate headquarters from the present location at 5215 North O’Connor Blvd, Irving, Texas, where the Company occupies approximately 31,300 square feet. Lease payments on the new lease will start on January 1, 2006, which coincides with the termination of the North O’Connor Blvd. lease on December 31, 2005. The new lease also provides terms under which ownership of certain furniture and equipment will be conveyed to the Company in April 2007, providing that the Company has met its obligations under the lease at that time. While the Company plans to continue to make payments on the North O’Connor lease until its expiration in December 2005, the relocation of employees, equipment and related materials is scheduled to take place in the second quarter of 2005. As such, the Company anticipates accruing a loss on the abandonment of the North O’Connor Blvd. property, based upon the future lease payment obligation as of the cease-use date plus other relocation expenses. Based upon the reduced square footage and the lower rental rate per square foot of the new facility, the Company expects a cash savings of over $700,000 per year, including lease expenses, utilities, parking, and property taxes, commencing in January 2006.
Healthaxis has no other significant cash commitments other than those required by the normal day-to-day operation of its business.
Recently Adopted Accounting Pronouncements
See Note B to the Consolidated Financial Statements herein for a discussion of the impact on the Company’s financial statements of new accounting standards.
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-14. 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.
We have re-evaluated our disclosure controls and procedures in light of the factors that led us to make the restatements in this report. Based on our review and discussion with our audit committee, we determined that the reclassifications are necessary to reflect the non-cash financing transaction and have amended our financial statements included in this Form 10-Q/A to present them on a comparable basis with subsequent reports. We continue to believe our disclosure controls and procedures were effective at March 31, 2005. This conclusion is based upon the following: 1) The Company views its internal controls over financial reporting as a component of its overall disclosure controls and procedures. 2) The Company believes that the reclassification related to the UICI debt payments should not change the reader’s view on the overall sources and uses of cash for the accounting
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periods reported, or the readers opinion of the Company’s overall cash position, future obligations or liquidity. Furthermore, the netting process that lead to the reclassifications in the Consolidated Statements of Cash Flows was fully disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview —Note Payable to UICI”. 3) The restatements had no effect on the Company’s Consolidated Statements of Operations or Consolidated Balance Sheets for the periods reported herein.
Limitations on Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The likelihood of achieving the objectives of a control system is affected by limitations inherent in such controls and procedures, including the fact that human judgment in decision-making can be faulty and that breakdowns in internal controls can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, do not expect that the Company’s disclosure controls or internal controls for financial reporting will prevent all error and all fraud. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
Item 6.
| | Exhibits
| |
|---|
| | | (10.1) | | Sublease Agreement effective April 1, 2005 between BearingPoint,Inc. and Registrant, previously filed with the Quarterly Report on Form 10-Q on May 16, 2005. |
| | | (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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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | |
| | | | | | | |
| | | | | Healthaxis Inc. |
| | | | | |
| | | | | |
| Date: November 9, 2005 | | | | By: /s/ John M. Carradine
John M. Carradine, President and Chief Executive Officer
|
| | | | | (Principal Executive Officer) |
| | | | | |
| | | | | |
| | | | | By: /s/ Jimmy D. Taylor
Jimmy D. Taylor, Chief Financial Officer
(Principal Financial Officer) |
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Exhibit Index
| (10.1) | | | | Sublease Agreement effective April 1, 2005 between BearingPoint,Inc. and Registrant, , previously filed with the Quarterly Report on Form 10-Q on May 16, 2005. |
| (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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