Adam (ADAM) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

OR

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

For the transition period from

Commission File Number 001-34401

A.D.A.M., INC.

(Exact Name of Registrant as Specified in its Charter)

Georgia	58-1878070
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

10 10^th Street NE, Suite 525

Atlanta, Georgia 30309-3848

(Address of Principal Executive Offices, Zip Code)

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  ¨

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

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

Large accelerated filer  ¨	Accelerated filer  ¨	Non-accelerated filer  ¨	Smaller reporting company  x
		(Do not check if a smaller reporting company)

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

As of August 6, 2010, there were 9,971,360 shares of the Registrant’s common stock, par value $.01 per share, outstanding.

A.D.A.M., Inc.

Form 10-Q for the Quarter Ended June 30, 2010

		Page No.
	Index
	Part I. Financial Information
ITEM 1.	Financial Statements	3
	Balance Sheets at June 30, 2010 (unaudited) and December 31, 2009	3
	Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)	4
	Statement of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2010 (unaudited)	5
	Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (unaudited)	6
	Notes to Financial Statements (unaudited)	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
ITEM 4.	Controls and Procedures	19
	Part II. Other Information
ITEM 1.	Legal Proceedings	20
ITEM 1A.	Risk Factors	20
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
ITEM 3.	Defaults Upon Senior Securities	20
ITEM 4.	(Removed and Reserved)	20
ITEM 5.	Other Information	20
ITEM 6.	Exhibits	20

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

A.D.A.M., Inc.

Balance Sheets

(In thousands, except share data)

	June 30, 2010			December 31, 2009
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	3,952		$	5,446
Accounts receivable, net of allowances of $271 and $274, respectively		2,465			2,516
Inventories, net		15			30
Prepaids and other current assets		332			208
Deferred income tax asset		678			678
Total current assets		7,442			8,878
Property and equipment, net		1,627			1,543
Intangible assets, net		9,011			9,375
Goodwill		13,690			13,690
Other assets		206			206
Deferred financing costs, net		37			52
Deferred income tax asset		5,712			5,712
Total assets	$	37,725		$	39,456
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued expenses	$	5,186		$	4,895
Deferred revenue		5,349			5,796
Current portion of long-term debt		2,000			2,000
Current portion of capital lease obligations		25			22
Total current liabilities		12,560			12,713
Capital lease obligations, net of current portion		76			90
Other liabilities		637			1,385
Long-term debt, net of current portion		3,000			6,000
Total liabilities		16,273			20,188
Shareholders’ equity
Common stock, $.01 par value; 20,000,000 shares authorized; 10,241,119 shares issued and 9,971,360 shares outstanding at 6/30/2010 and 10,174,519 shares issued and 9,904,760 shares outstanding at 12/31/2009		102			102
Treasury stock, at cost, 269,759 shares		(1,088	)		(1,088	)
Additional paid-in capital		59,460			59,256
Accumulated deficit		(37,022	)		(39,002	)
Total shareholders’ equity		21,452			19,268
Total liabilities and shareholders’ equity	$	37,725		$	39,456

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

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A.D.A.M., Inc.

Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2010		2009			2010		2009
Revenues, net
Licensing	$	6,465	$	6,528		$	12,932	$	12,704
Product		78		340			157		555
Professional services and other		185		204			361		482
Total revenues, net		6,728		7,072			13,450		13,741
Cost of revenues
Cost of revenues		875		1,064			1,742		2,179
Cost of revenues – amortization		450		512			904		975
Total cost of revenues		1,325		1,576			2,646		3,154
Gross profit		5,403		5,496			10,804		10,587
Operating expenses
Product and content development		1,352		1,445			2,649		2,490
Sales and marketing		2,008		1,831			3,975		3,778
General and administrative		935		1,161			1,951		2,244
Goodwill impairment		—		—			—		13,940
Restructuring costs		—		1,408			—		1,408
Total operating expenses		4,295		5,845			8,575		23,860
Operating income (loss)		1,108		(349	)		2,229		(13,273	)
Interest expense, net		89		114			189		233
Income (loss) before income taxes		1,019		(463	)		2,040		(13,506	)
Income tax expense		30		—			60		—
Net income (loss)	$	989	$	(463	)	$	1,980	$	(13,506	)
Basic net income (loss) per common share	$	0.10	$	(0.05	)	$	0.20	$	(1.37	)
Basic weighted average number of common shares outstanding		9,957		9,882			9,938		9,882
Diluted net income (loss) per common share	$	0.10	$	(0.05	)	$	0.19	$	(1.37	)
Diluted weighted average number of common shares outstanding		10,394		9,882			10,420		9,882

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

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A.D.A.M., Inc.

Statement of Changes in Shareholders’ Equity

(In thousands, except share data)

(Unaudited)

	Common Stock			Treasury Stock					Additional Paid-in Capital		Accumulated Deficit			Total
	Shares	Amount		Shares		Amount
Balance at December 31, 2009	10,174,519	$	102	(269,759	)	$	(1,088	)	$	59,256	$	(39,002	)	$	19,268
Net Income	—		—	—			—			—		1,980			1,980
Stock-based compensation expense	—		—	—			—			177		—			177
Exercise of common stock options	66,600		—	—			—			27		—			27
Balance at June 30, 2010	10,241,119	$	102	(269,759	)	$	(1,088	)	$	59,460	$	(37,022	)	$	21,452

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

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A.D.A.M., Inc.

Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2010			2009
Cash flows from operating activities
Net income (loss)	$	1,980		$	(13,506	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Goodwill impairment		—			13,940
Restructuring costs		—			1,408
Depreciation and amortization		1,168			1,186
Payments for restructuring costs		(754	)		(841	)
Stock-based compensation expense		177			306
Provisions for bad debt expense		40			53
Deferred financing cost amortization		15			20
Loss on disposal of assets		5			—
Changes in assets and liabilities:
Accounts receivable		11			1,227
Accounts payable and accrued expenses		95			(756	)
Deferred revenue		(447	)		(591	)
Other liabilities		72			319
Prepaids and other assets		(124	)		60
Inventories		15			10
Net cash provided by operating activities		2,253			2,835
Cash flows from investing activities
Software product and content development costs		(540	)		(866	)
Purchases of property and equipment		(223	)		(114	)
Net change in restricted cash		—			29
Goodwill, additional cost of previous acquisition from earnout payments		—			(13	)
Net cash used in investing activities		(763	)		(964	)
Cash flows from financing activities
Payment on long term debt		(3,000	)		(1,000	)
Repayments on capital leases		(11	)		(33	)
Proceeds from exercise of common stock options		27			—
Net cash used in financing activities		(2,984	)		(1,033	)
Increase (decrease) in cash and cash equivalents		(1,494	)		838
Cash and cash equivalents, beginning of period		5,446			1,377
Cash and cash equivalents, end of period	$	3,952		$	2,215
Cash paid for interest	$	135		$	161
Supplemental disclosure of non-cash activities
Capital expenditures in accounts payable and accrued expenses	$	130		$	—

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

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A.D.A.M., Inc.

Notes to Financial Statements (Unaudited)

June 30, 2010

1. BUSINESS AND BASIS OF PRESENTATION

Business

A.D.A.M., Inc. (Nasdaq: ADAM) primarily provides online information and technology solutions for employers, benefits brokers, healthcare organizations and online media companies. Our solutions are divided into two segments:

• Health information and health decision support tools that we market to healthcare organizations, online media companies, and Internet search and technology firms; and

• Benefits communication tools that help employees evaluate, select and enroll in various benefit plans, and benefits broker tools that help advisors manage their business, market benefit related products and recommend benefit plans to employers, which we market directly to employers with more than 500 employees and to benefits brokers and national agencies with employer clients.

Our solutions are delivered through a Software as a Service-type model (“SaaS”) that provides rapid and efficient deployment of our products and allows us to integrate third party products and services that we monetize across our network of clients and end users.

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the general instructions to Form 10-Q. Accordingly, certain information and footnotes required by GAAP for complete financial statements may be condensed or omitted. These interim financial statements should be read in conjunction with our audited financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Certain amounts previously reported have been reclassified for comparative purposes to conform with current period presentation.

Operating results for the six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or any future period.

Recent accounting standards adopted

Effective January 1, 2010, we adopted the provisions of the FASB issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 updates the existing fair value measurements and disclosures guidance currently included in ASC 820, Fair Value Measurements and Disclosures. ASU 2010-06 requires new disclosures about significant transfers in and out of Levels 1 and 2 fair value measurements and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. The ASU also clarifies existing disclosure requirements regarding inputs and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities for which separate fair value measurements should be disclosed. The adoption of this ASU did not have a material impact on our financial condition or results of operations.

New accounting standards to be adopted

In October 2009, the FASB issued ASU 2009-13, Revenue Recognition: Multiple-Deliverable Revenue Arrangements. This authoritative guidance revises the current accounting treatment to specifically address how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. This guidance is applicable to revenue arrangements entered into or materially modified during our first fiscal year that begins after June 15, 2010. The guidance may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. We are currently evaluating this authoritative guidance to determine any potential impact that it may have on our financial results.

In October 2009, the FASB issued ASU 2009-14, Software: Certain Revenue Arrangements That Include Software Elements. This authoritative guidance changes the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality, are no longer within the scope of the software revenue guidance. This guidance is applicable to revenue arrangements entered into or materially modified during our first fiscal year that begins after June 15, 2010. The guidance may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or

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retrospectively. We have evaluated this authoritative guidance and do not expect the adoption to have a material impact on our financial results.

Net income per common share

Net income per share is computed in accordance with ASC 260-Earnings Per Share. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for each period. Diluted net income per share is based upon the addition of the effect of common stock equivalents (stock options, stock warrants and restricted stock awards) to the denominator of the basic net income per share calculation using the treasury stock method, if their effect is dilutive. The computation of net income per share for the three and six months ended June 30, 2010 and 2009 is as follows (in thousands, except per share data):

	Three Months Ended June  30,					Six Months Ended June 30,
	2010		2009			2010		2009
Net income/(loss)	$	989	$	(463	)	$	1,980	$	(13,506	)
Weighted average common shares outstanding – basic		9,957		9,882			9,938		9,882
Weighted average common share equivalents		437		—			482		—
Weighted average common shares outstanding – diluted		10,394		9,882			10,420		9,882
Net income (loss) per common share:
Basic	$	0.10	$	(0.05	)	$	0.20	$	(1.37	)
Diluted	$	0.10	$	(0.05	)	$	0.19	$	(1.37	)
Anti-dilutive stock options, restricted stock awards and warrants outstanding		1,262		2,817			1,262		2,299

2. Long-term debt

In conjunction with the acquisition of OnlineBenefits in 2006, we entered into a credit agreement (the “2006 Credit Agreement”) with Capital Source Finance LLC (“Capital Source”).

All outstanding obligations under the 2006 Credit Agreement were repaid in full and the agreement was terminated on December 31, 2008. In connection with the termination of the 2006 Credit Agreement and as consideration for Capital Source’s agreement to the prepayment of a convertible note, which we were not otherwise able to prepay, we issued a warrant to an affiliate of Capital Source to purchase up to 411,667 shares of our common stock at a price of $3.65 per share, to replace the equity component of the convertible note. This warrant is exercisable immediately and expires on August 14, 2011; provided that the warrant will expire on August 14, 2014 if, as of August 14, 2011, we have issued any shares of any class of capital stock, which is preferred as to dividends or as to the distribution of assets upon the voluntary or involuntary dissolution, liquidation or winding up of the shares issued upon exercise of the warrant. This warrant was issued in a transaction not involving a public offering pursuant to the exemption provided under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The shares of our common stock to be issued upon exercise of the warrant have not been registered under the Securities Act and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements. None of the warrants have been exercised as of June 30, 2010.

On December 31, 2008, we entered into a Loan and Security Agreement (the “2008 Loan Agreement”) with RBC Bank (USA) (“RBC Bank”). The credit facility under the 2008 Loan Agreement consists of a revolving line of credit, a term loan facility and a letter of credit facility. The 2008 Loan Agreement, with related balances at June 30, 2010 and December 31, 2009, is summarized below (numbers in column are in thousands):

	Balance at June 30, 2010		Balance at December 31, 2009
$3,000,000 revolver with RBC Bank —principal repayable in full in December 2010; interest at 1-month LIBOR plus 2.75% (3.10% at 6/30/10 and 2.99% at 12/31/09), payable monthly in advance	$	—	$	—
$10,000,000 term loan with RBC Bank —principal repayable in monthly installments of $166,667 plus interest at 1-month LIBOR plus 3.25% (3.60% at 6/30/10 and 3.49% at 12/31/09) until December 2011, when one final payment of the remaining balance of principal, interest and any other fees and expenses outstanding are due		5,000		8,000
Total	$	5,000	$	8,000

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Under the 2008 Loan Agreement, through December 31, 2010, we may request RBC Bank to issue letters of credit for its account in an aggregate outstanding face amount not to exceed the amount of advances available under the revolving line of credit at the time of the issuance of the letter of credit. Subject to other limitations set forth in the 2008 Loan Agreement, the amount of aggregate outstanding amount of letters of credit shall not exceed $500,000. We are required to pay RBC Bank a fee of 1.5% per annum of the face amount of the letters of credit issued pursuant to the 2008 Loan Agreement. At June 30, 2010, we have no outstanding letters of credit.

Loans made under the 2008 Loan Agreement are secured by a first lien security interest on all assets, including our intellectual property.

The 2008 Loan Agreement contains customary representations, warranties, affirmative and negative covenants (including a requirement that we maintain our primary operating depository accounts with RBC Bank), agreements, default provisions and indemnities. We are also subject to certain specified financial covenants with respect to a minimum funded debt to EBITDA ratio and a modified fixed charge coverage ratio. The 2008 Loan Agreement generally prohibits us from paying dividends on our common stock. As of June 30, 2010, we were in compliance with all covenants related to the 2008 Loan Agreement.

Maturities of debt under the credit facility with RBC Bank as of June 30, 2010 are as follows (in thousands):

	2010		2011		Total Remaining Principal Repayments
2008 Loan Agreement	$	1,000	$	4,000	$	5,000

We incurred $92,000 in financing fees related to the 2008 Loan Agreement. This amount has been deferred and will be amortized over the 36-month term of the loan. Accumulated amortization was $55,000 at June 30, 2010 and $40,000 at December 31, 2009. During the six months ended June 30, 2010, we made additional advance payments on the loan totaling $2,000,000, which reduced our 2011 liability to $4,000,000.

3. Intangible Assets

Intangible assets are summarized as follows (in thousands):

	Estimated amortizable lives (years)	June 30, 2010			December 31, 2009
Intangible assets:
Internally developed software	2 – 3	$	9,578		$	9,038
Purchased software	3		500			500
Purchased intellectual content	3		1,431			1,431
Purchased customer contracts	2		333			333
Purchased customer relationships	15		8,800			8,800
Intangible assets, gross			20,642			20,102
Accumulated amortization:
Internally developed software			(7,090	)		(6,479	)
Purchased software			(500	)		(500	)
Purchased intellectual content			(1,431	)		(1,431	)
Purchased customer contracts			(333	)		(333	)
Purchased customer relationships			(2,277	)		(1,984	)
Accumulated amortization			(11,631	)		(10,727	)
Intangible assets, net		$	9,011		$	9,375

Amortization expense for the three and six months ended June 30, 2010 was $450,000 and $904,000, respectively. This expense included amortization expense for internally developed software for the three and six months ended June 30, 2010 of $303,000 and $611,000, respectively. For the three and six months ended June 30, 2009, amortization expense was $512,000 and $975,000, respectively. This expense included amortization expense for internally developed software for the three and six months ended June 30, 2009 of $323,000 and $598,000, respectively.

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4. Goodwill

Under GAAP, goodwill and other intangible assets with indefinite lives are not amortized, but rather tested for impairment at least annually. This annual evaluation was performed as of November 1, 2009 and the goodwill was deemed not impaired.

The Intangibles-Goodwill and Other Topic of the FASB ASC prescribes a two-step method for determining impairment of goodwill and certain other intangible assets. Factors considered in determining fair value for purposes of this Topic include, among other things, our market capitalization as determined by quoted market prices for our common stock, market values of our reporting units based on common market multiples for comparable companies, and discount rates that appropriately reflect not only our businesses, but also the current overall economic environment.

During the three months ended March 31, 2009, based on the further weakening of the then-current macro-economic business environment and the decline of our common stock price since the 2008 annual evaluation, we realized the need to re-evaluate and potentially lower the carrying amount of goodwill in the first quarter of 2009. Based on the results of the review performed as of March 31, 2009, we estimated that the fair value of the goodwill assigned to our benefit solutions was less than the carrying value on the balance sheet as of March 31, 2009, and accordingly we recognized a pre-tax non-cash impairment charge of $13,940,000 in the quarter ended March 31, 2009. While the impairment charge reduces reported results under GAAP, such charges do not affect our liquidity, cash flows, or future operations.

The estimation of the fair value was primarily determined based on an estimate of future cash flows (income approach) discounted at a market derived weighed average cost of capital, which cost of capital was estimated. The income approach was determined to be the most representative, because we do not have an active trading market for our equity in the reporting unit. The implied value of the goodwill was estimated based on a hypothetical allocation of each reporting unit’s fair value, assuming a taxable asset sale, to all of our underlying assets and liabilities. The determination of future cash flows is based on the businesses’ plans and long-range planning forecasts. Other valuation methods, such as a market approach utilizing market multiples, are used to corroborate the discounted cash flow analysis performed at the reporting unit. If different assumptions were used in these plans, the related cash flows used in measuring impairment could be different and additional impairment of assets might be required to be recorded.

Impairment charges related to goodwill and other intangible assets are reflected as “Goodwill impairment” in the accompanying statements of operations. Such charges have no impact on our cash flows or liquidity.

5. Income Taxes

We recognized income tax expenses of $60,000 for the six months ended June 30, 2010.

We account for income taxes using the liability method in accordance with the Income Taxes topic of the ASC. Deferred income taxes arise from the temporary differences in the recognition of income and expenses for tax purposes. A valuation allowance is established when we believe that it is more likely than not that some portion of our deferred tax assets will not be realized.

We performed our quarterly evaluation of the deferred tax asset and the related valuation allowance as of June 30, 2010 and based on our analysis, we do not expect to record an income tax provision or benefit for the quarter due to the release of a portion of the valuation allowance for tax assets we determined will more likely than not be utilized. Current income tax recognized for the six months ended June 30, 2010 primarily related to alternative minimum tax or to state taxes that either do not have net operating loss carryforwards or that do not consider net operating losses in the tax liability calculation.

Internal Revenue Code Section (“IRC”) 382 limits the utilization of NOL carryforwards when a change in ownership, as defined by the Internal Revenue Service, occurs. We continue to track and monitor ownership changes as defined by IRC 382 to identify any future limitations on the use of NOL’s to offset tax liability. As of June 30, 2010, no additional ownership changes have been identified. However, if the company were to incur any future 382 limitations its usage of NOLs to offset income tax liabilities could be limited.

6. Stock-based Compensation

We account for stock-based compensation in accordance with the Compensation—Stock Compensation Topic of the FASB ASC. Accordingly, stock-based compensation cost is measured at the grant date based on fair value of the award, and is recognized as an expense on a straight-line basis over the employee’s requisite service period.

In 2002, our Board of Directors and shareholders approved the 2002 Stock Incentive Plan, under which 1,500,000 shares of common stock were reserved pursuant to the grant of incentive or non-qualified stock options to full-time employees and key persons. Under this plan, a number of additional shares are reserved annually. This number is 3% of the number of shares of stock outstanding on January 1 of each year, not to exceed 250,000 shares annually.

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Stock Options

Options are granted at an exercise price as determined by our Board of Directors, which may not be less than the fair market value of our common stock at the date of the grant, and the options generally vest ratably over a three-year service period. Options granted under this plan generally expire ten years from the date of the grant. Upon exercise of options, stock is issued from our authorized and unissued shares of common stock. We use the Black-Scholes method (which models the value over time of financial instruments) to estimate the fair value at the grant date of the options. The Black-Scholes method uses several assumptions to value an option. The following assumptions were used:

• Expected Dividend Yield—because we do not currently pay dividends or expect to pay dividends in the near future, the expected dividend yield is zero;

• Expected Volatility in Stock Price—reflects the historical change in our stock price over the expected term of the stock option;

• Risk-free Interest Rate—reflects the average rate on a United States Treasury bond with maturity equal to the expected term of the option; and

• Expected Life of Stock Awards—is based on historical experience that was modified based on expected future changes.

The weighted average assumptions used in the option pricing model and the resulting grant date fair value for stock option grants were as follows:

	Six Months Ended June 30,
	2010			2009
Expected Dividend Yield		—			—
Expected Volatility in Stock Price		62.25	%		58.70	%
Risk-Free Interest Rate		1.85	%		1.68	%
Expected Life of Stock Awards – Years		3.50			3.50
Weighted Average Fair Value at Grant Date	$	1.77		$	1.34

We recorded $177,000 and $306,000 of stock-based compensation expense for the six months ended June 30, 2010 and 2009, respectively, related to employee stock options. We expect to incur approximately $573,000 of expense over a weighted average of 2.2 years for all unvested options outstanding at June 30, 2010.

The following table summarizes stock option activity for the six months ended June 30, 2010:

	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2009	2,477,781		$	4.44
Granted	315,000		$	3.87
Exercised	(66,600	)	$	.41
Forfeited or expired	(481,596	)	$	7.86
Outstanding at June 30, 2010	2,244,585		$	3.74
Exercisable at June 30, 2010	1,780,423		$	3.66

The weighted average remaining contractual term at June 30, 2010 for options outstanding was 4.65 years and for options exercisable was 3.43 years. During the six months ended June 30, 2010, the aggregate intrinsic value of options exercised was $226,000, and the fair value of options vesting was $328,000.

As of June 30, 2010, the aggregate intrinsic value of options outstanding and exercisable was $1,057,000 and $1,038,000, respectively. Aggregate intrinsic value was calculated by multiplying the number of options by the amount by which our market price at June 30, 2010 exceeded the strike price for each option. The market price at June 30, 2010 was $3.19.

Restricted Stock Awards

The fair value of restricted stock awards used for the application of the Compensation-Stock Compensation Topic of the FASB ASC is the market value of the stock on the date of grant.

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The following table summarizes restricted stock activity for the six months ended June 30, 2010:

	Shares	Weighted Average Grant Date Fair Value
Unvested at December 31, 2009	—	$	—
Granted	14,284		4.20
Vested	—		—
Forfeited	—		—
Unvested at June 30, 2010	14,284	$	4.20

On January 4, 2010, we awarded a total of 14,284 shares of restricted stock to our Board of Directors with a grant date fair value of $4.20 per share. These shares had a fair value of $60,000 and will be expensed from the date issued until the vesting date of December 31, 2010. At June 30, 2010, total unrecognized compensation expense related to restricted stock was $30,000.

7. Related Party Transactions

Investment with BeBetter Networks, Inc.

At June 30, 2010 and December 31, 2009, the Company had a 2% investment in BeBetter Networks, Inc. (“BeBetter”). As of June 30, 2010 and December 31, 2009, the Chairman of our Board of Directors held an approximate 2% voting interest in this company. The investment was accounted for under the cost method, as we had less than a 20% ownership and do not exercise significant influence over the investee.

At June 30, 2010 and December 31, 2009, the carrying value of the investment in BeBetter was $0. We have no plans to make additional investments in BeBetter in the future.

Investment with ThePort Network, Inc.

The Chairman of our Board of Directors currently serves as the Chairman of the Board of Directors and Chief Executive Officer of ThePort Network, Inc. (“ThePort”).

At June 30, 2010 and December 31, 2009, we held an approximate voting interest in ThePort of 2% and 3%, respectively. The Chairman of our Board of Directors held an approximate voting interest in ThePort at June 30, 2010 and December 31, 2009 of 24% and 27%, respectively, and held a convertible note from ThePort in the amount of approximately $705,000 and $325,000 at June 30, 2010 and December 31, 2009, respectively. Two of our other directors also own equity interests in ThePort. ThePort is accounted for under the cost method, as we had less than a 20% ownership and do not exercise significant influence over the investee.

At June 30, 2010 and December 31, 2009, the carrying value of the investment in ThePort was $0. We have not adjusted our investment below zero for our share of ThePort’s losses since we have not provided or committed to provide any additional financial support to ThePort.

8. Contingencies

We indemnify customers from third party claims of intellectual property infringement relating to the use of our products. Historically, costs related to this guarantee have not been significant and we are unable to estimate the potential impact of this guarantee on future results of operations.

9. Concentrations

No one customer accounted for more than 10% of our revenues during the six months ended June 30, 2010 or 2009.

10. Fair value of financial instruments

In accordance with FASB ASC Topic 825—Financial Instruments, the carrying value of short-term debt, which totaled $2,000,000 as of June 30, 2010 and $2,000,000 as of December 31, 2009, was estimated to approximate its fair value. The carrying value of long-term debt of $3,000,000 as of June 30, 2010 and $6,000,000 as of December 31, 2009 approximated fair value. The fair value of debt is estimated based on approximate market interest rates for similar issues.

11. Operating Segments

The Segment Reporting Topic of the FASB ASC establishes standards for reporting information about operating segments. It defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing

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performance. We operate in one reportable segment. We sell a portfolio of products related to health content solutions and broker/ employer solutions. We consider the health content products and broker/ employer products to be two operating segments which aggregate into one reportable segment. Our SaaS model allows us to manage and deploy these products in a similar manner to similar customers. Our chief operating decision-maker is our Chief Executive Officer. The Chief Executive Officer reviews financial information on a consolidated basis and by products when making decisions for allocating resources and evaluating financial performance. Periodic decisions may be made separately for the two operating segments due to timing of customer strategies, product releases, market conditions, acquisitions, or staffing resources, but the common long term growth outlook for each segment remains constant.

In determining that we have one reportable segment, we viewed both health content and broker/ employer products as sharing similar economic characteristics for long term growth. Historical product margins for both product segments have been in the 70-90% range. All products are distributed over a similar platform with low incremental costs so we expect margins to remain within the 70-90% range. The health content product which can be sold separately is also sold as an imbedded product within our broker/ employer product. As the products continue to be more intertwined, the margins for both are expected to converge and the allocation of costs related to each will not be as relevant.

12. Subsequent Events

In accordance with FASB ASC Topic 855—Subsequent Events, general standards are established for the accounting and disclosures of, events that occurred after the balance sheet date but before financial statements are issued or are available to be issued. For the three months ended June 30, 2010, we evaluated, for potential recognition and disclosure, events that occurred through the date of the filing of our Quarterly Report on Form 10Q for the three months ended June 30, 2010, and determined no adjustment or additional disclosure is needed.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

We provide online information and technology solutions for employers, benefits brokers, healthcare organizations and online media companies. For the end users of our solutions—consumers, employees, patients, and health plan members—our products and services help people to better understand their health, and the benefits plans their employers provide, and make well informed decisions about their healthcare and benefits selections. In addition, we help people understand the relationship between their benefits and the costs associated with them. This connection between financial understanding and benefits choice and use of benefits is increasingly important as consumers are assuming more of the financial responsibilities for their healthcare.

Our proprietary health information products are derived from what we believe to be one of the largest continually enhanced online consumer health reference information libraries available. The web-based information we provide includes information on diseases, symptoms, treatments, surgical procedures, specialty medicine and topics, and alternative medicine. Our content is enhanced with visuals, animations and other new media providing a graphically rich environment to promote learning retention and interactivity. In addition, we offer a number of health-related applications, such as health risk assessments and other decision support applications that are used by consumers to make informed healthcare decisions.

Our primary product for benefits brokers and employers is Benergy™, a web-based portal for employees that communicates benefits and other company-sponsored information, improves benefits education and selection, automates benefits enrollment, manages healthcare financial accounts, such as Flexible Spending Accounts, and provides health content and decision support tools to aid in health education and awareness. The tools, information and services offered through Benergy automate and streamline many important human resources functions so that employers can optimize their time and reduce administrative costs—while providing employees with a high level of access to pertinent benefits and health information. Benefits brokers consider Benergy to be an important part of their service offering to their employer clients. Brokers make available to their clients a Benergy site that is populated with that employer’s specific benefits plan information. In many instances they manage the Benergy site on behalf of their employer client, providing a deeper level of client service.

In addition to Benergy, we offer benefits brokers a comprehensive agency management system called AgencyWare^TM. With AgencyWare, brokers can manage the entire employer client lifecycle, moving prospects through each phase of the sales process, sending requests for proposals, preparing client presentations, managing client renewals and commissions, tracking customer service issues and organizing client data. We also offer brokers other tools that improve their communication with their respective clients.

Critical Accounting Policies and Estimates

Discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial

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statements requires us to make estimates and judgments that affect the amounts reported in the financial statements and the accompanying notes. On an on-going basis, we evaluate our estimates, including those related to product returns, product and content development expenses, bad debts, intangible assets, income taxes and contingencies. We base our estimates on experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:

• Revenue Recognition

We derive revenues from the following sources: (1) electronically delivered software, which includes software license and post contract customer support (PCS) revenue; (2) hosted software, which includes software license, hosting and PCS revenue; (3) professional services; and (4) product sales. We recognize revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. When a contract includes multiple elements, such as software and services, the entire fee is allocated to each respective element based on vendor specific objective evidence of fair value, and recognized when the revenue criteria for each element is met.

Electronically delivered software, which includes software license and PCS revenue, is recognized in accordance with the Software Topic of the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) with the entire amount recognized ratably over the term of the license agreement.

Hosted software, which includes software license, hosting and PCS revenue, is recognized using GAAP principles for service revenue recognition as per the Software Topic of the FASB ASC. The entire amount of revenue is recognized ratably over the term of the license agreement, which matches the service that is being provided.

Professional service revenues are generally recognized upon completion and acceptance by the customer. For revenue arrangements in which we sell through a reseller, we recognize revenue only after an agreement has been finalized between the customer and our authorized reseller and the content has been delivered to the customer by the reseller.

Product sales revenues are generally recognized at the time title passes to customers, distributors or resellers.

• Sales Allowance for Doubtful Accounts

Significant management judgments and estimates must be made in connection with establishing the sales allowances for doubtful accounts in any accounting period. Management must make estimates of the uncollectability of accounts receivable. Management specifically analyzes accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

• Capitalized Software Product and Content Development Costs

We capitalize software product and content development costs in accordance with the Software Topic of the FASB ASC. This Topic specifies that costs incurred internally in creating a computer software product shall be charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of all planning, designing, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. We cease capitalization of internally developed software when the product is made available for general release to customers and thereafter, any maintenance and customer support is charged to expense when related revenue is recognized or when those costs are incurred. We amortize such capitalized costs as cost of revenues on a product-by-product basis using the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight line basis over the estimated life of the software, which we have determined to generally be two years. We continually evaluate the recoverability of capitalized costs and if the successes of new product releases are less than we anticipate then a write-down of capitalized costs may be made which could adversely affect our results in the reporting period in which the write-down occurs.

We also capitalize internal software development costs for internal use in accordance with the Intangibles-Goodwill and Other Topic of the FASB ASC. This Topic specifies that computer software development costs for computer software intended for internal use occurs in three stages: (1) the preliminary project stage, where costs are expensed as incurred, (2) the application development stage, where costs are capitalized, and (3) the post-implementation or operation stage, where again costs are expensed as incurred. We cease capitalization of developed software for internal use when the software is ready for its intended use and placed in service. We amortize such capitalized costs as cost of revenues on a product-by-product basis using the straight-line method over a period of three years. We continually evaluate the usability of the products that make up our

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capitalized costs and if certain circumstances arise such as the introduction of new technology in the marketplace that management intends to use in place of the capitalized project, then a write-down of capitalized costs may be made which could adversely affect our results in the reporting period in which the write-down occurs.

• Goodwill and Intangible Assets

In accordance with the Intangibles-Goodwill and Other Topic of the FASB ASC, we evaluate goodwill and intangible assets for impairment on an annual basis.

Additionally, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an entity below its carrying value. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. The carrying value of goodwill is evaluated in relation to the operating performance and estimated future discounted cash flows of the entity.

• Income Taxes

As part of the process of preparing our financial statements we are required to estimate our taxes in each of the jurisdictions in which we operate. This process involves management estimating the actual tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and U.S. GAAP purposes. These differences result in deferred tax assets and liabilities, which are included within our accompanying balance sheet. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance.

In periodically assessing the Company’s ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of our deferred tax assets will be realized. Management analyzes several factors, including the amount and timing of the scheduled expiration and reversals of our net operating loss carryforwards (NOLs) and deferred tax items, as well as potential generation of future taxable income over the periods for which the NOLs are applicable. Certain estimates used in this analysis are based on the current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. In determining the potential generation of future taxable income related to the deferred tax asset, we estimate taxable income over the next 4 years. The recurring nature of our license revenue allows us to estimate future revenues based on an annual growth rate. We use historical operating margin percents of revenue to estimate future income over the 4 year period. Although it is the belief that the expectations reflected in these estimates are based upon reasonable assumptions, the Company cannot give assurance that actual results will not differ materially from these expectations.

• Stock-based Compensation

We account for stock-based compensation in accordance with the Compensation—Stock Compensation Topic of the FASB ASC. Accordingly, stock-based compensation cost is measured at grant date based on the fair value of the award, and is recognized as an expense on a straight-line basis over the employee’s requisite service period. Options are granted at an exercise price as determined by our Board of Directors, which may not be less than the fair market value of our common stock at the date of the grant, and the options generally vest ratably over a three-year service period. Options granted under this plan generally expire ten years from the date of the grant. Upon exercise of options, stock is issued from our authorized and unissued shares of common stock. We use the Black-Scholes method (which models the value over time of financial instruments) to estimate the fair value at the grant date of the options.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2010 with the Three Months Ended June 30, 2009.

Revenues(numbers in table in thousands)

	Three Months Ended June 30,				$ Change			% Change
	2010		2009
Licensing	$	6,465	$	6,528	$	(63	)	(1.0	)%
Product		78		340		(262	)	(77.1	)%
Professional services and other		185		204		(19	)	(9.3	)%
Total Net Revenues	$	6,728	$	7,072	$	(344	)	(4.9	)%

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Total net revenues decreased 4.9%, or $344,000, to $6,728,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. For the three months ended June 30, 2010, 96.1% of our total net revenues came from the licensing of our health and benefits technology solutions.

Licensing revenues are recognized on a monthly basis, either based on usage, expiration of monthly minimums, or on a straight-line basis over the life of the contract. Therefore, fluctuation in licensing revenue is due to new contracts, customer usage levels or contract changes and contract terminations. Licensing revenue decreased 1.0%, or $63,000, to $6,465,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Health Solutions licensing increased 6.9%, or $221,000 over last year, which was offset by a decrease in broker license revenue of 10.5% or $350,000. The broker-related decrease is due to broker turnover and product utilization. Further, we launched our online education solutions in the third quarter of 2009 which accounted for $66,000 of licensing revenue in the three months ended June 30, 2010. Revenues from product sales decreased 77.1%, or $262,000, to $78,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Our product revenues consist primarily of CD-ROM product sales to the educational market. Revenues had decreased in product sales because of a market shift from CD-ROM products to online solutions. To address this issue, during 2009, we launched three new online education products, which were formerly only available in a CD-ROM format. While these products are designed to increase sales in the education market, product revenue will continue to decrease, as the revenue from these new online solutions is recorded as licensing revenue. Licensing revenue is recognized ratably over the subscription period.

Professional services and other revenue decreased $19,000, or 9.3%, to $185,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Professional services and other revenue are derived from products such as custom implementation services and sales of nonrecurring products such as books, publications, and medical images.

Operating Costs and Expenses(numbers in table in thousands)

	Three Months Ended June 30,						$ Change			% Change
	2010			2009
Cost of revenues	$	875		$	1,064		$	(189	)	(17.8	)%
Cost of revenues – amortization		450			512			(62	)	(12.1	)%
Product and content development		1,705			1,898			(193	)	(10.2	)%
Development capitalization		(353	)		(453	)		100		22.1	%
Sales and marketing		2,008			1,831			177		9.7	%
General and administrative		935			1,161			(226	)	(19.5	)%
Restructuring Costs		—			1,408			(1,408	)	(100.0	)%
Total Operating Cost and Expenses	$	5,620		$	7,421		$	(1,801	)	(24.3	)%

Cost of revenues consists primarily of costs associated with royalties, distribution license fees and personnel support for our products and services. Cost of revenues decreased $189,000, or 17.8%, to $875,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The decrease is attributable to fewer education product sales, due to the new online solutions, as well as a reduction in client service support due to cost-cutting measures as a result of improved organizational efficiencies.

Cost of revenues—amortization decreased $62,000, or 12.1%, to $450,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Cost of revenues—amortization consists of costs associated with amortization of capitalized customer lists, software product, and content development costs. We see fluctuations in amortization costs from period to period based on the timing of capital projects and their completion dates.

Product and content development expenses decreased $193,000, or 10.2%, to $1,705,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Product and content development expenses consist of salary and costs associated with engineering and developing our product and service offerings. Development capitalization decreased $100,000, or 22.1%, to $353,000 for the three months ended June 30, 2010. The decrease in both expense and capitalization is primarily attributable to additional costs incurred in 2009 related to the transition from education products to online solutions.

Sales and marketing expenses increased 9.7%, or $177,000, to $2,008,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Sales and marketing expenses include the personnel costs and their related travel and support costs, and the costs of our marketing and public relations programs. Sales costs increased with the building of our client relationship management team. Marketing costs have also increased as we invested in new marketing campaigns during 2010.

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General and administrative expenses decreased 19.5%, or $226,000, to $935,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. This reduction in expense is related to a reduction in staffing as well as a reduction in stock compensation expense resulting from an increase in the number of unvested option forfeitures.

Operating profit increased $1,457,000 to a profit of $1,108,000 for the three months ended June 30, 2010 compared to a $349,000 loss for the three months ended June 30, 2009. This increase is primarily related to the 2009 non-cash restructuring cost of $1,408,000.

Other Expenses and Income

Interest expense, net was $89,000 and $114,000 for the three months ended June 30, 2010 and 2009, respectively. This decrease in interest expense was primarily due to the pay down of debt from $9,500,000 at April 1, 2009 to $5,000,000 at June 30, 2010.

We recognized income tax expenses of $30,000 for the three months ended June 30, 2010. Income tax recognized relates primarily to alternative minimum tax or to state taxes that either do not have net operating loss carryforwards or that do not consider net operating losses in the tax liability calculation.

Net Income

As a result of the factors described above, net income increased $1,452,000, to a net income of $989,000 for the three months ended June 30, 2010 compared to net loss of $463,000 for the three months ended June 30, 2009.

Comparison of the Six Months Ended June 30, 2010 with the Six Months Ended June 30, 2009.

Revenues(numbers in table in thousands)

	Six Months Ended June 30,				$ Change			% Change
	2010		2009
Licensing	$	12,932	$	12,704	$	228		1.8	%
Product		157		555		(398	)	(71.7	)%
Professional services and other		361		482		(121	)	(25.1	)%
Total Net Revenues	$	13,450	$	13,741	$	(291	)	(2.1	)%

Total net revenues decreased 2.1%, or $291,000, to $13,450,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. For the six months ended June 30, 2010, 96.1% of our total net revenues came from the licensing of our health and benefits technology solutions.

Licensing revenues are recognized on a monthly basis, either based on usage, expiration of monthly minimums, or on a straight-line basis over the life of the contract. Therefore, fluctuation in licensing revenue is due to new contracts, customer usage levels or contract changes and contract terminations. Licensing revenue increased 1.8%, or $228,000, to $12,932,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Health Solutions licensing increased 8.2%, or $512,000 over last year, which was offset by a decrease in broker license revenue of 6.2% or $401,000. This decrease is due to broker turnover and product utilization. Further, we launched our online education solutions in the third quarter of 2009 which accounted for $117,000 of licensing revenue in the six months ended June 30, 2010.

Revenues from product sales decreased 71.7%, or $398,000, to $157,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Our product revenues consist primarily of CD-ROM product sales to the educational market. During 2009, we launched three new online education products, which were formerly only available in a CD-ROM format. Product revenue will continue to decrease, as the revenue from these new online solutions is recorded as licensing revenue. Licensing revenue is recognized ratably over the subscription period.

Professional services and other revenue decreased $121,000, or 25.1%, to $361,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Professional services and other revenue are derived from products such as custom implementation services and sales of nonrecurring products such as books, publications, and medical images. The decrease in revenue is related to the transition of our FSA delivery in 2009 which led to the recording of this service as broker licensing revenue.

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Operating Costs and Expenses(numbers in table in thousands)

	Six Months Ended June 30,						$ Change			% Change
	2010			2009
Cost of revenues	$	1,742		$	2,179		$	(437	)	(20.1	)%
Cost of revenues – amortization		904			975			(71	)	(7.3	)%
Product and content development		3,189			3,340			(151	)	(4.5	)%
Development capitalization		(540	)		(850	)		310		36.5	%
Sales and marketing		3,975			3,778			197		5.2	%
General and administrative		1,951			2,244			(293	)	(13.1	)%
Goodwill impairment		—			13,940			(13,940	)	(100.0	)%
Restructuring costs		—			1,408			(1,408	)	(100.0	)%
Total Operating Cost and Expenses	$	11,221		$	27,014		$	(15,793	)	(58.5	)%

Cost of revenues consists primarily of costs associated with royalties, distribution license fees and personnel support for our products and services. Cost of revenues decreased $437,000, or 20.1%, to $1,742,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease is attributable to fewer education product sales, due to the new online solutions, as well as a reduction in client service support due to cost-cutting measures as a result of improved organizational efficiencies.

Cost of revenues—amortization decreased $71,000, or 7.3%, to $904,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Cost of revenues—amortization consists of costs associated with amortization of capitalized customer lists, software product, and content development costs. We see fluctuations in amortization costs from period to period based on the timing of capital projects and their completion dates.

Product and content development expenses decreased $151,000, or 4.5%, to $3,189,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Product and content development expenses consist of salary and costs associated with engineering and developing our product and service offerings. Development capitalization decreased $310,000, or 36.5%, to $540,000 for the six months ended June 30, 2010. The decrease in both expense and capitalization is primarily attributable to significant costs incurred in 2009 related to the transition from education products to online solutions.

Sales and marketing expenses increased 5.2%, or $197,000, to $3,975,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Sales and marketing expenses include the personnel costs and their related travel and support costs and the costs of our marketing and public relations programs. For 2010, we have expanded our client relationships by building our client management team and increasing our marketing activities to improve customer satisfaction with the broker clients.

General and administrative expenses decreased 13.1%, or $293,000, to $1,951,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. This reduction in expense is related to a reduction in staffing as well as a reduction in stock compensation expense resulting from an increase in the number of unvested option forfeitures.

Operating profit increased $15,502,000 to a profit of $2,229,000 for the six months ended June 30, 2010 compared to a $13,273,000 loss for the six months ended June 30, 2009. This increase is primarily due to the 2009 non-cash goodwill impairment charge of $13,940,000 and the 2009 non-cash restructuring cost of $1,408,000.

Other Expenses and Income

Interest expense, net was $189,000 and $233,000 for the six months ended June 30, 2010 and 2009, respectively. This decrease in interest expense was primarily due to the pay down of debt from $10,000,000 at January 1, 2009 to $5,000,000 at June 30, 2010.

We recognized income tax expenses of $60,000 for the six months ended June 30, 2010. Income tax recognized relates primarily to alternative minimum tax or to state taxes that either do not have net operating loss carryforwards or that do not consider net operating losses in the tax liability calculation.

Net Income

As a result of the factors described above, net income increased $15,486,000, to a net income of $1,980,000 for the six months ended June 30, 2010 compared to net loss of $13,506,000 for the six months ended June 30, 2009.

Liquidity and Capital Resources

As of June 30, 2010, we had current assets of $7,442,000, including cash and cash equivalents of $3,952,000, and $12,560,000 in current liabilities, or a negative working capital of $5,118,000. Working capital includes $5,349,000 in deferred revenue for which

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we have already received payment. While we are obligated to provide services related to those payments in the future, we will not receive additional payments related to those services. Excluding the deferred revenue, working capital would have been $231,000. Our working capital is affected by the timing of each period end in relation to items such as payments received from customers, payments made to vendors, and internal payroll and billing cycles, as well as the seasonality within our business. Accordingly, our working capital, and its impact on cash flow from operations, can fluctuate materially from period to period. We use working capital to finance ongoing operations, fund the development and introduction of new business strategies and internally developed software, acquire complementary businesses and acquire capital equipment.

Cash provided by operating activities was $2,253,000 during the six months ended June 30, 2010, as compared to cash provided of $2,835,000 during the six months ended June 30, 2009. This $582,000 decrease in cash provided was due primarily to the decrease in cash received from the collection of accounts receivable of $1,216,000 during the period, offset by a $851,000 decrease in cash used in the payment of accounts payable and accrued expenses.

Cash used in investing activities was $763,000 during the six months ended June 30, 2010, as compared to cash used of $964,000 during the six months ended June 30, 2009. This $201,000 decrease in cash used was primarily due to lower capitalized software product and content development costs of $326,000 offset by an increase in cash used in purchases of property and equipment of $109,000. The high development costs in 2009 related to the deployment of our new online education product. Equipment purchases increased in 2010 related to updates to our data center.

Cash used in financing activities was $2,984,000 during the six months ended June 30, 2010, as compared to $1,033,000 during the six months ended June 30, 2009. The $1,951,000 increase in cash used was primarily due to additional $2,000,000 advance payments made in the six months ended June 30, 2010, related to the long-term debt associated with the OnlineBenefits acquisition.

We believe our cash resources from cash and a $3,000,000 revolving credit line with our lender, together with anticipated cash flows from operations, will be sufficient to meet our working capital needs for the next twelve months. However, we may be required to raise additional funds in order to accelerate development of new and existing services and products, to respond to competitive pressures or to possibly acquire complementary products, businesses or technologies. In addition, the $3,000,000 revolving credit line with our lender expires in December 2010. There can be no assurance that any required additional financing will be available on terms favorable to us, or at all. If additional funds are raised by the issuance of equity securities, our shareholders would experience dilution of their ownership interest and these securities may have rights senior to those of the holders of the common stock. If additional funds are raised by the issuance of debt securities, we may be subject to certain limitations on our operations, including limitations on the payment of dividends. If adequate funds are not available or not available on acceptable terms, we may be unable to take advantage of acquisition opportunities, develop or enhance services and products or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements made in this report, and other written or oral statements made by or on behalf of A.D.A.M., may constitute “forward-looking statements” within the meaning of the federal securities laws. When used in this report, the words “believes,” “expects,” “estimates,” “intends” and similar expressions are intended to identify forward-looking statements. Statements regarding future events and developments and our future performance, as well as our expectations, beliefs, plans, intentions, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. Examples of such statements in this report include descriptions of our plans and strategies with respect to developing certain market opportunities, our overall business plan, our plans to develop additional strategic partnerships, our intention to develop certain platform technologies and our continuing growth. All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected, including, without limitation, those risk and uncertainties that are described in our filings with the SEC. We believe that these forward-looking statements are reasonable; however, you should not place undue reliance on such statements. These statements are based on current expectations and speak only as of the date of such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Our management, including our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2010. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this quarterly report on Form 10-Q has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

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(b) Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

There were no changes in our internal control over financial reporting that occurred during the second quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

There has been no material change in the information provided in Item 1A of the Form 10-K Annual Report for the year ended December 31, 2009.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are filed with this report or incorporated herein by reference:

Exhibit Number	Exhibit Description
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	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	A.D.A.M., Inc. (Registrant)
Date: August 12, 2010	By:	/s/ MARK B. ADAMS
		Mark B. Adams President, Secretary and Chief Executive Officer (principal executive officer)
Date: August 12, 2010	By:	/s/ CHRISTOPHER R. JOE
		Christopher R. Joe Chief Financial Officer (principal financial officer)

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