AMERICAN CARESOURCE HOLDINGS, INC.

 

 

DELAWARE		20-0428568
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)
5429 LYNDON B. JOHNSON FREEWAY SUITE 700 DALLAS, TEXAS 75240
(Address of principal executive offices)
(Zip code)
(972) 308-6830
(Registrant’s telephone number, including area code)

 

q Large Accelerated Filer	q Non-Accelerated Filer
q Accelerated Filer  (do not check if a smaller reporting company)	x 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 o No x 
 

 

 

Part I	Financial Information	1
Item 1.	Financial Statements	1
	Consolidated Statements of Operations (unaudited)	1
	Consolidated Balance Sheets (unaudited)	2
	Consolidated Statements of Stockholders’ Equity (unaudited)	3
	Consolidated Statements of Cash Flows (unaudited)	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	9
Item 4.	Controls and Procedures	14
Part II	Other Information	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 6.	Exhibits	15
Signatures		16

 

 

American CareSource Holdings, Inc., a Delaware corporation (the “Company,” “American CareSource Holdings,” “ACS,” “we,” “our,” “us,” or the “Registrant”), is in the business of delivering ancillary healthcare services for employment groups through its national network of ancillary care providers. The Company markets its products to insurance companies, third-party administrators and preferred provider organizations.  American CareSource Holdings has one wholly owned subsidiary, Ancillary Care Services, Inc. (“Care Services”).

 

 

 

 

(2)      Revenue Recognition 

 

The Company evaluates its service provider contracts using the indicators of EITF No. 99-19 “Reporting Gross Revenue as a Principal vs. Net as an Agent” (“EITF 99-19”) to determine whether the Company is acting as a principal or an agent in the fulfillment of services to be rendered.

 

 

 

 

 

						Periods ended September 30, 2008																				Periods ended September 30, 2007
		As of																				As of
		September 30,																				September 30,
		2008				Three months								Nine months								2008				Three months								Nine months
		Accounts								% of Total								% of Total				Accounts								% of Total								% of Total
		receivable				Revenue				Revenues				Revenue				Revenues				receivable				Revenue				Revenues				Revenue				Revenues
Customer A		$	2,803			$	9,419				58	%		$	24,366				60	%		$	1,247			$	4,011				57	%		$	8,460				63	%
Customer B			1,998				6,265				39	%			15,305				38	%			1,261				2,856				40	%			3,854				29	%
Others			159				427				3	%			958				2	%			121				222				3	%			1,049				8	%
		$	4,960			$	16,111				100	%		$	40,629				100	%		$	2,629			$	7,089				100	%		$	13,363				100	%

 

(3)   Allowance for Doubtful Accounts

 

We maintain an allowance for doubtful accounts which are provided at the time revenue is recognized.  Co-payments, deductibles and co-insurance payments can all impact the collectability of each individual claim submitted to payors for payment.  While the Company is able to re-price a claim and estimate the cash it will receive from the payor for that claim, the presence of co-pays, deductibles and co-insurance payments can affect the ultimate collectability of the claim.  The Company records an allowance against gross revenue to better estimate collectability.  The allowance is applied specifically for each payor and is adjusted to reflect the Company’s collection experience on a quarterly basis.

 

The following table summarizes the changes in the allowance for doubtful accounts for the periods presented:

 

		Three months ended September 30,								Nine months ended September 30,
		2008				2007				2008				2007
Beginning balance		$	200			$	537			$	190			$	414
Provisions for losses - accounts receivable			-				355				85				243
Deduction for accounts charged off			-				(425	)			(75	)			(190	)
Ending balance		$	200			$	467			$	200			$	467

 

 

(4)   Earnings (Loss) Per Share

 

The following table details the reconciliation of basic earnings (loss) per share to diluted earnings (loss) per share:

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
Numerator for basic and diluted earnings per share:
Net income (loss)		$	1,001			$	188			$	2,144			$	(1,139	)
Denominator:
Weighted-average basic common shares outstanding			15,140				14,555				15,029				14,512
Assumed conversion of dilutive securities:
Stock options			1,158				969				941				-
Warrants			1,747				1,365				1,608				-
Potentially dilutive common shares			2,905				2,334				2,549				-
Denominator for diluted earnings
per share - Adjusted weighted average shares			18,045				16,889				17,578				14,512
Earnings (loss) per common share:
Basic		$	0.07			$	0.01			$	0.14			$	(0.08	)
Diluted		$	0.06			$	0.01			$	0.12			$	(0.08	)

 

(5)   Long-term Debt

 

Long-term debt consists of the following as of the dates presented:

 

		September 30, 2008				December 31, 2007
Notes payable to Capital One Bank, $135,000 due September 2009, due in monthly installments of approximately $4,143, including interest at 6.5%		$	-			$	82
Capital lease obligations			17				24
			17				106
Less current maturities			(11	)			(56	)
Long-term debt, less current maturities		$	6			$	50

 

During the three months ended September 30, 2008, we retired the note payable with Capital One Bank.  The final payment under the note was approximately $48,000.  As a condition to the issuance of the note, we were required to hold a restricted certificate of deposit in the amount of $145,000.  Subsequent to the retirement of the debt, the restriction on the balance was lifted and the certificate of deposit was redeemed.

 

(6)   Stock Warrants

 

On July 2, 2007, the Company announced that it had signed an Ancillary Care Services Network Access Agreement (“the agreement”) effective May 21, 2007 with a new customer, Texas True Choice, Inc. (“TTC”).  As partial compensation under the agreement, the Company issued to an affiliate of TTC, warrants to purchase a total of 225,000 shares of the Company’s common stock at an exercise price of $1.84, the closing price of our stock on May 21, 2007.  25% of the shares vested on each of May 21, 2007 and May 21, 2008, and 25% vest on May 21 of each of the two subsequent years.  As of September 30, 2008, 25%, or 56,250 warrants had vested.  According to the agreement, TTC must provide two years notice in the event of termination.  Since the measurement date for the third traunch of warrants was reached as of June 30, 2008, we recorded the fair value of 25% of the warrants, or 56,250 warrants, which were recorded as other non-current assets and will be amortized over the related contract period.  The total fair value of the warrants was $161,331, which was recorded based on the Black-Scholes-Merton method.

 

 

 

 (7)   Recent Accounting Pronouncements

 

In December 2007, the Financial Accounting Standards Board issued SFAS No. 141(R) “Business Combinations.”  SFAS No. 141(R) changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance.  SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited.   We are currently evaluating the impact of the pending adoption of SFAS 141(R) on our financial statements. 

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities. Prior to the issuance of SFAS No. 162, the GAAP hierarchy was defined in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards (“SAS”) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS No. 162 is effective 60 days following the Securities and Exchange Commission’s (“SEC’s”) approval of the Public Company Accounting Oversight Board (“PCAOB”) Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect the adoption of SFAS No. 162 to have an impact on its operating results or financial position.

 

 

 

FORWARD-LOOKING STATEMENTS

 

This discussion includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend”, “anticipate,” “believe,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future operating results or of our financial condition or state other “forward-looking” information.

 

We believe it is important to communicate to our stockholders and potential investors not only the Company’s current condition, but management’s forecasts about the Company’s future opportunities, performance and results, including, for example, information with respect to potential margin expansion, cash reserves and other financial items, and our strategies and prospects.  However, forward-looking statements are based on current expectations and assumptions and are subject to substantial risks and uncertainties, including, but not limited to, risks of market acceptance of, or preference for, the Company’s systems and services, competitive forces, the impact of geopolitical events and changes in government regulations, general economic conditions and economic factors in the country and the healthcare industry, and other risk factors as may be listed from time to time in the Company’s filings with the SEC. In evaluating such forward-looking statements, investors should specifically consider the matters set forth under the caption “Risk Factors” appearing in our Annual Report on Form 10-K for the year ended December 31, 2007 which was filed with the SEC on March 31, 2008, as well as any other cautionary language contained in this quarterly report, any of which could cause our actual results to differ materially from the expectations we describe in our forward-looking statements.  Except to the extent required by applicable securities laws and regulations, we disclaim any obligation to update or revise information contained in any forward-looking statement contained herein to reflect events or circumstances occurring after the date of this quarterly report.

 

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

 

 

GENERAL

 

 

 

		Third Quarter																Nine Months
										Change																Change
($ in thousands)		2008				2007				$				%				2008				2007				$					%
Net revenues		$	16,111			$	7,088			$	9,023				127	%		$	40,629			$	13,363			$	27,266				204	%

 

The Company’s net revenues are generated from ancillary healthcare service claims.  The increase in revenue for the three and nine months ended September 30, 2008 as compared to the same periods in 2007 is due to the addition of five new clients during 2007 and four new clients during 2008 and the expansion of our relationships with our two largest clients, one of which was established in 2006 and the other in early 2007.  The progression of these relationships allowed the Company access to a greater number of payors and allowed us to benefit from the external growth and expansion of our clients.  In addition, revenues were positively impacted by growth in our service provider network.

 

 

We maintain an allowance for doubtful accounts which are provided for at the time revenue is recognized.  Co-payments, deductibles and co-insurance payments can all impact the collectability of each individual claim submitted to payors for payment.  While the Company is able to re-price a claim and estimate the cash it will receive from the payor for that claim, the presence of co-pays, deductibles and co-insurance payments can affect the ultimate collectability of the claim.  The Company records an allowance against gross revenue to better estimate collectability.  The allowance is applied specifically for each payor and is adjusted to reflect the Company’s collection experience on a quarterly basis.

 

 

During the three months ended September 30, 2008, we did not record a provision for doubtful accounts and we did not write-off any accounts receivable, as compared to three months ended September 30, 2007 when we recorded a provision for doubtful accounts of approximately $355,000 and we wrote off accounts receivable of approximately $425,000.  During the nine months ended September 30, 2008, we recorded a provision for doubtful accounts of approximately $85,000 compared to a provision of approximately $243,000 for the same period in the prior year.  During 2008, we wrote off accounts receivable of approximately $75,000, compared to receivable write offs of approximately $190,000 during 2007. 

 

Revenue is recognized based on estimates of amounts to be collected in the future related to re-priced claims submitted to payors.  As our historical collection data has improved and our client/payor relationship have matured, we have improved our ability to more accurately estimate future amounts to be collected.  Thus, during 2008, the adjustments to the allowance for uncollectable accounts and receivables written off were consistent with the improvement of our collection estimates.

 

 

The following table sets forth a comparison of the components of our cost of revenues, for the periods presented ending September 30:

 

 

 

 

The following table sets forth a comparison of gross margin percentage for the periods presented ending September 30: 

 

 

Gross margin is calculated by dividing the difference between net revenues and total costs of revenues by net revenues.  The increase in gross margin reflected in the above table is attributable primarily to the increase in net revenues, offset by a variety of factors, including more aggressive pricing by the Company, fluctuations in the mix of services provided by the Company, and increased administration fees payable to clients as result of higher claim volume.  The Company anticipates that it will continue to experience margin expansion as the rate of client volume increases over time resulting in improved leverage of its fixed cost infrastructure.

 

 

The following table sets forth a comparison of our selling, general and administrative (“SG&A”) expenses for the periods presented ending September 30:

 

 

Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and related benefits, travel costs, sales commissions, sales materials, other marketing related expenses, costs of corporate operations, finance and accounting, human resources and other general operating expenses of the Company.  The increase in SG&A, on an absolute dollar basis, reflected in the above table is primarily related to increased professional expenses, specifically accounting, legal and consulting fees, accrued bonuses related to improved operating results compared to the prior year periods, increased stock-based compensation expense, increased recruiting fees related to attracting and hiring talented employees to facilitate the Company’s growth and sales commissions commensurate with our increased revenues.  For the nine months ended September 30, 2008, the increase was offset by the effect of the severance costs incurred during the three months ended June 30, 2007 related to our former Chief Executive Officer, who resigned effective June 30, 2007.  Those costs were approximately $330,000.

 

SG&A expenses as a percentage of net revenues decreased over the prior year periods as a result of net revenues growing more rapidly than our SG&A expenses, which is primarily the result of the achievement of economies of scale as our revenues increased.

 

 

The following table sets forth a comparison of depreciation and amortization for the periods presented ending September 30:

 

		Third Quarter								Change								Nine Months								Change
($ in thousands)		2008				2007				$					%			2008				2007				$					%
Depreciation		$	53			$	33			$	20				61	%		$	135			$	88			$	47				53	%
Amortization			53				53				-				-	%			160				160				-				-	%
Total Depreciation
and amortization		$	106			$	86			$	20				23	%		$	295			$	248			$	47				19	%