American CareSource Holdings, Inc. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - American CareSource Holdings, Inc.	Financial_Report.xls
EX-31.1 - EXECUTIVE CERT EXHIBIT - American CareSource Holdings, Inc.	anciexh2013q3-311.htm
EX-32.1 - SOX CERT EXHIBIT - American CareSource Holdings, Inc.	anciexh2013q3-321.htm
EX-31.2 - FINANCIAL CERT EXHIBIT - American CareSource Holdings, Inc.	anciexh2013q3-312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2013

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number 1-33094

AMERICAN CARESOURCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



DELAWARE		20-0428568
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

	5429 LYNDON B. JOHNSON FREEWAY
	SUITE 850
	DALLAS, TEXAS
	75240
	(Address of principal executive offices)
	(Zip code)

(972) 308-6830

(Registrant’s telephone number, including area 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 o

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 xNo o

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



Large accelerated filer o	Non-accelerated filer o
Accelerated filer o (do not check if a smaller reporting company)	Smaller Reporting Company x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: The number of shares of common stock of registrant outstanding on November 4, 2013 was 5,713,960.

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AMERICAN CARESOURCE HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2013




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 Operations	11
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
	Item 4.	Controls and Procedures	21
Part II		Other Information	22
	Item 1A.	Risk Factors	22
	Item 5.	Other Information	22
	Item 6.	Exhibits	23
		Signatures	24

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PART I.	FINANCIAL INFORMATION


ITEM 1.	Financial Statements

AMERICAN CARESOURCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(amounts in thousands, except per share data)



	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Net revenues	$	6,493		$	8,186		$	20,541		$	25,802
Cost of revenues:
Provider payments	4,811			6,119			15,539			18,992
Administrative fees	265			340			853			1,168
Claims administration and provider development	653			740			2,019			2,317
Total cost of revenues	5,729			7,199			18,411			22,477

Contribution margin	764			987			2,130			3,325

Selling, general and administrative expenses	1,424			1,836			5,016			5,097
Depreciation and amortization	192			222			615			662
Total operating expenses	1,616			2,058			5,631			5,759

Loss before income taxes	(852		)	(1,071		)	(3,501		)	(2,434		)
Income tax provision	6			4			17			28
Net loss	$	(858	)	$	(1,075	)	$	(3,518	)	$	(2,462	)

Loss per basic and diluted common share	$	(0.15	)	$	(0.19	)	$	(0.62	)	$	(0.43	)

Basic and diluted weighted average common shares outstanding	5,716			5,711			5,711			5,706

See accompanying notes.

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AMERICAN CARESOURCE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands except per share amounts)



	September 30, 2013 (Unaudited)			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	6,427		$	10,705
Accounts receivable, net	1,723			2,432
Prepaid expenses and other current assets	438			290
Deferred income taxes	6			6
Total current assets	8,594			13,433

Property and equipment, net	1,284			1,593

Other assets:
Deferred income taxes	221			222
Other non-current assets	391			16
Intangible assets, net	672			768
	$	11,162		$	16,032

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to service providers	$	1,595		$	3,100
Accounts payable and accrued liabilities	1,270			1,343
Total current liabilities	2,865			4,443

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value; 10,000 shares authorized, none issued	—			—
Common stock, $0.01 par value; 40,000 shares authorized; 5,711 and 5,706 shares issued and outstanding in 2013 and 2012, respectively.	57			57
Additional paid-in capital	23,071			22,845
Accumulated deficit	(14,831		)	(11,313		)
Total stockholders' equity	8,297			11,589
	$	11,162		$	16,032

See accompanying notes.

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AMERICAN CARESOURCE HOLDINGS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

(amounts in thousands)



				Additional					Total
	Common Stock			Paid-in		Accumulated			Stockholders'
	Shares	Amount		Capital		Deficit			Equity
Balance at December 31, 2012	5,706	$	57	$	22,845	$	(11,313	)	$	11,589
Net loss	—	—		—		(3,518		)	(3,518		)
Stock-based compensation expense	—	—		221		—			221
Issuance of common stock as equity incentive awards, net of tax withholdings	5	—		5		—			5
Balance at September 30, 2013	5,711	$	57	$	23,071	$	(14,831	)	$	8,297

See accompanying notes.

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AMERICAN CARESOURCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)



	Nine months ended September 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(3,518	)	$	(2,462	)
Adjustments to reconcile net loss to net cash used in operations:
Non-cash stock-based compensation expense	221			333
Depreciation and amortization	615			662
Amortization of long-term client agreement	—			187
Deferred income taxes	1			3
Changes in operating assets and liabilities:
Accounts receivable	709			1,697
Prepaid expenses and other assets	(523		)	—
Accounts payable and accrued liabilities	(73		)	73
Due to service providers	(1,505		)	(1,103		)
Net cash used in operating activities	(4,073		)	(610		)

Cash flows from investing activities:
Investment in software development costs	(199		)	(302		)
Additions to property and equipment	(11		)	(100		)
Net cash used in investing activities	(210		)	(402		)

Cash flows from financing activities:
Proceeds from exercise of equity incentives	5			—
Payment of income tax withholdings on net exercise of equity incentives	—			(8		)
Net cash provided by (used in) financing activities	5			(8		)

Net decrease in cash and cash equivalents	(4,278		)	(1,020		)
Cash and cash equivalents at beginning of period	10,705			11,315

Cash and cash equivalents at end of period	$	6,427		$	10,295

Supplemental cash flow information:
Cash paid for taxes	$	63		$	49

Supplemental non-cash operating and financing activity:
Accrued bonus paid with equity incentives	$	—		$	23

See accompanying notes.

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AMERICAN CARESOURCE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tables in thousands, except per share data)

1. Description of Business and Basis of Presentation

American CareSource Holdings, Inc. (“ACS,” “Company,” the “Registrant,” “we,” “us,” or “our”) works to help its clients control healthcare costs by offering cost containment strategies, primarily through the utilization of a comprehensive national network of ancillary healthcare service providers. The Company markets its services to a number of healthcare companies including third party administrators (“TPAs”), insurance companies, large self-funded organizations, various employer groups and preferred provider organizations ("PPOs"). The Company offers payors this solution by:


•	lowering its payors’ ancillary care costs through its network of high quality, cost effective providers that the Company has under contract at more favorable terms than they could generally obtain on their own;


•	providing payors with a comprehensive network of ancillary healthcare service providers that is tailored to each payor’s specific needs and is available to each payor’s members for covered services;


•	providing payors with claims management, reporting and processing and payment services;


•	performing network/needs analysis to assess the benefits to payors of adding additional/different service providers to the payor-specific provider networks; and


•	credentialing network service providers for inclusion in the payor-specific provider networks.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), interim reporting requirements of Form 10-Q and Rule 8-03 of Regulation S-X of the rules and regulations of the Securities and Exchange Commission (“SEC”). Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with GAAP have been condensed or omitted. Balance sheet amounts are as of September 30, 2013 and December 31, 2012 and operating results are for the three and nine months ended September 30, 2013 and 2012, and include all normal and recurring adjustments we consider necessary for the fair, summarized presentation of our financial position and operating results. Certain prior year amounts have been reclassified within the consolidated statement of operations to conform to the current year presentation. As these are condensed financial statements, readers of this report should, therefore, refer to the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 4, 2013.

The Company uses the “management approach” for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggregates a company. Based on the “management approach” model, the Company has determined that its business is comprised of a single operating segment.

Our interim results of operations are not necessarily indicative of results of operations that will be realized for the full fiscal year.

2. Revenue Recognition

The Company recognizes revenue on the services that it provides, which includes (i) providing payor clients with a comprehensive network of ancillary healthcare providers, (ii) providing claims management, reporting, processing and payment services, (iii) providing network/need analysis to assess the benefits to payor clients of adding additional/different service providers to the client-specific provider networks and (iv) providing credentialing of network service providers for inclusion in the client payor-specific provider networks. Revenue is recognized when services are delivered, which occurs after processed claims are billed to the client payors and collections are reasonably assured. The Company estimates revenues and costs of revenues using average historical collection rates and average historical margins earned on claims. Periodically, revenues are adjusted to reflect actual cash collections so that revenues recognized accurately reflect cash collected.

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The Company determines whether it is acting as a principal or agent in the fulfillment of the services rendered. After careful evaluation of the key gross and net revenue recognition indicators, the Company acknowledges that while the determination of gross versus net reporting is highly judgmental in nature, the Company has concluded that its circumstances are most consistent with those key indicators that support gross revenue reporting.

Following are the key indicators that support the Company’s conclusion that it acts as a principal when settling claims for service providers through its contracted service provider network:

•

The Company is the primary obligor in the arrangement. The Company has assessed its role as primary obligor as a strong indicator of gross reporting. The Company believes that it is the primary obligor in its transactions because it is responsible for providing the services desired by its client payors. The Company has distinct, separately negotiated contractual relationships with its client payors and with the ancillary healthcare providers in its networks. The Company does not negotiate “on behalf of” its client payors and does not hold itself out as the agent of the client payors when negotiating the terms of the Company’s ancillary healthcare service provider agreements. The Company’s agreements contractually prohibit client payors and service providers to enter into direct contractual relationships with one another. The client payors have no control over the terms of the Company’s agreements with the service providers. In executing transactions, the Company assumes key performance-related risks. The client payors hold the Company responsible for fulfillment, as the provider, of all of the services the client payors are entitled to under their contracts; client payors do not look to the service providers for fulfillment. In addition, the Company bears the pricing/margin risk as the principal in the transactions. Because the contracts with the client payors and service providers are separately negotiated, the Company has complete discretion in negotiating both the prices it charges its client payors and the financial terms of its agreements with the service providers. Since the Company’s profit is the spread between the amounts received from the client payors and the amount paid to the service providers, it bears significant pricing/margin risk. There is no guaranteed mark-up payable to the Company on the amount the Company has contracted. Thus, the Company bears the risk that amounts paid to the service provider will be greater than the amounts received from the client payors, resulting in a loss or negative claim.


•	The Company has latitude in establishing pricing. As stated above, the Company has complete latitude in negotiating the price to be paid to the Company by each client payor and the price to be paid to each contracted service provider. This type of pricing latitude indicates that the Company has the risks and rewards normally attributed to a principal in the transactions.

•

The Company changes the product or performs part of the services. The Company provides the benefits associated with the relationships it builds with the client payors and the service providers. While the parties could deal with each other directly, the client payors would not have the benefit of the Company’s experience and expertise in assembling a comprehensive network of service providers, in claims management, reporting and processing and payment services, in performing network/needs analysis to assess the benefits to client payors of adding additional/different service providers to the client payor-specific provider networks, and in credentialing network service providers.

•

The Company has complete discretion in supplier selection. One of the key factors considered by client payors who engage the Company is to have the Company undertake the responsibility for identifying, qualifying, contracting with and managing the relationships with the ancillary healthcare service providers. As part of the contractual arrangement between the Company and its client payors, the payors identify their obligations to their respective covered persons and then work with the Company to determine the types of ancillary healthcare services required in order for the payors to meet their obligations. The Company may select the providers and contract with them to provide services at its discretion.

•

The Company is involved in the determination of product or service specifications. The Company works with its client payors to determine the types of ancillary healthcare services required in order for the payors to meet their obligations to their respective covered persons. In some respects, the Company is customizing the product through its efforts and ability to assemble a comprehensive network of providers for its payors that is tailored to each payor’s specific needs. In addition, as part of its claims processing and payment services, the Company works with the client payors, on the one hand, and the providers, on the other, to set claims review, management and payment specifications.


•	The supplier (and not the Company) has credit risk. The Company believes it has some level of credit risk, but that risk is mitigated because the Company does not remit payment to providers unless and until it has received payment from the relevant client payors following the Company’s processing of a claim.


•	The amount that the Company earns is not fixed. The Company does not earn a fixed amount per transaction nor does it realize a per-person per-month charge for its services.

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The Company has evaluated the other indicators of gross and net revenue recognition, including whether or not the Company has general inventory risk. The Company does not have any general inventory risk, as its business is not related to the manufacture, purchase or delivery of goods and it does not purchase in advance any of the services to be provided by the ancillary healthcare service providers. While the absence of this risk would be one indicator in support of net revenue reporting, as described in detail above, the Company has carefully evaluated all of the key gross and net revenue recognition indicators and has concluded that its circumstances are most consistent with those key indicators that support gross revenue reporting.

If the Company were to report its revenues net of provider payments rather than on a gross reporting basis, for the three and nine months ended September 30, 2013, its net revenues would have been approximately $1.7 million and $5.0 million, respectively. For the three and nine months ended September 30, 2012, its net revenues would have been approximately $2.1 million and $6.8 million, respectively.

The Company records a provision for refunds based on an estimate of historical refund amounts. Refunds are paid to payors for overpayments on claims, claims paid in error, and claims paid for non-covered services. In some instances, we will recoup payments made to the ancillary service provider if the claim has been fully resolved. The evaluation is performed periodically and is based on historical data. We present revenue net of the provision for refunds on the consolidated statement of operations.

During the three and nine months ended September 30, 2013 and 2012, five of the Company’s clients comprised a significant portion of the Company’s revenues. The following is a summary of the approximate amounts of the Company’s revenue and accounts receivable contributed by each of those clients as of the dates and for the periods presented (amounts in thousands):



				Periods ended September 30, 2013													Periods ended September 30, 2012
	As of September 30, 2013			Three Months					Nine Months					As of September 30, 2012			Three Months					Nine Months
	Accounts Receivable			Net Revenue			% of Total Revenue		Net Revenue			% of Total Revenue		Accounts Receivable			Net Revenue			% of Total Revenue		Net Revenue			% of Total Revenue
Material Client Relationship	$	453		$	1,048		16.1	%	$	4,843		24	%	$	814		$	2,508		30.6	%	$	8,461		32	%
Benefit Administrative Systems, LLC	180			955			14.7		2,080			10		108			550			6.7		1,861			8
HealthSCOPE Benefits, Inc.	179			940			14.5		2,060			10		42			339			4.1		973			3
HealthMarkets, Inc.	165			800			12.3		2,338			11		120			632			7.7		1,915			8
MultiPlan, Inc. (formerly Viant Holdings, Inc.)	—			213			3.3		892			4		200			706			8.6		2,412			9
All Others	1,195			2,712			41.8		8,610			42		1,571			3,528			43.1		10,368			41
Allowance for Uncollectable Receivables/Provision for refunds	(449		)	(175		)	(2.7	)	(282		)	(1	)	(235		)	(77		)	(0.8	)	(188		)	(1	)
	$	1,723		$	6,493		100.0	%	$	20,541		100	%	$	2,620		$	8,186		100.0	%	25,802			100	%

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3. Reverse Stock Split

On August 31, 2012 the Company filed a Certificate of Amendment to its Certificate of Incorporation, as amended (the “Amendment”), to effect a 1-for-3 reverse stock split (“reverse split”) of its common stock, par value $0.01 per share (the “Common Stock”), effective September 4, 2012 (the “Effective Day”). Because the Amendment did not result in a reduction in the number of authorized shares of Common Stock, its effect was to increase the number of shares of Common Stock available for issuance relative to the number of shares issued and outstanding. In addition, the par value per share of Common Stock remained $0.01, thus Common Stock and Additional Paid-In Capital were adjusted $114,000 to reflect the reverse split on the consolidated balance sheet.

At the Company's annual meeting of stockholders, held on June 11, 2012, the stockholders voted to amend the Company's certificate of incorporation for the purpose of effecting a reverse stock split and authorized its Board of Directors to determine, in its sole discretion, whether to effect the amendment, the timing of the amendment, and the specific ratio of the reverse stock split, provided that such ratio is 1-for-2, 1-for-2.5, 1-for-3, 1-for-3.5 or 1-for-4.

On the Effective Day, every three shares of the Company's Common Stock issued and outstanding immediately prior to the Effective Day were automatically combined into one share of Common Stock. Stockholders that were left with a fraction of a share as a result of the reverse split received cash in lieu of the fractional share in an amount based on the closing sale price of the Common Stock on the business day immediately preceding the Effective Day as reported on the The Nasdaq Capital Market. The amount paid to stockholders was less than $1,000. In addition, any options, warrants and restricted stock units outstanding as of the Effective Day were adjusted accordingly. As a result of the reverse split, the Company had approximately 5,711,000 shares of common stock issued and outstanding as of September 30, 2012.

Shares of common stock and common stock equivalents, along with earnings per share and other per share amounts, have been retroactively restated to reflect the 1-for-3 reverse stock split that occurred on September 4, 2012 for all periods presented.

4. Earnings (Loss) Per Share

For purposes of this calculation, outstanding stock options, stock warrants, and unvested restricted stock units are considered common stock equivalents using the treasury stock method, and are the only such equivalents outstanding. For all periods presented all equivalent units outstanding were anti-dilutive. As of September 30, 2013, options to purchase approximately 726,000 shares of common stock, warrants to purchase 44,400 shares of common stock and approximately 42,700 unvested restricted stock units were excluded from the calculation as their impact would be anti-dilutive.

5. Software Development Costs

The Company capitalizes costs associated with internally developed software, developed for internal use only, during the application development stage. Application development stage costs generally include costs associated with internal-use software configuration, coding, installation and testing. Costs of significant upgrades and enhancements that result in additional functionality also are capitalized, whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal-use software and payroll and payroll-related expenses for employees who are directly associated with and devote time to the internal-use software projects. Capitalization of such costs begins when the preliminary project stage is complete and ceases no later than the point at which the project is substantially complete and ready for its intended purpose. Capitalized costs are amortized using the straight-line method over the useful life of the software, which is typically five years.

During the three and nine months ended September 30, 2013, the Company capitalized approximately $23,000 and $199,000, respectively. During the three and nine months ended September 30, 2012, the Company capitalized approximately $164,000 and $302,000, respectively.

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6. Warrants

The Company entered into an agreement as of February 25, 2011 with an employee, whereby the Company agreed to issue warrants to purchase 83,333 shares of common stock with an exercise price of $5.01. The warrants have a term of 5 years and vest in increments over a time period of 2 years depending on the achievement of defined, agreed upon revenue targets generated by new clients. The agreement also obligates the Company to issue warrants to purchase up to an additional 166,666 shares of common stock (issued in 83,333 increments) pursuant to the achievement of additional defined agreed upon revenue targets. During the twelve months ended December 31, 2011, we did not recognize compensation costs associated with these warrants due to the low probability of vesting.

On February 1, 2012, certain terms of the agreement were modified, including the revenue targets and the total number of shares under the initial and future warrants. The warrants initially granted now cover 44,444 shares to be purchased at an exercise price of $1.50, 22,222 of which vested immediately, and the remaining 22,222 shares vesting upon the achievement of certain revenue targets. The number of shares underlying warrants to be issued under the agreement in the future was reduced to 88,889 shares (issued in 44,444 increments) based upon the achievement of additional defined agreed upon revenue targets. During the first quarter of 2012, we recognized compensation costs of approximately $21,000 associated with the initial vesting of 22,222 shares.

We did not recognize compensation costs associated with the warrants, during the three and nine months ended September 30, 2013. Additional costs associated with the warrants will be recognized based on the probability that the revenue targets will be reached. That probability will be re-evaluated and updated based on current market conditions, on a quarterly basis, and compensation costs will be adjusted accordingly.

Shares of common stock and exercise price have been restated to reflect the 1-for-3 reverse stock split that occurred on September 4, 2012.

7. Severance Charges

At the Company's annual meeting of shareholders on May 30, 2013, the Company's shareholders reduced the Board of Directors from nine to five directors. Richard W. Turner, Ph.D., was appointed Chairman of the Board to lead the reconstituted Board consisting of four existing directors and one new director. Additionally, the Board appointed Matthew D. Thompson Acting Chief Operating Officer of the Company, replacing William J. Simpson, Jr. in that role. In addition to his duties as Acting Chief Operating Officer, Mr. Thompson continues to serve as the Company's Chief Financial Officer. The Board furthermore appointed Laura L. Little to the position of Vice President of Finance and Principal Accounting Officer. Ms. Little has been with the Company since December 2009.

On June 3, 2013, the Board of Directors accepted the resignation of Rost A. Ginevich from his position with the Company as Chief Information Officer and appointed James A. Honn to this position. In connection with his resignation, Mr. Ginevich entered into a severance agreement and general release with the Company, effective June 14, 2013. Under the agreement, Mr. Ginevich will receive, in addition to any base compensation owed and earned but unused vacation pay, severance payments over a three month period that in the aggregate equal three months' worth of his annual base compensation. During the second quarter of 2013, the Company recorded a severance charge of approximately $46,000 in connection with the severance agreement.

Mr. Simpson continued to serve as President of the Company until July 2, 2013 when he resigned, effective July 1, 2013. In connection with his resignation, Mr. Simpson entered into a severance agreement and general release with the Company, effective July 1, 2013. Under the agreement, Mr. Simpson will receive, in addition to any base compensation owed and earned but unused vacation pay, severance payments over a six month period that in the aggregate equal six months' worth of his annual base compensation, or $147,500, and has the right to continue participation in the Company-sponsored group health insurance plan in accordance with applicable laws, rules and regulations. The total severance charge recorded by the Company during the three months ended June 30, 2013 related to Mr. Simpson's resignation was approximately $170,000.

The severance charges related to Mr. Simpson and Mr. Ginevich are included in selling, general and administrative expenses on the consolidated statement of operations. The Company did not record severance charges during the three months ended September 30, 2013.

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FORWARD-LOOKING STATEMENTS

This document contains 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 statements can be identified by forward-looking words such as “may,” “will,” “expect,” “intend”, “anticipate,” “believe,” “estimate” and “continue” or similar words and discuss the Company’s plans, objectives and expectations for future operations, including its services, contain projections of the Company’s future operating results or financial condition, and discuss its expectations with respect to the growth in healthcare costs in the United States, the demand for ancillary benefits management services, and the Company’s competitive advantages, or contain other “forward-looking” information.

Such forward-looking statements are based on current information, assumptions and belief of management, and are not guarantees of future performance. Substantial risks and uncertainties could cause actual results to differ materially from those indicated by such forward-looking statements, including, but not limited to, the Company’s inability to attract or maintain providers or clients or achieve its financial results, changes in national healthcare policy, federal or state regulation, and/or rates of reimbursement including without limitation the impact of the Patient Protection and Affordable Care Act, Health Care and Educational Affordability Reconciliation Act and medical loss ratio regulations, general economic conditions (including economic downturns and increases in unemployment), lower than anticipated demand for ancillary services, pricing, market acceptance/preference, the Company’s ability to integrate with its clients, the Company's ability to maintain a network of ancillary service providers that is adequate to generate significant claims volume, consolidation in the industry that may affect the Company’s key clients, changes in the business decisions by significant clients, increased competition from major carriers, implementation and performance difficulties, and other risk factors detailed from time to time in the Company’s periodic filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2012 and the quarterly reports on Form 10-Q filed for each of the subsequent quarters.

Do not place undue reliance on these forward-looking statements, which speak only as of the date this document was prepared. All forward-looking statements included herein are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable securities laws and regulations, the Company undertakes no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.

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

GENERAL

Management’s discussion and analysis provides a review of the Company’s operating results for the three and nine months ended September 30, 2013 and its financial condition at September 30, 2013. The focus of this review is on the underlying business reasons for significant changes and trends affecting the net revenues, operating results and financial condition of the Company. This review should be read in conjunction with the accompanying unaudited consolidated financial statements and the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.

OVERVIEW


•	lowering its payors’ ancillary care costs through its network of high quality, cost effective providers that the Company has under contract at more favorable terms than they could generally obtain on their own;


•	providing payors with a comprehensive network of ancillary healthcare service providers that is tailored to each payor’s specific needs and is available to each payor’s members for covered services;


•	providing payors with claims management, reporting and processing and payment services;


•	performing network/needs analysis to assess the benefits to payors of adding additional/different service providers to the payor-specific provider networks; and


•	credentialing network service providers for inclusion in the payor-specific provider networks.

The Company has assembled a network of ancillary healthcare service providers that supplement or support the care provided by hospitals and physicians and includes 31 service categories. We have a dedicated provider development function, whose primary responsibility is to contract with providers and strategically grow our network of ancillary service providers.

We secure contracts with ancillary service providers by offering them the following:


•	inclusion in a nationwide network that provides exposure to our client payors and their aggregate member lives;


•	an array of administrative and back-office services, such as collections and appeals;


•	increased claims volume through various "soft steerage" mechanisms; and


•	advocacy in the claims appeals process.

Payors route healthcare claims to us after service has been performed by participant providers in our network. We process those claims and charge the payor according to its contractual rate for the services according to our contract with the payor. In processing the claim, we are paid directly by the payor or the insurer for the service. We then pay the provider of service according to its independently-negotiated contractual rate. We assume the risk of generating positive margin, the difference between the payment we receive for the service and the amount we are obligated to pay the provider of service.

The Company recognizes revenues for ancillary healthcare services when services by providers have been authorized and performed, the claim has been billed to the payor and collections from payors are reasonably assured. Cost of revenues for ancillary healthcare services consist of amounts due to providers for providing ancillary healthcare services, client administration fees paid to our client payors to reimburse them for routing the claims to us for processing, and the Company’s related direct labor and overhead of processing billings, collections and payments. The Company is not liable for costs incurred by independent contract service providers until payment is received from the payors. The Company recognizes actual or estimated liabilities to independent contract service providers as the related revenues are recognized.

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The Company is seeking growth in the number of client payors and service provider relationships it secures by focusing on providing in-network services for its payors and aggressively pursuing additional TPAs, self-insured employers and other direct payors as its primary sales targets. The Company believes this strategy should increase the volume of claims the Company can process in addition to the expansion in the number of lives that are eligible to receive ancillary healthcare benefits. No assurances can be given that the Company can expand its service provider or payor relationships, nor that any such expansion will result in an improvement in the results of operations of the Company.

In addition, under the medical loss ratio ("MLR") regulations included in the Affordable Care Act, it is possible that a portion of the fees our existing and prospective payors are contractually required to pay us and that do not qualify as 'incurred claims' may not be included as expenditures for activities that improve healthcare quality. Such a determination may make it more difficult for us to retain existing clients and/or add new clients, because our clients' or prospective clients' MLR may otherwise not meet the specified targets. This may reduce our net revenues and profit margins. See "Recent and pending healthcare reforms could materially adversely affect our revenues, financial position and our results of operations" under "Item 1.A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012.

ANALYSIS OF RESULTS OF OPERATIONS

We have experienced significant revenue declines over the past four years, primarily related to the declines in the business of our two significant legacy clients, both of which are PPOs. Due to a variety of factors affecting the healthcare industry, including but not limited to healthcare legislation, the economy, industry consolidation, change in strategic direction and for other reasons, revenue from each of our two significant legacy clients continued to decline resulting in year-over-year quarterly declines in our revenue from those accounts. Because of the significance of the revenue concentration from these two clients (from approximately 98% in 2008 to 28% through the nine months ended September 30, 2013), the declines of the business of these clients has had a significant negative impact on our operating results and cash position over the past four years, despite our new business development efforts. We expect revenue from one of these clients to discontinue during 2013 and, although we have entered into a new agreement with the other, the agreement does not provide for any minimum level of volume, and we cannot be certain of any level of continued revenue from such relationship, despite our efforts to create new revenue streams. During the period from 2008 to 2013 (excluding the addition of any entities affiliated with either of our two significant legacy clients), we added 40 new clients, which contributed $20.4 million of gross revenue in 2012. Those clients generated $14.6 million of gross revenue in the nine months ended September 30, 2013 and $14.3 million in the same prior year period.

The Company believes that it has a unique business model and offers a solid value proposition to our client payors, as well as our providers, by delivering superior discounts through our network of contracted ancillary healthcare service providers. In 2013, we have made progress in adding new client relationships, but do not believe that the revenue from those accounts will offset the losses from our two significant client relationships and declines from our other legacy accounts. We will continue to opportunistically investigate strategic initiatives that will grow our revenue base, while controlling non-variable costs consistent with our existing revenue streams. Nevertheless, until we can replace a greater amount of the revenue than we have lost from our two significant legacy clients, we will continue to experience operating losses and we will continue to reduce our existing cash reserves for operating and investing activities.

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The following table sets forth a comparison of our results of operations for the following periods presented (certain prior year amounts have been reclassified for comparability purposes):



	Third Quarter											Nine Months
							Change											Change
	2013			2012			$			%		2013			2012			$			%
Net revenues	$	6,493		$	8,186		$	(1,693	)	(20.7	)%	$	20,541		$	25,802		$	(5,261	)	(20.4	)%

Variable costs:
Provider payments	4,811			6,119			1,308			21.4		15,539			18,992			3,453			18.2
Administrative fees	265			340			75			22.1		853			1,168			315			27.0
Total variable costs	5,076			6,459			1,383			21.4		16,392			20,160			3,768			18.7
Percent of net revenues	78.2		%	78.9		%						79.8		%	78.1		%

Variable flowthrough	1,417			1,727			(310		)	(18.0	)	4,149			5,642			(1,493		)	(26.5	)
Variable margin	21.8		%	21.1		%						20.2		%	21.9		%

Non-variable costs:
Claims administration	529			538			9			1.7		1,607			1,706			99			5.8
Provider development	124			202			78			38.6		412			611			199			32.6
Sales & marketing	414			547			133			24.3		1,540			1,694			154			9.1
Finance & administration	1,010			1,289			279			21.6		3,476			3,403			(73		)	(2.1	)
Total non-variable costs	2,077			2,576			499			19.4		7,035			7,414			379			5.1
Percent of net revenue	32.0		%	31.5		%						34.2		%	28.7		%

Loss before depreciation, amortization, and income taxes	(660		)	(849		)	189			22.3		(2,886		)	(1,772		)	(1,114		)	(62.9	)
Percent of net revenue	(10.2		)%	(10.4		)%						(14.0		)%	(6.9		)%

Depreciation and amortization	192			222			30			13.5		615			662			47			7.1
Income tax provision	6			4			(2		)	(50.0	)	17			28			11			39.3
Net loss	$	(858	)	$	(1,075	)	$	217		20.2	%	$	(3,518	)	$	(2,462	)	$	(1,056	)	(42.9	)%

The following discussion compares the historical results of operations on a basis consistent with GAAP for the three and nine months ended September 30, 2013 and 2012.

Net Revenues

The Company’s net revenues are generated from ancillary healthcare service claims. Revenue is recognized when we bill our client payors for services performed and collection is reasonably assured. The Company estimates revenues using average historical collection rates. When estimating collectibility, we assess the impact of items such as non-covered benefits, payments made directly to the service provider by the client payor, denied claims, deductibles and co-payments. Periodically, revenues and related estimates are adjusted to reflect actual cash collections so that revenues recognized accurately reflect cash collected. There are no assurances that actual cash collections will meet or exceed estimated cash collections.

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There can be variations in revenue from period-to-period due to the demand for various ancillary service specialties by our clients' members. The variations can impact revenue, revenue per claim, collectibility and margins after payments made to the ancillary service providers. While we focus on attaining the most advantageous contractual rates possible with our clients and ancillary service providers, we have minimal control over the mix of ancillary service specialties billed and the ancillary service providers that are utilized.

The following tables set forth a comparison of our net revenues and billed claims for the following periods presented ended September 30, (in thousands):



	Net Revenue											Billed Claims Volume
	Third Quarter						Change					Third Quarter		Change
(in thousands)	2013			2012			$			%		2013	2012	Claims		%
Legacy clients:
Material Client Relationship	$	1,048		$	2,508		$	(1,460	)	(58	)%	4	8	(4	)	(50	)%
MultiPlan, Inc. (formerly Viant, Inc.)	213			706			(493		)	(70	)	1	3	(2	)	(67	)
All other clients	5,407			5,049			358			7		25	26	(1	)	(4	)
Total gross revenue	$	6,668		$	8,263		$	(1,595	)	(19	)%	30	37	(7	)	(19	)%
Provision for refunds	(175		)	(77		)	(98		)	(127	)	—	—	—		nm
Net Revenue	$	6,493		$	8,186		$	(1,693	)	(21	)%	30	37	(7	)	(19	)%



	Net Revenue											Billed Claims Volume
	Nine Months						Change					Nine Months		Change
(in thousands)	2013			2012			$			%		2013	2012	Claims		%
Legacy clients:
Material Client Relationship	$	4,843		$	8,461		$	(3,618	)	(43	)%	15	28	(13	)	(46	)%
MultiPlan, Inc. (formerly Viant, Inc.)	892			2,412			(1,520		)	(63	)	3	12	(9	)	(75	)
All other clients	15,088			15,117			(29		)	—		75	83	(8	)	(10	)
Total gross revenue	$	20,823		$	25,990		$	(5,167	)	(20	)%	93	123	(30	)	(24	)%
Provision for refunds	(282		)	(188		)	(94		)	(50	)	—	—	—		nm
Net Revenue	$	20,541		$	25,802		$	(5,261	)	(20	)%	93	123	(30	)	(24	)%

In addition, the following table sets forth a comparison of processed and billed claims for the following periods presented ended September 30, (in thousands):



	Third Quarter						Nine Months
			Change						Change
(in thousands)	2013	2012	Claims		%		2013	2012	Claims		%
Processed	36	46	(10	)	(22	)%	114	154	(40	)	(26	)%
Billed	30	37	(7	)	(19	)	93	123	(30	)	(24	)

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Following is a discussion of the changes in net revenue for the three and nine months ended September 30, 2013 as compared to the same period in 2012:

Material Client Relationship

The decline in billed claims volume from our relationship with one of our material clients for the three and nine months ended September 30, 2013 is due to, among others, the following factors:


•	The client continues to suffer attrition in its network client base, as it continues to re-focus its business strategy resulting in declines in claims volume.


•	The client lost several significant employer groups which accounted for approximately $143,000 and $1.3 million of revenue to us during the three and nine months ended September 30, 2012, respectively. Only $3,000 of revenue from these employer groups was generated during the nine months ended September 30, 2013.


•	Laboratory service claims generated from the client declined 45% and 76% for the three and nine months ended September 30, 2013. The declines in claim count resulted in estimated declines in revenue of approximately $40,000 and $216,000 for the three and nine months ended September 30, 2013.


•	Under our new agreement executed on December 31, 2012, the client has more flexibility to utilize ancillary care providers with which it is directly contracted or that are accessible through other provider networks.

The performance of the client account during the remainder of 2013 will be affected by attrition in its own client base, its internal strategic initiatives and the actual utilization of our network of ancillary healthcare providers over other networks the client has access to. Despite the new agreement the Company and this client entered into on December 31, 2012, and our continued efforts to secure new revenue-generating opportunities, we cannot be certain of any level of continued volume from this client.

MultiPlan, Inc. (formerly Viant Holdings, Inc.)

The decline in net revenue and billed claims volume from our relationship with MultiPlan, Inc. ("MultiPlan") is due to the acquisition by MultiPlan of Viant Holdings, Inc. As part of that transition, MultiPlan moved its payors and employer groups to its existing networks. While we did not receive a formal termination notice from MultiPlan, the transition was completed as of December 31, 2012. The expectation is that all claims volume and related revenue from the client will discontinue in 2013. Thus, we have no assurances of future collections; therefore we will recognize revenue only to the extent of cash collections on outstanding claims.

All Other Clients

Our other clients consist of various relationships with PPOs, TPAs, insurance companies and direct payors which we have contracted from 2005 through the current period. Through our client service group, we maintain contact with these clients to determine if opportunities exist to serve the accounts and generate incremental revenue. Such opportunities include the addition of incremental employer groups by our clients that previously did not access our network of ancillary service provider, addressing system and work-flow issues that will improve claims volume and/or collections and focusing sales efforts on certain specialties that provide greater savings for our clients.

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For the three months ended September 30, 2013, revenue increased 7% as compared to the same prior year period due to, among others, the following factors:

•

The addition of incremental employer groups that previously did not access our network of ancillary service providers. We work with our clients to add employer groups by providing technical and sales support. The employer groups include those existing that have not historically accessed our network and new groups that have contracted with our clients. Our client service group works continuously on this effort in order to maximize our revenue opportunity with each client.

•

A shift in the mix of ancillary specialties billed during the third quarter of 2013 as compared to the same prior year quarter. Overall, billings and related revenue, for specialties such as infusion services and long term acute care decreased, when compared to the same prior year period. We experienced an increase in billings and related revenue for specialties such as dialysis, surgery centers and laboratory services. A change in patient and specialty mix, as well as benefit plan design changes, is not a factor controlled by us, thus there can be variations in claims volume and billed amounts from period-to-period.


•	The access by some of our clients of ancillary healthcare service providers that provide greater savings relative to other providers for specialties such as dialysis.

The overall 7% increase discussed above, was partially offset by the loss of one of our clients during the three months ended September 30, 2013. This client, which was implemented in 2010, was on an annualized run rate of approximately $500,000.

During the nine months ended September 30, 2013 compared to the same period in 2012, revenue remained relatively unchanged. Revenue is impacted most significantly by the mix of specialties utilized and those specialties' associated collection rates, the clients' ability to maintain its own book of business, as well as our ability to retain our current clients and generate new client relationships.

Billed claims volume decreased 4% and 10% for the three and nine months ended September 30, 2013, respectively, as compared to the same prior year periods. The overall decline in claims volume was primarily comprised of specialties generating lower revenue per claim. While our client services group works closely with our clients to ensure they are receiving the maximum benefit from our network of ancillary healthcare service providers, a change in patient and specialty mix, as well as benefit plan design changes, is not a factor controlled by us.

In 2010 we began to pursue TPAs and direct payors, as we believe we can have more of a direct impact on the relationship. The following table details the change in revenue generated from different client types (includes all Company clients) for the periods ended September 30,:



	Third Quarter
	2013					2012					Change
($ in thousands)	Count	Revenue		% of revenue		Count	Revenue		% of revenue		$			%
TPAs *	28	$	4,206	63.1	%	27	$	3,940	47.7	%	$	266		7	%
PPOs	11	1,572		23.5		11	3,635		44.0		(2,063		)	(57	)
Direct/Insurance Companies	2	845		12.7		3	647		7.8		198			31
Other	3	45		0.7		1	41		0.5		4			10
Gross revenue, before provision for refunds		$	6,668	100.0	%		$	8,263	100.0	%	$	(1,595	)	(19	)%

* This group includes a TPA controlled by our most significant client. The TPA generated revenue of approximately $65,000 and $364,000 in 2013 and 2012, respectively.



	Nine Months
	2013					2012					Change
($ in thousands)	Count	Revenue		% of revenue		Count	Revenue		% of revenue		$			%
TPAs *	28	$	12,010	57.7	%	27	$	12,367	47.6	%	$	(357	)	(3	)%
PPOs	11	6,243		30.0		11	11,624		44.7		(5,381		)	(46	)
Direct/Insurance Companies	2	2,405		11.5		3	1,945		7.5		460			24
Other	3	165		0.8		1	54		0.2		111			206
Gross revenue, before provision for refunds		$	20,823	100.0	%		$	25,990	100.0	%	$	(5,167	)	(20	)%

* This group includes a TPA controlled by our most significant client. The TPA generated revenue of approximately $449,000 and $1,064,000 in 2013 and 2012, respectively.

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Variable Costs

Variable costs are comprised of payments to our providers and administrative fees paid to our clients for converting claims to electronic data interchange and routing them to both the Company for processing and to their payors for payment. Payments to providers are the most significant variable cost and it consists of our payments for ancillary care services in accordance with contracts negotiated separately with providers for specific ancillary services.

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



	Third Quarter
									Change
($ in thousands)	2013		% of net revenue		2012		% of net revenue		$			%
Provider payments	$	4,811	74.1	%	$	6,119	74.7	%	$	(1,308	)	(21	)%
Administrative fees	265		4.1		340		4.2		(75		)	(22	)
Total variable costs	$	5,076	78.2	%	$	6,459	78.9	%	$	(1,383	)	(21	)%



	Nine Months
									Change
($ in thousands)	2013		% of net revenue		2012		% of net revenue		$			%
Provider payments	$	15,539	75.7	%	$	18,992	73.6	%	$	(3,453	)	(18	)%
Administrative fees	853		4.1		1,168		4.5		(315		)	(27	)
Total variable costs	$	16,392	79.8	%	$	20,160	78.1	%	$	(3,768	)	(19	)%

Provider payments

The 21% and 18% decrease in provider payments for the third quarter and first nine months of 2013, respectively, is consistent with the decline in revenue as discussed above. The increase in provider payments as a percentage of net revenues compared to the same prior year period is primarily due to the combination of the mix of clients that utilized our network of ancillary service providers and the mix of ancillary service categories utilized. The mix of clients and service categories shifted from those that historically contribute higher margins relative to other clients and categories.

Administrative fees

Administrative fees paid to clients as a percent of net revenues were 4.1% and 4.2% for the three months ended September 30, 2013 and 2012, respectively. Additionally, administrative fees paid to clients during the nine months ended September 30, 2013 decreased to 4.1% compared to 4.5% in the same prior year period. The decrease is due to a change in mix from clients with higher administrative fees to clients with lower administrative fees.

Non-variable Costs

Non-variable costs are those that are not contingent on claims activity and are more fixed in nature, but can be adjusted. They are comprised of such expenses as salaries and benefits, professional fees, consulting costs, non-cash equity compensation costs and travel and entertainment expenses. A significant driver of these costs are headcount, as payroll, commissions and related benefits (including non-cash equity compensation) accounted for approximately 57% of our non-variable cost structure during the nine months ended September 30, 2013. Our headcount of full-time employees ("FTE's") was 48 and 55 at September 30, 2013 and 2012, respectively.

In the fourth quarter of 2012, two key departments were created: strategic development (classified as sales and marketing) and performance management (classified as finance and administration). Both groups were staffed solely from existing headcount. The prior year amounts have been reclassified within the consolidated statement of operations to conform to the current year presentation. In addition, the Company continually monitors and adjusts the alignment of the organizational structure in an effort to optimize performance and maximize output.

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Following is a discussion of the changes in non-variable costs and related drivers:

Claims administration

Our claims administration function consists of our operations and information technology groups. Our operations group is responsible for all aspects of claims management and processing, including billing, quality assurance and collection efforts. In addition, our operations group is responsible for credentialing contracted ancillary service providers. Our information technology group is responsible for maintaining and enhancing the technological capabilities and applications of the claims management process.

During the three months ended September 30, 2013, costs related to the claims administration function decreased 2%, or $9,000, as compared to the same prior year period primarily as a result of costs related to recruiting incurred in the third quarter of 2012.

During the nine months ended September 30, 2013, the costs related to the claims administration function decreased 6% partially due to a decrease in outsourced claims processing costs of $40,000. Headcount decreased by two FTE's, through natural attrition, within the information technology group, which contributed to the reduction in costs year-over-year.

Provider Development

Our provider development function is responsible for developing our network of ancillary healthcare service providers, which includes contracting with providers to be included in the network and maintaining a relationship with existing providers, all for the purpose of enhancing our ancillary service provider network for our client payors. We customize networks for our clients, thus as new client contracts are secured, our recruiting activities will increase.

The 39% and 33% decrease in costs related to the provider development function during the three and nine months ended September 30, 2013 as compared to the same prior year periods is primarily the result of a headcount reduction of two FTE's, through natural attrition, reduced legal fees and travel expenses.

Sales and Marketing

Our sales and marketing function consists of our sales and client services groups, as well as the strategic development group. Our sales group is primarily responsible for securing new client contracts, while our client services group maintains our existing client relationships, as well as attempts to generate incremental growth from those relationships. The strategic development group is responsible for executing the strategic objectives as dictated by the Board of Directors and executive management.

For the three months ended September 30, 2013, costs related to the sales and marketing group decreased 24% as a result of a reduction in total consulting fees of approximately $77,000 and a headcount reduction of two FTE's, when compared to the same prior year period.

The 9% decrease in costs related to sales and marketing during the nine months ended September 30, 2013 as compared to the same prior year period was the result of the headcount reduction described above.

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Finance and Administration

Our finance and administration function consists primarily of human resources, finance and accounting, and performance management as well as our former Chief Executive Officer, former President and Chief Operating Officer and Chief Financial Officer.

For the three months ended September 30, 2013, costs related to the finance and administration function decreased 22%, as compared to the same prior year period. A decrease of approximately $279,000, quarter-over-quarter, is the result of a reduction in professional fees related to investigating various strategic initiatives, audit fees, legal consultation regarding employment issues and legal review of various client contracts.

The costs related to the finance and administration function increased 2% for the nine months ended September 30, 2013 as compared to the same prior year period. A severance charge of approximately $216,000 was recorded in the second quarter of 2013. The severance charge is discussed in greater detail within note seven to the unaudited consolidated financial statements.

The severance charge was mostly offset by the decrease in expenses discussed above.

Selling, General and Administrative Expenses

Following is a table showing the components of selling, general and administrative (“SG&A”) expenses as presented per the Consolidated Statement of Operations for the period presented ending September 30,:



	Third Quarter										Nine Months
							Change										Change
($ in thousands)	2013			2012			$		%		2013			2012			$			%
Sales and marketing	$	414		$	547		$	133	24	%	$	1,540		$	1,694		$	154		9	%
Finance and administration	1,010			1,289			279		22		3,476			3,403			(73		)	(2	)
Selling, general and administrative expenses	$	1,424		$	1,836		$	412	22	%	$	5,016		$	5,097		$	81		2	%
Percentage of total net revenues	21.9		%	22.4		%					24.4		%	19.8		%

SG&A expenses as a percentage of total net revenues decreased during the three months ended September 30, 2013 compared to the same prior year period as a direct result of the cost containment measures discussed above. During the nine months ended September 30, 2013 SG&A expenses as a percentage of total net revenues increased compared to the same prior year period, due primarily to the decline in net revenues compared to the same prior year period.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (“GAAP”) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, provider cost recognition, the resulting contribution margins, potential impairment of intangible assets and stock-based compensation expense. As these are condensed consolidated financial statements, you should also read expanded information about our critical accounting policies and estimates provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Critical Accounting Policies,” included in our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes to our critical accounting policies and estimates from the information provided in our Form 10-K for the year ended December 31, 2012.

FINANCIAL CONDITION AND LIQUIDITY

As of September 30, 2013 the Company had working capital of $5.7 million compared to $9.0 million at December 31, 2012. Our cash and cash equivalents balance decreased to $6.4 million as of September 30, 2013 compared to $10.7 million at December 31, 2012. We continued to experience a decline in claims volume and related revenue, resulting in a net loss during the nine months ended September 30, 2013, which expended cash despite our cost containment measures. During the third quarter we invested $500,000 in a project with a strategic partner that is expected to facilitate the future implementation of new business. Additionally, the decline in our cash balance is also attributable to the timing of payments to providers during January 2013 related to cash received from payors in December 2012. The payments made totaled $1.2 million. The table below reconciles the loss before income taxes to the net decrease in cash for the nine months ended September 30, 2013.



	Nine months ended September 30, 2013
Loss before income taxes	$	(3,501	)
Depreciation and amortization	615
Non-cash stock-based compensation expense	221
Investment in joint project with strategic partner	(500		)
Payment of annual premiums for property and casualty insurance, net of amounts amortized	(100		)
Capital expenditures (primarily software development costs)	(210		)
Other working capital changes	(803		)
Decrease in cash for the nine months ended September 30, 2013	$	(4,278	)

We believe our current cash balance of $6.4 million as of September 30, 2013 will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities through the foreseeable future, but our continuing losses will continue to reduce our available cash. We have reduced our non-variable cost structure to preserve our existing cash balances for investments in the business model and/or other strategic initiatives. However, we will need to increase our client base significantly or identify alternative business opportunities in order to stop the reduction in our available cash. If we are unable to do so, we might be required to access additional capital either through debt or equity markets. If additional financing is required, there cannot be assurances that we would be successful in obtaining sufficient capital financing on commercially reasonable terms or at all, or, if we did obtain capital financing, that it would not be dilutive to current shareholders. We do not have any lines of credit, credit facilities or outstanding bank indebtedness as of September 30, 2013.

INFLATION

Inflation did not have a significant impact on the Company’s costs during the quarter ended September 30, 2013. The Company continues to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet arrangements as of September 30, 2013 or 2012 or for the periods then ended.

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ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk

Not applicable.


ITEM 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Controls Over Financial Reporting. Our management, with the participation of our principal executive officer and principal financial officer, has concluded that there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the last fiscal quarter that have materially affected the Company’s internal control over financial reporting or are reasonably likely to materially affect internal control over financial reporting.

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PART II.	OTHER INFORMATION


ITEM 1A.	Risk Factors

We have experienced declining revenue over the past four years primarily as a result of the decline in business from our two significant legacy clients. While we continue to seek, and have secured, new client relationships, we have no assurances that they will generate revenue levels sufficient to offset the aforementioned revenue declines. Absent on-going revenue from new clients, overall revenues will continue to decline, resulting in operating losses and a decline in our available cash.

In addition to the other information set forth in this report, one should carefully consider the discussion of various risks and uncertainties contained in Part I, “Item 1A. Risk Factors” in our 2012 Annual Report on Form 10-K. We believe those risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us.


ITEM 5.	Other Information

Not applicable.

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ITEM 6.	Exhibits



Exhibit 31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101	The following financial statements and footnotes from the American CareSource Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations; (ii) Consolidated Balance Sheets; (iii) Consolidated Statement of Stockholders' Equity; (iv) Consolidated Statements of Cash Flows; and (v) the Notes to Unaudited Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		AMERICAN CARESOURCE HOLDINGS, INC.

Date:	November 8, 2013	By:	/s/ Matthew D. Thompson
			Matthew D. Thompson
			Acting Chief Operating Officer and Chief Financial Officer (Principal Executive Officer)



Date:	November 8, 2013	By:	/s/ Laura L. Little
			Laura L. Little
			Vice President of Finance (Principal Financial Officer and Principal Accounting Officer)

Attached files

American CareSource Holdings, Inc. Reports

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