American CareSource Holdings, Inc. - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - American CareSource Holdings, Inc.	Financial_Report.xls
EX-31.2 - EXHIBIT-PFO CERTIFICATION - American CareSource Holdings, Inc.	anciexh2014q1-312.htm
EX-32.1 - EXHIBIT SOX CERTIFICATION - American CareSource Holdings, Inc.	anciexh2014q1-321.htm
EX-31.1 - EXHIBIT-PEO CERTIFICATION - American CareSource Holdings, Inc.	anciexh2014q1-311.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 March 31, 2014

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 May 5, 2014 was 6,713,960.

TABLE OF CONTENTS

AMERICAN CARESOURCE HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2014




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	18
	Item 4.	Controls and Procedures	19
Part II		Other Information	20
	Item 1A.	Risk Factors	20
	Item 5.	Other Information	20
	Item 6.	Exhibits	21
		Signatures	22

Table of Contents


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 March 31,
	2014			2013
Net revenues	$	5,008		$	7,605
Cost of revenues:
Provider payments	3,753			5,816
Administrative fees	220			330
Claims administration and provider development	971			889
Total cost of revenues	4,944			7,035

Contribution margin	64			570

Selling, general and administrative expenses	1,324			1,503
Depreciation and amortization	178			211
Total operating expenses	1,502			1,714

Loss before income taxes	(1,438		)	(1,144		)
Income tax provision (benefit)	(3		)	7
Net loss	$	(1,435	)	$	(1,151	)

Loss per basic and diluted common share	$	(0.25	)	$	(0.20	)

Basic and diluted weighted average common shares outstanding	5,729			5,711

See accompanying notes.

Table of Contents

AMERICAN CARESOURCE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands except per share amounts)



	March 31, 2014			December 31, 2013
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	5,103		$	6,207
Accounts receivable, net	1,648			1,977
Prepaid expenses and other current assets	406			357
Deferred income taxes	6			6
Total current assets	7,163			8,547

Property and equipment, net	1,201			1,236

Other assets:
Deferred income taxes	215			215
Other non-current assets	391			391
Intangible assets, net	608			640
	$	9,578		$	11,029

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to service providers	$	1,580		$	1,865
Accounts payable and accrued liabilities	1,251			1,056
Total current liabilities	2,831			2,921

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; 5,713 shares issued and outstanding in 2014 and 2013.	57			57
Additional paid-in capital	23,223			23,149
Accumulated deficit	(16,533		)	(15,098		)
Total stockholders' equity	6,747			8,108
	$	9,578		$	11,029

See accompanying notes.

Table of Contents

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, 2013	5,713	$	57	$	23,149	$	(15,098	)	$	8,108
Net loss	—	—		—		(1,435		)	(1,435		)
Stock-based compensation expense	—	—		74		—			74
Balance at December 31, 2014	5,713	$	57	$	23,223	$	(16,533	)	$	6,747

See accompanying notes.

Table of Contents

AMERICAN CARESOURCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)



	Three months ended March 31,
	2014			2013
Cash flows from operating activities:
Net loss	$	(1,435	)	$	(1,151	)
Adjustments to reconcile net loss to net cash used in operations:
Non-cash stock-based compensation expense	74			77
Depreciation and amortization	178			211
Deferred income taxes	—			1
Changes in operating assets and liabilities:
Accounts receivable	329			(372		)
Prepaid expenses and other assets	(49		)	(4		)
Accounts payable and accrued liabilities	195			(27		)
Due to service providers	(285		)	(427		)
Net cash used in operating activities	(993		)	(1,692		)

Cash flows from investing activities:
Investment in software development costs	(99		)	(154		)
Additions to property and equipment	(12		)	(9		)
Net cash used in investing activities	(111		)	(163		)

Net decrease in cash and cash equivalents	(1,104		)	(1,855		)
Cash and cash equivalents at beginning of period	6,207			10,705

Cash and cash equivalents at end of period	$	5,103		$	8,850

Supplemental cash flow information:
Cash paid for taxes, net of refunds	$	10		$	13

See accompanying notes.

Table of Contents

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,” "the 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, 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 March 31, 2014 and December 31, 2013 and operating results are for the three months ended March 31, 2014 and 2013, 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, 2013, filed with the SEC on February 28, 2014.

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.

Table of Contents

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.

Table of Contents

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 months ended March 31, 2014, its net revenues would have been approximately $1.3 million. For the three months ended March 31, 2013, its net revenues would have been approximately $1.8 million.

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 months ended March 31, 2014 and 2013, three 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):



	As of March 31, 2014			Three months ended March 31, 2014					As of March 31, 2013			Three months ended March 31, 2013
	Accounts Receivable			Net Revenue			% of Total Revenue		Accounts Receivable			Net Revenue			% of Total Revenue
Material Client Relationship	$	774		$	1,232		24.6	%	$	951		$	2,357		31.0	%
HealthSCOPE Benefits, Inc.	128			694			13.9		101			583			7.7
HealthMarkets, Inc.	167			499			10.0		188			657			8.6
All Others	1,042			2,636			52.6		1,754			4,049			53.2
Allowance for Uncollectable Receivables/Provision for refunds	(463		)	(53		)	(1.1	)	(190		)	(41		)	(0.5	)
	$	1,648		$	5,008		100.0	%	$	2,804		$	7,605		100.0	%

Table of Contents

3. 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 March 31, 2014, options to purchase approximately 857,000 shares of common stock, warrants to purchase 44,400 shares of common stock and approximately 29,800 unvested restricted stock units were excluded from the calculation as their impact would be anti-dilutive.

4. 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 months ended March 31, 2014, the Company capitalized approximately $99,000. During the three months ended March 31, 2013, the Company capitalized approximately $154,000.

5. Severance Charges

The Company recorded $108,000 in severance charges during the three months ended March 31, 2014. In an effort to conserve cash resources for the existing business and strategic opportunities, the Company reduced its headcount by six full-time employees. This expense is included in selling, general and administrative (“SG&A”) expenses as presented per the Consolidated Statement of Operations.

Table of Contents

6. Related Party Transactions

On January 10, 2014, the Company entered into an arrangement with Equity Dynamics, Inc. for monthly strategic consulting services. As part of the arrangement, Equity Dynamics, Inc. will receive a monthly fee of $10,000 for performance of such consulting services. Equity Dynamics, Inc. is a company owned by John Pappajohn and served by Executive Vice-President Matthew Kinley, both active members on the Board of Directors.

During the three months ended March 31, 2014, the Company incurred expenses of $30,000 for the consulting services described above payable to Equity Dynamics, Inc. This expense is included in selling, general and administrative (“SG&A”) expenses as presented per the Consolidated Statement of Operations.

7. Subsequent Events

We evaluate events and transactions that occur after the balance sheet date as potential subsequent events. Subsequent to March 31, 2014, the Company announced its strategy to enter the Urgent Care market. In addition, the company also announced that its Board has named Dr. Richard W. Turner its Chief Executive Officer, in addition to his role as Chairman of the Board, to lead the organization into the Urgent Care market.

On April 28, 2014, American CareSource Holdings, Inc. (the “Company”) entered into an employment agreement with its Chairman of the Board, Richard W. Turner (the “Employment Agreement”), appointing him as Chief Executive Officer of the Company.

Under the terms of the Employment Agreement, the Company will employ Dr. Turner as the Company’s Chairman and Chief Executive Officer for an initial one-year term to commence on April 29, 2014, to be automatically renewed for successive one-year periods thereafter unless either party provides the other with 90 days' notice of non-renewal.

Dr. Turner will receive an annual base salary in the amount of $300,000 and will be eligible to participate in the Company’s bonus compensation plan pursuant to which he will be eligible for an annual performance bonus to be determined by the Board based on the Company’s performances, but in no event less than $50,000. In addition, Dr. Turner was granted an incentive stock option to purchase 350,000 shares of common stock and 50,000 shares of restricted common stock of the Company.

On April 30, 2014, the Company entered into a definitive agreement to acquire substantially all the assets of CorrectMed LLC of Atlanta, Ga., which includes urgent care centers in located in Locust Grove and Decatur, Georgia. The definitive agreement is subject to certain customary closing conditions. The purchase price of the assets was $2.7 million, which includes $2.2 million of cash payable at the closing of the transaction, and a $500,000 note payable due and payable on the first anniversary of the date of closing. Interest is payable on the note at 5%. The purchase price is subject to certain post-closing adjustments.

On May 5, 2014, American CareSource Holdings, Inc. (the “Company”) closed its private placement of 1,000,000 shares of the Company’s common stock, par value $0.01 per share (the “Shares”), at a purchase price of $2.00 per share for an aggregate purchase price of $2,000,000 for the Shares.

The investors in the offering included John Pappajohn, Mark C. Oman and Matt Kinley, who are each directors of the Company, as well as certain other non-affiliated investors.

Table of Contents

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, 2013 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.

Table of Contents


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 months ended March 31, 2014 and its financial condition at March 31, 2014. 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, 2013.

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, 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.

Table of Contents

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, 2013.

ANALYSIS OF RESULTS OF OPERATIONS

We have experienced significant revenue declines over the past five years, primarily related to the declines in the business of our two historically-significant 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 of our clients and for other reasons, revenue from each of our two historically-significant 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 only 28% for the three months ending March 31, 2014), the declines of the business of these clients has had a significant negative impact on our operating results and cash position over the past five years, despite our new business development efforts.

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 2014, we will focus on adding new client relationships, as well as investigate other avenues for monetizing our most significant asset, which is our network. While the Company and our clients have been negatively impacted by global healthcare factors brought about by the Affordable Care Act (“ACA”), we believe that our network creates an opportunity to provide savings to the healthcare consumer beyond those achievable through traditional healthcare vehicles. While we work to capitalize on those opportunities, we continue to see deterioration in our existing client base. Until we can replace a greater amount of the revenue than we have lost as a result of these global factors and from our two significant clients (one of which we expect to generate no revenue from in 2014), we will continue to experience operating losses and we will continue to reduce our existing cash reserves for operating and investing activities.

Table of Contents

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):



	First Quarter
							Change
	2014			2013			$			%
Net revenues	$	5,008		$	7,605		$	(2,597	)	(34.1	)%

Variable costs:
Provider payments	3,753			5,816			2,063			35.5
Administrative fees	220			330			110			33.3
Total variable costs	3,973			6,146			2,173			35.4
Percent of net revenues	79.3		%	80.8		%

Variable flowthrough	1,035			1,459			(424		)	(29.1	)
Variable margin	20.7		%	19.2		%

Non-variable costs:
Claims administration	795			734			(61		)	(8.3	)
Provider development	176			155			(21		)	(13.5	)
Sales & marketing	358			572			214			37.4
Finance & administration	966			931			(35		)	(3.8	)
Total non-variable costs	2,295			2,392			97			4.1
Percent of net revenue	45.8		%	31.5		%

Loss before depreciation, amortization, and income taxes	(1,260		)	(933		)	(327		)	(35.0	)
Percent of net revenue	(25.2		)%	(12.3		)%

Depreciation and amortization	178			211			33			15.6
Income tax provision (benefit)	(3		)	7			10			142.9
Net loss	$	(1,435	)	$	(1,151	)	$	(284	)	(24.7	)%

The following discussion compares the historical results of operations on a basis consistent with GAAP for the three months ended March 31, 2014 and 2013.

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.

Table of Contents

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 table set forth a comparison of our net revenues and billed claims for the following periods presented ended March 31, (in thousands):



	Net Revenue											Billed Claims Volume
	First Quarter						Change					First Quarter		Change
(in thousands)	2014			2013			$			%		2014	2013	Claims		%
Material Client Relationship	$	1,232		$	2,357		$	(1,125	)	(48	)%	7	6	1		17	%
All other clients	3,829			5,289			(1,460		)	(28	)	20	25	(5	)	(20	)
Total gross revenue	$	5,061		$	7,646		$	(2,585	)	(34	)%	27	31	(4	)	(13	)%
Provision for refunds	(53		)	(41		)	(12		)	(29	)	—	—	—		nm
Net Revenue	$	5,008		$	7,605		$	(2,597	)	(34	)%	27	31	(4	)	(13	)%

In addition, the following table sets forth a comparison of processed and billed claims for the following periods presented ended March 31, (in thousands):



	First Quarter
			Change
(in thousands)	2014	2013	Claims		%
Processed	33	39	(6	)	(15	)%
Billed	27	31	(4	)	(13	)

Following is a discussion of the changes in net revenue and billed claims volumes for the three months ended March 31, 2014 as compared to the same period in 2013:

Material Client Relationship

During the three months ended March 31, 2014, revenue from our most material client relationship declined $1.1 million, while billed claims volume increased 17%. The decline in revenue is primarily due to our client continuing to suffer attrition in its network client base, as well as a decline in revenue related to dialysis services. Revenue from the client related to dialysis services was minimal during the first quarter of 2014, declining 99% or approximately $435,000, as compared to the same prior year period. The 17% increase in billed claims volume was primarily due to the increase in claims billed for laboratory and rehabilitation services, which generate lower revenue per claim relative to other specialties.

The decline in revenue from our relationship with this client was partially offset by the contributions from an Oklahoma City-based third-party administrator, which was acquired by our client. Late in 2013, we partnered with our client to quickly and efficiently implement the new book of business, which contributed revenue of approximately $487,000 in the first quarter.

The performance of the client account during 2014 was, and will continue to be, affected by attrition in its own network 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 our efforts to secure new revenue-generating opportunities with our client, we cannot be certain of any level of continued volume from this client.

Table of Contents

All Other Clients

Our client base consists of various relationships with PPOs, TPAs, insurance companies and direct payors which we have contracted from 2005 through the current period. Through our client serviced 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.

For the three months ended March 31, 2014, revenue and billed claims volumes decreased 28% and 20%, respectively, as compared to the same prior year period. Our clients were impacted by the loss of self-insured employer groups that moved to larger national carriers for broader network opportunities that offered more competitive discounts specifically from physician and hospital providers. In addition, they were negatively impacted by global healthcare factors brought about by the Affordable Care Act, which resulted in lower participation, delays in the enrollment process and a focus on high-deductible plans, all of which negatively affected our claims volume and our ability to collect on claims.

Revenue is also impacted 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.

The following table details the change in revenue generated from our different client types (includes all Company clients) for the periods ended March 31,:



	First Quarter
	2014					2013					Change
($ in thousands)	Count	Revenue		% of revenue		Count	Revenue		% of revenue		$			%
TPAs *	28	$	3,460	68.4	%	28	$	4,194	54.9	%	$	(734	)	(18	)%
PPOs	11	1,066		21.1		11	2,711		35.4		(1,645		)	(61	)
Direct/Insurance Companies	2	508		10.0		2	668		8.7		(160		)	(24	)
Other	3	27		0.5		3	73		1.0		(46		)	(63	)
Gross revenue, before provision for refunds		$	5,061	100.0	%		$	7,646	100.0	%	$	(2,585	)	(34	)%

* This group includes three TPAs controlled by our most significant client. The TPAs generated revenue of approximately $553,000 and $201,000 in 2014 and 2013, respectively.

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 March 31,:



	First Quarter
									Change
($ in thousands)	2014		% of net revenue		2013		% of net revenue		$			%
Provider payments	$	3,753	74.9	%	$	5,816	76.5	%	$	(2,063	)	(35	)%
Administrative fees	220		4.4		330		4.3		(110		)	(33	)
Total variable costs	$	3,973	79.3	%	$	6,146	80.8	%	$	(2,173	)	(35	)%

Table of Contents

Provider payments

The 35% decrease in provider payments for the first quarter of 2014 is consistent with the decline in revenue as discussed above. The decrease 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 to 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 4.4% and 4.3% for the three months ended March 31, 2014 and 2013, respectively. The increase is due to a change in mix to clients with higher administrative fees from 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 is headcount, as payroll, commissions and related benefits (including non-cash equity compensation) accounted for approximately 61% of our non-variable cost structure during the three months ended March 31, 2014. Our headcount of full-time employees ("FTE's") was 48 and 52 at March 31, 2014 and 2013, respectively.

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

Claims administration

Our claims administration function consists of our operations, information technology, and performance management 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 March 31, 2014, the costs related to the claims administration function increased 8% and is primarily the result of lower than expected benefit costs in the first quarter of 2013.

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.

During the three months ended March 31, 2014, costs related to the provider development function increased 14%, or $21,000 as compared to the same prior year periods.

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 March 31, 2014, costs related to the sales and marketing group decreased 37%, or $214,000. During the last half of 2013, we eliminated the use of consultants, resulting in savings of approximately $120,000 during the first quarter of 2014 as compared to the same prior year period. Additionally, costs related to the sales and marketing group decreased as a result of headcount reduction through natural attrition and a reduction in travel expenses, when compared to the same prior year period.

Table of Contents

Finance and Administration

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

For the three months ended March 31, 2014, costs related to the finance and administration function increased only 4%, or $35,000 as compared to the same prior year period. During the first quarter of 2014, costs related to the finance and administration function increased, as compared to the same prior year period, as a result of strategic, transaction-related expenses of approximately $157,000. Additionally, in an effort to conserve cash resources for the existing business and strategic opportunities, the Company reduced its headcount by six full-time employees and, as a result, recognized severance expenses of $108,000 during the first quarter of 2014. The aforementioned increases were almost entirely offset by an adjustment in the overall cost structure of the Company which occurred during the middle of 2013. The adjustment included a reduction in strategic consulting services costs and legal and audit fees.

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 March 31,:



	First Quarter
							Change
($ in thousands)	2014			2013			$			%
Sales and marketing	$	358		$	572		$	214		37	%
Finance and administration	966			931			(35		)	(4	)
Selling, general and administrative expenses	$	1,324		$	1,503		$	179		12	%
Percentage of total net revenues	26.4		%	19.8		%

During the three months ended March 31, 2014, 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.

Table of Contents

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, 2013. 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, 2013.

FINANCIAL CONDITION AND LIQUIDITY

As of March 31, 2014, the Company had working capital of $4.3 million compared to $5.6 million at December 31, 2013. Our cash and cash equivalents balance decreased to $5.1 million as of March 31, 2014 compared to $6.2 million at December 31, 2013. We continued to experience a decline in claims volume and related revenue, resulting in a net loss during the three months ended March 31, 2014, which expended cash despite our cost containment measures. The table below reconciles the loss before income taxes to the net decrease in cash for the three months ended March 31, 2014.



	Three months ended March 31, 2014
Loss before income taxes	$	(1,438	)
Depreciation and amortization	178
Non-cash stock-based compensation expense	74
Capital expenditures (primarily software development costs)	(111		)
Other working capital changes	193
Decrease in cash for the three months ended March 31, 2014	$	(1,104	)

We believe our current cash balance of $5.1 million, as of March 31, 2014, 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, which included a headcount reduction of six full-time employees, to preserve our existing cash balances for investments in the business model and/or other strategic initiatives. We expect the headcount reduction to generate annual savings of approximately $500,000. In addition to cost reductions, we will need to increase our client base significantly or generate alternative revenue streams 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 March 31, 2014.

INFLATION

Inflation did not have a significant impact on the Company’s costs during the quarter ended March 31, 2014. 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 March 31, 2014 or 2013 or for the periods then ended.


ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Table of Contents


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 March 31, 2014. 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.

Table of Contents


PART II.	OTHER INFORMATION


ITEM 1A.	Risk Factors

We have experienced declining revenue over the past five years primarily as a result of the decline in business from our two historically-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 2013 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.

Table of Contents


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.

Table of Contents

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:	May 9, 2014	By:	/s/ Matthew D. Thompson
			Matthew D. Thompson
			Acting Chief Operating Officer and Chief Financial Officer (Principal Executive Officer)



Date:	May 9, 2014	By:	/s/ Laura L. Little
			Laura L. Little
			Vice President of Finance (Principal Financial Officer and Principal Accounting Officer)

American CareSource Holdings, Inc. - FORM 10-Q - May 9, 2014

Attached files

American CareSource Holdings, Inc. Reports