UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





xQUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934.





For the
quarterly period ended September 30, 2009





OR





oTRANSITION 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.
      employerincorporation
      or organization)
            identification
      no.)  5429
      LYNDON B. JOHNSON FREEWAYSUITE
      850DALLAS,
      TEXAS75240(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 xNo 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 oNo 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 oAccelerated
      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 oNo 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 6, 2009 was
15,432,338.
















TABLE OF
CONTENTS


AMERICAN
CARESOURCE HOLDINGS, INC.


FORM
10-Q


FOR THE
QUARTER ENDED SEPTEMBER 30, 2009





Part
      I
            
            Financial
      Information
            1Item
      1.
            Financial Statements
            1Consolidated Statements of Income
      (unaudited)
            1Consolidated Balance Sheets
      (unaudited)
            2Consolidated Statements of Stockholders’
      Equity (unaudited)
            3Consolidated Statements of Cash Flows
      (unaudited)
            4Notes to Unaudited Consolidated
      Financial Statements
            5Item
      2.
            Management’s Discussion and Analysis of
      Financial Condition and Results of Operation
            10Item
      3.
            Evaluation of Disclosure Controls and
      Procedures
            20Part
      II
            
            Other
      Information
            20Item
      1.
            Risk Factors
            20Item
      2.
            Unregistered Sales of Equity Securities
      and Use of Proceeds
            21Item
      6.
            Exhibits
            21Signatures
            22


PART
      I.
            FINANCIAL
      INFORMATION





ITEM
      1.
            Financial
      Statements





AMERICAN
CARESOURCE HOLDINGS, INC.


CONSOLIDATED
STATEMENTS OF INCOME


(Unaudited)





Three
      months ended
            
            
            Nine
      months endedSeptember
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      revenues
            
            $
            18,234,674
            
            
            $
            16,110,795
            
            
            $
            51,424,977
            
            
            $
            40,628,998Cost
      of revenues:Provider payments
            
            
            13,799,863
            
            
            
            11,744,523
            
            
            
            38,670,094
            
            
            
            29,690,099Administrative fees
            
            
            900,573
            
            
            
            927,932
            
            
            
            2,494,245
            
            
            
            2,380,627Claims administration and provider development
            
            
            1,177,813
            
            
            
            881,897
            
            
            
            3,258,654
            
            
            
            2,395,341Total
      cost of revenues
            
            
            15,878,249
            
            
            
            13,554,352
            
            
            
            44,422,993
            
            
            
            34,466,067Contribution margin
            
            
            2,356,425
            
            
            
            2,556,443
            
            
            
            7,001,984
            
            
            
            6,162,931Selling,
      general and administrative expenses
            
            
            2,041,884
            
            
            
            1,488,455
            
            
            
            5,923,449
            
            
            
            3,795,813Depreciation
      and amortization
            
            
            155,448
            
            
            
            105,887
            
            
            
            400,560
            
            
            
            294,559Total operating expenses
            
            
            2,197,332
            
            
            
            1,594,342
            
            
            
            6,324,009
            
            
            
            4,090,372Operating income
            
            
            159,093
            
            
            
            962,101
            
            
            
            677,975
            
            
            
            2,072,559Other
      income (expense):Interest income
            
            
            30,729
            
            
            
            65,531
            
            
            
            107,397
            
            
            
            137,439Interest
      expense
            
            
            (128
            )
            
            
            (1,067
            )
            
            
            (440
            )
            
            
            (4,511
            )Unrealized gain (loss) on warrant derivative
            
            
            (21,923
            )
            
            
            -
            
            
            
            232,186
            
            
            
            -Total other income, net
            
            
            8,678
            
            
            
            64,464
            
            
            
            339,143
            
            
            
            132,928Income
      before income taxes
            
            
            167,771
            
            
            
            1,026,565
            
            
            
            1,017,118
            
            
            
            2,205,487Income
      tax provision
            
            
            20,555
            
            
            
            25,559
            
            
            
            57,067
            
            
            
            61,623Net
      income
            
            $
            147,216
            
            
            $
            1,001,006
            
            
            $
            960,051
            
            
            $
            2,143,864Earnings
      per common share:Basic
            
            $
            0.01
            
            
            $
            0.07
            
            
            $
            0.06
            
            
            $
            0.14Diluted
            
            $
            0.01
            
            
            $
            0.06
            
            
            $
            0.05
            
            
            $
            0.12Basic
      weighted average common shares outstanding
            
            
            15,432,338
            
            
            
            15,139,839
            
            
            
            15,425,567
            
            
            
            15,029,161Diluted
      weighted average common shares outstanding
            
            
            17,572,875
            
            
            
            18,044,602
            
            
            
            17,971,805
            
            
            
            17,577,846





See
      accompanying notes.





1




AMERICAN CARESOURCE HOLDINGS,
      INC.CONSOLIDATED
      BALANCE SHEETSSeptember
      30,2009
            
            
            December
      31,(Unaudited)
            
            
            2008ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            10,341,501
            
            
            $
            10,577,829Accounts
      receivable, net
            
            
            7,208,922
            
            
            
            5,788,457Prepaid
      expenses and other current assets
            
            
            716,621
            
            
            
            489,928Deferred
      income taxes
            
            
            5,886
            
            
            
            5,886Total
      current assets
            
            
            18,272,930
            
            
            
            16,862,100Property
      and equipment, net
            
            
            1,691,376
            
            
            
            915,224Other
      assets:Deferred
      income taxes
            
            
            243,959
            
            
            
            243,959Other
      non-current assets
            
            
            775,160
            
            
            
            883,155Intangible
      assets, net
            
            
            1,184,607
            
            
            
            1,280,656Goodwill
            
            
            4,361,299
            
            
            
            4,361,299$
            26,529,331
            
            
            $
            24,546,393LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Due
      to service providers
            
            $
            6,866,804
            
            
            $
            5,964,392Accounts
      payable and accrued liabilities
            
            
            2,081,439
            
            
            
            3,111,862Total
      current liabilities
            
            
            8,948,243
            
            
            
            9,076,254Warrant
      derivative liability
            
            
            109,616
            
            
            
            -Long-term
      debt
            
            
            -
            
            
            
            3,053Commitments
      and contingenciesShareholders'
      equity:Preferred
      stock, $0.01 par value; 10,000,000 shares authorized,none
      issued
            
            
            -
            
            
            
            -Common
      stock, $0.01 par value; 40,000,000 shares authorized;15,432,338
      and 15,406,972 shares issued and outstanding in 2009 and 2008,
      respectively
            
            
            154,323
            
            
            
            154,069Additional
      paid-in capital
            
            
            20,148,268
            
            
            
            19,046,367Accumulated
      deficit
            
            
            (2,831,119
            )
            
            
            (3,733,350
            )Total shareholders'
    equity
            
            
            17,471,472
            
            
            
            15,467,086$
            26,529,331
            
            
            $
            24,546,393





See
      accompanying notes.





2





AMERICAN CARESOURCE HOLDINGS,
      INC.CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY(Unaudited)Additional
            
            
            
            
            
            TotalCommon
      Stock
            
            
            Paid-in
            
            
            Accumulated
            
            
            Stockholders'Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            EquityBalance
      at December 31, 2008
            
            
            15,406,972
            
            
            $
            154,069
            
            
            $
            19,046,367
            
            
            $
            (3,733,350
            )
            
            $
            15,467,086Cumulative
      effect of change in accounting principle-January 1, 2009
      reclassification of embedded feature of equity-linked financial instrument
      to derivative warrant liability
            
            
            -
            
            
            
            -
            
            
            
            (316,376
            )
            
            
            (57,820
            )
            
            
            (374,196
            )Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            960,051
            
            
            
            960,051Stock-based
      compensation expense
            
            
            -
            
            
            
            -
            
            
            
            1,026,388
            
            
            
            -
            
            
            
            1,026,388Issuance
      of common stock uponexercise of stock options
            
            
            11,922
            
            
            
            119
            
            
            
            (3,742
            )
            
            
            -
            
            
            
            (3,623
            )Issuance
      of common stock warrantsfor payment of client management
      fees
            
            
            -
            
            
            
            -
            
            
            
            311,259
            
            
            
            -
            
            
            
            311,259Issuance
      of common stock uponexercise of stock warrants
            
            
            13,444
            
            
            
            135
            
            
            
            84,030
            
            
            
            -
            
            
            
            84,165Balance
      at September 30, 2009
            
            
            15,432,338
            
            
            $
            154,323
            
            
            $
            20,148,268
            
            
            $
            (2,831,119
            )
            
            $
            17,471,472





See
      accompanying notes.





3





AMERICAN CARESOURCE HOLDINGS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Nine
      months ended September 30,2009
            
            
            2008Cash
      flows from operating activities:Net income
            
            $
            960,051
            
            
            $
            2,143,864Adjustments to reconcile net income to net cashprovided by operations:Stock-based compensation
    expense
            
            
            1,026,338
            
            
            
            485,568Depreciation and amortization
            
            
            400,560
            
            
            
            294,559Unrealized gain on warrant
      derivative
            
            
            (232,186
            )
            
            
            -Amortization of long-term client
      agreement
            
            
            187,500
            
            
            
            -Client administration fee expense related to
      warrants
            
            
            106,105
            
            
            
            54,467Changes in operating assets and
      liabilities:Accounts
      receivable
            
            
            (1,420,465
            )
            
            
            (1,309,032
            )Prepaid expenses and
      other assets
            
            
            (124,655
            )
            
            
            205,510Accounts payable and
      accrued liabilities
            
            
            (993,256
            )
            
            
            599,448Due to service
      providers
            
            
            902,413
            
            
            
            1,733,044Net cash provided by
      operating activities
            
            
            812,405
            
            
            
            4,207,428Cash
      flows from investing activities:Redemption of certificate of deposit
            
            
            -
            
            
            
            145,000Investment in software development costs
            
            
            (464,194
            )
            
            
            (351,605
            )Additions to property and equipment
            
            
            (592,544
            )
            
            
            (258,065
            )Net cash used in
      investing activities
            
            
            (1,056,738
            )
            
            
            (464,670
            )Cash
      flows from financing activities:Payments on long-term debt
            
            
            (7,355
            )
            
            
            (89,369
            )Proceeds from exercise of stock warrants
            
            
            12,650
            
            
            
            127,428Proceeds from exercise of stock options
            
            
            2,710
            
            
            
            168,033Net cash provided by
      financing activities
            
            
            8,005
            
            
            
            206,092Net
      increase (decrease) in cash and cash equivalents
            
            
            (236,328
            )
            
            
            3,948,850Cash
      and cash equivalents at beginning of period
            
            
            10,577,829
            
            
            
            4,272,498Cash
      and cash equivalents at end of period
            
            $
            10,341,501
            
            
            $
            8,221,348Supplemental
      non-cash activity:Warrants
      issued as payment of client administrative fees
            
            $
            311,259
            
            
            $
            161,311





4





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,”) is an ancillary benefits management company that offers cost effective
access to a comprehensive national network of ancillary healthcare service
providers.  The Company’s healthcare payor customers, which include
preferred provider organizations (“PPOs”), third party administrators (“TPAs”),
insurance companies, large self-funded organizations and Taft-Hartley union
plans (i.e., employee benefit plans that are self-administered under collective
bargaining agreements), engage the Company to provide them with a complete
outsourced solution designed to manage each customer’s obligations to its
covered persons.  The Company offers its customers this solution
by:





·
                  providing payor customers with a comprehensive network of
      ancillary healthcare services providers that is tailored to each payor
      customer’s specific needs and is available to each payor customer’s
      covered persons for covered
services;
 ·
                    providing
      payor customers with claims management, reporting, and processing and
      payment services;
 ·
                      performing
      network/needs analysis to assess the benefits to payor customers of adding
      additional/different service providers to the payor customer-specific
      provider networks; and
 ·
                        credentialing
      network service providers for inclusion in the payor customer-specific
      provider networks.


ACS was
incorporated in Delaware in 2003 as a wholly-owned subsidiary of Patient
Infosystems, Inc. (“Patient Infosystems”) in order to facilitate Patient
Infosystems’ acquisition of substantially all of the assets of American
CareSource Corporation.  American CareSource Corporation had been in
operation since 1997, and its predecessor company, Physician’s Referral Network,
had been in operation since 1995.  In December 2005, Patient
Infosystems distributed substantially all of its shares of the Company to its
then-current stockholders through a dividend, and since that time ACS has been
an independent, publicly-traded company.





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, 2009 and December 31, 2008 and operating result
amounts are for the three and nine months ended September 30, 2009 and 2008, and
include all normal and recurring adjustments that we consider necessary for the
fair, summarized presentation of our financial position and operating
results.  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, 2008, filed with the SEC on March 31, 2009.





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 what additional/different service providers to the
client-specific provider networks and (iv) providing credentialing of network
services 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.





5




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 health care 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 services 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 discretion in
      supplier selection .  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 customers
      that is tailored to each client 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.
  6
 
 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, 2009,
its net revenues would have been approximately $4.5 million and $12.9 million,
respectively.  For the three and nine months ended September 30, 2008,
its net revenues would have been approximately $4.4 million and $10.9 million,
respectively.




During the three and nine months ended September 30, 2009 and
2008, two of the Company’s customers 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 customers as of the dates and for the periods presented (amounts in
thousands):





Periods
      ended September 30, 2009
            
            
            
            
            
            Periods
      ended September 30, 2008As
      of September
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            As
      of September30,
      2009
            
            
            Three
      months
            
            
            Nine
      months
            
            
            30,
      2008
            
            
            Three
      months
            
            
            Nine
      monthsAccounts
            
            
            
            
            
            % of
      Total
            
            
            
            
            
            % of
      Total
            
            
            Accounts
            
            
            
            
            
            % of
      Total
            
            
            
            
            
            % of
      Totalreceivable
            
            
            Revenue
            
            
            Revenues
            
            
            Revenue
            
            
            Revenues
            
            
            receivable
            
            
            Revenue
            
            
            Revenues
            
            
            Revenue
            
            
            RevenuesCustomer
      A
            
            $
            3,257
            
            
            $
            8,910
            
            
            
            49
            %
            
            $
            25,827
            
            
            
            50
            %
            
            $
            2,803
            
            
            $
            9,419
            
            
            
            58
            %
            
            $
            24,366
            
            
            
            60
            %Customer
      B
            
            
            2,870
            
            
            
            6,417
            
            
            
            35
            %
            
            
            19,714
            
            
            
            38
            %
            
            
            1,998
            
            
            
            6,265
            
            
            
            39
            %
            
            
            15,305
            
            
            
            38
            %Others
            
            
            1,145
            
            
            
            2,908
            
            
            
            16
            %
            
            
            5,884
            
            
            
            12
            %
            
            
            159
            
            
            
            427
            
            
            
            3
            %
            
            
            958
            
            
            
            2
            %$
            7,272
            
            
            $
            18,235
            
            
            
            100
            %
            
            $
            51,425
            
            
            
            100
            %
            
            $
            4,960
            
            
            $
            16,111
            
            
            
            100
            %
            
            $
            40,629
            
            
            
            100
            %





(3)
                    Earnings
      Per Share


The
following table details the reconciliation of basic earnings per share to
diluted earnings per share (amounts in thousands except per share
amounts):





Three
      months ended
            
            
            Nine
      months endedSeptember
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Numerator
      for basic and diluted earnings per share:Net income
            
            $
            147
            
            
            $
            1,001
            
            
            $
            960
            
            
            $
            2,144Denominator:Weighted-average
      basic common shares outstanding
            
            
            15,432
            
            
            
            15,140
            
            
            
            15,425
            
            
            
            15,029Assumed conversion of dilutive securities:Stock options
            
            
            545
            
            
            
            1,158
            
            
            
            829
            
            
            
            941Warrants
            
            
            1,595
            
            
            
            1,747
            
            
            
            1,716
            
            
            
            1,608Restricted Stock Units
            
            
            -
            
            
            
            -
            
            
            
            2
            
            
            
            -Potentially
      dilutive common shares
            
            
            2,140
            
            
            
            2,905
            
            
            
            2,547
            
            
            
            2,549Denominator
      for diluted earningsper share - Adjusted weighted - average shares
            
            
            17,572
            
            
            
            18,045
            
            
            
            17,972
            
            
            
            17,578Earnings
      per common share:Basic
            
            $
            0.01
            
            
            $
            0.07
            
            
            $
            0.06
            
            
            $
            0.14Diluted
            
            $
            0.01
            
            
            $
            0.06
            
            
            $
            0.05
            
            
            $
            0.12





(4)
                      Significant
      Client Agreements


On
December 31, 2008, we entered into an amendment (the “Amendment”) to our
Provider Service Agreement with one of our significant clients.  The
purpose of the Amendment is, among other things, to facilitate and accelerate
the integration into the Company’s business model of one of the client’s
affiliates, adjust the administrative fees outlined in the previous amendment,
define and clarify the exclusivity and levels of cooperation contemplated by the
previous amendments, and extend the partnership between the Company and the
client and the duration of their Provider Service Agreement to December 31,
2012.  Under a strategic contracting plan that the Amendment requires
the parties to develop, the Company will be the exclusive outsourced ancillary
contracting and network management provider for the client’s group health
clients and any third party administrators (TPAs).





7




As part
of the Amendment, the Company agreed to pay to the client $1,000,000 for costs
incurred in connection with the integration of and access to the Company’s
network by members of the affiliate’s network, including, but not limited to,
costs associated with salaries, benefits, and third party
contracts.  The payment was made in April 2009.  The Company
will continue to pay an administrative fee to the client designed to reimburse
and compensate for the work that it is required to perform to support the
Company’s program.  The Company recognized the $1,000,000 fee as a
prepaid expense which is being amortized over the term of the
agreement.  During the three and nine months ended September 30, 2009,
we recorded amortization related to the agreement of $62,500 and $187,500,
respectively.  At September 30, 2009, $250,000 was classified as a
current asset on the consolidated balance sheet representing the amount to be
amortized during the subsequent twelve-month period.  The remaining
$562,500 balance was classified as a long-term other asset at September 30,
2009.





(5)
                      Stock
      Warrants


In
September 2008, additional accounting guidance was issued relating to
determining whether an instrument (or embedded feature) is indexed to entity’s
own stock.  The guidance mandates a two-step process for evaluating
whether an equity-linked financial instrument or embedded feature is indexed to
the entity’s own stock.  Warrants to purchase 109,095 shares of common
stock issued by the Company contain a strike price adjustment feature, which
upon adoption, resulted in the instruments no longer being considered indexed to
the Company’s own stock.  Accordingly, adoption changed the current
classification (from equity to liability) and the related accounting for these
warrants outstanding as of January 1, 2009.  As of that date, we
reclassified the warrants, based on a fair value of $3.43 per warrant, as
calculated using the Black–Scholes–Merton valuation model.  During the
nine months ended September 30, 2009, the liability was adjusted for warrants
exercised and the change in fair value of the warrants.  A liability
of $109,616 related to the stock warrants is included as a warrant derivative
liability in our consolidated balance sheet as of September 30,
2009.  During the three and nine months ended September 30, 2009, we
recorded an unrealized loss on warrant derivative of $21,923 and an unrealized
gain on warrant derivative of $232,186, respectively, related to the change in
fair value of the warrants.





Effective
May 21, 2007, the Company signed an Ancillary Care Services Network Access
Agreement (“the agreement”) with Texas True Choice, Inc. (“TTC”).  As
partial compensation under the agreement, the Company issued to an affiliate of
TTC, warrants to purchase a total of 225,000 shares of the Company’s common
stock at an exercise price of $1.84, the closing price of our stock on May 21,
2007.  As of September 30, 2009, 75%, or warrant to purchase 168,750
shares had vested with the remaining 25% vesting in May
2010.  According to the agreement, TTC must provide two years notice
in the event of termination.  Since the measurement date for the
fourth and final tranche of warrants had been reached as of June 30, 2009, we
recorded the fair value of 25% of the warrants, or warrant to acquire 56,250
shares, which were recorded as other non-current assets and will be amortized
over the related contract period.  The total fair value of the fourth
tranche of warrants was $311,259, which was recorded based on the
Black-Scholes-Merton method.





(6)
                      Warrant
      Derivative


The
Company is required to disclose the fair value measurements The warrant
derivative liability recorded at fair value in the balance sheet as of September
30, 2009 is categorized based upon the level of judgment associated with the
inputs used to measure their fair value.  Hierarchical levels, are
directly related to the amount of subjectivity associated with the inputs to
fair valuation of these liabilities is as follows:





Level 1 —
Inputs are unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date;





Level 2 —
Inputs other than Level 1 inputs that are either directly or indirectly
observable; and





Level 3 —
Unobservable inputs, for which little or no market data exist, therefore
requiring an entity to develop its own assumptions.





The
following table summarizes the financial liabilities measured at fair value on a
recurring basis as of September 30, 2009, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value
(amounts in thousands):





Total
            
            
            Quoted
      prices in active markets for identical assets (Level 1)
            
            
            Significant
      other observable inputs (Level 2)
            
            
            Significant
      unobservable inputs
              (Level
      3)Warrant
      derivative liability
            
            $
            110
            
            
            $
            —
            
            
            $
            —
            
            
            $
            110




8





Equity-linked
financial instruments consist of stock warrants issued by the Company that
contain a strike price adjustment feature, as described in Note 5 in the Notes
to the Consolidated Financial Statements.  We calculated the fair
value of the warrants using the Black–Scholes–Merton valuation
model.  During the three and nine months ended September 30, 2009, we
recognized an unrealized loss of $21,923 and an unrealized gain of $232,186,
respectively, related to the change in the fair value of the warrant derivative
liability.





The
assumptions used in the Black-Scholes-Merton valuation model were as
follows:





January
      1,
            
            
            September
      30,2009
            
            
            2009Fair
      value
            
            $
            3.43
            
            
            $
            1.10Expected
      volatility
            
            
            73.4
            %
            
            
            70.1
            %Expected
      life (years)
            
            
            2.13
            
            
            
            1.41Risk
      free interest rate
            
            
            0.8
            %
            
            
            0.7
            %Forfeiture
      rate
            
            
            —
            
            
            
            —Dividend
      rate
            
            
            —
            
            
            
            —





The
following table reflects the activity for liabilities measured at fair value
using Level 3 inputs for the nine months ended September 30, 2009 (amounts in
thousands):





Initial
      recognition of warrant derivative as of January 1, 2009
            
            $
            374Sales
      of warrant derivative
            
            
            (32
            )Unrealized
      gains related to the change in fair value
            
            
            (232
            )Balance
      as of September 30, 2009
            
            $
            110





In
addition, the Company’s financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued
expenses.  The fair value of instruments is determined by reference to
various market data and other valuation techniques, as
appropriate.  Unless otherwise disclosed, the fair value of short-term
financial instruments approximates their recorded values due to the short-term
nature of the instruments.


(7)
                        Recent
      Accounting
Pronouncements


Effective
July 2009, the FASB Accounting Standards Codification (“ASC”), also known
collectively as the “Codification,” is considered the single source of
authoritative U.S. accounting and reporting standards, except for additional
authoritative rules and interpretive releases issued by the SEC. 
Non-authoritative guidance and literature would include, among other things,
FASB Concepts Statements, American Institute of Certified Public Accountants
Issue Papers and Technical Practice Aids and accounting
textbooks.  The Codification was developed to organize GAAP
pronouncements by topic so that users can more easily access authoritative
accounting guidance.  It is organized by topic, subtopic, section, and
paragraph, each of which is identified by a numerical
designation.  This statement applies beginning in third quarter
2009.  All accounting references have been updated, and therefore SFAS
references have been removed.





(8)
                      Subsequent
      Events


We
evaluate events and transactions that occur after the balance sheet date as
potential subsequent events.  We performed this evaluation through
November 9, 2009, the date on which we issued our financial
statements.  No events occurred as of that date that required
disclosure.




9




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 and objectives 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
health care 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, changes in national health care
policy, regulation, and/or reimbursement, general economic conditions (including
the recent 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,
consolidation in the industry that may affect the Company’s key clients, changes
in the business decisions by significant clients, increased competition, the
Company’s inability to attract or maintain providers or clients or achieve its
financial results, the Company’s inability to manage growth, 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, 2008
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.




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, 2009 and its financial condition
at September 30, 2009.  The focus of this review is on the underlying
business reasons for significant changes and trends affecting the revenues, net
income 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, 2008.





OVERVIEW





American
CareSource Holdings, Inc. (the “Company”, “ACS”, “we”, “us”, or “our”) is an
ancillary benefits management company that offers cost effective access to a
comprehensive national network of ancillary healthcare service
providers.  The Company’s healthcare payor customers, which include
preferred provider organizations (“PPOs”), third party administrators (“TPAs”),
insurance companies, large self-funded organizations and Taft-Hartley union
plans (i.e., employee benefit plans that are self-administered under collective
bargaining agreements), engage the Company to provide them with a complete
outsourced solution designed to manage each customer’s obligations to its
covered persons.  The Company offers its customers this solution
by:





·
            providing
      payor customers with a comprehensive network of ancillary healthcare
      services providers that is tailored to each payor customer’s specific
      needs and is available to each payor customer’s covered persons for
      covered services;





·
            providing
      payor customers with claims management, reporting, and processing and
      payment services;





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





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





10




The
Company’s business model, illustrating the relationships among the persons
involved, directly or indirectly, in the Company’s business and its generation
of revenue and expenses is depicted below:










Our
clients route healthcare claims to us after service has been performed by
participant providers in our network.  We process those claims and
charge the client/payor according to its contractual rate for the services
according to our contract with the client/payor.  In processing the
claim, we are paid directly by the client 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 health care 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 invoices,
collections and payments.  The Company is not liable for costs
incurred by independent contract service providers until payment is received by
us from the payors.  The Company recognizes actual or estimated
liabilities to independent contract service providers as the related revenues
are recognized.





The
Company markets its products to preferred provider organizations (“PPOs”), third
party administrators (“TPAs”), insurance companies, large self-funded
organizations and Taft-Hartley union plans, such as employee benefit plans that
are self-administered under collective bargaining agreements.





The
Company is seeking continuing growth in the number of client payor and service
provider relationships by focusing on providing in-network services for its
payors and aggressively pursuing additional PPOs, TPAs and other direct payors
as its primary sales target.  The Company believes that 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 health
care 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.





Although
the Company has continued to experience revenue growth from 2008 to
2009,  its financial condition has been impacted by the current
economic crisis.  First, the unemployment rate has caused fewer people
to participate in insurance programs with our customers.  Second, plan
participants, seeking to spend less money, appear to be making less frequent use
of some ancillary services.  Third, the possibility exists that client
and, or provider consolidation within our industry could adversely affect our
business.  To the extent that these trends continue, or become worse,
we may receive less revenue and our profitability and growth could be adversely
affected, depending on the extent of the declines.  Finally, as with
any business, the deterioration of the financial condition or sale or change of
control of our significant customers (with two customers accounting for in
excess of 84% and 88% of our revenue during the three and nine months ended
September 30, 2009, respectively) could have a corresponding adverse effect on
us.  Additional risks that we do not consider material, or of which we
are not currently aware, may also have an adverse impact on
us.





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,
amortization and potential impairment of intangible assets and goodwill 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, 2008.  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,
2008.





11




ANALYSIS
OF RESULTS OF OPERATIONS





Revenues





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





Third
      Quarter
            
            
            Nine
      MonthsChange
            
            
            
            
            
            
            
            
            Change($
      in thousands)
            
            2009
            
            
            2008
            
            
            $
            
            
            %
            
            
            2009
            
            
            2008
            
            
            $
            
            
            %Net
      revenues
            
            $
            18,235
            
            
            $
            16,111
            
            
            $
            2,124
            
            
            
            13
            %
            
            $
            51,425
            
            
            $
            40,629
            
            
            $
            10,796
            
            
            
            27
            %





The
Company’s net revenues are generated from ancillary healthcare service
claims.  Revenue is recognized when we bill our client payors for
services performed.  The increase in revenue for the three and nine
months ended September 30, 2009 as compared to the same periods in 2008 was due
primarily to the progression of our client relationships, which allowed the
Company access to a greater number of payors and allowed us to benefit from the
external growth and expansion of our clients.  In addition, revenues
were positively impacted by growth in our ancillary service provider
network.





During
the three months and nine months ended September 30, 2009, revenues from seven
clients (one of which is an affiliate of one of our two existing significant
customers), all added in 2008 increased over the same prior year periods by $1.5
million and $3.2 million, respectively, which was due to the progression and
development of our client relationships, resulting in an increased number of
payors and increased claims volume.  Clients added during 2009
contributed an incremental $2.1 million and $3.2 million for the three and nine
months ended September 30, 2009.  The increases are a direct result of
a concentrated effort to diversify our revenue base.  For the three
and nine months ended September 30, 2009, our two significant customers
accounted for 84% and 88%, respectively, as compared to 97% and 98% for the same
periods in 2008, respectively.





The
increase in revenues in the third quarter of 2009 from clients added in 2008 and
2009, was offset by a decline in revenues from our legacy clients (those added
in 2007 or earlier) of $1.5 million, or 10%.  The decrease was
attributable primarily to reductions in revenue from our two largest customers,
which were impacted by macro-economic factors, as previously
discussed.  Revenues from those same clients added in 2007 and prior
increased $4.4 million, or 11%, for the nine months ended September 30, 2009
compared to the prior year period.





The
following table details revenues generated by clients and the periods in which
those clients were added for the periods presented ended September 30 (amounts
in thousands):





Year
      of implementation
            
            2007
      and prior
            
            
            2008
            
            
            2009
            
            
            TotalThird
      quarter 2009
            
            $
            14,355
            
            
            $
            1,754
            
            
            $
            2,126
            
            
            $
            18,235Third
      quarter 2008
            
            
            15,886
            
            
            
            225
            
            
            
            -
            
            
            
            16,111Nine
      months 2009
            
            $
            44,747
            
            
            $
            3,478
            
            
            $
            3,200
            
            
            $
            51,425Nine
      months 2008
            
            
            40,395
            
            
            
            234
            
            
            
            -
            
            
            
            40,629




The Company will continue to seek growth in the number of client
payor and service provider relationships by focusing on providing in-network
services for its payors and aggressively pursuing additional PPOs, TPAs and
other direct payors as its primary sales target.  In addition, we are
targeting service providers that will specifically enhance our network as
determined through collaboration with our clients.  The Company
believes that this strategy should increase the volume of claims the Company can
process, as well as expand the number of lives that are eligible to receive
ancillary health care 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, during the three and  nine months ended September 30, 2009,
the number of billed claims increased by 29% and 42%, respectively, compared to
the same prior year periods.  The increase in claim volume was driven
by the expansion of existing client relationships, new clients implemented
during the first nine months of 2009 as well as through expansion of our network
of service providers.





12




Revenue
per claim declined for the periods presented due to lower than estimated
collection rates related to our new client relationships, limited benefits
offered by certain recently implemented clients and the change in mix of
provider specialties driving our claim volume during the first nine months of
2009.  In particular, we have experienced accelerated growth in
categories such as laboratory services with lower average revenue per claim
while other higher average revenue per claim categories such as dialysis
services have not grown as rapidly.  The decline was offset somewhat
by an increase in claims from the diagnostic imaging services
category.  Revenues from the diagnostic imaging services increased as
a percent of total revenue for the third quarter 2009 as compared to the same
prior year period as a result of our expanding relationship witha third-party which
manages and maintains a national imaging network.  Revenue per claim
can vary significantly depending upon factors including the types of services
consumed by clients members, the quantity of services delivered, client
negotiated pricing, provider negotiated service rates, the rate of collections
based upon the client and members financial responsibility and other
factors.  The following table provides information with respect to
claims processed, claims billed and the associated revenue per claim metrics for
the periods ended September 30:





Three
      months ended
            
            
            Nine
      months ended2009
            
            
            2008
            
            
            2009
            
            
            2008Claims
      processed (in thousands)
            
            
            117
            
            
            
            87
            
            
            
            329
            
            
            
            220Claims
      billed (in thousands)
            
            
            101
            
            
            
            78
            
            
            
            282
            
            
            
            198Revenue
      per processed claim
            
            $
            156
            
            
            $
            185
            
            
            $
            156
            
            
            $
            185Revenue
      per billed claim
            
            
            181
            
            
            
            207
            
            
            
            182
            
            
            
            205




Cost of Revenues and
Contribution Margin





The
following table sets forth a comparison of the components of our cost of
revenues, for the three months ended September 30:





Third
      QuarterChange%
      of
            
            
            
            
            
            %
      of($
      in thousands)
            
            2009
            
            
            revenues
            
            
            2008
            
            
            revenues
            
            
            $
            
            
            %Provider
      payments
            
            $
            13,800
            
            
            
            75.7
            %
            
            $
            11,744
            
            
            
            72.9
            %
            
            $
            2,056
            
            
            
            17.5
            %Administrative
      fees
            
            
            900
            
            
            
            4.9
            
            
            
            928
            
            
            
            5.8
            
            
            
            (28
            )
            
            
            (3.0
            )Claims
      administration andprovider development
            
            
            1,178
            
            
            
            6.5
            
            
            
            882
            
            
            
            5.5
            
            
            
            296
            
            
            
            33.6Total
      cost of revenues
            
            $
            15,878
            
            
            
            87.1
            %
            
            $
            13,554
            
            
            
            84.2
            %
            
            $
            2,324
            
            
            
            17.1
            %





13




The
following table sets forth a comparison of the components of our cost of
revenues, for the nine months ended September 30:





Nine
      MonthsChange%
      of
            
            
            
            
            
            %
      of($
      in thousands)
            
            2009
            
            
            revenues
            
            
            2008
            
            
            revenues
            
            
            $
            
            
            %Provider
      payments
            
            $
            38,670
            
            
            
            75.2
            %
            
            $
            26,690
            
            
            
            73.1
            %
            
            $
            11,980
            
            
            
            44.9
            %Administrative
      fees
            
            
            2,495
            
            
            
            4.9
            
            
            
            2,381
            
            
            
            5.9
            
            
            
            114
            
            
            
            4.8Claims
      administration andprovider development
            
            
            3,258
            
            
            
            6.3
            
            
            
            2,395
            
            
            
            5.9
            
            
            
            863
            
            
            
            36.0Total
      cost of revenues
            
            $
            44,423
            
            
            
            86.4
            %
            
            $
            31,466
            
            
            
            77.4
            %
            
            $
            12,957
            
            
            
            41.1
            %





Cost of
revenues is comprised of payments to our providers, administrative fees paid to
our client payors for converting claims to electronic data interchange and
routing them to both the Company for processing and to their payors for payment,
and the costs of our claims administration and provider development
organizations.  Payments to providers is the largest component of our
cost of revenues and it consists of our payments for ancillary care services in
accordance with contracts negotiated separately with providers for specific
ancillary services.





In the
third quarter of 2009, cost of revenues related to payments to providers
increased as compared to the third quarter of 2008 as a result of increased
claims volume and increased revenues, and the fluctuation in the mix of types of
services provided by the Company.  Payments made to providers as a
percent of net revenues were 75.7% during the third quarter of 2009 and 72.9%
during the same period in 2008.  Provider payments as a percent of
revenues increased due primarily to lower margins in our laboratory services,
dialysis services and infusion services specialties.  These category
margins were impacted by the execution of new provider agreements, pricing for
associated services on recently implemented and existing client contracts, the
mix of services delivered in each category, the mix of providers delivering the
services and overall pricing pressures which have resulted in lower client
rates.





Further,
in the third quarter of 2009, administrative fees increased due to increased
claim volume as a result of expanded relationships with existing clients as well
as increased services provided to recently implemented
clients.  Administrative fees paid to clients as a percent of net
revenues were 4.9% during the third quarter of 2009 and 5.8% during the same
period in 2008.  The decrease in administrative fees as a percent of
net revenues was due to a shift in revenues to clients that carry lower
contracted administrative fee rates.





During
the nine months ended September 30, 2009, provider payments were 75.2% of
revenues, compared to 73.1% for the same prior year period.  Provider
payments as a percent of revenues increased due primarily to lower margins in
our dialysis and infusion services specialties, offset by improvements in
margins in our laboratory and diagnostic imaging specialties.  These
category margins were impacted by the execution of new provider agreements,
pricing for associated services on recently implemented and existing client
contracts, the mix of services delivered in each category, the mix of providers
delivering the services and overall pricing pressures which have resulted in
lower client rates.





Further,
during the first nine months of 2009, administrative fees increased due to
increased claim volume as a result of expanded relationships with existing
clients as well as recently implemented clients.  Administrative fees
paid to clients as a percent of net revenues were 4.9% during the first nine
months of 2009 and 5.9% during the same period in 2008.  The decrease
in administrative fees as a percent of net revenues was due to a shift in
revenues to clients that carry lower contracted administrative fee
rates.





14





The
detail of the costs of our claims administration and provider development
organizations are as follows for the periods presented ending September 30
(amounts in thousands):





Third
      QuarterClaims
      Administration
            
            
            Provider
      Development
            
            
            TotalIncrease
            
            
            
            
            
            
            
            
            Increase
            
            
            
            
            
            
            
            
            Increase2009
            
            
            2008
            
            
            (Decrease)
            
            
            2009
            
            
            2008
            
            
            (Decrease)
            
            
            2009
            
            
            2008
            
            
            (Decrease)Total
      wages, incentives and benefits
            
            $
            602
            
            
            $
            471
            
            
            $
            131
            
            
            
            28
            %
            
            $
            409
            
            
            $
            222
            
            
            $
            187
            
            
            
            84
            %
            
            $
            1,011
            
            
            $
            693
            
            
            $
            318
            
            
            
            46
            %Contract
      labor and consulting fees
            
            
            142
            
            
            
            194
            
            
            
            (52
            )
            
            
            -27
            %
            
            
            24
            
            
            
            3
            
            
            
            21
            
            
            
            nm
            %
            
            
            166
            
            
            
            197
            
            
            
            (31
            )
            
            
            (16)
            %Capitalized
      development costs
            
            
            (135
            )
            
            
            (68
            )
            
            
            (67
            )
            
            
            99
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %
            
            
            (135
            )
            
            
            (68
            )
            
            
            (67
            )
            
            
            98
            %Other
            
            
            37
            
            
            
            2
            
            
            
            35
            
            
            
            nm
            %
            
            
            22
            
            
            
            9
            
            
            
            13
            
            
            
            144
            %
            
            
            59
            
            
            
            11
            
            
            
            48
            
            
            
            436
            %Allocation
      of shared overheads
            
            
            (35
            )
            
            
            (19
            )
            
            
            (16
            )
            
            
            84
            %
            
            
            112
            
            
            
            68
            
            
            
            44
            
            
            
            65
            %
            
            
            77
            
            
            
            49
            
            
            
            28
            
            
            
            57
            %$
            611
            
            
            $
            580
            
            
            $
            31
            
            
            
            5
            %
            
            $
            567
            
            
            $
            302
            
            
            $
            265
            
            
            
            88
            %
            
            $
            1,178
            
            
            $
            882
            
            
            $
            296
            
            
            
            34
            %




Our claims administration organization consists of our operations
and information technology groups.  Our operations group is
responsible for all aspects of the claims management and processing including
billing, quality assurance and collections efforts.  Our information
technology group is responsible for maintaining and enhancing the technological
capabilities and applications with the claims management process.  Our
provider development group is responsible for developing our network of
ancillary healthcare service providers, which includes contracting with
providers to be included in the network, credentialing new service providers and
maintaining a relationship with existing providers, all for the purpose of
enhancing our ancillary service provider network offering to our client
payors.





The
increase in costs during the second quarter of 2009 as compared to the same
prior year period is due primarily to the following:





·
            Investments
      in our claims administration and provider development
      organizations.  Wages, incentives and benefits increased due to
      resource additions.  Headcount as of September 30, 2009 and 2008
      were as follows:  Operations -- 20 and 15, respectively;
      Information Technology -- 10 and 8, respectively; and Provider Development
      -- 13 and 11, respectively.  The increases in headcount were
      made to facilitate growth through the enhancement of our network of
      ancillary care providers, and to grow our claims processing and management
      capabilities consistent with growth in claims
  volume;





·
            We
      incurred incremental costs in our provider development organization;
      consultants were hired which assisted us in improving the integrity of our
      provider data, creating mechanisms to manage provider credentialing to
      facilitate greater quality in our network and supplementing our provider
      data; and





·
            The
      aforementioned cost increases were offset by a decrease in consulting fees
      related to an information technology initiative in which a platform was
      developed to create data analysis efficiencies.  The fees were
      primarily incurred during the second and third quarters of
      2008.





15




The
detail of the costs of our claims administration and provider development
organizations are as follows for the periods presented ending September 30
(amounts in thousands):





Nine
      MonthsClaims
      Administration
            
            
            Provider
      Development
            
            
            TotalIncrease
            
            
            
            
            
            
            
            
            Increase
            
            
            
            
            
            
            
            
            Increase2009
            
            
            2008
            
            
            (Decrease)
            
            
            2009
            
            
            2008
            
            
            (Decrease)
            
            
            2009
            
            
            2008
            
            
            (Decrease)Total
      wages, incentives and benefits
            
            $
            1,744
            
            
            $
            1,298
            
            
            $
            446
            
            
            
            34
            %
            
            $
            1,089
            
            
            $
            596
            
            
            $
            493
            
            
            
            83
            %
            
            $
            2,834
            
            
            $
            1,894
            
            
            $
            940
            
            
            
            50
            %Contract
      labor and consulting fees
            
            
            431
            
            
            
            540
            
            
            
            (109
            )
            
            
            -20
            %
            
            
            27
            
            
            
            13
            
            
            
            14
            
            
            
            107
            %
            
            
            458
            
            
            
            553
            
            
            
            (95
            )
            
            
            (17)
            %Capitalized
      development costs
            
            
            (464
            )
            
            
            (352
            )
            
            
            (112
            )
            
            
            32
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %
            
            
            (464
            )
            
            
            (352
            )
            
            
            (112
            )
            
            
            32
            %Other
            
            
            100
            
            
            
            60
            
            
            
            40
            
            
            
            66
            %
            
            
            116
            
            
            
            15
            
            
            
            101
            
            
            
            673
            %
            
            
            216
            
            
            
            75
            
            
            
            141
            
            
            
            188
            %Allocation
      of shared overheads
            
            
            (84
            )
            
            
            46
            
            
            
            (130
            )
            
            
            283
            %
            
            
            299
            
            
            
            179
            
            
            
            120
            
            
            
            67
            %
            
            
            215
            
            
            
            225
            
            
            
            (10
            )
            
            
            4
            %$
            1,727
            
            
            $
            1,592
            
            
            $
            135
            
            
            
            8
            %
            
            $
            1,531
            
            
            $
            803
            
            
            $
            728
            
            
            
            91
            %
            
            $
            3,258
            
            
            $
            2,395
            
            
            $
            863
            
            
            
            36
            %





The
increase in costs during the nine months ended September 30, 2009 as compared to
the same prior year period is due primarily to the following:





·
            Investments
      in our claims administration and provider development
      organizations.  Wages, incentives and benefits increased due to
      resource additions as described
above;





·
            The
      utilization of consultants by our provider development organization which
      assisted us in improving the integrity of our provider data, creating
      mechanisms to manage provider credentialing to facilitate greater quality
      in our network and supplementing our provider data;
  and





·
            The
      aforementioned cost increases were offset by a decrease in consulting fees
      related to an information technology initiative in which a platform was
      developed to create data analysis efficiencies.  The fees were
      primarily incurred during the second and third quarters of
      2008.





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





Second
      Quarter
            
            
            Nine
      monthsChange
            
            
            
            
            
            
            
            
            Change2009
            
            
            2008
            
            
            %
      pts
            
            
            2009
            
            
            2008
            
            
            %
      ptsContribution
      margin percentage
            
            
            12.9
            %
            
            
            15.9
            %
            
            
            (3.0)
            %
            
            
            13.6
            %
            
            
            15.2
            %
            
            
            (1.6)
            %





Contribution
margin percentage is calculated by dividing the difference between net revenues
and total cost of revenues by net revenues.  The contribution margin
was impacted by changes in its components for the three and nine month periods
as follows:  Provider payments – declines of 2.2% and 1.8%,
respectively; administrative fees – increases of 0.9% and 1.0%, respectively;
and cost of claims administration and provider development – declines of 1.5%
and 0.7%, respectively.  The overall decline in contribution margin
percentage was discussed in detail in the preceding comments.  Our
contribution margin percentage fluctuates from quarter to quarter due to changes
in the prices we charge our client payors as compared to the financial terms of
our provider agreements, changes in costs of our claims administration and
provider development organizations and changes in the mix of services we
provide.  There can be no assurances that we will be able to maintain
contribution margin at current levels, either in absolute or in percentage
terms.





16





Selling, General and
Administrative Expenses





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





Third
      Quarter
            
            
            Nine
      MonthsChange
            
            
            
            
            
            
            
            
            Change($
      in thousands)
            
            2009
            
            
            2008
            
            
            $
            
            
            %
            
            
            2009
            
            
            2008
            
            
            $
            
            
            %Selling,
      general and administrative
      expenses
            
            $
            2,042
            
            
            $
            1,488
            
            
            $
            554
            
            
            
            37
            %
            
            $
            5,923
            
            
            $
            3,796
            
            
            $
            2,127
            
            
            
            56
            %Percentage of total net
      revenues
            
            
            11.2
            %
            
            
            9.2
            %
            
            
            
            
            
            
            
            
            
            
            11.5
            %
            
            
            9.3
            %





Selling,
general and administrative (“SG&A”) expenses consist primarily of salaries
and related benefits, travel costs, sales commissions, sales materials, other
marketing related expenses, costs of corporate operations, finance and
accounting, human resources and other general operating expenses of the
Company.





Selling,
general and administrative expenses represent the following costs for the
periods presented ending September 30 (amounts in thousands):





Third
      QuarterFinance
      & Administration
            
            
            Sales
      & Marketing
            
            
            TotalSelling,
      general andadministrative
      expenses
            
            2009
            
            
            2008
            
            
            Increase
      (Decrease)
            
            
            2009
            
            
            2008
            
            
            Increase
      (Decrease)
            
            
            2009
            
            
            2008
            
            
            Increase
      (Decrease)Total
      wages, commissions,incentives and
      benefits
            
            $
            441
            
            
            $
            464
            
            
            $
            (23
            )
            
            
            (5)
            %
            
            $
            362
            
            
            $
            182
            
            
            $
            180
            
            
            
            99
            %
            
            $
            803
            
            
            $
            646
            
            
            $
            157
            
            
            
            24
            %Professional
      fees (legal,accounting and
      consulting)
            
            
            201
            
            
            
            125
            
            
            
            76
            
            
            
            61
            %
            
            
            5
            
            
            
            19
            
            
            
            (14
            )
            
            
            (74)
            %
            
            
            206
            
            
            
            144
            
            
            
            62
            
            
            
            43
            %Stock-based
      compensation expense
            
            
            283
            
            
            
            169
            
            
            
            114
            
            
            
            67
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %
            
            
            283
            
            
            
            169
            
            
            
            114
            
            
            
            67
            %Investor
      relations costs
            
            
            73
            
            
            
            24
            
            
            
            49
            
            
            
            204
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %
            
            
            73
            
            
            
            24
            
            
            
            49
            
            
            
            204
            %Recruiting
      costs
            
            
            11
            
            
            
            169
            
            
            
            (158
            )
            
            
            (93)
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %
            
            
            11
            
            
            
            169
            
            
            
            (158
            )
            
            
            -93
            %Marketing
      costs
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %
            
            
            92
            
            
            
            5
            
            
            
            87
            
            
            
            nm
            %
            
            
            92
            
            
            
            5
            
            
            
            87
            
            
            
            nm
            %Banking
      fees
            
            
            46
            
            
            
            28
            
            
            
            18
            
            
            
            64
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %
            
            
            46
            
            
            
            28
            
            
            
            18
            
            
            
            64
            %Other
            
            
            78
            
            
            
            100
            
            
            
            (22
            )
            
            
            (22)
            %
            
            
            21
            
            
            
            11
            
            
            
            10
            
            
            
            91
            %
            
            
            99
            
            
            
            111
            
            
            
            (12
            )
            
            
            (11)
            %Allocation
      of shared overheads
            
            
            145
            
            
            
            159
            
            
            
            (14
            )
            
            
            -9
            %
            
            
            61
            
            
            
            33
            
            
            
            28
            
            
            
            85
            %
            
            
            206
            
            
            
            192
            
            
            
            14
            
            
            
            7
            %Restructuring
      charge
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            223
            
            
            
            —
            
            
            
            223
            
            
            
            100
            %Total selling,
      general andadministrative
      expenses
            
            $
            1,278
            
            
            $
            1,238
            
            
            $
            40
            
            
            
            3
            %
            
            $
            541
            
            
            $
            250
            
            
            $
            291
            
            
            
            116
            %
            
            $
            2,042
            
            
            $
            1,488
            
            
            $
            554
            
            
            
            37
            %




The
increase in SG&A, reflected in the above table is related to the
following:





·
            Increased
      headcount in our sales and marketing group.  Wages, commissions,
      incentives and benefits during the second quarter of 2009 reflect the
      addition of five resources.  These resources were added during
      late-2008 and the first quarter of 2009.  Headcount as of
      September 30, 2009 and 2008 were as follows:  Finance &
      Administration – 10 and 8, respectively; and Sales & Marketing – 7 and
      5, respectively.







·
            Increased
      compensation costs related to our stock-based incentive
      plans.  The increase in these costs are the direct result of the
      increase in the fair value of our common stock (as calculated under the
      Black-Scholes-Merton valuation model) which is directly related to the
      increase in the value of our common stock.  As a result,
      stock-based awards made in late-2008 and early-2009 had higher associated
      costs than those awarded during the same prior year
    periods.





17




·
            Increased
      professional fees.  During the three months ended September 30,
      2009, fees for our audit-related activities increased over the same prior
      year period and we implemented an enhanced compensation plan for our Board
      of Directors.





·
            Marketing
      costs included $62,500 of amortization of the amendment of our client
      agreement with one of our significant clients.  The $1 million
      payment is being amortized over a four-year period, which is the term of
      the amended agreement.





·
            The
      increases were offset by a decline in recruiting costs of
      $158,000.  During the third quarter 2008, we incurred
      significant costs associated with increasing our headcount to support
      strategic initiatives.





In
addition, during the three months ended September 30, 2009 we made
organizational changes to bring our internal cost structure in line with
expected levels of revenue while reorganizing our functional groups to ensure
that we capitalize on certain market opportunities.  We eliminated
approximately six positions, including our Vice President of Client Development
and other administrative personnel.





In
connection with the reorganization, we incurred certain charges in the third
quarter of 2009.  Those charges, which are primarily comprised of
employee severance costs and related fringe benefits, totaled approximately
$223,357.  The majority of the payments will be made by December 31,
2009.  For the three months ended September 30, 2009, SG&A,
excluding the restructuring charge, as a percent of revenues was
9.9%.





Selling,
general and administrative expenses represent the following costs for the nine
months ended September 30 (amounts in thousands):





Nine
      MonthsFinance
      & Administration
            
            
            Sales
      & Marketing
            
            
            TotalSelling,
      general andadministrative
      expenses
            
            2009
            
            
            2008
            
            
            Increase
      (Decrease)
            
            
            2009
            
            
            2008
            
            
            Increase
      (Decrease)
            
            
            2009
            
            
            2008
            
            
            Increase
      (Decrease)Total
      wages, commissions,incentives and
      benefits
            
            $
            1,253
            
            
            $
            1,192
            
            
            $
            61
            
            
            
            5
            %
            
            $
            1,300
            
            
            $
            418
            
            
            $
            882
            
            
            
            211
            %
            
            $
            2,553
            
            
            $
            1,610
            
            
            $
            943
            
            
            
            59
            %Professional
      fees (legal, accounting and
      consulting)
            
            
            643
            
            
            
            438
            
            
            
            205
            
            
            
            47
            %
            
            
            105
            
            
            
            37
            
            
            
            68
            
            
            
            184
            %
            
            
            748
            
            
            
            475
            
            
            
            273
            
            
            
            57
            %Stock-based
      compensation expense
            
            
            812
            
            
            
            485
            
            
            
            327
            
            
            
            67
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %
            
            
            812
            
            
            
            485
            
            
            
            327
            
            
            
            67
            %Investor
      relations costs
            
            
            209
            
            
            
            86
            
            
            
            123
            
            
            
            143
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %
            
            
            209
            
            
            
            86
            
            
            
            123
            
            
            
            143
            %Recruiting
      costs
            
            
            76
            
            
            
            251
            
            
            
            (175
            )
            
            
            -70
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %
            
            
            76
            
            
            
            251
            
            
            
            (175
            )
            
            
            -70
            %Marketing
      costs
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %
            
            
            247
            
            
            
            18
            
            
            
            229
            
            
            
            nm
            %
            
            
            247
            
            
            
            18
            
            
            
            229
            
            
            
            nm
            %Banking
      fees
            
            
            120
            
            
            
            86
            
            
            
            34
            
            
            
            40
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0
            %
            
            
            120
            
            
            
            86
            
            
            
            34
            
            
            
            40
            %Other
            
            
            246
            
            
            
            242
            
            
            
            4
            
            
            
            2
            %
            
            
            103
            
            
            
            32
            
            
            
            71
            
            
            
            222
            %
            
            
            349
            
            
            
            274
            
            
            
            75
            
            
            
            27
            %Allocation
      of shared overheads
            
            
            385
            
            
            
            432
            
            
            
            (47
            )
            
            
            -11
            %
            
            
            201
            
            
            
            79
            
            
            
            122
            
            
            
            154
            %
            
            
            586
            
            
            
            511
            
            
            
            75
            
            
            
            15
            %Restructuring
      charge
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            223
            
            
            
            —
            
            
            
            223
            
            
            
            100
            %Total selling,
      general and administrative expenses
            
            $
            3,744
            
            
            $
            3,212
            
            
            $
            532
            
            
            
            17
            %
            
            $
            1,956
            
            
            $
            584
            
            
            $
            1,372
            
            
            
            235
            %
            
            $
            5,923
            
            
            $
            3,796
            
            
            $
            2,127
            
            
            
            56
            %







The
increase in SG&A, reflected in the above table is related to the
following:





·
            Increased
      headcount in our sales and marketing group.  Wages, commissions,
      incentives and benefits during the nine months ended September 30, 2009
      reflect the addition of resources as described
  above;





·
            Increased
      compensation costs related to our stock-based incentive
      plans.  The increase in these costs are the direct result of the
      increase in the fair value of our common stock (as calculated under the
      Black-Scholes-Merton valuation model) which is directly related to the
      increase in the value of our common stock.  As a result,
      stock-based awards made in late-2008 and early-2009 had higher associated
      costs than those awarded during the same prior year
    periods.





18




·
            Increased
      professional fees.  During the nine months ended September 30,
      2009, fees for our audit-related activities increased over the same prior
      year period, we implemented an enhanced compensation plan for our Board of
      Directors and we incurred costs related to strategic marketing initiatives
      related to branding and product identification.  We do not
      anticipate our consulting costs to continue at these levels during the
      remainder of 2009 as we incurred a disproportionate amount of costs during
      the nine months ended September 30,
2009.





·
            Marketing
      costs included $187,500 of amortization of the amendment of our client
      agreement with one of our significant clients.  The $1 million
      payment is being amortized over a four-year period, which is the term of
      the amended agreement.







·
            Other
      costs increased primarily due to increased travel expenses related to
      client and investor relations activities during the first nine months of
      2009 compared to the same prior year period and a one-time payment of
      $75,000 paid to one of our executive officers for relocation
      costs.





In
addition, as described above, we incurred a restructuring charge of $223,357
during the three months ended September 30, 2009.  For the nine months
ended September 30, 2009, SG&A, excluding the restructuring charge, as a
percent of revenues was 11.1%.





Unrealized Gain (Loss) on
Warrant Derivative





During
the three and nine months ended September, 30, 2009, we had unrealized losses of
$21,923 and unrealized gains of $232,186, respectively, related to warrants
accounted for under the liability method.  In September 2008, the
Financial Accounting Standards Board (“FASB”) ratified EITF 07-5.  The
Company uses a two-step process for evaluating whether an equity-linked
financial instrument or embedded feature is indexed to the entity’s own
stock.  Warrants to purchase 109,095 shares of common stock issued by
the Company contain a strike price adjustment feature, which results in the
instruments no longer being considered indexed to the Company’s own stock and
required the Company to record these warrants under the liability accounting
method.  Accordingly, on January 1, 2009, the Company adopted current
accounting guidance that changed the current classification (from equity to
liability) and the related accounting for these warrants.  As of that
date, we reclassified the warrants, based on a fair value of $3.43 per warrant,
as calculated using the Black–Scholes–Merton valuation model.  During
the first nine months of 2009, the liability was adjusted for warrants exercised
and the change in fair value of the warrants.  A liability of $109,616
related to the stock warrants is included as a warrant derivative liability in
our consolidated balance sheet as of September 30, 2009.  The
unrealized gain on the warrant derivative reflects the change in fair value of
the warrants.





Depreciation and
Amortization





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





Third
      Quarter
            
            
            Change
            
            
            Nine
      Months
            
            
            Change($
      in thousands)
            
            2009
            
            
            2008
            
            
            $
            
            
            %
            
            
            2009
            
            
            2008
            
            
            $
            
            
            %Depreciation
            
            $
            123
            
            
            $
            53
            
            
            $
            70
            
            
            
            132
      %
            
            
            $
            305
            
            
            $
            135
            
            
            $
            170
            
            
            
            126
            %Amortization
            
            
            32
            
            
            
            53
            
            
            
            (21
            )
            
            
            (40
            )%
            
            
            96
            
            
            
            160
            
            
            
            (64
            )
            
            
            (40
            )%Total Depreciationand amortization
            
            $
            155
            
            
            $
            106
            
            
            $
            49
            
            
            
            46
            %
            
            $
            401
            
            
            $
            295
            
            
            $
            106
            
            
            
            36
            %





Amortization
of intangibles consists of amortization of $32,000 of the capitalized value of
provider contracts that were acquired in the 2003 acquisition of the assets of
our predecessor, American CareSource Corporation by Patient Infosystems (now
CareGuide, Inc.), our former parent corporation.  Amortization in the
third quarter and the nine months ended September 30, 2008 included amortization
of approximately $21,000 and $63,000, respectively, related to the value
assigned to software as part of the aforementioned transaction.  The
balance became fully amortized as of December 31, 2008.





The
increase in depreciation expense is due to increased capital expenditures
(primarily internally developed software) during 2008 and the nine months ended
September 30, 2009 due to new capabilities and functionality within our internal
systems.





Income Tax
Provision





For the
three months ended September 30, 2009 and 2008, a provision for income taxes of
$20,555 and $25,559, respectively, was recorded.  For the nine months
ended September 30, 2009 and 2008, a provision for income taxes of $57,067 and
$61,623, respectively, was recorded.  The provision for the
aforementioned periods represents our estimated margin tax liability in the
State of Texas.  Because we continue to believe that we should
maintain our valuation allowance on our net operating loss carryforward, which
was approximately $5.0 million at December 31, 2008, and any federal taxes
related to our current year income would be offset by the net operating loss
carryforward,.  we have no federal income tax provision for the three
and nine months ended September 30, 2009.





19




FINANCIAL
CONDITION AND LIQUIDITY





As of
September 30, 2009, the Company had working capital of $9.3 million compared to
$7.8 million at December 31, 2008.  Our cash and cash equivalents
balance decreased to $10.3 million as of September 30, 2009 compared to $10.6
million at December 31, 2008.  The decrease in cash is primarily
related to the $1 million payment made to one of our significant customers as
required by the amendment of our agreement with that client.  The
decrease was offset by cash generated from operations.




For the nine months ended September 30, 2009, operating
activities provided net cash of approximately $812,405, the primary components
of which were net income of approximately $960,000, adjusted for non-cash items
including: share-based compensation expense of approximately $1.0 million,
depreciation and amortization of approximately $401,000, an unrealized gain on
the warrant derivative of approximately $232,000, and amortization of the
warrant costs of approximately of $106,000 and amortization of the costs
associated with the amendment to the contract with one of our significant
clients of $187,500, as well as, a net cash outflow from net operating assets
and liabilities of approximately $1.6 million, compared to the corresponding
prior year quarter.  The net cash outflow from net operating assets
and liabilities was due primarily to the previously mentioned $1 million payment
made to one of our significant clients and the timing of collection of claims
paid to us by our clients and payments made by us to the service providers in
our network.





Investing
activities during the nine months ended September 30, 2009 were comprised of
investments in software development costs of approximately $464,000 and in
property and equipment of approximately $593,000.  The software
development costs relate primarily to enhancements to our internal billing
system, while the increase in property and equipment relates primarily to
investments in computer equipment and leasehold improvements made to our
expanded lease space to accommodate continued growth and increased
headcount.





Historically,
we have relied on external sources of capital, including indebtedness or
issuance of equity securities to fund our operations.  We believe our
current cash balance of $10.3 million as of September 30, 2009 and expected
future cash flows from operations will be sufficient to meet our anticipated
cash needs for working capital, capital expenditures and other activities
through at least the next twelve months.  If operating cash flows are
not sufficient to meet our needs, we believe that credit or access to capital
through issuance of equity would be available to us.  However, as a
result of the tightening in the credit markets, low level of liquidity in many
financial markets and extreme volatility in fixed income, credit, currency and
equity markets, there can be assurances that, if necessary, we would be
successful in obtaining sufficient capital financing on commercially reasonable
terms or at all.





INFLATION





Inflation
did not have a significant impact on the Company’s costs during the quarters
ended September 30, 2009 and September 30, 2008, respectively.  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,
2009 or 2008 or for the periods then ended.





ITEM 3.
            Evaluation
      of Disclosure Controls and
Procedures





Evaluation of Disclosure Controls
and Procedures .  Our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as of September 30,
2009.  Based upon this evaluation, our Chief Executive Officer and
Chief 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 the 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 Chief Executive
Officer and Chief 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 Chief Executive Officer and Chief Financial Officer, has concluded that
there were no changes in the Company’s internal controls over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
since the last fiscal quarter that have materially affected the Company’s
internal controls over financial reporting or are reasonably likely to
materially affect internal controls over financial reporting, including any
corrective actions with regard to significant deficiencies and material
weaknesses.





PART II.
            OTHER
      INFORMATION





ITEM
      1.
            Risk
      Factors





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 2008 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.  Please note, however, that
those are not the only risk factors facing us.  During the nine months
ended September 30, 2009, one of our significant customers, accounting for 35%
of our revenues during the three months ended September 30, 2009, entered into a
merger agreement with a large supplier of independent, network-based cost
management solutions.  We will seek to continue our existing
relationship with the resulting organization, but we cannot assume that our
position with our customer will not be affected.  In addition, our
business is also subject to the effects of changes in our provider
base.  Although we have very limited concentration of providers, Quest
Diagnostics, Inc., one of our laboratory specialty providers, accounting for
approximately 6% of our revenues during the nine months ended September 30,
2009, recently terminated its relationship with us.




20


Our
business, financial condition and results of operations could be seriously
harmed if any of these risks or uncertainties actually occur or
materialize.  In that event, the market price for our common stock
could decline, and our shareholders may lose all or part of their
investment.  During the three months ended September 30, 2009, there
were no material changes in the information regarding risk factors contained in
our Annual Report on Form 10-K for the year ended December 31,
2008.





ITEM 2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds





On
January 20, 2009, the Company issued an aggregate of 7,144 shares of its common
stock in connection with an exercise by an accredited investor of restricted
warrants to purchase an aggregate of 7,144 shares for an aggregate exercise
price of $39,292, which was received in December 2008.





On April
21, 2009, the Company issued 1,863 shares of its common stock in connection with
a cashless exercise by an accredited investor of restricted warrants to purchase
an aggregate of 2,000 shares.  The Holder of the warrant forfeited the
right to acquire 137 shares of its common stock under the warrant as
consideration for this cashless exercise.





On May 7,
2009, the Company issued 1,864 shares of its common stock in connection with a
cashless exercise by an accredited investor of restricted warrants to purchase
an aggregate of 2,000 shares.  The Holder of the warrant forfeited the
right to acquire 136 shares of its common stock under the warrant as
consideration for this cashless exercise.





On May
21, 2009, the Company issued an aggregate of 2,300 shares of its common stock in
connection with an exercise by an accredited investor of restricted warrants to
purchase an aggregate of 2,300 shares for an aggregate exercise price of
$12,650.





This
share issuances described above were each not registered under the Securities
Act of 1933, as amended (the “Securities Act”).  The issuance were
each exempt from registration pursuant to Section 4(2) of the Securities Act and
Regulation D thereunder, as it was a transaction by the issuer that did not
involve public offerings of securities and involved a sale made to an accredited
investor.





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





21





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.By:
              /s/ David
      S. BooneDavid
      S. BoonePresident
      and Chief Executive Officer (principal executive officer and an authorized
      signatory)


By:
                /s/ Steven
      J. ArmondSteven
      J. ArmondChief
      Financial Officer (principal financial officer and an authorized
      signatory)
 By:
                  /s/ Matthew
      D. ThompsonMatthew
      D. ThompsonController
      (principal accounting officer and an authorized
      signatory)
 Date:
November 9, 2009








22


---