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 June 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 August 10, 2009 was
15,431,391.
  
  TABLE OF
CONTENTS
 AMERICAN
CARESOURCE HOLDINGS, INC.
 FORM
10-Q
 FOR THE
QUARTER ENDED JUNE 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
              12Item 3.
              Evaluation of Disclosure Controls and
      Procedures
              21Part II
              
              Other
      Information
              22Item 1.
              Risk
      Factors
              22Item 2.
              Unregistered Sales
      of Equity Securities and Use of Proceeds
              22Item 3.
              Submission of
      Matters to a Vote of Security Holders
              23Item 4.
              Exhibits
              23Signatures
              24
  
  PARTI.
              FINANCIAL
      INFORMATION
  ITEM
      1.
              Financial
      Statements
  AMERICAN
CARESOURCE HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF INCOME
 (Unaudited)
  Three months
      ended
              
              
              Six months
      endedJune 30,
              
              
              June 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
    revenues
              
              $
              17,134,653
              
              
              $
              13,012,528
              
              
              $
              33,190,303
              
              
              $
              24,518,203Cost of
      revenues:Provider
      payments
              
              
              12,879,496
              
              
              
              9,554,966
              
              
              
              24,815,332
              
              
              
              17,945,576Administrative
      fees
              
              
              778,146
              
              
              
              751,018
              
              
              
              1,593,672
              
              
              
              1,452,694Claims
      administration and provider development
              
              
              1,131,167
              
              
              
              804,609
              
              
              
              2,135,740
              
              
              
              1,513,445Total cost of
      revenues
              
              
              14,788,809
              
              
              
              11,110,593
              
              
              
              28,544,744
              
              
              
              20,911,715Contribution
      margin
              
              
              2,345,844
              
              
              
              1,901,935
              
              
              
              4,645,559
              
              
              
              3,606,488Selling, general and
      administrative expenses
              
              
              1,980,887
              
              
              
              1,194,504
              
              
              
              3,881,565
              
              
              
              2,307,358Depreciation and
      amortization
              
              
              132,315
              
              
              
              96,606
              
              
              
              245,112
              
              
              
              188,672Total operating
      expenses
              
              
              2,113,202
              
              
              
              1,291,110
              
              
              
              4,126,677
              
              
              
              2,496,030Operating
      income
              
              
              232,642
              
              
              
              610,825
              
              
              
              518,882
              
              
              
              1,110,458Other income
      (expense):Interest
      income
              
              
              35,706
              
              
              
              31,240
              
              
              
              76,668
              
              
              
              71,908Interest
      expense
              
              
              -
              
              
              
              (1,606
              )
              
              
              (312
              )
              
              
              (3,444
              )Unrealized gain on warrant
      derivative
              
              
              278,591
              
              
              
              -
              
              
              
              254,109
              
              
              
              -Total other income,
      net
              
              
              314,297
              
              
              
              29,634
              
              
              
              330,465
              
              
              
              68,464Income before income
      taxes
              
              
              546,939
              
              
              
              640,459
              
              
              
              849,347
              
              
              
              1,178,922Income tax
      provision
              
              
              13,163
              
              
              
              19,019
              
              
              
              36,512
              
              
              
              36,064Net income
              
              $
              533,776
              
              
              $
              621,440
              
              
              $
              812,835
              
              
              $
              1,142,858Earnings per common
      share:Basic
              
              $
              0.03
              
              
              $
              0.04
              
              
              $
              0.05
              
              
              $
              0.08Diluted
              
              $
              0.03
              
              
              $
              0.04
              
              
              $
              0.04
              
              
              $
              0.07Basic weighted average common
      shares outstanding
              
              
              15,425,774
              
              
              
              15,069,007
              
              
              
              15,422,144
              
              
              
              14,973,213Diluted weighted average common
      sharesoutstanding
              
              
              18,054,976
              
              
              
              17,435,365
              
              
              
              18,171,233
              
              
              
              17,343,860
  See
      accompanying notes.
  1
  AMERICANCARESOURCE HOLDINGS, INC.CONSOLIDATED BALANCE
      SHEETSJune 30,2009
              
              
              December
    31,(Unaudited)
              
              
              2008ASSETSCurrent
      assets:Cash and cash
      equivalents
              
              $
              9,906,816
              
              
              $
              10,577,829Accounts
      receivable, net
              
              
              6,875,211
              
              
              
              5,788,457Prepaid
      expenses and other current assets
              
              
              775,916
              
              
              
              489,928Deferred
      income taxes
              
              
              5,886
              
              
              
              5,886Total
      current assets
              
              
              17,563,829
              
              
              
              16,862,100Property and equipment,
      net
              
              
              1,508,935
              
              
              
              915,224Other
    assets:Deferred
      income taxes
              
              
              243,959
              
              
              
              243,959Other
      non-current assets
              
              
              887,744
              
              
              
              883,155Intangible
      assets, net
              
              
              1,216,623
              
              
              
              1,280,656Goodwill
              
              
              4,361,299
              
              
              
              4,361,299$
              25,782,389
              
              
              $
              24,546,393LIABILITIES AND SHAREHOLDERS'
      EQUITYCurrent
      liabilities:Due to service
      providers
              
              $
              6,750,646
              
              
              $
              5,964,392Accounts
      payable and accrued liabilities
              
              
              2,029,555
              
              
              
              3,111,862Total
      current liabilities
              
              
              8,780,201
              
              
              
              9,076,254Warrant derivative
      liability
              
              
              87,693
              
              
              
              -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
              
              
              154,323
              
              
              
              154,0692009 and 2008,
      respectivelyAdditional
      paid-in capital
              
              
              19,738,507
              
              
              
              19,046,367Accumulated
      deficit
              
              
              (2,978,335
              )
              
              
              (3,733,350
              )Total shareholders'
      equity
              
              
              16,914,495
              
              
              
              15,467,086$
              25,782,389
              
              
              $
              24,546,393
  See
      accompanying notes.
  2
  AMERICANCARESOURCE 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 featureof equity-linked financial
      instrument to derivativewarrant
      liability
              
              
              -
              
              
              
              -
              
              
              
              (316,376
              )
              
              
              (57,820
              )
              
              
              (374,196
              )Net income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              812,835
              
              
              
              812,835Stock-based compensation
      expense
              
              
              -
              
              
              
              -
              
              
              
              616,969
              
              
              
              -
              
              
              
              616,969Issuance 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 June 30,
      2009
              
              
              15,432,338
              
              
              $
              154,323
              
              
              $
              19,738,507
              
              
              $
              (2,978,335
              )
              
              $
              16,914,495
  See
      accompanying notes.
  3
  AMERICANCARESOURCE
HOLDINGS, INC.
 CONSOLIDATED STATEMENTS OF CASH
FLOWS
 (Unaudited)
  Six months ended June
      30,2009
              
              
              2008Cash flows from operating
      activities:Net
      income
              
              $
              812,835
              
              
              $
              1,142,858Adjustments to
      reconcile net income to net cashprovided
      by operations:Stock-based compensation
      expense
              
              
              616,969
              
              
              
              316,147Depreciation and
      amortization
              
              
              245,112
              
              
              
              188,672Unrealized gain on warrant
      derivative
              
              
              (254,109
              )
              
              
              -Amortization of long-term client
      agreement
              
              
              125,000
              
              
              
              -Client
      administration fee expense related to warrants
              
              
              56,022
              
              
              
              26,455Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (1,086,754
              )
              
              
              (770,020
              )Prepaid expenses and other
      assets
              
              
              (168,312
              )
              
              
              13,876Accounts payable and accrued
      liabilities
              
              
              (1,047,071
              )
              
              
              285,403Due to service
      providers
              
              
              786,254
              
              
              
              881,081Net cash provided by operating
      activities
              
              
              85,946
              
              
              
              2,084,472Cash flows from investing
      activities:Investment in
      software development costs
              
              
              (329,347
              )
              
              
              (284,085
              )Additions to
      property and equipment
              
              
              (437,471
              )
              
              
              (105,461
              )Net cash used in investing
      activities
              
              
              (766,818
              )
              
              
              (389,546
              )Cash flows from financing
      activities:Payments on
      long-term debt
              
              
              (5,501
              )
              
              
              (27,360
              )Proceeds from
      exercise of stock warrants
              
              
              12,650
              
              
              
              -Proceeds from
      exercise of stock options
              
              
              2,710
              
              
              
              137,331Net cash provided by financing
      activities
              
              
              9,859
              
              
              
              109,971Net increase (decrease) in cash
      and cash equivalents
              
              
              (671,013
              )
              
              
              1,804,897Cash and cash equivalents at
      beginning of period
              
              
              10,577,829
              
              
              
              4,272,498Cash and cash equivalents at end
      of period
              
              $
              9,906,816
              
              
              $
              6,077,395Supplemental non-cash
      activity:Warrants issued as payment of
      client administrative fees
              
              $
              311,259
              
              
              $
              161,311
  4
  AMERICANCARESOURCE 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 June 30, 2009 and December 31, 2008 and operating result
amounts are for the three and six months ended June 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.
  In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131,
“Disclosures About Segments of an Enterprise and Related Information,” 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.
  5
  (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.
  The
Company presents its revenues in accordance with EITF No. 99-19 “Reporting Gross
Revenue as a Principal vs. Net as an Agent” (EITF 99-19), which requires the
determination of whether the Company is acting as a principal or an agent in the
fulfillment of the services rendered.  After careful evaluation of the
key indicators detailed in EITF No. 99-19, 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 under EITF No. 99-19 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 as
      described in EITF No. 99-19.  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.
  6
  ·
              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.
  The
Company has evaluated the other indicators under EITF 99-19, 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 indicators detailed in EITF No. 99-19 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 six months ended June 30, 2009, its net
revenues would have been approximately $4.3 million and $8.4 million,
respectively.  For the three and six months ended June 30, 2008, its
net revenues would have been approximately $3.5 million and $6.6 million,
respectively.
  7
  During
the three and six months ended June 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 June 30, 2009
              
              
              
              
              
              Periods
      ended June 30, 2008As
      of June
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              As
      of June30,
      2009
              
              
              Three
      months
              
              
              Six
      months
              
              
              30,
      2008
              
              
              Three
      months
              
              
              Six
      monthsAccounts
              
              
              
              
              
              % of
      Total
              
              
              
              
              
              % of
      Total
              
              
              Accounts
              
              
              
              
              
              % of
      Total
              
              
              
              
              
              % of
      Totalreceivable
              
              
              Revenue
              
              
              Revenues
              
              
              Revenue
              
              
              Revenues
              
              
              receivable
              
              
              Revenue
              
              
              Revenues
              
              
              Revenue
              
              
              RevenuesCustomer
      A
              
              $
              3,353
              
              
              $
              8,179
              
              
              
              48
              %
              
              $
              16,917
              
              
              
              51
              %
              
              $
              2,183
              
              
              $
              7,880
              
              
              
              60
              %
              
              $
              14,947
              
              
              
              61
              %Customer
      B
              
              
              2,401
              
              
              
              6,851
              
              
              
              40
              %
              
              
              13,297
              
              
              
              40
              %
              
              
              2,183
              
              
              
              5,025
              
              
              
              39
              %
              
              
              9,040
              
              
              
              37
              %Others
              
              
              1,121
              
              
              
              2,105
              
              
              
              12
              %
              
              
              2,976
              
              
              
              9
              %
              
              
              55
              
              
              
              108
              
              
              
              1
              %
              
              
              531
              
              
              
              2
              %$
              6,875
              
              
              $
              17,135
              
              
              
              100
              %
              
              $
              33,190
              
              
              
              100
              %
              
              $
              4,421
              
              
              $
              13,013
              
              
              
              100
              %
              
              $
              24,518
              
              
              
              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
              
              
              Six months
      endedJune
      30,
              
              
              June 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Numerator for basic and diluted
      earnings per share:Net income
              
              $
              534
              
              
              $
              621
              
              
              $
              813
              
              
              $
              1,143Denominator:Weighted-average basic common
      shares outstanding
              
              
              15,426
              
              
              
              15,069
              
              
              
              15,422
              
              
              
              14,973Assumed conversion of dilutive
      securities:Stock
      options
              
              
              889
              
              
              
              806
              
              
              
              970
              
              
              
              833Warrants
              
              
              1,733
              
              
              
              1,560
              
              
              
              1,775
              
              
              
              1,538Restricted
      Stock Units
              
              
              7
              
              
              
              -
              
              
              
              4
              
              
              
              -Potentially dilutive common
      shares
              
              
              2,629
              
              
              
              2,366
              
              
              
              2,749
              
              
              
              2,371Denominator for diluted
      earningsper share - Adjusted weighted -
      average shares
              
              
              18,055
              
              
              
              17,435
              
              
              
              18,171
              
              
              
              17,344Earnings per common
      share:Basic
              
              $
              0.03
              
              
              $
              0.04
              
              
              $
              0.05
              
              
              $
              0.08Diluted
              
              $
              0.03
              
              
              $
              0.04
              
              
              $
              0.04
              
              
              $
              0.07
  (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).
  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 six months ended June 30, 2009, we
recorded amortization related to the agreement of $62,500 and $125,000,
respectively.  At June 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 $625,000
balance was classified as a long-term other asset at June 30, 2009.
  8
  (5)
              Stock
      Warrants
  In June
2008, the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues
Task Force (“EITF”) Issue No. 07-5, “Determining Whether an Instrument (or
Embedded Feature) Is Indexed to Entity’s Own Stock (“EITF
07-5”).  EITF 07-5 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 of EITF 07-5, resulted in the instruments no longer being
considered indexed to the Company’s own stock.  Accordingly, adoption
of EITF 07-5 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 first six months of 2009, the liability
was adjusted for warrants exercised and the change in fair value of the
warrants.  In accordance with EITF 07-5, a liability of $87,693
related to the stock warrants is included as a warrant derivative liability in
our consolidated balance sheet as of June 30, 2009.  During the three
and six months ended June 30, 2009, we recorded an unrealized gain on warrant
derivative of $278,591 and $254,109, 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 June 30, 2009, 75%, or 168,750 warrants 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 56,250 warrants, which were recorded as other non-current assets and will be
amortized over the related contract period.  The total fair value of
the fourth tranche of warrants was $311,259, which was recorded based on the
Black-Scholes-Merton method.
  (6)
              Warrant
      Derivative
  As a
result of the adoption of EITF 07-5, the Company is required to disclose the
fair value measurements required by SFAS No. 157, “Fair Value Measurements.” The
warrant derivative liability recorded at fair value in the balance sheet as of
June 30, 2009 is categorized based upon the level of judgment associated with
the inputs used to measure their fair value.  Hierarchical levels,
defined by SFAS No. 157 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 June 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
              
              $
              88
              
              
              $
              —
              
              
              $
              —
              
              
              $
              88
  9
 
 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.  In accordance with EITF
07-5, we calculated the fair value of the warrants using the
Black–Scholes–Merton valuation model.  During the three and six months
ended June 30, 2009, we recognized $278,591 and $254,109, respectively, of
unrealized gains 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,
              
              
              March 31,
              
              
              June 30,2009
              
              
              2009
              
              
              2009Fair value
              
              $
              3.43
              
              
              $
              3.64
              
              
              $
              0.88Expected
      volatility
              
              
              73.4
              %
              
              
              68.6
              %
              
              
              70.5
              %Expected life
      (years)
              
              
              2.13
              
              
              
              1.89
              
              
              
              1.65Risk free interest
      rate
              
              
              0.8
              %
              
              
              0.8
              %
              
              
              0.9
              %Forfeiture
      rate
              
              
              -
              
              
              
              -
              
              
              
              -Dividend
    rate
              
              
              -
              
              
              
              -
              
              
              
              -
 
 The
following table reflects the activity for liabilities measured at fair value
using Level 3 inputs for the six months ended June 30, 2009 (amounts in
thousands):
  Initial
      recognition of warrant derivative as of January 1, 2009
              
              $
              374Transfers
      into level 3
              
              
              —Transfers
      out of level 3
              
              
              —Sales
      of warrant derivative
              
              
              (32
              )Unrealized
      gains related to the change in fair value
              
              
              (254
              )Balance
      as of June 30, 2009
              
              $
              88
 
 In
addition, the Company’s financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses and
long-term debt.  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.  Based on the borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities, the fair value of long-term debt approximates its carrying
value.
  (7)
              Subsequent
      Events
  On July
21, 2009, David A. George was appointed to the Board of Directors (the “Board”)
of the Company.  Mr. George was also appointed to serve as
non-executive Chairman of the Board.  In connection with his
appointment to the Board, Mr. George was granted (i) a stock option to purchase
100,000 shares of common stock and (ii) 3,333 restricted stock
units.  The stock option and restricted stock units vest in equal
successive annual installments over a 5-year period.  Edward B.
Berger, the previous Chairman, will continue to serve on the Board.
  Effective
July 31, 2009, the Company has entered into a Release and Acknowledgement
Agreement (the “Agreement”) with Kurt Fullmer, in connection with Mr. Fullmer’s
resignation as the Company’s Vice President of Client
Development.  The Agreement provides for, among other things, cash
payments by the Company to Mr. Fullmer of an aggregate of approximately $112,500
over the next six months.  The Agreement also provides that restricted
stock units exercisable for 8,761 shares of common stock that Mr. Fullmer had
previously received as a bonus for 2008 vest immediately, that options to
purchase 17,500 shares that Mr. Fullmer had previously received will vest
through September 24, 2009 as compensation for consulting services to be
rendered through such time, and that all other unvested options and grants shall
expire.  The Company’s offer remains outstanding through August 21,
2009.
  10
  On August
3, 2009, an announcement was made that one of our significant customers will be
acquired by a national provider of healthcare cost management
solutions.  The transaction is expected to be closed by the end of
2009, subject to the satisfaction of closing conditions including customary
regulatory approvals.  During the three and six months ended June 30,
2009, $6.9 million and $13.3 million of revenue was generated from this
customer.
  (8)
              Recent
      Accounting Pronouncements
  In June
2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168,
The “FASB Accounting Standards
Codification” and the Hierarchy of Generally Accepted Accounting
Principles.  This standard replaces SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, and establishes only two levels of U.S. GAAP,
authoritative and non-authoritative.  The FASB Accounting Standards
Codification (the “Codification”) will become the source of authoritative,
nongovernmental GAAP, except for rules and interpretive releases of the SEC,
which are sources of authoritative GAAP for SEC registrants.  All
other non-grandfathered, non-SEC accounting literature not included in the
Codification will become non-authoritative.  This standard is
effective for financial statements for interim or annual reporting periods
ending after September 15, 2009.  We will begin to use the new
guidelines and numbering system prescribed by the Codification when referring to
GAAP in the third quarter of fiscal 2009.  As the Codification was not
intended to change or alter existing GAAP, it will not have any impact on our
consolidated financial statements.
  In May
2009, the FASB issued SFAS No. 165, Subsequent
Events.  This standard is intended to establish general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued.  Specifically, this standard sets forth the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet
date.  Management of the Company has evaluated the period after the
balance sheet date up through August 11, 2009, which is the date that the
consolidated financial statements were issued, and determined that there were no
subsequent events or transactions that required recognition or disclosure in the
consolidated financial statements.
  FORWARD-LOOKING
STATEMENTS
  This
discussion includes forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.  You can identify these statements
by forward-looking words such as “may,” “will,” “expect,” “intend”,
“anticipate,” “believe,” “estimate” and “continue” or similar
words.  You should read statements that contain these words carefully
because they discuss our future expectations, contain projections of our future
operating results or of our financial condition or state other “forward-looking”
information.
  We
believe it is important to communicate to our stockholders and potential
investors not only the Company’s current condition, but management’s forecasts
about the Company’s future opportunities, performance and results, including,
for example, information with respect to potential margin expansion, cash
reserves and other financial items, and our strategies and
prospects.  However, forward-looking statements are based on current
expectations and assumptions and are subject to substantial risks and
uncertainties, including, but not limited to, risks of market acceptance of, or
preference for, the Company’s systems and services, competitive forces, the
impact of geopolitical events and changes in government regulations, general
economic conditions and economic factors in the country and the healthcare
industry, including the recent economic downturns and increases in unemployment
and other risk factors as may be listed from time to time in the Company’s
filings with the SEC.  In evaluating such forward-looking statements,
investors should specifically consider the matters set forth under the caption
“Risk Factors” appearing in our Annual Report on Form 10-K for the year ended
December 31, 2008 which was filed with the SEC on March 31, 2009, as well as any
other cautionary language contained in this quarterly report, any of which could
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements.  Except to the extent required by
applicable securities laws and regulations, we disclaim any obligation to update
or revise information contained in any forward-looking statement contained
herein to reflect events or circumstances occurring after the date of this
quarterly report.
  11
  ITEM2.
              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 six months ended June 30, 2009 and its financial condition at June
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.
  12
  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.
  13
  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.
  ANALYSIS
OF RESULTS OF OPERATIONS
  Revenues
  The
following table sets forth a comparison of our revenues for the periods
presented ended June 30:
  Second
    Quarter
              
              
              Six MonthsChange
              
              
              
              
              
              
              
              
              Change($ in
      thousands)
              
              2009
              
              
              2008
              
              
              $
              
              
              %
              
              
              2009
              
              
              2008
              
              
              $
              
              
              %Net
    revenues
              
              $
              17,135
              
              
              $
              13,013
              
              
              $
              4,122
              
              
              
              32
              %
              
              $
              33,190
              
              
              $
              24,518
              
              
              $
              8,672
              
              
              
              35
              %
  The
Company’s net revenues are generated from ancillary healthcare service
claims.  Revenue is recognized when we bill our client payors for
services performed.  Overall, the increase in revenue for the three
and six months ended June 30, 2009 as compared to the same periods in 2008 was
due 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.
  Revenues
generated from clients with whom we had relationships commencing in 2007 and
prior (which consist primarily of our two significant customers as described in
Note 2, “Revenue Recognition” of the Notes to the Condensed Financial
Statements), increased $2.1 million, or 16%, in the second quarter of 2009
compared to the same prior year period, and $5.9 million or 24% for the first
six months of 2009 compared to the same period in 2008.  The increase
is due to the progression and development of our client relationships, which
resulted in an increased number of payors and increased claims
volume.  In addition, during 2008, we implemented seven new clients
(one of which is an affiliate of one of our two existing significant customers),
which were responsible for approximately $919,000 and $1.7 million of
incremental revenues in the three and six months ended June 30,
2009.  Five new clients implemented in 2009 contributed incremental
revenues of $1.1 million in the three and six months ended June 30,
2009.
  The
following table details revenues generated by clients and the periods in which
those clients were added for the periods presented ended June 30 (amounts in
thousands):
  Year of
      implementation
              
              2007 and
    prior
              
              
              2008
              
              
              2009
              
              
              TotalSecond quarter
      2009
              
              $
              15,144
              
              
              $
              928
              
              
              $
              1,063
              
              
              $
              17,135Second quarter
      2008
              
              
              13,004
              
              
              
              9
              
              
              
              -
              
              
              
              13,013Six months
      2009
              
              $
              30,393
              
              
              $
              1,724
              
              
              $
              1,073
              
              
              $
              33,190Six months
      2008
              
              
              24,509
              
              
              
              9
              
              
              
              -
              
              
              
              24,518
  14
 
 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.  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  six months ended June 30, 2009, the
number of billed claims increased by 53% and 51%, 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 half of 2009 as well as through expansion of our network of service
providers.
  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 six months of
2009.  In particular, we have experienced accelerated growth in
categories such as laboratory services with a lower average revenue per claim
while other higher average revenue per claim categories such as dialysis
services have not grown as rapidly.  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 June 30 (claim
amounts in thousands):
  Three months
      ended
              
              
              Six
      months ended2009
              
              
              2008
              
              
              2009
              
              
              2008Claims
      processed
              
              
              121
              
              
              
              72
              
              
              
              211
              
              
              
              132Claims
    billed
              
              
              101
              
              
              
              66
              
              
              
              181
              
              
              
              120Revenue per processed
      claim
              
              $
              142
              
              
              $
              180
              
              
              $
              157
              
              
              $
              186Revenue per billed
      claim
              
              
              169
              
              
              
              197
              
              
              
              183
              
              
              
              204
 
 Cost of Revenues and
Contribution Margin
  The
following table sets forth a comparison of the components of our cost of
revenues, for the periods presented ended June 30:
  Second
    QuarterChange% of
              
              
              
              
              
              % of($ in
      thousands)
              
              2009
              
              
              revenues
              
              
              2008
              
              
              revenues
              
              
              $
              
              
              %Provider
      payments
              
              $
              12,880
              
              
              
              75.2
              %
              
              $
              9,555
              
              
              
              73.4
              %
              
              $
              3,325
              
              
              
              34.8
              %Administrative
      fees
              
              
              778
              
              
              
              4.5
              
              
              
              751
              
              
              
              5.8
              
              
              
              27
              
              
              
              3.6Claims administration
      andprovider
      development
              
              
              1,131
              
              
              
              6.6
              
              
              
              805
              
              
              
              6.2
              
              
              
              326
              
              
              
              40.5Total cost of
      revenues
              
              $
              14,789
              
              
              
              86.3
              %
              
              $
              11,111
              
              
              
              85.4
              %
              
              $
              3,678
              
              
              
              33.1
              %
  15
  The
following table sets forth a comparison of the components of our cost of
revenues, for the periods presented ended June 30:
  Six MonthsChange% of
              
              
              
              
              
              % of($ in
      thousands)
              
              2009
              
              
              revenues
              
              
              2008
              
              
              revenues
              
              
              $
              
              
              %Provider
      payments
              
              $
              24,815
              
              
              
              74.8
              %
              
              $
              17,946
              
              
              
              73.2
              %
              
              $
              6,869
              
              
              
              38.3
              %Administrative
      fees
              
              
              1,594
              
              
              
              4.8
              
              
              
              1,453
              
              
              
              5.9
              
              
              
              141
              
              
              
              9.7Claims administration
      andprovider
      development
              
              
              2,136
              
              
              
              6.4
              
              
              
              1,513
              
              
              
              6.2
              
              
              
              623
              
              
              
              41.2Total cost of
      revenues
              
              $
              28,545
              
              
              
              86.0
              %
              
              $
              20,912
              
              
              
              85.3
              %
              
              $
              7,633
              
              
              
              36.5
              %
  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
second quarter of 2009, cost of revenues related to payments to providers
increased as compared to the second 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 75.2% during the second quarter of 2009 and 73.4%
during the same period in 2008.  Provider payments as a percent of
revenues increased due primarily to lower margins in our 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, and the mix of providers delivering the
services.
  Further,
in the second quarter 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 4.5% during the second 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 six months ended June 30, 2009, provider payments were 74.8% of revenues,
compared to 73.2% 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.  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, and the mix of providers delivering
the services.
  Further,
in the first half 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 4.8% during the first half 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.
  The
detail of the costs of our claims administration and provider development
organizations are as follows for the periods presented ending June 30 (amounts
in thousands):
  Second
      QuarterClaims
      Administration
              
              
              Provider
      Development
              
              
              TotalIncrease
              
              
              
              
              
              
              
              
              Increase
              
              
              
              
              
              
              
              
              Increase2009
              
              
              2008
              
              
              (Decrease)
              
              
              2009
              
              
              2008
              
              
              (Decrease)
              
              
              2009
              
              
              2008
              
              
              (Decrease)Total
      wages, incentives and benefits
              
              $
              608
              
              
              $
              430
              
              
              $
              178
              
              
              
              41
              %
              
              $
              372
              
              
              $
              216
              
              
              $
              156
              
              
              
              72
              %
              
              $
              980
              
              
              $
              646
              
              
              $
              334
              
              
              
              52
              %Contract
      labor and consulting fees
              
              
              172
              
              
              
              240
              
              
              
              (68
              )
              
              
              -28
              %
              
              
              69
              
              
              
              10
              
              
              
              59
              
              
              
              590
              %
              
              
              241
              
              
              
              250
              
              
              
              (9
              )
              
              
              -4
              %Capitalized
      development costs
              
              
              (215
              )
              
              
              (203
              )
              
              
              (12
              )
              
              
              6
              %
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              0
              %
              
              
              (215
              )
              
              
              (203
              )
              
              
              (12
              )
              
              
              6
              %Other
              
              
              37
              
              
              
              34
              
              
              
              3
              
              
              
              9
              %
              
              
              6
              
              
              
              5
              
              
              
              1
              
              
              
              20
              %
              
              
              43
              
              
              
              39
              
              
              
              4
              
              
              
              10
              %Allocation
      of shared overheads
              
              
              (18
              )
              
              
              8
              
              
              
              (26
              )
              
              
              -325
              %
              
              
              100
              
              
              
              65
              
              
              
              35
              
              
              
              54
              %
              
              
              82
              
              
              
              73
              
              
              
              9
              
              
              
              12
              %$
              584
              
              
              $
              509
              
              
              $
              75
              
              
              
              15
              %
              
              $
              547
              
              
              $
              296
              
              
              $
              251
              
              
              
              85
              %
              
              $
              1,131
              
              
              $
              805
              
              
              $
              326
              
              
              
              40
              %
  16
  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 June 30, 2009 and 2008 were
      as follows:  Operations -- 20 and 15, respectively; Information
      Technology -- 11 and 7, respectively; and Provider Development -- 17 and
      10, 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.  In addition, consulting fees includes administrative fees
      paid to a third-party which manages and maintains a national imaging
      network; 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 quarter of
  2008.
  The
detail of the costs of our claims administration and provider development
organizations are as follows for the periods presented ending June 30 (amounts
in thousands):
  Six
      MonthsClaims
      Administration
              
              
              Provider
      Development
              
              
              TotalIncrease
              
              
              
              
              
              
              
              
              Increase
              
              
              
              
              
              
              
              
              Increase2009
              
              
              2008
              
              
              (Decrease)
              
              
              2009
              
              
              2008
              
              
              (Decrease)
              
              
              2009
              
              
              2008
              
              
              (Decrease)Total
      wages, incentives and benefits
              
              $
              1,142
              
              
              $
              827
              
              
              $
              315
              
              
              
              38
              %
              
              $
              680
              
              
              $
              374
              
              
              $
              306
              
              
              
              82
              %
              
              $
              1,822
              
              
              $
              1,201
              
              
              $
              621
              
              
              
              52
              %Contract
      labor and consulting fees
              
              
              289
              
              
              
              346
              
              
              
              (57
              )
              
              
              -16
              %
              
              
              119
              
              
              
              10
              
              
              
              109
              
              
              
              1090
              %
              
              
              408
              
              
              
              356
              
              
              
              52
              
              
              
              15
              %Capitalized
      development costs
              
              
              (329
              )
              
              
              (284
              )
              
              
              (45
              )
              
              
              16
              %
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              0
              %
              
              
              (329
              )
              
              
              (284
              )
              
              
              (45
              )
              
              
              16
              %Other
              
              
              63
              
              
              
              58
              
              
              
              5
              
              
              
              9
              %
              
              
              32
              
              
              
              6
              
              
              
              26
              
              
              
              433
              %
              
              
              95
              
              
              
              64
              
              
              
              31
              
              
              
              48
              %Allocation
      of shared overheads
              
              
              (47
              )
              
              
              65
              
              
              
              (112
              )
              
              
              -172
              %
              
              
              187
              
              
              
              111
              
              
              
              76
              
              
              
              68
              %
              
              
              140
              
              
              
              176
              
              
              
              (36
              )
              
              
              -20
              %$
              1,118
              
              
              $
              1,012
              
              
              $
              106
              
              
              
              10
              %
              
              $
              1,018
              
              
              $
              501
              
              
              $
              517
              
              
              
              103
              %
              
              $
              2,136
              
              
              $
              1,513
              
              
              $
              623
              
              
              
              41
              %
  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 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.  In
      addition, consulting fees includes administrative fees paid to a
      third-party which manages and maintains a national imaging
      network.  These costs were incremental compared to the prior
      year period; 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 quarter of
  2008.
  17
  The
following table sets forth a comparison of contribution margin percentage for
the periods presented ending June 30:
  Second
    Quarter
              
              
              Six monthsChange
              
              
              
              
              
              
              
              
              Change2009
              
              
              2008
              
              
              % pts
              
              
              2009
              
              
              2008
              
              
              % ptsContribution margin
      percentage
              
              
              13.7
              %
              
              
              14.6
              %
              
              
              (0.9
              )%
              
              
              14.0
              %
              
              
              14.7
              %
              
              
              (0.7
              )
      %
  Contribution
margin percentage is calculated by dividing the difference between net revenues
and total cost of revenues by net revenues.  The components of
contribution margin changed for the three and six month periods as
follows:  Provider payments – declines of 1.8% and 1.6%, respectively;
administrative fees – increases of 1.3% and 1.1%, respectively; and cost of
claims administration and provider development – declines of 0.4% and 0.4%,
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.
  Selling, General and
Administrative Expenses
  The
following table sets forth a comparison of our selling, general and
administrative (“SG&A”) expenses for the periods presented ending June
30:
  Second
    Quarter
              
              
              Six MonthsChange
              
              
              
              
              
              
              
              
              Change($ in
      thousands)
              
              2009
              
              
              2008
              
              
              $
              
              
              %
              
              
              2009
              
              
              2008
              
              
              $
              
              
              %Selling, general
      and
              
              $
              1,981
              
              
              $
              1,195
              
              
              $
              786
              
              
              
              66
              %
              
              $
              3,882
              
              
              $
              2,307
              
              
              $
              1,575
              
              
              
              68
              %administrative
      expensesPercentage of
      total net revenues
              
              
              11.6
              %
              
              
              9.2
              %
              
              
              
              
              
              
              
              
              
              
              11.7
              %
              
              
              9.4
              %
  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 June 30 (amounts in thousands):
  Second
      QuarterFinance
      & Administration
                
                
                Sales
      & Marketing
                
                
                TotalSelling,
      general and   administrative
      expenses
                
                2009
                
                
                2008
                
                
                Increase
      (Decrease)
                
                
                2009
                
                
                2008
                
                
                Increase
      (Decrease)
                
                
                2009
                
                
                2008
                
                
                Increase
      (Decrease)Total
      wages, commissions,incentives
      and benefits
                
                $
                453
                
                
                $
                381
                
                
                $
                72
                
                
                
                19
                %
                
                $
                440
                
                
                $
                114
                
                
                $
                326
                
                
                
                286
                %
                
                $
                893
                
                
                $
                495
                
                
                $
                398
                
                
                
                80
                %Professional
      fees (legal,accounting
      and consulting)
                
                
                173
                
                
                
                103
                
                
                
                70
                
                
                
                68
                %
                
                
                40
                
                
                
                18
                
                
                
                22
                
                
                
                122
                %
                
                
                213
                
                
                
                121
                
                
                
                92
                
                
                
                76
                %Stock-based
      compensation expense
                
                
                285
                
                
                
                159
                
                
                
                126
                
                
                
                79
                %
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                0
                %
                
                
                285
                
                
                
                159
                
                
                
                126
                
                
                
                79
                %Investor
      relations costs
                
                
                64
                
                
                
                42
                
                
                
                22
                
                
                
                52
                %
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                0
                %
                
                
                64
                
                
                
                42
                
                
                
                22
                
                
                
                52
                %Recruiting
      costs
                
                
                35
                
                
                
                76
                
                
                
                (41
                )
                
                
                -54
                %
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                0
                %
                
                
                35
                
                
                
                76
                
                
                
                (41
                )
                
                
                -54
                %Marketing
      costs
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                0
                %
                
                
                76
                
                
                
                10
                
                
                
                66
                
                
                
                660
                %
                
                
                76
                
                
                
                10
                
                
                
                66
                
                
                
                660
                %Banking
      fees
                
                
                41
                
                
                
                31
                
                
                
                10
                
                
                
                32
                %
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                0
                %
                
                
                41
                
                
                
                31
                
                
                
                10
                
                
                
                32
                %Other
                
                
                87
                
                
                
                89
                
                
                
                (2
                )
                
                
                -2
                %
                
                
                95
                
                
                
                11
                
                
                
                84
                
                
                
                764
                %
                
                
                182
                
                
                
                100
                
                
                
                82
                
                
                
                82
                %Allocation
      of shared overheads
                
                
                122
                
                
                
                137
                
                
                
                (15
                )
                
                
                -11
                %
                
                
                70
                
                
                
                24
                
                
                
                46
                
                
                
                192
                %
                
                
                192
                
                
                
                161
                
                
                
                31
                
                
                
                19
                %Total
      selling, general andadministrative
      expenses
                
                $
                1,260
                
                
                $
                1,018
                
                
                $
                242
                
                
                
                24
                %
                
                $
                721
                
                
                $
                177
                
                
                $
                544
                
                
                
                307
                %
                
                $
                1,981
                
                
                $
                1,195
                
                
                $
                786
                
                
                
                66
                %
 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 (one of whose costs were included in cost of
      revenues during 2008 as this employee was assigned to the sales &
      marketing group in late 2008).  These resources were added
      during late-2008 and the first quarter of 2009.  In addition,
      during the first quarter of 2009, we added three administrative resources
      that contributed to the increase in compensation
      costs.  Headcount as of June 30, 2009 and 2008 were as
      follows:  Finance & Administration – 12 and 7, respectively;
      and Sales & Marketing – 10 and 5,
  respectively.
  18
  ·
              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.
  ·
              Increased
      professional fees.  During the three months ended June 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
      last six months of 2009 as we incurred a disproportionate amount of costs
      during the six months ended June 30,
2009.
  ·
              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.
  ·
              Other
      costs increased primarily due to a one-time payment of $50,000 paid to one
      of our executive officers for relocation
costs.
  Selling,
general and administrative expenses represent the following costs for the
periods presented ending June 30 (amounts in thousands):
  Six
      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
              
              $
              823
              
              
              $
              728
              
              
              $
              95
              
              
              
              13
              %
              
              $
              863
              
              
              $
              236
              
              
              $
              627
              
              
              
              266
              %
              
              $
              1,686
              
              
              $
              964
              
              
              $
              722
              
              
              
              75
              %Professional
      fees (legal,accounting
      and consulting)
              
              
              442
              
              
              
              313
              
              
              
              129
              
              
              
              41
              %
              
              
              100
              
              
              
              18
              
              
              
              82
              
              
              
              456
              %
              
              
              542
              
              
              
              331
              
              
              
              211
              
              
              
              64
              %Stock-based
      compensation expense
              
              
              528
              
              
              
              316
              
              
              
              212
              
              
              
              67
              %
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              0
              %
              
              
              528
              
              
              
              316
              
              
              
              212
              
              
              
              67
              %Investor
      relations costs
              
              
              136
              
              
              
              62
              
              
              
              74
              
              
              
              119
              %
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              0
              %
              
              
              136
              
              
              
              62
              
              
              
              74
              
              
              
              119
              %Recruiting
      costs
              
              
              65
              
              
              
              82
              
              
              
              (17
              )
              
              
              -21
              %
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              0
              %
              
              
              65
              
              
              
              82
              
              
              
              (17
              )
              
              
              -21
              %Marketing
      costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              0
              %
              
              
              155
              
              
              
              13
              
              
              
              142
              
              
              
              1092
              %
              
              
              155
              
              
              
              13
              
              
              
              142
              
              
              
              1092
              %Banking
      fees
              
              
              76
              
              
              
              58
              
              
              
              18
              
              
              
              31
              %
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              0
              %
              
              
              76
              
              
              
              58
              
              
              
              18
              
              
              
              31
              %Other
              
              
              160
              
              
              
              142
              
              
              
              18
              
              
              
              13
              %
              
              
              158
              
              
              
              20
              
              
              
              138
              
              
              
              690
              %
              
              
              318
              
              
              
              162
              
              
              
              156
              
              
              
              96
              %Allocation
      of shared overheads
              
              
              241
              
              
              
              273
              
              
              
              (32
              )
              
              
              -12
              %
              
              
              135
              
              
              
              46
              
              
              
              89
              
              
              
              193
              %
              
              
              376
              
              
              
              319
              
              
              
              57
              
              
              
              18
              %Total
      selling, general andadministrative
      expenses
              
              $
              2,471
              
              
              $
              1,974
              
              
              $
              497
              
              
              
              25
              %
              
              $
              1,411
              
              
              $
              333
              
              
              $
              1,078
              
              
              
              324
              %
              
              $
              3,882
              
              
              $
              2,307
              
              
              $
              1,575
              
              
              
              68
              %
  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 six months ended June 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.
  ·
              Increased
      professional fees.  During the six months ended June 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
      last six months of 2009 as we incurred a disproportionate amount of costs
      during the six months ended June 30,
2009.
  ·
              Marketing
      costs included $125,000 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.
  19
  ·
              Other
      costs increased primarily due to increased travel expenses related to
      client and investor relations activities during the first six 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.
  Unrealized Gain on Warrant
Derivative
  During
the three and six months ended June, 30, 2009, we had unrealized gains of
$278,591 and $254,109, respectively, related to warrants that are accounted for
under Emerging Issues Task Force (“EITF”) Issue No. 07-5, “Determining Whether
an Instrument (or Embedded Feature) Is Indexed to Entity’s Own Stock (“EITF
07-5”).  In June 2008, the Financial Accounting Standards Board
(“FASB”) ratified EITF 07-5.  It 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 of EITF 07-5, resulted in the instruments no longer
being considered indexed to the Company’s own stock.  Accordingly,
adoption of EITF 07-5 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 first six months of
2009, the liability was adjusted for warrants exercised and the change in fair
value of the warrants.  In accordance with EITF 07-5, a liability of
$87,693 related to the stock warrants is included as a warrant derivative
liability in our consolidated balance sheet as of June 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 June 30:
  Second
    Quarter
              
              
              Change
              
              
              Six
      Months
              
              
              Change($ in
      thousands)
              
              2009
              
              
              2008
              
              
              $
              
              
              %
              
              
              2009
              
              
              2008
              
              
              $
              
              
              %Depreciation
              
              $
              100
              
              
              $
              44
              
              
              $
              56
              
              
              
              127%
              
              
              $
              181
              
              
              $
              83
              
              
              $
              98
              
              
              
              118
              %Amortization
              
              
              32
              
              
              
              53
              
              
              
              (21
              )
              
              
              (40
              )%
              
              
              64
              
              
              
              106
              
              
              
              (42
              )
              
              
              (40
              )%Total
      Depreciationand
      amortization
              
              $
              132
              
              
              $
              97
              
              
              $
              35
              
              
              
              36
              %
              
              $
              245
              
              
              $
              189
              
              
              $
              56
              
              
              
              30
              %
  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
second quarter and first six months of 2008 included amortization of
approximately $21,000 and $42,000, 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 first six months
of 2009 due to new capabilities and functionality within our internal
systems.
  Income Tax
Provision
  For the
three months ended June 30, 2009 and 2008, a provision for income taxes of
$13,163 and $19,019, respectively, was recorded.  For the six months
ended June 30, 2009 and 2008, a provision for income taxes of $36,512 and
$36,064, respectively, was recorded.  The provision for the
aforementioned periods represents our estimated margin tax liability in the
State of Texas.  Because we have a valuation allowance on our net
operating loss carryforward, which was approximately $5.0 million at December
31, 2008, we have no federal income tax liability for the three and six months
ended June 30, 2009.
  FINANCIAL
CONDITION AND LIQUIDITY
  As of
June 30, 2009, the Company had working capital of $8.8 million compared to $7.8
million at December 31, 2008.  Our cash and cash equivalents balance
decreased to $9.9 million as of June 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.
  20
  For the
six months ended June 30, 2009, operating activities provided net cash of
approximately $86,000, the primary components of which were net income of
approximately $813,000, adjusted for non-cash charges of share-based
compensation expense of approximately $617,000, depreciation and amortization of
approximately $245,000 offset by a use of cash from net operation assets, and
amortization of the costs associated with the amendment to the contract with one
of our significant clients of $125,000, as well as, a net cash outflow from net
operating assets and liabilities of approximately $1.5 million, compared to the
corresponding prior year quarter.  The net cash outflow from net
operating assets and liabilities was due primarily to the aforementioned $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 six months ended June 30, 2009 were comprised of
investments in software development costs of approximately $329,000 and in
property and equipment of approximately $437,000.  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 $9.9 million as of June 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 June 30, 2009 and June 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 June 30, 2009 or
2008 or for the periods then ended.
  ITEM3.
              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 June 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.
  21
  PARTII.
              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.  Although the Company has continued to experience growth in
its revenue from 2008 to 2009, it has observed that the current economic crisis
has had an effect on our business.  First, to the extent that there
have been significant increases in unemployment, fewer people are participating
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 consolidation
within our industry could adversely affect our business, for example if any of
our clients and/or providers are involved in strategic transactions with our
competitors.  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 88% of our revenue during the three months ended June 30, 2009)
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.  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 June
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.
  ITEM2.
              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.
  22
  ITEM3.
              Submission
      of Matters to a Vote of Security
Holders
  We held
our annual meeting of stockholders on May 19, 2009.  The results of
the matters voted on at the meeting are as follows:
  With
respect to the election of directors, shares were voted as follows:
  Number
      of
              Number
      of VotesNominee
              Votes
      For
              WithheldSami
      S. Abbasi
              11,491,203
              143,478Edward
      B. Berger
              11,523,805
              110,876David
      S. Boone
              11,251,210
              383,471John
      W. Colloton
              11,522,717
              111,964Kenneth
      S. George
              11,492,895
              141,786John
      N. Hatsopoulos
              10,374,197
              1,260,484John
      Pappajohn
              11,524,271
              110,410Derace
      L. Schaffer, MD
              11,522,244
              112,437
 
 With
respect to the ratification of McGladrey & Pullen LLP as our independent
auditors for fiscal year 2008, votes were as follows:
  For
              Against
              Abstain11,613,684
              18,424
              2,573
 
 With
respect to the approval of the American CareSource Holdings, Inc. 2009 Equity
Incentive Plan, votes were as follows:
  For
              Against
              Abstain5,168,813
              2,282,187
              13,790
 
 With
respect to the approval of the amendment to the American CareSource Holdings,
Inc. 2005 Stock Option Plan to increase the number of shares subject to the
American CareSource Holdings, Inc. 2005 Stock Option Plan from 3,249,329 shares
to 3,749,329 shares, votes were as follows:
  For
              Against
              Abstain5,166,457
              2,293,618
              4,715
  ITEM4.
                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
  23
 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.
      Boone
 David
      S. Boone
 President
      and Chief Executive Officer (principal executive officer and an authorized
      signatory)
  By:
              /s/ Steven J.
      Armond
 Steven
      J. Armond
 Chief
      Financial Officer (principal financial officer and an authorized
      signatory)
  By:
              /s/ Matthew D.
      Thompson
 Matthew
      D. Thompson
 Controller
      (principal accounting officer and an authorized
  signatory)
  Date:
August 11, 2009
   24