UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 x QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934.
 
 For the
quarterly period ended March 31, 2010
 
 OR
 
 o TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d)
 OF THE
SECURITIES EXCHANGE ACT OF 1934.
 
 Commission
File Number 1-33094
 
 AMERICAN
CARESOURCE HOLDINGS, INC.
 (Exact
name of registrant as specified in its charter)
 
 DELAWARE
              20-0428568(State
      or other jurisdiction of
              (I.R.S.
      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 May 10, 2010 was
16,391,844.
 
 Table of
Contents
  TABLEOF CONTENTS
 AMERICAN
CARESOURCE HOLDINGS, INC.
 FORM
10-Q
 FOR THE
QUARTER ENDED MARCH 31, 2010
 
 Part
      I
              
              Financial Information
              1Item
      1.
              Financial Statements
              1Consolidated Income Statements (unaudited)
              1Consolidated Balance Sheets (unaudited)
              2Consolidated Statements of Stockholders’ Equity
      (unaudited)
              3Consolidated Statements of Cash Flows
      (unaudited)
              4Notes to Unaudited Consolidated Financial
      Statements
              5Item
      2.
              Management’s Discussion and Analysis of Financial Condition and
      Results of Operation
              10Item
      4.
              Controls and Procedures
              16Part II
              
              Other Information
              16Item
      1A.
              Risk Factors
              16Item
      2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              17Item 6.
              Exhibits
              17Signatures
              18
  Table of
Contents
  PART
      I.
              FINANCIAL INFORMATION
 
 ITEM
      1.
              Financial
      Statements
 
 AMERICAN
CARESOURCE HOLDINGS, INC.
 CONSOLIDATED
INCOME STATEMENTS
 (Unaudited)
 (amounts in thousands, except per
share data)
 
 Three
      months endedMarch
      31,2010
                
                
                2009Net
      revenues
                
                $
                14,431
                
                
                $
                16,056Cost
      of revenues:Provider payments
                
                
                10,474
                
                
                
                11,936Administrative fees
                
                
                707
                
                
                
                815Claims
      administration and provider development
                
                
                1,220
                
                
                
                1,005Total
      cost of revenues
                
                
                12,401
                
                
                
                13,756Contribution margin
                
                
                2,030
                
                
                
                2,300Selling,
      general and administrative expenses
                
                
                1,857
                
                
                
                1,901Depreciation
      and amortization
                
                
                182
                
                
                
                113Total operating expenses
                
                
                2,039
                
                
                
                2,014Operating income (loss)
                
                
                (9
                )
                
                
                286Other
      income (expense):Interest income, net
                
                
                22
                
                
                
                41Unrealized gain (loss) on warrant derivative
                
                
                14
                
                
                
                (25
                )Total other income, net
                
                
                36
                
                
                
                16Income
      before income taxes
                
                
                27
                
                
                
                302Income
      tax provision
                
                
                26
                
                
                
                23Net
      income
                
                $
                1
                
                
                $
                279Earnings
      (loss) per common share:Basic
                
                $
                0.00
                
                
                $
                0.02Diluted
                
                $
                (0.00
                )
                
                $
                0.02Basic
      weighted average common shares outstanding
                
                
                16,203
                
                
                
                15,418Diluted
      weighted average common shares outstanding
                
                
                16,203
                
                
                
                18,287
 
 See
      accompanying notes.
  1
 Table of
Contents
  AMERICAN CARESOURCE HOLDINGS, INC.CONSOLIDATED
      BALANCE SHEETS(amounts in thousands except
      per share amounts)March
      31,2010
                
                
                December
      31,(Unaudited)
                
                
                2009ASSETSCurrent
      assets:Cash and cash equivalents
                
                $
                10,651
                
                
                $
                11,868Accounts receivable, net
                
                
                7,155
                
                
                
                7,474Prepaid expenses and other current assets
                
                
                786
                
                
                
                822Deferred income taxes
                
                
                153
                
                
                
                576Total current assets
                
                
                18,745
                
                
                
                20,740Property
      and equipment, net
                
                
                1,878
                
                
                
                1,762Other
      assets:Deferred income taxes
                
                
                734
                
                
                
                317Other non-current assets
                
                
                544
                
                
                
                657Intangible assets, net
                
                
                1,121
                
                
                
                1,153Goodwill
                
                
                4,361
                
                
                
                4,361$
                27,383
                
                
                $
                28,990LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Due to service providers
                
                $
                6,044
                
                
                $
                7,702Accounts payable and accrued liabilities
                
                
                1,876
                
                
                
                1,980Total current liabilities
                
                
                7,920
                
                
                
                9,682Warrant
      derivative liability
                
                
                4
                
                
                
                18Commitments
      and contingenciesShareholders'
      equity:Preferred stock, $0.01 par value; 10,000 shares authorized,
      none
      issued
                
                
                —
                
                
                
                —Common stock, $0.01 par value; 40,000 shares authorized;
      16,392
      and 15,642 shares issued and outstanding in
                
                
                164
                
                
                
                1562010 and 2009, respectivelyAdditional paid-in capital
                
                
                20,765
                
                
                
                20,605Accumulated deficit
                
                
                (1,470
                )
                
                
                (1,471
                )Total shareholders'
    equity
                
                
                19,459
                
                
                
                19,290$
                27,383
                
                
                $
                28,990
 
 See
      accompanying notes.
 
 2
 Table of
Contents
 
 AMERICAN CARESOURCE HOLDINGS, INC.CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY(Unaudited)(amounts in
      thousands)Additional
                
                
                
                
                
                TotalCommon
      Stock
                
                
                Paid-in
                
                
                Accumulated
                
                
                Stockholders'Shares
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                EquityBalance
      at December 31, 2009
                
                
                15,642
                
                
                $
                156
                
                
                $
                20,605
                
                
                $
                (1,471
                )
                
                $
                19,290Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1
                
                
                
                1Stock-based
      compensation expense
                
                
                —
                
                
                
                —
                
                
                
                186
                
                
                
                —
                
                
                
                186Issuance
      of common stock upon exercise
      of restricted stockunits
                
                
                23
                
                
                
                1
                
                
                
                (19
                )
                
                
                —
                
                
                
                (18
                )Issuance
      of common stock upon exercise of stock warrants
                
                
                727
                
                
                
                7
                
                
                
                (7
                )
                
                
                —
                
                
                
                —Balance
      at March 31, 2010
                
                
                16,392
                
                
                $
                164
                
                
                $
                20,765
                
                
                $
                (1,470
                )
                
                $
                19,459
 
 See
      accompanying notes.
 3
 Table of
Contents
 
 AMERICAN
CARESOURCE HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 (amounts in
thousands)
 
 Three
      months ended March 31,2010
                
                
                2009Cash
      flows from operating activities:Net income
                
                $
                1
                
                
                $
                279Adjustments to reconcile net income to net cash provided by (used
      in) operations:Stock-based compensation
    expense
                
                
                186
                
                
                
                260Depreciation and amortization
                
                
                182
                
                
                
                113Unrealized (gain) loss on warrant
      derivative
                
                
                (14
                )
                
                
                25Amortization of long-term client
      agreement
                
                
                62
                
                
                
                62Client administration fee expense related to
      warrants
                
                
                50
                
                
                
                28Deferred
      income taxes
                
                
                6
                
                
                
                —Changes in operating assets and
      liabilities:Accounts
      receivable
                
                
                319
                
                
                
                (385
                )Prepaid expenses and
      other assets
                
                
                38
                
                
                
                (41
                )Accounts payable and
      accrued liabilities
                
                
                (123
                )
                
                
                (122
                )Due to service
      providers
                
                
                (1,658
                )
                
                
                (168
                )Net cash provided by
      (used in) operating activities
                
                
                (951
                )
                
                
                51Cash
      flows from investing activities:Investment in software development costs
                
                
                (127
                )
                
                
                (114
                )Additions to property and equipment
                
                
                (139
                )
                
                
                (171
                )Net cash used in
      investing activities
                
                
                (266
                )
                
                
                (285
                )Cash
      flows from financing activities:Proceeds from exercise of stock options
                
                
                —
                
                
                
                2Net cash provided by
      financing activities
                
                
                —
                
                
                
                2Net
      decrease in cash and cash equivalents
                
                
                (1,217
                )
                
                
                (232
                )Cash
      and cash equivalents at beginning of period
                
                
                11,868
                
                
                
                10,578Cash
      and cash equivalents at end of period
                
                $
                10,651
                
                
                $
                10,346Supplemental
      cash flow information:Cash
      paid for taxes
                
                $
                40
                
                
                $
                —Supplemental
      non-cash financing activity:Income
      tax withholdings on exercise of equity incentives
                
                $
                19
                
                
                $
                —
  4
 Table of
Contents
 
 AMERICAN CARESOURCE HOLDINGS, INC.
 NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (tables in thousands, except per
share data)
 
 (1)
                Description
      of Business and Basis of
Presentation
 
 American
CareSource Holdings, Inc. (“ACS,” “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 clients are national, regional and local
health plans, 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), that engage the
Company to provide them with a complete outsourced solution designed to manage
each payor’s obligations to its covered persons.  The Company offers
payors this solution by:
 
 ·
                lowering
      our payors’ ancillary care costs throughout our network of high quality,
      cost effective ancillary service providers that we have under contract at
      more favorable terms than our payors could generally obtain on their
      own;
 
 ·
                providing
      payors with a comprehensive network of ancillary healthcare services
      providers that is tailored to each payor’s specific needs and is available
      to each payor’s covered persons for covered
  services;
 
 ·
                providing
      payors with claims management, reporting, and processing and payment
      services;
 
 ·
                performing
      network/needs analysis to assess the benefits to payors of adding
      additional/different service providers to the payor specific provider
      networks; and
 
 ·
                credentialing
      network service providers for inclusion in the payor specific provider
      networks.
 
 ACS was
incorporated under the laws of the State of Delaware on November 24, 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.  The predecessor company
to American CareSource Corporation, Physician’s Referral Network, had been in
operation since 1995.  On December 23, 2005, the Company became an
independent company when Patient Infosystems distributed by dividend to its
stockholders substantially all of its shares of the Company. Ancillary Care
Services, Inc. is a wholly owned subsidiary of the 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 March 31, 2010 and December 31, 2009 and operating result
amounts are for the three months ended March 31, 2010 and 2009, 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, 2009, filed with the SEC on March 26, 2010.
 
 The
Company uses the “management approach” for reporting information about segments
in annual and interim financial statements.  The management approach
is based on the way the chief operating decision-maker organizes segments within
a company for making operating decisions and assessing
performance.  Reportable segments are based on products and services,
geography, legal structure, management structure and any other manner in which
management disaggregates a company.  Based on the “management
approach” model, the Company has determined that its business is comprised of a
single operating segment.
 
 Our
interim results of operations are not necessarily indicative of results of
operations that will be realized for the full fiscal year.
  (2)
                Revenue
      Recognition
 
 The
Company recognizes revenue on the services that it provides, which includes (i)
providing payor clients with a comprehensive network of ancillary healthcare
providers, (ii) providing claims management, reporting, processing and payment
services, (iii) providing network/need analysis to assess the benefits to payor
clients of adding additional/different service providers to the client-specific
provider networks and (iv) providing credentialing of network services providers
for inclusion in the client payor-specific provider networks.  Revenue
is recognized when services are delivered, which occurs after processed claims
are billed to the client payors and collections are reasonably
assured.  The Company estimates revenues and costs of revenues using
average historical collection rates and average historical margins earned on
claims.  Periodically, revenues are adjusted to reflect actual cash
collections so that revenues recognized accurately reflect cash
collected.
 
 5
 Table of
Contents
  The
Company determines whether it is acting as a principal or agent in the
fulfillment of the services rendered.  After careful evaluation of the
key gross and net revenue recognition indicators, the Company acknowledges that
while the determination of gross versus net reporting is highly judgmental in
nature, the Company has concluded that its circumstances are most consistent
with those key indicators that support gross revenue reporting.
 
 Following
are the key indicators that support the Company’s conclusion that it acts as a
principal when settling claims for service providers through its contracted
service provider network:
 
 ·
                The Company is the primary
      obligor in the arrangement.The Company has assessed its
      role as primary obligor as a strong indicator of gross
      reporting.  The Company believes that it is the primary obligor
      in its transactions because it is responsible for providing the services
      desired by its client payors.  The Company has distinct,
      separately negotiated contractual relationships with its client payors and
      with the ancillary health care providers in its networks.  The
      Company does not negotiate “on behalf of” its client payors and does not
      hold itself out as the agent of the client payors when negotiating the
      terms of the Company’s ancillary healthcare service provider
      agreements.  The Company’s agreements contractually prohibit
      client payors and service providers to enter into direct contractual
      relationships with one another.  The client payors have no
      control over the terms of the Company’s agreements with the service
      providers.  In executing transactions, the Company assumes key
      performance-related risks.  The client payors hold the Company
      responsible for fulfillment, as the provider, of all of the services the
      client payors are entitled to under their contracts; client payors do not
      look to the service providers for fulfillment.  In addition, the
      Company bears the pricing/margin risk as the principal in the
      transactions.  Because the contracts with the client payors and
      service providers are separately negotiated, the Company has complete
      discretion in negotiating both the prices it charges its client payors and
      the financial terms of its agreements with the service
      providers.  Since the Company’s profit is the spread between the
      amounts received from the client payors and the amount paid to the service
      providers, it bears significant pricing/margin risk.  There is
      no guaranteed mark-up payable to the Company on the amount the Company has
      contracted.  Thus, the Company bears the risk that amounts paid
      to the service provider will be greater than the amounts received from the
      client payors, resulting in a loss or negative
  claim.
 
 ·
                The Company has latitude in
      establishing pricing.As stated above, the Company has
      complete latitude in negotiating the price to be paid to the Company by
      each client payor and the price to be paid to each contracted service
      provider.  This type of pricing latitude indicates that the
      Company has the risks and rewards normally attributed to a principal in
      the transactions.
 
 ·
                The Company changes the
      product or performs part of the services.The Company
      provides the benefits associated with the relationships it builds with the
      client payors and the services providers.  While the parties
      could deal with each other directly, the client payors would not have the
      benefit of the Company’s experience and expertise in assembling a
      comprehensive network of service providers, in claims management,
      reporting and processing and payment services, in performing network/needs
      analysis to assess the benefits to client payors of adding
      additional/different service providers to the client payor-specific
      provider networks, and in credentialing network service
      providers.
  
 ·
                The Company has 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.
 
 6
 Table of
Contents
  ·
                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 of gross and net revenue recognition,
including whether or not the Company has general inventory risk.  The
Company does not have any general inventory risk, as its business is not related
to the manufacture, purchase or delivery of goods and it does not purchase in
advance any of the services to be provided by the ancillary healthcare service
providers.  While the absence of this risk would be one indicator in
support of net revenue reporting, as described in detail above, the Company has
carefully evaluated all of the key gross and net revenue recognition indicators
and has concluded that its circumstances are most consistent with those key
indicators that support gross revenue reporting.
 
 If the
Company were to report its revenues net of provider payments rather than on a
gross reporting basis, for the three months ended March 31, 2010, its net
revenues would have been approximately $4.0 million.  For the three
months ended March 31, 2009, its net revenues would have been approximately $4.1
million.
  During the three months ended March 31,
2010 and 2009, two of the Company’s clients comprised a significant portion of
the Company’s revenues.  The following is a summary of the approximate
amounts of the Company’s revenue and accounts receivable contributed by each of
those clients as of the dates and for the periods presented (amounts in
thousands):
 
 As
      of March 31, 2010
                
                
                Three
      months ended March 31, 2010
                
                
                
                As
      of March 31, 2009
                
                
                Three
      months ended March 31, 2009Accounts
                
                
                
                
                
                % of
      Total
                
                
                
                Accounts
                
                
                
                
                
                % of
      Totalreceivable
                
                
                Revenue
                
                
                Revenues
                
                
                
                receivable
                
                
                Revenue
                
                
                RevenuesClient
      A
                
                $
                3,648
                
                
                $
                7,007
                
                
                
                49
                %
                
                
                $
                3,289
                
                
                $
                8,738
                
                
                
                54
                %Client
      B
                
                
                2,166
                
                
                
                4,966
                
                
                
                34
                %
                
                
                
                2,335
                
                
                
                6,446
                
                
                
                40
                %Others
                
                
                1,341
                
                
                
                2,458
                
                
                
                17
                %
                
                
                
                549
                
                
                
                872
                
                
                
                6
                %$
                7,155
                
                
                $
                14,431
                
                
                
                100
                %
                
                
                $
                6,173
                
                
                $
                16,056
                
                
                
                100
                %
 
 (3)
                Earnings
      (Loss) Per Share
 
 The
following table details the reconciliation of basic earnings (loss) per share to
diluted earnings (loss) per share (amounts in thousands except per share
amounts):
 
 Three
      months endedMarch
      31,2010
                
                
                2009Numerator
      for basic and diluted earnings per share:Net income for basic earnings per share
                
                $
                1
                
                
                $
                279Less:Gain
      on warrant derivative liability
                
                
                14
                
                
                
                —Net
      income (loss) for diluted earnings per share
                
                
                (13
                )
                
                
                279Denominator:Weighted-average
      basic common shares outstanding
                
                
                16,203
                
                
                
                15,418Assumed conversion of dilutive securities:Stock options
                
                
                —
                
                
                
                1,051Stock warrants
                
                
                —
                
                
                
                1,818Restricted Stock Units
                
                
                —
                
                
                
                -Potentially
      dilutive common shares
                
                
                ­—
                
                
                
                2,869Denominator
      for diluted earningsper share - Adjusted weighted-average shares
                
                
                16,203
                
                
                
                18,287Earnings
      (loss) per common share:Basic
                
                $
                0.00
                
                
                $
                0.02Diluted
                
                $
                (0.00
                )
                
                $
                0.02
 
 For
purposes of this calculation, outstanding stock options, stock warrants, and
restricted stock units are considered common stock equivalents using the
treasury stock method, and are the only such equivalents
outstanding.  For the three months ended March 31, 2010, options to
purchase approximately 2.2 million shares of common stock, warrants to purchase
approximately 956,000 shares of common stock, and approximately 88,000
restricted stock units were excluded from the calculation as their impact would
be anti-dilutive.
  7
 Table of
Contents
  (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.
 
 As part
of the Amendment, the Company agreed to pay to the client $1.0 million 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 a service 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 has recognized the $1.0 million fee as a prepaid
expense which will be amortized over the term of the
agreement.  During the three months ended March 31, 2010, we recorded
amortization related to the agreement of $62,500.  At March 31, 2010,
$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 $437,500 balance was classified as a long-term
other asset at March 31, 2010.
  
 (5)
                Stock
      Warrants
 
 On
January 22, 2010, Series A warrants to purchase approximately 872,000 shares of
the Company’s common stock were exercised, through a cashless net
exercise.  727,498 shares of common stock were issued as a result of
the exercise. The exercise price of the warrants was $0.40 per
share.
  The
outstanding Series B warrants to purchase 631,000 shares of common stock are set
to expire August 9, 2010.  The exercise price of the warrants is $0.49
per share.
 
 (6)
                Warrant
      Derivative
 
 The
warrant derivative liability recorded at fair value in the balance sheet as of
March 31, 2010 is categorized based upon the level of judgment associated with
the inputs used to measure their fair value.  Hierarchical levels, are
directly related to the amount of subjectivity associated with the inputs to
fair valuation of these liabilities is as follows:
 
 Level 1 —
Inputs are unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date;
 
 Level 2 —
Inputs other than Level 1 inputs that are either directly or indirectly
observable; and
 
 Level 3 —
Unobservable inputs, for which little or no market data exist, therefore
requiring an entity to develop its own assumptions.
 
 The
following table summarizes the warrant derivative liability measured at fair
value on a recurring basis as of the dates presented, 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)March
      31, 2010
                
                $
                4
                
                
                $
                —
                
                
                $
                —
                
                
                $
                4December
      31, 2009
                
                
                18
                
                
                
                —
                
                
                
                —
                
                
                
                18
 
 Equity-linked
financial instruments consist of stock warrants issued by the Company that
contain a strike price adjustment feature.  We calculated the fair
value of the warrants using the Black–Scholes–Merton valuation
model.  During the three months ended March 31, 2010 and 2009, we
recorded an unrealized gain (loss) on warrant derivative of approximately
$14,000 and ($25,000) related to the change in fair value of the
warrants.
 
 8
 Table of
Contents
  The
assumptions used in the Black-Scholes-Merton valuation model were as
follows:
 
 March
      31,
                
                
                December
      31,2010
                
                
                2009Exercise
      price
                
                $
                5.50
                
                
                $
                5.50Expected
      volatility
                
                
                71.4
                %
                
                
                68.9
                %Expected
      life (years)
                
                
                0.9
                
                
                
                1.2Risk
      free interest rate
                
                
                0.4
                %
                
                
                0.6
                %Forfeiture
      rate
                
                
                —
                
                
                
                —Dividend
      rate
                
                
                —
                
                
                
                —
 
 The
following table reflects the activity for liabilities measured at fair value
using Level 3 inputs for the three months periods presented:
 
 ($
      in thousands)
                
                2010
                
                
                2009Balance
      as of January 1
                
                $
                18
                
                
                $
                374Sales
      of warrant derivative
                
                
                —
                
                
                
                25Unrealized
      gains related to the change in fair value
                
                
                (14
                )
                
                
                (25
                )Balance
      as of March 31
                
                $
                4
                
                
                $
                374
 
 In
addition, the Company’s financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued
expenses.  The fair value of financial instruments is determined by
reference to various market data and other valuation techniques, as
appropriate.  Unless otherwise disclosed, the fair value of short-term
financial instruments approximates their recorded values due to the short-term
nature of the instruments.
  (7)
                  Income
      Taxes
  The
effective income tax rates for the three months ended March 31, 2010 and 2009
were different from the statutory United States federal income tax rate of 35%
primarily due to state income taxes and permanent differences.
 
 (8)
                Recent
      Accounting Pronouncements
 
 In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value
Measurements. The Update provides amendments to FASB ASC 820-10 that requires
entities to disclose separately the amounts of significant transfers in and out
of Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers. In addition, the Update requires entities to present separately
information about purchases, sales, issuances, and settlements in the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3). The disclosures related to Level 1 and Level 2 fair value
measurements are effective for us in 2010 and the disclosures related to Level 3
fair value measurements are effective for us in 2011. The Update requires new
disclosures only, and will have no impact on our consolidated financial
position, results of operations, or cash flows.
 
 (9)
                Subsequent
      Events
 
 We
evaluate events and transactions that occur after the balance sheet date as
potential subsequent events.  No events have occurred that required
disclosure.
  9
 Table of
Contents
  FORWARD-LOOKING STATEMENTS
 
 This
document contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.  These statements can be identified
by forward-looking words such as “may,” “will,” “expect,” “intend”,
“anticipate,” “believe,” “estimate” and “continue” or similar words and discuss
the Company’s plans and objectives for future operations, including its
services, contain projections of the Company’s future operating results or
financial condition, and discuss its expectations with respect to the growth in
health care costs in the United States, the demand for ancillary benefits
management services, and the Company’s competitive advantages, or contain other
“forward-looking” information.
  Such
forward-looking statements are based on current information, assumptions and
belief of management, and are not guarantees of future
performance.  Substantial risks and uncertainties could cause actual
results to differ materially from those indicated by such forward-looking
statements, including, but not limited to, changes in national health care
policy, regulation, and/or reimbursement, general economic conditions (including
the recent economic downturns and increases in unemployment), lower than
anticipated demand for ancillary services, pricing, market
acceptance/preference, the Company’s ability to integrate with its clients,
consolidation in the industry that may affect the Company’s key clients, changes
in the business decisions by significant clients, increased competition, the
Company’s inability to attract or maintain providers or clients or achieve its
financial results, the Company’s inability to manage growth, implementation and
performance difficulties, and other risk factors detailed from time to time in
the Company’s periodic filings with the Securities and Exchange Commission,
including its Annual Report on Form 10-K for the year ended December 31, 2009
and the quarterly reports on Form 10-Q filed for each of the subsequent
quarters.
  Do not
place undue reliance on these forward-looking statements, which speak only as of
the date this document was prepared.  All forward-looking statements
included herein are expressly qualified in their entirety by the cautionary
statements contained or referred to in this section.  Except to the
extent required by applicable securities laws and regulations, the Company
undertakes no obligation to update or revise these forward-looking statements to
reflect events or circumstances after the date of this document or to reflect
the occurrence of unanticipated events.
  ITEM
    2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
 
 GENERAL
 
 Management’s
discussion and analysis provides a review of the Company’s operating results for
the three months ended March 31, 2010 and its financial condition at March 31,
2010.  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,
2009.
 
 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 customers include self-insured employers, indemnity insurers, PPOs,
HMOs, third-party administrators and federal and local governments that engage
the Company to provide them with a complete outsourced solutions designed to
manage each customer’s obligations to its covered persons.  The
Company offers its customers this solution by executing the
following:
 
 ·
                lowering
      our payors’ ancillary care costs throughout our network of high quality,
      cost effective providers that we have under contract at more favorable
      terms than our payors could generally obtain on their
  own;
 
 ·
                providing
      payors with a comprehensive network of ancillary healthcare services
      providers that is tailored to each payor’s specific needs and is available
      to each payor’s covered persons for covered
  services;
 
 ·
                providing
      payors with claims management, reporting, and processing and payment
      services;
 
 ·
                performing
      network/needs analysis to assess the benefits to payors of adding
      additional/different service providers to the payor -specific provider
      networks; and
 
 ·
                credentialing
      network service providers for inclusion in the payor -specific provider
      networks.
  10
 Table of
Contents
 
 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
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 original provider of service or member of its
proprietary network.
 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.
 
 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, 2009.  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,
2009.
 
 11
 Table of
Contents
  ANALYSIS
OF RESULTS OF OPERATIONS
 
 Revenues
 
 The
following table sets forth a comparison of our revenues for the periods
presented ended March 31:
 
 First
      QuarterChange($
      in thousands)
                
                2010
                
                
                2009
                
                
                $
                
                
                %Net
      revenues
                
                $
                14,431
                
                
                $
                16,056
                
                
                $
                (1,625
                )
                
                
                (10
                %)
 
 The
Company’s net revenues are generated from ancillary healthcare service
claims.  Revenue is recognized when we bill our client payors for
services performed and collection is reasonably assured.  The decrease
in revenue for the three months ended March 31, 2010 as compared to the same
period in 2009 was due primarily to a 16% decline in billed claims volume from
our two significant clients.  This drop in claims volume resulted in a
$3.2 million, or 21%, decline in revenues from the two clients in the first
quarter compared to the corresponding prior year quarter.  The
declines were partially offset by a 300% increase in claims volume from all
other client accounts, or a net increase in revenues from such clients of $1.6
million compared to the first quarter of 2009.  Those accounts were
primarily new clients that were added during 2009.  The following
table details the change in client accounts for the periods
presented:
 
 Revenue
                
                Billed
      Claims VolumeFirst
      Quarter
                
                
                Change
                
                First
      Quarter
                
                Change(in
      thousands)
                
                2010
                
                
                2009
                
                
                $
                
                
                %
                
                2010
                
                2009
                
                Claims
                
                %Client
      A
                
                $
                7,007
                
                
                $
                8,738
                
                
                $
                (1,731
                )
                
                
                (20
                %)
                33
                
                36
                
                (3
                )
                (8
                %)Client
      B
                
                
                4,966
                
                
                
                6,446
                
                
                
                (1,480
                )
                
                
                (23
                )
                29
                
                38
                
                (9
                )
                (24
                )All
      other clients
                
                
                2,458
                
                
                
                872
                
                
                
                1,586
                
                
                
                182
                
                24
                
                6
                
                18
                
                300Total
                
                $
                14,431
                
                
                $
                16,056
                
                
                $
                (1,625
                )
                
                
                (10
                %)
                86
                
                80
                
                6
                
                8
                %
  Revenues
and claims volume from our legacy clients, primarily our two significant
clients, declined due to the impact of macro-economic factors and continued
reduction in covered lives.  For the three months ended March 31,
2010, revenues from our other client relationships (which were added primarily
in 2009) increased compared to the corresponding prior year quarter due to the
progression and development of those relationships, which resulted in an
increased number of payors and increased claims volume.  We enhance
those relationships through focused efforts to add ancillary service providers
that will be more attractive to our clients’ base of lives and through programs
to educate our client payors so that they may fully utilize our
network.  Clients added during 2009 contributed an incremental $1.7
million for the three months ended March 31, 2010, as compared to the prior year
period.  In addition, clients added in the first quarter of 2010
contributed an incremental $265,000 for the period.  The increases are
also a direct result of a concentrated effort to diversify our revenue
base.  For the three months ended March 31, 2010, our two significant
clients accounted for 83% of our net revenues as compared to 94% for the same
period in 2009.
 
 The
Company will continue to seek growth in the number of client payor and service
provider relationships by focusing on providing in-network services for its
payors and aggressively pursuing additional PPOs, TPAs and other direct payors
as its primary sales target.  In addition, we are targeting service
providers that will specifically enhance our network as determined through
collaboration with our clients.  The Company believes that this
strategy should increase the volume of claims the Company can process, as well
as expand the number of lives that are eligible to receive ancillary health care
benefits.  No assurances can be given that the Company can expand its
service provider or payor relationships, nor that any such expansion will result
in an improvement in the results of operations of the Company.
  In
addition, during the three months ended March 31, 2010, the number of billed
claims increased approximately 8% compared to the corresponding prior year
period.  The increase in claim volume was driven by the expansion of
existing client relationships, as described above, new clients implemented
during 2009 and the first quarter of 2010, as well as through expansion of our
network of service providers.
  Revenue
per claim declined for the period presented due to lower than estimated
collection rates related to a client that was implemented in 2009 that offers
limited benefits, and the change in mix of provider specialties driving our
claim volume during the first three months of 2010.  We entered into a
relationship with a new client in April 2009 that offers limited benefits and
carries a lower collection rate.  While we had no revenue from that
client in the first quarter of 2009, it accounted for 8% of our revenue in the
first quarter of 2010.  In addition, we experienced accelerated growth
in categories such as rehabilitation services and chiropractic services with
lower average revenue per claim while other higher average revenue per claim
categories such as dialysis services declined during the period
presented.  This decline in average revenue per claim was offset
somewhat by an increase in claims from the diagnostic imaging services
category.  Revenues from the diagnostic imaging services increased as
a percent of total revenue during the first quarter 2010 as compared to the
corresponding prior year period as a result of an increased focus on the
specialty facilitated by our relationship with a third-party national imaging
network.
  12
 Table of
Contents
  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 March 31:
 
 Three
      months ended(in
      thousands, except per claim data)
                
                2010
                
                
                2009Claims
      processed
                
                
                105
                
                
                
                90Claims
      billed
                
                
                86
                
                
                
                80Revenue
      per processed claim
                
                $
                137
                
                
                $
                178Revenue
      per billed claim
                
                
                168
                
                
                
                201
 
 Cost of Revenues and
Contribution Margin
 
 The
following table sets forth a comparison of the components of our cost of
revenues, for the three months ended March 31:
 
 First
      QuarterChange%
      of
                
                
                
                
                
                %
      of($
      in thousands)
                
                2010
                
                
                revenues
                
                
                2009
                
                
                revenues
                
                
                $
                
                
                %Provider
      payments
                
                $
                10,474
                
                
                
                72.6
                %
                
                $
                11,936
                
                
                
                74.3
                %
                
                $
                (1,462
                )
                
                
                (12
                %)Administrative
      fees
                
                
                707
                
                
                
                4.9
                
                
                
                815
                
                
                
                5.1
                
                
                
                (108
                )
                
                
                (13
                )Claims
      administration and provider development
                
                
                1,220
                
                
                
                8.5
                
                
                
                1,005
                
                
                
                6.3
                
                
                
                215
                
                
                
                22Total
      cost of revenues
                
                $
                12,401
                
                
                
                86.0
                %
                
                $
                13,756
                
                
                
                85.7
                %
                
                $
                (1,355
                )
                
                
                (10
                %)
  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.
  Following
is an explanation of the changes in the components of costs of revenues in the
first quarter of 2010 as compared to the first quarter of 2009:
 
 ·
                Provider
      payments.  The 12% decrease in provider payments is
      consistent with the decline in revenue, primarily related to our two
      significant clients.  The decrease in provider payments as a
      percent of net revenues from 74.3% during the three months ended March 31,
      2009 to 72.6% during the corresponding period in 2010 is due primarily to
      the change in the mix of specialties from which we generated revenue, in
      addition to the improvement in margins in certain specialty
      categories.  Categories that carry higher margins, such as
      diagnostic imaging services, rehabilitation services and chiropractic
      services, were a larger percent of our revenues as compared to the first
      quarter of 2009, while margins in specialty categories such as dialysis
      services improved in the three months ended March 31, 2010 compared to the
      same prior year period.  These
      category margins are 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.
  ·
                Administrative fees.
      Administrative fees decreased due to decreased claim
      volume.  Administrative fees paid to clients as a percent of net
      revenues were 4.9% during the first quarter of 2010 and 5.1% during the
      corresponding period in 2009.  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.
 
 ·
                Claims administration and
      provider development.  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 the costs during the
      three months ended March 31, 2010 compared to the corresponding prior year
      period is due to investments in our claims administration and provider
      development organizations.  Wages, incentives and benefits
      increased due to resource additions.  Headcount as of March 31,
      2010 and 2009 were as follows:  Operations -- 21 and 19,
      respectively; Information Technology -- 13 and 10, respectively; and
      Provider Development -- 17 and 12, 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.  The following table details the costs within the claims
      administration and provider development groups for the periods
      presented:
  13
 Table of
Contents
  First
      QuarterClaims
      Administration
                
                
                Provider
      Development
                
                
                TotalIncrease
                
                
                
                
                
                
                
                
                Increase
                
                
                
                
                
                
                
                
                Increase($
      in thousands)
                
                2010
                
                
                2009
                
                
                (Decrease)
                
                
                2010
                
                
                2009
                
                
                (Decrease)
                
                
                2010
                
                
                2009
                
                
                (Decrease)Total
      wages, incentives and benefits
                
                $
                671
                
                
                $
                533
                
                
                $
                138
                
                
                
                26
                %
                
                $
                410
                
                
                $
                308
                
                
                $
                102
                
                
                
                33
                %
                
                $
                1,081
                
                
                $
                841
                
                
                $
                240
                
                
                
                29
                %Other
                
                
                15
                
                
                
                (1
                )
                
                
                16
                
                
                
                nm
                %
                
                
                124
                
                
                
                165
                
                
                
                (41
                )
                
                
                (25
                %)
                
                
                139
                
                
                
                164
                
                
                
                (25
                )
                
                
                (15
                %)$
                686
                
                
                $
                532
                
                
                $
                154
                
                
                
                29
                %
                
                $
                534
                
                
                $
                473
                
                
                $
                61
                
                
                
                13
                %
                
                $
                1,220
                
                
                $
                1,005
                
                
                $
                215
                
                
                
                21
                %
 
 We
monitor the efficiency, effectiveness, and scalability of our claims
administration group by evaluating cost per claim.  Cost per claim is
calculated by dividing the cost of our claims administration group, which is
detailed above, by the number of processed claims for the
period.  Following is the cost per claim for the periods
presented:
 
 First
      QuarterChange($ in thousands except per
      claim data)
                
                2010
                
                
                2009
                
                
                $
                
                
                %Cost
      of claims administration
                $
                686
                
                $
                532
                
                $
                154
                
                
                29
                %Processed
      claims
                
                105
                
                
                90
                
                
                15
                
                
                17Cost
      per claim
                
                6.53
                
                
                5.91
                
                
                0.62
                
                
                10
 
 The
increase in cost per claim for the three months ended March 31, 2010 compared to
the same prior year period is due to less than expected claims volume during the
first quarter of 2010, which is consistent with the decline in revenue during
the first quarter compared to the prior year.  While we attempt to
gain efficiency through process improvements and utilization of technology, cost
per claim is impacted by variations in claim volume.
 
 The
following table sets forth a comparison of contribution margin percentage for
the periods presented ending March 31:
 
 First
      QuarterChange2010
                
                
                2009
                
                
                %Contribution
      margin percentage
                
                
                14.0
                %
                
                
                14.3
                %
                
                
                (0.3
                )%
 
 Contribution margin
percentage is calculated by dividing the difference between net revenues and
total cost of revenues by net revenues.  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 and overall pricing pressures which have resulted in
lower client rates.  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 three months ended March
31:
 
 First
      QuarterChange($
      in thousands)
                
                2010
                
                
                2009
                
                
                $
                
                
                %Selling,
      general and administrative expenses
                
                $
                1,857
                
                
                $
                1,901
                
                
                $
                (44
                )
                
                
                (2
                )%Percentage of total net
      revenues
                
                
                12.9
                %
                
                
                11.8
                %
 
 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.
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  For the
three months ended March 31, 2010, SG&A expenses include approximately
$143,000 of severance costs related to the departure of our former chief
financial officer in March 2010.  Excluding those costs, SG&A
expenses were approximately $1.7 million, and declined 9.8% compared to the same
prior year period.  In addition, excluding the severance charge,
SG&A expense was 11.9% of revenue.
 
 The
decrease in SG&A (excluding the severance charge described above) in the
first quarter of 2010 compared to the same prior year period is due to the
following:
 
 ·
                Salaries,
      wages and benefits decreased approximately $110,000 due primarily to a
      decline in headcount in our sales and marketing group.  As of
      March 31, 2009, we had 10 employees, as compared to seven as of March 31,
      2010.  Effective July 31, 2009, we made organizational changes,
      which included the reorganization of our sales and marketing and client
      development groups.  As a result, we eliminated the Vice
      President of Client Development position.  In addition, we
      decreased our incentive compensation, which is based on our operating
      results, by 86% during the first quarter 2010, as compared to the same
      prior year period; and
 
 ·
                A
      reduction in our stock-based compensation expense of approximately
      $113,000 related mainly to the forfeiture of non-vested stock options that
      were awarded to our former Chairman of the Board of Directors, our former
      Chief Financial Officer, and our former Senior Vice President of Sales and
      Marketing.
 
 Selling,
general and administrative expenses represent the following costs for the
periods presented ending March 31:
 
 First
      Quarter($
      in thousands)
                
                Finance
      & Administration
                
                
                Sales
      & Marketing
                
                
                TotalSelling,
      general andadministrative
      expenses
                
                2010
                
                
                2009
                
                
                Increase
      (Decrease)
                
                
                2010
                
                
                2009
                
                
                Increase
      (Decrease)
                
                
                2010
                
                
                2009
                
                
                Increase
      (Decrease)Total
      wages, commissions, incentives and benefits
                
                $
                387
                
                
                $
                367
                
                
                $
                20
                
                
                
                5
                %
                
                $
                318
                
                
                $
                448
                
                
                $
                (130
                )
                
                
                (29
                %)
                
                $
                705
                
                
                $
                815
                
                
                $
                (110
                )
                
                
                (13
                %)Professional
      fees (legal, accounting, marketing and consulting)
                
                
                290
                
                
                
                268
                
                
                
                22
                
                
                
                8
                %
                
                
                118
                
                
                
                139
                
                
                
                (21
                )
                
                
                (15
                %)
                
                
                408
                
                
                
                407
                
                
                
                1
                
                
                
                nm
                %Stock-based
      compensation expense
                
                
                131
                
                
                
                244
                
                
                
                (113
                )
                
                
                (46
                %)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                %
                
                
                131
                
                
                
                244
                
                
                
                (113
                )
                
                
                (46
                %)Other
                
                
                354
                
                
                
                329
                
                
                
                25
                
                
                
                8
                %
                
                
                116
                
                
                
                106
                
                
                
                10
                
                
                
                9
                %
                
                
                470
                
                
                
                435
                
                
                
                35
                
                
                
                8
                %Severance
      costs
                
                
                143
                
                
                
                —
                
                
                
                143
                
                
                
                100
                %
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                143
                
                
                
                —
                
                
                
                143
                
                
                
                100
                %Total
      selling, general and administrative expenses
                
                $
                1,305
                
                
                $
                1,208
                
                
                $
                97
                
                
                
                8
                %
                
                $
                552
                
                
                $
                693
                
                
                $
                (141
                )
                
                
                (20
                %)
                
                $
                1,857
                
                
                $
                1,901
                
                
                $
                (44
                )
                
                
                (2
                %)
   Depreciation and
Amortization
 
 The
following table sets forth a comparison of depreciation and amortization for the
periods presented ending March 31:
 
 First
      Quarter
                
                
                Change($
      in thousands)
                
                2010
                
                
                2009
                
                
                $
                
                
                %Depreciation
                
                $
                150
                
                
                $
                81
                
                
                $
                69
                
                
                
                85
                %Amortization
                
                
                32
                
                
                
                32
                
                
                
                -
                
                
                
                nmTotal
      Depreciation and amortization
                
                $
                182
                
                
                $
                113
                
                
                $
                69
                
                
                
                61
                %
 
 The
increase in depreciation expense is primarily due to increased capital
expenditures during 2009 related to the continued development of our technology
infrastructure and facility improvements to accommodate our increase in
headcount during 2009.
 
 Income
Tax Provision
  The
effective income tax rates for the three months ended March 31, 2010 and 2009
were different from the statutory United States federal income tax rate of 35%
primarily due to state income taxes and permanent differences.
  15
 Table of
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  FINANCIAL CONDITION AND LIQUIDITY
 
 As of
March 31, 2010 the Company had working capital of $10.8 million compared to
$11.1 million at December 31, 2009.  Our cash and cash equivalents
balance decreased to $10.7 million as of March 31, 2010 compared to $11.9
million at December 31, 2009.  The decrease in cash is primarily
related to the decline in revenue during the first quarter of 2010 as compared
to prior periods and the timing of provider payments made during the quarter
related to cash received from claims prior to December 31, 2009.
  For the
three months ended March 31, 2010, operating activities utilized net cash of
approximately $951,000, the primary components of which were net income of
approximately $1,000, adjusted for non-cash items including: share-based
compensation expense of approximately $186,000, depreciation and amortization of
approximately $182,000, an unrealized gain on the warrant derivative of
approximately $14,000, amortization of the warrant costs of approximately of
$50,000, amortization of the costs associated with the amendment to the contract
with one of our significant clients of approximately $62,000, and a decrease in
deferred taxes of approximately $6,000, as well as, a net cash outflow from net
operating assets and liabilities of approximately $1.4 million.  The
net cash outflow from net operating assets and liabilities was due primarily to
a decline in revenue during the first quarter of 2010 as compared to prior
periods and the timing of provider payments made during the quarter related to
cash received from claims prior to December 31, 2009.
  Investing
activities during the three months ended March 31, 2010 were comprised of
investments in software development of approximately $127,000 and in property
and equipment of approximately $139,000.  The software development
costs relate primarily to enhancements of our internal billing system, while the
increase in property and equipment relates primarily to investments in computer
equipment.
  Historically,
we have relied on external sources of capital, including indebtedness or
issuance of equity securities, and during the past two years, earnings, to fund
our operations.  We believe our current cash balance of $10.7 million
as of March 31, 2010 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 cannot 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 March 31, 2010 and March 31, 2009, 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 March 31, 2010 or
2009 or for the periods then ended.
 
 ITEM
    4.
                Controls
      and Procedures
 
 Evaluation of Disclosure Controls
and Procedures .Our management, with the participation of our
Chief Executive Officer and Interim Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as of March 31,
2010.  Based upon this evaluation, our Chief Executive Officer and
Interim 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 Interim 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 Interim 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.
  PART
    II.
                OTHER
      INFORMATION
 
 ITEM
      1A.
                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 2009 Annual Report on Form
10-K.  We believe those risk factors are the most relevant to our
business and could cause our results to differ materially from the
forward-looking statements made by us.  Please note, however, that
those are not the only risk factors facing us.  During the three
months ended March 31, 2010, one of our significant customers, accounting for
34% of our revenues during the three months ended March 31, 2010, merged with a
large supplier of independent, network-based cost management
solutions.  We will seek to continue our existing relationship with
the resulting organization, but we cannot assume that our position with our
customer will not be affected.
  16
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  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 March 31, 2010, 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, 2009.
  During
the three months ended March 31, 2010, President Obama signed the Patient
Protection and Affordable Care Act and the Health Care and Educational
Affordability Reconciliation Act legislating broad-based changes to the U.S.
health care system. Among other things, the health reform legislation includes
guaranteed coverage requirements, eliminates pre-existing condition exclusions
and annual and lifetime maximum limits, restricts the extent to which policies
can be rescinded, and imposes new and significant taxes on health insurers and
health care benefits.
  Provisions
of the health reform legislation become effective at various dates over the next
several years.  The Department of Health and Human Services, the
National Association of Insurance Commissioners, the Department of Labor and the
Treasury Department have yet to issue necessary enabling regulations and
guidance with respect to the health care reform legislation.
  Due to
the breadth and complexity of the health reform legislation, the lack of
implementing regulations and interpretive guidance, and the phased-in nature of
the implementation, it is difficult to predict the overall impact of the health
reform legislation on our business over the coming years.  Possible
adverse affects of the health reform legislation include reduced revenues,
increased costs, exposure to expanded liability, and requirement for us to
revise the ways in which we conduct business or risk of loss of
business.  In addition, our results of operations, our financial
position, including our ability to maintain the value of our goodwill, and cash
flows could be materially adversely affected.
 
 ITEM
    2.
                Unregistered
      Sales of Equity Securities and Use of
Proceeds
 
 On
January 22, 2010, the Company issued 727,498 shares of common stock in
connection with the cashless exercise of the remaining Series A
warrants.  The exercise price of the warrants was $0.40 per
share.
  On March
15, 2010, the Company issued 5,038 shares of its common stock related to 7,090
vested restricted stock units granted to officers of the Company in
2009.  The holders of the restricted stock units forfeited the right
to acquire 2,052 shares of its common stock to cover income tax withholdings
related to the grant.
 
 The share
issuances described above were not registered under the Securities Act of 1933,
as amended (the “Securities Act”).  The issuances were each exempt
from registration pursuant to Section 4(2) of the Securities Act and Regulation
D thereunder, as they were transactions by the issuer that did not involve
public offerings of securities.
 
 ITEM
    6.
                Exhibits
 
 Exhibit
      31.1
                Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002
 
 Exhibit
      31.2
                Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002
 
 Exhibit
      32.1
                Certifications
      Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
  17
 Table of
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  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 AMERICAN
      CARESOURCE HOLDINGS, INC.By:
                    /s/ David
      S. BooneDavid
      S. BooneChief
      Executive Officer (Principal Executive
  Officer)
 By:
                        /s/ Matthew
      D. ThompsonMatthew
      D. ThompsonVice
      President of Finance and Interim Chief Financial Officer (Principal
      Financial Officer and Principal Accounting
      Officer)
 
 Date: May
14, 2010
 
 
 18