** **

**UnitedStates**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

 

**FORM 10-Q**

 

 

| x      |   | QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                             |
|   |   | For the quarterly period ended          **September  30****, 2007** |
|   |   |                                                                                                             |
|   |   | or                                                                                                               |
|   |   |                                                                                                             |
| o      |   | TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934                        |

 

For the transition period from          to         

 

Commission file number      **0-13591**

 

 

**HEALTHAXIS INC.**

(Exact name of registrant as specified in itscharter)

 

| **Pennsylvania**                 | **23-2214195**       |
|----------------------------------|----------------------|
| (State or other  jurisdiction of | (I.R.S. Employer     |
| incorporation or  organization)  | Identification  No.) |

 

**7301 N. State Highway 161, Suite 300, Irving,Texas 75039**

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code:**  (972) 443-5000**

 

Former name, former address and former fiscal year, ifchanged since last report:  N/A

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes   x   No   o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
| Large accelerated filer         o | Accelerated filer   o | Non-Accelerated filer          x |
|---------------------------------------------------------------------------|---------------------------------|-------------------------------------------------------------------------------|

 

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

 

Indicate the number of shares outstanding of eachof the issuer’s classes of common stock, as of the latest practicable date:8,611,805 shares of common stock, par value $.10, outstanding as of November 2,2007.

 

 

----

Healthaxis Inc.

 

Table of Contents

 
|                                |                                                                                        | **Page** |
|-------------------------------------|---------------------------------------------------------------------------------------------|----------|
| PART  I  Financial Information |                                                                                        |     |
|                                |                                                                                        |     |
| Item 1.                             | Financial Statements                                                                        |     | 3 |
|                                | Consolidated  Balance Sheets                                                                |     | 3 |
|                                | Consolidated Statements of Operations                                                       |     | 4 |
|                                | Consolidated Statements of Cash Flows                                                       |     | 5 |
|                                | Notes to Consolidated Financial Statements                                                  |     | 6 |
|                                |                                                                                        |     |
| Item 2.                             | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |     | 9 |
|                                |                                                                                        |     |
| Item 3.                             | Quantitative and Qualitative Disclosures About Market  Risk                                 |     | 14 |
|                                |                                                                                        |     |
| Item 4.                             | Controls and Procedures                                                                     |     | 14 |
|                                |                                                                                        |     |
| PART  II  Other Information    |                                                                                        |     |
|                                |                                                                                        |     |
| Items  1-5                          |                                                                                        | 15       |
|                                |                                                                                        |     |
| Item 6. Exhibits                    | 15                                                                                          |
|                                |                                                                                        |     |
| Signatures                          | 16                                                                                          |
|                                |                                                                                        |     |
| Exhibit Index                       |                                                                                        | 17       |

 

2

----

 

# **PART I.         FINANCIAL INFORMATION**

 

**Item 1.            Consolidated Financial Statements**

 

**Healthaxis Inc. and Subsidiaries**

#### **Consolidated Balance Sheets**

(Inthousands except share and per share data) (Unaudited)

 
| ** **                                                                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                                                        | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| **Assets**                                                                                                                                                        |       |              |       |             |       |
| Current assets:                                                                                                                                                   |       |              |       |             |       |
| Cash and cash  equivalents                                                                                                                                        |       | $                 | 2,356      |             | $          | 3,362 |   |
| Accounts and  note receivable, net of allowance for doubtful accounts of $9 and $7,  respectively                                                                 |       | 3,039             |       | 2,943            |       |
| Prepaid expenses                                                                                                                                                  |       | 628               |       | 544              |       |
| Total current  assets                                                                                                                                             |       | 6,023             |       | 6,849            |       |
|                                                                                                                                                              |       |              |       |             |       |
| Property,  equipment and software, less accumulated depreciation and amortization of  $7,044 and $6,554, respectively                                             |       | 1,415             |       | 1,550            |       |
| Contract  start-up costs, less accumulated amortization of $2,480 and $2,026,  respectively                                                                       |       | 1,310             |       | 1,340            |       |
| Goodwill                                                                                                                                                          |       | 11,276            |       | 11,276           |       |
| Other assets                                                                                                                                                      |       | 102               |       | 303              |       |
| Total assets                                                                                                                                                      |       | $                 | 20,126     |             | $          | 21,318 |   |
|                                                                                                                                                              |       |              |       |             |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                    | ** ** | ** **        | ** ** | ** **       | ** ** |
| Current  liabilities:                                                                                                                                             |       |              |       |             |       |
| Accounts payable                                                                                                                                                  |       | $                 | 1,200      |             | $          | 1,498 |   |
| Accounts payable  to related parties                                                                                                                              |       | 163               |       | 89               |       |
| Accrued  liabilities                                                                                                                                              |       | 777               |       | 509              |       |
| Deferred  revenues                                                                                                                                                |       | 1,371             |       | 1,612            |       |
| Note payable,  current portion                                                                                                                                    |       | 285               |       | 750              |       |
| Equipment line  of credit, current portion                                                                                                                        |       | 310               |       | 655              |       |
| Post retirement  and employment liabilities, current portion                                                                                                      |       | 124               |       | 124              |       |
| Capital lease  obligations, current portion                                                                                                                       |       | —            |       | 57               |       |
| Total current  liabilities                                                                                                                                        |       | 4,230             |       | 5,294            |       |
|                                                                                                                                                              |       |              |       |             |       |
| Post retirement  and employment liabilities                                                                                                                       |       | 717               |       | 768              |       |
| Note payable,  net of current portion                                                                                                                             |       | —            |       | 93               |       |
| Working capital  and equipment lines of credit, net of current portion                                                                                            |       | 965               |       | 361              |       |
| Deferred rent                                                                                                                                                     |       | 292               |       | 306              |       |
| Other  liabilities                                                                                                                                                |       | 202               |       | 174              |       |
| Total  liabilities                                                                                                                                                |       | 6,406             |       | 6,996            |       |
|                                                                                                                                                              |       |              |       |             |       |
| Commitments and  contingencies                                                                                                                                    |       |              |       |             |       |
|                                                                                                                                                              |       |              |       |             |       |
| Stockholders’  Equity:                                                                                                                                       |       |              |       |             |       |
| Preferred stock,  par value $1.00: authorized 100,000,000 shares:  Series A Convertible, 740,401 shares issued  and outstanding, (no liquidation preference) |       | 740               |       | 740              |       |
| Common stock,  par value $.10: authorized 1,900,000,000 shares, issued and outstanding  8,296,680 and 8,172,112 shares, respectively                              |       | 829               |       | 817              |       |
| Note receivable  from employees                                                                                                                                   |       | (5                | )          | (23              | )          |
| Additional  paid-in capital                                                                                                                                       |       | 450,589           |       | 450,416          |       |
| Accumulated  deficit                                                                                                                                              |       | (438,433          | )          | (437,628         | )          |
| Total  stockholders’ equity                                                                                                                                  |       | 13,720            |       | 14,322           |       |
| Total  liabilities and stockholders’ equity                                                                                                                  |       | $                 | 20,126     |             | $          | 21,318 |   |
|                                                                                                                                                                   |            |                   |            |                  |            |  |  |  |

 

See notes to unauditedconsolidated financial statements.

 

 

3

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**HealthaxisInc. and Subsidiaries**

#### **Consolidated Statementsof Operations**

#### **(In thousands, except share and per share data) (Unaudited)**

 
| ** **                                                                                | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                | ** ** | **2007**                               | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                                   |       | $                                      | 3,853      |                                  | $          | 4,354 |   | $ | 12,067 |   | $ | 12,386 |   |
|                                                                                      |       |                                   |       |                                  |       |   |   |   |   |
| Expenses:                                                                                 |       |                                   |       |                                  |       |   |   |   |   |
| Cost of revenues                                                                          |       | 3,354                                  |       | 3,507                                 |       | 10,249 |   | 10,292 |   |
| Sales and  marketing                                                                      |       | 193                                    |       | 283                                   |       | 676 |   | 976 |   |
| General and  administrative                                                               |       | 582                                    |       | 559                                   |       | 1,840 |   | 1,800 |   |
| Total expenses                                                                            |       | 4,129                                  |       | 4,349                                 |       | 12,765 |   | 13,068 |   |
|                                                                                      |       |                                   |       |                                  |       |   |   |   |   |
| Operating (loss)  income                                                                  |       | (276                                   | )          | 5                                     |       | (698 | ) | (682 | ) |
|                                                                                      |       |                                   |       |                                  |       |   |   |   |   |
| Interest and other  income, net                                                           |       | 26                                     |       | 36                                    |       | 78 |   | 92 |   |
| Interest expense                                                                          |       | (67                                    | )          | (48                                   | )          | (176 | ) | (145 | ) |
|                                                                                      |       |                                   |       |                                  |       |   |   |   |   |
| Loss before  income taxes                                                                 |       | (317                                   | )          | (7                                    | )          | (796 | ) | (735 | ) |
| Income tax  (provision) benefit                                                           |       | (3                                     | )          | 324                                   |       | (9 | ) | 324 |   |
| Net (loss)  income                                                                        |       | $                                      | (320       | )                                     | $          | 317 |   | $ | (805 | ) | $ | (411 | ) |
|                                                                                      |       |                                   |       |                                  |       |   |   |   |   |
| Net (loss)  income per share of common stock (basic and diluted)                          |       | $                                      | (0.04      | )                                     | $          | 0.04 |   | $ | (0.10 | ) | $ | (0.06 | ) |
|                                                                                      |       |                                   |       |                                  |       |   |   |   |   |
| Weighted average  common shares and equivalents used in computing income (loss) per share |       |                                   |       |                                  |       |   |   |   |   |
| Basic                                                                                     |       | 8,287,128                              |       | 7,721,689                             |       | 8,234,728 |   | 6,649,675 |   |
| Diluted                                                                                   |       | 8,287,128                              |       | 8,883,018                             |       | 8,234,728 |   | 6,649,675 |   |

 

Seenotes to unaudited consolidated financial statements.

 

 

4

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#### **Healthaxis Inc. and Subsidiaries**

#### **Consolidated Statements of Cash Flows**

#### **(In thousands) (Unaudited)**

** **
| ** **                                                                   | ** ** | **Nine Months Ended   September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **Cash  flows from operating activities**                                    | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| Net loss                                                                     |       | $                                     | (805       | ) | $ | (411 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                  |       |   |   |
| Depreciation and  amortization                                               |       | 840                                   |       | 823 |   |
| Restricted stock  compensation                                               |       | 246                                   |       | 62 |   |
| Other                                                                        |       | (2                                    | )          | 2 |   |
| Reversal of tax  accrual                                                     |       | —                                |       | (324 | ) |
| Change in:                                                                   |       |                                  |       |   |   |
| Accounts  receivable                                                         |       | (498                                  | )          | (1,263 | ) |
| Prepaid expenses  and other current assets                                   |       | (84                                   | )          | (44 | ) |
| Other assets                                                                 |       | 189                                   |       | (211 | ) |
| Accounts payable  and accrued liabilities                                    |       | (9                                    | )          | 338 |   |
| Deferred  revenues                                                           |       | (241                                  | )          | 906 |   |
| Other  liabilities                                                           |       | (80                                   | )          | (145 | ) |
| Net cash used in  operating activities                                       |       | (444                                  | )          | (267 | ) |
| ** **                                                                   | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Cash  flows from investing activities**                                    | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Investment in  capitalized software and contract start-up costs              |       | (555                                  | )          | (1,055 | ) |
| Purchases of  property, equipment and software                               |       | (120                                  | )          | (440 | ) |
| Proceeds from  sale of property, equipment, and software                     |       | —                                |       | — |   |
| Net cash used in  investing activities                                       |       | (675                                  | )          | (1,495 | ) |
| ** **                                                                   | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Cash  flows from financing activities**                                    | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Proceeds from  lines of credit                                               |       | 259                                   |       | 851 |   |
| Net (payments)  proceeds from issuance of common stock                       |       | —                                |       | (45 | ) |
| Payments on note  payable                                                    |       | (146                                  | )          | (500 | ) |
| Net cash  generated in financing activities                                  |       | 113                                   |       | 306 |   |
| Decrease in cash  and cash equivalents                                       |       | (1,006                                | )          | (1,456 | ) |
| Cash and cash  equivalents, beginning of period                              |       | 3,362                                 |       | 4,729 |   |
| Cash and cash  equivalents, end of period                                    |       | $                                     | 2,356      |   | $ | 3,273 |   |
|                                                                         |       |                                  |       |   |   |
| Non-cash  financing activities                                               |       |                                  |       |   |   |
| Accounts receivable  applied to note and interest payable in lieu of cash    |       | $                                     | 412        |   | $ | 585 |   |
|                                                                         |       |                                  |       |   |   |   |   |
| Interest paid                                                                |       | $                                     | 99         |   | $ | 50 |   |
|                                                                              |            |                                       |            |  |  |  |  |  |

 

Seenotes to unaudited consolidated financial statements.

 

 

5

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#### **Healthaxis Inc. and Subsidiaries**

**Notes to Unaudited ConsolidatedFinancial Statements**

**September 30, 2007**

 

**Note A —Description of business and basis of presentation**

 

*Unaudited Financial Information*

 

                Theunaudited consolidated financial statements have been prepared by HealthaxisInc. and its subsidiaries (“Healthaxis,” the “Company,” “we,” “our” or “us”),pursuant to the rules and regulations of the Securities and Exchange Commissionand reflect all adjustments consisting of normal recurring entries, which, inthe opinion of the Company, are necessary to present fairly the results for theinterim periods. The interim financial statements do not include alldisclosures provided in fiscal year end financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America, although the Company believes that the accompanying disclosures areadequate to make the information presented not misleading.  Results of operations for the three andnine-month periods ended September 30, 2007, are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2007.  These financial statements should be read inconjunction with the financial statements and notes thereto contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2006.

 

*Earnings Per Share*

 

Basic income(loss) per share is computed using only the weighted average number of commonshares outstanding during the respective periods.  Diluted earnings per share is computed toshow the dilutive effect, if any, of convertible preferred stock, stock optionsand warrants using the treasury stock method based on the average market priceof the stock during the respective periods. In certain of the periods presented, the Company reported a net loss andthe effect of including the convertible preferred stock, stock options andwarrants in the computation of diluted earnings per share would beanti-dilutive for each of those periods, thus these items have not been includedin the computation.  Following is asummary of these potentially dilutive securities:

 
| ** **                       | ** ** | **As of  September 30,** |
|----------------------------------|------------|--------------------------|
| ** **                       | ** ** | **2007**                 | ** ** | **2006** |
|                             |       |                     |   |   |
| Options                          |       | 1,163,453                |   | 1,198,603 |
| Restricted stock                 |       | 313,125                  |   | 184,500 |
| Warrants                         |       | 7,229,186                |   | 7,229,186 |
| Preferred stock                  |       | 740,401                  |   | 740,401 |
| Total common shares if converted |       | 9,446,165                |   | 9,352,690 |

 

                *Equity Compensation*

 

                The Company accounts for equitycompensation in accordance with Statement of Financial Accounting Standards No.123R, “Share Based Payment” (SFAS 123R). On January 16, 2007, the Company granted 92,500 shares of restrictedstock to its directors.  The restrictedstock has been valued at approximately $127,000, which represents the tradingvalue of the stock as quoted on NASDAQ January 16, 2007.  The shares of stock granted to directors vestover the calendar year of service, thus three fourths of the shares vested inthe nine months ended September 30, 2007, and the Company recognizedcompensation expense of approximately $96,000.

 

                On April 20, 2007, the Companygranted 210,000 shares of restricted stock to its officers and key employees,which have been valued at approximately $370,000 based on the trading value ofthe stock on the date of grant.  Onefourth of these shares, 52,500 shares, vested immediately and the balance veston the anniversary 

 

 

6

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dateof the grant over the next three years. The Company recorded compensation expense of $92,000 related to theshares that vested immediately plus $39,000 related to the time vestingcomponent of the remaining shares.  Alsoin the second quarter of 2007, 15,500 shares of restricted stock vested thatwere subject to performance-based vesting, which resulted in compensationexpense of $19,000.  No stock options weregranted or vested in 2006 or during the first nine months of 2007.

 

**Note B — Significant Customer Concentrations**

 

                Forthe three months ended September 30, 2007 and 2006, three customers accountedfor $2.5 million (66%) and $2.8 million (64%), respectively, of the Company’stotal revenues.  For the nine monthsended September 30, 2007 and 2006, these three customers accounted for $7.8million (65%), and $7.8 million (63%), respectively, of the Company’s totalrevenues.  At September 30, 2007 andDecember 31, 2006, three customers individually accounted for more than 10% ofthe Company’s accounts receivable as shown in the table below.

 
| ** ** | ** ** | **Percent of accounts and notes receivable** | ** ** |
|------------|------------|----------------------------------------------|------------|
| ** ** | ** ** | **September 30, 2007**                       | ** ** | **December 31, 2006** | ** ** |
| Customer A |       | 34                                           | %          | 30 | % |
| Customer B |       | 24                                           | %          | 28 | % |
| Customer C |       | 16                                           | %          | 10 | % |
|            |            |                                              |            |  |  |  |

 

**Note C — Related PartyTransactions**

 

**               **The Company is a party to a RemoteResourcing Agreement with Healthcare BPO Partners L.P., a company affiliatedwith a significant shareholder. Healthcare BPO Partners, based in Jaipur, India, provides personnel andinfrastructure that is utilized by the Company to provide business processoutsourcing services and other software development and technical supportservices to support the Company’s operations. The resources provided by Healthcare BPO Partners supplement the Company’sexisting wholly-owned operations in Utah, Texas and Jamaica.  As a part of the Resourcing Agreement,Healthcare BPO Partners also provided data center hosting services, at a ViennaVirginia facility, to Healthaxis during 2006 and through September 12,2007.  For the nine months endedSeptember 30, 2007 and September 30, 2006, the Company incurred costs ofapproximately $784,000 and $790,000, respectively, related to the ResourcingAgreement.  At September 30, 2007 andDecember 31, 2006, the Company had accounts payable to Healthcare BPO Partnersof approximately $163,000 and $89,000.

 

**Note D — Recent Accounting Pronouncements**

 

                In July 2006,the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accountingfor Income Taxes.”  FIN 48 requires thata position taken or expected to be taken in a tax return be recognized in thefinancial statements when it is more likely than not (i.e. a likelihood of morethan fifty percent) that the position would be sustained upon examination bytax authorities.  A recognized taxposition is then measured at the largest amount of benefit that is greater thanfifty percent likely of being realized upon ultimate settlement.  The Company is subject to the provisionsof FIN 48 as of January 1, 2007. The Company believes that its income tax filing positions and deductionswould be sustained on audit and does not anticipate any adjustments that wouldresult in a material change to its financialposition.  Therefore, no reserves for uncertain income taxpositions have been recorded pursuant to FIN 48.

 

                InSeptember 2006, FASB Statement 157, “Fair Value Measurements” (“SFAS 157”)was issued.  SFAS 157 establishes aframework for measuring fair value by providing a standard definition of fairvalue as it applies to assets and liabilities. SFAS 157, which does not require any new fair value measurements, clarifiesthe application of other accounting pronouncements that require or permit fairvalue measurements.  The effective date forthe Company is January 1, 2008.  Theadoption of SFAS 157 is not anticipated to have a material impact on ourConsolidated Financial Statements.

 

 

7

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**Note E — Lines of Credit**

 

                On April16, 2007, the Company entered into an amendment to its Loan and SecurityAgreement (“LSA”) with Silicon Valley Bank. Under the original LSA, the revolving line would have expired in August2007.  As a result of the amendment, 1)the expiration of the revolving line was extended to April 2009, 2) theavailable borrowing limit and the draw period under the equipment line wereincreased, and 3) certain covenants were modified.  The Company elected to reduce the maximumamount available under the revolving line to avoid paying higher unusedrevolving line facility fees.  Theclassification of the lines of credit on Consolidated Balance Sheets as currentor non-current is based on the amended maturity date.  Based on the calculation of the borrowingbase as of September 30, 2007, we would have been eligible to draw up toapproximately $2.3 million under the revolving line, of which $500,000 had beendrawn as of that date.

 

 

8

**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Forward-Looking Statements**

 

All statements other than statements of historicalfact contained in this report, including statements in this “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”concerning the Company’s financial position and liquidity, results ofoperations, prospects for future growth, and other matters are forward-lookingstatements.  These statements may beidentified with words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,”“intend,” “should,” “could,” “goal,” “target,” “designed,” “on track,” “comfortablewith,” “optimistic” and other similar expressions, and constituteforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. These forward-looking statements are subject to known andunknown risks, uncertainties and other factors, which may cause actual resultsto be materially different from those contemplated by the forward-lookingstatements.  Such factors include therisks and uncertainties identified in Healthaxis documents filed with, orfurnished to, the Securities and Exchange Commission, including withoutlimitation those identified under the caption “Risk Factors” in the Company’sForm 10-K for the year ended December 31, 2006. The Company undertakes no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events orotherwise.  Readers are cautioned not toplace undue reliance on forward-looking statements.

 

**Overview**

 

Healthaxis Inc. isa Pennsylvania corporation, which was organized in 1982. Healthaxis’ commonstock trades on the NASDAQ Capital Market under the symbol “HAXS.”  The operations of Healthaxis are conductedthrough its subsidiary, Healthaxis, Ltd. Unless otherwise indicated, or the context otherwise requires, allreferences in this document to the “Company,” “Healthaxis,” “we,” “our” or “us”include Healthaxis Inc. and all of its subsidiaries.  Healthaxis maintains a website atwww.healthaxis.com.  The Healthaxis Codeof Conduct can be found on the Healthaxis website.  Information found on the Healthaxis websiteis not a part of this report.

For the third quarter of 2007, the Company reported revenue of $3.9 million and an operating loss of $276,000.  Revenue was approximately $501,000 less than the third quarter of 2006 and the operating income (loss) for the third quarter of 2007 was negatively impacted by $281,000 as compared to the third quarter of 2006.  Year-to-date, revenues of $12.1 million decreased $320,000 over last year and the operating loss of $698,000 was virtually the same as in 2006.  Operational highlights of the year include completing a large-scale customer implementation that added a significant number of revenue-generating lives to our systems and adding new customers that we are implementing or have implemented so far this year.  Due to the subscription nature of our business, these customer wins do not immediately impact operating results, but are expected to provide additional revenue in future periods.  Additionally, we have improved the efficiency of our BPO Services, which has resulted in a reduction of variable labor, and we have reduced costs in multiple other areas.

 

The third quarter net loss was an improvement over the second quarter, and we remain focused upon a target of consistent profitability.  We continuously review every aspect of our cost structure looking for operational improvements and cost reductions and the reduction in third quarter operating expenses shows that we are making steady progress.  And while keeping costs under control is critical, growing revenue remains a high priority to us.  The loss of one of our BPO customers this year due to its acquisition has been disappointing and has had a noticeable impact on our financial results.  Nonetheless, we have a healthy pipeline of prospects with needs ranging from front-end BPO services to Ultimate TPA or similar full-service capabilities.  We continue to get very positive feedback for our unique best shore capability, whereby we provide BPO services wherever the customer chooses from on-shore to near-shore to off-shore.  We have added new customers in the last year and are pleased to see the progress these customers are making and the positive press they are receiving.  We also look for ways to help our existing customers grow and provide additional services to their customers which can lower their medical 

 

 

9

 

costs or provide a more comprehensive and consumer-directed set of services.  This will make them more successful and in turn benefit us.  We are also reviewing ways to move into other aspects or niches of the healthcare industry where our deep domain expertise, full range of services, and technological flexibility could create a growth opportunity for us.

 

*CriticalAccounting Policies*

 

                Critical accounting policies arethose which are most important to the financial statement presentation and thatrequire the most difficult, subjective complex judgments.  There have been no changes in the Company’scritical accounting policies as described in the Company’s Form 10-K for theyear ended December 31, 2006, other than as described in Note D to theUnaudited Consolidated Financial Statements.

** **

** **

**Results of Operations**

 

**Three months ended September 30, 2007compared to three months ended September 30, 2006**

 
| ** **       | ** ** | **(Table in thousands)  Three Months Ended   September 30,** | ** ** | ** ** | ** ** |
|------------------|------------|--------------------------------------------------------------|------------|------------|------------|
| ** **       | ** ** | **2007**                                                     | ** ** | **2006**   | ** ** | **Change** | ** ** |
|             |       |                                                         |       |       |       |   |   |
| Revenues         |       | $                                                            | 3,853      |       | $          | 4,354 |   | $ | (501 | ) |
| Cost of revenues |       | 3,354                                                        |       | 3,507      |       | 153 |   |
| Gross profit     |       | $                                                            | 499        |       | $          | 847 |   | $ | (348 | ) |
| % of revenue     |       | 13                                                           | %          | 19         | %          |   |   |

 

*               ***Revenues**were approximately $501,000 lower in thethree months ended September 30, 2007 compared to the same period in 2006.  Transaction fee revenue declined $137,000 andBPO service revenue declined $347,000 primarily due to the loss of a customeracquired by a larger organization as previously disclosed, and the continuingshift in the healthcare industry from paper claims to a higher volume ofelectronic claims.  Professional servicesrevenues were $18,000 lower than the prior year period and revenues from ASPlicense fees were relatively unchanged.

 

**                Costof revenues**includesall expenses directly associated with the production of revenue, and consistsprimarily of salaries and related benefits, rent, amortization anddepreciation, system expenses such as maintenance and repair, as well as otherrelated consumables and are partially reduced by the capitalization of certaincosts incurred (primarily employee compensation) for new customerimplementations and software development projects.  Cost of revenues decreased $153,000 in thethree months ended September 30, 2007 compared to the same period in 2006.  The gross cost of revenue before capitalizedcosts decreased approximately $397,000 from the 2006 period to the 2007 periodwhich includes a) approximately $129,000 reduction in variable labor related toBPO services due to increased efficiency and lower volumes, b) $86,000 in lowersalaries resulting from ongoing changes to the organization, c) $81,000 lowerhealth benefits cost due to fewer high dollar medical claims by our employeesand their dependents, d) $63,000 reduction in fixed costs such as data lines aswe continue to carefully monitor and control our cost structure, e) $23,000reduction in other variable costs such as travel and supplies, also due tostringent cost control and f) $34,000 reduction in variable costs of printingand postage related to the decrease in transaction fee revenue.  For the third quarter of 2007, we capitalizedapproximately $244,000 less in cost of revenues than in the third quarter of2006 because in the prior year period we were in the middle of the significantnew customer implementation that required a significant proportion of ourresources.  Significantly less time wasspent on implementations during the third quarter of 2007.  Cost of revenues 

 

 

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also contains non-cash equity compensation of $23,000resulting from the vesting of restricted stock in the 2007 period.  There was no such equity compensation chargein the 2006 period.

 
| ** **                          | ** ** | **(Table in thousands)  Three Months Ended   September 30,** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2007**                                                     | ** ** | **2006**   | ** ** | **Change** | ** ** |
| Sales and  marketing expense        |       | $                                                            | 193        |       | $          | 283 |   | $ | (90 | ) |
| General and  administrative expense |       | 582                                                          |       | 559        |       | 23 |   |
| Interest and  other income, net     |       | 26                                                           |       | 36         |       | (10 | ) |
| Interest expense                    |       | (67                                                          | )          | (48        | )          | (19 | ) |
| Income tax  benefit                 |       | (3                                                           | )          | 324        |       | (327 | ) |
|                                |       |                                                         |       |       |       |   |   |
|                                     |            |                                                              |            |            |            |  |  |  |  |  |

** **

**                Salesand marketing expenses**consist primarily of employee salaries and related benefits, as well aspromotional costs such as direct mailing campaigns, trade shows and mediaadvertising.   Sales and marketingexpenses decreased $90,000 in the three months ended September 30, 2007compared to the same quarter of 2006. This decrease was due to lower personnel costs and the related reductionin benefits and travel related to changes in the sales and marketing team overthe past year as well as reduced spending for marketing expenses.

 

                **General and administrative expenses**include executivemanagement, accounting, legal and human resources compensation and relatedbenefits, as well as expenditures for applicable overhead costs.  These expenses increased $23,000 in the threemonths ended September 30, 2007 compared to the same quarter of 2006.  This includes a) a non-cash equitycompensation charge of approximately $32,000 as compared to $21,000 in thethird quarter of 2006 resulting from the vesting of restricted stock granted tomembers of the board of directors and b) increases in total professionalservice fees from auditors, attorneys, and others due to increased compliancecosts associated with Section 404 of the Sarbanes-Oxley Act of 2002.

 

**Interest and other income, net** decreased $10,000 for the three monthsended September 30, 2007 compared to the same quarter of 2006 due primarily tolower balances of cash.

 

**Interest expense** increased $19,000 in the three months ended September30, 2007 compared to the same quarter of 2006. Interest was higher due to additional borrowings on the lines of credit,partially offset by reduced interest on the note payable to HealthMarkets dueto the declining principal balance.

 

**Provision for income taxes** was $3,000 for the three months endedSeptember 30, 2007 compared to a benefit of $324,000 in the same quarter of2006.  Effective January 1, 2007, theCompany is accruing an estimate of the tax due under the new margin tax enactedby the State of Texas.  The benefit lastyear was due to the reversal of a contingent tax liability following theexpiration of the statute of limitations.

 

 

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**Nine months ended September 30, 2007compared to nine months ended September 30, 2006**

 

| ** **       | ** ** | **(Table in thousands)   Nine Months Ended   September 30,** | ** ** | ** ** | ** ** |
|------------------|------------|--------------------------------------------------------------|------------|------------|------------|
| ** **       | ** ** | **2007**                                                     | ** ** | **2006**   | ** ** | **Change** | ** ** |
|             |       |                                                         |       |       |       |   |   |
| Revenues         |       | $                                                            | 12,067     |       | $          | 12,386 |   | $ | (319 | ) |
| Cost of revenues |       | 10,249                                                       |       | 10,292     |       | 43 |   |
| Gross profit     |       | $                                                            | 1,818      |       | $          | 2,094 |   | $ | (276 | ) |
| % of revenue     |       | 15                                                           | %          | 17         | %          |   |   |

 

*               ***Revenues**were approximately $319,000 lower for thenine months ended September 30, 2007 compared to the same period in 2006.  Revenues from ASP license fees increased$134,000 due to an overall increase in the number of customer lives on oursystems as additions from new customers offset a gradual decrease from someexisting customers.  Transaction feerevenue declined $170,000 and BPO service revenue declined $414,000 due to theaforementioned loss of the customer acquired by a larger organization and thecontinuing shift in the healthcare industry from paper claims to a highervolume of electronic claims. Professional services revenues increased $131,000 due in large part tonew customers added in the past year.

 

**                Costof revenues**declined$43,000 for the nine months ended September 30, 2007 compared to the sameperiod in 2006.  The gross cost ofrevenue before capitalized costs decreased approximately $603,000 from the 2006period to the 2007 period which includes a) approximately $292,000 reduction invariable labor related to BPO services due to increased efficiency and lowervolumes, b) $85,000 in lower salaries resulting from ongoing changes to theorganization, c) $50,000 in lower health benefits cost due to fewer high dollarmedical claims by our employees and their dependents, d) $205,000 reduction infixed costs such as data lines as we continue to carefully monitor and controlour cost structure, and e) $92,000 reduction in other variable costs such astravel and supplies, also due to stringent cost control.  Theses improvements were mostly offset by a)a $560,000 reduction of costs that are capitalized for accounting purposes dueto a significantly reduced amount of time spent on implementations in 2007, b)an increase in variable costs of printing and postage and c) non-cash equitycompensation of $55,000 resulting from the vesting of restricted stock in the2007 period.  There was no such equitycompensation charge in the 2006 period.

 

| ** **                          | ** ** | **(Table in thousands)   Nine Months Ended   September 30,** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2007**                                                     | ** ** | **2006**   | ** ** | **Change** | ** ** |
|                                |       |                                                         |       |       |       |   |   |
| Sales and  marketing expense        |       | $                                                            | 676        |       | $          | 976 |   | $ | (300 | ) |
| General and  administrative expense |       | 1,840                                                        |       | 1,800      |       | 40 |   |
| Interest and other  income, net     |       | 78                                                           |       | 92         |       | (14 | ) |
| Interest expense                    |       | (176                                                         | )          | (145       | )          | (31 | ) |
| Provision for  Income taxes         |       | (9                                                           | )          | 324        |       | (333 | ) |
|                                     |            |                                                              |            |            |            |  |  |  |  |  |

 

**                Salesand marketing expenses**decreased $300,000 in the nine months ended September30, 2007 compared to the same period of 2006. This decrease was due to lower personnel costs and the related reductionin benefits and travel related to changes in the sales and marketing team overthe past year as well as reduced spending for marketing expenses.

 

 

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                **General and administrative expenses**increased $40,000 for the nine months ended September 30, 2007compared to the same period of 2006.  Themajority of the increase is attributable to a non-cash equity compensationcharge of approximately $96,000 for the nine months ended September 30, 2007compared to $62,000 for the nine months ended September 30, 2006 resulting fromthe vesting of restricted stock granted to members of the board ofdirectors.  While the company has had toincrease spending on professional service fees related to compliance withSection 404 of the Sarbanes-Oxley Act of 2002, it has curtailed spending inother areas to minimize the overall impact.

 

                **Interest and other income, net** decreased $14,000 for thenine months ended September 30, 2007 compared to the same period of 2006 dueprimarily to lower balances of cash.

 

**Interest expense** increased $31,000 for the nine months ended September30, 2007 compared to the same period of 2006. Interest was higher due to additional borrowings on the lines of credit,partially offset by reduced interest on the note payable to HealthMarkets dueto the declining principal balance.

 

**Provision for income taxes** was $9,000 for the nine months endedSeptember 30, 2007 compared to a benefit of $324,000 in the same period of2006.  Effective January 1, 2007, theCompany is accruing an estimate of the tax due under the new margin tax enactedby the State of Texas.  The benefit lastyear was due to the reversal of a contingent tax liability following theexpiration of the statute of limitations.

 

**Liquidityand Capital Resources**

 

*Overview of Cash Resources*

 

**               **At September 30, 2007, our cash and cashequivalents amounted to $2.4 million compared to $3.4 million at December 31,2006.  The sources and uses of cashduring the first nine months of 2007 are described more fully in “Analysis ofCash Flows” below.  We believe that theCompany will maintain sufficient liquidity to fund operations for at least thenext 12 months.

 

                On April16, 2007, the Company entered into an amendment to its Loan and SecurityAgreement (“LSA”) with Silicon Valley Bank. Under the original LSA, the revolving line would have expired in August2007.  As a result of the amendment, 1)the expiration of the revolving line is extended to April 2009, 2) theavailable borrowing limit and the draw period under the equipment line wereincreased, and 3) certain covenants were modified.  The Company elected to reduce the maximumamount available under the revolving line to avoid paying higher unusedrevolving line facility fees.  Based onthe calculation of the borrowing base as of September 30, 2007, we would havebeen eligible to draw up to approximately $2.3 million under the revolvingline, of which $500,000 had been drawn as of that date.

 

*Analysisof Cash Flows*

 

*Cash usedin operating activities* for the nine months ended September 30, 2007 was approximately$444,000 as compared to $267,000 for the same period in 2006.  The increase was primarily the result ofchanges in working capital partially offset by the net loss adjusted fornon-cash items including depreciation, restricted stock, and the 2006 taxaccrual reversal.  Changes in workingcapital accounted for a $723,000 use of cash in the 2007 period as opposed to a$419,000 use of cash for the comparable period in 2006.  The most significant reason for the changesin working capital were payments received in 2006 from a customerimplementation recorded as deferred revenue. Timing of accounts receivable collections was also a factor, as September2007 receipts were less than our historical average.  We expect to return to normal levels infuture periods.

 

 

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*Cash usedin investing activities* for the nine months ended September 30, 2007 was $675,000 as comparedto $1.5 million for the same period in 2006. The Company’s investing activities continue to be primarily in the areasof developing software enhancements, contract start-up activities andacquisition of property, equipment and software.  Capitalized software and contract start-upcosts decreased, as significantly more time was spent in the 2006 periodrelated to a significant customer implementation and the related costs wererequired to be capitalized.  Purchases of property, equipment and softwarewere higher in 2006 due to the addition of equipment to increase the efficiencyof our mailroom operations.

*Cashgenerated in financing**activities* for the nine months ended September 30, 2007 was $113,000 while cashfrom financing activities for the nine months ended September 30, 2006 was$306,000.  The amounts for both periodsare primarily borrowings on bank lines of credit partially offset by debtpayments on the note payable to HealthMarkets.

**Recently Adopted Accounting Pronouncements**

 

                See Note D to the Consolidated Financial Statementsherein for a discussion of the impact on the Company’s financial statements ofnew accounting standards.

 

**Item 3.    Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Exposure to market riskfor changes in interest rates relate primarily to short-term investments. TheCompany does not use derivative financial instruments. The primary objective ofits investment activities is to preserve principal while maximizing yieldswithout significantly increasing risk. Due to the nature of the Company’sinvestments, we believe that there is no material risk exposure.

Our cashequivalents and other investment instruments are exposed to financial marketrisk due to fluctuation in interest rates, which may affect our interestincome. These instruments are not entered into for trading purposes.  We do not expect our interest income to besignificantly affected by a sudden change in market interest rates.

The dividend rateon our preferred stock is fixed at a nominal rate of $0.0001 per share of thenew preferred stock, payable semi-annually (aggregating less than $1,000 individend payments to all preferred shareholders annually).  The interest rate on our note payable isfixed at 6%.   The fair value of theseinstruments is therefore subject to market fluctuation as interest rateschange.

**Item 4.    Controls and Procedures**

As of the end ofthe period covered by this quarterly report, the Company carried out anevaluation, under the supervision and with the participation of the Companymanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Securities Exchange Act Rule13a-15.  Based on that evaluation, theChief Executive Officer and the Chief Financial Officer have concluded thatthese disclosure controls and procedures are effective as of the end of theperiod covered by this report.  There hasbeen no change in the Company’s internal control over financial reporting thatoccurred during the period covered by this report that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

 

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PART II.  OTHERINFORMATION

**Item 1.                    Legal Proceedings**.

 

                Weare not currently a party to any material legal proceedings and we are notaware of any pending or threatened litigation that would have a materialadverse effect on us or our business.

 

**Item 1A.                 Risk Factors**

 

                Weface a number of significant risks and uncertainties in our business, which aredetailed under “Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2006.  These risks anduncertainties may affect our current position and future prospects, and shouldbe considered carefully in evaluating us and an investment in our commonstock.  We described the potential lossof a customer whose contract was up for renewal as of September 30, 2006, andfor whom we were providing services on a month-to-month basis.  During the second quarter of 2007, thiscustomer terminated our services as referenced in *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*.  We have notidentified any other material changes to the Risk Factors detailed in our mostrecent Annual Report on Form 10-K.

 

**Item 2.                    Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

                                None.

 

**Item 3.                    Defaults Upon SeniorSecurities.**

 

                                None.

 

**Item 4.                    Submissionof Matters to a Vote of Security Holders.**

 

                                None.

 

**Item 5.                    Other Information.**

 

                                None.

 

**Item 6.                    Exhibits**

 
| (3.1)  |   | Articles of Amendment to the Company’s Amended and  Restated Articles of Incorporation, as filed on August 9, 2007 (incorporated by  reference from Current Report on Form 8-K filed August 10, 2007). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3.2)  |   | Bylaw Amendment amending the Company’s Second  Amended and Restated Bylaws, effective as of August 9, 2007 (incorporated by  reference from Current Report on Form 8-K filed August 10, 2007).         |
| (31.1) |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                        |
| (31.2) |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                        |
| (32.1) |   | Certifications of Chief Executive Officer and Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  furnished herewith.                                                      |

 

 

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### **Signature**

 

                Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                   | Healthaxis Inc.                                                                         |
|------------------------|-----------------------------------------------------------------------------------------|
|                   |                                                                                    |
|                   |                                                                                    |
| Date: November 9, 2007 | By:                                                                                     |  /s/ John M. Carradine |
|                   | John M. Carradine, President  and Chief Executive Officer (Principal Executive Officer) |
|                   |                                                                                    |
|                   |                                                                                    |
|                   | By:                                                                                     |  /s/ Ronald K. Herbert |
|                   | Ronald K. Herbert, Chief  Financial Officer   (Principal Financial Officer)             |

 

 

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#### **Exhibit Index**

 

| (3.1)  |   | Articles of Amendment to the Company’s Amended and  Restated Articles of Incorporation, as filed on August 9, 2007 (incorporated  by reference from Current Report on Form 8-K filed August 10, 2007). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3.2)  |   | Bylaw Amendment amending the Company’s Second Amended  and Restated Bylaws, effective as of August 9, 2007 (incorporated by  reference from Current Report on Form 8-K filed August 10, 2007).         |
| (31.1) |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                        |
| (31.2) |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                        |
| (32.1) |   | Certifications  of Chief Executive Officer and Chief Financial Officer Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002, furnished herewith.                                                      |

 

 

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