**Table of Contents**

** **

** **

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**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 June 30,  2008** |
|                                                    |                                                                                                                                                      |
| **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 its charter)

 

| **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 checkmark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.                                   xYes           oNo

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.  (Check one):
| Large  accelerated filero |   | Accelerated  filero |   | Non-accelerated  filero |   | Smaller  reporting companyx |
|---------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).
| oYes       xNo           |
|---------------------------------------------------------------------------------------------------------------|

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: 8,816,088 shares of common stock, par value $.10,outstanding as of August 1, 2008.

 

 

 

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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 4T.           | Controls and  Procedures                                                                    | 14         |
|               |                                                                                        |       |
| PART II       | Other Information                                                                           |       |
|               |                                                                                        |       |
| Items  1-5         | 15                                                                                          |
|               |                                                                                        |
| Item 6. Exhibits   | 16                                                                                          |
|               |                                                                                        |
| Signatures         | 17                                                                                          |
|               |                                                                                        |
| Exhibit Index | 18                                                                                          |
|                    |                                                                                             |            |  |

 

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# **PART I.FINANCIAL INFORMATION**

#  

**Item1.   Consolidated Financial Statements**

 

**Healthaxis Inc. and Subsidiaries**

**Consolidated Balance Sheets**

(In thousandsexcept share and per share data) (Unaudited)

 
| ** **                                                                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                           | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| **Assets**                                                                                                                           |       |              |       |                  |       |
| Current assets:                                                                                                                      |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                           |       | $                 | 2,497      |                  | $          | 2,621 |   |
| Accounts and  note receivable, net of allowance for doubtful accounts of $105 and $109, respectively                                 |       | 2,444             |       | 2,630                 |       |
| Prepaid expenses                                                                                                                     |       | 788               |       | 510                   |       |
| Total current  assets                                                                                                                |       | 5,729             |       | 5,761                 |       |
|                                                                                                                                 |       |              |       |                  |       |
| Property,  equipment and software, less accumulated depreciation and amortization of  $7,524 and $7,213, respectively                |       | 1,150             |       | 1,361                 |       |
| Contract start-up  costs, less accumulated amortization of $2,875 and $2,599, respectively                                           |       | 1,005             |       | 1,214                 |       |
| Goodwill                                                                                                                             |       | 11,276            |       | 11,276                |       |
| Other assets                                                                                                                         |       | 80                |       | 80                    |       |
| Total assets                                                                                                                         |       | $                 | 19,240     |                  | $          | 19,692 |   |
|                                                                                                                                 |       |              |       |                  |       |
| **Liabilities  and Stockholders’ Equity**                                                                                       |       |              |       |                  |       |
| Current  liabilities:                                                                                                                |       |              |       |                  |       |
| Accounts payable                                                                                                                     |       | $                 | 1,362      |                  | $          | 1,215 |   |
| Accounts payable  to related parties                                                                                                 |       | 86                |       | 84                    |       |
| Accrued  liabilities                                                                                                                 |       | 725               |       | 640                   |       |
| Deferred  revenues                                                                                                                   |       | 1,018             |       | 1,309                 |       |
| Note payable,  current portion                                                                                                       |       | —            |       | 93                    |       |
| Working capital  line of credit, current portion                                                                                     |       | 1,200             |       | —                |       |
| Equipment line  of credit, current portion                                                                                           |       | 321               |       | 313                   |       |
| Current portion,  post retirement and employment liabilities                                                                         |       | 121               |       | 121                   |       |
| Total current  liabilities                                                                                                           |       | 4,833             |       | 3,775                 |       |
|                                                                                                                                 |       |              |       |                  |       |
| Post retirement  and employment liabilities                                                                                          |       | 666               |       | 704                   |       |
| Working capital  and equipment lines of credit                                                                                       |       | 241               |       | 1,192                 |       |
| Deferred rent                                                                                                                        |       | 214               |       | 267                   |       |
| Other  liabilities                                                                                                                   |       | 202               |       | 202                   |       |
| Total  liabilities                                                                                                                   |       | 6,156             |       | 6,140                 |       |
|                                                                                                                                 |       |              |       |                  |       |
| 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  8,417,838 and 8,319,805 shares, respectively |       | 842               |       | 832                   |       |
| Note receivable  from employees                                                                                                      |       | —            |       | (5                    | )          |
| Additional  paid-in capital                                                                                                          |       | 450,758           |       | 450,618               |       |
| Accumulated  deficit                                                                                                                 |       | (439,256          | )          | (438,633              | )          |
| Total  stockholders’ equity                                                                                                     |       | 13,084            |       | 13,552                |       |
| Total  liabilities and stockholders’ equity                                                                                     |       | $                 | 19,240     |                  | $          | 19,692 |   |

 

See notes to unauditedconsolidated financial statements.

 

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**Healthaxis Inc. and Subsidiaries**

**Consolidated Statements ofOperations**

(In thousands, exceptshare and per share data) (Unaudited)

 
| ** **                                                                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Revenue                                                                                             |       | $                                                   | 3,935      |                                              | $          | 4,003 |   | $ | 7,939 |   | $ | 8,214 |   |
|                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Expenses:                                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Cost of revenues                                                                                    |       | 3,384                                               |       | 3,457                                             |       | 6,922 |   | 6,895 |   |
| Sales and  marketing                                                                                |       | 61                                                  |       | 235                                               |       | 446 |   | 483 |   |
| General and  administrative                                                                         |       | 522                                                 |       | 699                                               |       | 1,108 |   | 1,258 |   |
| Total expenses                                                                                      |       | 3,967                                               |       | 4,391                                             |       | 8,476 |   | 8,636 |   |
|                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Operating loss                                                                                      |       | (32                                                 | )          | (388                                              | )          | (537 | ) | (422 | ) |
|                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Interest and  other income, net                                                                     |       | 4                                                   |       | 19                                                |       | 15 |   | 52 |   |
| Interest expense                                                                                    |       | (45                                                 | )          | (51                                               | )          | (87 | ) | (109 | ) |
|                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Net loss before  taxes                                                                              |       | (73                                                 | )          | (420                                              | )          | (609 | ) | (479 | ) |
| Provision for  income taxes                                                                         |       | (8                                                  | )          | (3                                                | )          | (14 | ) | (6 | ) |
| Net loss                                                                                            |       | $                                                   | (81        | )                                                 | $          | (423 | ) | $ | (623 | ) | $ | (485 | ) |
|                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Net loss per  share of common stock (basic and diluted)                                             |       | $                                                   | (0.01      | )                                                 | $          | (0.05 | ) | $ | (0.07 | ) | $ | (0.06 | ) |
|                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average  common shares and equivalents used in computing basic and diluted loss per  share |       | 8,402,464                                           |       | 8,224,508                                         |       | 8,364,161 |   | 8,208,014 |   |

 

See notes to unauditedconsolidated financial statements.

 

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**Healthaxis Inc. and Subsidiaries**

**Consolidated Statements of CashFlows**

(In thousands)(Unaudited)

** **
| ** **                                                                                    | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities**                                                     | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net loss                                                                                      |       | $                                                 | (623       | ) | $ | (485 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                  |       |                                              |       |   |   |
| Depreciation and  amortization                                                                |       | 587                                               |       | 556 |   |
| Restricted stock  compensation                                                                |       | 141                                               |       | 191 |   |
| Other                                                                                         |       | —                                            |       | (2 | ) |
| Change in:                                                                                    |       |                                              |       |   |   |
| Accounts  receivable                                                                          |       | 190                                               |       | (135 | ) |
| Prepaid expenses  and other current assets                                                    |       | (278                                              | )          | (87 | ) |
| Other assets                                                                                  |       | (12                                               | )          | 120 |   |
| Accounts payable  and accrued liabilities                                                     |       | 203                                               |       | (65 | ) |
| Deferred  revenues                                                                            |       | (234                                              | )          | (130 | ) |
| Other  liabilities                                                                            |       | (38                                               | )          | (89 | ) |
| Net cash used in  operating activities                                                        |       | (64                                               | )          | (126 | ) |
|                                                                                          |       |                                              |       |   |   |
| **Cash  flows from investing activities**                                                     |       |                                              |       |   |   |
| Contract  start-up costs                                                                      |       | (67                                               | )          | (278 | ) |
| Purchases of  property, equipment and software and internally developed capitalized  software |       | (157                                              | )          | (258 | ) |
| Net cash used in  investing activities                                                        |       | (224                                              | )          | (536 | ) |
|                                                                                          |       |                                              |       |   |   |
| **Cash  flows from financing activities**                                                     |       |                                              |       |   |   |
| Proceeds from  lines of credit                                                                |       | 1,700                                             |       | — |   |
| Payments on  lines of credit                                                                  |       | (1,536                                            | )          | (47 | ) |
| Net cash  provided by (used in) financing activities                                          |       | 164                                               |       | (47 | ) |
| Decrease in cash  and cash equivalents                                                        |       | (124                                              | )          | (709 | ) |
| Cash and cash  equivalents, beginning of period                                               |       | 2,621                                             |       | 3,362 |   |
| Cash and cash  equivalents, end of period                                                     |       | $                                                 | 2,497      |   | $ | 2,653 |   |
|                                                                                          |       |                                              |       |   |   |
| Non-cash  financing activities                                                                |       |                                              |       |   |   |
| Accounts  receivable applied to note and interest payable in lieu of cash                     |       | $                                                 | —     |   | $ | 390 |   |
| Interest paid                                                                                 |       | $                                                 | 63         |   | $ | 50 |   |

 

See notes to unauditedconsolidated financial statements.

 

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**Healthaxis Inc. and Subsidiaries**

**Notes to Unaudited ConsolidatedFinancial Statements**

**June 30, 2008**

 

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

 

*Unaudited Financial Information*

 

The unauditedconsolidated financial statements have been prepared by Healthaxis Inc. and itssubsidiaries (“Healthaxis” or the “Company”), pursuant to the rules andregulations of the Securities and Exchange Commission and reflect alladjustments consisting of normal recurring entries, which, in the opinion ofthe Company, are necessary to present fairly the results for the interimperiods. The interim financial statements do not include all disclosuresprovided in fiscal year end financial statements prepared in accordance withaccounting principles generally accepted in the United States of America,although the Company believes that the accompanying disclosures are adequate tomake the information presented not misleading. Results of operations for the three and six-month periods ended June 30,2008, are not necessarily indicative of the results that may be expected forthe year ending December 31, 2008.

 

These financialstatements should be read in conjunction with the financial statements andnotes thereto contained in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2007.

 

*Earnings Per Share*

 

Basic loss per share is computed using only the weighted average numberof common shares 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. The effect of including the convertible preferred stock, stock optionsand warrants in the computation of diluted earnings per share would beanti-dilutive for each of the periods presented, thus these items have not beenincluded in the computation.  Followingis a summary of these potentially dilutive securities:

 
| ** **                       | ** ** | **As of June 30,** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **2008**                          | ** ** | **2007** | ** ** |
|                             |       |                              |       |   |   |
| Options                          |       | 881,447                           |       | 1,170,396 |   |
| Restricted stock                 |       | 408,750                           |       | 336,250 |   |
| Warrants                         |       | 5,800,277                         |       | 7,229,186 |   |
| Preferred stock                  |       | 740,401                           |       | 740,401 |   |
| Total common shares if converted |       | 7,830,875                         |       | 9,476,233 |   |

 

*Equity Compensation*

 

TheCompany accounts for equity compensation in accordance with Statement ofFinancial Standards No. 123R, “Share Based Payment” (SFAS 123R).  TheCompany uses stock options and restricted stock as a method of compensation forits employees and directors.  While no stock options were granted orvested in 2007 or 2008, the Company has granted and vested restricted stockduring those periods.  The value of restricted stock is calculated basedon the trading value of the stock as quoted on NASDAQ on the date of grant. Shares of stock granted to directors vest over the calendar year ofservice, while shares granted to employees vest either over a specifiedperiod of time or based on certain performancecriteria.  Additionally, in March 2008, the Company entered intoan Employment Separation Agreement with one of its officers whereby 34,750shares of restricted stock previously granted to the officer becamefully vested.  The Company recorded a charge of $53,000 in March 2008to reflect the immediate vesting of these shares.  The companyrecognized total compensation expense related to the vesting of restrictedstock of approximately $47,000 and $160,000 for the three months ended June 30,2008, and 

 

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2007, respectively,and $141,000 and $191,000 for the six months ended June 30, 2008, and2007, respectively.  All shares of restricted stock granted bythe Company vest upon a change of control.

 

**Note B –Significant Customer Concentrations**

 

For the three months ended June 30, 2008 and2007, three customers accounted for $2.4 million (60%) and $2.6 million (65%),respectively, of the Company’s total revenues. For the six months ended June 30, 2008 and 2007, these threecustomers accounted for $4.9 million (62%) and $5.3 million (64%),respectively, of the Company’s total revenues. At June 30, 2008 and December 31,2007, these three customers individually accounted for more than 10% of theCompany’s accounts receivable as shown in the table below.

 
| ** ** | ** ** | **Percent of accounts and note receivable** | ** ** |
|------------|------------|----------------------------------------------------------------------|------------|
| ** ** | ** ** | **June 30, 2008**                                          | ** ** | **Dec. 31, 2007** | ** ** |
| Customer A |       | 22                                                                   | %          | 32 | % |
| Customer B |       | 27                                                                   | %          | 21 | % |
| Customer C |       | 13                                                                   | %          | 9 | % |

 

**Note C – Related PartyTransactions**

 

The Company is a party to a Remote ResourcingAgreement with Healthcare BPO Partners L.P., a company affiliated with asignificant shareholder.  Healthcare BPOPartners, based in Jaipur, India, provides personnel and infrastructure that isutilized by the Company to provide business process outsourcing services andother software development and technical support services to support theCompany’s operations.  The resourcesprovided by Healthcare BPO Partners supplement the Company’s existingwholly-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 until September 2007.  For the six months ended June 30, 2008and June 30, 2007, the Company incurred costs of approximately $253,000and $533,000, respectively, related to the Resourcing Agreement.  For the three months ended June 30, 2008and 2007, the Company incurred costs of approximately $129,000 and $266,000,respectively.  At June 30, 2008 and December 31,2007, the Company had accounts payable to Healthcare BPO Partners ofapproximately $86,000 and $84,000, respectively.

 

**Note D – RecentAccounting 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 deductionswill be sustained on audit and does not anticipate any adjustments that willresult in a material change to its financialposition.  Therefore, no reserves for uncertain income taxpositions have been recorded pursuant to FIN 48.

 

In September 2006,FASB Statement 157, “Fair Value Measurements” (“SFAS 157”) was issued.  SFAS 157 establishes a framework formeasuring fair value by providing a standard definition of fair value as itapplies to assets and liabilities.  SFAS157, which does not require any new fair value measurements, clarifies theapplication of other accounting pronouncements that require or permit fairvalue measurements.  The effective datefor the Company was January 1, 2008. The adoption of SFAS 157 did not have a material impact on ourConsolidated Financial Statements.

 

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**Note E – Lines ofCredit**

 

On April 25,2008, the Company entered into an amendment to its Loan and Security Agreement(“LSA”) with Silicon Valley Bank.  As aresult of the amendment, certain covenants were modified.  Based on the calculation of the borrowingbase as of June 30, 2008, we would have been eligible to draw up toapproximately $1.8 million under the revolving line, of which $1.2 million hadbeen drawn as of that date.

 

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

 

##### **Forward-Looking Statements**

 

All statements other thanstatements of historical fact contained in this report, including statements inthis “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” concerning the Company’s financial position and liquidity,results of operations, prospects for future growth, and other matters areforward-looking statements.  Thesestatements may be identified with words such as “anticipate,” “believe,” “plan,”“estimate,” “expect,” “intend,” “should,” “could,” “goal,” “target,” “designed,”“on track,” “comfortable with,” “optimistic” and other similar expressions, andconstitute forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. These forward-looking statements are subjectto known and unknown risks, uncertainties and other factors, which may causeactual results to be materially different from those contemplated by theforward-looking statements.  Such factorsinclude the risks and uncertainties identified in Healthaxis documents filedwith, or furnished to, the Securities and Exchange Commission, includingwithout limitation those identified under the caption “Risk Factors” in theCompany’s Form 10-K for the year ended December 31, 2007.  The Company undertakes no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise. Readers are cautioned not to place undue reliance on forward-lookingstatements.

 

**Overview**

** **

Healthaxis Inc. is a Pennsylvania corporation, whichwas organized in 1982. Healthaxis’ common stock trades on the NASDAQ CapitalMarket under the symbol “HAXS.”  Theoperations of Healthaxis are conducted through its subsidiary, Healthaxis,Ltd.  Unless otherwise indicated, or thecontext otherwise requires, all references 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 second quarter of 2008, the Company reported revenue of $3.9 million and returned to near break-even with an operating loss of $32,000.  Revenue was approximately $68,000 less than the second quarter of 2007 as the loss of a BPO services customer in mid 2007 was significantly offset by the addition of new customers and sales of additional services to existing customers.  The operating loss for the second quarter of 2008 decreased approximately $356,000 as compared to the second quarter of 2007 due to a lower cost structure.

 

*CriticalAccounting Policies*

 

Critical accountingpolicies are those which are most important to the financial statementpresentation and that require the most difficult, subjective complexjudgments.  There have been no changes inthe Company’s critical accounting policies as described in the Company’s Form 10-Kfor the year ended December 31, 2007, other than as described in Note D tothe Unaudited Consolidated Financial Statements.

 

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## **Results ofOperations**

## ** **

**Threemonths ended June 30, 2008 compared to three months ended June 30,2007**

** **
| ** **       | ** ** | **(Table in thousands)**                  | ** ** | ** ** | ** ** |
|------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **       | ** ** | **Three Months Ended June 30,** | ** ** | ** ** | ** ** |
| ** **       | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** |
|             |       |                                                |       |       |       |   |   |
| Revenues         |       | $                                                   | 3,935      |       | $          | 4,003 |   | $ | (68 | ) |
| Cost of revenues |       | 3,384                                               |       | 3,457      |       | (73 | ) |
| Gross profit     |       | $                                                   | 551        |       | $          | 546 |   | $ | 5 |   |
| % of revenue     |       | 14                                                  | %          | 14         | %          |   |   |

 

**Revenues**were approximately $68,000 lower in the three months ended June 30,2008 compared to the same period in 2007. BPO services revenues decreased approximately $179,000 due to the 2007mid-year loss of a BPO services customer that was acquired by a largerorganization.  BPO services revenuegenerated by our new initiative to provide BPO services in accounts payableoutsourcing more than offset other BPO services revenue declines resulting fromfewer paper-based healthcare claims to process as a result of the combinedimpact of fewer lives on our systems from some existing customers and acontinuing shift in the healthcare industry from paper claims to higher volumesof electronic claims. Application Service Provider (“ASP”) license feesincreased slightly from new service offerings, though in total our customersexperienced a net loss in the number of lives they service, while transactionfees decreased slightly due to the change in covered lives.  Professional services revenue increased dueto specific projects undertaken for a couple of our customers.

 

**Cost ofrevenues**includes all expenses directly associated with theproduction of revenue, and consists primarily of salaries and related benefits,rent, amortization and depreciation, system expenses such as maintenance andrepair, as well as other related consumables. Cost of revenues decreased $73,000 in the three months ended June 30,2008 compared to the same period in 2007. The most significant components of this decrease were a $130,000reduction in variable labor related to BPO services due to increased efficiencyand lower volumes and a $64,000 reduction in variable costs of printing andpostage related to the decline in transaction fee revenue.  Offsetting these cost reductions was theimpact of costs that are capitalized for accounting purposes.  Capitalized costs are a reduction to cost ofrevenues for costs incurred (primarily employee compensation) for new customerimplementations and software development projects.  For the second quarter of 2008, wecapitalized approximately $117,000 less in cost of revenues than in the secondquarter of 2007 because in the prior year period we were in the middle of thesignificant new customer implementation that required a significant proportionof our resources.  Significantly lesstime was spent on implementations during the second quarter of 2008.  Non-cash equity compensation was $13,000 forthe three months ended June 30, 2008 versus $45,000 in the 2007 period.

 

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| ** **                          | ** ** | **(Table in thousands)**                  | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **Three Months Ended June 30,** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** |
|                                |       |                                                |       |       |       |   |   |
| Sales and  marketing expense        |       | $                                                   | 61         |       | $          | 235 |   | $ | (174 | ) |
| General and  administrative expense |       | 522                                                 |       | 699        |       | (177 | ) |
| Interest and  other income, net     |       | 4                                                   |       | 19         |       | (15 | ) |
| Interest expense                    |       | (45                                                 | )          | (51        | )          | 6 |   |
| Provision for  income taxes         |       | (8                                                  | )          | (3         | )          | (5 | ) |
|                                     |            |                                                     |            |            |            |  |  |  |  |  |

 

**Sales andmarketing expenses**consist primarily of employee salaries andrelated benefits, as well as promotional costs such as direct mailingcampaigns, trade shows and media advertising.  Sales and marketing expenses decreased $174,000 in the three monthsended June 30, 2008 compared to the same quarter of 2007.  This decrease was due to lower personnelcosts and the related decrease in benefits and travel related to changes in thesales and marketing team.  Sales andmarketing expense for the three months ended June 30, 2008 included nonon-cash equity compensation from the vesting of restricted stock as comparedto $13,000 in the 2007 period.

 

**Generaland administrative expenses**include executive management,accounting, legal and human resources compensation and related benefits, aswell as expenditures for applicable overhead costs.  These expenses decreased $177,000 in thethree months ended June 30, 2008 compared to the same quarter of2007.  The decrease is the net result ofa) non-cash equity compensation of $34,000 in 2008 that resulted from thevesting of restricted stock versus $101,000 in 2007 and b) decreases in totalprofessional service fees from auditors, attorneys, and others.

 

**Interestand other income, net** decreased $15,000 in the three monthsended June 30, 2008 compared to the same quarter of 2007 due primarily tolower cash balances.

 

**Interest expense**decreased $6,000 in the three months ended June 30, 2008 compared to thesame quarter of 2007 due to reduced average daily debt balances.

 

**Provision for income taxes**increased $5,000 for the three months ended June 30, 2008 compared to thesame quarter of 2007.  Effective January 1,2007, the Company is accruing an estimate of the tax due under the new margintax enacted by the State of Texas.

 

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**Sixmonths ended June 30, 2008 compared to six months ended June 30, 2007**

 
| ** **       | ** ** | **(Table in thousands)**                | ** ** | ** ** | ** ** |
|------------------|------------|---------------------------------------------------|------------|------------|------------|
| ** **       | ** ** | **Six Months Ended June 30,** | ** ** | ** ** | ** ** |
| ** **       | ** ** | **2008**                                          | ** ** | **2007**   | ** ** | **Change** | ** ** |
|             |       |                                              |       |       |       |   |   |
| Revenues         |       | $                                                 | 7,939      |       | $          | 8,214 |   | $ | (275 | ) |
| Cost of revenues |       | 6,922                                             |       | 6,895      |       | 27 |   |
| Gross profit     |       | $                                                 | 1,017      |       | $          | 1,319 |   | $ | (302 | ) |
| % of revenue     |       | 13                                                | %          | 16         | %          |   |   |

 

**Revenues**were approximately $275,000 lower in the six months ended June 30,2008 compared to the same period in 2007. BPO services revenues decreased approximately $418,000 due to the 2007mid-year loss of a BPO services customer that was acquired by a largerorganization.  BPO services revenue generatedby our new initiative to provide BPO services in accounts payable outsourcingmore than offset other BPO services revenue declines resulting from fewerpaper-based healthcare claims to process as a result of the combined impact offewer lives on our systems from some existing customers and a continuing shiftin the healthcare industry from paper claims to higher volumes of electronicclaims. ASP license fees increased slightly from new service offerings, thoughin total our customers experienced a net loss in the number of lives theyservice, while transaction fees decreased slightly due to the change in coveredlives.  Professional services revenueincreased due to specific projects undertaken for a couple of our customers.

 

**Cost ofrevenues**increased $27,000in the six months ended June 30, 2008 compared to the same period in2007.  The most significant component ofthis increase was a $344,000 reduction of costs that are capitalized foraccounting purposes due to a significantly reduced amount of time spent onimplementations in 2008.  The gross costof revenue before capitalized costs decreased approximately $317,000 from the2007 period to the 2008 period which includes approximately $301,000 reductionin variable labor related to BPO services due to increased efficiency and lowervolumes, and a $65,000 reduction in variable costs of printing and postagerelated to the decline in transaction fee revenue.  Non-cash equity compensation was $22,000 forthe six months ended June 30, 2008 versus $45,000 in the 2007 period.

 
| ** **                          | ** ** | **(Table in thousands)**                | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **Six Months Ended June 30,** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **2008**                                          | ** ** | **2007**   | ** ** | **Change** | ** ** |
|                                |       |                                              |       |       |       |   |   |
| Sales and  marketing expense        |       | $                                                 | 446        |       | $          | 483 |   | $ | (37 | ) |
| General and  administrative expense |       | 1,108                                             |       | 1,258      |       | (150 | ) |
| Interest and  other income, net     |       | 15                                                |       | 52         |       | (37 | ) |
| Interest expense                    |       | (87                                               | )          | (109       | )          | 22 |   |
| Provision for  income taxes         |       | (14                                               | )          | (6         | )          | (8 | ) |
|                                     |            |                                                   |            |            |            |  |  |  |  |  |

 

**Sales andmarketing expenses**decreased$37,000 in the six months ended June 30, 2008 compared to the same periodof 2007.  This decrease was due to reducedpersonnel costs and the related decrease in benefits and travel related to thechanges in the sales and marketing team over the past year, which were mostlyoffset by a severance charge of $204,000 recorded in the first quarter of 2008.Sales and marketing expense for the six months ended June 30, 2008includes $56,000 of non-cash equity compensation that resulted from the vestingof restricted stock, versus $13,000 in the same period of 2007.

 

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**Generaland administrative expenses**decreased $150,000 for the six months ended June 30, 2008compared to the same period of 2007.  Thedecrease is the net result of a) non-cash equity compensation of $63,000 in2008 that resulted from the vesting of restricted stock versus $133,000 in 2007and b) decreases in total professional service fees from auditors, attorneys,and others.

 

**Interestand other income, net** decreased $37,000 in the six monthsended June 30, 2008 compared to the same period of 2007 due primarily tolower balances of cash.

 

**Interest expense**decreased $22,000 in the six months ended June 30, 2008 compared to thesame period of 2007 due to reduced average daily debt balances.

 

**Provision for income taxes**was $14,000 for the six months ended June 30, 2008 compared to $6,000 inthe same period of 2007.  Effective January 1,2007, the Company is accruing an estimate of the tax due under the new margintax enacted by the State of Texas.

 

**Liquidityand Capital Resources**

** **

*Overviewof Cash Resources*

 

At June 30,2008, our cash and cash equivalents totaled $2.5 million compared to $2.6million at December 31, 2007.  Thesources and uses of cash during the first six months of 2008 are described morefully in “Analysis of Cash Flows” below. Assuming there are no material changes in the Company’s operations, webelieve that the Company will maintain sufficient liquidity to fund operationsfor at least the next 12 months.

 

On April 25,2008, the Company entered into an amendment to its Loan and Security Agreement(“LSA”) with Silicon Valley Bank whereby certain covenants were modified.

 

*Analysisof Cash Flows*

 

*Cash used in operating activities*for the six months ended June 30, 2008 was approximately $64,000 ascompared to $126,000 for the same period in 2007.  The improvement was largely the result ofworking capital management, particularly collection of accounts receivable.

 

*Cash used in investing activities*for the six months ended June 30, 2008 was $224,000 as compared to$536,000 for the same period in 2007. 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 contract start-up costsdecreased, as significantly more time was spent in the 2007 period related to asignificant customer implementation and the related costs were required to becapitalized.  Purchases of property,equipment and software and internally developed software were higher in 2007due to normal replacement of servers and other equipment combined with morework performed on enhancements to our internally developed software.

 

*Cash provided by financing**activities* for thesix months ended June 30, 2008 was $164,000 related to borrowings on theCompany’s working capital line of credit offset by repayments plus principalpayments on the Company’s equipment line of credit.  Cash used in financing activities for the sixmonths ended June 30, 2007 was $47,000 related to principal payments ofthe equipment line.

 

**Recently Adopted AccountingPronouncements**

 

See Note D to the Unaudited Consolidated Financial Statements herein fora discussion of the impact on the Company’s financial statements of newaccounting standards.

 

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**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

Not applicable undersmaller reporting company scaled disclosure requirements.

 

**Item4T. Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of the end of theperiod covered by this quarterly report, the Company carried out an evaluation,under the supervision and with the participation of the Company management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Securities Exchange Act Rule 13a-15.  Based on that evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer have concluded that these disclosurecontrols and procedures were effective as of the end of the period covered bythis report to provide reasonable assurance that information required to bedisclosed by the Company in reports filed or submitted by it under theSecurities and Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission rules and forms, and to provide reasonable assurance thatinformation required to be disclosed by the Company is accumulated andcommunicated to the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding disclosure.

 

**Changesin Internal Control over Financial Reporting**

 

There were no changes inthe Company’s internal controls over financial reporting that occurred duringthe period covered by this quarterly report that have materially affected, orare reasonably likely to materially affect, the Company’s internal controlsover financial reporting.

 

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**PART II.OTHER INFORMATION**

 

**Item 1.****            LegalProceedings**.

 

We are not currently a party to any material legalproceedings and we are not aware of any pending or threatened litigation thatwould have a material adverse effect on us or our business.

 

**Item 1A.****         RiskFactors**

 

Not applicableunder smaller reporting company scaled disclosure requirements.

 

**Item 2.****            UnregisteredSales of Equity Securities and Use of Proceeds.**

 

(c)           Second Quarter 2008 Issuer Purchasesof Equity Securities

 
| **Period**      | ** ** | **(a) Total  Number of  Shares  Purchased (1)** | ** ** | **(b) Average Price  Paid per Share** | ** ** | **(c) Total Number  of Shares  Purchased as  Part of Publicly  Announced Plans  or Programs** | ** ** | **(d) Maximum  Number (or  Approximate  Dollar Value) of  Shares that May  Yet Be  Purchased Under  the Plans or  Programs** | ** ** |
|-----------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 2008 |       | 4,931                                                          |       | .63                                                       |       | —                                                                                                                                |       | —                                                                                                                                                                         |       |

 

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(1)           Thesepurchases were not made pursuant to a publicly announced repurchase plan orprogram. Represents shares of common stock surrendered to Healthaxis to paywithholding taxes on shares of restricted stock vesting under the 2005 StockIncentive Plan.

 

**Item 3.****            DefaultsUpon Senior Securities.**

 

None.

 

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

 

None.

 

**Item 5.****            OtherInformation.**

 

None.

 

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**Item 6.            Exhibits**

** **
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                      |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                           |
| 10.1        |       | Third Amendment to Loan  and Security Agreement between the Company and Silicon Valley Bank dated  April 25, 2008 (incorporated by reference to Exhibit 10.1 to  Form 8-K filed April 29, 2008). |
|        |       |                                                                                                                                                                                                                 |
| 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: August 8,  2008 | 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

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                      |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                           |
| 10.1        |       | Third Amendment to Loan  and Security Agreement between the Company and Silicon Valley Bank dated  April 25, 2008 (incorporated by reference to Exhibit 10.1 to  Form 8-K filed April 29, 2008). |
|        |       |                                                                                                                                                                                                                 |
| 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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