SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2012
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 1-33094
AMERICAN CARESOURCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xNo o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer”,” large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: The number of shares of common stock of registrant outstanding on May 7, 2012 was 17,121,450.
TABLE OF CONTENTS
AMERICAN CARESOURCE HOLDINGS, INC.
FOR THE QUARTER ENDED MARCH 31, 2012
AMERICAN CARESOURCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
See accompanying notes.
AMERICAN CARESOURCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except per share amounts)
See accompanying notes.
AMERICAN CARESOURCE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(amounts in thousands)
See accompanying notes.
AMERICAN CARESOURCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
See accompanying notes.
AMERICAN CARESOURCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
1. Description of Business and Basis of Presentation
American CareSource Holdings, Inc. (“ACS,” “Company,” the “Registrant,” “we,” “us,” or “our”) is an ancillary services company that offers cost effective access to a comprehensive national network of ancillary healthcare service providers. The Company sells its services to a number of healthcare companies including preferred provider organizations ("PPOs"), third party administrators (“TPAs”), insurance companies, large self-funded organizations, various employee groups and other middle-market organizations. The Company offers payors this solution by:
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), interim reporting requirements of Form 10-Q and Rule 8-03 of Regulation S-X of the rules and regulations of the Securities and Exchange Commission (“SEC”). Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with GAAP have been condensed or omitted. Balance sheet amounts are as of March 31, 2012 and December 31, 2011 and operating results are for the three months ended March 31, 2012 and 2011, and include all normal and recurring adjustments we consider necessary for the fair, summarized presentation of our financial position and operating results. As these are condensed financial statements, readers of this report should, therefore, refer to the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 9, 2012.
The Company uses the “management approach” for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggregates a company. Based on the “management approach” model, the Company has determined that its business is comprised of a single operating segment.
Our interim results of operations are not necessarily indicative of results of operations that will be realized for the full fiscal year.
2. Revenue Recognition
The Company recognizes revenue on the services that it provides, which includes (i) providing payor clients with a comprehensive network of ancillary healthcare providers, (ii) providing claims management, reporting, processing and payment services, (iii) providing network/need analysis to assess the benefits to payor clients of adding additional/different service providers to the client-specific provider networks and (iv) providing credentialing of network services providers for inclusion in the client payor-specific provider networks. Revenue is recognized when services are delivered, which occurs after processed claims are billed to the client payors and collections are reasonably assured. The Company estimates revenues and costs of revenues using average historical collection rates and average historical margins earned on claims. Periodically, revenues are adjusted to reflect actual cash collections so that revenues recognized accurately reflect cash collected.
The Company determines whether it is acting as a principal or agent in the fulfillment of the services rendered. After careful evaluation of the key gross and net revenue recognition indicators, the Company acknowledges that while the determination of gross versus net reporting is highly judgmental in nature, the Company has concluded that its circumstances are most consistent with those key indicators that support gross revenue reporting.
Following are the key indicators that support the Company’s conclusion that it acts as a principal when settling claims for service providers through its contracted service provider network:
The Company has evaluated the other indicators of gross and net revenue recognition, including whether or not the Company has general inventory risk. The Company does not have any general inventory risk, as its business is not related to the manufacture, purchase or delivery of goods and it does not purchase in advance any of the services to be provided by the ancillary healthcare service providers. While the absence of this risk would be one indicator in support of net revenue reporting, as described in detail above, the Company has carefully evaluated all of the key gross and net revenue recognition indicators and has concluded that its circumstances are most consistent with those key indicators that support gross revenue reporting.
If the Company were to report its revenues net of provider payments rather than on a gross reporting basis, for the three months ended March 31, 2012 and 2011, its net revenues would have been approximately $2.6 million and $3.3 million, respectively.
The Company records a provision for refunds based on an estimate of historical refund amounts. Refunds are paid to payors for overpayments on claims, claims paid in error, and claims paid for non-covered services. In some instances, we will recoup payments made to the ancillary service provider if the claim has been fully resolved. The evaluation is performed periodically and is based on historical data. We present revenue net of the provision for refunds on the consolidated statement of operations.
During the three months ended March 31, 2012 and 2011, two of the Company’s clients, identified in the Company's annual report on Form 10-K for the year ended December 31, 2011, comprised a significant portion of the Company’s revenues. The following is a summary of the approximate amounts of the Company’s revenue and accounts receivable contributed by each of those clients as of the dates and for the periods presented (amounts in thousands):
3. Earnings (Loss) Per Share
For purposes of this calculation, outstanding stock options, stock warrants, and unvested restricted stock units are considered common stock equivalents using the treasury stock method, and are the only such equivalents outstanding. For the three months ended March 31, 2012, options to purchase approximately 2.2 million shares of common stock, warrants to purchase 358,334 shares of common stock and approximately 14,000 unvested restricted stock units were excluded from the calculation as their impact would be anti-dilutive.
4. Software Development Costs
The Company capitalizes costs associated with internally developed software, developed for internal use only, during the application development stage. Application development stage costs generally include costs associated with internal-use software configuration, coding, installation and testing. Costs of significant upgrades and enhancements that result in additional functionality also are capitalized, whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal-use software and payroll and payroll-related expenses for employees who are directly associated with and devote time to the internal-use software projects. Capitalization of such costs begins when the preliminary project stage is complete and ceases no later than the point at which the project is substantially complete and ready for its intended purpose. Capitalized costs are amortized using the straight-line method over the useful life of the software, which is typically five years.
During the three months ended March 31, 2012 and 2011, the Company capitalized approximately $77,000 and $116,000, respectively.
The Company entered into an agreement as of February 25, 2011 with an employee, whereby the Company agreed to issue warrants to purchase 250,000 shares of common stock with an exercise price of $1.67. The warrants vest in increments pursuant to the achievement of defined, agreed upon revenue targets generated by new clients within a five-year term. The agreement also obligates the Company to issue warrants to purchase up to an additional 500,000 shares of common stock (issued in 250,000 increments) pursuant to the achievement of additional defined agreed upon revenue targets. During the twelve months ended December 31, 2011, we did not recognize compensation costs associated with these warrants due to the probability of vesting.
On February 1, 2012, certain terms of the agreement were modified, including the revenue targets and the total number of shares under the initial and future warrants. The warrant issuance now allows for 133,334 shares to be purchased at an exercise price of $0.50, 66,667 of which vested immediately, and the remaining 66,667 shares vesting upon the achievement of certain revenue targets. The number of shares under the future warrant issuances was also reduced to 266,666 (issued in 133,333 increments) shares based upon the achievement of additional defined agreed upon revenue targets.
During the three months ended March 31, 2012, we recognized compensation costs of approximately $21,000 associated with the initial vesting of 66,667 shares. Additional costs associated with the warrants will be recognized based on the probability that the revenue targets will be reached. That probability will be re-evaluated and updated based on current market conditions, on a quarterly basis, and compensation costs will be adjusted accordingly.
6. Subsequent Events
We evaluate events and transactions that occur after the balance sheet date as potential subsequent events. No material event occurred subsequent to March 31, 2012.
This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by forward-looking words such as “may,” “will,” “expect,” “intend”, “anticipate,” “believe,” “estimate” and “continue” or similar words and discuss the Company’s plans, objectives and expectations for future operations, including its services, contain projections of the Company’s future operating results or financial condition, and discuss its expectations with respect to the growth in health care costs in the United States, the demand for ancillary benefits management services, and the Company’s competitive advantages, or contain other “forward-looking” information.
Such forward-looking statements are based on current information, assumptions and belief of management, and are not guarantees of future performance. Substantial risks and uncertainties could cause actual results to differ materially from those indicated by such forward-looking statements, including, but not limited to, the Company’s inability to attract or maintain providers or clients or achieve its financial results, changes in national health care policy, federal or state regulation, and/or rates of reimbursement including without limitation the impact of the Patient Protection and Affordable Care Act, Health Care and Educational Affordability Reconciliation Act and medical loss ratio regulations, general economic conditions (including the economic downturns and increases in unemployment), lower than anticipated demand for ancillary services, shifts from higher margin services to services with lower profit margins, pricing, market acceptance/preference, the Company’s ability to integrate with its clients, consolidation in the industry that are impacting the Company’s key clients and the resulting transition plans, changes in the business decisions by significant clients, inability to collect on the claims billed to our clients, increased competition, implementation and performance difficulties, and other risk factors detailed from time to time in the Company’s periodic filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2011 and the quarterly reports on Form 10-Q filed for each of the subsequent quarters.
Do not place undue reliance on these forward-looking statements, which speak only as of the date this document was prepared. All forward-looking statements included herein are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable securities laws and regulations, the Company undertakes no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
Management’s discussion and analysis provides a review of the Company’s operating results for the three months ended March 31, 2012 and its financial condition at March 31, 2012. The focus of this review is on the underlying business reasons for significant changes and trends affecting the net revenues, operating results and financial condition of the Company. This review should be read in conjunction with the accompanying unaudited consolidated financial statements and the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.
American CareSource Holdings, Inc. (“ACS,” “Company,” the “Registrant,” “we,” “us,” or “our”) works to help our clients control healthcare costs by offering cost containment strategies, primarily through the utilization of a comprehensive national network of ancillary healthcare service providers. The Company markets its services to a number of healthcare companies including third party administrators (“TPAs”), insurance companies, large self-funded organizations, various employee groups and preferred provider organizations ("PPOs"). The Company offers payors this solution by:
The Company has assembled a network of ancillary healthcare service providers that supplement or support the care provided by hospitals and physicians and includes 30 service categories. The Company has a dedicated provider development function comprised of eight full-time employees, whose primary responsibility is to contract with providers and strategically grow our network of ancillary service providers.
We secure contracts with ancillary service providers by offering them the following:
The Company’s business model, illustrating the relationships among the persons involved, directly or indirectly, in the Company’s business and its generation of revenue and expenses, is depicted below:
Payors route healthcare claims to us after service has been performed by participant providers in our network. We process those claims and charge the payor according to its contractual rate for the services according to our contract with the payor. In processing the claim, we are paid directly by the payor or the insurer for the service. We then pay the provider of service according to its independently-negotiated contractual rate. We assume the risk of generating positive margin, the difference between the payment we receive for the service and the amount we are obligated to pay the provider of service.
The Company recognizes revenues for ancillary healthcare services when services by providers have been authorized and performed, the claim has been billed to the payor and collections from payors are reasonably assured. Cost of revenues for ancillary healthcare services consist of amounts due to providers for providing ancillary healthcare services, client administration fees paid to our client payors to reimburse them for routing the claims to us for processing, and the Company’s related direct labor and overhead of processing billings, collections and payments. The Company is not liable for costs incurred by independent contract service providers until payment is received by it from the payors. The Company recognizes actual or estimated liabilities to independent contract service providers as the related revenues are recognized.
The Company is seeking growth in the number of client payors and service provider relationships it secures by focusing on providing in-network services for its payors and aggressively pursuing additional TPAs, self-insured employers and other direct payors as its primary sales targets. The Company believes this strategy should increase the volume of claims the Company can process in addition to the expansion in the number of lives that are eligible to receive ancillary healthcare benefits. No assurances can be given that the Company can expand its service provider or payor relationships, nor that any such expansion will result in an improvement in the results of operations of the Company.
In addition, under the Minimum Loss Ratio regulations ("MLR") included in the Affordable Care Act, it is possible that a portion of the fees our existing and prospective payors are contractually required to pay us and that do not qualify as 'incurred claims' may not be included as expenditures for activities that improve health care quality. Such a determination may make it more difficult for us to retain existing clients and/or add new clients, because our clients' or prospective clients' MLR may otherwise not meet the specified targets. This may reduce our net revenues and profit margins. See "Proposed healthcare reforms could materially adversely affect our revenues, financial position and our results of operations" under "Item 1.A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (“GAAP”) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, provider cost recognition, the resulting contribution margins, potential impairment of intangible assets and stock-based compensation expense. As these are condensed consolidated financial statements, you should also read expanded information about our critical accounting policies and estimates provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Critical Accounting Policies,” included in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to our critical accounting policies and estimates from the information provided in our Form 10-K for the year ended December 31, 2011.
The Company has experienced revenue declines over the past two years, primarily related to the declines in the business of our two largest clients, both of which are PPOs. Due to a variety of factors affecting the healthcare industry generally, the economy and for other reasons, revenue from each of our two largest clients continued to decline (with downturns in their own businesses) resulting in declines in our revenue from those accounts by between 22% to 42%. Because of the significance of the revenue concentration from these two clients (approximately 98% in 2008), the declines of the business of these clients has had a significant negative impact on our operating results over the past three years, despite our new business development.
In 2010, we began focusing our sales efforts on TPAs, insurance companies, self-funded organizations, employer groups and direct payors, as we believe we can more competitively impact those relationships. TPAs, in their fiduciary capacity, assist their clients (primarily employer groups) with cost containment; the ancillary network solution we provide is a valuable component to add to a TPAs portfolio. There are approximately 500 TPAs nationwide, with approximately 20% of those being our target market. According to research reported by the Employee Benefit Research Institute, as recently as 2008, approximately 55% of employees with health insurance were covered by a self-insured plan. In light of changes in healthcare legislation and the size of the self-insured market, we believe that TPAs are an important element of that market, with needs that we can address, primarily from a cost containment standpoint.
We added thirteen new clients that generated approximately $5.9 million of revenue in 2010. While those accounts will contribute an estimated $10-12 million of revenue annually, they have only partially offset the revenue declines from our significant legacy clients. During 2011, we signed only four new accounts.
Early in 2012, we made investments in our sales function in an effort to expand sales distribution channels, improve sales processes, evaluate marketing opportunities and most importantly, increase our number of sales personnel, which was five at March 31, 2012, compared to 2.5 full-time employees during most of 2011. The Company believes that it has a unique business model and offers a solid value proposition to our clients, as well as our providers, by delivering superior discounts through our network of contracted ancillary healthcare service providers. In 2012, the Company's objectives are to (1) add new significant client contracts, (2) control our cost structure to limit operating losses, (3) preserve our existing cash balances for investments in the business model and/or other strategic initiatives, and (4) investigate and identify strategic initiatives that the Company can execute in the short- and long-term that will bring value to our shareholders.
ANALYSIS OF RESULTS OF OPERATIONS
The following table sets forth a comparison of our results of operations for the following periods presented:
The following discussion compares the historical results of operations on a basis consistent with GAAP for the three months ended March 31, 2012 and 2011.
The Company’s net revenues are generated from ancillary healthcare service claims. Revenue is recognized when we bill our client payors for services performed and collection is reasonably assured. The Company estimates revenues using average historical collection rates. When estimating collectibility, we assess the impact of items such as non-covered benefits, denied claims, deductibles and co-payments. Periodically, revenues and related estimates are adjusted to reflect actual cash collections so that revenues recognized accurately reflect cash collected. There are no assurances that actual cash collections will meet or exceed estimated cash collections.
The following table sets forth a comparison of our net revenues and billed claims for the following periods presented ended March 31 (in thousands):
In addition, the following table sets forth a comparison of processed and billed claims for the following periods presented ended March 31 (in thousands):
Following is a discussion of the changes in net revenue generated by significant client/client grouping for the three months ended March 31, 2012 as compared to the same period in 2011:
Material Client Relationship
The decline in net revenue and billed claims volume from our relationship with one of our material clients is due to the following factors:
The performance of the client account during the remainder of 2012 will be affected by attrition in its own client base, its internal strategic initiatives and further technology infrastructure changes. We have no assurances that we will maintain a level of revenue consistent with the first quarter of 2012 or the prior year.
MultiPlan, Inc. (formerly Viant Holdings, Inc.)
The decline in net revenue and billed claims volume from our relationship with MultiPlan, Inc. ("MultiPlan") is due to the acquisition by MultiPlan of Viant Holdings, Inc. As part of that transition, MultiPlan is methodically moving its payors and employers groups to its existing networks. The transition included, among others, two Texas-based TPAs effective January 1, 2012. Revenue to us attributable to these two TPAs was approximately $443,000 in the first quarter of 2011, as compared to approximately $78,000 in the first quarter of 2012. The transition commenced in mid-2010 and is estimated to be complete at the end of 2012 at which time we do not expect any revenue contributions from the account.
Principal Life Insurance Company
As was announced publicly in late-2010, Principal Life Insurance Company ("Principal") exited the health insurance business. During the course of 2011, Principal transitioned its existing members and groups, which resulted in revenue of $860,000 and $2.6 million to us in the first quarter of 2011 and the full-year, respectively. We do not expect to generate meaningful revenue or claims volume from the account in 2012.
Other Legacy Clients
Our other legacy clients consist of 11 various relationships with PPOs, insurance companies and direct payors that were contracted between 2005 and 2009. While most of the accounts have matured, there are only limited opportunities for growth. Through our account management group, we maintain contact with these clients to determine if opportunities exist to serve the accounts and generate incremental revenue.
The overall declines in revenue and claims volume from the accounts in the first quarter of 2012, as compared to the same prior year period is due primarily to technological issues experienced by one of our clients. Consistent with regulatory requirements, our client made certain technological adjustments for compliance purposes that resulted in an interruption in our claims flow and associated revenue/collections estimates. While the issue has been rectified, it had a negative impact on revenue in the first quarter of 2012.
Clients implemented in 2010 - 2012
The thirteen clients implemented in 2010 consist of 12 TPAs and one PPO, and are the results of the initial stages of our focus on TPAs and direct payors. The accounts generated revenue of approximately $11.9 million during 2011. Absent any unforeseen negative factors, we expect the accounts to continue to generate approximately $10-12 million of revenue annually. Through our account management group, we work with these clients to determine ways in which we can bring value to the relationships and to add our network to incremental employer groups in order to maximize our revenue opportunity.
The increase in revenue in the first quarter of 2012 as compared to the same prior year period is due to the following:
During the first quarter of 2012, excluding the impact of our legacy clients, revenues increased approximately 40% compared to the first quarter of 2011. The growth was generated primarily from the accounts implemented in 2010, most of which are TPAs and direct payors. During the first quarter, investments were made in our sales function that will facilitate our continued focus on TPAs and direct payors as we believe there are opportunities to add value, primarily through the cost containment we can provide through our network of ancillary providers.
The following table details the change in revenue generated from different client groups for the periods ended March 31:
Variable costs are comprised of payments to our providers and administrative fees paid to our clients for converting claims to electronic data interchange and routing them to both the Company for processing and to their payors for payment. Payments to providers are the most significant variable cost and it consists of our payments for ancillary care services in accordance with contracts negotiated separately with providers for specific ancillary services.
The following tables set forth a comparison of the variable cost components of our cost of revenues, for the periods presented ended March 31:
The 31% decrease in provider payments for the first quarter of 2012 is consistent with the decline in revenue as discussed above. The decrease in provider payments as a percentage of net revenues compared to the same prior year periods is primarily due to the following:
Administrative fees paid to clients as a percent of net revenues was 4.9% for the three months ended March 31, 2012 compared to 5.1% in the same prior year period. The decrease is due to a change in mix from clients with higher administrative fees to clients with lower administrative fees.
Non-variable costs are those that are not contingent on claims activity and are fixed in nature, but can be adjusted. They are comprised of such expenses as salaries and benefits, professional fees, consulting costs, non-cash equity compensation costs and travel and entertainment expenses. A significant driver of these costs are headcount, as payroll, commissions and related benefits (including non-cash equity compensation) account for approximately 63% of our non-variable cost structure during the three months ended March 31, 2012. Our headcount of full-time employees ("FTE's") was 54 and 64 at March 31, 2012 and 2011, respectively.
Following is a discussion of the changes in non-variable costs and related drivers:
Our claims administration function consists of our operations and information technology groups. Our operations group is responsible for all aspects of claims management and processing, including billing, quality assurance and collection efforts. In addition, our operations group is responsible for credentialing contracted ancillary service providers. Our information technology group is responsible for maintaining and enhancing the technological capabilities and applications of the claims management process.
We adjust the headcount of our operations group consistent with the level of claims we process and bill. During the first quarter of 2012, we processed 55,000 claims compared to 85,000 claims during the first quarter of 2011. Accordingly, we had 18 FTE's in our operations group at March 31, 2012 compared to 22 FTE's as of March 31, 2011. Currently, we process approximately 90% of our claims electronically, making our processes scalable. In the event that we add a significant number of new clients, we don't anticipate the need to make significant investments in our operations group.
We eliminated two positions in our information technology group as a result of natural attrition, consistent with our focus on controlling costs. In the event of significant strategic information technology initiatives, we may increase our headcount in the future.
Our provider development function is responsible for developing our network of ancillary healthcare service providers, which includes contracting with providers to be included in the network and maintaining a relationship with existing providers, all for the purpose of enhancing our ancillary service provider network for our client payors. We customize networks for our clients, thus as new client contracts are secured, our recruiting activities will increase. While we anticipate having the capacity to increase our activities with our existing headcount (eight FTE's at March 31, 2012), it is possible that if a significant number of clients are added, we will increase headcount in our provider development function.
Sales and Marketing
Our sales and marketing function consists of our sales group, as well as our account management group. Our sales group is primarily responsible for securing new client contracts, while our account management group maintains our existing client relationships, as well as attempts to generate incremental growth from those relationships. The 83% increase in sales and marketing costs in the first quarter of 2012 as compared to last year is a result of the following:
Finance and Administration
Our finance and administration function consists primarily of human resources, finance and accounting as well as our Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer.
The 25% decrease in the finance and administration function is due primarily to the reduction in headcount; as of March 31, 2012, we had ten FTE's in the function, as compared to 15 FTE's at March 31, 2011. The decline in headcount is due to natural attrition. In addition, professional fees declined as we utilized lower cost consultants relative to the first quarter of 2011.
Selling, General and Administrative Expenses
Following is a reconciliation of our non-variable costs to selling, general and administrative (“SG&A”) expenses as presented per the Statement of Operations for the periods presented ending March 31:
SG&A expenses as a percentage of total net revenues increased during the three months ended March 31, 2012 compared to the same prior year periods, due primarily to the decline in net revenues compared to the same prior year periods. SG&A expenses during the three months ended March 31, 2012 included a severance charge of approximately $43,000. Excluding the severance charge, SG&A declined 5% in the first quarter of 2012 compared to the same prior year period.
Depreciation and Amortization
The following table sets forth a comparison of depreciation and amortization for the periods presented ended March 31:
FINANCIAL CONDITION AND LIQUIDITY
As of March 31, 2012 the Company had working capital of $10.9 million compared to $11.3 million at December 31, 2011. Our cash and cash equivalents balance increased to $11.5 million as of March 31, 2012 compared to $11.3 million at December 31, 2011. We continued to experience a decline in claims volume and resulting revenue and net loss during the three months ended March 31, 2012, however we were able to generate cash primarily as a result of cost containment measures implemented during the fourth quarter of 2011 and the positive impact of the change in our mix of clients generating revenue and claims.
For the three months ended March 31, 2012, operating activities provided net cash of approximately $339,000, the primary components of which were a net loss of approximately $558,000, adjusted for non-cash items including: share-based compensation expense of approximately $131,000, depreciation and amortization of approximately $219,000, amortization of the costs associated with the amendment to the contract with one of our significant clients of approximately $62,500, and a decrease in deferred taxes of $1,000, as well as, a net cash inflow from net operating assets and liabilities of approximately $484,000. The net cash inflow from net operating assets and liabilities was due primarily to the timing of cash collections and the related payments due to providers.
Investing activities during the three months ended March 31, 2012 were comprised of investments in software development of approximately $77,000 and purchases of property, plant and equipment of approximately $86,000. The significant investments in property and equipment were related to enhancements to our technology infrastructure that support our operations, primarily the replacement of fully-depreciated servers. In addition, software development costs related to the development of proprietary software connection to a certain claims adjudication system and enhancements to our internal repricing and billing system, primarily related to regulatory requirements. The proprietary connection was developed to simplify the implementation process for those prospects that utilize that particular adjudication system.
We believe our current cash balance of $11.5 million as of March 31, 2012 and expected future cash flows from operations will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities through the foreseeable future. In anticipation of adding new clients during 2012, we have reduced our non-variable cost structure to preserve our existing cash balances for investments in the business model and/or other strategic initiatives. If operating cash flows are not sufficient to meet our needs, we believe that credit or access to capital through issuance of equity would be available to us. However, as a result of the tightening in the credit markets, low level of liquidity in many financial markets and extreme volatility in fixed income, credit, currency and equity markets, there cannot be assurances that, if necessary, we would be successful in obtaining sufficient capital financing on commercially reasonable terms or at all. We do not have any lines of credit, credit facilities or outstanding bank indebtedness as of March 31, 2012.
Inflation did not have a significant impact on the Company’s costs during the quarters ended March 31, 2012 and March 31, 2011, respectively. The Company continues to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements as of March 31, 2012 or 2011 or for the periods then ended.
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2012. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that information required to the disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Controls Over Financial Reporting. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has concluded that there were no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) since the last fiscal quarter that have materially affected the Company’s internal controls over financial reporting or are reasonably likely to materially affect internal controls over financial reporting.
The Company has experienced declining revenue over the last two years primarily as a result of the decline in business from its two largest clients. Our second largest client continues to transition following a business combination. Our client continues to migrate its payors and employee groups to network alternatives, negatively impacting the claims volume from our client. We anticipate the transition to continue through 2012 and be complete by December 31, 2012. Although we continue to seek new clients and to expand our product offerings, we expect that our revenues will continue to decline over the next several quarters while we explore various options to offset revenue declines and return to profitability.
In addition to the other information set forth in this report, one should carefully consider the discussion of various risks and uncertainties contained in Part I, “Item 1A. Risk Factors” in our 2011 Annual Report on Form 10-K. We believe those risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us.
In a letter dated March 20, 2012, The NASDAQ Stock Market LLC (“NASDAQ”) notified the Company that it is eligible for an additional 180-day period to regain compliance with the Minimum Bid Price Requirement (as defined below).
On September 21, 2011, the Company had received a letter from NASDAQ stating that for 30 consecutive business days immediately preceding the date of the letter the Company's common stock did not maintain a minimum closing bid price of $1.00 per share (“Minimum Bid Price Requirement”) as required by NASDAQ Listing Rule 5550(a)(2). The Company was provided 180 calendar days, or until March 19, 2012, to regain compliance.
In the March 20 letter, NASDAQ stated that although the Company had not regained compliance with the Minimum Bid Price Requirement by March 19, 2012, it is eligible for an additional 180-day compliance period, or until September 17, 2012, based on the Company meeting the continued listing requirements for market value of publicly held shares and all other applicable standards for initial listing on the NASDAQ Capital Market (except for the Minimum Bid Price Requirement) and having notified NASDAQ of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.
If compliance cannot be demonstrated by September 17, 2012, NASDAQ will provide written notification that the Company’s securities will be delisted. At that time, the Company may appeal NASDAQ’s determination to a hearings panel with a plan to regain compliance. There can be no assurances that the Company will be able to regain compliance with the Minimum Bid Price Requirement.
*Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.