American CareSource Holdings, Inc. - FORM 10-Q

Attached files

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EX-31.1 - EXHIBIT 31.1 - American CareSource Holdings, Inc.	exh_311.htm
EX-32.2 - EXHIBIT 32.2 - American CareSource Holdings, Inc.	exh_322.htm
EX-32.1 - EXHIBIT 32.1 - American CareSource Holdings, Inc.	exh_321.htm
EX-10.1 - EXHIBIT 10.1 - American CareSource Holdings, Inc.	exh_101.htm
EX-31.2 - EXHIBIT 31.2 - American CareSource Holdings, Inc.	exh_312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2015

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number: 001-33094

American CareSource Holdings, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

20-0428568

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

1170 Peachtree Street, Suite 2350

Atlanta, Georgia 30309

(Address of principal executive offices)

(404) 465-1000

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share	The NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act:

None

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 ¨

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 x No ¨

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-Accelerated Filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	x

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

As of August 14, 2015, there were 6,743,853 outstanding shares of common stock of the registrant.

TABLE OF CONTENTS

AMERICAN CARESOURCE HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2015

Part I		Financial Information	3
	Item 1.	Financial Statements	3
		Consolidated Balance Sheets (unaudited)	3
		Consolidated Statements of Operations (unaudited)	4
		Consolidated Statements of Stockholders' Equity (unaudited)	5
		Consolidated Statements of Cash Flows (unaudited)	6
		Notes to Unaudited Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
	Item 4.	Controls and Procedures	29
Part II		Other Information	29
	Item 1.	Legal Proceedings	29
	Item 1A.	Risk Factors	29
	Item 6.	Exhibits	30
		Signatures	31
		Exhibit Index	32

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

AMERICAN CARESOURCE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

	June 30, 2015 (Unaudited)			December 31, 2014 (Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	491		$	1,020
Accounts receivable		3,470			4,135
Prepaid expenses and other current assets		667			612
Deferred income taxes		6			6
Total current assets		4,634			5,773

Property and equipment, net		4,089			4,322

Other assets:
Deferred income taxes		12			12
Deferred loan fees, net		1,725			2,666
Deferred offering costs		254			225
Other non-current assets		117			488
Intangible assets, net		756			1,437
Goodwill		6,182			6,182
Total other assets		9,046			11,010
Total assets	$	17,769		$	21,105

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit	$	5,000		$	-
Due to ancillary network service providers		2,045			2,308
Due to HealthSmart, ancillary network		745			903
Accounts payable		932			762
Accrued liabilities		2,411			1,875
Current portion of long-term debt		576			989
Capital lease obligations, current portion		126			117
Total current liabilities		11,835			6,954

Long-term liabilities:
Lines of credit		4,500			4,716
Promissory notes and notes payable		171			312
Capital lease obligations		1,698			1,764
Warrant derivative liability		1,871			3,200
Other long-term liabilities		341			222
Total long-term liabilities		8,581			10,214
Total liabilities		20,416			17,168

Commitments and contingencies		-			-

Stockholders' equity:
Preferred stock, $0.01 par value; 10,000 shares authorized, none issued		-			-
Common stock, $0.01 par value; 40,000 shares authorized; 6,902 and 6,713 shares issued and outstanding in 2015 and 2014, respectively		69			67
Additional paid-in capital		26,165			25,731
Accumulated deficit		(28,881	)		(21,861	)
Total stockholders' equity		(2,647	)		3,937
Total liabilities and stockholders' equity	$	17,769		$	21,105

The accompanying notes are an integral part of these unaudited financial statements

AMERICAN CARESOURCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(amounts in thousands, except per share data)

	Three months ended June 30,						Six months ended June 30,
	2015			2014			2015			2014
Net revenues:
Ancillary network	$	5,604		$	5,497		$	11,347		$	10,505
Urgent and primary care		2,354			474			5,026			474
Total net revenues		7,958			5,971			16,373			10,979
Operating expenses:
Ancillary network provider payments		4,137			3,880			8,468			7,633
Ancillary network administrative fees		194			307			524			527
Ancillary network other operating costs		933			-			1,905			-
Ancillary network prepaid write-off		487			-			487			-
Salaries, wages, benefits and taxes		2,968			1,695			5,776			3,082
Other operating expenses		2,430			1,199			5,332			2,111
Intangible asset impairment		520			-			520			-
Depreciation and amortization		292			215			583			393
Total operating expenses		11,961			7,296			23,595			13,746
Operating (loss)		(4,003	)		(1,325	)		(7,222	)		(2,767	)

Interest expense:
Interest expense		93			13			176			9
Gain on warrant liability, net of deferred loan fees amortization		(757	)		-			(388	)		-
Total interest expense		(664	)		13			(212	)		9
Loss before income taxes		(3,339	)		(1,338	)		(7,010	)		(2,776	)
Income tax expense		4			4			10			1
Net (loss)	$	(3,343	)	$	(1,342	)	$	(7,020	)	$	(2,777	)
Basic net loss per share	$	(0.49	)	$	(0.21	)	$	(1.03	)	$	(0.46	)
Diluted net loss per share	$	(0.49	)	$	(0.21	)	$	(1.14	)	$	(0.46	)
Basic weighted-average shares outstanding		6,849			6,395			6,811			6,062
Diluted weighted-average shares outstanding		6,849			6,395			6,851			6,062

The accompanying notes are an integral part of these unaudited financial statements

AMERICAN CARESOURCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(amounts in thousands)

	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated Deficit			Total Stockholders' Equity
Balance at December 31, 2014		6,713	$	67	$	25,731		$	(21,861	)	$	3,937
Net loss		-		-		-			(7,020	)		(7,020	)
Stock-based compensation expense		-		-		403			-			403
Issuance of common stock upon exercise of equity incentive awards		34		-		33			-			33
Issuance of common stock upon conversion of restricted stock units		155		2		(2	)		-			-
Balance at June 30, 2015		6,902	$	69	$	26,165		$	(28,881	)	$	(2,647	)

The accompanying notes are an integral part of these unaudited financial statements

AMERICAN CARESOURCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

	Six months ended June 30,
	2015			2014
Cash flows from operating activities:
Net loss	$	(7,020	)	$	(2,777	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash stock-based compensation expense		403			197
Intangible asset impairment		520			-
Depreciation and amortization		583			393
Gain on warrant liability, net of deferred loan fees amortization		(388	)		-
Change in deferred rent		119			-
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		665			(111	)
Prepaid expenses and other assets		265			(192	)
Due to ancillary network service providers		(263	)		(145	)
Due to HealthSmart, ancillary network		(158	)		-
Accounts payable		163			(51	)
Accrued liabilities		536			456
Net cash used in operating activities		(4,575	)		(2,230	)
Cash flows from investing activities:
Cost of acquisition		-			(2,180	)
Additions to property and equipment		(138	)		(196	)
Net cash used in investing activities		(138	)		(2,376	)
Cash flows from financing activities:
Proceeds from issuance of common stock and option exercises		33			2,000
Proceeds from borrowings under line of credit		4,784			-
Principal payments on capital lease obligations		(57	)		(1	)
Principal payments on long-term debt		(554	)		(6	)
Offering costs, paid and deferred		(22	)		-
Net cash provided by financing activities		4,184			1,993
Net decrease in cash and cash equivalents		(529	)		(2,613	)
Cash and cash equivalents at beginning of period		1,020			6,207
Cash and cash equivalents at end of period	$	491		$	3,594
Supplemental cash flow information:
Cash paid for taxes, net of refunds	$	-		$	25
Cash paid for interest		117			-
Supplemental non-cash operating and financing activity:
Offering costs, unpaid and deferred	$	7		$	-
Reclassified property and equipment from prepaid expenses	$	51		$	-

The accompanying notes are an integral part of these unaudited financial statements

AMERICAN CARESOURCE HOLDINGS, INC.

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

(tables in thousands, except per share data)

1. General

Basis of Presentation

The accompanying unaudited consolidated financial statements of American CareSource Holdings, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X of the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these statements include all adjustments necessary to present a fair statement of our consolidated results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. Preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and notes. Actual results could differ from those estimates. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2014. References herein to the "Company," "we," "us," or "our" refer to American CareSource Holdings, Inc. and its subsidiaries.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will become effective for the Company on January 1, 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance relates to the disclosures around going concern. The new standard update provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The guidance relates to the presentation of debt issuance costs. The new standard update provides guidance that would require debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

2. Description of Business

The Company engages in two lines of business: our urgent and primary care business and our ancillary network business. These lines of business are supported through a shared services function.

Urgent and Primary Care Business

In May 2014, we announced our entry into the urgent and primary care market. During the remainder of 2014, we, through our wholly-owned subsidiaries, acquired ten urgent and primary care centers located in Georgia (three), Florida (two), Alabama (three) and Virginia (two). These centers offer a wide array of services for non-life-threatening medical conditions. We strive to improve access to quality medical care by offering extended hours and weekend service and also by accepting patients primarily on a walk-in basis.

Ancillary Network Business

Our ancillary network business offers cost containment strategies, primarily through the utilization of a comprehensive national network of ancillary healthcare service providers. Our services are marketed to a number of healthcare companies including third-party administrators, insurance companies, large self-funded organizations, various employer groups, and preferred provider organizations. We offer payors this solution by:

lowering our payors' ancillary care costs throughout network of high quality, cost effective providers that we have under contract at more favorable terms than they could generally obtain on their own;

providing payors with a comprehensive network of ancillary healthcare service providers that is tailored to each payor's needs and is available to each payor's members for covered services;

providing payors with claims management, reporting, processing and payment services;

performing network/needs analysis to assess the benefits to payors of adding additional/different service providers to the payor-specific provider networks; and

credentialing network service providers for inclusion in the payor-specific provider networks.

On October 1, 2014, we entered into a management services agreement with HealthSmart Preferred Care II, L.P. ("HealthSmart"). Under the management services agreement, HealthSmart manages our ancillary network business, subject to the supervision of a five-person oversight committee comprised of three members selected by us and two members selected by HealthSmart. As part of the management arrangement, HealthSmart hired substantially all of our ancillary network business employees, purchased substantially all of our furniture, fixtures and equipment located in our Dallas, Texas office and assumed our lease for that office. As a result of this arrangement, we no longer employ the workforce of our ancillary network business.

Under the management services agreement, HealthSmart manages and operates our ancillary network business for a monthly fee equal to the sum of (a) 35% of the net profit derived from the operation of our ancillary network business plus (b) 120% of all direct and documented operating expenses and liabilities actually paid during such calendar month by HealthSmart in connection with providing its management services. For purposes of the fee calculation, the term "net profit" means gross ancillary network business revenue, less the sum of (x) the provider payments and administrative fees and (y) 120% of all direct and documented operating expenses and liabilities actually paid during such calendar month by HealthSmart in connection with providing its management services. Any remaining net profit accrues to us. During the term of the agreement, HealthSmart is responsible for the payment of all expenses incurred in providing the management services with respect to our ancillary network business, including personnel salaries and benefits, the cost of supplies and equipment, and rent. The initial term of the management services agreement is three years, and it renews annually thereafter for one-year terms unless either party gives notice of termination at least 90 days prior to the end of the then-current term.

Our management agreement with HealthSmart provides that at any time between October 1, 2016 and the expiration date of the management services agreement, HealthSmart may purchase, or we may require that HealthSmart purchase, our ancillary network business for a price equal to $6,500,000 less the aggregate sum of net profit received by us since the beginning of the management arrangement, which as of June 30, 2015 was approximately $1.1 million. The purchase price is to be payable by HealthSmart solely out of the net profit it derives from the operation of the ancillary network business after consummation of the transaction. Consummation of the transaction will be subject to the satisfaction of certain material conditions, currently including stockholder approval of the sale. If, the sale of our ancillary network business to HealthSmart is not consummated during or at the end of the term of the management services agreement, we expect to then either reassume management of that line of business, or seek to sell that business on the most favorable terms we are able to obtain.

3. Liquidity and Earnings (Loss) Per Share

Liquidity

We incurred losses from our investment in shared services to support planned growth in our urgent and primary care business segment and oversight of the network and ancillary business, the write-off of intangible assets, the payment and accrual of one-time severance charges, costs incurred to integrate our acquired urgent and primary care facilities, operating losses incurred by our urgent and primary care business segment as we implement changes to improve performance, and operating losses incurred in our network and ancillary network business. As a result of our recurring and nonrecurring losses, we used cash in our operations of $4.6 million and $2.2 million during the six months ended June 30, 2015 and 2014, respectively.

We anticipate we will continue to experience negative cash flow relating to our losses, during the next 12 months as we improve the operating performance of our existing urgent and primary care centers, expand our urgent and primary care segment and operate our ancillary network business.

Until we generate positive cash flows from operations, we will be dependent on our existing lines of credit and outside capital to fund our operations, fund planned and future acquisitions, and repay debt. At August 14, 2015, we have funds of $1,961,000 available for these needs. We plan to raise additional capital as follows:

Increase our existing lines of credits. We have two existing lines of credit under credit agreements with Wells Fargo, National Association, or Wells Fargo. One of our lines was entered into in July 2014 for $5.0 million of financing and the other was entered into in December 2014 for $6.0 million of financing. Both credit agreements were originally scheduled to mature on June 1, 2016. On August 12, 2015, the maturity of the $6.0 million line was extended to October 1, 2016 and the outstanding balance of $4.5 million was reclassified to long-term on our consolidated balance sheets. We plan to further extend these lines of credit, and will request the guarantors remain obligated under their respective guarantees until we have adequate capital to repay them. Along with the maturity date extension, we also increased the line of credit under our December 2014 credit agreement from $6,000,000 to $7,000,000. As of August 12, 2015, we have borrowed the $11.0 million of the $12 million available to us under our existing lines of credit.

A public offering of shares of our common stock. On February 6, 2015, we filed a Form S-1 Registration Statement with the SEC to sell additional shares of our common stock. If the public offering is fully subscribed, we will raise an additional $13,000,000 (less offering expenses), plus any proceeds we receive on account of the 15% over-allotment option we have granted to underwriters.

We also expect to raise additional capital later this year or in early 2016 to fund our operations, to repay indebtedness and to facilitate the expansion of our urgent and primary care business. We may raise such capital through one or more public or private equity offerings, debt financings, borrowings or a combination thereof.

There are no assurances that we will be successful in further extending the maturity dates under our lines of credit, that our guarantors will agree to continue their obligations under their guarantees, or that we will be able to obtain additional capital at terms acceptable to us or at all.

Earnings (Loss) Per Share

Basic (loss) per share is computed by dividing net (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period of computation. Diluted (loss) per share is computed similar to basic earnings per share except that the numerator is adjusted for the change in fair value of the warrant liability (only if dilutive), and the denominator is increased to include the number of dilutive potential common shares outstanding during the period using the treasury stock method.

Basic net (loss) and diluted net (loss) per share data were computed as follows:

	Three months ended June 30, 2015			Six months ended June 30, 2015
Numerator:
Net (loss) for basic earnings per share		(3,343	)		(7,020	)
Less gain on change in fair value of warrant liability		-			791
Net (loss) for diluted earnings per share		(3,343	)		(7,811	)
Denominator:
Weighted-average basic common shares outstanding		6,849			6,811
Assumed conversion of dilutive securities:
Common stock purchase warrants		-			40
Denominator for dilutive earnings per share - adjusted weighted-average shares		6,849			6,851

Basic net (loss) per share	$	(0.49	)	$	(1.03	)
Diluted net (loss) per share	$	(0.49	)	$	(1.14	)

The following table summarizes potentially dilutive shares outstanding as of June 30, 2015, which were excluded from the calculation due to being anti-dilutive:

	2015
Common stock purchase warrants		1,782
Stock options		748
Restricted shares of common stock		-

4. Acquisitions

During the year ended December 31, 2014, we closed five transactions supporting our entry into the urgent and primary care market. A summary of the acquisitions is as follows:

Business Acquired

State

Sites

Date of
Closing

CorrectMed

Georgia

May 8, 2014

Bay Walk-In Clinic

Florida

August 29, 2014

Mid-South Urgent Care

Alabama

September 12, 2014

MedHelp

Georgia

October 31, 2014

Stat Medical Care

Virginia

December 31, 2014

The following table provides certain pro forma financial information for the Company as if the acquisition of CorrectMed had occurred on January 1, 2014. Pro forma information for Bay Walk-In, Mid-South Urgent Care, MedHelp, and Stat Medical Care was not included since it was impracticable to obtain, due to the financial reporting approaches utilized by the prior owners of the businesses.

	6 months ended June 30,
	2015			2014
Net revenue
Ancillary network	$	11,347		$	10,505
Urgent and primary care		5,026			1,598
Total net revenue		16,373			12,103

Net loss	$	(7,020	)	$	(3,102	)

Basic net (loss) per common share	$	(1.03	)	$	(0.51	)
Diluted net (loss) per common share	$	(1.14	)	$	(0.51	)

5. Revenue Recognition, Accounts Receivable, and Concentration of Credit Risk

Our Urgent and Primary Care Business

We have agreements with governmental and other third-party payors that provide for payments to us based on contractual adjustments to our established rates. Net revenue is reported at the time service is rendered at the estimated net realizable amounts, after giving effect to estimated contractual amounts from patients, third-party payors and others, and an estimate for bad debts.

Contractual adjustments are accrued on an estimated basis in the period the related services are rendered, and adjusted in future periods as final settlements are determined. We grant credit without collateral to our patients, who consist primarily of local residents insured by third-party payors. A summary of the basis of reimbursement with major third-party payors is as follows:

Commercial and HMO – We have entered into agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. Billing methodologies under these agreements include discounts from established charges and prospectively determined rates.

Medicare – Services rendered to Medicare program beneficiaries are recorded at prospectively determined rates. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors.

In establishing allowance for bad debts, we consider historical collection experience, the aging of the account, payor classification and patient payment patterns. We adjust this allowance prospectively.

Collection of payment for services provided to patients without insurance coverage is done at time of service.

Below is a summary of accounts receivable as of June 30, 2015, and revenues for the six months ending June 30, 2015, for our urgent and primary care business. We entered the urgent and primary care business in May 2014.

	June 30, 2015
Accounts receivable	$	2,616
Less:
Estimated allowance for uncollectible amounts		(1,538	)
Accounts receivable, net	$	1,078

	June 30, 2015
Gross revenue	$	10,119
Less:
Provision for contractual adjustments and estimated uncollectible amounts		(5,093	)
Net revenue	$	5,026

Our Ancillary Network Business

We recognize revenue on the services that we provide, 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 service 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 payor clients and collections are reasonably assured. We estimate 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.

We record a provision for refunds based on an estimate of historical refund amounts. Refunds are paid to payors for overpayment 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.

After careful evaluation of the key gross and net revenue recognition indicators, we have concluded that our circumstances are most consistent with those key indicators that support gross revenue reporting, since we are fulfilling the services of a principal versus an agent.

Following are the key indicators that support our conclusion that we act as a principal when settling claims for service providers through our contracted service provider network:

●

The Company is the primary obligor in the arrangement. We have assessed our role as primary obligor as a strong indicator of gross reporting. We believe that we are the primary obligor in our transactions because we are responsible for providing the services desired by our payor clients. We have distinct, separately negotiated contractual relationships with our payor clients and with the ancillary healthcare providers in our networks. We do not negotiate "on behalf of" our payor clients and do not hold ourselves out as the agent of the payor clients when negotiating the terms of our ancillary healthcare service provider agreements. Our agreements contractually prohibit payor clients and service providers from entering into direct contractual relationships with one another. The payor clients have no control over the terms of our agreements with the service providers. In executing transactions, we assume key performance-related risks. The payor clients hold us responsible for fulfillment, as the provider, of all of the services the payor clients are entitled to under their contracts; payor clients do not look to the service providers for fulfillment. In addition, we bear the pricing/margin risk as the principal in the transactions. Because the contracts with the payor clients and service providers are separately negotiated, we have complete discretion in negotiating both the prices we charge our payor clients and the financial terms of our agreements with the service providers. Because our profit is the spread between the amounts received from the payor clients and the amount paid to the service providers, we bear significant pricing and margin risk. There is no guaranteed mark-up payable to us on the amount we have contracted. Thus, we bear the risk that amounts paid to the service provider will be greater than the amounts received from the payor clients, resulting in a loss or negative claim.

●

The Company has latitude in establishing pricing. As stated above, we are able to negotiate the price payable to us by our payor clients as well as the price to be paid to each contracted service provider. This type of pricing latitude indicates that we have the risks and rewards normally attributed to a principal in the transactions.

●

The Company changes the product or performs part of the services. We provide the benefits associated with the relationships we build with the payor clients and the services providers. While the parties could deal with each other directly, the payor clients would not have the benefit of our experience and expertise in assembling a comprehensive network of service providers, in claims management, reporting and processing and payment services, in performing network/needs analysis to assess the benefits to payor clients of adding additional/different service providers to the client payor-specific provider networks, and in credentialing network service providers.

●

The Company has complete discretion in supplier selection. We have complete discretion in supplier selection. One of the key factors considered by payor clients which engage us is to have the Company undertake the responsibility for identifying, qualifying, contracting with and managing the relationships with the ancillary healthcare service providers. As part of the contractual arrangement between us and our payor clients, the payors identify their obligations to their respective covered persons and then work with us to determine the types of ancillary healthcare services required in order for the payors to meet their obligations. We may select the providers and contract with them to provide services at its discretion.

●

The Company is involved in the determination of product or service specifications. We work with our payor clients to determine the types of ancillary healthcare services required in order for the payors to meet their obligations to their respective covered persons. In some respects, we are customizing the product through our efforts and ability to assemble a comprehensive network of providers for our payors that is tailored to each payor's specific needs. In addition, as part of our claims processing and payment services, we work with the payor clients, on the one hand, and the providers, on the other, to set claims review, management and payment specifications.

●

The supplier (and not the Company) has credit risk. We believe we have some level of credit risk, but that risk is mitigated because we do not remit payment to providers unless and until we have received payment from the relevant payor clients following our processing of a claim.

●

The amount that the Company earns is not fixed. We do not earn a fixed amount per transaction nor do we realize a per-person per-month charge for our services.

We have evaluated the other indicators of gross and net revenue recognition, including whether or not we have general inventory risk. We do not have any general inventory risk, as our business is not related to the manufacture, purchase or delivery of goods and we do 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, we have carefully evaluated all of the key gross and net revenue recognition indicators and have concluded that our circumstances are more consistent with those key indicators that support gross revenue reporting.

If, however, we were to report our ancillary network revenues, net of provider payments rather than on a gross reporting basis, for the three and six months ended June 30, 2015, our net ancillary network revenues would have been $1.5 million and $2.9 million, respectively. For the three and six months ended June 30, 2014, our net ancillary network revenues would have been approximately $1.6 million and $2.9 million, respectively.

For our ancillary network business, HealthSmart comprised a significant portion of our net revenue during the period ended June 30, 2015 and 2014. The following is a summary of the approximate amounts of our net revenue and accounts receivable attributable to HealthSmart as of the dates and for the periods presented:

			Period ended June 30, 2015												Period ended June 30, 2014
	As of June 30, 2015		Three months					Six months					As of June 30, 2014		Three months					Six months
	Accounts Receivable		Revenue		% of Total Revenue			Revenue		% of Total Revenue			Accounts Receivable		Revenue		% of Total Revenue			Revenue		% of Total Revenue
HealthSmart Preferred Care II, L.P.	$	557	$	2,056		25	%	$	3,873		23	%	$	1,029	$	2,312		39	%	$	3,544		32	%

We maintain an allowance for uncollectible receivables which primarily relates to payor refunds. 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 payment made to the ancillary service provider if the claim has been fully resolved. Co-payments, deductibles and co-insurance payments can also impact the collectability of claims. While we are able to process a claim and estimate the cash we will receive from the payor for that claim, the presence of co-pays, deductibles and co-insurance payments can affect the ultimate collectability of the claim. We record an allowance against revenue to better estimate collectability. Provisions for refunds recorded were approximately $(174,000) and $53,000 for the three-month periods ended June 30, 2015 and 2014, respectively. The allowance was approximately $125,000 and $341,000 at June 30, 2015 and 2014, respectively.

6. Capital and Operating Lease Obligations

The following is a schedule of the future required payments under our lease agreements in effect at June 30, 2015:

	Capital Leases			Operating Leases		Total
2015 (remaining 6 months)	$	145		$	440	$	585
2016		299			879		1,178
2017		287			766		1,053
2018		276			651		927
2019		273			585		858
Thereafter		2,898			827		3,725
Total minimum lease payments		4,178		$	4,148	$	8,326
Less amount representing interest		(2,354	)
Present value of net minimum obligations		1,824
Less current obligation under capital lease		126
Long-term obligation under capital lease	$	1,698

7. Lines of Credit, Promissory Notes, and Notes Payable

Below is a summary of our short-term and long-term debt obligations.

Lines of Credit

On July 30, 2014, we entered into a credit agreement with Wells Fargo providing for a $5,000,000 revolving line of credit. On December 4, 2014, we entered into a second credit agreement with Wells Fargo Bank, providing for a $6,000,000 revolving line of credit. We refer to these two agreements as our credit agreements. Our obligation to repay advances under the credit agreements are evidenced by revolving line of credit notes, each with a fluctuating interest rate per annum of 1.75% above daily one month LIBOR, as in effect from time to time. The July 30, 2014 credit agreement matures on June 1, 2016, and all borrowings under this credit agreement are due and payable on that date. On August 12, 2015, we increased the line of credit under the December 4, 2014 credit agreement from $6,000,000 to $7,000,000 and extended the maturity date to October 1, 2016, and all borrowings under the December 2014 credit agreement are due and payable on that date. The obligations under the credit agreements are secured by all the assets of the Company and its subsidiaries. The credit agreements include ordinary and customary covenants related to, among other things, additional debt, further encumbrances, sales of assets, and investments and lending.

Borrowings under the credit agreements are also secured by guarantees provided by certain officers and directors of the Company, among others. On July 30, 2014, we issued to the guarantors of the July 2014 obligations warrants to purchase an aggregate of 800,000 shares of our common stock at $3.15 per share in consideration of their guaranteeing such indebtedness. The July 2014 warrants vested immediately and are exercisable any time prior to their expiration on October 30, 2019. In addition, on December 4, 2014, we issued to the guarantors of the December 2014 obligations warrants to purchase an aggregate of 960,000 shares of our common stock at $2.71 per share in consideration of their guaranteeing such indebtedness. The December 2014 warrants vested immediately and are exercisable any time prior to their expiration on December 4, 2019. In connection with the $1,000,000 increase in the line of credit under the December 2014 credit agreement, we issued warrants to the guarantors to purchase an additional 300,000 shares of our common stock at $1.70 per share, subject to certain adjustments under certain circumstances, in consideration of their guaranteeing such indebtedness. The warrants vested immediately and are exercisable at any time prior to their expiration on August 12, 2020.

As of June 30, 2015, we had outstanding borrowings of $5,000,000 under our July 2014 credit agreement and $4,500,000 under our December 2014 credit agreement. The amount outstanding under our July 2014 credit agreement was recorded as a current liability on our consolidated balance sheet as of June 30, 2015. Based on the extension of the December 2014 credit agreement to October 2016 subsequent to quarter end, the $4.5 million outstanding balance has been reclassified to long-term on our consolidated balance sheet. Substantially all of the borrowings under the credit agreements were used to finance acquisition activity, fund losses, and $200,000 was used to secure a bond required by a state license for the network business. The weighted-average interest rate on these borrowings was 1.94% as of June 30, 2015.

Promissory Notes and Notes Payable

The following is a summary of all Company debt as of June 30, 2015:

Revolving line of credit	$	9,500
Promissory notes, related to acquisitions		747
Total debt		10,247
Less current maturities		5,576
Long-term debt	$	4,671

Outstanding debt balances as of June 30, 2015 mature, adjusted for subsequent extension, as follows: 2015 (remaining 6 months) - $466,000; 2016 - $9,762,000; 2017 - $19,000.

8. Intangible Assets

Intangible assets and related accumulated amortization consists of the following as of the dates presented:

	June 30, 2015			December 31, 2014
Gross carrying amount of urgent and primary care intangibles:
Patient relationships and contracts	$	972		$	972
Accumulated amortization		(144	)		(47	)
Intangible asset impairment*		(520	)		-
Urgent and primary care intangibles, net		308			925

Gross carrying amount of ancillary intangibles:
Ancillary provider network		1,921			1,921
Software		428			428
		2,349			2,349
Accumulated amortization		(1,901	)		(1,837	)
Ancillary intangibles, net		448			512
Total intangibles, net	$	756		$	1,437

* At the time we purchased one of our urgent and primary care centers, we allocated $600,000 of the purchase price to a contract held by the acquired center that related to non-urgent care services. During the quarter ended June 30, 2015 we suspended our provision of services under that contract and have recorded a one-time impairment charge of $520,000 relating to the unamortized balance of that intangible asset.

Total amortization expense related to intangibles was approximately $80,000 and $37,000 during the three-month periods ended June 30, 2015 and 2014, respectively. The patient relationships and contracts are being amortized using the straight-line method over their estimate useful lives of five (5) years. The ancillary provider network is being amortized using the straight-line method over its expected useful life of 15 years. Experience-to-date is that approximately 2% - 8% annual turnover or attrition of provider contracts occurs each year. The ancillary provider network is being accounted for on a pooled basis and the actual cancellation rates of provider contracts that were acquired are monitored for potential impairment or amortization adjustment, if warranted.

Estimated annual amortization expense relating to intangibles is as follows:

Years ending December 31,	Urgent and Primary Care		Ancillary Care Services		Total
2015 (remaining 6 months)	$	38	$	64	$	102
2016		74		128		202
2017		74		128		202
2018		74		128		202
2019		48		-		48
Total	$	308	$	448	$	756

9. Warrants

The Company had 1,782,222 and 22,222 outstanding warrants to purchase common stock as of June 30, 2015 and June 30, 2014, respectively. 1,760,000 of those warrants, at June 30, 2015, are considered derivative warrants because they contain exercise-price adjustment features. The remaining 22,222 warrants that were outstanding as of June 30, 2015 and 2014 were non-derivative warrants, which expire on February 1, 2017 and have an exercise price of $1.50 per share of common stock.

July 30, 2014 Warrants

On July 30, 2014, we issued warrants to individuals who provided guarantees in connection with a $5,000,000 line of credit that was obtained by us on that same date. The warrants allow the warrant holders to purchase a total of 800,000 shares of our common stock for $3.15 per share, which was $0.01 per share higher than the closing market price of our common stock on July 30, 2014. The warrants vested immediately and are exercisable any time prior to their expiration on October 30, 2019. These warrants have anti-dilution provisions that could require some of the warrants' terms to change upon the occurrence of certain future events. The anti-dilution provisions could result in changes to the warrants' strike price and the number of shares that can be purchased by the warrant holders. Because the strike price is not fixed, the warrants are reported as liabilities on our balance sheet. On the date the warrants were issued, we recognized a warrant liability that was equal to the warrants' fair value of $1,420,000. A corresponding entry was made to deferred loan fees.

Deferred loan fees, an asset on our balance sheet, are being amortized over the life of the line of credit agreement, which expires on June 1, 2016. During the three months and six months ended June 30, 2015, we recognized $195,000 and $388,000, of amortization expense, respectively, on this asset.

The warrant liability is adjusted to the warrants' fair value at the end of each reporting period. Increases (decreases) in the warrant liability are reported as interest expense on the Company's statement of operations. On December 31, 2014 and June 30, 2015, the warrants were adjusted to their estimated fair value of $1,410,000 and $872,000, respectively. The Company's statement of operations for the three months and six months ended June 30, 2015 include unrealized gains included in interest expense of $578,000 and $538,000, respectively. The unrealized gains correspond with the decrease in the warrant liability since March 31, 2015 and December 31, 2014, respectively.

The warrants' fair value was calculated using the binomial options-pricing model. Pursuant to the terms of the relevant warrant agreements, the anti-dilution provisions are only applicable if a private offering is closed at a price below the warrant exercise price ($3.15) before a public offering is closed for at least $10,000,000. In the June 30, 2015 calculation, we assumed that there was a 25% probability that the Company would close a private stock offering in the remainder of 2015 that is not preceded by a material public offering. If the market price of the Company's stock was less than the warrants' exercise price on the date of a private stock offering, we assumed that the warrants' exercise price would be reduced, and the number of shares purchasable by warrant holders would increase, in accordance with the terms of the warrant agreements. Additional assumptions we used in our valuation calculations were as follows:

	June 30, 2015			December 31, 2014
Stock price	$	1.72		$	2.90
Volatility		80.0	%		72.5	%
Risk-free interest rate		1.32	%		1.65	%
Exercise price	$	3.15		$	3.15
Expected life (years)		4.33			4.83
Dividend yield		0	%		0	%
Private stock offering %		25	%		15	%
Public stock offering %		70	%		80	%
Equity raise time period		3rd Quarter 2015			4th Quarter 2015

December 4, 2014 Warrants

On December 4, 2014, we issued warrants to individuals who provided guarantees in connection with a $6,000,000 line of credit that was obtained by us on that same date. The warrants allow the warrant holders to purchase a total of 960,000 shares of the common stock for $2.71 per share, which was equal to the closing market price of our common stock on December 4, 2014. The warrants vested immediately and are exercisable any time prior to their expiration on December 4, 2019. These warrants have anti-dilution provisions, under which the warrants' strike price could change if certain future events occur. The anti-dilution provisions could result in changes to the warrants' strike price and the number of shares that can be purchased by the warrant holders. Because the strike price is not fixed, the warrants are reported as liabilities on our balance sheet. On the date the warrants were issued, we recognized a warrant liability that was equal to the warrants' fair value of $1,660,000. A corresponding entry was made to deferred loan fees.

Deferred loan fees, an asset on our balance sheet, is being amortized over the life of the line of credit agreement, which expires on June 1, 2016. During the three months and six months ended June 30, 2015, we recognized $277,000 and $553,000 of amortization expense, respectively, on this asset.

The warrant liability is adjusted to the warrants' fair value at the end of each reporting period. Increases (decreases) in the warrant liability are reported as interest expense on our statement of operations. On December 31, 2014 and June 30, 2015, the warrants were adjusted to their estimated fair value of $1,790,000 and $999,000, respectively. The Company's statement of operations for the three months and six months ended June 30, 2015 include unrealized gains included in interest expense of $651,000 and $791,000, respectively. The unrealized gains correspond with the decrease in the warrant liability since March 31, 2015 and December 31, 2014, respectively.

The warrants' fair value was calculated using the binomial options-pricing model. Pursuant to the terms of the relevant warrant agreements, the anti-dilution provisions are applicable if either a public or private offering is closed at a price below the warrant exercise price ($2.71). In the June 30, 2015 calculation, we assumed that there was a 100% probability that the Company would close a public or private stock offering in the remainder of 2015. If the market price of the Company's stock was less than the warrants' exercise price on the date of a stock offering, we assumed that the warrants' exercise price would be reduced, in accordance with the terms of the warrant agreements. Additional assumptions we used in our valuation calculations were as follows:

	June 30, 2015			December 31, 2014
Stock price	$	1.72		$	2.90
Volatility		80.0	%		72.5	%
Risk-free interest rate		1.32	%		1.65	%
Exercise price	$	2.71		$	2.71
Expected life (years)		4.43			4.93
Dividend yield		0	%		0	%

The following table summarizes the derivative warrant activity since December 31, 2014:

	Weighted- Average Exercise Price		Warrants Outstanding December 31, 2014		Warrants Issued in 2015		Warrants Outstanding June 30, 2015
Warrants issued July 30, 2014	$	3.15		800		-		800
Warrants issued December 4, 2014	$	2.71		960		-		960
Total	$	2.91		1,760		-		1,760

The following table summarizes the changes in the derivative warrants' fair values since December 31, 2014:

	Warrants Issued on July 30, 2014			Warrants Issued on December 4, 2014			Total
Fair value of outstanding warrants as of December 31, 2014	$	1,410		$	1,790		$	3,200
Change in fair value of warrants through 2nd Quarter 2015		(538	)		(791	)		(1,329	)
Fair value of outstanding warrants as of June 30, 2015	$	872		$	999		$	1,871

10. Segment Reporting

We operate in two segments, urgent and primary care and ancillary network. We evaluate performance based on several factors, of which the primary financial measure for each segment is operating income. We define segment income for our business segments as income before interest expense, gain or loss on disposal of assets, income taxes, depreciation expense, non-cash amortization of intangible assets, intangible asset impairment, non-cash stock-based compensation expense, shared service expenses, severance charges and any non-recurring costs. Shared services primarily consist of compensation costs for the executive management team, facilities' costs for our corporate headquarters, support services such as finance and accounting, human resources, legal, marketing and information technology and general administration. Shared services also include transactional costs.

The following tables set forth a comparison of operations for the following periods presented for our two lines of business and shared services (certain prior year amounts have been reclassified for comparability purposes).

Consolidated statements of operations by segment for the respective periods are as follows:

	Three months ended June 30,
	2015											2014
	Urgent and Primary Care			Ancillary Network		Shared Services			Total			Urgent and Primary Care		Ancillary Network		Shared Services			Total
Net revenues	$	2,354		$	5,604	$	-		$	7,958		$	474	$	5,497	$	-		$	5,971
Total segment income (loss)		(795	)		340		(1,610	)		(2,065	)		71		242		(1,300	)		(987	)

Additional Segment Disclosures:
Interest expense		70			-		23			93			13		-		-			13
Gain on warrant liability, net of deferred loan fees amortization		(568	)		-		(189	)		(757	)		-		-		-			-
Depreciation and amortization expense		151			141		-			292			41		174		-			215
Income tax expense		-			-		-			-			-		4		-			4
Total asset expenditures		19			-		29			48			-		85		-			85

	Six months ended June 30,
	2015											2014
	Urgent and Primary Care			Ancillary Network		Shared Services			Total			Urgent and Primary Care			Ancillary Network		Shared Services			Total
Net revenues	$	5,026		$	11,347	$	-		$	16,373		$	474		$	10,505	$	-		$	10,979
Total segment income (loss)		(1,245	)		450		(3,638	)		(4,433	)		71			75		(2,215	)		(2,069	)

Additional Segment Disclosures:
Interest expense		132			-		44			176			13			-		-			13
Gain on warrant liability, net of deferred loan fees amortization		(291	)		-		(97	)		(388	)		(4	)		-		-			(4	)
Depreciation and amortization expense		300			283		-			583			41			352		-			393
Income tax expense		-			6		-			6			-			1		-			1
Total asset expenditures		19			-		119			138			-			196		-			196

The following provides a reconciliation of reportable segment operating income (loss) to the Company’s consolidated totals:

	Three months ended June 30,						Six months ended June 30,
	2015			2014			2015			2014
Total segment loss	$	(2,065	)	$	(987	)	$	(4,433	)	$	(2,069	)
Less:
Severance charges		346			-			346			108
Ancillary network prepaid write-off		487			-			487			-
Depreciation and amortization expense		292			215			583			393
Non-cash stock-based compensation expense		256			123			403			197
Intangible asset impairment		520			-			520			-
Non-recurring professional fees		37			-			450			-
Operating loss		(4,003	)		(1,325	)		(7,222	)		(2,767	)
Bank interest expense		93			13			176			13
Gain on warrant liability, net of deferred loan fees amortization		(757	)		-			(388	)		(4	)
Loss before income taxes	$	(3,339	)	$	(1,338	)	$	(7,010	)	$	(2,776	)

Segment assets include accounts receivable, prepaid expenses and other current assets, property and equipment, and intangibles. Shared services assets consist of cash and cash equivalents, prepaid insurance, deferred income taxes and property and equipment primarily related to information technology assets. Consolidated assets, by segment and shared services, as of the periods presented are as follows:

	Urgent and Primary Care		Ancillary Network		Shared Services		Consolidated
June 30, 2015	$	12,137	$	4,515	$	1,117	$	17,769
December 31, 2014		11,958		5,202		3,945		21,105

11. Subsequent Events

On July 31, 2015, we entered into an asset purchase agreement with Medac Health Services, P.A., or Medac, and its shareholders to purchase certain assets used by Medac in the operation of its four urgent care centers in the greater Wilmington, North Carolina area. In connection with the purchase of the Medac assets, we will assume or enter into new leases for the four centers and then sublease them to Medac. The purchase price for the assets is $5,600,000, with $5,040,000 payable in cash at closing and the balance of $560,000 payable in the form of a promissory note with interest at 5% per annum and maturing 18 months after the closing. The asset purchase agreement provides that consummation of the transaction is subject to the satisfaction or waiver of certain conditions, including our receipt of financing in an amount no less than $5,600,000. In order to close this acquisition, we will require additional capital which we expect to raise through the offering discussed in Note 3.

On August 12, 2015 we amended the December 2014 credit agreement (a) to provide for $1,000,000 of additional borrowing capacity, and (b) to extend the maturity date to October 1, 2016. In connection with the $1,000,000 increase in the line of credit under the December 2014 credit agreement, we issued warrants to the guarantors to purchase an additional 300,000 shares of our common stock at $1.70 per share, subject to certain adjustments under certain circumstances, in consideration of their guaranteeing such indebtedness. The warrants vested immediately and are exercisable at any time prior to their expiration on August 12, 2020.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As used herein, the “Company,” “we,” “us,” “our” or similar terms, refer to American CareSource Holdings, Inc. and its wholly owned subsidiaries, except as expressly indicated or unless the context otherwise requires. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help facilitate an understanding of our financial condition and our historical results of operations for the periods presented and should be read together with our financial statements and related notes included elsewhere in this report. This MD&A may contain forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” below.

Overview

We engage in two lines of business: our urgent and primary care business and our ancillary network business. Although we have been engaged in our ancillary network business for a number of years, with our entry into the urgent and primary care business and our management arrangement with HealthSmart Preferred Care II, L.P., or HealthSmart, we now focus primarily on our urgent and primary care business. We believe that urgent and primary care centers are and will continue to be an essential component of the effective delivery of healthcare services in the United States. Accordingly, our resources are focused on the growth of that line of business.

Our Urgent and Primary Care Business

In early May 2014, we announced our entry into the urgent and primary care market. During the remainder of 2014, we, through our wholly-owned subsidiaries, consummated five transactions resulting in our acquisition of ten urgent and primary care centers, three of which are located in Georgia, two in Florida, three in Alabama and two in Virginia.

Our healthcare centers offer a wide array of services for non-life-threatening medical conditions. We strive to improve access to quality medical care by offering extended hours and weekend service primarily on a walk-in basis. Our centers offer a broad range of medical services that generally fall within the urgent care, primary care, family care, and occupational medicine classifications. Specifically, we offer non-life-threatening, out-patient medical care for the treatment of acute, episodic, and some chronic medical conditions. When hospitalization or specialty care is needed, referrals to appropriate providers are made.

Patients typically visit our centers on a walk-in basis when their condition is not severe enough to warrant an emergency visit or when treatment by their primary care provider is inconvenient. We also attempt to capture follow-up, preventative and general primary care business after walk-in visits. The services provided at our centers include, but are not limited to, the following:

routine treatment of general medical problems, including colds, flu, ear infections, hypertension, asthma, pneumonia, urinary tract infections, and other conditions typically treated by primary care providers;

treatment of injuries, such as simple fractures, dislocations, sprains, bruises, and cuts;

minor, non-emergent surgical procedures, including suturing of lacerations and removal of foreign bodies;

diagnostic tests, such as x-rays, electrocardiograms, complete blood counts, and urinalyses; and

occupational and industrial medical services, including drug testing, workers' compensation cases, and pre-employment physical examinations.

We staff our centers with a combination of licensed physicians, nurse practitioners, physician assistants, medical support staff, and administrative support staff. Our medical support staff includes licensed nurses, certified medical assistants, laboratory technicians, and registered radiographic technologists.

Our patient volume, and therefore our revenue, is sensitive to seasonal fluctuations in urgent and primary care activity. Typically, winter months tend to be busier as we see a higher occurrence of influenza, bronchitis, pneumonia and similar illnesses; however, the timing and severity of these outbreaks can vary dramatically. Additionally, as consumers shift towards high deductible insurance plans, they are responsible for a greater percentage of their bill, particularly in the early months of the year before other healthcare spending has occurred. Our inability to collect the full patient liability portion of the bill at the time of service may lead to an increase in bad debt expense during that period. Our quarterly operating results may fluctuate significantly in the future depending on these and other factors.

We intend to grow our urgent and primary care business through the acquisition of new centers, by improving patient volume of overall performance in our existing centers, and by developing new centers in strategic areas located in the eastern and southeastern United States.

Our Ancillary Network Business

Our ancillary network business offers cost containment strategies to our payor clients, primarily through the utilization of a comprehensive national network of ancillary healthcare service providers. This service is marketed to a number of healthcare companies including third-party administrators, insurance companies, large self-funded organizations, various employer groups and preferred provider organizations. We are able to lower the payors' ancillary care costs through our network of high quality, cost effective providers that we have under contract at more favorable terms than the payors could generally obtain on their own.

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 an agreed upon, contractual rate. Upon processing the claim, we are paid directly by the payor or the insurer for the service. We then pay the medical service provider according to a separately negotiated contractual rate. We assume the risk of generating positive margin, which is calculated as the difference between the payment we receive for the service from the payor and the amount we are obligated to pay the service provider.

On October 1, 2014, we entered into a management services agreement with HealthSmart. Under the management services agreement, HealthSmart manages the operation of our ancillary network business, subject to the supervision of a five-person oversight committee comprised of three members selected by us and two members selected by HealthSmart. As a result of this arrangement, we no longer employ the workforce of our ancillary network business. Under the management services agreement, HealthSmart operates our ancillary network business for a management fee equal to the sum of (a) 35% of the net profit derived from operation of our ancillary network business, plus (b) 120% of all direct and documented operating expenses and liabilities actually paid during such calendar month by HealthSmart in connection with providing its management services. For purposes of the fee calculation, the term "net profit" means gross ancillary network business revenue, less the sum of (x) the provider payments and administrative fees and (y) 120% of all direct and documented operating expenses and liabilities actually paid during such calendar month by HealthSmart in connection with providing its management services. Any remaining net profit accrues to us. During the term of the agreement, HealthSmart is responsible for the payment of all expenses incurred in providing the management services with respect to our ancillary network business, including personnel salaries and benefits, the cost of supplies and equipment, and rent. The initial term of the management services agreement is three years, and it renews annually thereafter for one-year terms unless either party gives notice of termination at least 90 days prior to the end of the then-current term.

Our management services agreement with HealthSmart provides that at any time after October 1, 2016 and during the remaining term of the management services agreement, HealthSmart may purchase, or we may require that HealthSmart purchase, our ancillary network business for a price equal to $6,500,000 less the aggregate sum of net profit received by us since the beginning of the management services agreement. As of June 30, 2015, the aggregate net profit received by us since the beginning of the management services agreement was approximately $1.1 million. Consummation of the transaction will be subject to the satisfaction of certain material conditions, currently including stockholder approval of the sale. The purchase price is to be payable by HealthSmart as follows: Within 30 days following each calendar month after the closing, HealthSmart will be obligated to pay to us 65% of the net profit derived from the operation of the ancillary network business minus 120% of all direct and documented operating expenses and liabilities actually paid by HealthSmart during such calendar month in connection with operating the ancillary network business until the purchase price is paid in full. In the event HealthSmart purchases our ancillary network business, the urgent and primary care business will be our only business line following completion of that transaction. If the sale of our ancillary network business to HealthSmart is not consummated during or at the end of the term of the management services agreement, we expect to then re-assume management of that line of business, seek to sell that business on the most favorable terms we are able to obtain or phase out that line of business.

Results of Operations

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

The following table summarizes our results of operations for the three months ended June 30, 2015 and 2014 (in thousands) (certain prior quarter amounts have been reclassified for comparability purposes):


	June 30, 2015												June 30, 2014										Change
	Urgent and Primary Care			Ancillary Network			Shared Services			Total			Urgent and Primary Care		Ancillary Network		Shared Services			Total			$			%
Net revenues	$	2,354		$	5,604		$	-		$	7,958		$	474	$	5,497	-			$	5,971		$	1,987		33	%
Operating expenses:
Ancillary network provider payments		-			4,137			-			4,137			-		3,880		-			3,880			257		7	%
Ancillary network administrative fees		-			194			-			194			-		307		-			307			(113	)	-37	%
Ancillary network other operating costs		-			933			-			933			-		-		-			-			933		N/A
Ancillary network prepaid write-off		-			487			-			487			-		-		-			-			487		N/A
Salaries, wages, benefits and taxes		1,744			-			1,224			2,968			265		825		605			1,695			1,273		75	%
Other operating expenses		1,405			-			1,025			2,430			138		270		791			1,199			1,231		103	%
Intangible asset impairment		520			-			-			520			-		-		-			-			520		N/A
Depreciation and amortization		151			141			-			292			41		174		-			215			77		36	%
Total operating expenses	$	3,820		$	5,892		$	2,249		$	11,961		$	444	$	5,456	$	1,396		$	7,296		$	4,665		64	%

Operating income (loss)	$	(1,466	)	$	(288	)	$	(2,249	)	$	(4,003	)	$	30	$	41	$	(1,396	)	$	(1,325	)	$	(2,678	)	202	%

Interest expense:
Interest expense											93										13			80
Gain on warrant liability, net of deferred loan fees amortization											(757	)									-			(757	)
Total interest expense											(664	)									13			(677	)	-5208	%
Loss before income taxes										$	(3,339	)								$	(1,338	)	$	(2,001	)	150	%

Our Urgent and Primary Care Business

Our urgent and primary care business segment reported an operating loss of $1,466,000 during the three months ended June 30, 2015. Because we entered the urgent and primary care business in May 2014, a comparison of the results for the second quarter of 2015 with those for the second quarter of 2014 would not be meaningful. Contributing to the segment's operating loss in the second quarter of 2015 were, among other things, the following:

we experienced predictable declines in our quarterly patient volumes, and therefore revenue, due to the seasonality of the business;

we incurred expenses related to our integration of our ten centers, which were acquired at various dates between May and December 2014;

our Springville, Alabama center opened for business in October 2014, and we experienced customary start-up operating losses relating to the center;

two of our centers were underperforming at the time we acquired them, and our operational improvement efforts have yet to produce their expected results; and

we have yet to realize certain economies of scale we expect to realize.

Net Revenues

Net revenues are recognized at the time services are rendered at the estimated net realizable amounts from patients, third-party payors and others, after reduction for estimated contractual adjustments pursuant to agreements with third-party payors and an estimate for bad debts. For the quarter ended June 30, 2015, our urgent and primary care business experienced, in the aggregate, approximately 20,000 patient visits which generated net revenues of approximately $2,354,000. We averaged 22 patient visits per day per center, resulting in average net revenue per patient visit of approximately $118 for the three months ended June 30, 2015. We define a patient visit as a billable patient encounter.

Salaries, Wages, Benefits and Taxes

Salaries, wages and benefits primarily consist of compensation and benefits to our clinical providers and staff at our centers. We employ a staffing model at each center that generally includes at least one board-certified physician, one or more physician assistants or nurse practitioners, nurses or medical assistants and a front office staff member on-site at all times. Salaries, wages, benefits and taxes are the most significant operating expense components of our urgent and primary care business. For the three-month period ended June 30, 2015, salaries, wages and associated benefits and taxes aggregated approximately 74% of net revenues. We monitor our center-level staffing to ensure staffing levels are sufficient, but not excessive, to meet expected patient demands. Management has implemented several cost reduction measures and is considering several others to further reduce compensation expense relative to revenues.

Other Operating Expenses

Other operating expenses primarily consist of facility and operating lease costs, medical and laboratory supplies, billing and collection fees, radiology overhead and laboratory fees, utilities, software licensing fees, premiums for medical malpractice and other insurance, and costs related to office administration and information technology. Also included in other operating expenses was approximately $416,000 of labor costs paid or payable to our contracted (not employed) medical professionals for the three months ended June 30, 2015.

For the three months ended June 30, 2015, other operating expenses were 60% of net revenue.

Intangible Asset Impairment

At the time we purchased one of our urgent and primary care centers, we allocated $600,000 of the purchase price to a contract held by the acquired center that related to non-urgent care services. During the quarter ended June 30, 2015 we suspended our provision of services under that contract and have recorded a one-time impairment charge of $520,000 relating to the unamortized balance of that intangible asset.

Our Ancillary Network Business

Our ancillary network business segment reported an operating income (loss) of $(288,000) and $41,000 for the three months ended June 30, 2015 and 2014, respectively. During the quarter ended June 30, 2014, our shared services costs and expenses were included in the ancillary network business. With our entry into the urgent and primary care business, these costs have been allocated to shared services, rather than to our two operating segments.

Net Revenues

Revenue from our ancillary network business is recognized when we bill our client payors for services performed and collection is reasonably assured. We estimate revenues using average historical collection rates. When estimating collectability, we assess the impact of items such as non-covered benefits, payments made directly to the service provider by the client payor, 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. There can be variations in revenue from period-to-period due to the demand for various ancillary service specialties by our clients' members. The variations can impact revenue, revenue per claim, collectability and margins after payments made to the ancillary service providers. Also impacting revenue is the mix of ancillary service specialties billed and the ancillary service providers that are utilized.

During the quarter ended June 30, 2015 net revenue from our ancillary network business increased 2%, compared to the same period in 2014. Although revenue increased in the second quarter of 2015, we believe future declines in revenue are more likely than continued growth.

Provider Payment and Administrative Fees

We make payments to our providers and pay administrative fees 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 cost and they consist of our payments for ancillary care services in accordance with contracts negotiated separately with providers for specific ancillary services.

Provider payments. Provider payments represented 73.8% and 70.6% of revenues for the three months ended June 30, 2015 and 2014, respectively. The increase in the current year period is attributable in large part to payor clients utilizing more of our lower margin contracts.

Administrative fees. Administrative fees paid to clients as a percent of net revenue were 3.5% for the three-month period ended June 30, 2015 and 5.6% for the comparable period in 2014. The decrease in the current year period is due to a change in mix to clients with lower administrative fees.

Other Network Operating Costs

Ancillary network other operating costs amounted to $933,000 in the current year period. This amount represents profit sharing and expense reimbursement amounts paid or payable to HealthSmart under our management services agreement. The majority of the operating costs were attributable to payroll expenses. HealthSmart began managing our ancillary network business under our management services agreement on November 1, 2014, at which time HealthSmart hired substantially all our employees dedicated to our ancillary network business.

Network Prepaid Write-Off

During the first quarter of 2014 we advanced $500,000 to one of our ancillary network customers, which was to be withheld from future administrative fees earned by the customer. During the quarter ended June 30, 2015 the customer terminated its contract with us. Accordingly we have recorded a one-time charge of $487,000 to write-off the remaining balance of this asset that was recorded as prepaid expense and other non-current assets.

Shared Services

Shared services include the common costs related to both the urgent and primary care and ancillary network lines of business such as the salaries of our Chief Executive Officer, Chief Financial Officer, Chief Information Officer and the remainder of the executive management team, whose time is allocable across both business segments. The following functions are also included in shared services: finance and accounting; human resources; legal; marketing; information technology; and general administration.

In addition, all strategic functions, including but not limited to transactional activities and the related integration of the acquired businesses, are included in shared services. As of June 30, 2015 and 2014, shared services included 17 and 12 full-time employees, respectively. Certain 2014 expenses were reclassified to conform to the 2015 shared services presentation. Shared services expenses totaled $2,249,000 and $1,396,000 for the three months ended June 30, 2015 and June 30, 2014, respectively. The increase in the current year period in costs relates to the transition of the Company to owning and operating urgent and primary care centers, including significant professional fees resulting therefrom, and to establishing the infrastructure to accommodate future growth. The Company expects to reduce professional fees significantly in subsequent quarters.

We reduced our operating costs during the quarter ended June 30, 2015 through a reduction in work force resulting in a one-time severance charge of $346,000. The severance charge was recorded in shared services other operating expenses. We believe this workforce reduction will reduce our quarterly operating expenses by approximately $250,000 beginning in the third quarter of 2015.

Interest Expense, Warrant Gain

We issued warrants to individuals who provide guarantees in connection with our credit agreements. The warrant fair value at date of grant has been capitalized as deferred loan fees and is being amortized over the term of credit agreement and a warrant liability was established. These warrants are considered derivative warrants because they contain exercise-price adjustment features. Accordingly, the warrant liability is adjusted to its fair market value at the end of each reporting period. For the quarter ended June 30, 2015, the gain due to change in warrant liability amounted to $1,229,000 and amortization of deferred loan fees amounted to $472,000, resulting in a positive income effect of $757,000.

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

The following table summarizes our results of operations for the six months ended June 30, 2015 and 2014 (in thousands) (certain prior period amounts have been reclassified for comparability purposes):


	June 30, 2015												June 30, 2014											Change
	Urgent and Primary Care			Ancillary Network			Shared Services			Total			Urgent and Primary Care		Ancillary Network			Shared Services			Total			$			%
Net revenues	$	5,026		$	11,347		$	-		$	16,373		$	474	$	10,505		-			$	10,979		$	5,394		49	%
Operating expenses:
Ancillary network provider payments		-			8,468			-			8,468			-		7,633			-			7,633			835		11	%
Ancillary network administrative fees		-			524			-			524			-		527			-			527			(3	)	-1	%
Ancillary network other operating costs		-			1,905			-			1,905			-		-			-			-			1,905		N/A
Ancillary network prepaid write-off		-			487			-			487			-		-			-			-			487		N/A
Salaries, wages, benefits and taxes		3,650			-			2,126			5,776			265		1,804			1,013			3,082			2,694		87	%
Other operating expenses		2,621			-			2,711			5,332			138		524			1,449			2,111			3,221		153	%
Intangible asset impairment		520			-			-			520			-		-			-			-			520		N/A
Depreciation and amortization		300			283			-			583			41		352			-			393			190		48	%
Total operating expenses	$	7,091		$	11,667		$	4,837		$	23,595		$	444	$	10,840		$	2,462		$	13,746		$	9,849		72	%

Operating income (loss)	$	(2,065	)	$	(320	)	$	(4,837	)	$	(7,222	)	$	30	$	(335	)	$	(2,462	)	$	(2,767	)	$	(4,455	)	161	%

Interest expense:
Interest expense											176											9			167
Gain on warrant liability, net of deferred loan fees amortization											(388	)										-			(388	)
Total interest expense											(212	)										9			(221	)	-2456	%
Loss before income taxes										$	(7,010	)									$	(2,776	)	$	(4,234	)	153	%

Our Urgent and Primary Care Business

Our urgent and primary care business segment reported an operating loss of $2,065,000 during six months ended June 30, 2015. Because we entered the urgent and primary care business in May 2014, a comparison of the results for the six months ended June 30, 2015 with those for the six months ended June 30, 2014 would not be meaningful.

Net Revenues

For the six months ended June 30, 2015, our urgent and primary care business experienced, in the aggregate, approximately 43,000 patient visits which generated net revenues of approximately $5,026,000. We averaged 24 patient visits per day per center, resulting in average net revenue per patient visit of approximately $117 for the six months ended June 30, 2015.

Salaries, Wages, Benefits and Taxes

Salaries, wages, benefits and taxes are the most significant operating expense components of our urgent and primary care business. For the six months ended June 30, 2015, salaries, wages and associated benefits and taxes aggregated approximately 73% of net revenue.

Other Operating Expenses

Other operating expenses primarily consist of facility and operating lease costs, medical and laboratory supplies, radiology and laboratory fees, utilities, medical malpractice and other insurance, office and information technology. For the six months ended June 30, 2015, other operating expenses were 52% of net revenue. Also included in other operating expenses was approximately $681,000 of labor costs paid or payable to our contracted (not employed) medical professionals for the six months ended June 30, 2015.

Intangible Asset Impairment

At the time we purchased one of our urgent and primary care centers, we allocated $600,000 of the purchase price to a contract held by the acquired center that related to non-urgent care services. During the six months ended June 30, 2015 we suspended our provision of services under that contract and have recorded a one-time impairment charge of $520,000 relating to the unamortized balance of that intangible asset.

Our Ancillary Network Business

Our ancillary network business segment reported operating losses of $320,000 and $335,000 for the six months ended June 30, 2015 and 2014, respectively. During the six months ended June 30, 2014, shared service cost and expenses were included in the ancillary network business. These costs have been reclassified to shared services to conform to the current year segment reporting presentation.

Net Revenues

During the six months ended June 30, 2015, net revenue increased 8%. Although revenue increased in the six months ended June 30, 2015 we believe future declines in revenue are more likely than continued growth.

Provider Payment and Administrative Fees

Provider payments. Provider payments represent 74.6% and 72.7% of revenues for the six months ended June 30, 2015 and 2014, respectively. The increase is attributable in large part to payor clients utilizing more of our lower margin contracts.

Administrative fees. Administrative fees paid to clients as a percent of net revenue were 4.6% for the six-month period ended June 30, 2015 and 5.0% for the comparable period in 2014. The decrease is due to a change in mix to clients with lower administrative fees.

Other Operating Costs

Ancillary network other operating costs amounted to $1,905,000 for the six months ended June 30, 2015. This amount represents profit sharing and expense reimbursement amounts paid or payable to HealthSmart under the management services agreement. The majority of the operating costs were attributable to payroll expenses. HealthSmart began managing our ancillary network business under our management services agreement on November 1, 2014, at which time HealthSmart hired substantially all our employees dedicated to our ancillary network business.

Network Prepaid Write-Off

During the first quarter of 2014 we advanced $500,000 to one of our ancillary network customers, which was to be withheld from future administrative fees earned by the customer. During the six months ended June 30, 2015 the customer terminated its contract with us. Accordingly we have recorded a one-time charge of $487,000 to write-off the remaining balance of this asset that was recorded as prepaid expense and other non-current assets.

Shared Services

As of June 30, 2015, shared services included 17 full-time employees compared to 12 at June 30, 2014. Certain expenses for the six months ended June 30, 2014 were reclassified to conform to the shared services presentation for the six months ended June 30, 2015. Shared services expenses totaled $4,837,000 and $2,462,000 for the six months ended June 30, 2015 and June 30, 2014, respectively. The increase was primarily due to the expansion of our infrastructure to operate and grow our urgent and primary care business, including interim staffing and accounting costs related to personnel changes and relocation of our corporate office to Atlanta, Georgia.

Interest Expense, Warrant Gain

We issued warrants to individuals who provide guarantees in connection with our credit agreements. The warrant fair value at date of grant has been capitalized as deferred loan fees and is being amortized over the term of credit agreement and a warrant liability was established. These warrants are considered derivative warrants because they contain exercise-price adjustment features. Accordingly, the warrant liability is adjusted to its fair market value at the end of each reporting period. For the six months ended June 30, 2015, the gain due to change in warrant liability amounted to $1,329,000 and amortization of deferred loan fees amounted to $941,000, resulting in a positive income effect of $388,000.

Liquidity and Capital Resources

We had negative working capital of $7,201,000 at June 30, 2015 compared to negative working capital of $1,181,000 at December 31, 2014. The increase in negative working capital in the six months ended June 30, 2015 was due to additional operating losses. We expect to generate additional operating losses until we acquire or develop sufficient centers to generate positive operating income. The table below reconciles the loss before income taxes to the net decrease in cash for the six months ended June 30, 2015.

	Six months ended June 30, 2015
Loss before income taxes	$	(7,010	)
Borrowings under line of credit		4,784
Depreciation and amortization		583
Non-cash stock-based compensation expense		403
Other		711
Decrease in cash	$	(529	)

Our cash and cash equivalents balance decreased to approximately $491,000 as of June 30, 2015 compared to $1,020,000 at December 31, 2014. Our available borrowing capacity under existing lines of credit was $1,500,000 and $6,284,000 at June 30, 2015 and December 31, 2014, respectively. At August 14, 2015 our available borrowing capacity was $1,000,000 as a result of the August 12, 2015 increase in the line of credit under our December 2014 credit agreement discussed below.

On July 30, 2014, we entered into the July 2014 credit agreement with Wells Fargo providing for a $5,000,000 revolving line of credit, which we used primarily to fund our urgent and primary care acquisitions. Our obligation to repay advances under the July 2014 credit agreement is evidenced by a credit note, with a fluctuating interest rate per annum of 1.75% above daily one month LIBOR, as in effect from time to time. The credit note matures on June 1, 2016, and all borrowings under the July 2014 credit agreement are due and payable on that date.

Borrowings under the July 2014 credit agreement are also secured by guarantees provided by our Chairman and acting Chief Executive Officer and another director of the Company and two stockholders who were not officers or directors of the Company. On July 30, 2014, we issued warrants to the guarantors to purchase an aggregate of 800,000 shares of our common stock at $3.15 per share, subject to certain adjustments under certain circumstances, in consideration of their guaranteeing such indebtedness. The warrants vested immediately and are exercisable any time prior to their expiration on October 30, 2019.

To further our ability to execute our strategy of acquiring urgent care and primary care facilities and operations, on December 4, 2014, we entered into the December 2014 credit agreement with Wells Fargo providing for a $6,000,000 line of credit. Our obligation to repay advances under the December 2014 credit agreement is evidenced by a credit note, with a fluctuating interest rate per annum of 1.75% above daily one month LIBOR, as in effect from time to time. On August 12, 2015 we increased the line of credit to $7,000,000 and extended the maturity date to October 1, 2016, and all borrowings are due and payable on that date.

The obligations under the July 2014 credit agreement and the December 2014 credit agreement and the credit notes are secured by all the assets of the Company and its subsidiaries. The credit agreements include customary covenants related to, among other things, additional debt, further encumbrances, sales of assets, and investments and lending.

Borrowings under the December 2014 credit agreement are secured by guarantees provided by two directors of the Company and a third party who is not an officer, director or stockholder of the Company. On December 4, 2014, we issued warrants to the guarantors to purchase an aggregate of 960,000 shares of our common stock at $2.71 per share, subject to certain adjustments under certain circumstances, in consideration of their guaranteeing such indebtedness. The warrants vested immediately and are exercisable any time prior to their expiration on December 4, 2019. In connection with the $1,000,000 increase in the line of credit under the December 2014 credit agreement, we issued warrants to the guarantors to purchase an additional 300,000 shares of our common stock at $1.70 per share, subject to certain adjustments under certain circumstances, in consideration of their guaranteeing such indebtedness. The warrants vested immediately and are exercisable at any time prior to their expiration on August 12, 2020.

As of June 30, 2015, we had outstanding borrowings of $5,000,000 and $4,500,000, under our July 2014 and December 2014 credit agreements, respectively. As of June 30, 2015, the weighted-average interest rate on these borrowings was 1.94%. The July 2014 credit agreement matures on June 1, 2016, and the December 2014 credit agreement matures on October 1, 2016.

In connection with the acquisitions of our urgent and primary care centers in 2014, our wholly-owned subsidiaries issued promissory notes to the sellers in the transactions in the aggregate original principal amount of $1,500,000, as follows:

ACSH Urgent Care of Georgia, LLC, or ACSH Georgia, issued a promissory note in the principal amount of $500,000 to CorrectMed, LLC and other sellers. The note provided for simple interest at a fixed rate of 5% per annum, matured on May 8, 2015 and the full amount due thereunder has been paid.

ACSH Urgent Care of Florida, LLC issued three promissory notes in the aggregate principal amount of $700,000 to Bay Walk-In Clinic, Inc. One promissory note in the principal amount of $200,000 bears simple interest at a fixed rate of 5% per annum and is payable in two installments: $110,000 on August 29, 2015 and $105,000 on August 29, 2016. The second promissory note also in the principal amount of $200,000 bears simple interest at a fixed rate of 5% per annum and is payable in 24 equal monthly installments of $8,776.51 each, beginning on September 30, 2014. The third promissory note in the principal amount of $300,000 is noninterest bearing and is due and payable in 30 equal monthly installments of $10,000 each, beginning on September 30, 2014.

ACSH Urgent Care Holdings, LLC issued a promissory note in the principal amount of $150,000 to Jason Junkins, M.D. The note is guaranteed by American CareSource Holdings, Inc. and is payable in two equal principal installments of $75,000, plus accrued interest at the rate of 5% per annum, on the first and second annual anniversaries of the closing date, September 12, 2014.

ACSH Georgia issued a promissory note in the amount of $100,000 to Han C. Phan, M.D. and Thinh D. Nguyen, M.D. The note matures on the one-year anniversary of the closing date, October 31, 2014.

ACSH Urgent Care of Virginia, LLC issued a promissory note in the principal amount of $50,000 to Stat Medical Care, P.C. (d/b/a Fair Lakes Urgent Care Center) and William and Teresa Medical Care, Inc. (d/b/a Virginia Gateway Urgent Care Center). The note bears simple interest at a fixed rate of 5% annum, matures on December 31, 2015, and is subject to a working capital adjustment as set forth in the purchase agreement.

On July 31, 2015, our wholly owned subsidiary, ACSH Medical Management, LLC, or ACSH Management, entered into an asset purchase agreement with Medac Health Services, P.A., or Medac, and its shareholders to purchase certain of the assets, including Medac's accounts receivable, used by Medac in the operation of its four urgent care centers in the greater Wilmington, North Carolina area. In connection with the purchase of these assets, we will assume or enter into new leases for the four centers and then sublease them to Medac. The purchase price for the assets is $5,600,000, with $5,040,000 payable in cash at closing and the balance of $560,000 payable in the form of a promissory note with interest at 5% per annum and maturing 18 months after the closing. The asset purchase agreement provides that consummation of the transaction is subject to the satisfaction or waiver of certain conditions, including ACHS Management having received financing in an amount no less than $5,600,000. We expect to use a portion of the proceeds of the offering discussed below to fund the purchase of the Medac assets and expect the transaction to close in the third quarter of 2015 shortly after the closing of the offering.

We have initiated efforts to raise additional equity capital during 2015. On February 6, 2015 we filed a Form S-1 Registration Statement to sell additional shares of our common stock. If the offering is fully subscribed, we will raise an additional $13,000,000 (less offering expenses), plus any proceeds we receive on account of the 15% over-allotment option we have granted to underwriters. With the anticipated net proceeds from the offering along with the remaining borrowing capacity under the December 2014 credit agreement, we believe our cash resources will be sufficient to satisfy our liquidity requirements, including funding the purchase the Medac assets, until the first quarter of 2016. We expect to raise additional capital later this year or in early 2016 to fund our operations, to repay indebtedness and to facilitate the expansion of our urgent and primary care business. We may raise such capital through one or more public or private equity offerings, debt financings, borrowings or a combination thereof. If we raise funds through the incurrence of additional debt or the issuance of debt securities, the lenders or purchasers of debt securities may require security that is senior to the rights of our common stockholders. In addition, our incurrence of additional debt could result in the imposition of covenants that restrict our operations or limit our ability to achieve our business objectives. The issuance of any new equity securities will likely dilute the interest of our current stockholders. In light of our historical performance, additional capital may not be available when needed on acceptable terms, or at all. If adequate funds are not available, we will need to curb our expansion plans, which would have a material adverse impact on our business prospects and results of operations.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2014.

Forward-Looking Statements

Statements in this Management's Discussion and Analysis and elsewhere in this Quarterly Report on Form 10-Q that are forward-looking are based upon current expectations, and actual results or future events may differ materially. Therefore, the inclusion of such forward-looking information should not be regarded as a representation by us that our objectives or plans will be achieved. Such statements include, but are not limited to, our expectations regarding the revenues in our ancillary network business, acquiring the Medac assets, using of a portion of offering proceeds to fund the purchase of the Medac assets, raising additional equity capital in 2015, our cash on hand, borrowings, and proceeds from financings being sufficient to meet our anticipated needs until the first quarter of 2016, raising additional capital later in 2015 or in early 2016 and expense reductions. Words such as “expects,” “believes,” “anticipates,” “intends,” “should,” “plans,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements contained herein involve numerous risks and uncertainties, and there are a number of factors that could cause actual results or future events to differ materially, including, but not limited to, our ability to attract or maintain patients, clients or providers or achieve our financial results, changes in national healthcare policy, federal or state regulation, and/or rates of reimbursement, including without limitation due to 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 economic downturns and increases in unemployment), the Company's ability to successfully implement our growth strategy for the urgent and primary care business, the Company's ability to identify and acquire target centers, increased competition in the urgent care and primary care market, the Company's ability to recruit and retain qualified physicians and other healthcare professionals, reduction in reimbursement rates from governmental payors, lower than anticipated demand for services, pricing, market acceptance or preference, changes in the business relationship with significant clients, term expirations of contracts with significant clients, increased competition, the Company's inability to maintain a network of ancillary service providers that is adequate to generate significant claims volume, increased competition in the ancillary network business, the Company's inability to manage growth, implementation and performance difficulties, and other risk factors detailed from time to time in the Company's periodic filings with the Securities and Exchange Commission. Except as otherwise required by law, the Company undertakes no obligation to update or revise these forward-looking statements.

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

Pursuant to permissive authority under Rule 305 of Regulation S-K, we have omitted Quantitative and Qualitative Disclosures About Market Risk.

Item 4. Controls And Procedures.

Evaluation of Disclosure Controls and Procedures

Management (with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO)), carried out an evaluation of the effectiveness of the design and operation of 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) as of June 30, 2015. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures along with the related internal controls over financial reporting were not effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Please refer to Item 9A “Controls and Procedures” in our Annual Report on Form 10K for the year ended December 31, 2014 for a complete description of our control deficiencies and our remediation plan.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Status of Remediation Plan

We are training our new employees. We are also using outside consulting services when the scope and complexity of our internal control needs exceed our internal capabilities.

We expect to have addressed and fully remediated our significant deficiencies and material weaknesses by December 31, 2015, but we cannot assure you that our current remediation plan can resolve all of our material weaknesses. If not, we will need to implement additional remedial measures. Subsequent to quarter end, management is in the process of implementing new processes and controls over financial reporting to promote effective remediation.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

There have been no material developments in the legal proceeding described in Part II, Item 1, of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2014 except as set forth below which relates to our planned acquisition of Medac:

We may be unable to complete our planned acquisition of certain assets of Medac Health Services, P.A., or Medac, on currently anticipated terms, or at all.

On July 31, 2015, we entered into an asset purchase agreement to acquire certain assets of Medac. The agreement provides that the transaction will close, if at all, by October 4, 2015. The total consideration for the acquisition is $5,600,000, subject to certain adjustments set forth in the asset purchase agreement. We plan to finance the acquisition with a portion of the proceeds from a public equity offering, which we anticipate closing in September 2015. If we do not successfully complete this offering, or if we raise an amount less than $5,600,000, we may be unable to complete the acquisition on currently anticipated terms, or at all, which could have a material adverse effect on our results from operation, financial condition and the trading price of our common stock.

Item 6.	Exhibits

Exhibit Number	Description

10.1	Amended and Restated American CareSource Holdings, Inc. 2009 Equity Incentive Plan.

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following financial statements and footnotes from the American CareSource Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations; (ii) Consolidated Balance Sheets; (iii) Consolidated Statement of Stockholders' Equity; (iv) Consolidated Statements of Cash Flows; and (v) the Notes to Unaudited Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		AMERICAN CARESOURCE HOLDINGS, INC.

Date:	August 14, 2015	By:	/s/ John Pappajohn
			John Pappajohn
			Acting Chief Executive Officer (Principal Executive Officer)



Date:	August 14, 2015	By:	/s/ Anthony R. Levinson
			Anthony R. Levinson
			Chief Financial Officer (Principal Financial Officer)

Exhibit Index

Exhibit Number	Description

10.1	Amended and Restated American CareSource Holdings, Inc. 2009 Equity Incentive Plan.

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following financial statements and footnotes from the American CareSource Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations; (ii) Consolidated Balance Sheets; (iii) Consolidated Statement of Stockholders' Equity; (iv) Consolidated Statements of Cash Flows; and (v) the Notes to Unaudited Consolidated Financial Statements.

American CareSource Holdings, Inc. - FORM 10-Q - August 14, 2015

Attached files

American CareSource Holdings, Inc. Reports