EMAGEON, INC.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2005 |
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File No.: 0-51149
Emageon Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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63-1240138 |
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(State of incorporation)
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(I.R.S. Employer Identification No.) |
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1200 Corporate Drive, Suite 200 |
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Birmingham, Alabama
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35242 |
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(Address of principal executive offices)
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(zip code) |
Registrants telephone number, including area code:
(205) 980-9222
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 þ NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). YES o NO þ
The number of shares outstanding of the registrants Common Stock, par value $.001 per share,
as of August 9, 2005 was 20,070,607.
PART I: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
EMAGEON INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
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June 30, |
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December 31, |
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2005 |
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2004 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
18,394 |
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$ |
5,994 |
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Marketable securities |
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44,229 |
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Trade accounts receivable, net of allowance for doubtful accounts of $100
and $75 at June 30, 2005 and December 31, 2004, respectively |
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13,405 |
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14,255 |
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Prepaid expenses and other current assets |
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2,420 |
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1,799 |
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Deferred offering costs |
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|
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1,326 |
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Unbilled revenue |
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235 |
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|
302 |
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Third-party components to be sold to customers |
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1,925 |
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1,422 |
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Total current assets |
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80,608 |
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25,098 |
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Property and equipment, net |
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10,754 |
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8,832 |
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Restricted cash |
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532 |
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903 |
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Other noncurrent assets |
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116 |
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62 |
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Intangible assets: |
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Goodwill |
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3,755 |
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3,755 |
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Acquired software, net |
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2,430 |
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2,847 |
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Capitalized software development costs, net |
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165 |
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21 |
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Trademark |
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250 |
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250 |
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Total intangible assets |
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6,600 |
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6,873 |
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Total assets |
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$ |
98,610 |
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$ |
41,768 |
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LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT) |
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Current liabilities: |
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Accounts payable |
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$ |
4,662 |
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$ |
4,658 |
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Accrued payroll and related costs |
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1,183 |
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1,557 |
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Deferred revenue |
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19,172 |
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21,357 |
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Other accrued expenses |
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2,093 |
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3,838 |
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Current portion of long-term debt |
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1,927 |
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2,472 |
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Current portion of capital lease obligations |
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649 |
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620 |
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Total current liabilities |
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29,686 |
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34,502 |
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Long-term deferred revenue |
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2,778 |
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2,796 |
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Deferred tax liability |
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95 |
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95 |
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Long-term debt |
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1,785 |
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5,528 |
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Capital lease obligations, less current portion |
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538 |
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869 |
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Total liabilities |
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34,882 |
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43,790 |
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Redeemable preferred stock: |
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Series B redeemable preferred stock, $0.001 par value; 17,200,000 shares
authorized, no shares and 16,885,966 shares issued and outstanding at June
30, 2005 and December 31, 2004, respectively |
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9,597 |
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Series B-1 redeemable preferred stock, $0.001 par value; 5,700,000 shares
authorized, no shares and 5,652,631 shares issued and outstanding at June
30, 2005 and December 31, 2004, respectively |
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3,210 |
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Series C redeemable preferred stock, $0.001 par value; 27,500,000 shares
authorized, no shares and 27,433,370 shares issued and outstanding at June
30, 2005 and December 31, 2004, respectively |
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11,620 |
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Series E redeemable preferred stock, $0.001 par value; 14,050,000 shares
authorized, no shares and 14,035,087 shares issued and outstanding at June
30, 2005 and December 31, 2004, respectively |
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5,921 |
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Total redeemable preferred stock |
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30,348 |
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Stockholders equity (deficit): |
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Series A preferred stock, $0.001 par value; 5,965,000 shares authorized, no
shares and 5,965,000 shares issued and outstanding at June 30, 2005 and
December 31, 2004, respectively |
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1,438 |
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Series D preferred stock, $0.001 par value; 18,000,000 shares authorized, no
shares and 13,727,358 shares issued and no shares and 12,354,620 outstanding
at June 30, 2005 and December 31, 2004, respectively |
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5,868 |
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Common stock, $0.001 par value; 66,000,000 and 165,050,000 shares
authorized, 20,203,681 and 3,056,181 issued and 20,027,924 and 2,709,370
shares outstanding at June 30, 2005 and December 31, 2004, respectively |
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20 |
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3 |
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Additional paid in capital |
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113,312 |
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6,998 |
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Treasury stock, 175,757 shares, at cost |
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(275 |
) |
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(275 |
) |
Accumulated deficit |
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(49,329 |
) |
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(46,402 |
) |
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Total stockholders equity (deficit) |
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63,728 |
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(32,370 |
) |
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Total liabilities, redeemable preferred stock and stockholders equity (deficit) |
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$ |
98,610 |
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$ |
41,768 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3
EMAGEON INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data and per share amounts)
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For the Three Months Ended |
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For the Six Months Ended |
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June 30, |
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June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenue: |
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System sales |
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$ |
13,402 |
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$ |
8,761 |
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$ |
21,121 |
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$ |
13,670 |
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Support services |
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5,168 |
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3,356 |
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8,785 |
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5,564 |
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Total revenue |
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18,570 |
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12,117 |
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29,906 |
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19,234 |
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Cost of revenue: |
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System sales |
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5,753 |
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4,117 |
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10,576 |
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|
7,606 |
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Support services |
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3,322 |
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|
2,414 |
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|
6,405 |
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4,693 |
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Total cost of revenue |
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9,075 |
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6,531 |
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16,981 |
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12,299 |
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Gross profit |
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9,495 |
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5,586 |
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12,925 |
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6,935 |
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Operating expenses: |
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Research and development |
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2,533 |
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|
1,303 |
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4,918 |
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|
2,573 |
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Sales and marketing |
|
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2,521 |
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|
2,407 |
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|
5,210 |
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|
4,145 |
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General and administrative |
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2,876 |
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|
1,832 |
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5,431 |
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3,573 |
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Total operating expenses |
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7,930 |
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|
5,542 |
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|
15,559 |
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|
10,291 |
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Operating income (loss) |
|
|
1,565 |
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|
44 |
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|
(2,634 |
) |
|
|
(3,356 |
) |
Other income (expense): |
|
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|
|
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|
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Interest income |
|
|
477 |
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|
|
2 |
|
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|
710 |
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|
3 |
|
Interest expense |
|
|
(142 |
) |
|
|
(190 |
) |
|
|
(994 |
) |
|
|
(383 |
) |
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|
|
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|
|
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Total other income (expense) |
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|
335 |
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|
(188 |
) |
|
|
(284 |
) |
|
|
(380 |
) |
|
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|
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|
|
|
|
|
|
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Net income (loss) |
|
$ |
1,900 |
|
|
$ |
(144 |
) |
|
$ |
(2,918 |
) |
|
$ |
(3,736 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Net income (loss) per share basic and diluted |
|
$ |
0.09 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.19 |
) |
|
$ |
(1.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding basic |
|
|
20,027,665 |
|
|
|
2,521,496 |
|
|
|
15,707,613 |
|
|
|
2,476,072 |
|
|
|
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|
|
|
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|
|
|
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Weighted average common stock outstanding diluted |
|
|
21,493,240 |
|
|
|
2,521,496 |
|
|
|
15,707,613 |
|
|
|
2,476,072 |
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|
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|
|
|
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4
EMAGEON INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(Unaudited)
(in thousands, except for share data)
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Preferred Stock |
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Common Stock |
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Additional |
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Total |
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Carrying |
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|
Par |
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Paid in |
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|
Treasury |
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Accumulated |
|
|
Stockholders' |
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|
Shares |
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|
Value |
|
|
Shares |
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|
Value |
|
|
Capital |
|
|
Stock |
|
|
Deficit |
|
|
Equity (Deficit) |
|
Balance at
December 31, 2004 |
|
|
19,692,358 |
|
|
$ |
7,306 |
|
|
|
3,056,181 |
|
|
$ |
3 |
|
|
$ |
6,998 |
|
|
$ |
(275 |
) |
|
$ |
(46,402 |
) |
|
$ |
(32,370 |
) |
Exercise of stock
options |
|
|
|
|
|
|
|
|
|
|
503 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Exercise of stock
warrants |
|
|
105,703 |
|
|
|
58 |
|
|
|
16,504 |
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
117 |
|
Exercise of
mandatorily
redeemable stock
warrants in
connection with
initial public
offering |
|
|
|
|
|
|
|
|
|
|
537,082 |
|
|
|
1 |
|
|
|
735 |
|
|
|
|
|
|
|
|
|
|
|
736 |
|
Proceeds from
initial public
offering, net of
issuance costs |
|
|
|
|
|
|
|
|
|
|
5,750,000 |
|
|
|
6 |
|
|
|
67,195 |
|
|
|
|
|
|
|
|
|
|
|
67,201 |
|
Automatic
conversion of
non-redeemable
preferred stock
into common stock
in connection
with initial
public offering |
|
|
(19,798,061 |
) |
|
|
(7,364 |
) |
|
|
2,402,898 |
|
|
|
2 |
|
|
|
7,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Automatic
conversion of
redeemable
preferred stock
into common stock
in connection
with initial
public offering |
|
|
|
|
|
|
|
|
|
|
8,440,513 |
|
|
|
8 |
|
|
|
30,348 |
|
|
|
|
|
|
|
|
|
|
|
30,356 |
|
Stock based
compensation -
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
613 |
|
|
|
|
|
|
|
|
|
|
|
613 |
|
Accretion of
redeemable
preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
(9 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,918 |
) |
|
|
(2,918 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
June 30, 2005 |
|
|
|
|
|
$ |
|
|
|
|
20,203,681 |
|
|
$ |
20 |
|
|
$ |
113,312 |
|
|
$ |
(275 |
) |
|
$ |
(49,329 |
) |
|
$ |
63,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
5
EMAGEON INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,918 |
) |
|
$ |
(3,736 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,221 |
|
|
|
651 |
|
Depreciation of property and equipment at contracted customer sites |
|
|
1,336 |
|
|
|
1,368 |
|
Amortization of acquired software |
|
|
417 |
|
|
|
417 |
|
Amortization of capitalized software development costs |
|
|
31 |
|
|
|
177 |
|
Bad debt expense |
|
|
20 |
|
|
|
|
|
Interest income on restricted cash |
|
|
(3 |
) |
|
|
(3 |
) |
Sales discount from issuance of warrants |
|
|
62 |
|
|
|
20 |
|
Consulting expense for options issued to non-employees |
|
|
41 |
|
|
|
|
|
Amortization and write off of subordinated debt discount |
|
|
646 |
|
|
|
|
|
Stock based compensation expense |
|
|
572 |
|
|
|
171 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
830 |
|
|
|
(1,010 |
) |
Prepaid expenses and other current assets |
|
|
(683 |
) |
|
|
(529 |
) |
Unbilled revenue |
|
|
67 |
|
|
|
(1,372 |
) |
Other noncurrent assets |
|
|
(54 |
) |
|
|
|
|
Third-party components to be sold to customers |
|
|
(503 |
) |
|
|
(1,105 |
) |
Accounts payable |
|
|
4 |
|
|
|
159 |
|
Accrued payroll and related costs |
|
|
(375 |
) |
|
|
90 |
|
Other accrued expenses |
|
|
(1,745 |
) |
|
|
846 |
|
Deferred revenue |
|
|
(2,203 |
) |
|
|
8,496 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(3,237 |
) |
|
|
4,640 |
|
Investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment for internal purposes |
|
|
(3,317 |
) |
|
|
(575 |
) |
Purchases of third-party components to be located at contracted
customer sites |
|
|
(1,168 |
) |
|
|
(1,131 |
) |
Sales of third-party components leased to customers |
|
|
|
|
|
|
1,501 |
|
Purchases of marketable securities |
|
|
(59,229 |
) |
|
|
|
|
Proceeds from maturities of marketable securities |
|
|
15,000 |
|
|
|
|
|
Capitalized software development costs |
|
|
(175 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(48,889 |
) |
|
|
(215 |
) |
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of issuance costs |
|
|
69,328 |
|
|
|
7 |
|
Proceeds from issuance of preferred stock, net of issuance costs |
|
|
58 |
|
|
|
|
|
Payments on capital lease obligations |
|
|
(301 |
) |
|
|
(279 |
) |
Payments of loans |
|
|
(4,933 |
) |
|
|
(868 |
) |
Proceeds from loans, net of issuance costs |
|
|
|
|
|
|
3,980 |
|
Additions to restricted cash to secure letter of credit |
|
|
|
|
|
|
(96 |
) |
Cash released from restriction |
|
|
374 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
64,526 |
|
|
|
2,744 |
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
12,400 |
|
|
|
7,169 |
|
Cash at beginning of period |
|
|
5,994 |
|
|
|
2,340 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
18,394 |
|
|
$ |
9,509 |
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6
EMAGEON INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of Emageon Inc.
(Emageon or the Company) have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and notes required by
accounting principles generally accepted in the United States of America. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments, for a fair
presentation have been included. Operating results for the three months and six months ended June
30, 2005 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2005. These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2004. Certain amounts in the prior period financial statements have been
reclassified to conform to the current financial statement presentation.
Securities Held-to-Maturity
The Company is required to classify debt securities as held-to-maturity, available-for-sale or
trading. The appropriateness of each classification is reassessed at each reporting date. As of
June 30, 2005, the Company classified all debt securities as held-to-maturity. At June 30, 2005,
securities held-to-maturity totaling $44.2 million consisted of U.S. Government Agency securities
and marketable corporate debt securities carried at amortized cost in accordance with the Financial
Accounting Standards Board Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The estimated fair value of all held-to-maturity securities at June 30, 2005
was approximately $44.5 million.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred income
tax assets and liabilities are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized. The effective tax rate for the three months ended June 30,
2005 is zero percent due to a reduction in the
valuation allowance, which equaled the tax effect of our taxable
income during the quarter.
Because the majority of the deferred tax assets relate to net operating loss (NOL)
carryforwards that can only be realized if the Company is profitable in future periods, it is
uncertain whether the Company will realize any tax benefit related to the net operating loss
carryforward. Accordingly, the Company has provided a valuation allowance against the net deferred
tax assets due to uncertainties as to their ultimate realization. The valuation allowance will
remain at the full amount of the deferred tax asset until it is more likely than not that the
related tax benefits will be realized through deduction against taxable income during the
carryforward period. In the event of certain ownership changes, the Tax Reform Act of 1986 imposes
restrictions on the amount of net operating loss and research credit carryforwards that the Company
may use in any year. Due to recent stock issuances, it is possible that such limitations could
currently apply. The Company has not performed a detailed analysis on its ability to use these net
operating loss and research credit carryforwards. However, it is not anticipated that any such
analysis would have a material impact on the balance sheet as a result of offsetting changes in the
deferred tax valuation allowance.
Indemnification Provisions
In November 2002, the Financial Accounting Standards Board (FASB) issued Financial
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 elaborates on the disclosures to
be made by a guarantor in interim and annual financial statements regarding obligations under
certain guarantees. FIN 45 also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation undertaken by
7
issuing the guarantee. The accounting requirements for the initial recognition and
measurement of guarantees are applicable on a prospective basis for guarantees issued or modified
after December 31, 2002. The following is a summary of those of our agreements that we have
determined to be within the scope of FIN 45:
(1) Our sales agreements with customers generally contain infringement indemnity provisions.
Under these agreements, we agree to indemnify, defend and hold harmless the customer in connection
with patent, copyright or trade secret infringement claims made by third parties with respect to
the customers authorized use of our products and services. The indemnity provisions generally
provide for our control of any required defense and settlement and cover costs and damages finally
awarded against the customer. Our infringement indemnity provisions typically give us the option
to make modifications of the product so it is no longer infringing or, if it cannot be corrected,
to require the customer to return the product in exchange for a specified payment for loss of use.
Our sales agreements with customers sometimes also contain indemnity provisions for death, personal
injury or property damage caused by our personnel or contractors in the course of performing
services to customers. Under these agreements, we agree to indemnify, defend and hold harmless the
customer in connection with death, personal injury and property damage claims made by third parties
with respect to actions of our personnel or contractors. The indemnity provisions generally
provide for our control of any required defense and settlement and cover costs and damages finally
awarded against the customer. The indemnity obligations contained in sales agreements generally
have no specified expiration date but typically limit the amount of award covered to some portion
of the fees paid by the customer over some portion of the contract term. To date, we have not
incurred any costs to settle claims or pay awards under these indemnification obligations, nor have
we been notified of any such claims. Accordingly, we have no liabilities recorded for these
provisions as of June 30, 2005.
(2) We warrant that our software products will perform in all material respects in accordance
with our standard published specifications in effect at the time of delivery of the licensed
products to the customer as long as the contract remains in effect. Additionally, we warrant that
our services will be performed by qualified personnel in a manner consistent with normally accepted
industry standards. If necessary, we would provide for the estimated cost of product and service
warranties based on specific warranty claims and claim history. However, we have not incurred
significant recurring expense under our product or service warranties. Accordingly, we have no
liabilities recorded for these provisions as of June 30, 2005.
(3) Our standard contracts with customers typically provide for a 99% guarantee of system
availability and a 98% guarantee of component availability with penalty provisions if our solution
fails to meet the guarantee thresholds. Our 99% system availability guarantee covers our solution
as a whole, while the component guarantee covers each individual component, as in certain
circumstances a component may fail without affecting system availability. The penalty provisions
in our contracts typically allow for a reduction in the software maintenance fee related to failure
to meet guaranteed uptime percentages. We calculate these penalties as a percentage of the
software maintenance fee and would reduce the amount of the software maintenance fee charged in a
specific period for these penalties. To date, we have not incurred any penalties associated with
these guarantees. Accordingly, we have no liabilities recorded for these provisions as of June 30,
2005.
(2) COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income (loss) per share basic is computed using the weighted average common shares
outstanding during the period. Net income (loss) per share diluted is computed using the
weighted average common shares outstanding and common share equivalents outstanding during the
period. Common share equivalents consist of common convertible preferred stock, stock warrants and
options to purchase common stock. Certain common share equivalents were excluded from periods with
a net loss because they were anti-dilutive.
8
The computations for basic and diluted net income (loss) per share for each period are as
follows (in thousands, except for share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,900 |
|
|
$ |
(144 |
) |
|
$ |
(2,918 |
) |
|
$ |
(3,736 |
) |
Accretion of redemption value related to
redeemable preferred stock |
|
|
|
|
|
|
(17 |
) |
|
|
(9 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) allocable to common stockholders |
|
$ |
1,900 |
|
|
$ |
(161 |
) |
|
$ |
(2,927 |
) |
|
$ |
(3,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock outstanding at beginning of period |
|
|
20,027,621 |
|
|
|
2,430,648 |
|
|
|
2,709,370 |
|
|
|
2,429,742 |
|
Weighted average effect of the release of
escrowed common stock |
|
|
|
|
|
|
90,242 |
|
|
|
|
|
|
|
45,121 |
|
Weighted average effect of the conversion of
preferred stock to common stock |
|
|
|
|
|
|
|
|
|
|
8,147,536 |
|
|
|
|
|
Weighted average effect of the issuance of
common stock in initial public offering |
|
|
|
|
|
|
|
|
|
|
4,303,867 |
|
|
|
|
|
Weighted average effect of the issuance of
common stock and preferred stock pursuant to
stock option and warrant exercises |
|
|
44 |
|
|
|
606 |
|
|
|
418,315 |
|
|
|
1,209 |
|
Weighted average effect of the release of
escrowed common stock upon completion of
initial public offering |
|
|
|
|
|
|
|
|
|
|
128,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock basic |
|
|
20,027,665 |
|
|
|
2,521,496 |
|
|
|
15,707,613 |
|
|
|
2,476,072 |
|
Effect of dilutive stock options and warrants |
|
|
1,465,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock diluted |
|
|
21,493,240 |
|
|
|
2,521,496 |
|
|
|
15,707,613 |
|
|
|
2,476,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic |
|
$ |
0.09 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.19 |
) |
|
$ |
(1.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share diluted |
|
$ |
0.09 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.19 |
) |
|
$ |
(1.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock convertible into 10,827,403 shares of common stock for the three months and
six months ended June 30, 2004 and 10,843,411 shares of common stock for the six months ended June
30, 2005, was not included in the computation of diluted earnings per share because the effect on
earnings per share would have been anti-dilutive. Options and warrants to purchase 3,595,204,
2,380,202 and 3,595,204 shares of common stock for the three months ended June 30, 2004 and for the
six months ended June 30, 2005 and 2004, respectively, and warrants to purchase 216,138, none and
216,138 shares of Series D preferred stock for the three months ended June 30, 2004 and the six
months ended June 30, 2005 and 2004, respectively, were not included in the computation of diluted
earnings per share because their effect on earnings per share would have been anti-dilutive.
(3) STOCK-BASED COMPENSATION
The Company recognizes compensation expense for its stock-based employee and director
compensation plans using the intrinsic value method prescribed in Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees (APB 25), and complies with the
disclosure provisions of Statement of Financial Accounting Standard (SFAS) No. 123, Accounting
for Stock-Based Compensation, as amended. Under APB 25, compensation expense of fixed stock options
is based on the difference, if any, on the date of the grant between the fair value of the stock
and the exercise price of the option. Compensation expense is recognized on a straight-line basis
over the vesting period, which is generally three years. The Company recognizes expense for
stock-based compensation issued to non-employees and non-directors at fair value in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services.
Had compensation expense for the stock-based compensation plans been determined using the
fair-value method at the grant date for all employee and director awards using the Black-Scholes
pricing model, the net income (loss) and related net income (loss) per share would have been as
follows for the periods indicated (in thousands, except for share and per share amounts):
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual net income (loss) |
|
$ |
1,900 |
|
|
$ |
(144 |
) |
|
$ |
(2,918 |
) |
|
$ |
(3,736 |
) |
Deduct: Accretion of redemption value related
to redeemable preferred stock |
|
|
|
|
|
|
(17 |
) |
|
|
(8 |
) |
|
|
(33 |
) |
Add: Total stock-based employee compensation
expense determined under APB 25 |
|
|
290 |
|
|
|
112 |
|
|
|
572 |
|
|
|
171 |
|
Deduct: Total stock-based employee compensation
expense determined under fair value method for
all awards (net of tax) |
|
|
(559 |
) |
|
|
(132 |
) |
|
|
(1,085 |
) |
|
|
(206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) allocable to common
stockholders |
|
$ |
1,631 |
|
|
$ |
(181 |
) |
|
$ |
(3,439 |
) |
|
$ |
(3,804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock basic |
|
|
20,027,665 |
|
|
|
2,521,496 |
|
|
|
15,707,613 |
|
|
|
2,476,072 |
|
Effect of dilutive stock options and warrants |
|
|
1,252,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock diluted |
|
|
21,280,240 |
|
|
|
2,521,496 |
|
|
|
15,707,613 |
|
|
|
2,476,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share basic |
|
$ |
0.08 |
|
|
$ |
(0.07 |
) |
|
$ |
(0.22 |
) |
|
$ |
(1.54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share diluted |
|
$ |
0.08 |
|
|
$ |
(0.07 |
) |
|
$ |
(0.22 |
) |
|
$ |
(1.54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro forma effects on the net income (loss) for the periods presented above are not
necessarily representative of the pro forma effects that may occur in future periods.
(4) INITIAL PUBLIC OFFERING
On February 14, 2005, the Company completed the initial public offering of its common stock.
The Company sold 5,000,000 shares of its common stock at a price of $13.00 per share. On February
18, 2005, the over-allotment option to purchase 750,000 additional shares of common stock was
exercised at $13.00 per share. Total proceeds from the initial public offering (net of
underwriting discount and offering expenses) were approximately $67.2 million. In conjunction with
the initial public offering, the Company issued 10,843,411 shares of common stock upon the
automatic conversion of outstanding shares of preferred stock into shares of common stock. The
Company also issued 537,082 shares of common stock upon the required exercise of warrants to
purchase common stock upon the closing of the offering. The Company also released the remaining
escrow holdback related to the Ultravisual Medical Systems Corporation (Ultravisual) merger upon
the closing of the offering. Upon completion of the offering, 552,661 of common stock warrants
with an exercise price of $0.00825 per share were canceled. As of the close of the initial public
offering, the Company had no remaining warrants to purchase preferred stock outstanding.
With a portion of the proceeds from the offering, the Company repaid $4.0 million of its
subordinated debt on February 18, 2005. Concurrent with this repayment, the Company recorded a
non-cash interest charge of $621,012 for the write-off of the debt discount related to warrants
issued in connection with the subordinated debt.
(5) MARKETABLE SECURITIES
At June 30, 2005, the Company had marketable debt securities that were classified as
held-to-maturity and carried at amortized cost. Held-to-maturity securities consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
U.S. government agency securities |
|
$ |
34,404 |
|
|
$ |
|
|
Corporate commercial paper |
|
|
9,825 |
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities |
|
$ |
44,229 |
|
|
$ |
|
|
|
|
|
|
|
|
|
At June 30, 2005, all held-to-maturity securities were classified as current and the estimated
fair value of each investment approximated its amortized cost, and, therefore, there were no
significant unrealized gains or losses.
10
(6) NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment (SFAS
123R). SFAS 123R establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment transactions.
SFAS 123R requires publicly-traded companies to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award and the
estimated number of awards that are expected to vest. That cost is to be recognized over the
period during which an employee is required to provide service in exchange for the award, which is
usually the vesting period. SFAS 123R supersedes APB 25, which the Company had previously elected
to follow. SFAS 123R will be effective for the Company at the beginning of the fiscal first
quarter of 2006. SFAS 123R applies to all awards granted after the required effective date and to
awards modified, repurchased, or canceled after that date. Compensation cost is recognized on or
after the required effective date for the portion of outstanding awards for which the requisite
services have not yet been rendered, based on the grant-date fair value of those awards calculated
under SFAS 123 that the Company has followed for disclosure purposes. For periods before the
required effective date, the Company may elect to adjust financial statements of prior periods on a
basis consistent with the pro forma disclosures required for those periods by SFAS 123. The
Company has elected not to restate prior periods. Based on stock options granted through June 30,
2005, the Company estimates that it will record additional costs relating to compensation expense
as a result of the adoption of SFAS 123R starting in the first quarter of 2006.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which is
a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Changes in
Interim Financial Statements. SFAS No. 154 applies to all voluntary changes in accounting
principle and changes in the accounting for and reporting of a change in accounting principle.
SFAS No. 154 requires that a change in method of depreciation or amortization for long-lived
non-financial assets be accounted for as a change in accounting estimate that is effected by a
change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005. The Company does not expect that
the adoption of SFAS No. 154 will have a material impact on its financial position, results of
operations or cash flows.
11
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated
financial statements and related notes included in Item 1 of Part I of this quarterly report and
the audited consolidated financial statements and notes and Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the
year ended December 31, 2004.
Company Overview
We provide an enterprise-level information technology solution for the clinical analysis and
management of digital medical images within health care provider organizations. Our solution
consists of advanced visualization and image management software, third-party components and
comprehensive support services. Our web-enabled advanced visualization software, which is hosted
by the customer, provides physicians across the enterprise in multiple medical specialties and at
any network access point with tools to manipulate and analyze images in 2D and 3D. We enable
physicians to better understand internal anatomic structure and pathology, improving clinical
diagnoses, disease screening and therapy planning. We believe our solution improves physician
productivity and patient care, enhances customer revenue opportunities, automates complex medical
imaging workflow and helps to maximize our customers investment in capital equipment and clinical
information systems.
Summary
Our revenue for the quarter ended June 30, 2005 was $18.6 million, which represents a 53.3%
increase over the corresponding quarter in 2004. This increase was comprised of a 53.0% increase
in system sales revenue and a 54.0% increase in support services revenue. Our overall gross margin
percentage increased from 46.1% for the quarter ended June 30, 2004 to 51.1% for the quarter ended
June 30, 2005. We achieved gross margin percentages of 57.1% and 35.7% for system sales and
support services revenue, respectively, during the quarter ended June 30, 2005, compared to 53.0%
and 28.1%, respectively, for the corresponding quarter in 2004. We recorded net income for the
quarter ended June 30, 2005 of $1.9 million, compared with a net loss of $0.1 million for the
corresponding quarter in 2004.
As of June 30, 2005, we had $125.9 million in contracted backlog, consisting primarily of fees
for contracted future installations and for the support of existing installations, an increase over
the contracted backlog of $118.2 million at December 31, 2004. Our backlog will decrease as we
recognize revenue under existing contracts, and it will increase as we enter into new contracts.
Also, during February 2005, we completed our initial public offering, selling a total of
5,750,000 shares of our common stock at a price of $13.00 per share, which resulted in net proceeds
to the Company of approximately $67.2 million. With a portion of the proceeds from the offering,
we repaid $4.0 million of our subordinated debt. We also recorded a non-cash interest charge of
$0.6 million for the write-off of the debt discount related to warrants issued in connection with
the subordinated debt.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue, costs and expenses and related disclosures. On an ongoing basis, we
evaluate our estimates and assumptions. Our actual results may differ from these estimates.
We believe that of our significant accounting policies, which are described in Note 2 of the
notes to our consolidated financial statements included in our Annual Report on Form 10-K for the
year ended December 31, 2004, the following accounting policies involve a greater degree of
judgment and complexity. Accordingly, these are the policies we believe are the most critical to
aid in fully understanding and evaluating our consolidated financial condition and results of
operations.
12
Revenue Recognition and Deferred Revenue
We derive revenue from two primary sources: (1) system sales revenue, which includes software
license revenue and third-party component sales revenue and (2) support services revenue, which
includes fees related to implementation, training, software maintenance, ongoing customer support
and third-party component maintenance. While the basis for software license revenue recognition is
substantially governed by the provisions of AICPA Statement of Position 97-2, (SOP 97-2),
Software Revenue Recognition, as amended, in the application of this standard, we exercise judgment
and use estimates in connection with the determination of the amount of software license and
support services revenue to be recognized in each accounting period.
We sell software under three types of licenses:
(1) Perpetual licenses: software licensed on a perpetual basis to a customer based on a
fixed number of users and/or estimates of annual study volumes where the customer has no right
to return the licensed software.
(2) Enterprise licenses: software licensed on a perpetual basis to a customer (typically a
multi-facility health care provider), as opposed to licensing based on a fixed number of users
or on estimates of annual study volumes, where the customer has no right to return the licensed
software.
(3) Term licenses: software licensed for a specific period of time according to a fixed
number of users and/or estimates of annual study volumes.
Generally, our software license arrangements do not include significant modification or
customization of the underlying software and, as a result, we recognize license revenue when: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) customer payment is
deemed fixed or determinable and (4) collection is probable. We assess each of the four criteria
as follows:
|
|
|
Persuasive evidence of an arrangement exists: Before we recognize revenue, we conduct
an assessment to determine whether a binding arrangement exists with the customer
counterparty. To this end, it is our customary practice to have a written contract, which
is signed by both the customer and us, or a purchase order from those customers that have
previously negotiated a standard end-user license arrangement, prior to recognizing revenue
on an arrangement. |
|
|
|
|
Delivery has occurred: Before we recognize revenue under any arrangement, we determine
whether our software has been actually delivered to the customer counterparty. It is our
customary practice to obtain formal acceptance for our software, which is evidenced by
written customer acknowledgement. In the event that we grant a customer the right to
specified upgrades, we defer recognition of the entire arrangement fee until we deliver the
specified upgrades as we have not established vendor-specific objective evidence (VSOE) of
fair value for specified upgrades. Specified upgrades include, but are not limited to,
future software deliverables that are stated in the customer contract. |
|
|
|
|
The customers payment is deemed fixed or determinable: If we find that an arrangement
exists and that delivery has occurred, before we recognize revenue in respect of any
particular customer, we assess whether fees are fixed or determinable and free of
contingencies or significant uncertainties at the time of sale and recognize revenue when
all other applicable revenue recognition requirements are met. While our standard payment
terms are net 30 days, we have, on a few occasions, extended payment terms beyond 30 days
(but none greater than six months) to creditworthy customers. We have established a
successful history of collection, without concessions, on these receivables; therefore
satisfying the required criteria for revenue recognition. If the fee is determined not to
be fixed or determinable, we recognize revenue as the amounts become due and payable. |
|
|
|
|
Collection is probable: In addition to the three foregoing factors which we review for
each customer arrangement, before we recognize any revenue for any particular customer, we
also conduct an assessment of the likelihood of collection from that customer. Both new
and existing customers are subjected to a credit review that evaluates such customers
financial position and ultimately its ability to pay. For follow-on sales to existing
customers, prior payment history is also used to evaluate probability of collection. If it
is determined from the outset of the arrangement that collection is not probable based upon
our credit review |
13
process, revenue is recognized on a cash-collected basis if all other applicable revenue
recognition criteria are met.
We account for software license and non-recurring support services revenue included in
multiple element arrangements using the residual method. Under the residual method, the fair value
of the undelivered elements (i.e., software maintenance and ongoing support services) based on VSOE
of fair value is deferred and the remaining portion of the arrangement fee is allocated to the
delivered elements (i.e., software license and non-recurring support services). If evidence of the
fair value of one or more of the undelivered services does not exist, revenue is deferred and
recognized when delivery of those services occurs or fair value can be established. We determine
VSOE of fair value for ongoing support services revenue based upon the renewal rates for the
maintenance and ongoing support, which coincide with our pricing model. Significant incremental
discounts offered in multiple element arrangements that would be characterized as separate elements
are infrequent and are allocated to software license revenue under the residual method.
For term license arrangements, we recognize revenue for the multiple element arrangement over
the term of the arrangement beginning in the month after we receive customer acceptance, provided
that the other applicable revenue recognition criteria have been met.
Software maintenance services generally include rights to upgrades (when and if available),
telephone support, updates and bug fixes. Software maintenance revenue is recognized ratably over
the term of the maintenance contract on a straight-line basis when all of the applicable revenue
recognition requirements are met. We include the first year of software maintenance in the
software license fee. We defer this software maintenance fee based on its fair value and recognize
it ratably over the first year of the arrangement.
Ongoing support services generally include telephone support related to third-party components
as well as quarterly customer metric reporting and other services. Ongoing support service revenue
is recognized ratably over the term of the ongoing support services contract on a straight-line
basis when all of the applicable revenue recognition requirements are met.
We recognize revenue related to the third-party components according to guidance set forth in
Emerging Issues Task Force Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables (EITF 00-21). Third-party component revenue, including hardware sales and hardware
maintenance, is recognized in accordance with contractual terms. When we are responsible for
installing the third-party components, revenue is recognized when the third-party components are
delivered, installed and accepted by the customer. When we are not responsible for installing the
third-party components, revenue is recognized when the third-party components are delivered to the
customer. We qualify to recognize hardware sales and hardware maintenance under EITF 00-21 as a
result of the following factors: (1) our software is not essential to the functionality of the
hardware, (2) our customers have the ability to purchase the hardware from other vendors and (3)
the purchase price of the hardware and hardware maintenance is separately stated in our contracts.
The following is a summary of our product warranty and guarantee and our related accounting
policies for these agreements:
(1) Our sales agreements with customers generally contain infringement indemnity provisions.
Under these agreements, we agree to indemnify, defend and hold harmless the customer in connection
with patent, copyright or trade secret infringement claims made by third parties with respect to
the customers authorized use of our products and services. The indemnity provisions generally
provide for our control of any required defense and settlement and cover costs and damages finally
awarded against the customer. Our infringement indemnity provisions typically give us the option
to make modifications of the product so it is no longer infringing or, if it cannot be corrected,
to require the customer to return the product in exchange for a specified payment for loss of use.
Our sales agreements with customers sometimes also contain indemnity provisions for death, personal
injury or property damage caused by our personnel or contractors in the course of performing
services to customers. Under these agreements, we agree to indemnify, defend and hold harmless the
customer in connection with death, personal injury and property damage claims made by third parties
with respect to actions of our personnel or contractors. The indemnity provisions generally
provide for our control of any required defense and settlement and cover costs and damages finally
awarded against the customer. The indemnity obligations contained in sales agreements generally
have no
14
specified expiration date but typically limit the amount of award covered to some portion of
the fees paid by the customer over some portion of the contract term. To date, we have not
incurred any costs to settle claims or pay awards under these indemnification obligations, nor have
we been notified of any such claims. Accordingly, we have no liabilities recorded for these
provisions as of June 30, 2005.
(2) We warrant that our software products will perform in all material respects in accordance
with our standard published specifications in effect at the time of delivery of the licensed
products to the customer as long as the contract remains in effect. Additionally, we warrant that
our services will be performed by qualified personnel in a manner consistent with normally accepted
industry standards. If necessary, we would provide for the estimated cost of product and service
warranties based on specific warranty claims and claim history. However, we have not incurred
significant recurring expense under our product or service warranties. Accordingly, we have no
liabilities recorded for these provisions as of June 30, 2005.
(3) Our standard contracts with customers typically provide for a 99% guarantee of system
availability and a 98% guarantee of component availability with penalty provisions if our solution
fails to meet the guarantee thresholds. Our 99% system availability guarantee covers our solution
as a whole, while the component guarantee covers each individual component, as in certain
circumstances a component may fail without affecting system availability. The penalty provisions
in our contracts typically allow for a reduction in the software maintenance fee related to failure
to meet guaranteed uptime percentages. We calculate these penalties as a percentage of the
software maintenance fee and would reduce the amount of the software maintenance fee charged in a
specific period for these penalties. To date, we have not incurred any penalties associated with
these guarantees. Accordingly, we have no liabilities recorded for these provisions as of June 30,
2005.
Billings may not coincide with the recognition of revenue. Unbilled revenue occurs when
revenue recognition precedes billing to the customer, and arises primarily from sales with
predetermined billing schedules. Billings in excess of sales (deferred revenue) occur when billing
to the customer precedes revenue recognition, and arise primarily from sales with partial
prepayments upon contract execution and from maintenance revenue billed in advance of performance
of the maintenance activity. At June 30, 2005, approximately $1.3 million of the balance in
current deferred revenue is related to two contracts where we have deferred all contract revenue
accounted for under SOP 97-2 as a result of specified upgrades. The remaining balance in deferred
revenue is primarily a result of timing of differences in contract execution and acceptance. The
majority of our current deferred revenue relates to system sales and non-recurring services, such
as implementation and training. Deferred revenue is recognized upon delivery of our products, as
ongoing services are rendered or as other requirements requiring deferral under SOP 97-2 are
satisfied.
The timing of customer acceptances could significantly affect the results of operations during
a given period. As noted above, we generally require written acknowledgement from the customer to
evidence that delivery of the products or services has occurred. Delays in the implementation
process could negatively affect operations in a given period by increasing volatility in revenue
recognition.
Capitalization of Software Development Costs
Research and development costs are charged to expense as incurred. However, the costs
incurred for the development of software that will be sold, leased or otherwise marketed are
capitalized when technological feasibility has been established and capitalization ceases when the
software is generally available for release. Judgment is involved in determining when
technological feasibility is reached. We believe that technological feasibility is reached when we
have completed a working model that is ready to be beta-tested at a customer site. These
capitalized costs are subject to an ongoing assessment of recoverability based on anticipated
future revenue and changes in technologies. Costs that are capitalized primarily consist of direct
labor.
Amortization of capitalized software development costs begins when the product is available
for general release. Amortization is provided on a product-by-product basis using the
straight-line method over periods not exceeding two years. Unamortized capitalized software
development costs determined to be in excess of net realizable values are expensed immediately.
Historically, we have had very short periods of time between when we believe a product has reached
technological feasibility and the date on which we typically release our products for general
release. As a result, we have not capitalized material software development costs.
15
Intangible and Other Long-Lived Assets
In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 141 requires the purchase method of accounting for all
business combinations after June 30, 2001, and that certain acquired intangible assets in a
business combination be recognized as assets separate from goodwill. We have applied SFAS No. 141
in our allocation of the purchase price of the Ultravisual Medical Systems Corporation
(Ultravisual) merger, which occurred in May 2003. Accordingly, we have identified and allocated
a value to the intangibles based on discounted cash flow analyses and market research, as well as
our judgment. SFAS No. 142 requires that intangibles determined to have an indefinite life are not
to be amortized but are to be tested for impairment at least annually. We will evaluate intangible
assets for impairment on an annual basis and when impairment indicators are identified. In
assessing the recoverability of intangibles, we must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective assets. These estimates
include forecasted revenue, which is inherently difficult to predict. If these estimates or their
related assumptions change in the future, we may be required to record impairment charges for these
assets. Historically, intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Property,
equipment and intangible assets are amortized over their useful lives. Useful lives of the
intangible assets are based on managements estimates of the period that such assets will generate
revenue.
Change in Financial Position
As noted above, we completed our initial public offering during February 2005. The following
significant changes in our financial position occurred as a result of the completion of the initial
public offering:
|
|
|
We issued 10,843,411 shares of common stock upon the automatic conversion of
outstanding shares of preferred stock into shares of common stock. |
|
|
|
|
We issued 5,750,000 shares of common stock in connection with the initial public
offering. |
|
|
|
|
We issued 537,082 shares of common stock upon exercise of mandatorily redeemable
warrants in conjunction with the initial public offering. |
|
|
|
|
We received total cash proceeds from the initial public offering (net of
underwriting discount and offering expenses) of $67.2 million. |
|
|
|
|
With a portion of the proceeds from the offering, we repaid $4.0 million of our
subordinated debt. |
|
|
|
|
We invested the remaining proceeds from the offering in cash equivalents and
short-term marketable securities. |
As of June 30, 2005, we have 20,203,681 shares of common stock issued, 20,027,924 shares of
common stock outstanding and warrants to purchase 57,114 shares of common stock outstanding at
exercise prices ranging from $1.65 to $5.52 per share. As of the close of the initial public
offering, we had no remaining warrants to purchase preferred stock outstanding.
Results of Operations
The following tables set forth information from our unaudited Consolidated Statements of
Operations for the three months and six months ended June 30, 2005 and 2004. The first two tables
set forth the unaudited Consolidated Statements of Operations with accompanying calculations of the
variances from period to period, in dollars and on a percentage basis for each line item. The
third table presents information expressed as a percentage of total revenue except for cost of
revenue related to system sales and support services, which are expressed as a percentage of system
sales and support services revenue, respectively. Explanations of certain variances from period to
period are contained in the paragraphs following the tables.
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Variances |
|
|
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
|
|
|
(in thousands) |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
13,402 |
|
|
$ |
8,761 |
|
|
$ |
4,641 |
|
|
|
53.0 |
% |
Support services |
|
|
5,168 |
|
|
|
3,356 |
|
|
|
1,812 |
|
|
|
54.0 |
|
|
|
|
Total revenue |
|
|
18,570 |
|
|
|
12,117 |
|
|
|
6,453 |
|
|
|
53.3 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
5,753 |
|
|
|
4,117 |
|
|
|
1,636 |
|
|
|
39.7 |
|
Support services |
|
|
3,322 |
|
|
|
2,414 |
|
|
|
908 |
|
|
|
37.6 |
|
|
|
|
Total cost of revenue |
|
|
9,075 |
|
|
|
6,531 |
|
|
|
2,544 |
|
|
|
39.0 |
|
|
|
|
Gross profit |
|
|
9,495 |
|
|
|
5,586 |
|
|
|
3,909 |
|
|
|
70.0 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
2,533 |
|
|
|
1,303 |
|
|
|
1,230 |
|
|
|
94.4 |
|
Sales and marketing |
|
|
2,521 |
|
|
|
2,407 |
|
|
|
114 |
|
|
|
4.7 |
|
General and administrative |
|
|
2,876 |
|
|
|
1,832 |
|
|
|
1,044 |
|
|
|
57.0 |
|
|
|
|
Total operating expenses |
|
|
7,930 |
|
|
|
5,542 |
|
|
|
2,388 |
|
|
|
43.1 |
|
|
|
|
Operating income |
|
|
1,565 |
|
|
|
44 |
|
|
|
1,521 |
|
|
NM |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
477 |
|
|
|
2 |
|
|
|
475 |
|
|
NM |
Interest expense |
|
|
(142 |
) |
|
|
(190 |
) |
|
|
48 |
|
|
|
25.3 |
|
|
|
|
Total other income (expense). |
|
|
335 |
|
|
|
(188 |
) |
|
|
523 |
|
|
|
278.2 |
|
|
|
|
Net income (loss) |
|
$ |
1,900 |
|
|
$ |
(144 |
) |
|
$ |
2,044 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Variances |
|
|
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
|
|
|
(in thousands) |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
21,121 |
|
|
$ |
13,670 |
|
|
$ |
7,451 |
|
|
|
54.5 |
% |
Support services |
|
|
8,785 |
|
|
|
5,564 |
|
|
|
3,221 |
|
|
|
57.9 |
|
|
|
|
Total revenue |
|
|
29,906 |
|
|
|
19,234 |
|
|
|
10,672 |
|
|
|
55.5 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
10,576 |
|
|
|
7,606 |
|
|
|
2,970 |
|
|
|
39.0 |
|
Support services |
|
|
6,405 |
|
|
|
4,693 |
|
|
|
1,712 |
|
|
|
36.5 |
|
|
|
|
Total cost of revenue |
|
|
16,981 |
|
|
|
12,299 |
|
|
|
4,682 |
|
|
|
38.1 |
|
|
|
|
Gross profit |
|
|
12,925 |
|
|
|
6,935 |
|
|
|
5,990 |
|
|
|
86.4 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
4,918 |
|
|
|
2,573 |
|
|
|
2,345 |
|
|
|
91.1 |
|
Sales and marketing |
|
|
5,210 |
|
|
|
4,145 |
|
|
|
1,065 |
|
|
|
25.7 |
|
General and administrative |
|
|
5,431 |
|
|
|
3,573 |
|
|
|
1,858 |
|
|
|
52.0 |
|
|
|
|
Total operating expenses |
|
|
15,559 |
|
|
|
10,291 |
|
|
|
5,268 |
|
|
|
51.2 |
|
|
|
|
Operating loss |
|
|
(2,634 |
) |
|
|
(3,356 |
) |
|
|
722 |
|
|
|
21.5 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
710 |
|
|
|
3 |
|
|
|
707 |
|
|
NM |
Interest expense |
|
|
(994 |
) |
|
|
(383 |
) |
|
|
(611 |
) |
|
|
(159.5 |
) |
|
|
|
Total other expense |
|
|
(284 |
) |
|
|
(380 |
) |
|
|
96 |
|
|
|
25.3 |
|
|
|
|
Net loss |
|
$ |
(2,918 |
) |
|
$ |
(3,736 |
) |
|
$ |
818 |
|
|
|
21.9 |
% |
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
72.2 |
% |
|
|
72.3 |
% |
|
|
70.6 |
% |
|
|
71.1 |
% |
Support services |
|
|
27.8 |
|
|
|
27.7 |
|
|
|
29.4 |
|
|
|
28.9 |
|
|
|
|
Total revenue |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
42.9 |
|
|
|
47.0 |
|
|
|
50.1 |
|
|
|
55.6 |
|
Support services |
|
|
64.3 |
|
|
|
71.9 |
|
|
|
72.9 |
|
|
|
84.3 |
|
|
|
|
Total cost of revenue |
|
|
48.9 |
|
|
|
53.9 |
|
|
|
56.8 |
|
|
|
63.9 |
|
|
|
|
Gross profit |
|
|
51.1 |
|
|
|
46.1 |
|
|
|
43.2 |
|
|
|
36.1 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
13.6 |
|
|
|
10.7 |
|
|
|
16.4 |
|
|
|
13.4 |
|
Sales and marketing |
|
|
13.6 |
|
|
|
19.9 |
|
|
|
17.4 |
|
|
|
21.5 |
|
General and administrative |
|
|
15.5 |
|
|
|
15.1 |
|
|
|
18.2 |
|
|
|
18.6 |
|
|
|
|
Total operating expenses |
|
|
42.7 |
|
|
|
45.7 |
|
|
|
52.0 |
|
|
|
53.5 |
|
|
|
|
Operating income (loss) |
|
|
8.4 |
|
|
|
0.4 |
|
|
|
(8.8 |
) |
|
|
(17.4 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2.6 |
|
|
|
0.0 |
|
|
|
2.4 |
|
|
|
0.0 |
|
Interest expense |
|
|
(0.8 |
) |
|
|
(1.6 |
) |
|
|
(3.3 |
) |
|
|
(2.0 |
) |
|
|
|
Total other income (expense). |
|
|
1.8 |
|
|
|
(1.6 |
) |
|
|
(0.9 |
) |
|
|
(2.0 |
) |
|
|
|
Net income (loss) |
|
|
10.2 |
% |
|
|
(1.2 |
)% |
|
|
(9.7 |
)% |
|
|
(19.4 |
)% |
|
|
|
Revenue
Total revenue for the three months ended June 30, 2005, consisting of system sales and support
services, increased by $6.5 million, or 53.3% as compared to the corresponding period in 2004. For
the six months ended June 30, 2005, revenue increased 55.5% to $29.9 million compared with $19.2
million for the same period in 2004. The increase in revenue for both periods in 2005 was
attributable to an increase in the size and number of new customer installations as well as
recognition of revenue that was deferred in the prior year due to previously undelivered elements.
During the six months ended June 30, 2004 and 2005, we recognized initial system sales revenue
related to seven and 22 customer contracts, respectively. All contracts for which initial system
sales revenue was recognized during the six months ended June 30, 2005 were perpetual software
licenses. Five out of the seven contracts for which initial system sales revenue was recognized
during the six months ended June 30, 2004, were perpetual software licenses.
We believe that the increased number of our contracts was a result of increased customer
awareness and acceptance of our products and services with multi-facility healthcare providers. Of
the seven and 22 contracts for which we recognized initial system sales revenue during the six
months ended June 30, 2004 and 2005, respectively, six and 20 of these contracts, respectively, are
related to agreements with multi-facility healthcare providers. We expect revenue to continue to
increase as we recognize revenue from our existing long-term customer agreements while also
recognizing revenue related to new customer agreements.
For the three and six month periods ended June 30, 2005, system sales revenue increased by
$4.6 million and $7.5 million, respectively, which represents increases of 53.0% and 54.5%,
respectively. Approximately $1.1 million and $2.4 million of the increases for the three and six
months ended June 30, 2005, respectively, were attributable to more health care institutions buying
and installing our solution, and approximately $3.5 million and $5.1 million of the increases for
the three and six months ended June 30, 2005, respectively, were related to a general shift in our
sales from term licenses, in which revenue is recognized ratably over the multiple years covered by
the licenses, to perpetual licenses, in which revenue for the license fee is recognized at system
acceptance assuming all applicable revenue recognition criteria have been satisfied. This shift
from term licensing to perpetual licensing occurred in mid-2003 and began to have a significant
impact in early 2004. We also recognized system sales revenue of $3.4 million during the three
months ended June 30, 2005 related to a contract in which we deferred
18
revenue in 2004 as a result of the existence of certain undelivered upgrades. We delivered
the additional software features during the current period and, as a result of all revenue
recognition criteria being met, we recognized the system sales revenue associated with the
contract.
For the three and six months ended June 30, 2005, support services revenue increased by $1.8
million and $3.2 million, respectively, which represents increases of 54.0% and 57.9%,
respectively. Approximately $1.3 million and $2.2 million of the increases in support services
revenue for the three and six months ended June 30, 2005, respectively, were attributable to an
increased number of customers that have implemented our solution and are paying us ongoing support
and maintenance fees. Also included in the increase for the six months ended June 30, 2005 is the
recognition of $0.4 million of revenue related to the contract mentioned in the above paragraph in
which we deferred revenue in 2004 as a result of the existence of undelivered upgrades. We
delivered the additional software features during the current period and, as a result of all
revenue recognition criteria being met, we recognized the support services revenue catch-up
adjustment during the second quarter of 2005. The remaining $0.5 million and $1.0 million
increases in support services revenue for the three and six months ended June 30, 2005,
respectively, were related to the increase in the recognition of non-recurring revenue related to
services such as implementation and training for these new customers.
Cost of Revenue
For the three months ended June 30, 2005, cost of revenue increased by $2.5 million, or 39.0%.
For the six months ended June 30, 2005, cost of revenue increased by $4.7 million, or 38.1%.
These increases were attributable to increased purchases of third-party components as a result of
the increased number and size of new customer installations. Cost of revenue as a percentage of
total revenue decreased from 53.9% for the quarter ended June 30, 2004 to 48.9% for the quarter
ended June 30, 2005. For the six months ended June 30, 2005, cost of revenue as a percentage of
total revenue was 56.8%, a decrease from 63.9% for the corresponding period in 2004. The decrease
in cost of revenue as a percentage of total revenue was a result of increased software license
revenue as a percentage of total revenue as a result of our continued transition to selling
perpetual software licenses. Our costs associated with software licenses as a percentage of total
revenue are significantly lower than costs associated with other components of our revenue.
For the three and six months ended June 30, 2005, cost of system sales increased by $1.6
million and $3.0 million, respectively, which represents increases of 39.7% and 39.0%,
respectively. These increases were caused by the increased number of health care institutions that
acquired and installed our solution. Cost of system sales as a percentage of system sales revenue
decreased from 47.0% for the quarter ended June 30, 2004 to 42.9% for the quarter ended June 30,
2005. For the six months ended June 30, 2005, cost of system sales as a percentage of total
revenue was 50.1%, a decrease from 55.6% for the corresponding period in 2004. We anticipate that
our cost of revenue will continue to increase in absolute dollars as a result of additional
purchases of third-party components related to customer installations, which purchases are in turn
driven by our increase in customers.
For the three and six months ended June 30, 2005, cost of support services increased by $0.9
million and $1.7 million, respectively, which represents increases of 37.6% and 36.5%,
respectively. These increases were caused by an increase in staffing levels in our support
services teams. Cost of support services as a percentage of support services revenue decreased
from 71.9% for the quarter ended June 30, 2004 to 64.3% for the quarter ended June 30, 2005. For
the six months ended June 30, 2005, cost of support services as a percentage of total revenue was
72.9%, a decrease from 84.3% for the corresponding period in 2004. The decrease in cost of support
services as a percentage of total support services revenue was a result of efficiencies realized as
our customer base grew and the cost of support services was spread over the broader base of
customers. Additionally, in 2004, we acquired software that enabled some of our previously manual
methods of providing support to be automated, thereby lowering the cost of service delivery. We
continue to realize increased efficiencies as a result of utilizing this software.
Gross Margin Percentage
Our gross margin percentage increased from 46.1% of total revenue for the quarter ended June
30, 2004 to 51.1% of total revenue for the quarter ended June 30, 2005. For the six months ended
June 30, 2005, our gross margin percentage increased to 43.2% as compared to 36.1% for the
corresponding period in 2004. These
19
improvements were a result of the increased revenue attributable to software licenses that
have a higher margin than other components of our revenue.
Research and Development
For the three and six months ended June 30, 2005, research and development expenses increased
by $1.2 million and $2.3 million, respectively, representing increases of 94.4% and 91.1%,
respectively. These increases are attributable to an increase in the number of personnel, which
accounted for approximately $0.9 million and $1.7 million of the increases, respectively, as well
as increased spending for outside consultants, which accounted for approximately $0.3 million and
$0.6 million of the increases, respectively. Research and development headcount increased to 65
employees at June 30, 2005 from 49 employees at January 1, 2004 and 60 employees at June 30, 2004.
In the future, we expect to continue to invest in research and development as we continue to
improve our existing technology and expand our software offering.
Sales and Marketing
For the three and six months ended June 30, 2005, sales and marketing expenses increased by
$0.1 million and $1.1 million, respectively, representing increases of 4.7% and 25.7%,
respectively. The relative stability in sales and marketing expenses during the three months ended
June 30, 2005 as compared to the corresponding period in 2004 includes a $0.6 million increase in
personnel expenses (excluding commissions), a $0.4 million decrease in commission expense and a
decrease in direct marketing expenses of $0.1 million. The decrease in commission expense during
the three months ended June 30, 2005 as compared to the corresponding period in 2004 is primarily
related to the timing of closing of contracts. The 25.7% increase from the six months ended June
30, 2005 as compared to the corresponding period in 2004 was attributable to an increase of $1.3
million in personnel expenses, a decrease of $0.1 million in commission expense and a decrease in
direct marketing expenses of $0.1 million. The decrease in commission expense during the six
months ended June 30, 2005 as compared to the corresponding period in 2004 is primarily related to
the reduced payments of commissions related to the execution of contract addenda in association
with existing customer master contracts. Commission payments related to the execution of master
contract addenda are generally less than the payments for new customer contracts as commissions
related to the original master contracts have already been paid or are being paid and expensed on a
monthly basis over the period of the master contract initial commitment. Commissions for new
contract addenda that are included in the master contract are typically paid based on contract
revenue above and beyond the levels in the master contract for that particular site; therefore,
although the new contract addenda related to these master contracts represent major new contracts,
the incremental commission expense associated with these addenda is less than the corresponding
level for a similarly sized, new contract.
Sales and marketing headcount increased to 40 employees at June 30, 2005, from 29 employees at
January 1, 2004 and 34 employees at June 30, 2004. For the three months ended June 30, 2005, sales
and marketing expenses decreased as a percentage of total revenue, from 19.9% for the quarter ended
June 30, 2004 to 13.6% for the quarter ended June 30, 2005. These percentages for the six months
ended June 30, 2005 and 2004, were 17.4% and 21.5%, respectively. As we continue to increase our
revenue, we believe that sales and marketing expenses as a percentage of revenue will remain
relatively consistent. We expect to increase our sales and marketing expenses as we hire
additional sales and marketing personnel and focus on increasing market awareness of our products
and service offerings.
General and Administrative
For the three and six months ended June 30, 2005, general and administrative expenses
increased by $1.0 million and $1.9 million, respectively, representing increases of 57.0% and
52.0%, respectively. The increase for the three months ended June 30, 2005, was attributable to
increased expenses related to insurance and professional services, such as accounting and legal, of
$0.3 million, an increase of $0.3 million in depreciation expense, an increase of $0.2 in
stock-based compensation and an increase in personnel related expenses of approximately $0.2
million. The increase for the six months ended June 30, 2005 was attributable to increased
expenses related to insurance and professional services, such as accounting and legal, of $0.6
million, an increase in personnel related expenses of approximately $0.5 million, an increase of
$0.4 million in depreciation expense and an increase of $0.4 in stock-based compensation. General
and administrative expenses as a percentage of total revenue increased slightly from
20
15.1% for the quarter ended June 30, 2004 to 15.5% for the quarter ended June 30, 2005.
General and administrative expenses as a percentage of total revenue decreased slightly from 18.6%
for the six months ended June 30, 2004 to 18.2% for the six months ended June 30, 2005. Although
our general and administrative expenses have increased as a result of being a public company, our
general and administrative expenses as a percentage of revenue have decreased as a result of solid
revenue growth. We expect our general and administrative expenses to continue to increase in
absolute dollars as a result of being a public company and also as a result of our continued
growth. Specifically, we expect to incur increased costs associated with accounting, consulting,
legal and other professional services, increased insurance costs and increased personnel in our
finance, legal and human resources functions.
Operating Income (Loss)
For the three months ended June 30, 2005, operating income increased by $1.5 million as
compared to the three months ended June 30, 2004. Operating income as a percentage of total
revenue increased from 0.4% for the quarter ended June 30, 2004 to 8.4% for the quarter ended June
30, 2005. For the six months ended June 30, 2005, operating loss decreased by $0.7 million as
compared to the six months ended June 30, 2004. Operating loss as a percentage of total revenue
decreased from 17.4% for the six months ended June 30, 2004 to 8.8% for the six months ended June
30, 2005. These improvements are a result of the total revenue increases coupled with the increased
leverage in operating costs discussed above.
Interest Income and Expense
For the three and six months ended June 30, 2005, interest income increased by $0.5 million
and $0.7 million, respectively, over the corresponding periods in 2004. These increases are a
result of investing the proceeds from our initial public offering.
For the three months ended June 30, 2005, interest expense decreased less than $0.1 million as
compared to the corresponding period in 2004. For the six months ended June 30, 2005, interest
expense increased by $0.6 million as compared to the corresponding period in 2004 as a result of
our repayment of $4.0 million of our subordinated debt with a portion of the proceeds from our
initial public offering. In conjunction with this extinguishment, we recorded a non-cash interest
charge of $0.6 million for the write-off of the subordinated debt discount related to warrants
issued in connection with the subordinated debt.
Liquidity and Capital Resources
As of June 30, 2005, we had $62.6 million in unrestricted cash, cash equivalents and
marketable securities, working capital of $50.9 million and $4.9 million of borrowings, as compared
to $6.0 million of cash and cash equivalents, working capital deficit of $9.4 million and $9.5
million of borrowings as of December 31, 2004. As of June 30, 2005 and December 31, 2004, we had
approximately $0.5 million and $0.9 million, respectively, of restricted cash and cash equivalents
held as collateral for equipment loans related to customer third-party components and one internal
equipment lease. During the quarter ended March 31, 2005, the restrictions related to one of the
equipment loans were satisfied and therefore we reclassified the previously restricted amount of
$0.4 million to unrestricted cash. The remaining restrictions on cash will be released in
connection with the maturity of the remaining equipment loan and the expiration of the lease, which
will both occur in 2006.
Operating Activities
During the six months ended June 30, 2005, cash used in operations was $3.2
million, which primarily related to our net loss of $2.9 million and changes in
working capital accounts. We also experienced a decline due to the payment of
higher than usual other accrued expenses existing at December 31, 2004 during
the first half of 2005. Our days sales outstanding in accounts receivable on an
annualized basis as of June 30, 2005 and December 31, 2004, were 66 days and 114
days, respectively. Our weighted average collection period for accounts
receivable as of June 30, 2005 was less than 50 days compared to 55 days at
December 31, 2004. The changes in other working capital accounts were primarily
driven by increased operations and the timing of cash payments.
21
During the six months ended June 30, 2004, cash provided by operations was $4.6 million, which
consisted of an increase in cash of $5.5 million from changes in working capital accounts and a
decrease in cash of $0.9 million as a result of our net loss offset by non-cash items. Changes in
the working capital accounts primarily related to a decrease in accounts receivable, a decrease in
unbilled revenue and an increase in deferred revenue due to an increased customer base and timing
of customer payments. The changes in other working capital accounts were primarily driven by
increased operations and the timing of cash payments.
Cash provided by and used in operating activities has historically been affected by changes in
working capital accounts, primarily deferred revenue, accounts receivable and accrued expenses.
Fluctuations within accounts receivable and deferred revenue are primarily related to the timing of
billings and the associated revenue recognition.
Investing Activities
We used cash of $48.9 million and $0.2 million for investing activities during the first six
months of 2005 and 2004, respectively.
We used $4.5 million and $1.7 million for property and equipment purchases during the first
six months of 2005 and 2004, respectively. Approximately $3.3 million of the purchases for the
first half of 2005 related to investments in equipment for internal use, including test equipment
for our research and development and quality assurance departments as well as computer equipment
for new and existing personnel. Approximately $0.6 million of the purchases for the first half of
2004 related to computer equipment for new and existing personnel. We anticipate that we will
continue to purchase property and equipment as necessary in the normal course of business.
Approximately $1.2 million and $1.1 million of the purchases for the six months ended June 30, 2005
and 2004, respectively, related to investments in equipment located at contracted customer sites.
We anticipate that we will incur additional capital expenditures at customer sites as we further
standardize and update our equipment platform. During the six months ended June 30, 2004, we sold
equipment that we owned that had a net book value of $1.5 million to a customer.
We used $44.2 million for the purchase of marketable securities during the first six months of
2005. The marketable securities consist of U.S. government agency obligations and corporate
commercial paper, all with maturities of less than one year.
Financing Activities
Cash provided by financing activities totaled $64.5 million and $2.7 million for the six
months ended June 30, 2005 and 2004, respectively. The cash provided by financing activities for
the first six months of 2005 resulted primarily from the completion of our initial public offering.
This inflow of cash was offset by our $4.0 million repayment of our subordinated debt and other
payments on borrowings. During the six months ended June 30, 2005, we also had $0.4 million of
restricted cash released from restriction. The cash provided by financing activities for the first
six months of 2004 resulted from proceeds from the issuance of subordinated debt of $4.0 million,
which was later repaid upon completion of our initial public offering, offset by payments on
existing borrowings and an addition to restricted cash used to secure a letter of credit for an
operating lease.
In April 2004, we entered into a loan and security agreement with a bank under which we can
borrow up to $4.0 million subject to certain restrictions. Interest accrues at the prime rate plus
1.5% to 2.0%, depending on our net income. This line of credit was amended as of July 31, 2004 and
expires April 30, 2006 at which time all advances will be due and payable. As of June 30, 2005 we
had no outstanding balance under this line of credit.
We believe our existing cash, together with future cash flows from operations and the
availability under our loan and security agreement will be sufficient to execute our business plan
in 2005. However, any projections of future cash inflows and outflows are subject to uncertainty.
Our future capital requirements will depend on many factors, including our rate of revenue growth,
the expansion of our marketing and sales activities, the timing and extent of spending to support
product development efforts and expansion into new territories, the timing of introductions of new
products and services and enhancements to existing products and services, and the continuing market
acceptance of our solution. To the extent that our existing cash, together with future cash flows
from operations and
22
the availability under our loan and security agreement are insufficient to fund our future
activities, we may need to raise additional funds through equity or debt financing. Although we
are currently not a party to any binding agreement or letter of intent with respect to potential
investments in, or acquisitions of, complementary businesses, services or technologies, we may
enter into these types of arrangements in the future, which could also require us to seek
additional equity or debt financing. Additional funds may not be available on terms favorable to
us or at all.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment
(SFAS 123R). SFAS 123R establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It focuses primarily on accounting
for transactions in which an entity obtains employee services in share-based payment transactions.
SFAS 123R requires a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the award and the
estimated number of awards that are expected to vest. That cost will be recognized over the period
during which an employee is required to provide service in exchange for the award, which is usually
the vesting period. SFAS 123R supersedes APB 25, which the Company has elected to follow. SFAS
123R will be effective for the Company at the beginning of the fiscal first quarter of 2006. SFAS
123R applies to all awards granted after the required effective date and to awards modified,
repurchased, or canceled after that date. Compensation cost is recognized on or after the required
effective date for the portion of outstanding awards for which the requisite services have not yet
been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 that
the Company has followed for disclosure purposes. For periods before the required effective date,
the Company may elect to adjust financial statements of prior periods on a basis consistent with
the pro forma disclosures required for those periods by SFAS 123. The Company has elected not to
restate prior periods. Based on stock options granted through June 30, 2005, the Company estimates
that it will record additional costs relating to compensation expense as a result of the adoption
of SFAS 123R starting in the first quarter of 2006.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which is
a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Changes in
Interim Financial Statements. SFAS No. 154 applies to all voluntary changes in accounting
principle and changes in the accounting for and reporting of a change in accounting principle.
SFAS No. 154 requires that a change in method of depreciation or amortization for long-lived
non-financial assets be accounted for as a change in accounting estimate that is effected by a
change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005. The Company does not expect that
the adoption of SFAS No. 154 will have a material impact on its financial position, results of
operations or cash flows.
Forward Looking Statements; Important Factors Affecting Future Results
Some of the statements made in this section captioned Managements Discussion and
Analysis of Financial Condition and Results of Operations contain forward-looking statements which
reflect our plans, beliefs and current views with respect to, among other things, future events and
financial performance. We often identify these forward-looking statements by the use of
forward-looking words such as believe, expect, potential, continue, may, will,
should, could, would, seek, predict, intend, plan, estimate, anticipate or the
negative version of those words or other comparable words. Any forward-looking statements
contained in this Quarterly Report are based upon our historical performance and on current plans,
estimates and expectations. The inclusion of this forward-looking information should not be
regarded as a representation by us or any other person that the future plans, estimates or
expectations contemplated by us will be achieved. Such forward-looking statements are subject to
various risks and uncertainties. These risks, uncertainties and other factors include, among
others, the risk that we may not compete successfully against larger competitors, risks associated
with our history of operating losses, the risk that we may not manage our growth effectively, risks
associated with our reliance on continuing relationships with large customers, the risk of
significant product errors or product failures, our reliance on reseller arrangements for important
components of our solution, the risk that we may not respond effectively to changes in our
industry, our customers reliance on third party reimbursements, and the potential impact on our
business of FDA regulations and other applicable health care regulations. In addition, there are
or will be important factors that could cause our actual results to differ materially from those
indicated in these forward-looking statements.
23
These cautionary statements should not be construed as exhaustive and should be read in
conjunction with the other cautionary statements that are included in this Quarterly Report and in
our 2004 Annual Report on Form 10-K. Moreover, we operate in a continually changing business
environment, and new risks and uncertainties emerge from time to time. Management cannot predict
these new risks or uncertainties, nor can it assess the impact, if any, that any such risks or
uncertainties may have on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ from those projected in any forward-looking statement.
Accordingly, the risks and uncertainties to which we are subject can be expected to change over
time, and we undertake no obligation to update publicly or review the risks or uncertainties
described herein. We also undertake no obligation to update publicly or review any of the
forward-looking statements made in this Quarterly Report, whether as a result of new information,
future developments or otherwise.
If one or more of the risks or uncertainties referred to in this Quarterly Report or in our
2004 Annual Report on Form 10-K materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we projected. Any forward-looking
statements you read in this prospectus reflect our current views with respect to future events and
are subject to these and other risks, uncertainties and assumptions relating to our operations,
financial condition, growth strategy and liquidity. You should specifically consider the factors
identified in this Quarterly Report that could cause actual results to differ.
For a more complete discussion of the important factors that may impact future performance and
prospects, please refer to the discussion of Risk Factors as set forth in our 2004 Annual Report on
Form 10-K in the portion of Item 7 labeled Managements Discussion and Analysis of Financial
Condition and Results of Operations Risk Factors.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our debt instruments do not expose us to material market risks relating to changes in interest
rates. Some of the proceeds of our initial public offering have been invested in short-term,
interest-bearing, investment grade securities pending their application. The value of these
securities will be subject to interest rate risk and could fall in value if interest rates rise.
The effect of a hypothetical one hundred basis point decrease across all interest rates related to
our investments would result in an annual decrease of approximately $0.4 million in operating
results assuming no further changes in the amount of our investments outstanding at June 30, 2005.
The primary objective of our investment activities is to preserve principal while maximizing
the income we receive from our investments without significantly increasing our risk. We invest
excess cash principally in U.S. marketable debt securities from a diversified portfolio of
institutions with strong credit ratings and in U.S. government and agency bills and notes, and by
policy, limit the amount of credit exposure at any one institution. These investments are
generally not collateralized and mature within one year. Some of the securities we invest in may
have market risk. This means that a change in prevailing interest rates may cause the fair value
of the principal amount of the investment to fluctuate. To minimize this risk, we schedule our
investments to have maturities that coincide with our expected cash flow needs, thus avoiding the
need to redeem an investment prior to its maturity date. Accordingly, we believe we have no
material exposure to interest rate risk arising from our investments. Therefore, no quantitative
tabular disclosure is provided.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2005. Based on this evaluation, our
chief executive officer and chief financial officer concluded that, as of June 30, 2005, our
disclosure controls and procedures were (1) designed to ensure that material information relating
to us is made known to our chief executive officer and chief financial officer by others within our
company, particularly during the period in which this report was being prepared and (2) effective,
in that they provide reasonable assurance that information required to be disclosed by us in the
reports that we file or submit
24
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
25
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None
Use of Proceeds from Initial Public Offering
Our initial public offering of common stock was effected through a Registration Statement on
Form S-1 (File No. 333-120621) that was declared effective by the Securities and Exchange
Commission on February 8, 2005, pursuant to which we sold all 5,750,000 shares of our common stock
registered. We received net proceeds of approximately $67.2 million from the offering. We used
$4.0 million of the net proceeds to repay borrowings outstanding under our subordinated notes on
February 18, 2005. We invested the remaining net proceeds, after payment of the subordinated notes
referred to in the preceding paragraph, in short-term, investment-grade, interest bearing
instruments.
During the six months ended June 30, 2005, we spent approximately $4.5 million of such net
proceeds on capital purchases, substantially all of which was spent on purchases of equipment.
ITEM 6: EXHIBITS
(a) Exhibit Index.
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Exhibit No. |
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Description |
10.1
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Summary of Cash Incentive Compensation Criteria |
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31.1
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Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934 |
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31.2
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Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934 |
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32.1
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Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized August
11, 2005.
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Emageon Inc.
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By: |
/s/ Charles A. Jett. Jr.
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Charles A. Jett, Jr. |
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Chief Executive Officer
(principal executive officer) |
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By: |
/s/ W. Randall Pittman
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W. Randall Pittman |
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Chief Financial Officer and Treasurer
(principal accounting and financial officer) |
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