EMAGEON INC.
UNITED STATES 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 |
For the quarterly period ended March 31, 2007
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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 |
For the transition period from to
Commission file number 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 or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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1200 Corporate Drive, Suite 200
Birmingham, Alabama
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35242 |
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(Address of principal executive offices)
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(Zip Code) |
(205) 980-9222
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þYes oNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
o
Accelerated Filer þ
Non-Accelerated Filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No.
Common stock, par value $0.001 per share: 21,333,391 shares outstanding as of April 25, 2007.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
EMAGEON INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
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(Unaudited) |
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March 31, 2007 |
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December 31, 2006 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
18,032 |
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$ |
23,008 |
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Trade accounts receivable, net |
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25,100 |
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27,602 |
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Inventories |
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7,245 |
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8,579 |
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Prepaid expenses and other current assets |
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4,982 |
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4,459 |
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Total current assets |
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55,359 |
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63,648 |
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PROPERTY AND EQUIPMENT, net |
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17,461 |
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18,362 |
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OTHER NONCURRENT ASSETS |
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1,483 |
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1,808 |
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INTANGIBLE ASSETS, net |
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29,509 |
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30,090 |
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TOTAL ASSETS |
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$ |
103,812 |
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$ |
113,908 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
8,561 |
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$ |
9,738 |
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Accrued payroll and related costs |
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1,549 |
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3,770 |
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Deferred revenue |
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19,897 |
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24,849 |
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Other accrued expenses |
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3,200 |
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2,946 |
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Current portion of long-term debt and capital lease obligations |
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372 |
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953 |
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Total current liabilities |
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33,579 |
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42,256 |
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LONG-TERM DEFERRED REVENUE |
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5,364 |
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5,851 |
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OTHER LONG-TERM LIABILITIES |
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591 |
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686 |
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LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS |
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3 |
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8 |
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TOTAL LIABILITIES |
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39,537 |
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48,801 |
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STOCKHOLDERS EQUITY: |
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Common
stock, $0.001 par value, 165,050 shares authorized; 21,474
shares and 21,434 shares issued, and 21,298 shares and 21,258
shares outstanding at March 31, 2007 and December 31, 2006,
respectively |
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21 |
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21 |
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Additional paid-in capital |
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123,511 |
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122,538 |
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Accumulated other comprehensive income |
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292 |
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262 |
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Deficit |
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(59,274 |
) |
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(57,439 |
) |
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64,550 |
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65,382 |
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Treasury stock, 176 shares, at cost |
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(275 |
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(275 |
) |
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Total stockholders equity |
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64,275 |
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65,107 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
103,812 |
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$ |
113,908 |
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The accompanying notes are an integral part of these financial statements.
3
EMAGEON INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
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Three Months Ended March 31, |
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2007 |
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2006(1) |
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REVENUE: |
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System sales |
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$ |
13,668 |
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$ |
17,269 |
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Support services |
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13,682 |
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9,732 |
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Total revenue |
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27,350 |
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27,001 |
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COST OF REVENUE: |
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System sales |
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8,722 |
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13,284 |
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Support services |
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7,160 |
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6,257 |
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Total cost of revenue |
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15,882 |
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19,541 |
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GROSS PROFIT |
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11,468 |
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7,460 |
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OPERATING EXPENSES: |
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Research and development |
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5,139 |
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4,184 |
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Sales and marketing |
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4,392 |
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4,067 |
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General and administrative |
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3,623 |
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4,160 |
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Amortization of intangible assets related to
Camtronics acquisition |
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345 |
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885 |
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Integration costs related to Camtronics acquisition |
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1,204 |
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Total operating expenses |
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13,499 |
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14,500 |
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LOSS FROM OPERATIONS |
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(2,031 |
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(7,040 |
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INTEREST INCOME |
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229 |
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156 |
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INTEREST EXPENSE |
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(33 |
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(109 |
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NET LOSS |
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$ |
(1,835 |
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$ |
(6,993 |
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NET LOSS PER SHARE BASIC AND DILUTED |
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$ |
(0.09 |
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$ |
(0.34 |
) |
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WEIGHTED AVERAGE SHARES OUTSTANDINGBASIC AND DILUTED |
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21,272 |
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20,583 |
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(1) |
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Certain reclassifications have been made to the
prior year amounts to conform with the current year presentation. |
The accompanying notes are an integral part of these financial statements.
4
EMAGEON INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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OPERATING ACTIVITIES |
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Net loss |
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$ |
(1,835 |
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$ |
(6,993 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities: |
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Depreciation |
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1,717 |
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1,731 |
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Amortization of intangible assets |
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720 |
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1,293 |
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Stock-based compensation expense |
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687 |
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575 |
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Other
operating activities, net |
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169 |
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36 |
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Changes in operating assets and liabilities, net |
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(5,486 |
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(1,089 |
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Net cash used in operations |
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(4,028 |
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(4,447 |
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INVESTING ACTIVITIES |
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Purchases of property and equipment |
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(985 |
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(1,413 |
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Maturities of marketable securities |
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5,000 |
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Capitalized software development costs |
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(111 |
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(109 |
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Other investing activities |
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219 |
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Net cash (used in) provided by investing activities |
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(1,096 |
) |
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3,697 |
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FINANCING ACTIVITIES |
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Proceeds of issuance of common stock |
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286 |
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1,516 |
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Payment of debt and capital lease obligations |
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(586 |
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(686 |
) |
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Decrease in
restricted cash |
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446 |
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Net cash provided by financing activities |
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146 |
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830 |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
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2 |
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(3 |
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NET (DECREASE) INCREASE IN CASH |
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(4,976 |
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77 |
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CASH at beginning of period |
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23,008 |
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15,520 |
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CASH at end of period |
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$ |
18,032 |
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$ |
15,597 |
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The accompanying notes are an integral part of these financial statements.
5
EMAGEON INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 . BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements include the accounts of
Emageon Inc.(Emageon, or the Company) and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying financial statements contain all adjustments
(consisting of normal recurring items) necessary for a fair presentation of results for the interim
periods presented. These unaudited interim financial statements should be read in conjunction with
the audited consolidated financial statements and related notes contained in the Companys Annual
Report on Form 10-K for the year ended December 31, 2006.
Certain reclassifications have been made to the prior year amounts to provide comparability with
the current year presentation.
Operating results for the three month period ended March 31, 2007 are not necessarily indicative of
results that may be expected for the year ending December 31, 2007.
The Company has revised its presentation of expenses incurred on behalf of and billable to its
customers in accordance with Emerging Issues Task Force Issue No. 01-14 to reflect those expenses in
support services cost of revenue and reflect the related customer billing in support services
revenue. Previously, revenue from such customer billings was netted against the related expense for
presentation in the statement of operations. The effect of this revision of revenue and expense was
to increase both support services revenue and cost of revenue by $423 for the three months ended March 31, 2006. The revision had no effect on
the Companys reported income from operations or net income for the period. The statements of
operations included in this quarterly report on Form 10-Q for the three months ended March 31, 2006
have been revised to reflect this change in presentation.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires that management use judgments to make estimates and assumptions that
affect the amounts reported in the financial statements. As a result, there is some risk that
reported financial results could have been materially different had different methods, assumptions,
and estimates been used. The Company believes that of its significant accounting policies, those
related to revenue recognition, research and development costs, and intangible and other long-lived
assets may involve a higher degree of judgment and complexity than other accounting policies used
in the preparation of its consolidated financial statements. There have been no significant
changes during the three months ended March 31, 2007 to the items disclosed as Critical Accounting
Policies and Estimates in the Companys Annual Report on Form 10-K for the year ended December 31,
2006 or in the Companys method of application of these critical accounting policies.
All numbers of shares and dollar amounts in the financial statements and footnotes, except per
share amounts, are expressed in thousands.
NOTE 2. ACQUISITIONS AND INTANGIBLE ASSETS
On November 1, 2005 the Company acquired all of the outstanding capital stock of Camtronics Medical
Systems, Ltd. (Camtronics), a developer and manufacturer of cardiology image and information
management systems, for a cash purchase price, including acquisition expenses and net of cash
acquired, of $40,359. The results of operations of Camtronics have been included in the Companys
statement of operations since the acquisition date.
The purchase price of Camtronics was allocated to the assets and liabilities of Camtronics on a
fair-value basis, including the identification and valuation of its intangible assets and the
assignment of value to goodwill. Goodwill represents, among other things, the synergistic value
and potential competitive benefits that may be realized as a result of the acquisition, any future
products that may arise from the acquired technology, and the skilled and
6
specialized workforce acquired. In total, intangible asset value of $11,603 and goodwill value of
$17,325 related to the Camtronics acquisition was identified and recorded.
Summarized below are the Companys intangible assets, which include those arising from acquisitions
of other businesses and the capitalized portion of costs of internally developed software. These
assets are amortized on a straight-line basis over lives ranging from one to six years, with the
exception of goodwill, which is not amortized but is tested for impairment at least annually or as
circumstances arise that may indicate impairment.
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March 31, 2007 |
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December 31, 2006 |
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Gross |
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Gross |
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Carrying |
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Total |
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Net Carrying |
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Carrying |
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Total |
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Net Carrying |
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Amount |
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Amortization |
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Amount |
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Amount |
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Amortization |
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Amount |
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Acquired technology |
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$ |
5,240 |
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$ |
3,701 |
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$ |
1,539 |
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$ |
5,240 |
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$ |
3,404 |
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$ |
1,836 |
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Customer relationships |
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8,010 |
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|
1,957 |
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6,053 |
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10,028 |
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3,629 |
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6,399 |
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Trade names |
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501 |
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|
501 |
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Software development
costs |
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|
1,561 |
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|
882 |
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|
679 |
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|
1,451 |
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|
806 |
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|
645 |
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Goodwill |
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|
21,238 |
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|
21,238 |
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|
21,210 |
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21,210 |
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Total |
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$ |
36,049 |
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|
$ |
6,540 |
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|
$ |
29,509 |
|
|
$ |
38,430 |
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|
$ |
8,340 |
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|
$ |
30,090 |
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|
Weighted average amortization periods are 4.6 years for acquired technology, 5.8 years for
customer relationships, and 1.3 years for software development costs.
Amortization expense was $4,969 for the year ended December 31, 2006 and $720 for the three months
ended March 31, 2007. Estimated amortization expense for the
remainder of 2007 and beyond is as
follows:
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|
2007 |
|
$ |
2,270 |
|
2008 |
|
|
2,366 |
|
2009 |
|
|
1,381 |
|
2010 |
|
|
1,335 |
|
2011 and thereafter |
|
|
919 |
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Total |
|
$ |
8,271 |
|
NOTE 3. MARKETABLE SECURITIES
At December 31, 2005 the Company held marketable debt securities classified as available-for-sale
and carried at estimated fair market value, consisting of U.S. government agency securities, in the
amount of $4,951. These securities matured during the quarter ended March 31, 2006. The Company
held no marketable securities at December 31, 2006 or at March 31, 2007.
7
NOTE 4. INVENTORIES
Inventories consist of the following:
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March 31, 2007 |
|
|
December 31, 2006 |
|
Third-party components |
|
$ |
3,532 |
|
|
$ |
2,716 |
|
Work-in-process |
|
|
331 |
|
|
|
336 |
|
Completed systems |
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|
3,382 |
|
|
|
5,527 |
|
|
|
|
|
|
|
|
Total |
|
$ |
7,245 |
|
|
$ |
8,579 |
|
|
|
|
|
|
|
|
Inventories include the costs of materials,
labor, and overhead. The costs of purchased third-party hardware and software
associated with customer sales contracts are included as inventory in the
consolidated balance sheet and charged to system sales cost of revenue in the
statement of operations when customer acceptance has been received and all other
revenue recognition criteria have been met.
NOTE 5. SUPPLEMENTARY CASH FLOW INFORMATION
Changes in operating assets and liabilities of the Company in reconciling net loss to net cash
used in operations are as follows:
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|
Three Months Ended March 31, |
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|
2007 |
|
|
2006 |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Trade accounts receivable, net |
|
$ |
2,502 |
|
|
$ |
670 |
|
Inventories, net |
|
|
1,334 |
|
|
|
(1,695 |
) |
Prepaid expenses and other current assets |
|
|
(523 |
) |
|
|
(745 |
) |
Other noncurrent assets |
|
|
(121 |
) |
|
|
(5 |
) |
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(1,177 |
) |
|
|
(1,522 |
) |
Accrued payroll and related costs |
|
|
(2,221 |
) |
|
|
(1,270 |
) |
Other accrued expenses |
|
|
159 |
|
|
|
1,717 |
|
Deferred revenue |
|
|
(5,439 |
) |
|
|
1,761 |
|
|
|
|
|
|
|
|
Net changes in operating assets and liabilities |
|
$ |
(5,486 |
) |
|
$ |
(1,089 |
) |
|
|
|
|
|
|
|
There were no significant non-cash investing and financing transactions in the three month
periods ended March 31, 2007 and 2006.
NOTE 6. COMPUTATION OF NET LOSS PER SHARE
Basic and
diluted net loss per share is computed using the weighted average common shares outstanding
during the period. Common share equivalents
consist of common stock warrants, restricted stock awards, and stock options granted to employees and
directors. All common stock equivalents, consisting of 2,129 shares for the quarter ended March 31,
2007 and 1,778 shares for the quarter ended March 31, 2006 were excluded from the computation for
these net loss periods because their inclusion would have been anti-dilutive.
8
NOTE 7. STOCK-BASED COMPENSATION
The Companys stock-based compensation plans are administered by the Compensation Committee of the
Board of Directors, which selects persons eligible to receive awards and determines the number of
restricted shares and/or stock options subject to each award and the terms, conditions, performance
measures, and other provisions of the award. Note 14 of the Companys consolidated financial
statements included in its Annual Report on Form 10-K for the year ended December 31, 2006 contains
additional information related to these stock-based compensation plans.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised), Share-Based Payment (SFAS 123R) utilizing the modified prospective approach. Prior to
the adoption of SFAS 123R, the Company accounted for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees (the intrinsic value method), and
accordingly recognized no compensation expense for stock options that were granted at or above fair
market value on the date of grant.
The Company used the Black-Scholes option pricing model to estimate the fair value of stock-based
awards utilizing the following assumptions for the quarter ended March 31, 2007. No stock-based
awards were granted during the quarter ended March 31, 2006.
|
|
|
|
|
Dividend yield |
|
|
0.0 |
% |
Expected volatility |
|
|
70.9 |
% |
Risk-free interest rate |
|
|
4.62 |
% |
Expected life of options (in years) |
|
|
5.0 |
|
The assumptions above are based on multiple factors, including historical exercise patterns of
employees in relatively homogeneous groups with respect to exercise and post-vesting employment
termination behaviors, expected future exercising patterns for these same homogeneous groups, and
the volatility of the Companys stock price.
During the quarter ended March 31, 2007, the Company granted 297 stock options at a weighted
average grant date fair value of $7.75 per share, and granted 61 restricted stock units at a
weighted average grant date fair value of $12.46 per share. Stock
options were exercised on 41 shares for proceeds of
$286 during the first quarter of 2007, and restricted share
awards of 7 shares vested during that period.
Stock-based compensation expense recognized in the consolidated statement of operations for the
quarter ended March 31, 2007 was $687, and for the quarter ended March 31, 2006 was $575. At March
31, 2007, there was $8.5 million of unrecognized compensation cost related to share-based payments.
The Company expects this compensation cost to be recognized over a weighted-average period of 3.09
years.
NOTE 8. COMPREHENSIVE LOSS
The
Companys comprehensive loss differs from its reported net loss due to foreign currency translation adjustments. Comprehensive loss for the quarter ended March 31, 2007
was $1,806 and for the quarter ended March 31, 2006 was $6,989. Net accumulated comprehensive
income adjustments as of March 31, 2007 are $292.
9
NOTE 9. INCOME TAXES
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting For Uncertainty In Income Taxes (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting For
Income Taxes. FIN 48 requires recognition in the consolidated financial statements
of only those tax positions determined to be more likely than not of being sustained upon
examination based on the technical merits of the positions, and also provides guidance on
derecognition, classification, interest and penalties, interim period accounting, disclosure, and
transition. The Company adopted the provisions of FIN 48 effective January 1, 2007.
The Company has not had taxable income since incorporation and therefore has not paid any income
taxes or recognized any tax benefit or tax expense in its statements of operations. At January 1,
2007, the Company had net deferred tax assets of $21.8 million, the majority of which relates to
the tax benefit of net operating loss carryforwards that will be realized only if the Company is
profitable in future years. Because future profitability is uncertain, the Company has provided a
valuation allowance against its net deferred tax assets, including its net operating loss
carryforwards, in full. The valuation allowance will remain at the full amount until it is more
likely than not that the related tax benefits will be realized through deduction against taxable
income during the carryforward periods, which extend from 2019 through 2026. Given its lack of
historical taxable income and the full amount of the deferred tax asset valuation allowance,
adoption of FIN 48 had no effect on the Companys first quarter 2007 statement of
operations or on the balance of its accumulated deficit as of January 1, 2007.
The
Company files income tax returns in the United States and Canada federal
jurisdictions, and in various state
jurisdictions. The Companys federal income tax returns have never been examined, and all years
since the Companys incorporation in 1998 remain subject to federal and state tax examination. The Company believes that any adjustments resulting
from tax examinations would have an immaterial effect on its results of operations and financial
position.
As of
January 1, 2007, the gross amount of unrecognized tax benefits
and the total
amount of unrecognized tax benefits that, if recognized, would affect the Companys financial
statement effective rate of tax were zero.
The Company has not recognized any significant amount of interest or penalties related to
unrecognized tax benefits.
NOTE 10. SUBSEQUENT EVENT
In May,
2007, the Company acted to align its operating expenses
with the current level of revenue by reducing its workforce through
elimination of existing positions and normal attrition. In connection with that action,
the Company in May, 2007 eliminated thirty positions, primarily in
the customer service and product management areas. The Company estimates that the incremental cost of this action, which
will be recorded in the operating expenses of its second quarter
2007, will be $600. These
incremental expenses consist primarily of severance pay.
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING STATEMENTS
Some of the statements made in this Quarterly Report on Form 10-Q contain forward-looking
statements which reflect the Companys plans, beliefs, and current views with respect to, among
other things, future events and financial performance. These statements are often identified by
use of forward-looking words such as believe, expect, potential, continue, may, will, should, could, would, intend, plan, estimate,
10
anticipate, and comparable words or the negative version of these and other words. Any
forward-looking statement contained in this Form 10-Q is based upon the Companys historical
performance and on current plans, estimates, and expectations. The inclusion of this
forward-looking information should not be regarded as a representation by the Company or any other
person that the future plans, estimates, or expectations contemplated by the Company will be
achieved. Such forward-looking statements are subject to various risks and uncertainties. In
addition, there are or will be important factors that could cause actual results to differ
materially from those indicated in the statements. These factors include, but are not limited to,
those described in Item 1A of the Companys Annual Report on Form 10-K for the year ended December
31, 2006 under the caption Risk Factors.
This cautionary statement should not be regarded as exhaustive and should be read in
conjunction with other cautionary statements and other information contained in the Companys
Annual Report on Form 10-K for the year ended December 31, 2006. The Company operates in a
continually changing business environment, and new risks and uncertainties emerge from time to
time. Management cannot predict these new risks and uncertainties, nor can it assess the impact,
if any, that any such risks and uncertainties may have on the Companys 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 the Company is
subject can be expected to change over time, and the Company undertakes no obligation to update
publicly or review the risks or uncertainties described herein or in the Companys Annual Report on
Form 10-K for the year ended December 31, 2006. The Company also undertakes no obligation to
update publicly or review any of the forward-looking statements made in this Form 10-Q, whether as
a result of new information, future developments, or otherwise.
This Managements Discussion and Analysis of Financial Condition and Results of Operations
section should be read in conjunction with the unaudited financial statements and footnotes
appearing in Part I of this Form 10-Q and the audited financial statements included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2006.
COMPANY OVERVIEW
Emageon provides an enterprise-level information technology solution for the clinical analysis
and management of digital medical images within multi-hospital networks, community hospitals, and
diagnostic imaging centers. The Companys solution consists of advanced visualization and image
management software, third-party components, and comprehensive support services. The Companys
web-enabled advanced visualization software, which is hosted by the customer, provides physicians
across the enterprisein multiple medical specialties and at any
network access pointwith dynamic
tools to manipulate and analyze images in both a two dimensional and three dimensional perspective.
With these tools, physicians have the ability to better understand internal anatomic structure and
pathology, which can improve clinical diagnoses, disease screening, and therapy planning. The
Companys open standard solution is designed to help customers improve staff productivity, enhance
revenue opportunities, automate complex medical imaging workflow, lower total cost of ownership,
and provide better service to physicians and patients.
RESULTS SUMMARY
Revenue for the three months ended March 31, 2007 (the Companys first fiscal quarter of 2007)
was $27.3 million, a 1.3% increase over the first quarter of 2006. The Companys gross margin was
at a more normal level in first quarter 2007 compared to first quarter 2006, and
research and development, sales and marketing, and general and administrative expenses in total
were up 6% over the comparable prior year period. The net loss for the first quarter was $1.8 million,
or $0.09 per share, compared to a net loss of $7.0 million, or $0.34 per share, in the first
quarter of 2006.
Included in the results of the Company for the three month periods ended March 31, 2007 and
2006 are the following:
|
1) |
|
First quarter 2007 non-cash expenses of $0.3 million in
amortization of intangible assets acquired in the Camtronics acquisition ($0.9 million for the three months ended March 31, 2006); |
11
|
2) |
|
First quarter 2007 non-cash expenses of $0.7 million for
stock-based compensation ($0.6 million for the three months ended
March 31, 2006); and |
|
|
3) |
|
First quarter 2006 expenses of $1.2 million related to the
integration of Camtronics into the operations of the Company. The integration of Camtronics
was substantially completed as of December 31, 2006. |
Cash
used in operations in the first quarter of 2007 was $4.0 million and for the three months
ended March 31, 2006, was $4.4 million. At March 31, 2007 the Company had $18.0 million in
cash and cash equivalents. The Company has available an unused $10 million secured
line of credit with a bank.
Revenue and Gross Margin
Revenue consists of system sales and support services revenue. System sales revenue is
comprised of revenue from sales of the Companys software and third-party components, primarily
computer hardware. Costs of system sales revenue consist of system
integration and testing costs, purchases of hardware and software from
third party vendors for use by customers, and the internal costs of the Companys software licenses.
Software development expenses are generally included in research and
development expenses in the
Companys statement of operations.
Support
services revenue is comprised of revenue from professional services, such as
implementation and training, as well as ongoing maintenance services. Costs of support services
revenue consist of labor, overhead, and associated costs of implementation, installation, and
training on behalf of customers, and the costs of providing continuous support of hardware and
software sold to customers.
The characteristics of individual system sales can vary significantly
as to length of implementation time, total value of the sale, and
gross margin earned. In
addition, in any given period, the mix of
system sales revenue to support
services revenue and the mix of hardware and software comprising systems revenue can produce significant variability in the levels of
revenue and total gross margin reported.
The following table sets forth comparative revenue and gross margin data for the three month
periods ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Revenue: |
|
|
|
|
|
|
|
|
System sales |
|
$ |
13,668 |
|
|
$ |
17,269 |
|
Support
services |
|
|
13,682 |
|
|
|
9,732 |
|
|
|
|
|
|
|
|
Total |
|
$ |
27,350 |
|
|
$ |
27,001 |
|
Cost of Revenue: |
|
|
|
|
|
|
|
|
System sales |
|
$ |
8,722 |
|
|
$ |
13,284 |
|
Support services |
|
|
7,160 |
|
|
|
6,257 |
|
|
|
|
|
|
|
|
Total |
|
$ |
15,882 |
|
|
$ |
19,541 |
|
Gross Profit: |
|
|
|
|
|
|
|
|
System sales |
|
$ |
4,946 |
|
|
$ |
3,985 |
|
Support services |
|
|
6,522 |
|
|
|
3,475 |
|
|
|
|
|
|
|
|
Total |
|
$ |
11,468 |
|
|
$ |
7,460 |
|
Gross Margin: |
|
|
|
|
|
|
|
|
System sales |
|
|
36.2 |
% |
|
|
23.1 |
% |
Support services |
|
|
47.7 |
% |
|
|
35.7 |
% |
|
|
|
|
|
|
|
Total |
|
|
41.9 |
% |
|
|
27.6 |
% |
12
Summary
Total revenue in first quarter 2007 was $27.3 million, a 1.3% increase over first quarter
2006. First quarter 2007 total revenue reflects the effects of (a) a longer sales cycle than
experienced in the past in the Companys primary system sales market, (b) delays in the award of
system sales contracts with certain not-for-profit hospitals and other customers, and (c) offsetting the system
sales trend, the anticipated increase in support services revenue as the installed base of Company
systems increases. For the same periods, gross margin earned on total revenue increased to 41.9%,
reflecting a return to a more normal and anticipated gross profit
level after higher than normal hardware
content in the Companys system sales revenue and lower than expected support services gross margin
held first quarter 2006 total gross margin to 27.6%. The system sales
and support services components of the Companys revenue
and gross margin are discussed in more detail below in comparison to the prior year periods.
As
expected, total revenue in first quarter 2007 declined sequentially
from fourth quarter 2006 levels, in part reflecting the traditional seasonality of
the Companys system sales revenue and also reflecting the
factors described in the preceding paragraph.
System Sales Revenue
First quarter 2007 system sales revenue declined from the comparable 2006 period by $3.6
million, or 20.9%. The most significant factors contributing to the quarter over quarter decline
are an increasingly longer sales cycle in the Companys primary
radiology market, which is now largely a replacement market among larger-sized existing and potential customers, and delays in the award of
several sales contracts from not-for-profit hospitals and other customers. The Company believes
that its first quarter 2007 reduced rate of revenue growth is the
result of these delays in sales orders
and not loss of customers. In addition, first quarter 2007 system sales were negatively impacted by
lower than anticipated sales from the Companys cross selling efforts with customers
obtained in the acquisition of Camtronics in late 2005. The Company
continues to believe these cross
selling efforts ultimately will be successful. Revenues from the Companys cardiology products, acquired in
the Camtronics acquisition, exhibited some strength in first quarter 2007 compared to first quarter
2006.
System Sales Gross Margin
The Companys system sales gross margin was 36.2% in first quarter 2007, marking a return to a
more normal level from the 23.1% gross margin in first quarter 2006. Gross margin for first quarter
2006 was significantly lowered by higher than normal hardware content (and correspondingly lower
software content) in system sales. While first quarter 2007 gross margin was improved over the
comparable prior year period as the result of higher software content in its system sales, it was
held below its anticipated levels by the lower volume of sales activity and by a higher mix of
cardiology to radiology system sales.
In
general, the costs of third party hardware components tend to lower
the Companys system sales
gross margin. The Company expects
system sales gross margins in the low-to-mid forty percent range going forward assuming a normal mix of
hardware versus software revenues.
However, the Companys system sales gross margin may fluctuate significantly from period to period depending on the mix of revenue
recognized in a given reporting period.
Support Services Revenue
The Companys support services revenue increased by $3.9 million, or 40.6%, in first quarter
2007 compared to the prior year period. Support services revenue, which consists primarily of
system installation services, customer training, and system maintenance services, are ancillary to
the Companys system sales revenues and therefore tend to grow as the installed base of the Companys
system sales revenue grows and as more customers subscribe to maintenance services.
13
Support Services Gross Margin
The Companys support services gross margin was 47.7% in first quarter 2007, a 12.0 percentage point
increase over the first quarter 2006 level. The first quarter 2007
margin is the result of
increased efficiencies in the Companys support organization, specifically a staffing level whose cost is
spread over an increasingly larger installed customer base. In first quarter 2006, the support
services staff level was increasing to meet higher system sales levels, and the anticipated
leverage off the related fixed costs of the staff had not yet been achieved. Though the
expectations of the Company for service margins remain in the mid-forty percent range on an annual
basis, the timing of individual system acceptances from quarter to quarter can significantly impact
the level of reported support services revenue and gross margin for any given interim period.
Research & Development, Sales & Marketing, and General & Administrative Expenses
Total research and development, sales and marketing, and general and administrative expenses
for the quarter ended March 31, 2007 were $13.2 million as compared to $12.4 million in the
corresponding prior year quarter, an increase of $0.7 million or 6.0%. The increase in first
quarter 2007 expenses is due generally to higher research and development expenses offset by a
decline in general and administrative expenses, as explained below. As a percentage of revenue,
these expenses were 48.1% in the first quarter of 2007 compared to
46.0% in the first quarter of 2006.
The Company expects that growth in its research and development, sales and marketing, and
general and administrative expenses will continue in line with its annual revenue growth, though
quarter to quarter variability will occur depending on activity levels, particularly with respect
to its research and development and sales and marketing expenses. The Company has taken steps to
limit growth in its operating expenses and align those expenses with current revenue levels, including a reduction in employee headcount in May, 2007 as described in Note 10 in this Form 10-Q.
Research and Development Expenses
Research and development expenses increased by $1.0 million, or 22.8 %, in first quarter 2007
compared to first quarter 2006. The increase is a result of higher utilization and higher costs of
outsourced research and development and related services in 2007 and to the undertaking of fewer
projects that qualify for research and development cost capitalization than in 2006. As a
percentage of revenue, research and development expenses were 18.8%
in the first quarter of 2007 compared
to 15.5% in the first quarter of 2006.
Sales and Marketing Expenses
Sales and marketing expenses increased by $0.3 million, or 8.0%, in the first quarter of 2007
compared to the first quarter of 2006. The increase is the result of higher sales commissions in first
quarter 2007 compared to first quarter 2006, resulting primarily from differences in timing of
customer bookings, revenue recognition, and cash collection between the two periods. As a
percentage of revenue, sales and marketing expenses were 16.1% in the
first quarter of 2007 compared to
15.1% in the first quarter of 2006.
General and Administrative Expenses
General
and administrative expenses decreased by $0.5 million, or 12.9%,
in the first quarter of 2007
compared to the first quarter of 2006. Beginning in the first quarter
of 2006, a portion of support services personnel
hired to perform the anticipated higher level of 2006 support activities were temporarily engaged
in activities of an administrative nature, and accordingly their cost was charged to general and
administrative expense. Over the course of 2006, these personnel became fully engaged in
support services activities, which lowered reported general and
administrative expenses and
increased support services cost of sales. These personnel no longer
perform administrative duties. In addition, the Companys management incentive bonus expense was less in the first quarter of 2007 compared to the first
quarter of 2006. This decline in general
and administrative expenses was partially offset by the continued high level of professional and
other fees required to support the various compliance
14
activities required of a publicly held company, including compliance with the Sarbanes-Oxley
Act of 2002. As a percentage of revenue, general and administrative
expenses were 13.3% in the first
quarter of 2007 compared to 15.4% in the first quarter of 2006.
LIQUIDITY AND CAPITAL RESOURCES
Summary
The
Companys cash and cash equivalents at March 31, 2007
totaled $18.0 million, a decline of approximately $5.0 million since December 31, 2006. This
decline is primarily the result of funding of the Companys net loss for the first quarter, but
also includes the effects of investment in property, plant, and equipment of $1.0 million and the
payment of scheduled debt installments of $0.6 million. Also contributing to the decline in cash in
first quarter 2007 were a decline in accounts
payable and accrued liabilities of $3.4 million reflecting the traditionally lower activity
levels of first quarter compared to fourth quarter, offset by a decline in accounts receivable of
$2.5 million and a decline in inventories of $1.3 million, both reflecting lower first quarter
sales. Total debt remained minimal at $0.4 million, and the Company has not drawn on its $10
million line of credit arrangement with a bank. The Company believes that its existing cash
balances, together with its future cash flows and the availability of funding under its line of
credit, if necessary, will be sufficient to fund its operations for
the next 12 months.
Cash Used In Operating Activities
Net
cash used in operations for the three months ended March 31,
2007 was $4.0 million, versus
a net usage of cash from operations in the three months ended March 31, 2006 of $4.4 million. The
net use of cash in the first quarter of 2007 is essentially the result of the Companys net loss
for the period, but also includes settlement of the higher current liability levels of fourth
quarter 2006 that resulted from higher activity levels in that period, and lower revenues in first quarter 2007.
The net use of cash of $4.4 million in the three months ended March 31, 2006 was the result
primarily of that periods net loss of $7.0 million, but also included the effects of an inventory
increase of $1.7 million and an accounts payable and accrued liability decline of $1.1 million,
both due to timing of purchases and payments.
Cash from operating activities in a given period is most affected by the Companys net income
or loss for the period, by the timing of billings to customers versus the timing of revenue
recognition, and by the timing of receipt and delivery of sales orders, which can temporarily
affect the levels of inventory and accounts payable. In addition, the seasonality of the Companys
business wherein activity levels are much higher in fourth quarter than in first quarter can have a
pronounced effect on the Companys cash flow.
Cash From Investing Activities
Net cash used in investing activities was $1.1 million in the three months ended March 31,
2007 versus a net provision of cash by investing activities of $3.7 million in the same prior year
period. The first quarter 2007 use of cash consisted of additions to property, plant and
equipment, primarily computer equipment, while the first quarter 2006 provision of cash by
investing activities consisted of the maturity of marketable securities of $5.0 million, the
proceeds of which were used to finance operations, offset by property, plant and equipment
additions of $1.4 million, primarily for equipment used in research and development and the
equipping of new employees.
The Company expects that purchases of property and equipment for internal use and for use at
customer sites will continue as its customer base and its research
and development activities continue to grow.
15
Cash From Financing Activities
Net
cash provided by financing activities was $0.1 million for the three months ended March 31,
2007 compared to a net provision of cash by financing activities of $0.8 million in first quarter 2006.
First quarter 2007 activity included payments of scheduled debt of $0.6 million, offset by $0.3
million in proceeds from exercises of employee stock options. In the first
quarter of 2006, scheduled debt
payments were $0.7 million, and proceeds from stock option exercises were $1.5 million.
Contractual Cash Obligations
As of March 31, 2007 the Company had total obligations for the payment of cash of
approximately $6.5 million, consisting of $0.4 million in debt and capital lease obligations
and $6.1 million in operating lease commitments, primarily of office space. Under their present
terms, these obligations come due in the amounts of approximately $1.9 million in less than one
year, $3.1 million in one to three years, and $1.5 million in three years and beyond.
Available Credit
In April of 2006, the Company entered into a new agreement with a bank that provides available
credit of $10.0 million at the banks prime interest rate. The agreement is for a term of two
years, at the end of which all amounts become due and payable. Security for any amounts borrowed
under the agreement consists of all assets of the Company other than its intellectual property and
real estate. At March 31, 2007 there were no amounts outstanding under the agreement.
The Company believes that existing cash, together with its future cash flows and amounts
available under its loan and security agreement, if necessary, will be sufficient to execute its
business plan for the next twelve months. However, any projections of cash flow are subject to
uncertainties, including the Companys rate of revenue growth, the expansion of its sales and
marketing activities, the timing and extent of spending in support of product development efforts,
the timing and success of new product introductions, continuing market acceptance of the Companys
products, costs and risks associated with the integration of acquired businesses, and the Companys
ability to manage its growth. In addition, although not currently a party to any letter of intent
or binding agreement, the Company may also invest in or acquire complementary businesses, services,
or technologies, which could require that funding be obtained through additional equity or debt
financing. It is possible that additional financing for any of these purposes could be required,
and that additional funds may not be available on favorable terms or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The debt instruments of the Company do not expose the Company to material market risks
relating to changes in interest rates.
Excess funds of the Company are invested in short-term, interest-bearing, investment-grade
securities. The value of these securities is subject to interest rate risk and could decline in
value if interest rates rise. The effect of a hypothetical one hundred basis point decrease across
all interest rates related to the Companys investments would result in an annual decrease of
approximately $0.1 million in operating results, assuming no change in the amount of investments on
hand at March 31, 2007.
The primary objective of the Companys investing activity is to preserve principal while
maximizing income without significantly increasing risk. Cash is invested principally in U.S.
marketable debt securities from a diversified portfolio of institutions with strong credit ratings
and in U.S. government agency notes. By policy, the amount of credit exposure to any single
institution is limited. These investments generally are not collateralized and mature in one year.
To minimize the exposure to changes in interest rates, the Company schedules its investments to
mature in line with expected cash needs, thus reducing the potential of selling investments prior
to their maturity. The Company believes it has minimal exposure to interest rate risk.
16
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, that are designed to
ensure that information required to be disclosed in the reports filed or submitted by the Company
under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the SECs rules and forms and that such information is accumulated and communicated to
management of the Company, including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Charles A. Jett, Jr., Chief
Executive Officer and President, and W. Randall Pittman, Chief Financial Officer and Treasurer,
conducted an evaluation of the effectiveness of the design and operation of the Companys
disclosure controls and procedures as of March 31, 2007 and, based on that evaluation, found the
Companys disclosure controls and procedures were effective in ensuring that information required
to be disclosed in the reports filed by the Company and submitted under the Exchange Act is
recorded, processed, summarized and reported as and when required, and that information required to
be disclosed is accumulated and communicated to them as appropriate to allow timely decisions
regarding timely disclosure. There have been no changes in the Companys internal controls over
financial reporting during the three months ended March 31, 2007 that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over financial
reporting.
17
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, careful consideration should be
given to the factors discussed in Part I, Item 1A Risk Factors in the Companys Annual Report on
Form 10-K for the year ended December 31, 2006, which could materially affect the Companys
business, financial condition, or future results. The risks described in the Companys Annual
Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties
not currently known or that are currently deemed to be immaterial also may materially adversely
affect the Companys business, financial condition, and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Companys initial public offering of its common stock was effected through a Registration
Statement on Form S-1 which was declared effective on
February 8, 2005. In the offering, the
Company sold 5,750,000 shares of common stock for net proceeds of approximately $67.2 million. On
February 18, 2005 the Company used $4.0 million of the proceeds to repay borrowings under its
subordinated notes, and invested the remaining proceeds in short-term, investment grade securities
pending further use. Since that time and through March 31, 2007, the Company has used
approximately $11.5 million of the net proceeds for capital purchases, substantially all of which
have been equipment, and an additional $40.0 million of the net proceeds to acquire all of the
outstanding stock of Camtronics Medical Systems, Ltd. on November 1, 2005.
ITEM 6. EXHIBITS
|
|
|
Exhibit No. |
|
Description |
|
|
|
31.1*
|
|
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 the 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*
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Certification of the 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 Section 13 or 15(d) of the Securities Exchange Act of 1934,
Emageon Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized May 10, 2007.
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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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Chairman, Chief Executive Officer, and President
(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 Financial and Accounting Officer) |
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19