e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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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 June 30, 2011
or
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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 001-33689
athenahealth, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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04-3387530 |
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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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311 Arsenal Street, Watertown, Massachusetts
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02472 |
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(Address of principal executive offices)
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(Zip Code) |
617-402-1000
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer þ | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of July 18, 2011, there were 34,986,593 shares of the registrants $0.01 par value common
stock outstanding.
athenahealth, Inc.
FORM 10-Q
INDEX
ii
PART IFINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited).
athenahealth, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per-share amounts)
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June |
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December |
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30, 2011 |
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31, 2010 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
47,370 |
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$ |
35,944 |
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Short-term investments |
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57,038 |
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80,231 |
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Accounts receivable net |
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43,927 |
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36,870 |
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Deferred tax assets |
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4,818 |
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3,856 |
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Prepaid expenses and other current assets |
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7,189 |
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6,749 |
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Total current assets |
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160,342 |
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163,650 |
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Property and equipment net |
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41,289 |
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31,899 |
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Restricted cash |
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5,804 |
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8,691 |
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Software development costs net |
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4,812 |
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3,642 |
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Purchased intangibles net |
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11,731 |
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12,651 |
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Goodwill |
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22,450 |
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22,450 |
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Deferred tax assets |
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10,816 |
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10,959 |
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Investments and other assets |
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22,728 |
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7,228 |
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Total assets |
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$ |
279,972 |
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$ |
261,170 |
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Liabilities & Stockholders Equity |
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Current liabilities: |
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Current portion of long-term debt and capital lease obligations |
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$ |
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$ |
2,909 |
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Accounts payable |
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1,348 |
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559 |
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Accrued compensation |
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18,196 |
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19,178 |
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Accrued expenses |
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11,316 |
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10,981 |
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Current portion of deferred revenue |
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5,528 |
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4,978 |
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Interest rate derivative liability |
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490 |
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Current portion of deferred rent |
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896 |
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1,497 |
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Total current liabilities |
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37,284 |
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40,592 |
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Deferred rent, net of current portion |
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3,258 |
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5,960 |
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Deferred revenue, net of current portion |
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39,998 |
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35,661 |
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Other long-term liabilities |
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1,394 |
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1,897 |
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Debt and capital lease obligations, net of current portion |
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6,307 |
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Total liabilities |
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81,934 |
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90,417 |
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Commitments and contingencies (note 10) |
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Stockholders equity: |
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Preferred stock, $0.01 par value: 5,000 shares authorized; no shares issued
and outstanding at June 30, 2011 and December 31, 2010, respectively |
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Common stock, $0.01 par value: 125,000 shares authorized; 36,245 shares
issued, and 34,967 shares outstanding at June 30, 2011; 35,808 shares
issued and 34,530 shares outstanding at December 31, 2010 |
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362 |
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358 |
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Additional paid-in capital |
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219,153 |
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200,339 |
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Treasury stock, at cost, 1,278 shares |
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(1,200 |
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(1,200 |
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Accumulated other comprehensive income |
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58 |
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28 |
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Accumulated deficit |
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(20,335 |
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(28,772 |
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Total stockholders equity |
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198,038 |
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170,753 |
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Total liabilities and stockholders equity |
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$ |
279,972 |
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$ |
261,170 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
athenahealth, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per-share amounts)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenue: |
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Business services |
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$ |
75,349 |
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$ |
56,399 |
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$ |
142,835 |
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$ |
108,964 |
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Implementation and other |
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2,536 |
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2,153 |
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4,980 |
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4,065 |
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Total revenue |
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77,885 |
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58,552 |
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147,815 |
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113,029 |
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Expense: |
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Direct operating |
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29,020 |
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24,101 |
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56,290 |
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47,620 |
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Selling and marketing |
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18,815 |
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12,693 |
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35,756 |
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24,753 |
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Research and development |
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5,166 |
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4,824 |
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10,245 |
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8,898 |
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General and administrative |
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11,718 |
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11,403 |
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23,437 |
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23,080 |
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Depreciation and amortization |
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3,737 |
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2,657 |
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7,135 |
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5,077 |
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Total expense |
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68,456 |
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55,678 |
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132,863 |
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109,428 |
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Operating income |
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9,429 |
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2,874 |
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14,952 |
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3,601 |
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Other income (expense): |
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Interest income |
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109 |
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66 |
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216 |
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144 |
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Interest expense |
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(54 |
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(118 |
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(231 |
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(335 |
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Loss on interest rate derivative contract |
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(138 |
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(304 |
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(73 |
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(364 |
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Other income |
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6 |
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33 |
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44 |
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63 |
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Total other expense |
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(77 |
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(323 |
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(44 |
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(492 |
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Income before income taxes |
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9,352 |
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2,551 |
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14,908 |
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3,109 |
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Income tax provision |
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(4,166 |
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(1,253 |
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(6,471 |
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(1,534 |
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Net income |
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$ |
5,186 |
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$ |
1,298 |
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$ |
8,437 |
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$ |
1,575 |
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Net income per share Basic |
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$ |
0.15 |
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$ |
0.04 |
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$ |
0.24 |
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$ |
0.05 |
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Net income per share Diluted |
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$ |
0.14 |
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$ |
0.04 |
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$ |
0.24 |
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$ |
0.04 |
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Weighted average shares used in computing net income per share: |
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Basic |
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34,917 |
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34,106 |
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34,798 |
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34,061 |
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Diluted |
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35,773 |
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35,178 |
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35,715 |
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35,190 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
athenahealth, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
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Six Months Ended |
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June 30, |
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2011 |
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2010 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
8,437 |
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$ |
1,575 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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8,055 |
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5,997 |
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Amortization of premium on investments |
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868 |
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733 |
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Provision for uncollectible accounts |
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593 |
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423 |
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Excess tax benefit from stock-based awards |
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(6,432 |
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(1,281 |
) |
Deferred income tax |
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(819 |
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(399 |
) |
Increase in fair value of contingent consideration |
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224 |
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304 |
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Stock-based compensation expense |
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7,916 |
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6,694 |
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Loss on interest rate derivative contract |
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73 |
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364 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(7,650 |
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(2,347 |
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Prepaid expenses and other current assets |
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5,985 |
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(584 |
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Other long-term assets |
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166 |
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277 |
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Accounts payable |
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781 |
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128 |
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Accrued expenses |
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388 |
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(896 |
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Deferred revenue |
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4,887 |
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4,866 |
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Deferred rent |
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(3,303 |
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(614 |
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Net cash provided by operating activities |
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20,169 |
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15,240 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capitalized software development costs |
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(3,068 |
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(1,579 |
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Purchases of property and equipment |
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(6,841 |
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(9,870 |
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Proceeds from sale or disposal of equipment |
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363 |
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Proceeds from sales and maturities of investments |
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86,834 |
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50,450 |
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Purchases of short-term and long-term investments |
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(80,175 |
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(60,372 |
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Payments for acquisition |
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(6,988 |
) |
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Decrease in restricted cash |
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2,887 |
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331 |
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Net cash used in investing activities |
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(7,351 |
) |
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(20,677 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from issuance of common stock under stock plans |
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4,558 |
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3,425 |
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Excess tax benefit from stock-based awards |
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6,432 |
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1,281 |
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Payment of contingent consideration accrued at acquisition date |
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(2,558 |
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Payment to terminate interest rate derivative contract |
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(563 |
) |
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Payments on long-term debt and capital lease obligations |
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(9,216 |
) |
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(1,786 |
) |
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Net cash (used in) provided by financing activities |
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(1,347 |
) |
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2,920 |
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Effects of exchange rate changes on cash and cash equivalents |
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(45 |
) |
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(64 |
) |
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Net increase in cash and cash equivalents |
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11,426 |
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(2,581 |
) |
Cash and cash equivalents at beginning of period |
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35,944 |
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30,526 |
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Cash and cash equivalents at end of period |
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$ |
47,370 |
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$ |
27,945 |
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Supplemental disclosures of non-cash items Property and equipment
recorded in accounts payables and accrued expenses |
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$ |
222 |
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$ |
273 |
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Supplemental disclosures Cash paid for interest |
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$ |
225 |
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$ |
284 |
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Supplemental disclosures Cash paid for taxes |
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$ |
804 |
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$ |
1,389 |
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Property and equipment acquired under capital leases |
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$ |
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$ |
363 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
athenahealth, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited amounts in thousands, except per-share amounts)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared by
athenahealth, Inc. (the Company) in accordance with accounting principles generally
accepted in the United States (GAAP) for interim financial reporting and as required by
Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of the Companys management, the
accompanying unaudited condensed consolidated financial statements contain all adjustments
(consisting of items of a normal and recurring nature) necessary to present fairly the financial
position as of June 30, 2011, and the results of operations for the three and six month periods
ended June 30, 2011 and 2010 and cash flows for the six month period ended June 30, 2011 and 2010.
The results of operations for the three and six month periods ended June 30, 2011 are not
necessarily indicative of the results to be expected for the full year. When preparing financial
statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, expenses, and related disclosures at the date of the
financial statements. Actual results could differ from those estimates.
The Company considers events or transactions that occur after the balance sheet date but
before the financial statements are issued to provide additional evidence relative to certain
estimates or to identify matters that require additional disclosure. Subsequent events have been
evaluated through the date of issuance of these financial statements. The accompanying unaudited
condensed consolidated financial statements and notes thereto should be read in conjunction with
the audited consolidated financial statements for the year ended December 31, 2010, included in the Companys
Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (SEC) on
February 18, 2011.
2. RECENT ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by the FASB and are adopted by the Company
as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of other
recently issued accounting pronouncements will not have a material impact on its consolidated
financial position, results of operations, and cash flows, or do not apply to its operations.
3. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted average number
of common shares outstanding during the period. Diluted net income per share is computed by
dividing net income by the weighted average number of common shares outstanding and potentially
dilutive securities outstanding during the period under the treasury stock method. Potentially
dilutive securities include stock options, restricted stock units, shares to be purchased under the
employee stock purchase plan, and warrants. Under the treasury stock method, dilutive securities
are assumed to be exercised at the beginning of the periods and as if funds obtained thereby were
used to purchase common stock at the average market price during the period. Securities are
excluded from the computations of diluted net income per share if their effect would be
antidilutive to earnings per share.
4
athenahealth, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited amounts in thousands, except per-share amounts)
The following table reconciles the weighted average shares outstanding for basic and diluted
net income per share for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income |
|
$ |
5,186 |
|
|
$ |
1,298 |
|
|
$ |
8,437 |
|
|
$ |
1,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing basic
net income per share |
|
|
34,917 |
|
|
|
34,106 |
|
|
|
34,798 |
|
|
|
34,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
$ |
0.15 |
|
|
$ |
0.04 |
|
|
$ |
0.24 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,186 |
|
|
$ |
1,298 |
|
|
$ |
8,437 |
|
|
$ |
1,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing basic
net income per share |
|
|
34,917 |
|
|
|
34,106 |
|
|
|
34,798 |
|
|
|
34,061 |
|
Effect of dilutive securities |
|
|
856 |
|
|
|
1,072 |
|
|
|
917 |
|
|
|
1,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing
diluted net income per share |
|
|
35,773 |
|
|
|
35,178 |
|
|
|
35,715 |
|
|
|
35,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted |
|
$ |
0.14 |
|
|
$ |
0.04 |
|
|
$ |
0.24 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The computation of diluted net income per share does not include 1,412 and 1,161 options
and restricted stock units for the three and six months ended June 30, 2011, respectively, because
their inclusion would have an antidilutive effect on net income per share. The computation of
diluted net income per share does not include 2,927 options for the three and six months ended June
30, 2010, because their inclusion would have an antidilutive effect on net income per share.
4. COMPREHENSIVE INCOME
Comprehensive income was as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income |
|
$ |
5,186 |
|
|
$ |
1,298 |
|
|
$ |
8,437 |
|
|
$ |
1,575 |
|
Unrealized holding gain (loss) on
available-for-sale investments, net of tax |
|
|
25 |
|
|
|
2 |
|
|
|
15 |
|
|
|
(54 |
) |
Foreign currency translation adjustment |
|
|
(17 |
) |
|
|
(65 |
) |
|
|
15 |
|
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
5,194 |
|
|
$ |
1,235 |
|
|
$ |
8,467 |
|
|
$ |
1,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of June 30, 2011 and December 31, 2010, the carrying amounts of cash and cash equivalents,
restricted cash, receivables, accounts payable, and accrued expenses approximated their estimated
fair values because of the short-term nature of these financial instruments. All highly liquid debt
instruments purchased with a maturity of three months or less at the date of acquisition are
included in cash and cash equivalents. Included in cash and cash equivalents as of June 30, 2011
and December 31, 2010, are money market fund investments of $28,932 and $10,799, respectively,
which are reported at fair value.
At December 31, 2010, the carrying amounts of the Companys debt obligations approximate fair
value based upon its best estimate of interest rates that would be available to the Company for
similar debt obligations. The estimated fair value of its long-term debt was determined using
quoted market prices and other inputs that were derived from available market information and may
not be representative of actual values that could have been or will be realized in the future.
5
athenahealth, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited amounts in thousands, except per-share amounts)
The following table presents information about the Companys financial assets and liabilities
that are measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, and
indicates the fair value hierarchy of the valuation techniques the Company utilized to determine
such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets or liabilities and fair values determined by
Level 2 inputs utilize quoted prices (unadjusted) in inactive markets for identical assets or
liabilities obtained from readily available pricing sources for similar instruments. The fair
values determined by Level 3 inputs are unobservable values which are supported by little or no
market activity. Investments include $20,266 of long-term U.S. government backed securities that
have been classified in investments and other assets on the condensed consolidated balance sheet at
June 30, 2011. Investments include $3,500 of long-term U.S. government backed securities and
$2,081 of long-term corporate bonds that have been classified in investments and other assets on
the condensed consolidated balance sheet at December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements At June 30, 2011, Using |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market |
|
$ |
28,932 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
28,932 |
|
Available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerical paper |
|
|
|
|
|
|
11,099 |
|
|
|
|
|
|
|
11,099 |
|
Corporate bonds |
|
|
|
|
|
|
43,939 |
|
|
|
|
|
|
|
43,939 |
|
U.S. government backed securities |
|
|
|
|
|
|
22,266 |
|
|
|
|
|
|
|
22,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
28,932 |
|
|
$ |
77,304 |
|
|
$ |
|
|
|
$ |
106,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued contingent consideration |
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,321 |
) |
|
$ |
(2,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,321 |
) |
|
$ |
(2,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2010, Using |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market |
|
$ |
10,799 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10,799 |
|
Corporate bonds |
|
|
|
|
|
|
577 |
|
|
|
|
|
|
|
577 |
|
Available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
|
|
|
|
|
29,642 |
|
|
|
|
|
|
|
29,642 |
|
Corporate bonds |
|
|
|
|
|
|
40,676 |
|
|
|
|
|
|
|
40,676 |
|
U.S. government backed securities |
|
|
|
|
|
|
15,494 |
|
|
|
|
|
|
|
15,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
10,799 |
|
|
$ |
86,389 |
|
|
$ |
|
|
|
$ |
97,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued contingent consideration |
|
$ |
|
|
|
$ |
|
|
|
$ |
(4,655 |
) |
|
$ |
(4,655 |
) |
Interest rate swap derivative contract |
|
|
|
|
|
|
(490 |
) |
|
|
|
|
|
|
(490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
(490 |
) |
|
$ |
(4,655 |
) |
|
$ |
(5,145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government backed securities, corporate bonds and commercial paper are valued using
a market approach based upon the quoted market prices of identical instruments when available or
other observable inputs such as trading prices of identical instruments in inactive markets or
similar securities. The interest rate swap derivative contract is valued using an interest rate
swap model and observable inputs at the reporting date.
It is the Companys policy to recognize transfers between levels of the fair value hierarchy,
if any, at the end of the reporting period however there have been no such transfers during any
periods presented.
Contingent consideration is recorded at fair value as an element of purchase price with
subsequent adjustments recognized in the consolidated statement of operations. At the acquisition
date and reporting date, the fair value of the accrued contingent consideration was determined
using a probability-weighted income approach based on upside, downside and base case scenarios.
This approach is based on significant inputs that are not observable in the market, which are
referred to as Level 3 inputs. As of June 30, 2011 and December 31, 2010, the Company has accrued a
liability of $2,321 and $4,655, respectively, for the estimated fair value of contingent
6
athenahealth, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited amounts in thousands, except per-share amounts)
considerations estimated to be payable upon the acquired company reaching specific performance
metrics over the initial three years of operation after acquisition. There are two separate
elements that make up the contingent consideration.
The first potential contingent consideration ranges from zero to $4,800 and is payable in one
installment based upon operational performance for the year ended December 31, 2010. Based on the
actual operational performance for the year ended December 31, 2010, the Company had accrued $2,400
relating to the first potential contingent consideration which was paid in March of 2011.
The second potential contingent consideration ranges from zero to $2,900 and is payable in
quarterly installments based upon the cross selling of the Companys services into the acquired
companys customer base for the years ended December 31, 2010 and 2011, and the six-month period
ending June 30, 2012. Any amounts not earned in the first potential contingent consideration can be
earned under the second potential contingent consideration in excess of the initial $2,900 bringing
the total potential contingent consideration to $5,300. At June 30, 2011, key assumptions relating
to the second potential contingent consideration include a discount rate of 20% and a probability
adjusted level of 50% for the base case scenario and 25% for the upside and downside scenarios. At
December 31, 2010, key assumptions relating to the second potential contingent consideration
included a discount rate of 21% and a probability adjusted level of 50% for the base case scenario
and 25% for the upside and downside scenarios. The change in the assumption was caused by the
expected results from 2011 and 2012 operations and resulted in an increase of $224 in the fair
value of the total contingent consideration during the six months ended June 30, 2011. The Company
paid $158 during the six months ended June 30, 2011, under the terms of the second potential
contingent consideration. No amounts were paid under either contingent consideration in the three
months ended June 30, 2011 and, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Balance beginning of period |
|
$ |
2,211 |
|
|
$ |
5,100 |
|
|
$ |
4,655 |
|
|
$ |
5,100 |
|
Payments |
|
|
|
|
|
|
|
|
|
|
(2,558 |
) |
|
|
|
|
Change in fair value (included in G&A expenses) |
|
|
110 |
|
|
|
304 |
|
|
|
224 |
|
|
|
304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of period |
|
$ |
2,321 |
|
|
$ |
5,404 |
|
|
$ |
2,321 |
|
|
$ |
5,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. INVESTMENTS
The summary of available-for-sale securities at June 30, 2011, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized |
|
|
|
|
|
|
Amortized Cost |
|
|
Gain (Loss) |
|
|
Fair Value |
|
Commercial paper |
|
$ |
11,090 |
|
|
$ |
9 |
|
|
$ |
11,099 |
|
Corporate bonds |
|
|
43,960 |
|
|
|
(21 |
) |
|
|
43,939 |
|
U.S. government backed securities |
|
|
22,253 |
|
|
|
13 |
|
|
|
22,266 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
77,303 |
|
|
$ |
1 |
|
|
$ |
77,304 |
|
|
|
|
|
|
|
|
|
|
|
Investments include $20,266 of long-term U.S. government backed securities that have been
classified in investments and other assets on the condensed consolidated balance sheet at June 30,
2011.
7
athenahealth, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited amounts in thousands, except per-share amounts)
The summary of available-for-sale securities at December 31, 2010, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized |
|
|
|
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Fair Value |
|
Commercial paper |
|
$ |
29,635 |
|
|
$ |
7 |
|
|
$ |
29,642 |
|
Corporate bonds |
|
|
40,694 |
|
|
|
(18 |
) |
|
|
40,676 |
|
U.S. government backed securities |
|
|
15,500 |
|
|
|
(6 |
) |
|
|
15,494 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
85,829 |
|
|
$ |
(17 |
) |
|
$ |
85,812 |
|
|
|
|
|
|
|
|
|
|
|
Investments include $3,500 of long-term U.S. government backed securities and $2,081 of
long-term corporate bonds that have been classified in investments and other assets on the
condensed consolidated balance sheet at December 31, 2010.
7. ACQUISITIONS
On June 24, 2011, the Company purchased certain net assets of the Point Lookout facility
located near Belfast, Maine for a purchase price of $7,700, which was adjusted for certain working
capital adjustments to arrive at a total cash consideration of $6,988. The facility will serve as
the Companys new client and employee training center. The valuation of the acquired land,
property and equipment is not final.
Subsequent
event On July 21, 2011, the Company entered into an agreement and plan of merger
with Proxsys LLC for approximately $28 million in cash with the potential for additional
consideration of up to $8 million based upon the achievement of certain business and financial
milestones. The total value of the consideration will be subject to working capital
adjustments and the fair value of the contingent consideration. The
merger is expected to broaden the Companys
product offerings by bringing hospital order management capabilities to the Companys service
platform. The transaction is expected to close in the third quarter
of 2011.
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The summary of outstanding debt and capital lease obligations is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
As of December 31, |
|
|
|
2011 |
|
|
2010 |
|
Term loan |
|
$ |
|
|
|
$ |
5,325 |
|
Capital lease obligation |
|
|
|
|
|
|
3,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,216 |
|
Less current portion of long-term debt and capital lease obligations |
|
|
|
|
|
|
(2,909 |
) |
|
|
|
|
|
|
|
Long-term debt and capital lease obligations, net of current portion |
|
$ |
|
|
|
$ |
6,307 |
|
|
|
|
|
|
|
|
2008
Term and Revolving Loans On September 30, 2008, the Company entered into a credit agreement (the Credit Agreement) with a financial institution. The Credit Agreement consists of a
revolving credit facility in the amount of $15,000 and a term loan facility in the amount of $6,000
(collectively, the Credit Facility). The revolving credit facility may be extended by an
additional $15,000 on the satisfaction of certain conditions and includes a $10,000 sublimit for
the issuance of standby letters of credit. The revolving credit
facility matures on September 30,
2011, and the term loan facility originally matured on September 30, 2013, although either facility may be
voluntarily prepaid in whole or in part at any time without premium or penalty. On September 30, 2008, the
Company borrowed a total of $6,000 under the term loan facility for general working capital
purposes. The term loan has a 5 year term which is payable quarterly starting December 31, 2008,
for $75 each quarter. The Company has the option to extend the loan, subject to agreement of the
lender, at the end of the 5 year term. On May 4, 2011, the Company repaid the outstanding balance
of the term loan and as a result, the entire Credit Agreement now matures on September 30, 2011. As of June 30, 2011, there were no amounts outstanding under
the Credit Agreement.
The obligations of the Company and its subsidiaries under the Credit Agreement are
collateralized by substantially all assets.
Capital Lease Obligations In June 2007, the Company entered into a master lease and security
agreement (the Equipment Line) with a financing company. The Equipment Line allows for the
Company to lease from the financing company eligible equipment purchases, submitted within 90 days
of the applicable equipments invoice date. Each lease has a 36 month term which is payable in
equal monthly installments, commencing on the first day of the fourth month after the date of the
disbursements of such
8
athenahealth, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited amounts in thousands, except per-share amounts)
loan and continuing on the first day of each month thereafter until paid in full. The
Company has accounted for these as capital leases. On May 4, 2011 the Company terminated these
leases and elected to purchase the assets for $1,103. At June 30, 2011 and December 31, 2010, the
Company had $0 and $3,891, respectively, of outstanding capital leases. The weighted average
interest rate implicit in the leases was 4.3%.
9. INTEREST RATE SWAP
The Company entered into a derivative instrument which has a decreasing notional value over
the term to offset the cash flow exposure associated with its interest payments on certain
outstanding debt. In October 2008, we entered into an interest rate swap derivative contract to
mitigate the cash flow exposure associated with our interest payments on certain outstanding debt.
The Companys interest rate swap is not designated as a hedging instrument. The derivative is accounted for
at fair value with gains or losses reported in earnings.
The swap had a notional amount of $5,850 to hedge changes in cash flows attributable to
changes in the LIBOR rate associated with the September 30,
2008, issuance of the term loan facility due
September 30, 2028. We pay a fixed rate of 4.5% and receive a variable rate based on one month
LIBOR. In May 2011, in connection with the repayment on the term loan, the Company terminated the
swap at its fair value. The fair value of derivatives as of June 30, 2011, and December 31, 2010,
is summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives |
|
Fair Value as of |
|
|
|
Balance Sheet Location |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Interest rate derivative contract |
|
Interest rate derivative liability |
|
$ |
|
|
|
$ |
490 |
|
|
|
|
|
|
|
|
|
|
Total derivative |
|
|
|
$ |
|
|
|
$ |
490 |
|
|
|
|
|
|
|
|
|
|
The effect of derivative instruments on the consolidated statement of operations for the
three months ended June 30, 2011 and 2010, is summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Recognized in Earnings |
|
Loss Recognized in Earnings |
|
|
Location of Loss Recognized in |
|
for Three Months Ended |
|
for Three Months Ended |
|
|
Earnings |
|
June 30, 2011 |
|
June 30, 2010 |
Interest rate contracts |
|
Loss on interest rate derivative contract |
|
$ |
(138 |
) |
|
$ |
(304 |
) |
The effect of derivative instruments on the consolidated statement of operations
for the six months ended June 30, 2011 and 2010, is summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Recognized in Earnings |
|
Loss Recognized in Earnings |
|
|
Location of Loss Recognized in |
|
for Six Months Ended June |
|
for Six Months Ended June |
|
|
Earnings |
|
30, 2011 |
|
30, 2010 |
Interest rate contracts |
|
Loss on interest rate derivative contract |
|
$ |
(73 |
) |
|
$ |
(364 |
) |
Derivatives are carried at fair value, as determined using standard valuation models, and
adjusted, when necessary, for credit risk and are separately presented on the balance sheet.
10. COMMITMENTS AND CONTINGENCIES
On March 2, 2010, a complaint was filed by Prompt Medical Systems, L.P. naming the
Company and several other defendants in a patent infringement case (Prompt Medical Systems, L.P. v.
AllscriptsMisys Healthcare Solutions, Inc. et al., Civil Action No. 6:2010cv00071, United States
District Court for the Eastern District of Texas). The complaint alleges that the Company has
9
athenahealth, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited amounts in thousands, except per-share amounts)
infringed U.S. Patent No. 5,483,443 with a listed issue date of January 9, 1996, entitled Method
for Computing Current Procedural Terminology Codes from Physician Generated Documentation. The
complaint seeks an injunction enjoining infringement, damages, and pre- and post-judgment costs and
interest. The Company and several other defendants filed motions to dismiss the complaint. On
February 11, 2011, the Court issued an Order granting-in-part and denying-in-part the motions to
dismiss. The Court ordered the plaintiff to replead certain claims within fourteen days of the
Order.
On February 23, 2011, the plaintiff filed its amended complaint in response to the Courts
February 11, 2011, order. The Company filed its answer to the amended complaint on March 9, 2011,
asserting a number of defenses and counterclaiming for a declaration of non-infringement,
invalidity, and unenforceability. The Company also filed a joint motion with other defendants
seeking sanctions for the plaintiffs spoliation of evidence, which is now fully briefed.
On November 24, 2010, several defendants filed (i) a motion for summary judgment of invalidity
against the patent-in-suit on the basis that it claims only non-patentable subject matter and (ii)
a motion to stay all proceedings pending the resolution of the motion for summary judgment. The
Company filed a motion to join in the motion to stay the proceedings. The motions are fully briefed
and awaiting a decision by the Court. On May 18, 2011, the defendants provided notice that they
wish to continue to urge the pending motion for summary judgment as to the first amended complaint.
The case is currently in the discovery phase. A claim construction hearing is scheduled for
November 11, 2011. Trial is scheduled for June 11, 2012. On June 17, 2011, the defendants filed a
notice of their disclosure of preliminary proposed claim constructions and extrinsic evidence.
The Company is being indemnified in this lawsuit from and against any liability and reasonable
costs, including attorneys fees, incurred by the Company in its defense, pursuant to a license
agreement with its vendor.
The Company believes that it has meritorious defenses to the lawsuit and continues to contest
it vigorously.
On March 19, 2010, a putative shareholder class action complaint was filed in the
United States District Court for the District of Massachusetts against the Company and certain of
its current and former officers entitled Casula v. athenahealth, Inc. et al., Civil Action No.
1:10-cv-10477. On June 3, 2010, the court appointed Waterford Township General Employees Retirement
System as the lead plaintiff. On August 2, 2010, the lead plaintiff filed an amended complaint. The
amended complaint alleges that the defendants violated the federal securities laws by disseminating
false and misleading statements through press releases, statements by senior management, and SEC
filings. The alleged false and misleading statements concern, among other things, the amortization
period for deferred implementation revenues. The amended complaint seeks unspecified damages,
costs, and expenses. The defendants filed a motion to dismiss the amended complaint on October 1,
2010, and a reply brief in further support of the motion to dismiss the amended complaint on
December 30, 2010. The Company believes that it has meritorious defenses to the amended complaint
and will contest the claims vigorously.
On March 17, 2011, a complaint was filed by PPS Data, LLC naming the Company and several other
defendants in a patent infringement case (PPS Data, LLC v. Allscripts Healthcare Solutions, Inc. et
al., Civil Action No. 3:11-CU-273-J-99MMH-TEM, United States District Court for the Middle District
of Florida). The complaint alleges that the Company has infringed U.S. Patent No. 6,343,271 with a
listed issue date of January 29, 2002, entitled Electronic Creation, Submission, Adjudication, and
Payment of Health Insurance Claims. The complaint seeks an injunction enjoining infringement,
damages, pre- and post-judgment costs and interest, and attorneys fees. On April 14, 2011, the
Company filed a motion to dismiss, or, in the alternative, a motion for summary judgment. On May 5,
2011, the Company filed a motion to sever and transfer the case. Both the April 14 and May 5, 2011,
motions were fully briefed and the Court heard oral argument on July 12, 2011. The Court has not
yet ruled on either of these motions. The Company believes that it has meritorious defenses to the
complaint and will continue to contest the claims vigorously.
On May 25, 2011, a complaint was filed by Medsquire, LLC naming the Company and several other
defendants in a patent infringement case (Medsquire, LLC v. Spring Medical Systems, Inc. et al.,
Civil Action
No. 2:11-CV-04504-DSF-AGR, United States District Court for the Central District of
California). The complaint alleges that the Company has infringed U.S. Patent No. 5,682,526 with a listed issue date of October 28, 1997,
entitled Method and System for Flexibly Organizing, Recording, and Displaying Medical Patient Care
Information Using Fields in a Flowsheet. The complaint seeks damages, pre-judgment interest, and
attorneys fees. On July 18, 2011, several of the defendants, including the Company, filed a
partial motion to dismiss. The Company believes that it has meritorious defenses to the complaint
and will contest the claims vigorously.
On July 18, 2011, the Company filed a complaint against AdvancedMD Software, Inc. in the
United States District Court for the District of Massachusetts. The complaint alleges that AdvancedMD Software, Inc. has infringed two of the Companys U.S. Patents: No. 7,617,116, which was issued
on November 10, 2009, for Practice Management and Billing Automation System and No. 7,720,701,
which was issued on May 18, 2010, for Automated Configuration of Medical Practice Management
Systems. The Company is seeking permanent injunctive relief, damages, pre- and post-judgment costs
and interest, and attorneys fees.
On or about July 18, 2011, a complaint was filed in the Superior Court for Waldo County,
Maine, against the Company entitled Cordjia, LLC v. athenahealth, Inc. The complaint alleges that
the Company entered into a partnership with the plaintiff to purchase property in Maine, that the
parties entered into a mutual non-disclosure agreement governing the sharing of confidential
information between them, and that the Company subsequently terminated the partnership and
purchased the property itself, using the confidential information obtained from the plaintiff to do
so. The complaint purports to state claims for common-law fraud, negligent misrepresentation,
breach of fiduciary duty, unjust enrichment, quantum meruit, promissory estoppel, breach of
contract, and violation of the Maine Uniform Trade Secrets Act. The complaint seeks unspecified
damages, fees and costs, and injunctive relief enjoining the Company from making further use of the
plaintiffs confidential information and requiring the Company to return all confidential
information in its possession to the plaintiff. The Company believes that it has meritorious
defenses to the complaint and intends to contest the claims vigorously.
10
athenahealth, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited amounts in thousands, except per-share amounts)
In addition, from time to time the Company may be subject to other legal proceedings, claims,
and litigation arising in the ordinary course of business. The Company does not, however, currently
expect that the ultimate costs to resolve any pending matter will have a material adverse effect on
the Companys consolidated financial position, results of operations, or cash flows.
11
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other
than statements of historical fact contained in this Quarterly Report on Form 10-Q are
forward-looking statements, including those regarding expanded sales and marketing efforts; changes
in expenses related to operations, selling, marketing, research and development, general and
administrative matters, and depreciation and amortization; liquidity issues; additional
fundraising; and the expected performance period and estimated term of our client relationships, as
well as more general statements regarding our expectations for future financial and operational
performance, product and service offerings, regulatory environment, and market trends. In some
cases, you can identify forward-looking statements by terminology such as may, will, should,
expects, plans, anticipates, believes, estimates, predicts, potential, or continue;
the negative of these terms; or other comparable terminology. Forward-looking statements in this
Item 2 include, without limitation, statements reflecting managements expectations for future
financial performance and operating expenditures, expected growth, profitability and business
outlook, increased sales and marketing expenses, increased cross-selling efforts among the
Companys service offerings, expected client implementations, expected certification and regulatory
approvals and the benefits of the Companys current service offerings and research and development
for new service offerings and the benefits of current and expected strategic and sales and
marketing relationships.
Forward-looking statements are only current predictions and are subject to known and unknown
risks, uncertainties, and other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from those anticipated by such statements.
These factors include, among other things, those set forth in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2010, under the heading Part I, Item 1A Risk Factors and any
set forth below under Part II, Item 1A, Risk Factors.
Although we believe that the expectations reflected in the forward-looking statements
contained in this Quarterly Report on Form 10-Q are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements. Except as required by law, we are under no duty
to update or revise any of such forward-looking statements, whether as a result of new information,
future events, or otherwise, after the date of this Quarterly Report on Form 10-Q.
Overview
athenahealth provides business services that help medical practices achieve and sustain
financial health by collecting more money and exercising more control over their administrative
tasks. These services are designed to reduce the administrative burden of complex billing rules,
quality measurement and reporting, clinical documentation and data exchange, patient communication,
and many of the related tasks that distract medical providers and staff from the practice of
medicine. Our services are delivered and consumed through a single instance of our cloud-based
platform, athenaNet. We differentiate our services by regularly deploying updates and improvements
through athenaNet to clients without any action on the part of the client. athenaNet enables us to
quickly implement our solution at a low up-front cost and to seamlessly work in tandem with our
clients in real time.
The services provided through our single-instance cloud are currently packaged as three
integrated components: athenaCollector for revenue cycle management, athenaClinicals for clinical
cycle management, and athenaCommunicator for patient cycle management. The use of our
single-instance platform allows all clients to benefit from the collective knowledge of all of our
other clients through our patented billing Rules Engine and our clinical Quality Management Engine.
Our clients use these rules engines to monitor and benchmark their performance with peer practices
across the network. Our business intelligence application, Anodyne Analytics, also supports our
clients in their pursuit of financial health by equipping users with data visualization tools and
insight into their practices performance.
Each service we provide is supported by a model comprised of three distinct components:
Software, Knowledge, and Work. The cloud-based software is provided at no extra charge to users but
is the primary conduit through which we exchange information between clients, payers, and our staff
of experts. Knowledge is infused into each of our services via our Rules Engine as we work with
clients, payers, and other partners to codify rules associated with reimbursement, clinical quality
measures, and other factors related to our clients performance. The third component to each of our
services is the Work that we perform on behalf of our clients. Wherever possible, we replace manual
processes with automation, but where automation is not possible, we provide that manual labor
rather than returning it to clients to be completed. This unique service model of Software,
Knowledge, and Work has allowed us to align our success with our clients performance, creating a
continual cycle of improvement and efficiency. We charge clients a percentage of collections in
most cases, so our financial results are a direct reflection of our ability to drive revenue to
medical practices.
For the six months ended June 30, 2011, we generated revenue of $147.8 million from the sale
of our services compared to $113.0 million for the six months ended June 30, 2010. For the three
months ended June 30, 2011, we generated revenue of $77.9 million from the sale of our services
compared to $58.6 million for the three months ended June 30, 2010. In 2010, we generated revenue
of $245.5 million from the sale of our services compared to $188.5 million in 2009. Given the scope
of our market opportunity, we have increased our spending each year on growth, innovation, and
infrastructure. Despite increased spending in these areas, higher revenue and lower operating
expenses as a percentage of revenue typically lead to greater operating income.
12
Our revenue is predominately derived from business services that we provide on an ongoing
basis. This revenue is generally determined as a percentage of payments collected by us on behalf
of our clients, so the key drivers of our revenue include growth in the number of physicians
working within our client accounts, the collections of these physicians, and the number of services
purchased. To provide these services, we incur expenses in several categories, including direct
operating, selling and marketing, research and development, general and administrative, and
depreciation and amortization expense. In general, our direct operating expense increases as our
volume of work increases, whereas our selling and marketing expense increases in proportion to our
intended growth rate of adding new accounts to our network of physician clients. Our other expense
categories are less directly related to growth of revenues and relate more to our planning for the
future, our overall business management activities, and our infrastructure. As our revenues have
grown, the difference between our revenue and our direct operating expense also has grown, which
has afforded us the ability to spend more in other categories of expense and to experience
increases in operating income. We manage our cash and our use of credit facilities to ensure
adequate liquidity, in adherence to related financial covenants.
Recent Development
On July 21, 2011, the Company entered into an agreement and plan of merger with
Proxsys LLC for approximately $28 million in cash with the potential for additional
consideration of up to $8 million based upon achievement of certain business and financial
milestones. The merger is expected to broaden the Companys product offerings by
bringing hospital care order management capabilities to the Companys service platform.
The transaction is expected to close in the third quarter of
2011.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with GAAP requires us
to make estimates and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosures of contingent assets and liabilities as of the date of
the financial statements, and the reported amounts of revenues and expenses during the reporting
periods. Significant estimates and assumptions are used for, but are not limited to: (1) revenue
recognition, including our estimated expected customer life; (2) allowance for doubtful accounts;
(3) asset impairments (4) depreciable lives of assets; (5) economic lives and fair value of leased
assets; (6) income tax reserves and valuation allowances; (7) fair value of stock options; (8)
allocation of direct and indirect cost of sales; (9) fair value of contingent consideration and
(10) litigation reserves. Future events and their effects cannot be predicted with certainty, and
accordingly, our accounting estimates require the exercise of judgment. The accounting estimates
used in the preparation of our consolidated financial statements will change as new events occur,
as more experience is acquired, as additional information is obtained and as our operating
environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and
may employ outside experts to assist in our evaluations. Actual results could differ from the
estimates we have used.
Critical accounting policies are those policies that affect our more significant judgments and
estimates used in the preparation of our condensed consolidated financial statements. We believe
our critical accounting policies include our policies regarding revenue recognition, software
development costs, stock-based compensation, income taxes, and contingent consideration. For a more
detailed discussion of our critical accounting policies, please refer to our Annual Report on Form
10-K for the fiscal year ended December 31, 2010, as filed with the SEC on February 18, 2011. For recent accounting pronouncements, please refer to Note 2.
Financial Operations Overview
Revenue. We derive our revenue from two sources: from business services associated with our
revenue cycle, clinical cycle, patient cycle and Anodyne Analytics offerings and from
implementation and other services. Implementation and other revenue consist primarily of
professional services fees related to assisting clients with the initial implementation of our
services and for ongoing training and related support services. Business services accounted for
approximately 97% and 96% of our total revenues for the six months ended June 30, 2011 and 2010,
respectively. Business services revenue are typically 2% to 8% of a practices total collections
depending upon the services purchased, the size, complexity, and other characteristics of the
practice, plus a per-statement charge for billing statements that are generated for patients.
Accordingly, business services revenue is largely driven by: the number of physician practices and
other service providers we serve, the number of physicians and other medical providers working in
those physician practices, the volume of activity and related collections of those physicians, the
mix of our services used by those physician practices and other medical providers, and our
contracted rates. We expect to increase the number of physician practices we serve through
increased sales and marketing expense, and we expect our existing clients to use more of our
services through cross-selling efforts and growth in the number of combined services sales. There
is moderate seasonality in the activity level of physician practices. Typically, discretionary use
of physician services declines in the late summer and during the holiday season, which leads to a
decline in collections by our physician clients about 30 to 50 days later. Additionally, the volume
of activity and related collections vary from year to year based in large part on the severity,
length and timing of the onset of the flu season. While we believe that the severity, length and
timing of the onset of the cold and flu season will continue to impact collections by our physician
clients, there can be no assurance that our future sales of these products will necessarily follow
historical patterns. Implementation revenue and other revenue are largely driven by the increase
in the volume of our new business. As a result, we expect implementation and other revenue to
increase in absolute terms for the foreseeable future but to remain relatively consistent as a
percentage of total revenue. None of our clients accounted for more than 10% of our total revenues
for the three and six months ended June 30, 2011, and 2010.
Direct Operating Expense. Direct operating expense consists primarily of salaries, benefits,
claim processing costs, other direct expenses, and stock-based compensation related to personnel
who provide services to clients, including staff who implement new clients. We expense
implementation costs as incurred. We include in direct operating expense all service costs
associated with athenaCollector, athenaClinicals, athenaCommunicator, ReminderCall, and Anodyne
Analytics. Although we expect that direct operating expense will increase in absolute terms for
the foreseeable future, the direct operating expense is expected to decline as a
13
percentage of
revenue over time as we increase automation. We expect to increase our overall level of automation
as we become a
larger operation, with higher volumes of work in particular functions, geographies, and
medical specialties. We also expect these expenses to increase in absolute terms for the
foreseeable future but to decline as a percentage of revenue. This decrease will also be driven by
increased levels of automation and economies of scale. Direct operating expense does not include
allocated amounts for rent, occupancy and other indirect costs (including building maintenance and
utilities), depreciation, and amortization, except for amortization related to purchased intangible
assets.
Selling and Marketing Expense. Selling and marketing expense consists primarily of marketing
programs (including trade shows, brand messaging, and on-line initiatives) and personnel-related
expense for sales and marketing employees (including salaries, benefits, commissions, stock-based
compensation, non-billable travel, lodging, and other out-of-pocket employee-related expenses).
Although we recognize substantially all of our revenue when services have been delivered, we
recognize a large portion of our sales commission expense at the time of contract signature and at
the time our services commence. Accordingly, we incur a portion of our sales and marketing expense
prior to the recognition of the corresponding revenue. We have increased our sales and marketing
expenses from year to year and we expect to continue to increase our investment in sales and
marketing by hiring additional direct sales personnel and support personnel to add new clients and
increase sales to our existing clients and expand awareness through paid search and other similar
initiatives. We also plan to expand our marketing activities, such as attending trade shows,
expanding user groups, and creating new printed materials. As a result, we expect that sales and
marketing expense will increase in absolute terms and will likely increase as a percentage of total
revenue in the near-term.
Research and Development Expense. Research and development expense consists primarily of
personnel-related expenses for research and development employees (including salaries, benefits,
stock-based compensation, non-billable travel, lodging, and other out-of-pocket employee-related
expenses) and consulting fees for third-party developers. We expect that in the future, research
and development expense will increase in absolute terms but not as a percentage of total revenue as
new services and more mature products require incrementally less new research and development
investment.
General and Administrative Expense. General and administrative expense consists primarily of
personnel-related expense for administrative employees (including salaries, benefits, stock-based
compensation, non-billable travel, lodging, and other out-of-pocket employee-related expense),
occupancy and other indirect costs (including building maintenance and utilities), and insurance
premiums; software license fees; outside professional fees for accountants, lawyers, and
consultants; and compensation for temporary employees. We expect that general and administrative
expense will increase in absolute terms as we invest in infrastructure to support our growth.
Though expenses are expected to continue to rise in absolute terms, we expect general and
administrative expense to decline as a percentage of total revenue over time.
Depreciation and Amortization Expense. Depreciation and amortization expense consists
primarily of depreciation of fixed assets and amortization of capitalized software development
costs, which we amortize over a two-year period from the time of release of related software code.
As we grow, we will continue to make capital investments in the infrastructure of the business and
we will continue to develop software that we capitalize. At the same time, because we are spreading
fixed costs over a larger client base, we expect related depreciation and amortization expense to
decline as a percentage of total revenue over time.
Other Income (Expense). Interest expense has historically consisted of interest costs related
to our equipment-related term leases and our term loan and revolving loans under our credit
facility, offset by interest income on investments. Interest income represents earnings from our
cash, cash equivalents, and investments. The gain (loss) on the interest rate derivative contract
represented the change in the fair market value of a derivative instrument that is not designated
as a hedge. As we have repaid all capital leases, the term loan and terminated the interest rate
derivative contract during the three months ended June 30, 2011, we expect that our interest
expense will be insignificant until such time we determine that entering into new financing
arrangements is appropriate.
Results of Operations
Comparison of the Six Months Ended June 30, 2011 and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Change |
|
|
|
2011 |
|
|
2010 |
|
|
Amount |
|
|
Percent |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Business services |
|
$ |
142,835 |
|
|
$ |
108,964 |
|
|
$ |
33,871 |
|
|
|
31 |
% |
Implementation and other |
|
|
4,980 |
|
|
|
4,065 |
|
|
|
915 |
|
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
147,815 |
|
|
$ |
113,029 |
|
|
$ |
34,786 |
|
|
|
31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Total revenue for the six months ended June 30, 2011, was $147.8 million, an
increase of $34.8 million, or 31%, over revenue of $113.0 million for the six months ended June 30,
2010. This increase was due almost entirely to an increase in business services revenue.
14
Business Services Revenue. Revenue from business services for the six months ended June 30,
2011, was $142.8 million, an increase of 31%, over revenue of $109.0 million for the six months
ended June 30, 2010. This increase was primarily due to the growth in the number of physicians and
medical providers using our services. The summary of changes in the physicians and active medical
providers using our revenue cycle management service, athenaCollector, clinical cycle management
service, athenaClinicals, and patient cycle management service, athenaCommunicator are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
|
|
2011 |
|
2010 |
|
Change |
|
|
Amount |
|
Amount |
|
Amount |
|
Percent |
Physicians revenue cycle management service |
|
|
20,824 |
|
|
|
17,136 |
|
|
|
3,688 |
|
|
|
22 |
% |
Active medical providers revenue cycle management service |
|
|
29,482 |
|
|
|
24,782 |
|
|
|
4,700 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physicians clinicals cycle management service |
|
|
3,444 |
|
|
|
1,548 |
|
|
|
1,896 |
|
|
|
122 |
% |
Active medical providers clinicals cycle management service |
|
|
4,848 |
|
|
|
2,256 |
|
|
|
2,592 |
|
|
|
115 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physicians patient cycle management service |
|
|
1,198 |
|
|
|
442 |
|
|
|
756 |
|
|
|
171 |
% |
Active medical providers patient cycle management service |
|
|
1,936 |
|
|
|
689 |
|
|
|
1,247 |
|
|
|
181 |
% |
Also contributing to this increase was the growth in related collections on behalf of these
physicians and medical providers. The amount of collections processed for the six months ended June
30, 2011 was 3.4 billion, an increase of 0.7 billion, or 25%, over posted collections of 2.7
billion for the six months ended June 30, 2010.
Implementation and Other Revenue. Revenue from implementations and other sources was $5.0
million for the six months ended June 30, 2011, an increase of $0.9 million, or 23%, over revenue
of $4.1 million for the six months ended June 30, 2010. This increase was driven by new client
implementations and increased professional services for our larger client base as described above.
The increase in implementation and other revenue is the result of the increase in the volume of our
business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
Change |
|
|
2011 |
|
2010 |
|
Amount |
|
Percent |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Direct operating costs |
|
$ |
56,290 |
|
|
$ |
47,620 |
|
|
$ |
8,670 |
|
|
|
18 |
% |
Direct Operating Costs. Direct operating expense for the six months ended June 30, 2011,
was $56.3 million, an increase of 18%, over costs of $47.6 million for the six months ended June
30, 2010. This increase was primarily due to an increase in the number of claims that we processed
on behalf of our clients and the related expense of providing services, including transactions
expense and employee-related costs. The total claims submitted on behalf of clients for the six
months ended June 30, 2011 was 28.0 million, an increase of 5.5 million, or 25%, over total claims
submitted of 22.5 million for the six months ended June 30, 2010. Direct operating employee-related
costs increased $3.5 million from the six months ended June 30, 2010, to the six months ended June
30, 2011. This increase is primarily due to the 14% increase in headcount since June 30, 2010. We
increased headcount to meet the current and anticipated demand for our services as our customer
base has expanded and includes larger medical groups.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Change |
|
|
|
2011 |
|
|
2010 |
|
|
Amount |
|
|
Percent |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
$ |
35,756 |
|
|
$ |
24,753 |
|
|
$ |
11,003 |
|
|
|
44 |
% |
Research and development |
|
|
10,245 |
|
|
|
8,898 |
|
|
|
1,347 |
|
|
|
15 |
% |
General and administrative |
|
|
23,437 |
|
|
|
23,080 |
|
|
|
357 |
|
|
|
2 |
% |
Depreciation and amortization |
|
|
7,135 |
|
|
|
5,077 |
|
|
|
2,058 |
|
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
76,573 |
|
|
$ |
61,808 |
|
|
$ |
14,765 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and Marketing Expense. Selling and marketing expense for the six months ended
June 30, 2011, was $35.8 million, an increase of $11.0 million, or 44%, over costs of $24.8 million
for the six months ended June 30, 2010. This increase was primarily due to an increase in
employee-related costs, stock-based compensation expense, internal sales commissions and external
partner
15
channel commission of $6.3 million due to an increase in headcount and external channel
partners. Our sales and marketing headcount increased by 40% since June 30, 2010, as we hired
additional sales personnel to focus on adding new customers and increasing penetration within our
existing markets. The increase was also due to a $4.7 million increase in travel-related expenses,
consulting and other software licenses, online marketing, offline marketing and other marketing
events.
Research and Development Expense. Research and development expense for the six months ended
June 30, 2011, was $10.2 million, an increase of $1.3 million or 15% over research and development
expense of $8.9 million for the six months ended June 30, 2010. This increase was due to higher
employee-related costs and stock-based compensation expense of $1.3 million as a result of the
increased headcount. Our research and development headcount increased 27% since June 30, 2010, as
we hired additional research and development personnel in order to upgrade and extend our service
offerings and develop new technologies.
General and Administrative Expense. General and administrative expense for the six months
ended June 30, 2011, was $23.4 million, an increase of approximately $0.3 million, or 2%, over general and
administrative expenses of $23.1 million for the six months ended June 30, 2010. General and
administrative expense for the six months ended June 30, 2011, included an increase of $0.9 million
due to higher employee-related costs as a result of the increased headcount and an increase in
stock-based compensation expense. Our general and administrative headcount increased by 11% since
June 30, 2010, as we added personnel to support our growth. This increase is offset by a decrease
in legal, audit, insurance and consulting expenses of $0.5 million.
Depreciation and Amortization Expense. Depreciation and amortization expense for the six
months ended June 30, 2011, was $7.1 million, an increase of 41% over depreciation and amortization
expense of $5.1 million for the six months ended June 30, 2010. This was primarily due to higher
depreciation from fixed asset expenditures in 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
Percent |
|
Interest income |
|
$ |
216 |
|
|
$ |
144 |
|
|
$ |
72 |
|
|
|
* |
|
Interest expense |
|
|
(231 |
) |
|
|
(335 |
) |
|
|
104 |
|
|
|
-31 |
% |
Loss on interest rate derivative contract |
|
|
(73 |
) |
|
|
(364 |
) |
|
|
291 |
|
|
|
(80 |
) |
Other income |
|
|
44 |
|
|
|
63 |
|
|
|
(19 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
$ |
(44 |
) |
|
$ |
(492 |
) |
|
$ |
448 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense). Interest income for the six months ended June 30, 2011, was $0.2
million, an increase of $0.1 million from interest income of $0. 1 million for the six months ended
June 30, 2010. The increase was directly related to a higher cash balance. Interest expense for the
six months ended June 30, 2011, and 2010 was relatively flat at $0.2 million, which is driven by
the balance of outstanding debt. The loss on interest rate derivative for the six months ended June
30, 2011, and 2010, was relatively flat at less than $0.1 million. The loss on the interest rate
derivative was the result of the change in the fair market value of a derivative instrument that
was not designated a hedge.
Income Tax Provision. We recorded a provision for income taxes for the six months ended June
30, 2011, of approximately $6.5 million compared to $1.5 million for the six months ended June 30,
2010. The decrease in our effective tax rate was due to a decrease in the effect of our permanent
differences as a percent of the overall rate.
Comparison of the Three Months Ended June 30, 2011 and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Change |
|
|
|
2011 |
|
|
2010 |
|
|
Amount |
|
|
Percent |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Business services |
|
$ |
75,349 |
|
|
$ |
56,399 |
|
|
$ |
18,950 |
|
|
|
34 |
% |
Implementation and other |
|
|
2,536 |
|
|
|
2,153 |
|
|
|
383 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
77,885 |
|
|
$ |
58,552 |
|
|
$ |
19,333 |
|
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Total revenue for the three months ended June 30, 2011, was $77.9 million, an
increase of $19.3 million, or 33%, over revenue of $58.6 million for the three months ended June
30, 2010. This increase was due almost entirely to an increase in business services revenue.
16
Business Services Revenue. Revenue from business services for the three months ended June 30,
2011, was $75.3 million, an increase of $18.9 million, or 34%, over revenue of $56.4 million for
the three months ended June 30, 2010. This increase was primarily due to the growth in the number
of physicians and medical providers using our services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
|
|
2011 |
|
2010 |
|
Change |
|
|
Amount |
|
Amount |
|
Amount |
|
Percent |
Physicians revenue cycle management service |
|
|
20,824 |
|
|
|
17,136 |
|
|
|
3,688 |
|
|
|
22 |
% |
Active medical providers revenue cycle management service |
|
|
29,482 |
|
|
|
24,782 |
|
|
|
4,700 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physicians clinicals cycle management service |
|
|
3,444 |
|
|
|
1,548 |
|
|
|
1,896 |
|
|
|
122 |
% |
Active medical providers clinicals cycle management service |
|
|
4,848 |
|
|
|
2,256 |
|
|
|
2,592 |
|
|
|
115 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physicians patient cycle management service |
|
|
1,198 |
|
|
|
442 |
|
|
|
756 |
|
|
|
171 |
% |
Active medical providers patient cycle management service |
|
|
1,936 |
|
|
|
689 |
|
|
|
1,247 |
|
|
|
181 |
% |
Also contributing to this increase was the growth in related collections on behalf of these
physicians and medical providers. The amount of collections processed for the three months ended
June 30, 2011, was 1.8 billion, an increase of 0.4 billion, over posted collections of 1.4 billion
for the three months ended June 30, 2010.
Implementation and Other Revenue. Revenue from implementations and other sources was $2.5
million for the three months ended June 30, 2011, an increase of $0.3 million, or 18%, over revenue
of $2.2 million for the three months ended June 30, 2010. This increase was driven by new client
implementations and increased professional services for our larger client base as described above.
The increase in implementation and other revenue is the result of the increase in the volume of our
business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Change |
|
|
2011 |
|
2010 |
|
Amount |
|
Percent |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Direct operating costs |
|
$ |
29,020 |
|
|
$ |
24,101 |
|
|
$ |
4,919 |
|
|
|
20 |
% |
Direct Operating Costs. Direct operating expense for the three months ended June 30,
2011, was $29.0 million, an increase of $4.9 million, or 20%, over costs of $24.1 million for the
three months ended June 30, 2010. This increase was primarily due to an increase in the number of
claims that we processed on behalf of our clients and the related expense of providing services,
including transactions expense and employee-related costs. The total claims submitted on behalf of
clients for the three months ended June 30, 2011 was 14.4 million, an increase of 3.1 million, or
27%, over total claims submitted of 11.3 million for the three months ended June 30, 2010. Direct
operating employee-related costs increased $2.1 million from the three months ended June 30, 2010
to the three months ended June 30, 2011. This increase is primarily due to the 14% increase in
headcount since June 30, 2010. We increased the professional services headcount as part of a
redesign of our client services organization and in order to meet the current and anticipated
demand for our services as our customer base has expanded and includes larger medical groups.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Change |
|
|
|
2011 |
|
|
2010 |
|
|
Amount |
|
|
Percent |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
$ |
18,815 |
|
|
$ |
12,693 |
|
|
$ |
6,122 |
|
|
|
48 |
% |
Research and development |
|
|
5,166 |
|
|
|
4,824 |
|
|
|
342 |
|
|
|
7 |
% |
General and administrative |
|
|
11,718 |
|
|
|
11,403 |
|
|
|
315 |
|
|
|
3 |
% |
Depreciation and amortization |
|
|
3,737 |
|
|
|
2,657 |
|
|
|
1,080 |
|
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
39,436 |
|
|
$ |
31,577 |
|
|
$ |
7,859 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and Marketing Expense. Selling and marketing expense for the three months ended
June 30, 2011, was $18.8 million, an increase of $6.1 million, or 48%, over costs of $12.7 million
for the three months ended June 30, 2010. This increase was primarily due to an increase in
employee-related costs, stock-based compensation expense, internal sales commissions and external
partner channel commission of $3.2 million due to an increase in headcount and external channel
partners. Our sales and marketing headcount
17
increased by 40% since June 30, 2010, as we hired additional sales personnel to focus on
adding new customers and increasing penetration within our existing markets. The increase was also
due to a $2.9 million increase in travel-related expenses, consulting and other software licenses,
online marketing, offline marketing and other marketing events.
Research and Development Expense. Research and development expense for the three months ended
June 30, 2011, was $5.2 million, an increase of $0.4 million, or 7%, over research and development
expense of $4.8 million for the three months ended June 30, 2010. This increase was primarily due
to an increase in employee-related costs due to an increase in headcount. Our research and
development headcount increased 27% since June 30, 2010, as we hired additional research and
development personnel in order to upgrade and extend our service offerings and develop new
technologies.
General and Administrative Expense. General and administrative expense for the three months
ended June 30, 2011 was $11.7 million, an increase of $0.3 million, or 3%, over general and
administrative expenses of $11.4 million for the three months ended June 30, 2010. This increase
was partially due to a $0.3 million increase in employee-related costs due to an increase in
headcount. Our general and administrative headcount increased by 11% since June 30, 2010, as we
added personnel to support our growth.
Depreciation and Amortization. Depreciation and amortization expense for the three months
ended June 30, 2011, was $3.7 million, an increase of $1.0 million, or 41%, over depreciation and
amortization expense of $2.7 million for the three months ended June 30, 2010. This was primarily
due to higher depreciation expense from fixed asset expenditures in 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
Percent |
|
Interest income |
|
$ |
109 |
|
|
$ |
66 |
|
|
$ |
43 |
|
|
|
65 |
% |
Interest expense |
|
|
(54 |
) |
|
|
(118 |
) |
|
|
64 |
|
|
|
-54 |
% |
Loss on interest rate derivative contract |
|
|
(138 |
) |
|
|
(304 |
) |
|
|
166 |
|
|
|
-55 |
% |
Other income |
|
|
6 |
|
|
|
33 |
|
|
|
(27 |
) |
|
|
-82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
$ |
(77 |
) |
|
$ |
(323 |
) |
|
$ |
246 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense). Interest income for the three months ended June 30, 2011, and 2010,
was relatively flat at $0.1 million. Interest expense for the three months ended June 30, 2011, and
2010 was relatively flat at $0.1 million, which is driven by the balance of outstanding debt. The
loss on interest rate derivative for the three months ended June 30, 2011, and 2010, was $0.1
million and $0.3 million, respectively. The loss on the interest rate derivative was the result of
the change in the fair market value of a derivative instrument that was not designated a hedge.
Income Tax Provision. We recorded a provision for income taxes for the three months ended
June 30, 2011, of approximately $4.2 million compared to $1.3 million for the three months ended
June 30, 2010. The decrease in our effective tax rate was due to a decrease in the effect of our
permanent differences as percent of the overall rate.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have funded our growth primarily through the private sale of equity
securities, totaling approximately $50.6 million, as well as through long-term debt, working
capital, equipment-financing loans, and, in September 2007, we completed our initial public
offering which provided net proceeds of approximately $81.3 million.
As of June 30, 2011 our principal sources of liquidity consisted of cash, cash equivalents and
short-term investments of $104.4 million and available for sale long-term investments of $20.3
million. Our cash investments consist of corporate debt securities, U.S. Treasury and government
agency securities, and commercial paper. As specified in our investment policy, we place our
investments in instruments that meet high credit quality standards, the policy limits the amount of
our credit exposure to any one issue or issuer and seeks to manage these assets to achieve our
goals of preserving principal, maintaining adequate liquidity at all times, and maximizing returns.
As of June 30, 2011, we have no outstanding indebtedness. We have an unused revolving credit
facility in the amount of $15.0 million. The credit facility may be extended by up to an additional
$15.0 million on the satisfaction of certain conditions. There was no balance outstanding on the
revolving credit facility during the three and six months ended June 30, 2011, and 2010. The credit
facility expires on September 30, 2011. The credit facility contains certain financial and
nonfinancial covenants, including limitations on our consolidated leverage ratio and capital
expenditures, defaults relating to non-payment, breach of covenants, inaccuracy of representations
and warranties, default under other indebtedness (including a cross-default with our interest rate
swap), bankruptcy and insolvency, inability to pay debts, attachment of assets, adverse judgments,
ERISA violations, invalidity of loan and collateral
18
documents, and change of control. Upon an event of default, the lenders may terminate the
commitment to make loans and the obligation to extend letters of credit, declare the unpaid
principal amount of all outstanding loans and interest accrued under the Credit Agreement to be
immediately due and payable, require us to provide cash and deposit account collateral for our
letter of credit obligations, and exercise their security interests and other rights under the
Credit Agreement. As of June 30, 2011, we were in compliance with all financial and non financial
covenants under this agreement.
We believe our sources of liquidity will be sufficient to sustain operations, to finance our
strategic initiatives, make payments on our contractual obligations, and our purchases of property
and equipment for at least the next twelve months. Our analysis is supported by the growth in our
new customer base and a high rate of renewal rates with our existing customers and the
corresponding increase in billings and collections. We may pursue acquisitions or investments in
complementary businesses or technologies, in which case we may need to raise additional funds
sooner than expected. There can be no assurance that we will continue to generate cash flows at or
above current levels or that we will be able to maintain our ability to borrow under our existing
credit facility or obtain additional financing.
Commitments
We enter into various purchase commitments with vendors in the normal course of business. We
believe that our existing sources of liquidity will be adequate to fund these purchases during the
year 2011. In the normal course of business, we make representations and warranties that guarantee
the performance of services under service arrangements with clients. Historically, there has been
no material losses related to such guarantees.
Operating Cash Flow Activities
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Net Income |
|
$ |
8,437 |
|
|
$ |
1,575 |
|
Non-cash adjusments to net income |
|
|
10,478 |
|
|
|
12,835 |
|
Cash provided in changes in operating assets and liabilities |
|
|
1,254 |
|
|
|
830 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
20,169 |
|
|
$ |
15,240 |
|
|
|
|
|
|
|
|
Cash flow from operations increased approximately $5 million to $20.2 million for the six
months ended June 30, 2011, as compared to $15.2 million for the six months ended June 30, 2010.
The increase is mainly attributable to increases in net income. The increase in net income is
primarily due to the growth in our customer base, stability in renewal rates with our existing
customer base and increased adoption of our services. This increase is partially offset by an
increase in operating expenses that require cash outlays such as salaries, higher commissions,
direct operating expenses, and selling and marketing expenses. The increase in add-backs of
non-cash expenses during the six months ended June 30, 2011 and 2010 are primarily due to increases
in depreciation and amortization, stock-based compensation expense, and our provision for
uncollectible accounts. This is off-set by an increase in excess tax benefits from stock-based
awards. The increase in depreciation and amortization was primarily attributed to capital
expenditures, including capitalized software development costs of $18.3 million during the twelve
months ended June 30, 2011. The increase in stock-based compensation expense is primarily due to
the increase in the volume and the value of stock-based awards granted during 2011 over grants in
2010. The increase to cash provided by in changes in operating assets
and liabilities during the six
months ended June 30, 2011, was due in large part to the increase in our deferred revenue offset by
an increase in accounts receivable and a decrease in deferred rent. Accounts receivable increased
to $43.9 million at June 30, 2011 as compared to $36.9 million as of December 31, 2010. The
increase can be attributed to the overall increase in revenue and the timing of current billings
and subsequent payment of those billings as of June 30, 2011 as compared to the same period and
timing as of December 31, 2010. The decrease in deferred rent is related to the repayment of
rental incentive loans in the amount of $2.1 million.
Investing Cash Flow Activities
The cash used by investing activities decreased by $13.3 million to $7.4 million from cash
used by investing activities of $20.7 million for the six months ended June 30, 2011, and 2010,
respectively. Cash flows used in investing activities consist primarily of purchases of property
and equipment, payment for the acquisition of a conference center and training facility,
capitalized software development costs and our investment activities. We make investments in
property and equipment and in software development on an ongoing basis. Our investment in equipment
consists primarily of purchases of technology infrastructure to provide service stability and
additional capacity to support our expanding client base. We purchased $6.8 million of property and
equipment, including $1.1 million related to a purchase option under our capital lease obligations
which were terminated during the six months ended June 30, 2011. Our investment in software
development consists of company managed-design, development, and testing of new application
functionality with our less mature service offerings, which primarily include our athenaClinicals
and athenaCommunicator service offerings. Our capitalized software development amounted to $3.1
million for the six months ended June 30, 2011. Net cash paid for acquisition was approximately
$7.0 million relating to our acquisition of a conference center and training facility. Restricted
cash decreased by $2.9 million due to payments made for contingent consideration relating to
acquisitions completed in 2008 and 2009.
19
Financing Cash Flow Activities
The cash used in financing activities was $1.3 million for the six months ended June 30, 2011,
compared to cash provided by financing activities $2.9 million for the six months ended June 30,
2010. The change is attributable to payments on debt and to payment of contingent consideration
accrued at acquisition date relating to the Anodyne acquisition. We elected to repay all of our
outstanding debt balances under our equipment line of credit and term loan, as well as terminate
our related interest rate derivative. This is offset by the proceeds from the exercise of stock
options and the increase in the excess tax benefit from stock-based awards. We recorded a reduction
in income tax liability of $6.4 million related to excess tax deductions received from employee
stock option exercises. The benefit was recorded as additional paid in capital.
Contractual Obligations
We have contractual obligations under our operating leases for properties. The following table
summarizes our long-term contractual obligations and commitments as of June 30, 2011:
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|
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|
|
|
|
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|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
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|
|
|
|
|
|
|
|
|
After 5 |
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|
|
|
|
Total |
|
|
1 Year |
|
|
2 - 3 Years |
|
|
4 -5 Years |
|
|
years |
|
|
Other |
|
Operating lease obligations |
|
$ |
22,445 |
|
|
$ |
5,344 |
|
|
$ |
10,393 |
|
|
$ |
6,008 |
|
|
$ |
700 |
|
|
$ |
|
|
Other |
|
|
1,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total |
|
$ |
24,055 |
|
|
$ |
5,344 |
|
|
$ |
10,393 |
|
|
$ |
6,008 |
|
|
$ |
700 |
|
|
$ |
1,610 |
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|
|
|
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|
The commitments under our operating leases shown above consist primarily of lease payments for
our Watertown, Massachusetts, headquarters; our Rome, Georgia, offices; our Alpharetta, Georgia,
offices; and our Chennai, India, offices.
Other amount consists of uncertain tax benefits. We have not utilized these uncertain tax
benefits, nor do we have an expectation of when these uncertain tax benefits would be challenged.
As of June 30, 2011, we cannot reasonably estimate when any future cash outlays would occur related
to these uncertain tax positions.
Off-Balance Sheet Arrangements
As of June 30, 2011 and 2010, and December 31, 2010, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. Other than our operating leases for office space, we do not engage in off-balance sheet
financing arrangements.
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Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk. |
Foreign Currency Exchange Risk. Our results of operations and cash flows are subject to
fluctuations due to changes in the Indian rupee. None of our consolidated revenues are generated
outside the United States. None of our vendor relationships, including our contracts with our
offshore service providers International Business Machines Corporation and Vision Business Process
Solutions, Inc., a subsidiary of Dell, Inc. (formerly Perot Systems Corporation), for work
performed in India and the Philippines, is denominated in any currency other than the U.S. dollar.
For the six months ended June 30, 2011, less than 1% of our expenses occurred in our direct
subsidiary in Chennai, India, and was incurred in Indian rupees. We therefore believe that the risk
of a significant impact on our operating income from foreign currency fluctuations is not
substantial.
Interest Rate Sensitivity. We had unrestricted cash, cash equivalents and available for sale
investments totaling $124.7 million at June 30, 2011. These amounts are held for working capital
purposes and were invested primarily in deposits, money market funds, and short-term,
interest-bearing, investment-grade securities. Due to the short and expected term of these
investments, we believe that we do not have any material exposure to changes in the fair value of
our investment portfolio as a result of changes in interest rates. The value of these securities,
however, will be subject to interest rate risk and could fall in value if interest rates rise.
Interest Rate Risk. As of June 30, 2011, we had no outstanding long-term debt and capital
lease obligations and there were no amounts outstanding under the revolving credit facility. We
have the ability to draw up to $15.0 million under our line of credit at any time.
20
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Item 4. |
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Controls and Procedures. |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed by us in reports we file or submit under the Securities and Exchange Act
of 1934 (1) recorded, processed, summarized, and reported within the
time periods specified in the SECs rules and forms and (2)
accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure. As of June 30, 2011 (the Evaluation Date), 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
Securities and Exchange Act of 1934). Our management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving their
objectives, and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Our Chief Executive Officer and Chief Financial
Officer have concluded based upon the evaluation described above that, as of the Evaluation Date,
our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control
There
were no changes in our internal control over financial reporting for the quarter
ended June 30, 2011, that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART IIOTHER INFORMATION
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Item 1. |
|
Legal Proceedings. |
On March 2, 2010, a complaint was filed by Prompt Medical Systems, L.P. naming the
Company and several other defendants in a patent infringement case (Prompt Medical Systems, L.P. v.
AllscriptsMisys Healthcare Solutions, Inc. et al., Civil Action No. 6:2010cv00071, United States
District Court for the Eastern District of Texas). The complaint alleges that the Company has
infringed U.S. Patent No. 5,483,443 with a listed issue date of January 9, 1996, entitled Method
for Computing Current Procedural Terminology Codes from Physician Generated Documentation. The
complaint seeks an injunction enjoining infringement, damages, and pre- and post-judgment costs and
interest. The Company and several other defendants filed motions to dismiss the complaint. On
February 11, 2011, the Court issued an Order granting-in-part and denying-in-part the motions to
dismiss. The Court ordered the plaintiff to replead certain claims within fourteen days of the
Order.
On February 23, 2011, the plaintiff filed its amended complaint in response to the Courts
February 11, 2011, order. The Company filed its answer to the amended complaint on March 9, 2011,
asserting a number of defenses and counterclaiming for a declaration of non-infringement,
invalidity, and unenforceability. The Company also filed a joint motion with other defendants
seeking sanctions for the plaintiffs spoliation of evidence, which is now fully briefed.
On November 24, 2010, several defendants filed (i) a motion for summary judgment of invalidity
against the patent-in-suit on the basis that it claims only non-patentable subject matter and (ii)
a motion to stay all proceedings pending the resolution of the motion for summary judgment. The
Company filed a motion to join in the motion to stay the proceedings. The motions are fully briefed
and awaiting a decision by the Court. On May 18, 2011, the defendants provided notice that they
wish to continue to urge the pending motion for summary judgment as to the first amended complaint.
The case is currently in the discovery phase. A claim construction hearing is scheduled for
November 11, 2011. Trial is scheduled for June 11, 2012. On June 17, 2011, the defendants filed a
notice of their disclosure of preliminary proposed claim constructions and extrinsic evidence.
The Company is being indemnified in this lawsuit from and against any liability and reasonable
costs, including attorneys fees, incurred by the Company in its defense, pursuant to a license
agreement with its vendor.
The Company believes that it has meritorious defenses to the lawsuit and continues to contest
it vigorously.
On March 19, 2010, a putative shareholder class action complaint was filed in the
United States District Court for the District of Massachusetts against the Company and certain of
its current and former officers entitled Casula v. athenahealth, Inc. et al., Civil Action No.
1:10-cv-10477. On June 3, 2010, the court appointed Waterford Township General Employees Retirement
System as the lead plaintiff. On August 2, 2010, the lead plaintiff filed an amended complaint. The
amended complaint alleges that the defendants violated the federal securities laws by disseminating
false and misleading statements through press releases, statements by senior management, and SEC
filings. The alleged false and misleading statements concern, among other things, the amortization
period for deferred implementation revenues. The amended complaint seeks unspecified damages,
costs, and expenses. The defendants filed a motion to dismiss the amended complaint on October 1,
2010, and a reply brief in further support of the motion to dismiss the amended complaint on
December 30, 2010. The Company believes that it has meritorious defenses to the amended complaint
and will contest the claims vigorously.
On March 17, 2011, a complaint was filed by PPS Data, LLC naming the Company and several other
defendants in a patent infringement case (PPS Data, LLC v. Allscripts Healthcare Solutions, Inc. et
al., Civil Action No. 3:11-CU-273-J-99MMH-TEM, United States District Court for the Middle District
of Florida). The complaint alleges that the Company has infringed U.S. Patent No. 6,343,271 with a
listed issue date of January 29, 2002, entitled Electronic Creation, Submission, Adjudication, and
Payment of Health Insurance Claims. The complaint seeks an injunction enjoining infringement,
damages, pre- and post-judgment costs and interest, and attorneys fees. On April 14, 2011, the
Company filed a motion to dismiss, or, in the alternative, a motion for summary judgment. On May 5,
2011, the Company filed a motion to sever and transfer the case. Both the April 14 and May 5, 2011,
motions were fully briefed and the Court heard oral argument on July 12, 2011. The Court has not
yet ruled on either of these motions. The Company believes that it has meritorious defenses to the
complaint and will continue to contest the claims vigorously.
On May 25, 2011, a complaint was filed by Medsquire, LLC naming the Company and several other
defendants in a patent infringement case (Medsquire, LLC v. Spring Medical Systems, Inc. et al.,
Civil Action
No. 2:11-CV-04504-DSF-AGR, United States District Court for the Central District of
California). The complaint alleges that the
21
Company has infringed U.S. Patent No. 5,682,526 with a listed issue date of October 28, 1997,
entitled Method and System for Flexibly Organizing, Recording, and Displaying Medical Patient Care
Information Using Fields in a Flowsheet. The complaint seeks damages, pre-judgment interest, and
attorneys fees. On July 18, 2011, several of the defendants, including the Company, filed a
partial motion to dismiss. The Company believes that it has meritorious defenses to the complaint
and will contest the claims vigorously.
On July 18, 2011, the Company filed a complaint against AdvancedMD Software, Inc. in the
United States District Court for the District of Massachusetts. The complaint alleges that AdvancedMD Software, Inc. has infringed two of the Companys U.S. Patents: No. 7,617,116, which was issued
on November 10, 2009, for Practice Management and Billing Automation System and No. 7,720,701,
which was issued on May 18, 2010, for Automated Configuration of Medical Practice Management
Systems. The Company is seeking permanent injunctive relief, damages, pre- and post-judgment costs
and interest, and attorneys fees.
On or about July 18, 2011, a complaint was filed in the Superior Court for Waldo County,
Maine, against the Company entitled Cordjia, LLC v. athenahealth, Inc. The complaint alleges that
the Company entered into a partnership with the plaintiff to purchase property in Maine, that the
parties entered into a mutual non-disclosure agreement governing the sharing of confidential
information between them, and that the Company subsequently terminated the partnership and
purchased the property itself, using the confidential information obtained from the plaintiff to do
so. The complaint purports to state claims for common-law fraud, negligent misrepresentation,
breach of fiduciary duty, unjust enrichment, quantum meruit, promissory estoppel, breach of
contract, and violation of the Maine Uniform Trade Secrets Act. The complaint seeks unspecified
damages, fees and costs, and injunctive relief enjoining the Company from making further use of the
plaintiffs confidential information and requiring the Company to return all confidential
information in its possession to the plaintiff. The Company believes that it has meritorious
defenses to the complaint and intends to contest the claims vigorously.
In addition, from time to time the Company may be subject to other legal proceedings, claims,
and litigation arising in the ordinary course of business. The Company does not, however, currently
expect that the ultimate costs to resolve any pending matter will have a material adverse effect on
the Companys consolidated financial position, results of operations, or cash flows.
During the three and six months ended June 30, 2011, there were no material changes to the
risk factors that were disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the
period ended March 31, 2011, and in Part I, Item 1A of our Annual Report on Form 10-K for the year
ended December 31, 2010.
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Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds. |
Not applicable.
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|
|
Item 3. |
|
Defaults Upon Senior Securities. |
Not applicable.
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|
Item 4. |
|
(Removed and Reserved). |
|
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|
Item 5. |
|
Other Information. |
Not applicable.
(a) Exhibits.
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Exhibit |
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No. |
|
Exhibit Index |
10.1(i)
|
|
Amended and Restated athenahealth, Inc. 2007 Stock Option and Incentive Plan |
|
10.2*
|
|
Purchase and Sale Agreement by and between the Registrant and Point
Lookout, LLC, dated March 29, 2011, as amended May 12 and May 26, 2011 |
|
10.3*
|
|
First Amendment to Lease by and between the Registrant and President and
Fellows of Harvard College, dated May 16, 2011 |
|
31.1*
|
|
Rule 13a-14(a) or 15d-14 Certification of Chief Executive Officer |
|
31.2*
|
|
Rule 13a-14(a) or 15d-14 Certification of Chief Financial Officer |
|
32.1*
|
|
Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to Exchange Act rules 13a-14(b) or 15d-14(b) and 18 U.S.C.
Section 1350 |
|
101.INS**
|
|
XBRL Instance Document |
|
101.SCH**
|
|
XBRL Schema Document |
|
101.CAL**
|
|
XBRL Calculation Linkbase Document |
|
101.LAB**
|
|
XBRL Labels Linkbase Document |
|
101.PRE**
|
|
XBRL Presentation Linkbase Document |
|
101.DEF**
|
|
XBRL Definition Linkbase Document |
22
|
|
|
|
|
Indicates a management contract or any compensatory plan, contract, or arrangement. |
|
(i) |
|
Incorporated by reference to the Registrants current report on Form 8-K, filed May 27, 2011. |
|
* |
|
Filed herewith |
|
** |
|
Extensible Business Reporting Language (XBRL) information is furnished and deemed not filed
or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the
Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities
Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
23
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.
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ATHENAHEALTH, INC.
|
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By: |
/s/ Jonathan Bush
|
|
|
|
Jonathan Bush |
|
|
|
Chief Executive Officer, President, and Chairman |
|
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|
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|
By: |
/s/ Timothy M. Adams
|
|
|
|
Timothy M. Adams |
|
|
|
Chief Financial Officer, Senior Vice President |
|
Date:
July 22, 2011
24