Filed On 8/31/07 5:30pm ET · SEC File 333-143998 · Accession Number 950135-7-5470
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8/31/07 Athenahealth Inc S-1/A 8:357 Bowne of Boston I..01/FA
Pre-Effective Amendment to Registration Statement (General Form) · Form S-1
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1: S-1/A Form S-1/A - Athenahealth, Inc. HTML 1,510K
2: EX-3.1 EX-3.1 - Fifth Amended & Restated Certificate of HTML 94K
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3: EX-3.2 EX-3.2 - Sixth Amended & Restated Certificate of HTML 22K
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4: EX-3.3 EX-3.3 - Amended & Restated Bylaws HTML 66K
5: EX-10.4 EX-10.4 - 2007 Stock and Incentive Plan HTML 155K
6: EX-10.5 EX-10.5 2007 Employee Stock Purchase Plan HTML 26K
7: EX-10.21 EX-10.21 - Loan & Security Agreement 42 159K
8: EX-23.1 EX-23.1 - Consent of Deloitte & Touche Llp HTML 6K
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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 3
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
athenahealth, Inc.
(Exact Name of Registrant as
Specified in its Charter)
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7389
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04-3387530
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(State of
Incorporation)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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311 Arsenal Street
(Address, including zip code,
and telephone number,
including area code, of
registrant’s principal executive offices)
Jonathan Bush
Chief Executive Officer
athenahealth, Inc.
311 Arsenal Street
(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
Copies to:
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Lawrence S.
Wittenberg, Esq.
Michael H. Bison, Esq.
Goodwin Procter LLP
Exchange Place
53 State Street
Boston, MA 02109
(617) 570-1000
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Christopher E.
Nolin, Esq.
athenahealth, Inc.
311 Arsenal Street
Watertown, MA 02472
(617) 402-1000
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Christopher J. Austin, Esq.
Michael D. Beauvais, Esq.
Ropes & Gray LLP
One International Place
Boston, MA 02110
(617) 951-7000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended,
check the following box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and we are
not soliciting offers to buy these securities in any
jurisdiction where the offer or sale is not permitted.
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Shares
Common
Stock
This is an initial public offering of shares of common stock of
athenahealth, Inc. athenahealth is offering all of the shares to
be sold in the offering.
Prior to this offering, there has been no public market for our
common stock. It is currently estimated that the initial public
offering price per share will be between
$ and
$ . Application has been made for
listing on the NASDAQ Global Market under the symbol
“ATHN.”
See “Risk Factors” on page 8 to read about
factors you should consider before buying shares of the common
stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to
athenahealth
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$
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$
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To the extent that the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an
additional shares
from athenahealth and up to an
additional shares from a
selling stockholder at the initial public offering price less
the underwriting discount.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2007.
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| Goldman,
Sachs & Co. |
Merrill
Lynch & Co. |
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| Piper
Jaffray |
Jefferies &
Company |
Prospectus
dated ,
2007
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
are offering to sell, and are seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of our
common stock.
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information you
should consider before buying shares of our common stock. Before
deciding to invest in shares of our common stock, you should
read the entire prospectus carefully, including our consolidated
financial statements and the accompanying notes and the
information set forth under the headings “Risk
Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
in each case included elsewhere in this prospectus.
athenahealth,
Inc.
Overview
athenahealth is a provider of
internet-based
business services for physician practices. Our service offerings
are based on three integrated components: our proprietary
internet-based
software, our continually updated database of payer
reimbursement process rules and our back-office service
operations that perform administrative aspects of billing and
clinical data management for physician practices. Our principal
offering, athenaCollector, automates and manages billing-related
functions for physician practices and includes a medical
practice management platform. We have also developed a service
offering, athenaClinicals, that automates and manages medical
record-related functions for physician practices and includes an
electronic medical record, or EMR, platform. We refer to
athenaCollector as our revenue cycle management service and
athenaClinicals as our clinical cycle management service. Our
services are designed to help our clients achieve faster
reimbursement from payers, reduce error rates, increase
collections, lower operating costs, improve operational workflow
controls and more efficiently manage clinical and billing
information.
Our services require relatively modest initial investment, are
highly adaptable to changing healthcare and technology trends
and are designed to generate significant financial benefit for
our physician clients. Our results are directly tied to the
financial performance of our clients, because the majority of
our revenue is based on a percentage of their collections. Our
fees are typically 2% to 8% of a practice’s total
collections depending upon the size, complexity and other
characteristics of the practice, with other fees for
implementation, patient billing statements and training
services. Our services have enabled our clients, on average, to
resolve 93% of their claims to payers on their first submission
attempt, compared to an industry average we estimate to be 70%.
Our internal studies show that we have reduced the days in
accounts receivable of our client base by more than 30%. We have
experienced a
contract renewal rate of at least 97% in each of
the last five years, and this persistent client base drives a
predictable revenue stream. In 2006, we generated revenue of
$75.8 million from the sale of our services, compared to
$53.5 million in 2005. As of
June 30, 2007, there were
more than 10,500 medical providers, including more than 8,000
physicians, using our services across 32 states and 54
medical specialties.
We believe our innovative internet-based business services model
represents a significant departure from the traditional model of
physicians relying upon
on-site or
outsourced administrative staff, using stand-alone software that
is not internet-based, to run the back-office aspects of their
practices. By continuously improving all three components of our
services, we drive improvement in the business results of our
network of clients: we typically update our centralized
internet-based software every six to eight weeks; we add more
than 100 rules on average each month to our database of payer
rules; and we regularly improve our back-office service
operations with more efficient technology and processes.
Additionally, as our database of aggregated health information
grows, we are able to use this information to further the
strategic position of
our company. For example, in June 2006 we
introduced our annual PayerView rankings of health plans’
performance with respect to the speed and accuracy of
reimbursement processes at different insurance companies, an
initiative that we believe increases our profile in the provider
and payer communities.
Market
Opportunity
The market opportunity for our services is driven by physician
office collections in the United States. According to the
U.S. Centers for Medicare and Medicaid Services, since
2000, ambulatory care spending
1
increased by an average of 7.7% per year to $420 billion in
2005. As the ambulatory care market has grown, we estimate that
the market for revenue and clinical cycle management solutions
has grown to over $27 billion. These expenditures are
primarily comprised of salary and benefits for
in-house
administrative staff and the cost of third-party practice
management and EMR software.
In addition, growth in managed care has increased the complexity
of physician practice reimbursement. Managed care plans
typically create complex reimbursement structures and plan
designs that place greater responsibility on physician practices
to capture data and provide appropriate claims to obtain
payments. As a result, physician practices must keep track of
multiple plan designs and processing requirements to ensure
appropriate payment for services rendered. We also believe that
new initiatives by government-sponsored and private health plans
will further increase the complexity of physician practice
reimbursement. For example, pay-for-performance programs require
submission of enhanced information to payers, and new health
plan designs, known as consumer driven health plans, include
provisions for increased direct payment by patients.
Physician practices are generally not well equipped to address
this increasing complexity. In addition to administering typical
small business functions, physician practices must invest
significant time and resources in activities that are required
to secure reimbursement from third-party payers or patients and
to process inbound and outbound communications related to
physician orders to laboratories and pharmacies. To accomplish
these tasks, physician offices often use locally installed
software, send and receive paper-based and fax-based
communications and conduct telephone-based discussions with
payers and intermediaries to resolve unpaid claims or to inquire
about the status of transactions. This work is typically
performed by
in-house
staff, although some practices hire
third-party
services that also use locally installed software to manage
transactions.
As the complexity and number of health benefit plan payer rules
have increased, the ability of physician practices or
third-party billing services to use locally installed software
solutions to keep up with these rules has diminished, leading to
poor financial performance and decreased clinical efficiency. In
addition to the time and cost of these activities, medical
offices typically stop seeking reimbursement and write off
associated receivables for approximately 10% of their medical
claims.
Our
Solution
The dynamic and increasingly complex healthcare market requires
an integrated solution to effectively manage the reimbursement
and clinical landscape. We believe we are the first company to
integrate internet-based software, a continually updated
database of payer reimbursement process rules and back-office
service operations into a single internet-based business service
for physician practices. We deliver these services at each
critical step in the revenue and clinical cycle workflow through
a combination of software, knowledge and work:
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Software. athenaNet, our proprietary
internet-based practice management and EMR application, is a
workflow management tool used in every work step that is
required to properly handle billing, collections and medical
record management-related functions. All users across our
client-base simultaneously use the same version of our software
application, which connects them to our continually updated
database of payer rules and to our services team.
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Knowledge. athenaRules, our proprietary
database of payer rules, enforces physician office workflow
requirements, and is continually updated with payer-specific
coding and documentation information. This knowledge continues
to grow as a result of our years of experience managing back
office service operations for hundreds of physician practices,
including processing medical claims with tens of thousands of
health benefit plans.
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Work. The athenahealth service operations,
consisting of nearly 400 people in the United States, and more
than 700 people at our off-shore service provider, interact
with clients at all key steps of the revenue and clinical cycle
workflow. These operations include setting up medical providers
for billing, checking the eligibility of scheduled patients
electronically, submitting electronic and paper-based
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claims to payers directly or through intermediaries, processing
clinical orders, receiving and processing checks and remittance
information from payers, documenting the result of payers’
responses and evaluating and resubmitting claims denials.
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Our
Strategy
Our mission is to be the most trusted and effective provider of
business services for physician practices. To achieve this, our
strategy includes:
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Remaining intensely focused on our clients’
success. Our business model aligns our goals with
our clients’ goals and provides an incentive for us to
continually improve the performance of our clients. We believe
that this approach enables us to maintain client loyalty, to
enhance our reputation and to improve the quality of our
solutions.
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Maintaining and growing our payer rules
database. Our rules engine development work
increases the percentage of transactions that are successfully
executed on the first attempt and reduces the time to resolution
after claims or other transactions are submitted. An important
component of increasing value to our clients is that we continue
to develop our centralized payer reimbursement process rules
database, athenaRules, using our experience gained each day
across our network of clients. This continued development allows
all our clients to benefit from our more than 50 full-time
equivalent staff focused on finding, researching, documenting
and implementing new payer rules.
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Attracting new clients. We expect to continue
with current and expanded sales and marketing efforts to address
our market opportunity by aggressively seeking new clients. We
believe that our internet-based business services provide
significant value for physician offices of any size. We estimate
that our athenaCollector client base represents less than two
percent of the U.S. addressable market for revenue cycle
management.
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Increasing revenue per client by adding new service
offerings. We have only recently begun to offer
our athenaClinicals service, which we combine with
athenaCollector for sale to prospective clients. In the future,
we plan to offer athenaClinicals as a stand-alone option. We are
also developing additional services to address other
administrative tasks within the physician office, such as
patient communications for scheduling appointments, accessing
lab results and refilling prescriptions.
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Expanding operating margins by reducing the costs of
providing our services. We believe we can
increase our operating margins as we increase the scalability of
our service operations. Our integrated operations enable us to
deploy efficient and effective resources at each step of the
revenue and clinical cycle workflow.
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Risks
Associated with Our Business
Our business is subject to a number of risks which you should be
aware of before making an investment decision. Those risks are
discussed more fully in “Risk Factors” beginning on
page 8. For example:
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we have incurred significant losses since inception, including
net losses of $9.2 million and $6.1 million for the
year ended December 31, 2006 and the six months ended
June 30, 2007, respectively, resulting in an accumulated
deficit of $71.3 million at June 30, 2007;
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we operate in a highly competitive industry, and if we are not
able to compete effectively, our business and operating results
will be harmed;
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our proprietary internet-based software may not operate
properly, which could damage our reputation, give rise to claims
against us or divert application of our resources from other
purposes, any of which could cause harm to our business and
operating results; and
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government regulation of healthcare creates risks and challenges
with respect to our compliance efforts and our business
strategies.
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Our
Corporate Information
We were incorporated in Delaware on
August 21, 1997 as
Athena Healthcare Incorporated. We changed our name to
athenahealth.com, Inc. on
March 31, 2000 and to
athenahealth, Inc. on
November 17, 2000. Our corporate
headquarters are located at 311 Arsenal Street,
Watertown,
Massachusetts 02472, and our telephone number is
(617) 402-1000.
Our
website address is
www.athenahealth.com. The information on,
or that can be accessed through, our
website is not part of this
prospectus. In this prospectus, the terms
“athena,”
“athenahealth,” “we,” “us” and
“our” refer to athenahealth, Inc. and its subsidiary,
Athena Net India Pvt. Ltd., and any subsidiary that may be
acquired or formed in the future.
athenahealth, athenaNet and the athenahealth logo are registered
trademarks of athenahealth and athenaCollector, athenaClinicals,
athenaEnterprise and athenaRules are trademarks of athenahealth.
This prospectus also includes the registered and unregistered
trademarks of other persons.
4
THE
OFFERING
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Common stock offered by us |
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shares |
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Common stock to be outstanding after this offering |
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shares |
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Overallotment option offered by us and a selling stockholder |
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To the extent that the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an
additional shares
from athenahealth and up to an
additional shares
from our chief executive officer at the initial public offering
price less the underwriting discount. |
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Use of proceeds |
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We expect our net proceeds from the offering to be approximately
$ , assuming an initial offering
price of $ per share, which is the
midpoint of the range listed on the cover page of this
prospectus, after deducting the estimated underwriting discounts
and commissions and estimated fees and expenses payable by us.
If the underwriters’ overallotment option is exercised in
full, we estimate that our net proceeds will be
$ million. We will not
receive any of the proceeds from the sale of shares by our chief
executive officer. We intend to use the net proceeds to us from
this offering to repay outstanding indebtedness and the
remainder for working capital and other general corporate
purposes. We may also use a portion of the net proceeds to
acquire complementary technologies or businesses. See “Use
of Proceeds.” |
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Proposed NASDAQ Global Market symbol |
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“ATHN” |
The number of shares of common stock to be outstanding after
this offering is based on 26,600,399 shares of common stock
outstanding as of
June 30, 2007. The number of shares of
common stock to be outstanding after this offering does not
include:
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3,010,054 shares of common stock issuable upon the exercise
of stock options outstanding as of June 30, 2007 with a
weighted average exercise price of $3.43 per share;
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634,787 shares of common stock issuable upon the exercise
of warrants outstanding as of June 30, 2007 with a weighted
average exercise price of $3.28 per share; and
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shares
of common stock reserved for future issuance under our equity
incentive plans.
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Unless otherwise indicated, all information in this prospectus
assumes that the underwriters do not exercise their
over-allotment option to
purchase shares
of our common stock in this offering and also reflects:
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our amended and restated certificate of incorporation and the
adoption of our amended and restated by-laws, which will be in
place prior to the completion of this offering; and
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the conversion of all our outstanding preferred stock into
21,531,457 shares of common stock upon the closing of this
offering.
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5
SUMMARY
CONSOLIDATED FINANCIAL DATA
The following tables present our summary consolidated financial
data for our fiscal years 2004 through 2006 and for the six
months ended
June 30, 2006 and
2007 and our summary
consolidated balance sheet data as of
June 30, 2007. The
consolidated financial data for the fiscal years ended
December 31, 2004,
2005 and
2006 and for the six months
ended
June 30, 2006 and
2007 and as of
June 30, 2007
has been derived from our consolidated financial statements,
which appear elsewhere in this prospectus. The financial data as
of and for the six months ended
June 30, 2006 and
2007 are
derived from our consolidated financial statements, which in the
opinion of management contain all adjustments necessary for a
fair presentation of such consolidated financial data. Operating
results for these interim periods are not necessarily indicative
of the operating results for a full year. Historical results are
not necessarily indicative of the results to be expected in
future periods. You should read this information in conjunction
with our consolidated financial statements, the related notes to
these financial statements and
“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this prospectus.
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Six Months Ended
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Year Ended December 31,
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June 30,
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2004
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2005
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2006
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2006
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2007
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(unaudited)
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(in thousands except share and per share data)
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Consolidated Statements of
Operations Data:
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Revenue:
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Business services
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$
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35,033
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$
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48,958
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$
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70,652
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$
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32,822
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$
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43,268
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Implementation and other
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3,905
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4,582
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5,161
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2,517
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3,172
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Total revenue
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38,938
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53,540
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75,813
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35,339
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46,440
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Operating expenses(1):
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Direct operating
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20,512
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27,545
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36,530
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17,458
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22,168
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Selling and marketing
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7,650
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11,680
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15,645
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7,435
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8,314
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Research and development
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1,485
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2,925
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6,903
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2,509
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3,599
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General and administrative
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8,520
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15,545
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16,347
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7,771
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9,571
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Depreciation and amortization
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3,159
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5,483
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6,238
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2,952
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3,048
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Total operating expenses
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41,326
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63,178
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81,663
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38,125
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46,700
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Operating loss
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(2,388
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)
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(9,638
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)
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(5,850
|
)
|
|
|
(2,786
|
)
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
140
|
|
|
|
106
|
|
|
|
372
|
|
|
|
152
|
|
|
|
214
|
|
|
Interest expense
|
|
|
(1,362
|
)
|
|
|
(1,861
|
)
|
|
|
(2,671
|
)
|
|
|
(1,206
|
)
|
|
|
(1,622
|
)
|
|
Other expense
|
|
|
—
|
|
|
|
—
|
|
|
|
(702
|
)
|
|
|
(342
|
)
|
|
|
(4,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(1,222
|
)
|
|
|
(1,755
|
)
|
|
|
(3,001
|
)
|
|
|
(1,396
|
)
|
|
|
(5,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
change in accounting principle
|
|
|
(3,610
|
)
|
|
|
(11,393
|
)
|
|
|
(8,851
|
)
|
|
|
(4,182
|
)
|
|
|
(6,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in
accounting principle
|
|
|
—
|
|
|
|
—
|
|
|
|
(373
|
)
|
|
|
(373
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,610
|
)
|
|
$
|
(11,393
|
)
|
|
$
|
(9,224
|
)
|
|
$
|
(4,555
|
)
|
|
$
|
(6,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share —
basic and diluted
|
|
$
|
(0.87
|
)
|
|
$
|
(2.51
|
)
|
|
$
|
(1.96
|
)
|
|
$
|
(0.98
|
)
|
|
$
|
(1.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding — basic and diluted
|
|
|
4,151,156
|
|
|
|
4,531,691
|
|
|
|
4,707,902
|
|
|
|
4,656,924
|
|
|
|
4,933,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per
share — basic and diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
$
|
(0.35
|
)
|
|
|
|
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares
outstanding — basic and diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
|
26,239,359
|
|
|
|
|
|
|
|
26,465,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
(in thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts include
stock-based compensation expense as follows:
|
|
Direct operating
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64
|
|
|
$
|
27
|
|
|
$
|
93
|
|
|
Selling and marketing
|
|
|
—
|
|
|
|
—
|
|
|
|
43
|
|
|
|
19
|
|
|
|
81
|
|
|
Research and
development
|
|
|
—
|
|
|
|
—
|
|
|
|
53
|
|
|
|
24
|
|
|
|
99
|
|
|
General and
administrative
|
|
|
—
|
|
|
|
—
|
|
|
|
196
|
|
|
|
26
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
356
|
|
|
$
|
96
|
|
|
$
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary consolidated balance sheet data as of
June 30,
2007 is presented:
|
|
|
| |
•
|
on an actual basis;
|
| |
| |
•
|
on a pro forma basis to reflect the conversion of all of our
outstanding preferred stock into 21,531,457 shares of our
common stock upon the closing of this offering; and
|
| |
| |
•
|
on a pro forma as adjusted basis to further reflect:
|
|
|
|
| |
•
|
the receipt by us of net proceeds of
$ million from the sale of
the shares
of common stock offered by us in this offering at an assumed
public offering price of $ per
share, less underwriting discounts and commissions and estimated
offering expenses payable by us; and
|
| |
| |
•
|
the payment by us of approximately $32.7 million to repay
our outstanding indebtedness with, and other amounts payable to,
our financial lenders as described under “Use of
Proceeds.”
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
|
(unaudited)
|
|
|
|
|
(in thousands)
|
|
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term investments
|
|
$
|
12,660
|
|
|
$
|
12,660
|
|
|
|
|
|
|
Working capital
|
|
|
(2,380
|
)
|
|
|
(2,380
|
)
|
|
|
|
|
|
Total assets
|
|
|
44,345
|
|
|
|
44,345
|
|
|
|
|
|
|
Total indebtedness, including
current portion
|
|
|
32,038
|
|
|
|
32,038
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
50,094
|
|
|
|
—
|
|
|
|
|
|
|
Total stockholders’ equity
(deficit)
|
|
|
(68,528
|
)
|
|
|
(12,256
|
)
|
|
|
|
|
7
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should consider carefully the risks and uncertainties
described below, together with all of the other information in
this prospectus, including the consolidated financial statements
and the related notes appearing at the end of this prospectus,
before deciding to invest in shares of our common stock. If any
of the following risks actually occurs, our business, financial
condition, results of operations and future prospects could be
materially and adversely affected. In that event, the market
price of our common stock could decline and you could lose part
or all of your investment.
RISKS
RELATED TO OUR BUSINESS
We
have incurred significant operating losses in the past and may
not be profitable in the future.
We have incurred significant operating losses since our
inception. For the year ended
December 31, 2006, we had a
net loss of $9.2 million and a loss from operations of
$5.9 million and for the six months ended
June 30, 2007 we had a net loss of $6.1 million and a
loss from operations of $0.3 million. We have an
accumulated deficit of $71.3 million as of
June 30,
2007. It is not certain that we will become profitable, or that,
if we become profitable, our profitability will increase. In
addition, we expect our costs and operating expenses to increase
in the future as we expand our operations. If our revenue does
not grow to offset these expected increased costs and operating
expenses, we may not be profitable. You should not consider
recent quarterly revenue growth as indicative of our future
performance. In fact, in future quarters we may not have any
revenue growth and our revenue could decline. Furthermore, if
our costs and operating expenses exceed our expectations, our
financial performance will be adversely affected.
Our
operating results have in the past and may continue to fluctuate
significantly and if we fail to meet the expectations of
analysts or investors, our stock price and the value of your
investment could decline substantially.
Our operating results are likely to fluctuate, and if we fail to
meet or exceed the expectations of securities analysts or
investors, the trading price of our common stock could decline.
Moreover, our stock price may be based on expectations of our
future performance that may be unrealistic or that may not be
met. Some of the important factors that could cause our revenues
and operating results to fluctuate from quarter to quarter
include:
|
|
|
| |
•
|
the extent to which our services achieve or maintain market
acceptance;
|
| |
| |
•
|
our ability to introduce new services and enhancements to our
existing services on a timely basis;
|
| |
| |
•
|
new competitors and introduction of enhanced products and
services from new or existing competitors;
|
| |
| |
•
|
the length of our contracting and implementation cycles;
|
| |
| |
•
|
the financial condition of our current and potential clients;
|
| |
| |
•
|
changes in client budgets and procurement policies;
|
| |
| |
•
|
amount and timing of our investment in research and development
activities;
|
| |
| |
•
|
technical difficulties or interruptions in our services;
|
| |
| |
•
|
our ability to hire and retain qualified personnel, including
the rate of expansion of our sales force;
|
| |
| |
•
|
changes in the regulatory environment related to healthcare;
|
| |
| |
•
|
regulatory compliance costs;
|
| |
| |
•
|
the timing, size and integration success of potential future
acquisitions; and
|
| |
| |
•
|
unforeseen legal expenses, including litigation and settlement
costs.
|
8
Many of these factors are not within our control, and the
occurrence of one or more of them might cause our operating
results to vary widely. As such, we believe that
quarter-to-quarter comparisons of our revenues and operating
results may not be meaningful and should not be relied upon as
an indication of future performance.
A significant portion of our operating expense is relatively
fixed in nature and planned expenditures are based in part on
expectations regarding future revenue. Accordingly, unexpected
revenue shortfalls may decrease our gross margins and could
cause significant changes in our operating results from quarter
to quarter. In addition, our future quarterly operating results
may fluctuate and may not meet the expectations of securities
analysts or investors. If this occurs, the trading price of our
common stock could fall substantially either suddenly or over
time.
We
operate in a highly competitive industry, and if we are not able
to compete effectively, our business and operating results will
be harmed.
The provision by third parties of revenue cycle services to
physician practices has historically been dominated by small
service providers who offer highly individualized services and a
high degree of specialized knowledge applicable in many cases to
a limited medical specialty, a limited set of payers or a
limited geographical area. We anticipate that the software,
statistical and database tools that are available to such
service providers will continue to become more sophisticated and
effective and that demand for our services could be adversely
affected.
Revenue cycle software for physician practices has historically
been dominated by large, well-financed and
technologically-sophisticated entities that have focused on
software solutions. The size and financial strength of these
entities is increasing as a result of continued consolidation in
both the information technology and healthcare industries. We
expect large integrated technology companies to become more
active in our markets, both through acquisition and internal
investment. As costs fall and technology improves, increased
market saturation may change the competitive landscape in favor
of competitors with greater scale than we currently possess.
Some of our current large competitors, such as GE Healthcare,
Sage Software Healthcare, Inc., Misys Healthcare Systems,
Allscripts Healthcare Solutions, Inc., Quality Systems, Inc.,
Siemens Medical Solutions USA, Inc. and McKesson Corp. have
greater name recognition, longer operating histories and
significantly greater resources than we do. As a result, our
competitors may be able to respond more quickly and effectively
than we can to new or changing opportunities, technologies,
standards or client requirements. In addition, current and
potential competitors have established, and may in the future
establish, cooperative relationships with vendors of
complementary products, technologies or services to increase the
availability of their products to the marketplace. Accordingly,
new competitors or alliances may emerge that have greater market
share, larger client bases, more widely adopted proprietary
technologies, greater marketing expertise, greater financial
resources and larger sales forces than we have, which could put
us at a competitive disadvantage. Further, in light of these
advantages, even if our services are more effective than the
product or service offerings of our competitors, current or
potential clients might accept competitive products and services
in lieu of purchasing our services. Increased competition is
likely to result in pricing pressures, which could negatively
impact our sales, profitability or market share. In addition to
new niche vendors, who offer stand-alone products and services,
we face competition from existing enterprise vendors, including
those currently focused on software solutions, which have
information systems in place at clients in our target market.
These existing enterprise vendors may now, or in the future,
offer or promise products or services with less functionality
than our services, but which offer ease of integration with
existing systems and which leverage existing vendor
relationships.
The
market for our services is immature and volatile, and if it does
not develop or if it develops more slowly than we expect, the
growth of our business will be harmed.
The market for
internet-based
business services is relatively new and unproven, and it is
uncertain whether these services will achieve and sustain high
levels of demand and market acceptance. Our success
9
will depend to a substantial extent on the willingness of
enterprises, large and small, to increase their use of on-demand
business services in general, and for their revenue and clinical
cycles in particular. Many enterprises have invested substantial
personnel and financial resources to integrate established
enterprise software into their businesses, and therefore may be
reluctant or unwilling to switch to an on-demand application
service. Furthermore, some enterprises may be reluctant or
unwilling to use on-demand application services, because they
have concerns regarding the risks associated with security
capabilities, among other things, of the technology delivery
model associated with these services. If enterprises do not
perceive the benefits of our services, then the market for these
services may not develop at all, or it may develop more slowly
than we expect, either of which would significantly adversely
affect our operating results. In addition, as a new company in
this unproven market, we have limited insight into trends that
may develop and affect our business. We may make errors in
predicting and reacting to relevant business trends, which could
harm our business. If any of these risks occur, it could
materially adversely affect our business, financial condition or
results of operations.
If we
do not continue to innovate and provide services that are useful
to users, we may not remain competitive, and our revenues and
operating results could suffer.
Our success depends on providing services that the medical
community uses to improve business performance and quality of
service to patients. Our competitors are constantly developing
products and services that may become more efficient or
appealing to our clients. As a result, we must continue to
invest significant resources in research and development in
order to enhance our existing services and introduce new
high-quality services that clients will want. If we are unable
to predict user preferences or industry changes, or if we are
unable to modify our services on a timely basis, we may lose
clients. Our operating results would also suffer if our
innovations are not responsive to the needs of our clients, are
not appropriately timed with market opportunity or are not
effectively brought to market. As technology continues to
develop, our competitors may be able to offer results that are,
or that are perceived to be, substantially similar to or better
than those generated by our services. This may force us to
compete on additional service attributes and to expend
significant resources in order to remain competitive.
As a
result of our variable sales and implementation cycles, we may
be unable to recognize revenue to offset expenditures, which
could result in fluctuations in our quarterly results of
operations or otherwise harm our future operating
results.
The sales cycle for our services can be variable, typically
ranging from three to five months from initial contact to
contract execution. During the sales cycle, we expend time and
resources, and we do not recognize any revenue to offset such
expenditures. Our implementation cycle is also variable,
typically ranging from three to five months from
contract
execution to completion of implementation. Some of our
new-client
set-up
projects are complex and require a lengthy delay and significant
implementation work. Each client’s situation is different,
and unanticipated difficulties and delays may arise as a result
of failure by us or by the client to meet our respective
implementation responsibilities. During the implementation
cycle, we expend substantial time, effort and financial
resources implementing our service, but accounting principles do
not allow us to recognize the resulting revenue until the
service has been implemented, at which time we begin recognition
of implementation revenue over the life of the
contract. This
could harm our future operating results.
After a client
contract is signed, we provide an implementation
process for the client during which appropriate connections and
registrations are established and checked, data is loaded into
our athenaNet system, data tables are set up and practice
personnel are given initial training. The length and details of
this implementation process vary widely from client to client.
Typically implementation of larger clients takes longer than
implementation for smaller clients. Implementation for a given
client may be cancelled. Our
contracts typically provide that
they can be terminated for any reason or for no reason in
90 days. Despite the fact that we typically require a
deposit in advance of implementation, some clients have
cancelled before our service has been started. In addition,
implementation may be delayed or the target dates for completion
may be extended into the future for a variety of reasons,
including to meet the needs and requirements of the client,
because of delays with payer processing and because of the
volume and complexity of the implementations
10
awaiting our work. If implementation periods are extended, our
provision of the revenue cycle or clinical cycle services upon
which we realize most of our revenues will be delayed and our
financial condition may be adversely affected. In addition,
cancellation of any implementation after it has begun may
involve loss to us of time, effort and expenses invested in the
cancelled implementation process and lost opportunity for
implementing paying clients in that same period of time.
These factors may contribute to substantial fluctuations in our
quarterly operating results, particularly in the near term and
during any period in which our sales volume is relatively low.
As a result, in future quarters our operating results could fall
below the expectations of securities analysts or investors, in
which event our stock price would likely decrease.
If the
revenue of our clients decreases, our revenue will
decrease.
Under most of our client
contracts, we base our charges on a
percentage of the revenue that the client realizes while using
our services. Many factors may lead to decrease in client
revenue, including:
|
|
|
| |
•
|
interruption of client access to our system for any reason;
|
| |
| |
•
|
our failure to provide services in a timely or high-quality
manner;
|
| |
| |
•
|
failure of our clients to adopt or maintain effective business
practices;
|
| |
| |
•
|
actions by third-party payers of medical claims to reduce
reimbursement;
|
| |
| |
•
|
government regulations reducing reimbursement; and
|
| |
| |
•
|
reduction of client revenue resulting from increased competition
or other changes in the marketplace for physician services.
|
If the clients’ revenue decreases for any reason, our
revenue will likely decrease.
If
participants in our channel marketing and sales lead programs do
not maintain appropriate relationships with potential clients,
our sales accomplished with their help or data may be unwound
and our payments to them may be deemed
improper.
We maintain a series of relationships with third parties that we
term channel relationships. These relationships take different
forms under different contractual language. Some relationships
help us identify sales leads. Other relationships permit third
parties to act as value-added resellers or as independent sales
representatives for our services. In some cases, for example in
the case of some membership organizations, these relationships
involve endorsement of our services as well as other marketing
activities. In each of these cases, we require contractually
that the third party disclose information to
and/or limit
their relationships with potential purchasers of our services
for regulatory compliance reasons. If these third parties do not
comply with these regulatory requirements, sales accomplished
with the data or help that they have provided may not be
enforceable and may be unwound. Third parties that, despite our
requirements, exercise undue influence over decisions by
prospective clients, occupy positions with obligations of
fidelity or fiduciary obligations to prospective clients, or who
offer bribes or kickbacks to prospective clients or their
employees, may be committing wrongful or illegal acts that could
render any resulting
contract between us and the client
unenforceable. Any misconduct by these third parties with
respect to prospective clients may result in allegations that we
have encouraged or participated in wrongful or illegal behavior
and that payments to such third parties under our channel
contracts are improper. This misconduct could subject us to
civil or criminal claims and liabilities, could require us to
change or terminate some portions of our business, could require
us to refund portions of our services fees and could adversely
effect our revenue and operating margin. Even an unsuccessful
challenge of our activities could result in adverse publicity,
require costly response from us, impair our ability to attract
and maintain clients and lead analysts or potential investors to
reduce their expectations of our performance, resulting in
reduction to our market price.
11
Failure
to manage our rapid growth effectively could increase our
expenses, decrease our revenue and prevent us from implementing
our business strategy.
We have been experiencing a period of rapid growth. To manage
our anticipated future growth effectively, we must continue to
maintain and may need to enhance our information technology
infrastructure, financial and accounting systems and controls
and manage expanded operations in geographically-distributed
locations. We also must attract, train and retain a significant
number of qualified sales and marketing personnel, professional
services personnel, software engineers, technical personnel and
management personnel. Failure to manage our rapid growth
effectively could lead us to over-invest or under-invest in
technology and operations, could result in weaknesses in our
infrastructure, systems or controls, could give rise to
operational mistakes, losses, loss of productivity or business
opportunities, and could result in loss of employees and reduced
productivity of remaining employees. Our growth could require
significant capital expenditures and may divert financial
resources from other projects, such as the development of new
services. If our management is unable to effectively manage our
growth, our expenses may increase more than expected, our
revenue could decline or may grow more slowly than expected, and
we may be unable to implement our business strategy.
We
depend upon a third-party service provider for important
processing functions. If this third-party provider does not
fulfill its contractual obligations or chooses to discontinue
its services, our business and operations could be disrupted and
our operating results would be harmed.
We have entered into a service agreement with Vision
Healthsource, a subsidiary of Perot Systems Corporation, through
which more than 700 people provide data entry and other
services from facilities located in India and the Philippines to
support our client service operations. Among other things, this
provider processes critical claims data and patient statements.
If these services fail or are of poor quality, our business,
reputation and operating results could be harmed. Failure of the
service provider to perform satisfactorily could result in
client dissatisfaction, disrupt our operations and adversely
affect operating results. With respect to this service provider,
we have significantly less control over the systems and
processes than if we maintained and operated them ourselves,
which increases our risk. In some cases, functions necessary to
our business are performed on proprietary systems and software
to which we have no access. If we need to find an alternative
source for performing these functions, we may have to expend
significant money, resources and time to develop the
alternative, and if this development is not accomplished in a
timely manner and without significant disruption to our
business, we may be unable to fulfill our responsibilities to
clients or the expectations of clients, with the attendant
potential for liability claims and a loss of business
reputation, loss of ability to attract or maintain clients and
reduction of our revenue or operating margin.
Various
risks could interrupt international operations, exposing us to
significant costs.
We have contracted with companies operating in Canada, India and
the Philippines for various services, including data entry,
outgoing calls to payers, data classification and software
development. In addition, in October 2005, we established a
subsidiary in Chennai, India to conduct research and development
activities. International operations expose
the company to
potential operational disruptions as a result of currency
valuations, political turmoil and labor issues. Any such
disruptions may have a negative effect on our profits, on client
satisfaction and on our ability to attract or maintain clients.
Because
competition for our target employees is intense, we may not be
able to attract and retain the highly-skilled employees we need
to support our planned growth.
To continue to execute on our growth plan, we must attract and
retain highly-qualified personnel. Competition for these
personnel is intense, especially for engineers with high levels
of experience in designing and developing software and
internet-related services and senior sales executives. We may
not be successful in attracting and retaining qualified
personnel. We have from time to time in the past experienced,
and we expect to continue to experience in the future,
difficulty in hiring and retaining highly-skilled employees with
appropriate qualifications. Many of the companies with which we
compete for experienced personnel have greater resources than we
have. In addition, in making employment decisions, particularly
in the Internet and
12
high-technology industries, job candidates often consider the
value of the stock options they are to receive in connection
with their employment. Volatility in the price of our stock may,
therefore, adversely affect our ability to attract or retain key
employees. Furthermore, the new requirement to expense stock
options may discourage us from granting the size or type of
stock option awards that job candidates require to join our
company. If we fail to attract new personnel or fail to retain
and motivate our current personnel, our business and future
growth prospects could be severely harmed.
If we
acquire companies or technologies in the future, they could
prove difficult to integrate, disrupt our business, dilute
stockholder value and adversely affect our operating results and
the value of our common stock.
As part of our business strategy, we may acquire, enter into
joint ventures with, or make investments in complementary
companies, services and technologies in the future. Acquisitions
and investments involve numerous risks, including:
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difficulties in identifying and acquiring products, technologies
or businesses that will help our business;
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difficulties in integrating operations, technologies, services
and personnel;
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diversion of financial and managerial resources from existing
operations;
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risk of entering new markets in which we have little to no
experience; and
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delays in client purchases due to uncertainty and the inability
to maintain relationships with clients of the acquired
businesses.
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As a result, if we fail to properly evaluate acquisitions or
investments, we may not achieve the anticipated benefits of any
such acquisitions, we may incur costs in excess of what we
anticipate, and management resources and attention may be
diverted from other necessary or valuable activities.
If we
are required to collect sales and use taxes on the services we
sell in additional jurisdictions, we may be subject to liability
for past sales and our future sales may decrease.
We may lose sales or incur significant expenses should states be
successful in imposing broader guidelines to state sales and use
taxes. A successful assertion by one or more states that we
should collect sales or other taxes on the sale of our services
could result in substantial tax liabilities for past sales,
decrease our ability to compete with traditional retailers and
otherwise harm our business. Each state has different rules and
regulations governing sales and use taxes and these rules and
regulations are subject to varying interpretations that may
change over time. We review these rules and regulations
periodically and, when we believe our services are subject to
sales and use taxes in a particular state, voluntarily engage
state tax authorities in order to determine how to comply with
their rules and regulations. For example, in April 2006 we
entered into a settlement agreement with the Ohio Department of
Taxation after it determined that we owed sales and use taxes
for sales made in the State of Ohio between July 2005 and
January 2006. In connection with this settlement we paid the
State of Ohio $0.2 million in taxes, interest and
penalties. Additionally, in November 2004, we began paying sales
and use taxes in the State of Texas. We cannot assure you that
we will not be subject to sales and use taxes or related
penalties for past sales in states where we believe no
compliance is necessary.
Vendors of services, like us, are typically held responsible by
taxing authorities for the collection and payment of any
applicable sales and similar taxes. If one or more taxing
authorities determines that taxes should have, but have not,
been paid with respect to our services, we may be liable for
past taxes in addition to taxes going forward. Liability for
past taxes may also include very substantial interest and
penalty charges. Our client
contracts provide that our clients
must pay all applicable sales and similar taxes. Nevertheless,
clients may be reluctant to pay back taxes and may refuse
responsibility for interest or penalties associated with those
taxes. If we are required to collect and pay back taxes and the
associated interest and penalties and if our clients fail or
refuse to reimburse us for all or a portion of these amounts, we
will have incurred unplanned expenses that may be substantial.
Moreover, imposition of such taxes on our services going forward
will effectively increase the cost of such services to our
clients and may adversely affect our ability to retain existing
clients or to gain new clients in the areas in which such taxes
are imposed.
13
We may
be unable to adequately protect, and we may incur significant
costs in enforcing, our intellectual property and other
proprietary rights.
Our success depends in part on our ability to enforce our
intellectual property and other proprietary rights. We rely upon
a combination of trademark, trade secret, copyright, patent and
unfair competition laws, as well as license and access
agreements and other contractual provisions, to protect our
intellectual property and other proprietary rights. In addition,
we attempt to protect our intellectual property and proprietary
information by requiring certain of our employees and
consultants to enter into confidentiality, noncompetition and
assignment of inventions agreements. Our attempts to protect our
intellectual property may be challenged by others or invalidated
through administrative process or litigation. While we have six
U.S. patent applications pending, we currently have no
issued patents and may be unable to obtain meaningful patent
protection for our technology. We have received a final office
action rejecting application on our oldest and broadest
application and have filed a request for continued examination,
along with a response and revised claims with respect to that
patent. In addition, if any patents are issued in the future,
they may not provide us with any competitive advantages, or may
be successfully challenged by third parties. Agreement terms
that address non-competition are difficult to enforce in many
jurisdictions and may not be enforceable in any particular case.
To the extent that our intellectual property and other
proprietary rights are not adequately protected, third parties
might gain access to our proprietary information, develop and
market products or services similar to ours, or use trademarks
similar to ours, each of which could materially harm our
business. Existing U.S. federal and state intellectual
property laws offer only limited protection. Moreover, the laws
of other countries in which we now or may in the future conduct
operations or
contract for services may afford little or no
effective protection of our intellectual property. Further, our
platform incorporates open source software components that are
licensed to us under various public domain licenses. While we
believe we have complied with our obligations under the various
applicable licenses for open source software that we use, there
is little or no legal precedent governing the interpretation of
many of the terms of certain of these licenses and therefore the
potential impact of such terms on our business is somewhat
unknown. The failure to adequately protect our intellectual
property and other proprietary rights could materially harm our
business.
In addition, if we resort to legal proceedings to enforce our
intellectual property rights or to determine the validity and
scope of the intellectual property or other proprietary rights
of others, the proceedings could be burdensome and expensive,
even if we were to prevail. Any litigation that may be necessary
in the future could result in substantial costs and diversion of
resources and could have a material adverse effect on our
business, operating results or financial condition.
We may
be sued by third parties for alleged infringement of their
proprietary rights.
The software and Internet industries are characterized by the
existence of a large number of patents, trademarks and
copyrights and by frequent litigation based on allegations of
infringement or other violations of intellectual property
rights. Moreover, our business involves the systematic gathering
and analysis of data about the requirements and behaviors of
payers and other third parties, some or all of which may be
claimed to be confidential or proprietary. We have received in
the past, and may receive in the future, communications from
third parties claiming that we have infringed on the
intellectual property rights of others. For example, in 2005,
Billingnetwork Patent, Inc. sued us in Florida federal court
alleging infringement of its patent issued in 2002 entitled
“Integrated Internet Facilitated Billing, Data Processing
and Communications System.” We have moved to dismiss that
case and oral argument on that motion was heard by the court in
March 2006. We are awaiting further action from the court at
this time. Our technologies may not be able to withstand any
third-party claims or rights against their use. Any intellectual
property claims, with or without merit, could be time-consuming
and expensive to resolve, could divert management attention from
executing our business plan and could require us to pay monetary
damages or enter into royalty or licensing agreements. In
addition, many of our
contracts contain warranties with respect
to intellectual property rights, and some require us to
indemnify our clients for third-party intellectual property
infringement claims, which would increase the cost to us of an
adverse ruling on such a claim.
Moreover, any settlement or adverse judgment resulting from such
a claim could require us to pay substantial amounts of money or
obtain a license to continue to use the technology or
information that is the subject of the claim, or otherwise
restrict or prohibit our use of the technology or information.
There can be
14
no assurance that we would be able to obtain a license on
commercially reasonable terms, if at all, from third parties
asserting an infringement claim; that we would be able to
develop alternative technology on a timely basis, if at all; or
that we would be able to obtain a license to use a suitable
alternative technology to permit us to continue offering, and
our clients to continue using, our affected services.
Accordingly, an adverse determination could prevent us from
offering our services to others. In addition, we may be required
to indemnify our clients for third-party intellectual property
infringement claims, which would increase the cost to us of an
adverse ruling for such a claim.
We are
bound by exclusivity provisions that restrict our ability to
enter into certain sales and marketing relationships in order to
market and sell our services.
Our marketing and sales agreement with Worldmed Shared Services,
Inc. (d/b/a PSS World Medical Shared Services, Inc.), or PSS,
restricts us during the term of the agreement from certain sales
and marketing relationships, including relationships with
certain competitors of PSS and certain distributors and
manufacturers of medical, surgical or pharmaceutical supplies.
This restriction may make it more difficult for us to realize
sales, distribution and income opportunities with certain
potential clients, in particular small physician practices,
which could adversely affect our operating results.
We may
require additional capital to support business growth, and this
capital might not be available.
We intend to continue to make investments to support our
business growth and may require additional funds to respond to
business challenges or opportunities, including the need to
develop new services or enhance our existing service, enhance
our operating infrastructure or acquire complementary businesses
and technologies. Accordingly, we may need to engage in equity
or debt financings to secure additional funds. If we raise
additional funds through further issuances of equity or
convertible debt securities, our existing stockholders could
suffer significant dilution, and any new equity securities we
issue could have rights, preferences and privileges superior to
those of holders of our common stock. Any debt financing secured
by us in the future could involve restrictive covenants relating
to our capital raising activities and other financial and
operational matters, which may make it more difficult for us to
obtain additional capital and to pursue business opportunities,
including potential acquisitions. In addition, we may not be
able to obtain additional financing on terms favorable to us, if
at all. If we are unable to obtain adequate financing or
financing on terms satisfactory to us when we require it, our
ability to continue to support our business growth and to
respond to business challenges could be significantly limited.
Our
loan agreements contain operating and financial covenants that
may restrict our business and
financing activities.
We have loan agreements that provide for up to
$38.5 million of total borrowings, of which
$32.0 million was outstanding at
June 30, 2007.
Borrowings are secured by substantially all of our assets
including our intellectual property. Our loan agreements
restrict our ability to:
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incur additional indebtedness;
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create liens;
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make investments;
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sell assets;
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pay dividends or make distributions on and, in certain cases,
repurchase our stock; or
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consolidate or merge with other entities.
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In addition, our credit facilities require us to meet specified
minimum financial measurements. The operating and financial
restrictions and covenants in these credit facilities, as well
as any future financing agreements that we may enter into, may
restrict our ability to finance our operations, engage in
business activities or expand or fully pursue our business
strategies. Our ability to comply with these covenants may be
affected by events beyond our control, and we may not be able to
meet those covenants. A breach of any of
15
these covenants could result in a default under the loan
agreement, which could cause all of the outstanding indebtedness
under both credit facilities to become immediately due and
payable and terminate all commitments to extend further credit.
We
will incur significant increased costs as a result of operating
as a public company, and our management will be required to
devote substantial time to new compliance
initiatives.
We have never operated as a public company. As a public company,
we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the
Sarbanes-Oxley Act of 2002, as well as rules subsequently
implemented by the Securities and Exchange Commission and the
NASDAQ Global Market, have imposed various new requirements on
public companies, including requiring changes in corporate
governance practices. Our management and other personnel will
need to devote a substantial amount of time to these new
compliance initiatives. Moreover, these rules and regulations
will increase our legal and financial compliance costs and will
make some activities more time-consuming and costly. For
example, we expect these new rules and regulations to make it
more difficult and more expensive for us to obtain director and
officer liability insurance, and we may be required to incur
substantial costs to maintain the same or similar coverage.
In addition, the Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal control over
financial reporting and disclosure controls and procedures. In
particular, commencing in 2008, we must perform system and
process evaluation and testing of our internal control over
financial reporting to allow management and our independent
registered public accounting firm to report on the effectiveness
of our internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal control
over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 will require
that we incur substantial accounting expense and expend
significant management time on compliance-related issues.
Moreover, if we are not able to comply with the requirements of
Section 404 in a timely manner, or if we or our independent
registered public accounting firm identifies deficiencies in our
internal control over financial reporting that are deemed to be
material weaknesses, the market price of our stock could
decline, and we could be subject to sanctions or investigations
by the NASDAQ Global Market, the Securities and Exchange
Commission or other regulatory authorities, which would require
additional financial and management resources.
Current
and future litigation against us could be costly and time
consuming to defend.
We are from time to time subject to legal proceedings and claims
that arise in the ordinary course of business, such as claims
brought by our clients in connection with commercial disputes
and employment claims made by our current or former employees.
Litigation may result in substantial costs and may divert
management’s attention and resources, which may seriously
harm our business, overall financial condition and operating
results. In addition, legal claims that have not yet been
asserted against us may be asserted in the future. Insurance may
not cover such claims, may not be sufficient for one or more
such claims and may not continue to be available on terms
acceptable to us. A claim brought against us that is uninsured
or underinsured could result in unanticipated costs thereby
reducing our operating results and leading analysts or potential
investors to reduce their expectations of our performance
resulting in a reduction in the trading price of our stock.
RISKS
RELATED TO OUR SERVICE OFFERINGS
Our
proprietary athenaNet software may not operate properly, which
could damage our reputation, give rise to claims against us or
divert application of our resources from other purposes, any of
which could harm our business and operating
results.
Proprietary software development is time-consuming, expensive
and complex. Unforeseen difficulties can arise. We may encounter
technical obstacles, and it is possible that we discover
additional problems that prevent our proprietary athenaNet
application from operating properly. If athenaNet does not
function reliably
16
or fails to achieve client expectations in terms of performance,
clients could assert liability claims against us
and/or
attempt to cancel their
contracts with us. This could damage our
reputation and impair our ability to attract or maintain clients.
Moreover, information services as complex as those we offer have
in the past contained, and may in the future develop or contain,
undetected defects or errors. We cannot assure you that material
performance problems or defects in our services will not arise
in the future. Errors may result from interface of our services
with legacy systems and data which we did not develop and the
function of which is outside of our control. Despite testing,
defects or errors may arise in our existing or new software or
service processes. Because changes in payer requirements and
practices are frequent and sometimes difficult to determine
except through trial and error, we are continuously discovering
defects and errors in our software and service processes
compared against these requirements and practices. These defects
and errors and any failure by us to identify and address them
could result in loss of revenue or market share, liability to
clients or others, failure to achieve market acceptance or
expansion, diversion of development resources, injury to our
reputation and increased service and maintenance costs. Defects
or errors in our software and service processes might discourage
existing or potential clients from purchasing services from us.
Correction of defects or errors could prove to be impossible or
impracticable. The costs incurred in correcting any defects or
errors or in responding to resulting claims or liability may be
substantial and could adversely affect our operating results.
In addition, clients relying on our services to collect, manage
and report clinical, business and administrative data may have a
greater sensitivity to service errors and security
vulnerabilities than clients of software products in general. We
market and sell services that, among other things, provide
information to assist care providers in tracking and treating
ill patients. Any operational delay in or failure of our
technology or service processes may result in the disruption of
patient care and could cause harm to our business and operating
results.
Our clients or their patients may assert claims against us in
the future alleging that they suffered damages due to a defect,
error or other failure of our software or service processes. A
product liability claim or errors or omissions claim could
subject us to significant legal defense costs and adverse
publicity regardless of the merits or eventual outcome of such a
claim.
If our
security measures are breached or fail and unauthorized access
is obtained to a client’s data, our service may be
perceived as not being secure, clients may curtail or stop using
our service and we may incur significant
liabilities.
Our service involves the storage and transmission of
clients’ proprietary information and protected health
information of patients. Because of the sensitivity of this
information, security features of our software are very
important. If our security measures are breached or fail as a
result of third-party action, employee error, malfeasance or
otherwise, someone may be able to obtain unauthorized access to
client or patient data. As a result, our reputation could be
damaged, our business may suffer and we could face damages for
contract breach, penalties for violation of applicable laws or
regulations and significant costs for remediation and
remediation efforts to prevent future occurrences.
In addition, we rely upon our clients as users of our system for
key activities to promote security of the system and the data
within it, such as administration of client-side access
credentialing and control of client-side display of data. On
occasion, our clients have failed to perform these activities.
For example, our physician practice clients have, on occasion,
failed to terminate the athenaNet login/password of former
employees, or permitted current employees to share
login/passwords, each of which is a violation of our contractual
arrangement with these clients. When we become aware of such
breaches, we work with the client to terminate the inappropriate
access and provide additional instruction to our clients in
order to avoid the reoccurrence of such problems. Although to
date these breaches have not resulted in claims against us or in
material harm to our business, the failure of our clients in
future periods to perform these activities may result in claims
against us, which could expose us to significant expense and
harm to our reputation.
Because techniques used to obtain unauthorized access or to
sabotage systems change frequently and generally are not
recognized until launched against a target, we may be unable to
anticipate these techniques
17
or to implement adequate preventive measures. If an actual or
perceived breach of our security occurs, the market perception
of the effectiveness of our security measures could be harmed
and we could lose sales and clients. In addition, our clients
may authorize or enable third parties to access their client
data or the data of their patients on our systems. Because we do
not control such access, we cannot ensure the complete integrity
or security of such data in our systems.
Failure
by our clients to obtain proper permissions and waivers may
result in claims against us or may limit or prevent our use of
data which could harm our business.
We require our clients to provide necessary notices and to
obtain necessary permissions and waivers for use and disclosure
of the information that we receive, and we require contractual
assurances from them that they have done so and will do so. If
they do not obtain necessary permissions and waivers, then our
use and disclosure of information that we receive from them or
on their behalf may be limited or prohibited by state or federal
privacy laws or other laws. This could impair our functions,
processes and databases that reflect, contain or are based upon
such data and may prevent use of such data. In addition, this
could interfere with or prevent creation or use of rules,
analyses or other data-driven activities that benefit us.
Moreover, we may be subject to claims or liability for use or
disclosure of information by reason of lack of valid notice,
permission or waiver. These claims or liabilities could subject
us to unexpected costs and adversely affect our operating
results.
Various
events could interrupt clients’ access to athenaNet,
exposing us to significant costs.
The ability to access athenaNet is critical to our clients’
cash flow and business viability. Our operations and facilities
are vulnerable to interruption
and/or
damage from a number of sources, many of which are beyond our
control, including, without limitation: (i) power loss and
telecommunications failures; (ii) fire, flood, hurricane
and other natural disasters; (iii) software and hardware
errors, failures or crashes in our own systems or in other
systems; and (iv) computer viruses, hacking and similar
disruptive problems in our own systems and in other systems. We
attempt to mitigate these risks through various means including
redundant infrastructure, disaster recovery plans, separate test
systems and change control and system security measures, but our
precautions will not protect against all potential problems. If
clients’ access is interrupted because of problems in the
operation of our facilities, we could be exposed to significant
claims by clients or their patients, particularly if the access
interruption is associated with problems in the timely delivery
of funds due to clients or medical information relevant to
patient care. Our plans for disaster recovery and business
continuity rely upon third-party providers of related services,
and if those vendors fail us at a time that our systems are not
operating correctly, we could incur a loss of revenue and
liability for failure to fulfill our obligations. Any
significant instances of system downtime could negatively affect
our reputation and ability to retain clients and sell our
services which would adversely impact our revenues.
In addition, retention and availability of patient care and
physician reimbursement data are subject to federal and state
laws governing record retention, accuracy and access. Some laws
impose obligations on our clients and on us to produce
information to third parties and to amend or expunge data at
their direction. Our failure to meet these obligations may
result in liability which could increase our costs and reduce
our operating results.
Interruptions
or delays in service from our third-party data-hosting
facilities could impair the delivery of our service and harm our
business.
As of the date of this prospectus, we serve our clients from a
third-party data-hosting facility located in Waltham,
Massachusetts. As part of our current disaster recovery
arrangements, a subset of our production environment and client
data is currently replicated in a separate standby facility
located in Chicago, Illinois. We do not control the operation of
any of these facilities, and they are vulnerable to damage or
interruption from earthquakes, floods, fires, power loss,
telecommunications failures and similar events. They are also
subject to break-ins, sabotage, intentional acts of vandalism
and similar misconduct. Despite precautions taken at these
facilities, the occurrence of a natural disaster or an act of
terrorism, a decision to close the facilities
18
without adequate notice or other unanticipated problems at both
facilities could result in lengthy interruptions in our service.
Even with the disaster recovery arrangements, our service could
be interrupted.
We are planning to transition our primary hosting relationship
from Waltham, Massachusetts to another third-party hosting
facility located in Bedford, Massachusetts. In connection with
this transition, we will be moving, transferring or installing
equipment, data and software to and in that other facility.
Despite precautions taken during this process, any unsuccessful
transfers may impair the delivery of our service. Further, any
damage to, or failure of, our systems generally could result in
interruptions in our service. Interruptions in our service may
reduce our revenue, cause us to issue credits or pay penalties,
may cause clients to terminate services and may adversely affect
our renewal rates and our ability to attract new clients. Our
business may also be harmed if our clients and potential clients
believe our service is unreliable.
We
rely on Internet infrastructure, bandwidth providers, data
center providers, other third parties and our own systems for
providing services to our users, and any failure or interruption
in the services provided by these third parties or our own
systems could expose us to litigation and negatively impact our
relationships with users, adversely affecting our brand and our
business.
Our ability to deliver our internet-based services is dependent
on the development and maintenance of the infrastructure of the
Internet by third parties. This includes maintenance of a
reliable network backbone with the necessary speed, data
capacity and security for providing reliable Internet access and
services. Our services are designed to operate without
interruption in accordance with our service level commitments.
However, we have experienced and expect that we will in the
future experience interruptions and delays in services and
availability from time to time. We rely on internal systems as
well as third-party vendors, including data center providers and
bandwidth providers, to provide our services. We do not maintain
redundant systems or facilities for some of these services. In
the event of a catastrophic event with respect to one or more of
these systems or facilities, we may experience an extended
period of system unavailability, which could negatively impact
our relationship with users. To operate without interruption,
both we and our service providers must guard against:
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damage from fire, power loss and other natural disasters;
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communications failures;
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software and hardware errors, failures and crashes;
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security breaches, computer viruses and similar disruptive
problems; and
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other potential interruptions.
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Any disruption in the network access or co-location services
provided by these third-party providers or any failure of or by
these third-party providers or our own systems to handle current
or higher volume of use could significantly harm our business.
We exercise limited control over these third-party vendors,
which increases our vulnerability to problems with services they
provide.
Any errors, failures, interruptions or delays experienced in
connection with these third-party technologies and information
services or our own systems could negatively impact our
relationships with users and adversely affect our business and
could expose us to third-party liabilities. Although we maintain
insurance for our business, the coverage under our policies may
not be adequate to compensate us for all losses that may occur.
In addition, we cannot provide assurance that we will continue
to be able to obtain adequate insurance coverage at an
acceptable cost.
The reliability and performance of the Internet may be harmed by
increased usage or by denial-of-service attacks. The Internet
has experienced a variety of outages and other delays as a
result of damages to portions of its infrastructure, and it
could face outages and delays in the future. These outages and
delays could reduce the level of Internet usage as well as the
availability of the Internet to us for delivery of our
internet-based services.
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We
rely on third-party computer hardware and software that may be
difficult to replace or which could cause errors or failures of
our service which could damage our reputation, harm our ability
to attract and maintain clients and decrease our
revenue.
We rely on computer hardware purchased or leased and software
licensed from third parties in order to offer our service,
including database software from Oracle Corporation. These
licenses are generally commercially available on varying terms,
however it is possible that this hardware and software may not
continue to be available on commercially reasonable terms, or at
all. Any loss of the right to use any of this hardware or
software could result in delays in the provisioning of our
service until equivalent technology is either developed by us,
or, if available, is identified, obtained and integrated, which
could harm our business. Any errors or defects in third-party
hardware or software could result in errors or a failure of our
service which could damage our reputation, harm our ability to
attract and maintain clients and decrease our revenue.
We are
subject to the effect of payer and provider conduct which we
cannot control and which could damage our reputation with
clients and result in liability claims that increase our
expenses.
We offer certain electronic claims submission services as part
of our service, and we rely on content from clients, payers and
others. While we have implemented certain features and
safeguards designed to maximize the accuracy and completeness of
claims content, these features and safeguards may not be
sufficient to prevent inaccurate claims data from being
submitted to payers. Should inaccurate claims data be submitted
to payers, we may experience poor operational results and may be
subject to liability claims which could damage our reputation
with clients and result in liability claims that increase our
expenses.
If our
services fail to provide accurate and timely information, or if
our content or any other element of our service is associated
with faulty clinical decisions or treatment, we could have
liability to clients, clinicians or patients which could
adversely affect our results of operations.
Our software, content and services are used to assist clinical
decision-making and provide information about patient medical
histories and treatment plans. If our software, content or
services fail to provide accurate and timely information or are
associated with faulty clinical decisions or treatment, then
clients, clinicians or their patients could assert claims
against us that could result in substantial costs to us, harm
our reputation in the industry and cause demand for our services
to decline.
Our proprietary athenaClinicals service is utilized in clinical
decision-making, provides access to patient medical histories
and assists in creating patient treatment plans including the
issuance of prescription drugs. If our athenaClinicals service
fails to provide accurate and timely information, or if our
content or any other element of our service is associated with
faulty clinical decisions or treatment, we could have liability
to clients, clinicians or patients.
The assertion of such claims and ensuing litigation, regardless
of its outcome could result in substantial cost to us, divert
management’s attention from operations, damage our
reputation and decrease market acceptance of our services. We
attempt to limit by
contract our liability for damages and to
require that our clients assume responsibility for medical care
and approve key system rules, protocols and data. Despite these
precautions, the allocations of responsibility and limitations
of liability set forth in our
contracts may not be enforceable,
may not be binding upon patients or may not otherwise protect us
from liability for damages.
We maintain general liability and insurance coverage, but this
coverage may not continue to be available on acceptable terms or
may not be available in sufficient amounts to cover one or more
large claims against us. In addition, the insurer might disclaim
coverage as to any future claim. One or more large claims could
exceed our available insurance coverage.
Our proprietary software may contain errors or failures that are
not detected until after the software is introduced or updates
and new versions are released. It is challenging for us to test
our software for all potential problems because it is difficult
to simulate the wide variety of computing environments or
treatment methodologies that our clients may deploy or rely
upon. From time to time we have discovered defects or errors in
our software, and such defects or errors can be expected to
appear in the future. Defects and errors
20
that are not timely detected and remedied could expose us to
risk of liability to clients, clinicians and patients and cause
delays in introduction of new services, result in increased
costs and diversion of development resources, require design
modifications or decrease market acceptance or client
satisfaction with our services.
If any of these risks occur, they could materially adversely
affect our business, financial condition or results of
operations.
We may
be liable for use of incorrect or incomplete data we provide
which could harm our business, financial condition and results
of operations.
We store and display data for use by healthcare providers in
treating patients. Our clients or third parties provide us with
most of these data. If these data are incorrect or incomplete or
if we make mistakes in the capture or input of these data,
adverse consequences, including death, may occur and give rise
to product liability and other claims against us. In addition, a
court or government agency may take the position that our
storage and display of health information exposes us to personal
injury liability or other liability for wrongful delivery or
handling of healthcare services or erroneous health information.
While we maintain insurance coverage, we cannot assure that this
coverage will prove to be adequate or will continue to be
available on acceptable terms, if at all. Even unsuccessful
claims could result in substantial costs and diversion of
management resources. A claim brought against us that is
uninsured or under-insured could harm our business, financial
condition and results of operations.
RISKS
RELATED TO REGULATION
Government
regulation of healthcare creates risks and challenges with
respect to our compliance efforts and our business
strategies.
The healthcare industry is highly regulated and is subject to
changing political, legislative, regulatory and other
influences. Existing and new laws and regulations affecting the
healthcare industry could create unexpected liabilities for us,
could cause us to incur additional costs and could restrict our
operations. Many healthcare laws are complex, and their
application to specific services and relationships may not be
clear. In particular, many existing healthcare laws and
regulations, when enacted, did not anticipate the healthcare
information services that we provide, and these laws and
regulations may be applied to our services in ways that we do
not anticipate. Our failure to accurately anticipate the
application of these laws and regulations, or our other failure
to comply, could create liability for us, result in adverse
publicity and negatively affect our business. Some of the risks
we face from healthcare regulation are as follows:
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False or Fraudulent Claim Laws. There are
numerous federal and state laws that forbid submission of false
information or the failure to disclose information in connection
with submission and payment of physician claims for
reimbursement. In some cases, these laws also forbid abuse of
existing systems for such submission and payment. Any failure of
our services to comply with these laws and regulations could
result in substantial liability, including but not limited to
criminal liability, could adversely affect demand for our
services and could force us to expend significant capital,
research and development and other resources to address the
failure. Errors by us or our systems with respect to entry,
formatting, preparation or transmission of claim information may
be determined or alleged to be in violation of these laws and
regulations. Determination by a court or regulatory agency that
our services violate these laws could subject us to civil or
criminal penalties, could invalidate all or portions of some of
our client contracts, could require us to change or terminate
some portions of our business, could require us to refund
portions of our services fees, could cause us to be disqualified
from serving clients doing business with government payers and
could have an adverse effect on our business.
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In most cases where we are permitted to do so, we calculate
charges for our services based on a percentage of the
collections that our clients receive as a result of our
services. To the extent that violations or liability for
violations of these laws and regulations require intent, it may
be alleged that this percentage calculation provides us or our
employees with incentive to commit or overlook fraud or abuse in
connection with submission and payment of reimbursement claims.
The U.S. Centers for
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Medicare and Medicaid Services has stated that it is concerned
that percentage-based billing services may encourage billing
companies to commit or to overlook fraudulent or abusive
practices.
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HIPAA and other Health Privacy
Regulations. There are numerous federal and state
laws related to patient privacy. In particular, the Health
Insurance Portability and Accountability Act of 1996, or HIPAA,
includes privacy standards that protect individual privacy by
limiting the uses and disclosures of individually identifiable
health information and data security standards that require
covered entities to implement administrative, physical and
technological safeguards to ensure the confidentiality,
integrity, availability and security of individually
identifiable health information in electronic form. HIPAA also
specifies formats that must be used in certain electronic
transactions, such as claims, payment advice and eligibility
inquiries. Because we translate electronic transactions to and
from HIPAA-prescribed electronic formats and other forms, we are
a clearinghouse and as such are a covered entity. In addition,
our clients are also covered entities and are mandated by HIPAA
to enter into written agreements with us, known as business
associate agreements, that require us to safeguard individually
identifiable health information. Business associate agreements
typically include:
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a description of our permitted uses of individually identifiable
health information;
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a covenant not to disclose the information other than as
permitted under the agreement and to make our subcontractors, if
any, subject to the same restrictions;
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assurances that appropriate administrative, physical and
technical safeguards are in place to prevent misuse of the
information;
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an obligation to report to our client any use or disclosure of
the information not provided for in the agreement;
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a prohibition against our use or disclosure of the information
if a similar use or disclosure by our client would violate the
HIPAA standards;
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the ability for our clients to terminate the underlying support
agreement if we breach a material term of the business associate
agreement and are unable to cure the breach;
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the requirement to return or destroy all individually
identifiable health information at the end of our support
agreement; and
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access by the Department of Health and Human Services to our
internal practices, books and records to validate that we are
safeguarding individually identifiable health information.
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We may not be able to adequately address the business risks
created by HIPAA implementation. Furthermore, we are unable to
predict what changes to HIPAA or other law or regulation might
be made in the future or how those changes could affect our
business or the costs of compliance. In addition, the federal
Office of the National Coordinator for Health Information
Technology, or ONCHIT, is coordinating the development of
national standards for creating an interoperable health
information technology infrastructure based on the widespread
adoption of electronic health records in the healthcare sector.
We are unable to predict what, if any, impact the creation of
such standards will have on our compliance costs or our services.
In addition some payers and clearinghouses with which we conduct
business interpret HIPAA transaction requirements differently
than we do. Where clearinghouses or payers require conformity
with their interpretations a condition of successful transaction
we seek to comply with their interpretations.
The HIPAA transaction standards include proper use of procedure
and diagnosis codes. Since these codes are selected or approved
by our clients, and since we do not verify their propriety, some
of our capability to comply with the transaction standards is
dependant on the proper conduct of our clients.
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In addition to the HIPAA Privacy and Security Rules, most states
have enacted patient confidentiality laws that protect against
the disclosure of confidential medical information, and many
states have adopted or are considering further legislation in
this area, including privacy safeguards, security standards, and
data security breach notification requirements. Such state laws,
if more stringent than HIPAA requirements, are not preempted by
the federal requirements we are required to comply with them.
Failure by us to comply with any of the federal and state
standards regarding patient privacy may subject us to penalties,
including civil monetary penalties and in some circumstances,
criminal penalties. In addition, such failure may injure our
reputation and adversely affect our ability to retain clients
and attract new clients.
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Anti-Kickback and Anti-Bribery Laws. There are
federal and state laws that govern patient referrals, physician
financial relationships and inducements to healthcare providers
and patients. For example, the federal healthcare programs’
anti-kickback law prohibits any person or entity from offering,
paying, soliciting or receiving anything of value, directly or
indirectly, for the referral of patients covered by Medicare,
Medicaid and other federal healthcare programs or the leasing,
purchasing, ordering or arranging for or recommending the lease,
purchase or order of any item, good, facility or service covered
by these programs. Many states also have similar anti-kickback
laws that are not necessarily limited to items or services for
which payment is made by a federal healthcare program. Moreover,
both federal and state laws forbid bribery and similar behavior.
Any determination by a state or federal regulatory agency that
any of our activities or those of our clients or vendors violate
any of these laws could subject us to civil or criminal
penalties, could require us to change or terminate some portions
of our business, could require us to refund a portion of our
service fees, could disqualify us from providing services to
clients doing business with government programs and could have
an adverse effect on our business. Even an unsuccessful
challenge by regulatory authorities of our activities could
result in adverse publicity and could require costly response
from us.
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Anti-Referral Laws. There are federal and
state laws that forbid payment for patient referrals, patient
brokering, remuneration of patients or billing based on
referrals between individuals
and/or
entities that have various financial, ownership or other
business relationships. In many cases, billing for care arising
from such actions is illegal. These vary widely from state to
state, and one of the federal law, termed the Stark Law, is very
complex in its application. Any determination by a state or
federal regulatory agency that any of our clients violate or
have violated any of these laws may result in allegations that
claims that we have processed or forwarded are improper. This
could subject us to civil or criminal penalties, could require
us to change or terminate some portions of our business, could
require us to refund portions of our services fees and could
have an adverse effect on our business. Even an unsuccessful
challenge by regulatory authorities of our activities could
result in adverse publicity and could require costly response
from us.
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Corporate Practice of Medicine Laws and Fee-Splitting
Laws. In many states, there are state laws that
forbid physicians from practicing medicine in partnership with
non-physicians, such as business corporations. In some states,
including New York, these take the form of laws or regulations
forbidding splitting of physician fees with non-physicians or
others. In some cases, these laws have been interpreted to
prevent business service providers from charging their physician
clients on the basis of a percentage of collections or charges.
We have varied our charge structure in some states to comply
with these laws, which may make our services less desirable to
potential clients. Any determination by a state court or
regulatory agency that our service contracts with our clients
violate these laws could subject us to civil or criminal
penalties, could invalidate all or portions of some of our
client contracts, could require us to change or terminate some
portions of our business, could require us to refund portions of
our services fees and could have an adverse effect on our
business. Even an unsuccessful challenge by regulatory
authorities of our activities could result in adverse publicity
and could require costly response from us.
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Anti-Assignment Laws. There are federal and
state laws that forbid or limit assignment of claims for
reimbursement from government-funded programs. In some cases,
these laws have been interpreted in regulations or policy
statements to limit the manner in which business service
companies may handle checks or other payments for such claims
and to limit or prevent such companies from charging their
physician clients on the basis of a percentage of collections or
charges. Any determination by a state court or regulatory agency
that our service contracts with our clients violate these laws
could subject us to civil or criminal penalties, could
invalidate all or portions of some of our client contracts,
could require us to change or terminate some portions of our
business, could require us to refund portions of our services
fees and could have an adverse effect on our business. Even an
unsuccessful challenge by regulatory authorities of our
activities could result in adverse publicity and could require
costly response from us.
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Prescribing Laws. The use of our software by
physicians to perform a variety of functions, including
electronic prescribing, electronic routing of prescriptions to
pharmacies and dispensing of medication, is governed by state
and federal law, including fraud and abuse laws, drug control
regulations and state department of health regulations. States
have differing prescription format requirements. Many existing
laws and regulations, when enacted, did not anticipate methods
of
e-commerce
now being developed. For example, while federal law and the laws
of many states permit the electronic transmission of
prescription orders, the laws of several states neither
specifically permit nor specifically prohibit the practice.
Given the rapid growth of electronic transactions in healthcare,
and particularly the growth of the Internet, we expect the
remaining states to directly address these areas with regulation
in the near future. Regulatory authorities such as the
U.S. Department of Health and Human Services’ Centers
for Medicare and Medicaid Services may impose functionality
standards with regard to electronic prescribing and EMR
technologies. Determination that we or our clients have violated
prescribing laws may expose us to liability, loss of reputation
and loss of business. These laws and requirements may also
increase the cost and time necessary to market new services and
could affect us in other respects not presently foreseeable.
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Electronic Medical Records Laws. A number of
federal and state laws govern the use and content of electronic
health record systems, including fraud and abuse laws that may
affect the donation of such technology. As a company that
provides EMR functionality, our systems and services must be
designed in a manner that facilitates our clients’
compliance with these laws. Because this is a topic of
increasing state and federal regulation, we expect additional
and continuing modification of the current legal and regulatory
environment. We cannot predict the content or effect of possible
future regulation on our business activities. The software
component of our athenaClinicals service complies with the
Certification Commission for Healthcare Information Technology,
or CCHIT, for ambulatory electronic health record criteria for
2006.
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Claims Transmission Laws. Our services include
the manual and electronic transmission of our client’s
claims for reimbursement from payers. Federal and various state
laws provide for civil and criminal penalties for any person who
submits, or causes to be submitted, a claim to any payer,
including, without limitation, Medicare, Medicaid and any
private health plans and managed care plans, that is false or
that that overbills or bills for items that have not been
provided to the patient.
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Prompt Pay Laws. Laws in many states govern
prompt payment obligations for healthcare services. These laws
generally define claims payment processes and set specific time
frames for submission, payment and appeal steps. They frequently
also define and require clean claims. Failure to meet these
requirements and timeframes may result in rejection or delay of
claims. Failure of our services to comply may adversely affect
our business results and give rise to liability claims by
clients.
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Medical Device Laws. The U.S. Food and
Drug Administration (FDA) has promulgated a draft policy for the
regulation of computer software products as medical devices
under the 1976 Medical Device Amendments to the Federal Food,
Drug and Cosmetic Act. To the extent that computer software is a
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medical device under the policy, we, as a provider of
application functionality, could be required, depending on the
functionality, to:
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register and list our products with the FDA;
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notify the FDA and demonstrate substantial equivalence to other
products on the market before marketing our functionality; or
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obtain FDA approval by demonstrating safety and effectiveness
before marketing our functionality.
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The FDA can impose extensive requirements governing pre- and
post-market conditions like service investigation, approval,
labeling and manufacturing. In addition, the FDA can impose
extensive requirements governing development controls and
quality assurance processes.
Potential
regulatory requirements placed on our software, services and
content could impose increased costs on us, could delay or
prevent our introduction of new services types and could impair
the function or value of our existing service
types.
Our services are and are likely to continue to be subject to
increasing regulatory requirements in a multitude of ways. As
these requirements proliferate, we must change or adapt our
services and our software to comply. Changing regulatory
requirements may render our services obsolete or may block us
from accomplishing our work or from developing new services.
This may in turn impose additional costs upon us to comply or to
further develop services or software. It may also make
introduction of new service types more costly or more time
consuming than we currently anticipate. It may even prevent such
introduction by us of new services or continuation of our
existing services unprofitably or impossible.
Potential
additional regulation of the disclosure of health information
outside the United States may adversely affect our operations
and may increase our costs.
Federal or state governmental authorities may impose additional
data security standards or additional privacy or other
restrictions on the collection, use, transmission and other
disclosures of health information. Legislation has been proposed
at various times at both the federal and the state level that
would limit, forbid or regulate the use or transmission of
medical information outside of the United States. Such
legislation, if adopted, may render our use of our off-shore
partners, such as our data-entry and customer service provider,
Vision Healthsource, for work related to such data impracticable
or substantially more expensive. Alternative processing of such
information within the United States may involve substantial
delay in implementation and increased cost.
Errors
or illegal activity on the part of our clients may result in
claims against us.
We rely on our clients, and we contractually obligate them, to
provide us with accurate and appropriate data and directives for
our actions. We rely upon our clients as users of our system for
key activities to produce proper claims for reimbursement.
Failure of clients to provide these data and directives or to
perform these activities may result in claims against us that
our reliance was misplaced.
Our
services present the potential for embezzlement, identity theft
or other similar illegal behavior by our employees or
subcontractors with respect to third parties.
Among other things, our services involve handling mail from
payers and from patients for many of our clients, and this mail
frequently includes original checks
and/or
credit card information, and occasionally, it includes currency.
Even in those cases in which we do not handle original documents
or mail, our services also involve the use and disclosure of
personal and business information that could be used to
impersonate third parties or otherwise gain access to their data
or funds. If any of our employees or subcontractors takes,
converts or misuses such funds, documents or data, we could be
liable for damages, and our business reputation could be damaged
or destroyed.
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Potential
subsidy of services similar to ours may reduce client
demand.
Recently, entities such as the Massachusetts Healthcare
Consortium have offered to subsidize adoption by physicians of
electronic health record technology. In addition, federal
regulations have been changed to permit such subsidy from
additional sources subject to certain limitations. To the extent
that we do not qualify or participate in such subsidy programs,
demand for our services may be reduced which may decrease our
revenues.
RISKS
RELATED TO THIS OFFERING AND OWNERSHIP OF OUR COMMON
STOCK
An
active, liquid and orderly market for our common stock may not
develop.
Prior to this offering there has been no market for shares of
our common stock. An active trading market for our common stock
may never develop or be sustained, which could depress the
market price of our common stock and could affect your ability
to sell your shares. The initial public offering price will be
determined through negotiations between us and the
representatives of the underwriters and may bear no relationship
to the price at which our common stock will trade following the
completion of this offering. The trading price of our common
stock following this offering is likely to be highly volatile
and could be subject to wide fluctuations in response to various
factors, some of which are beyond our control. In addition to
the factors discussed in this “Risk Factors” section
and elsewhere in this prospectus, these factors include:
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our operating performance and the operating performance of
similar companies;
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the overall performance of the equity markets;
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announcements by us or our competitors of acquisitions, business
plans or commercial relationships;
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threatened or actual litigation;
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changes in laws or regulations relating to the sale of health
insurance;
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any major change in our board of directors or management;
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publication of research reports or news stories about us, our
competitors or our industry or positive or negative
recommendations or withdrawal of research coverage by securities
analysts;
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large volumes of sales of our shares of common stock by existing
stockholders; and
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general political and economic conditions.
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In addition, the stock market in general, and the market for
internet-related companies in particular, has experienced
extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of
those companies. These fluctuations may be even more pronounced
in the trading market for our stock shortly following this
offering. Securities class action litigation has often been
instituted against companies following periods of volatility in
the overall market and in the market price of a company’s
securities. This litigation, if instituted against us, could
result in very substantial costs, divert our management’s
attention and resources and harm our business, operating results
and financial condition.
Future
sales of shares of our common stock by existing stockholders
could depress the market price of our common
stock.
Upon completion of this offering, there will
be shares
of our common stock outstanding. Of these, shares are being sold
in this offering
(or shares,
if the underwriters exercise their overallotment option in full)
and will be freely tradable immediately after this offering
(except for shares purchased by affiliates) and the
remaining shares
may be sold upon expiration of
lock-up
agreements 180 days after the date of this offering
(subject in some cases to volume limitations). In addition, as
of
June 30, 2007, we had outstanding options to purchase
3,010,054 shares of common stock that, if exercised, will
result in these additional shares becoming available for sale
upon expiration of the
lock-up
agreements. A large portion of these shares and options are held
by a small number of persons and investment funds. Sales by
these stockholders or optionholders of a substantial number of
shares after this offering could
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significantly reduce the market price of our common stock.
Moreover, after this offering, the holders of shares of common
stock will have rights, subject to some conditions, to require
us to file registration statements covering the shares they
currently hold, or to include these shares in registration
statements that we may file for ourselves or other stockholders.
We also intend to register all common stock that we may issue
under our 1997 Stock Plan, 2000 Stock Plan and 2007 Stock Option
and Incentive Plan. Effective upon the completion of this
offering, an aggregate
of shares
of our common stock will be reserved for future issuance under
this plan. Once we register these shares, which we plan to do
shortly after the completion of this offering, they can be
freely sold in the public market upon issuance, subject to the
lock-up
agreements referred to above. If a large number of these shares
are sold in the public market, the sales could reduce the
trading price of our common stock. See “Shares Eligible for
Future Sale” for a more detailed description of sales that
may occur in the future.
You
will experience immediate and substantial
dilution.
The initial public offering price will be substantially higher
than the net tangible book value of each outstanding share of
common stock immediately after this offering. If you purchase
common stock in this offering, you will suffer immediate and
substantial dilution. At an assumed initial public offering
price of $ with net proceeds of
$ million, after deducting
estimated underwriting discounts and commissions and estimated
offering expenses, investors who purchase shares in this
offering will have contributed
approximately % of the total amount
of funding we have received to date, but will only hold
approximately % of the total voting
rights. The dilution will be $ per
share in the net tangible book value of the common stock from
the assumed initial public offering price. In addition, if
outstanding options to purchase shares of our common stock are
exercised, there could be further dilution. For more information
refer to “Dilution.”
We
have broad discretion in the use of the net proceeds from this
offering and may not use them effectively.
We cannot specify with certainty the particular uses of the net
proceeds we will receive from this offering. Our management will
have broad discretion in the application of the net proceeds,
including for any of the purposes described in “Use of
Proceeds”. Accordingly, you will have to rely upon the
judgment of our management with respect to the use of the
proceeds, with only limited information concerning
management’s specific intentions. Our management may spend
a portion or all of the net proceeds from this offering in ways
that our stockholders may not desire or that may not yield a
favorable return. The failure by our management to apply these
funds effectively could harm our business. Pending their use, we
may invest the net proceeds from this offering in a manner that
does not produce income or that loses value.
A
limited number of stockholders will have the ability to
influence the outcome of director elections and other matters
requiring stockholder approval.
After this offering, our directors, executive officers and their
affiliated entities will beneficially own more
than
percent of our outstanding common stock. These stockholders, if
they act together, could exert substantial influence over
matters requiring approval by our stockholders, including the
election of directors, the amendment of our certificate of
incorporation and
by-laws and the approval of mergers or other
business combination transactions. This concentration of
ownership may discourage, delay or prevent a change in control
of
our company, which could deprive our stockholders of an
opportunity to receive a premium for their stock as part of a
sale of
our company and might reduce our stock price. These
actions may be taken even if they are opposed by other
stockholders, including those who purchase shares in this
offering.
Provisions
in our certificate of incorporation and by-laws or Delaware law
might discourage, delay or prevent a change of control of our
company or changes in our management and, therefore, depress the
trading price of our common stock.
Provisions of our
certificate of incorporation and
by-laws and
Delaware law may discourage, delay or prevent a merger,
acquisition or other change in control that stockholders may
consider favorable, including
27
transactions in which you might otherwise receive a premium for
your shares of our common stock. These provisions may also
prevent or frustrate attempts by our stockholders to replace or
remove our management. These provisions include:
|
|
|
| |
•
|
limitations on the removal of directors;
|
| |
| |
•
|
advance notice requirements for stockholder proposals and
nominations;
|
| |
| |
•
|
the inability of stockholders to act by written consent or to
call special meetings; and
|
| |
| |
•
|
the ability of our board of directors to make, alter or repeal
our by-laws.
|
The affirmative vote of the holders of at least 75% of our
shares of capital stock entitled to vote is necessary to amend
or repeal the above provisions of our certificate of
incorporation. In addition, our board of directors has the
ability to designate the terms of and issue new series of
preferred stock without stockholder approval. Also, absent
approval of our board of directors, our
by-laws may only be
amended or repealed by the affirmative vote of the holders of at
least 75% of our shares of capital stock entitled to vote.
In addition, Section 203 of the Delaware General
Corporation Law prohibits a publicly-held Delaware corporation
from engaging in a business combination with an interested
stockholder, generally a person which together with its
affiliates owns, or within the last three years has owned, 15%
of our voting stock, for a period of three years after the date
of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner.
The existence of the foregoing provisions and anti-takeover
measures could limit the price that investors might be willing
to pay in the future for shares of our common stock. They could
also deter potential acquirers of
our company, thereby reducing
the likelihood that you could receive a premium for your common
stock in an acquisition.
We do
not currently intend to pay dividends on our common stock and,
consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our
common stock.
We have never declared or paid any cash dividends on our common
stock and do not currently intend to do so for the foreseeable
future. We currently intend to invest our future earnings, if
any, to fund our growth. Therefore, you are not likely to
receive any dividends on your common stock for the foreseeable
future and the success of an investment in shares of our common
stock will depend upon any future appreciation in its value.
There is no guarantee that shares of our common stock will
appreciate in value or even maintain the price at which our
stockholders have purchased their shares.
28
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All
statements other than statements of historical fact contained in
this prospectus are forward-looking statements. 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” or the negative of these terms or other
comparable terminology. These statements are only current
predictions and are subject to known and unknown risks,
uncertainties and other factors that may cause our or our
industry’s actual results, levels of activity, performance,
or achievements to be materially different from those
anticipated by the forward-looking statements. These factors
include, among other things, those listed under “Risk
Factors” and elsewhere in this prospectus.
Although we believe that the expectations reflected in the
forward-looking statements 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 the forward-looking statements, whether as a
result of new information, future events or otherwise, after the
date of this prospectus.
This prospectus contains statistical data that we obtained from
industry publications and reports generated by third parties.
Although we believe that the publications and reports are
reliable, we have not independently verified this statistical
data.
INDUSTRY
DATA
Unless otherwise indicated, information contained in this
prospectus concerning our industry and the markets in which we
operate, including our general expectations and market position,
market opportunity and market share, is based on information
from independent industry analysts and third party sources
(including industry publications, surveys and forecasts and our
internal research), and management estimates. Management
estimates are derived from publicly available information
released by independent industry analysts and third-party
sources, as well as data from our internal research, and are
based on assumptions made by us based on such data and our
knowledge of such industry and markets, which we believe to be
reasonable. None of the sources cited in this prospectus has
consented to the inclusion of any data from its reports, nor
have we sought their consent. Our internal research has not been
verified by any independent source, and we have not
independently verified any third-party information. While we
believe the market position, market opportunity and market share
information included in this prospectus is generally reliable,
such information is inherently imprecise. In addition,
projections, assumptions and estimates of our future performance
and the future performance of the industries in which we operate
are necessarily subject to a high degree of uncertainty and risk
due to a variety of factors, including those described in
“Risk Factors” and elsewhere in this prospectus. These
and other factors could cause results to differ materially from
those expressed in the estimates made by the independent parties
and by us.
29
USE OF
PROCEEDS
We estimate that the net proceeds to us from the sale of the
shares of common stock in this offering will be approximately
$ million at an assumed
initial public offering price of $
per share, the midpoint of the price range set forth on the
cover of this prospectus, and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses. A $1.00 increase (decrease) in the assumed initial
public offering price would increase (decrease) our net proceeds
from this offering by $ , assuming
the number of shares offered by us, as set forth on the cover of
this prospectus, remains the same. If the underwriters’
overallotment option is exercised in full, we estimate that our
net proceeds will be
$ million. We will not
receive any of the proceeds from the sale of shares by the
selling stockholder.
The principal reasons for this offering are to obtain additional
capital, to create a public market for our common stock and to
facilitate our future access to public equity markets. As a
result, we believe we will be better able to address our various
strategic initiatives and respond to changes in our industry
than we otherwise would as a private company.
We currently estimate that of the net proceeds we receive from
this offering we will spend approximately $32.7 million to
repay the following indebtedness outstanding as of
June 30,
2007, plus accrued but unpaid interest and prepayment penalties
thereon:
|
|
|
| |
•
|
approximately $8.9 million in aggregate principal and
interest under our working capital line of credit with Silicon
Valley Bank, or SVB;
|
| |
| |
•
|
approximately $1.3 million in aggregate principal, interest
and prepayment penalties under our equipment line of credit with
Bank of America, N.A., or Bank of America;
|
| |
| |
•
|
approximately $4.7 million in aggregate principal, interest
and prepayment penalties under our equipment line of credit with
Oxford Finance Corporation, or Oxford;
|
| |
| |
•
|
approximately $0.3 million in aggregate principal, interest
and prepayment penalties under our equipment line of credit with
General Electric Capital Corporation; and
|
| |
| |
•
|
approximately $17.5 million in aggregate principal,
interest and prepayment penalties under our term loans with ORIX
Venture Finance LLC, or ORIX.
|
Our working capital line of credit currently bears interest at a
per annum rate equal to SVB’s prime rate, which was 8.25%
as of
June 30, 2007, matures on
August 31, 2008. Our
equipment line of credit with Bank of America currently bears
interest at per annum rate equal to the greater of 9% or the
Bank of America’s prime rate, which was 8.25% as of
June 30, 2007, plus 3.75%, matures on
December 1, 2008
and may be prepaid with a 1% penalty. Our equipment line of
credit with Oxford currently bears interest at 10.73% per annum,
matures on
December 1, 2009 and may be prepaid with a 2%-3%
penalty if prepayment occurs prior within 90 days of the
effectiveness of this registration statement. Our equipment line
of credit with General Electric Capital Corporation currently
bears interest at 8.49% per annum, matures on
March 1, 2008
and may be prepaid with a 3% penalty if prepayment occurs prior
to
December 1, 2007. Each of our term loans with ORIX
currently bears interest at prime, which was 8.25% as of
June 30, 2007, plus 1.75% per annum, matures on
June 30, 2010, and may be prepaid in whole or in part with
a prepayment penalty equal to 3% of the amount prepaid if
prepayment occurs prior to
December 28, 2007. We used the
proceeds from indebtedness incurred during the past year to
acquire equipment and for other general working capital purposes.
We anticipate that we will use the remaining net proceeds we
receive from this offering for working capital and other general
corporate purposes, including the funding of our marketing
activities and further investment in the development of our
service offerings. Other than the repayment of indebtedness, we
have not allocated any specific portion of the net proceeds to
any particular purpose, and our management will have the
discretion to allocate the proceeds as it determines. We may use
a portion of the net proceeds for the acquisition of businesses,
products and technologies that we believe are complementary to
our own, although we have no agreements or understandings with
respect to any acquisition at this time.
30
Pending our use of the net proceeds from this offering, we
intend to invest the net proceeds of this offering in
short-term, interest-bearing, investment-grade securities.
This expected use of the net proceeds of this offering
represents our current intentions based upon our present plans
and business condition. The amounts and timing of our actual
expenditures will depend upon numerous factors, including cash
flows from operations and the anticipated growth of our
business. We will retain broad discretion in the allocation and
use of our net proceeds. See “Risk Factors —
Risks Related to This Offering and Ownership of Our Common
Stock.”
DIVIDEND
POLICY
We have never declared or paid any dividends on our capital
stock and our loan agreements restrict our ability to pay
dividends. We currently intend to retain any future earnings and
do not intend to declare or pay cash dividends on our common
stock in the foreseeable future. Any future determination to pay
dividends will be, subject to applicable law, at the discretion
of our board of directors and will depend upon, among other
factors, our results of operations, financial condition,
contractual restrictions and capital requirements.
31
CAPITALIZATION
The following table sets forth our capitalization as of
June 30, 2007:
|
|
|
| |
•
|
on an actual basis;
|
| |
| |
•
|
on a pro forma basis to reflect the conversion of all of our
outstanding preferred stock into 21,531,457 shares of our common
stock upon the closing of this offering; and
|
| |
| |
•
|
on a pro forma as adjusted basis to further reflect:
|
|
|
|
| |
•
|
the receipt by us of net proceeds of
$ million from the sale of
the shares
of common stock offered by us in this offering at an assumed
public offering price of $ per
share, less underwriting discounts and commissions and estimated
offering expenses payable by us; and
|
| |
| |
•
|
the payment by us of approximately $32.7 million to repay
our outstanding indebtedness with, and other amounts payable to,
our financial lenders as described under “Use of
Proceeds.”
|
You should read this information together with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” our consolidated
financial statements and the notes to those statements appearing
elsewhere in this prospectus.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
|
(in thousands, except share and
|
|
|
|
|
per share data)
|
|
|
|
|
Long-term debt
|
|
|
32,038
|
|
|
|
32,038
|
|
|
|
|
|
|
Deferred rent
|
|
|
11,670
|
|
|
|
11,670
|
|
|
|
|
|
|
Warrant liability
|
|
|
6,178
|
|
|
|
—
|
|
|
|
|
|
|
Convertible preferred stock;
$0.01 par value per share; 26,389,684 shares
authorized, 22,331,991 shares issued and
21,531,457 shares outstanding, actual; no shares
authorized, issued and outstanding, pro forma and pro forma as
adjusted
|
|
|
50,094
|
|
|
|
—
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value; no shares authorized, issued and outstanding, actual and
pro forma; 5,000,000 shares authorized and no shares issued
and outstanding, pro forma as adjusted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Common stock; $0.01 par value
per share; 50,000,000 shares authorized,
5,546,267 shares issued and 5,068,942 shares
outstanding, actual; 50,000,000 shares authorized,
27,878,258 shares issued and 26,600,399 shares outstanding, pro
forma; 125,000,000 shares authorized
and shares issued and
outstanding, pro forma as adjusted
|
|
|
55
|
|
|
|
270
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
3,819
|
|
|
|
59,876
|
|
|
|
|
|
|
Accumulated other comprehensive
income
|
|
|
62
|
|
|
|
62
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(71,264
|
)
|
|
|
(71,264
|
)
|
|
|
|
|
|
Treasury stock,
1,277,859 shares
|
|
|
(1,200
|
)
|
|
|
(1,200
|
)
|
|
|
|
|
|
Total stockholders’ deficit
|
|
|
(68,528
|
)
|
|
|
(12,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
|
31,452
|
|
|
|
31,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) each of additional paid-in capital,
total stockholders’ deficit and total capitalization by
approximately $ million,
assuming that the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same.
The number of shares shown as issued and outstanding in the
table above does not include:
|
|
|
| |
•
|
3,010,054 shares of common stock issuable upon the exercise
of stock options outstanding as of June 30, 2007 with a
weighted average exercise price of $3.43 per share; and
|
| |
| |
•
|
634,787 shares of common stock issuable upon the exercise
of warrants outstanding as of June 30, 2007 with a weighted
average exercise price of $3.28 per share.
|
32
DILUTION
If you invest in our common stock in this offering, your
interest will be diluted to the extent of the difference between
the public offering price per share of our common stock and the
pro forma net tangible book value per share of our common stock.
The net tangible book value of our common stock as of
June 30, 2007 was a deficit of
$ million, or
$ per share. Net tangible book
value per share represents the amount of stockholders’
deficit divided by shares of common stock outstanding at that
date. The pro forma net tangible book value of our common stock
as of
June 30, 2007 was
$ million, or approximately
$ per share, excluding proceeds
from this offering. Pro forma net tangible book value gives
effect to the conversion of all shares of outstanding preferred
stock into shares of common stock upon the closing of this
offering.
Net tangible book value dilution per share to new investors
represents the difference between the amount per share paid by
purchasers of common stock in this offering and the pro forma
net tangible book value per share of common stock immediately
after completion of this offering. After giving effect to our
sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share, and
after deducting estimated underwriting discounts and commissions
and estimated offering expenses, our pro forma net tangible book
value as of
June 30, 2007 would have been
$ per share. This represents an
immediate increase in net tangible book value of
$ per share to existing
stockholders and an immediate dilution in net tangible book
value of $ per share to purchasers
of common stock in this offering, as illustrated in the
following table:
| |
|
|
|
|
|
|
|
|
|
Assumed initial public offering
price per share
|
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
Increase per share attributable to
new investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value
per share at June 30, 2007 after giving effect to the
offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming the exercise in full of the underwriters’
overallotment option, our pro forma net tangible book value at
June 30, 2007 would have been approximately
$ per share, representing an
immediate increase in the pro forma net tangible book value of
$ per share to our existing
stockholders and an immediate decrease in net tangible book
value of $ per share to new
investors.
The following table summarizes, on a pro forma basis, as of
June 30, 2007, the difference between the number of shares
of common stock purchased from us, the total consideration paid
to us and the average price per share paid by existing
stockholders and by new investors at an assumed initial public
offering price of $ per share,
before deducting estimated underwriting discounts and
commissions and estimated offering expenses.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Avg
|
|
|
|
|
Shares Purchased
|
|
|
Consideration
|
|
|
Price
|
|
|
|
|
Number
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
/ Share
|
|
|
|
|
Existing stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
The discussion and the tables above assume no exercise of stock
options outstanding on
June 30, 2007 and no issuance of
shares reserved for future issuance under our equity
compensation plans. In addition, the numbers set forth in the
table above assume the conversion as of
June 30, 2007 of
all outstanding shares of our preferred stock into shares of our
common stock. As of
June 30, 2007, there were:
|
|
|
| |
•
|
3,010,054 shares of common stock issuable upon the exercise
of stock options outstanding with a weighted average exercise
price of $3.43 per share;
|
| |
| |
•
|
634,787 shares of common stock issuable upon the exercise
of warrants outstanding as of June 30, 2007 with a weighted
average exercise price of $3.28 per share; and
|
| |
| |
•
|
170,504 shares of common stock reserved for issuance under
our equity incentive plans.
|
If the underwriters’ overallotment option is exercised in
full, the following will occur:
|
|
|
| |
•
|
the percentage of shares of common stock held by existing
stockholders will decrease to
approximately % of the total number
of shares of our common stock outstanding after this
offering; and
|
| |
| |
•
|
the number of shares held by new investors will be increased
to , or
approximately %, of the total
number of shares of our common stock outstanding after this
offering.
|
34
SELECTED
CONSOLIDATED FINANCIAL DATA
The following tables summarize our consolidated financial data
for the periods presented. You should read the following
financial information together with the information under
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and the related notes to these consolidated
financial statements appearing elsewhere in this prospectus. The
selected consolidated statements of operations data for the
fiscal years ended
December 31, 2004,
2005 and
2006, and
the selected consolidated balance sheet data as of
December 31, 2005 and
2006 are derived from our
consolidated financial statements, which are included elsewhere
in this prospectus, and have been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as indicated in their report. The
selected consolidated statements of operations data for the
years ended
December 31, 2002 and
2003, and the
consolidated balance sheet data at
December 31, 2002,
2003
and
2004 are derived from our audited consolidated financial
statements not included in this prospectus. The selected
consolidated balance sheet data as of
June 30, 2007 and the
selected consolidated statements of operations data for six
months ended
June 30, 2006 and
2007 are derived from our
unaudited consolidated financial statements appearing elsewhere
in this prospectus. The unaudited consolidated financial
statements have been prepared on the same basis as our audited
financial statements and include, in the opinion of management,
all adjustments that management considers necessary for a fair
presentation of the financial information set forth in those
statements. Operating results for these periods are not
necessarily indicative of the operating results for a full year.
Historical results are not necessarily indicative of the results
to be expected in future periods.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
(in thousands except share and per share data)
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business services
|
|
$
|
10,475
|
|
|
$
|
21,953
|
|
|
$
|
35,033
|
|
|
$
|
48,958
|
|
|
$
|
70,652
|
|
|
$
|
32,822
|
|
|
$
|
43,268
|
|
|
Implementation and other
|
|
|
1,509
|
|
|
|
2,713
|
|
|
|
3,905
|
|
|
|
4,582
|
|
|
|
5,161
|
|
|
|
2,517
|
|
|
|
3,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
11,984
|
|
|
|
24,666
|
|
|
|
38,938
|
|
|
|
53,540
|
|
|
|
75,813
|
|
|
|
35,339
|
|
|
|
46,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
|
|
10,107
|
|
|
|
15,396
|
|
|
|
20,512
|
|
|
|
27,545
|
|
|
|
36,530
|
|
|
|
17,458
|
|
|
|
22,168
|
|
|
Selling and marketing
|
|
|
3,952
|
|
|
|
4,994
|
|
|
|
7,650
|
|
|
|
11,680
|
|
|
|
15,645
|
|
|
|
7,435
|
|
|
|
8,314
|
|
|
Research and development
|
|
|
488
|
|
|
|
1,051
|
|
|
|
1,485
|
|
|
|
2,925
|
|
|
|
6,903
|
|
|
|
2,509
|
|
|
|
3,599
|
|
|
General and administrative
|
|
|
4,448
|
|
|
|
5,222
|
|
|
|
8,520
|
|
|
|
15,545
|
|
|
|
16,347
|
|
|
|
7,771
|
|
|
|
9,571
|
|
|
Depreciation and amortization
|
|
|
2,493
|
|
|
|
2,894
|
|
|
|
3,159
|
|
|
|
5,483
|
|
|
|
6,238
|
|
|
|
2,952
|
|
|
|
3,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
21,488
|
|
|
|
29,557
|
|
|
|
41,326
|
|
|
|
63,178
|
|
|
|
81,663
|
|
|
|
38,125
|
|
|
|
46,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(9,504
|
)
|
|
|
(4,891
|
)
|
|
|
(2,388
|
)
|
|
|
(9,638
|
)
|
|
|
(5,850
|
)
|
|
|
(2,786
|
)
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
326
|
|
|
|
65
|
|
|
|
140
|
|
|
|
106
|
|
|
|
372
|
|
|
|
152
|
|
|
|
214
|
|
|
Interest expense
|
|
|
(380
|
)
|
|
|
(540
|
)
|
|
|
(1,362
|
)
|
|
|
(1,861
|
)
|
|
|
(2,671
|
)
|
|
|
(1,206
|
)
|
|
|
(1,622
|
)
|
|
Other expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(702
|
)
|
|
|
(342
|
)
|
|
|
(4,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(54
|
)
|
|
|
(475
|
)
|
|
|
(1,222
|
)
|
|
|
(1,755
|
)
|
|
|
(3,001
|
)
|
|
|
(1,396
|
)
|
|
|
(5,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
change in accounting principle
|
|
|
(9,558
|
)
|
|
|
(5,366
|
)
|
|
|
(3,610
|
)
|
|
|
(11,393
|
)
|
|
|
(8,851
|
)
|
|
|
(4,182
|
)
|
|
|
(6,084
|
)
|
|
Cumulative effect of change in
accounting principle
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(373
|
)
|
|
|
(373
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,558
|
)
|
|
$
|
(5,366
|
)
|
|
$
|
(3,610
|
)
|
|
$
|
(11,393
|
)
|
|
$
|
(9,224
|
)
|
|
$
|
(4,555
|
)
|
|
$
|
(6,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share —
basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.96
|
)
|
|
|
|
|
|
$
|
(1.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
(in thousands except share and per share data)
|
|
|
|
|
Weighted average shares
outstanding — basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,707,902
|
|
|
|
|
|
|
|
4,933,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per
share — basic and diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.35
|
)
|
|
|
|
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares
outstanding — basic and diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,239,359
|
|
|
|
|
|
|
|
26,465,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts include
stock-based compensation expense as follows:
|
|
Direct operating
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64
|
|
|
$
|
27
|
|
|
$
|
93
|
|
|
Selling and marketing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43
|
|
|
|
19
|
|
|
|
81
|
|
|
Research and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53
|
|
|
|
24
|
|
|
|
99
|
|
|
General and
administrative
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
196
|
|
|
|
26
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
356
|
|
|
$
|
96
|
|
|
$
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
As of December 31,
|
|
|
June 30,
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Balance Sheet Data:
|
|
(in thousands)
|
|
Cash, cash equivalents and
short-term investments
|
|
$
|
7,634
|
|
|
$
|
8,432
|
|
|
$
|
8,763
|
|
|
$
|
9,309
|
|
|
$
|
9,736
|
|
|
$
|
12,660
|
|
|
Current assets
|
|
|
10,017
|
|
|
|
12,791
|
|
|
|
14,981
|
|
|
|
17,722
|
|
|
|
21,355
|
|
|
|
26,569
|
|
|
Total assets
|
|
|
16,520
|
|
|
|
18,830
|
|
|
|
26,022
|
|
|
|
38,345
|
|
|
|
39,973
|
|
|
|
44,345
|
|
|
Current liabilities
|
|
|
7,317
|
|
|
|
8,474
|
|
|
|
14,196
|
|
|
|
16,947
|
|
|
|
23,646
|
|
|
|
28,949
|
|
|
Total non-current liabilities
|
|
|
1,514
|
|
|
|
7,442
|
|
|
|
5,335
|
|
|
|
25,640
|
|
|
|
30,504
|
|
|
|
33,830
|
|
|
Total liabilities
|
|
|
8,831
|
|
|
|
15,916
|
|
|
|
19,531
|
|
|
|
42,587
|
|
|
|
54,150
|
|
|
|
62,779
|
|
|
Convertible preferred stock
|
|
|
43,678
|
|
|
|
43,678
|
|
|
|
50,094
|
|
|
|
50,094
|
|
|
|
50,094
|
|
|
|
50,094
|
|
|
Total indebtedness including
current portion
|
|
|
4,775
|
|
|
|
9,852
|
|
|
|
11,467
|
|
|
|
20,137
|
|
|
|
27,293
|
|
|
|
32,038
|
|
|
Total stockholders’ deficit
|
|
|
(35,989
|
)
|
|
|
(40,764
|
)
|
|
|
(43,603
|
)
|
|
|
(54,336
|
)
|
|
|
(64,271
|
)
|
|
|
(68,528
|
)
|
36
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with our consolidated financial statements, the
accompanying notes to these financial statements and the other
financial information that appear elsewhere in this prospectus.
This discussion contains predictions, estimates and other
forward-looking statements that involve a number of risks and
uncertainties. Actual results may differ materially from those
discussed in these forward-looking statements due to a number of
factors, including those set forth in the section entitled
“Risk Factors” and elsewhere in this prospectus.
Overview
athenahealth is a provider of
internet-based
business services for physician practices. Our service offerings
are based on three integrated components: our proprietary
internet-based software, our continually updated database of
payer reimbursement process rules and our back-office service
operations that perform administrative aspects of billing and
clinical data management for physician practices. Our principal
offering, athenaCollector, automates and manages billing-related
functions for physician practices and includes a medical
practice management platform. We have also developed a service
offering, athenaClinicals, that automates and manages medical
record-related functions for physician practices and includes an
electronic medical record, or EMR, platform. We refer to
athenaCollector as our revenue cycle management service and
athenaClinicals as our clinical cycle management service. Our
services are designed to help our clients achieve faster
reimbursement from payers, reduce error rates, increase
collections, lower operating costs, improve operational workflow
controls and more efficiently manage clinical and billing
information.
Our services require relatively modest initial investment, are
highly adaptable to changing healthcare and technology trends
and are designed to generate significant financial benefit for
our physician clients. Our results are directly tied to the
financial performance of our clients because the majority of our
revenue is based on a percentage of their collections. Our
services have enabled our clients on average, to resolve 93% of
their claims to payers on their first submission attempt,
compared to an industry average we estimate to be 70%. Our
internal studies show that we have reduced the days in accounts
receivable of our client base by more than 30%. We have
experienced a
contract renewal rate of at least 97% in each of
the last five years, and this persistent client base drives a
predictable revenue stream.
In 2006, we generated revenue of $75.8 million from the
sale of our services compared to $53.5 million in 2005. For
the six months ended
June 30, 2007 we generated revenue of
$46.4 million versus $35.3 million for the six months
ended
June 30, 2006. 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 direct operating expense
as a percentage of revenue have led to smaller net losses.
Our revenues are predominately derived from business services
that we provide on an ongoing basis. This revenue is generally
determined as a percentage of payments collected by our clients,
so the key drivers of our revenue include growth in the number
of physicians working within our client accounts and the
collections of these physicians. To provide these services we
incur expense 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 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 an
increase in operating margin. Due to growth in the value of our
equity, we have incurred substantial expenses related to
warrants that will cease to accrue further upon the completion
of this offering. We manage our cash and our use of credit
facilities to ensure adequate liquidity, in adherence to related
financial covenants. As a result of this offering, we expect to
retire most of our current debt and seek to establish sufficient
liquidity to achieve our business objectives.
37
Sources
of Revenue
We derive our revenue from two sources: from business services
associated with our revenue cycle and clinical cycle offerings
and from implementation and other services. Implementation and
other services 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 93% of
our total revenues for the six months ended
June 30, 2007
and 90%, 91% and 93% for the twelve months ended
December 31, 2004,
2005 and
2006, respectively. Business
services fees are typically 2% to 8% of a practice’s total
collections depending upon 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 fees are largely driven by: the number of
physician practices we serve; the number of physicians working
in those physician practices; and the volume of activity and
related collections of those physicians, which is largely a
function of the number of patients seen or procedures performed
by the practice, the medical specialty in which the practice
operates and the geographic location of the practice. For
example, high volume, specialty practices in metropolitan areas
tend to collect more payments than slower, primary care
practices in rural areas. There is moderate seasonality in the
activity level of physician offices. 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 of about
30-50 days
later. None of our clients accounted for more than 5% of our
total revenues for the six months ended
June 30, 2007 or
the twelve months ended
December 31, 2006. For the twelve
months ended
December 31, 2004 and
2005, our largest client
accounted for approximately 7% of revenues in both years and no
other client exceeded 5% of our total revenues in those years.
Operating
Expense
Direct Operating Expense. Direct operating
expense consists primarily of salaries, benefits, claim
processing costs, other direct costs and stock-based
compensation related to personnel who provide services to
clients, including staff who implement new clients. 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 percentage of revenues as we further
increase the percentage of transactions that are resolved on the
first attempt. In addition, over the longer term, we expect to
increase our overall level of automation and to reduce our
direct operating expense as a percentage of revenues as we
become a larger operation, with higher volumes of work in
particular functions, geographies and medical specialties. In
2007, we include in direct operating expense the service costs
associated with our athenaClinicals offering, which includes
transaction handling related to lab requisitions, lab results
entry, fax classification and other services. We also expect
these costs to increase in absolute terms for the foreseeable
future but to decline as a percentage of revenue. This decrease
will be driven by increased levels of automation and by
economies of scale. Direct operating expense does not include
allocated amounts for rent, depreciation and amortization.
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 expense). 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 plan to continue to invest in sales
and marketing by hiring additional direct sales personnel to add
new clients and increase sales to our existing clients. 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 in the future, sales and marketing
expense will increase in absolute terms but decline over time as
a percentage of revenue.
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
expense) 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 revenue as
new services and more mature products require incrementally less
new research and
38
development investment. For our revenue cycle related
application development, we expense nearly all of the
development costs because we believe the development is
substantially complete. For our clinical cycle related
application development, we capitalized nearly all of our
research and development costs during the year ended
December 31, 2006 and the six months ended
June 30,
2007, which capitalized costs represented approximately 16% of
our total research and development expenditures in 2006 and
approximately 14% in the six months ended
June 30, 2007. We
expect these capitalized expenditures will begin to amortize
during the first quarter of 2008 when we begin to implement our
services to clients who are not part of our beta-testing
program. Our beta-testing program is the implementation and
utilization of a test version of our athenaClinicals product
with a client. It allows for testing, in a live environment, of
the features and functionality of the product. The intent is to
find errors in the application and subsequently correct them.
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, as
well as software license fees and outside professional fees for
accountants, lawyers and consultants and temporary employees. We
expect that general and administrative expense will increase in
absolute terms for the foreseeable future as we invest in
infrastructure to support our growth and incur additional
expense related to being a publicly traded company. Though
expenses are expected to continue to rise in absolute terms, we
expect general and administrative expense to decline as a
percentage of overall revenues.
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. Because our core revenue cycle
application is relatively mature, we elect to expense those
costs as incurred, and as a result in 2006 approximately 86% of
our software development expenditures were expensed rather than
capitalized. In the six months ended
June 30, 2007,
approximately 86% were expensed rather than capitalized. 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 revenues over time.
Other Income (Expense). Interest expense
consists primarily of interest costs related to our working
capital line of credit, our equipment-related term loans and our
subordinated term loan, offset by interest income on
investments. Interest income represents earnings from our cash,
cash equivalents and short-term investments. The unrealized loss
on warrant liability represents the change in the fair value of
our warrants to purchase shares of our preferred stock at the
end of each reporting period. This ongoing loss will cease upon
the completion of this offering at which time the associated
liability will convert to additional paid-in-capital.
Critical
Accounting Policies
We prepare our financial statements in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, expense and related
disclosures. We base our estimates and assumptions on historical
experience and on various other factors that we believe to be
reasonable under the circumstances. We evaluate our estimates
and assumptions on an ongoing basis. Our actual results may
differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies, among
others, affect our more significant judgments and estimates used
in the preparation of our financial statements.
Revenue
Recognition
We recognize revenue when all of the following conditions are
satisfied:
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there is evidence of an arrangement;
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the service has been provided to the client;
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39
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the collection of the fees is reasonably assured; and
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the amount of fees to be paid by the client is fixed or
determinable.
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Our arrangements do not contain general rights of return. All
revenue, other than implementation revenue, is recognized when
the service is performed. As the implementation service is not
separable from the ongoing business services, we record
implementation fees as deferred revenue until the implementation
service is complete, at which time we recognize revenue ratably
on a monthly basis over the expected performance period.
Our clients typically purchase one-year
contracts that renew
automatically upon completion. In most cases, our clients may
terminate their agreements with 90 days notice without
cause. We typically retain the right to terminate client
agreements in a similar timeframe. Our clients are billed
monthly, in arrears, based either upon a percentage of
collections posted to athenaNet, minimum fees, flat fees or per
claim fees where applicable. Invoices are generated within the
first two weeks of the month and delivered to clients primarily
by email. For most of our clients, fees are then deducted from a
pre-determined bank account one week after invoice receipt via
an auto-debit transaction. Amounts that have been invoiced are
recorded as revenue or deferred revenue, as appropriate, and are
included in our accounts receivable balances. Deposits received
for future services (such as implementation fees) are recorded
as deferred revenue and amortized over the term of the service
agreement when ongoing services commence.
Software
Development Costs
We account for software development costs under the provisions
of American Institute of Certified Public Accountants Statement
of Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Under
SOP 98-1,
costs related to the preliminary project stage of subsequent
versions of athenaNet
and/or other
technology are expensed as incurred. Costs incurred in the
application development stage are capitalized. Such costs are
amortized over the software’s estimated economic life of
two years. In 2006 approximately 86% of our software development
expenditures were expensed rather than capitalized based upon
the stage of development of the software. In the six months
ended
June 30, 2007, approximately 86% of our software
development expenditures were expensed rather than capitalized.
Stock-Based
Compensation
Prior to
January 1, 2006, we accounted for stock-based
awards to employees using the intrinsic value method as
prescribed by Accounting Principles Board (APB) Opinion
No. 25,
Accounting for Stock Issued to Employees,
and related interpretations. Under the intrinsic value
method, compensation expense is measured on the date of grant as
the difference between the deemed fair value of our common stock
and the option exercise price multiplied by the number of
options granted. Generally, we grant stock options with exercise
prices equal to or above the estimated fair value of our common
stock. The option exercise prices and fair value of our common
stock is determined by our management and board of directors.
Accordingly, no compensation expense was recorded for options
issued to employees prior to
January 1, 2006 in fixed
amounts and with fixed exercise prices at least equal to the
fair value of our common stock at the date of grant.
On
January 1, 2006, we adopted SFAS No. 123(R),
Share-Based Payment, which requires companies to expense
the fair value of employee stock options and other forms of
share-based awards. SFAS 123(R) addresses accounting for
share-based awards, including shares issued under employee stock
purchase plans, stock options and share-based awards, with
compensation expense measured using the fair value, for
financial reporting purposes, and recorded over the requisite
service period of the award. In accordance with
SFAS 123(R), we recognize compensation expense for awards
granted and awards modified, repurchased or cancelled after the
adoption date. Under SFAS 123(R), we estimate the fair
value of stock options and share-based awards using the
Black-Scholes option-pricing model.
We have recorded stock-based compensation under SFAS 123(R)
using the prospective transition method and accordingly, will
continue to account for awards granted prior to the adoption
date of SFAS 123(R) following the provisions of APB Opinion
No. 25. Prior periods have not been restated. For awards
granted after
January 1, 2006, we have elected to recognize
compensation expense for awards with service conditions
40
on a straight line basis over the requisite service period.
Prior to the adoption of SFAS 123(R), we used the
straight-line method of recognition for all awards. For the six
months ended
June 30, 2007 and for the twelve months ended
December 31, 2006, we recorded $0.6 million and
$0.4 million in stock-based compensation expense,
respectively. As of
December 31, 2006 the future expense of
non-vested options of approximately $2.5 million is to be
recognized through 2010. There was no impact on the presentation
in the consolidated statements of cash flows as no excess tax
benefits have been realized in 2006.
The fair value of our options issued during the six months ended
June 30, 2007 and the twelve months ended
December 31,
2006 was determined using the Black-Scholes model with the
following range of assumptions:
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Year Ended
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Six Months Ended
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December 31, 2006
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June 30, 2007
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(unaudited)
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Risk-free interest rate
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4.9%
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4.5%
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Expected dividend yield
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0.0%
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0.0%
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Expected option term (years)
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6.25
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6.25
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Expected stock volatility
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71.0%
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71.0%
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As there was no public market for our common stock prior to this
offering, we have determined the volatility for options granted
in 2006 and 2007 based on an analysis of reported data for a
peer group of companies that issued options with substantially
similar terms. These companies include: HLTH Corporation
(formerly known as Emdeon Corp.), Quality Systems, Inc., Per Se
Technologies, Inc. (acquired by McKesson Corp.) and Allscripts
HealthCare Solutions, Inc. The expected volatility of options
granted has been determined using an average of the historical
volatility measures of this peer group of companies. The
expected volatility for options granted during 2006 and 2007 was
71%. The expected life of options granted during the year ended
December 31, 2006 and the six months ended
June 30, 2007 was determined to be 6.25 years using
the
“simplified” method as prescribed by SAB
No. 107,
Share-Based Payment. For 2006 and the six
months ended
June 30, 2007, the weighted-average risk free
interest rate used was 4.9% and 4.5%, respectively. The
risk-free interest rate is based on a treasury instrument whose
term is consistent with the expected life of the stock options.
We have not paid and do not anticipate paying cash dividends on
our shares of common stock; therefore, the expected dividend
yield is assumed to be zero. In addition,
SFAS No. 123(R) requires companies to utilize an
estimated forfeiture rate when calculating the expense for the
period. Our estimated forfeiture rate of 17% in 2006 and 2007
used in determining the expense recorded in our consolidated
statement of operations is based on our actual forfeiture rate
since 1997.
We believe there is a high degree of subjectivity involved when
using option-pricing models to estimate share-based compensation
under SFAS 123(R). There is currently no market-based
mechanism or other practical application to verify the
reliability and accuracy of the estimates stemming from these
valuation models, nor is there a means to compare and adjust the
estimates to actual values. Although the fair value of employee
share-based awards is determined in accordance with
SFAS 123(R) using an option-pricing model, that value may
not be indicative of the fair value observed in a market
transaction between a willing buyer and willing seller. If
factors change and we employ different assumptions in the
application of SFAS 123(R) in future periods than those
currently applied under SFAS 123(R), the compensation
expense that we record in future under SFAS 123(R) may
differ significantly from what we have historically reported.
For example, if the volatility percentage used in calculating
our SFAS 123(R) stock compensation expense had fluctuated
by 10%, the total stock compensation expense to be recognized
over the stock options’ four year vesting period would have
increased or decreased by approximately $0.3 million. If
the volatility percentage had fluctuated by the 10%, the effect
on our stock compensation expense for the year ended
December 31, 2006 and for the six months ended
June 30, 2006 and
2007 would be an increase or decrease of
approximately $6,000, $18,000 and $38,000, respectively. If the
forfeiture rate used in calculating our SFAS 123(R) stock
compensation expense had fluctuated by 10%, the total stock
compensation expense to be recognized over the stock
options’ four year vesting period would have decreased or
increased by approximately $0.5 million. If the forfeiture
rate had fluctuated by the 10%, the effect on our stock
compensation expense for the year ended
December 31, 2006
and for the six months ended
June 30, 2006 and
2007 would
be a decrease or increase of approximately $9,000, $25,000 and
$50,000, respectively. There would be no
41
fluctuation in the expected life used in calculating our
SFAS 123(R) stock compensation expense as the expected life
was determined to be 6.25 years for all period using the
“simplified” method as prescribed by SAB
No. 107, Share-Based Payment. There would be no
fluctuation in the risk free interest rate used in calculating
our SFAS 123(R) stock compensation expense as the risk free
interest rate used in the calculation is dependant upon the
expected life used in the calculation which remains stagnant as
discussed above. There would also be no fluctuation in the
dividend rate used in calculating our SFAS 123(R) stock
compensation expense as we have never paid a dividend and
currently have no plans to pay a dividend in the future.
Prior to offering, the fair value for our common stock, for the
purpose of determining the exercise prices of our common stock
options, was estimated by our board of directors, with input
from management. Our board of directors exercised judgment in
determining the estimated fair value of our common stock on the
date of grant based on several factors, including:
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the nature and history of our business;
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our significant accomplishments and future prospects;
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our revenue growth and expected future revenue rates;
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our book value and financial condition;
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the existence of goodwill or other intangible value within our
company;
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our ability (or inability) to pay dividends;
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external market conditions affecting the healthcare information
technology industry sector;
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the illiquid nature of an investment in our common stock;
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the prices at which we sold shares of our convertible preferred
stock;
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the superior rights and preferences of securities senior to our
common stock at the time of each grant;
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the likelihood of achieving a liquidity event such as an initial
public offering or sale; and
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the market prices of publicly traded companies engaged in the
same or similar lines of business.
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We believe this to have been a reasonable approach to estimating
the fair value of our common stock for those periods along with
our analyses of comparable companies in our industry and
arm’s-length transactions involving our common stock.
Determining the fair value of our stock requires making complex
and subjective judgments, however, and there is inherent
uncertainty in our estimate of fair value.
The following table presents the grant dates and related
exercise prices of stock options granted to employees in the
year ended
December 31, 2006 and the six months ended
June 30, 2007:
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Number of
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Weighted Average
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Grants Made During Quarter Ended
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Options Granted
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Exercise Price
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174,978
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$
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5.26
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107,702
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5.72
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66,652
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6.16
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353,200
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6.58
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468,350
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7.36
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52,900
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9.30
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Total grants
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1,223,782
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$
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6.71
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The exercise price of all stock options described above was
equal to the estimated fair value of our common stock on the
date of grant, and therefore the intrinsic value of each option
grant was zero.
The exercise price of the stock options granted after
January 1, 2006 was set by the board of directors based
upon, in addition to what is described above, an internal
valuation model. The internal valuation model used the weighted
average of the guideline public company method and the
discounted future cash flow
42
method. The enterprise value from that analysis was then
utilized in the option pricing method as outlined in the
American Institute of Certified Public Accountants (AICPA)
Technical Practice Aid,
Valuation of Privately-Held-Company
Equity Securities Issued as Compensation (Practice Aid). The
exercise price for stock options granted subsequent to
January 1, 2006, was based upon our contemporaneous
valuation completed on a quarterly basis.
We estimated our enterprise value under the guideline public
company method by comparing
our company to publicly-traded
companies in our industry group. The companies used for
comparison under the guideline public company method were
selected based on a number of factors, including but not limited
to, the similarity of their industry, business model and similar
financial risk to those of ours. We used those companies that we
believed were closely comparable to ours, based on the above
factors. In determining our enterprise value under this method,
we utilized a risk-adjusted enterprise value multiple to sales
ratio, which ranged from 3.0 to 5.6 during the period from
January 1, 2006 through
June 30, 2007, based on the
median of the guideline companies and applied the ratio to the
sales of
our company.
We also estimated our enterprise value under the discounted
future cash flow method, which involves applying appropriate
discount rates to estimated cash flows that are based on
forecasts of revenue and costs. Our revenue forecasts were based
on expected market growth rates ranging from 12% to 38% during
the next five years, as well as related assumptions about our
future costs during this period. There is inherent uncertainty
in making these estimates. These assumptions underlying the
estimates are consistent with the plans and estimates that we
use to manage the business. The risks associated with achieving
our forecasts were assessed in selecting the appropriate
discount rates, which was approximately 15% to 17% for all
periods during the period from
January 1, 2006 through
June 30, 2007. If different discount rates had been used,
the valuations would have been different.
The enterprise value was then allocated to preferred and common
shares using the option-pricing method. The option-pricing
method involves making estimates of the anticipated timing of a
potential liquidity event such as a sale of
our company or an
initial public offering, and estimates of the volatility of our
equity securities. The anticipated timing is based on the plans
of our board and management. Estimating the volatility of the
share price of a privately held company is complex because there
is no readily available market for the shares. We estimated the
volatility of our stock based on available information on
volatility of stocks of publicly traded companies in the
industry. Had we used different estimates of volatility, the
allocations between preferred and common shares would have been
different.
The determination of the deemed fair value of our common stock
has involved significant judgments, assumptions, estimates and
complexities that impact the amount of deferred stock-based
compensation recorded and the resulting amortization in future
periods. If we had made different assumptions, the amount of our
deferred stock-based compensation, stock-based compensation
expense, operating loss, net loss attributable to common
stockholders and net loss per share attributable to common
stockholders amounts could have been significantly different. We
believe that we have used reasonable methodologies, approaches
and assumptions to determine the fair value of our common stock
and that stock-based deferred compensation and related
amortization have been recorded properly for accounting purposes.
As discussed more fully in Note 10 to our consolidated
financial statements which appear elsewhere in this prospectus,
we granted stock options with a weighted average exercise price
of $6.08 per share during the twelve months ended
December 31, 2006 and with a weighted average exercise
price of $7.56 per share during the six months ended
June 30, 2007. The increase in weighted average exercise
price resulted from continued growth in our revenue and a
reduction in the net loss. Both of these factors resulted in an
increase in common stock value when factored into our internal
valuation model.
For each of the stock options described above, the exercise
price was equal to the estimated fair value of our common stock
on the date of grant, as determined by our board of directors.
In making these determinations our board of directors relied
upon the internal valuation model and other factors described
above. Specifically, our board of directors took into account
our operating results, market position and
43
operating achievements at the time of grant, among other
factors. The primary reasons for the difference between the fair
value of our common stock on each of these dates are as follows:
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On February 28, 2006, we granted options to purchase an
aggregate of 174,978 shares of our common stock with an
exercise price of $5.26 per share. Total revenues increased
approximately 41.6% from the year ended December 31, 2005
to the year ended December 31, 2006. Total revenue
increased approximately 12.7% for the quarter ended
September 30, 2005 to the quarter ended December 31,
2005 and the number of clients and the number of physicians live
on athenaNet also increased by 9 clients and 505 physicians,
respectively, during that same period.
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On May 4, 2006, we granted options to purchase an aggregate
of 107,702 shares of our common stock with an exercise
price of $5.72 per share. Total revenue increased approximately
9.4% from the quarter ended December 31, 2005 to the
quarter ended March 31, 2006 and the number of clients and
the number of physicians live on athenaNet also increased by 58
clients and 166 physicians, respectively, during that same
period. Additionally, in April 2006, the first beta client went
live on our athenaClinicals service offering. A beta-client is a
client willing to implement a test version of our
athenaClinicals product. They agree to do so with the
understanding that the product is being used for testing
purposes in an attempt to identify and correct product errors.
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On July 27, 2006, we granted options to purchase an
aggregate of 66,652 shares of our common stock with an
exercise price of $6.16 per share. Total revenue increased
approximately 10.6% from the quarter ended March 31, 2006
to the quarter ended June 30, 2006 and the number of
clients and the number of physicians live on athenaNet also
increased by 48 clients and 284 physicians, respectively, during
that same period. Additionally, during this period we announced
several strategic partner alliances, including our announcement
on June 30, 2006 of a channel marketing agreement with a
leading provider of advanced clinical, financial and management
software and service solutions.
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On October 31, 2006 and November 3, 2006, we granted
options to purchase an aggregate of 1,000 and
352,200 shares, respectively, of our common stock with an
exercise price of $6.58 per share. Total revenue increased
approximately 5.8% from the quarter ended June 30, 2006 to
the quarter ended September 30, 2006 and the number of
clients and the number of physicians live on athenaNet also
increased by 59 clients and 587 physicians, respectively, during
that same period. Additionally, in September 2006, we hired a
chief operations officer.
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On February 7, 2007 and March 15, 2007, we granted
options to purchase an aggregate of 77,100 and
391,250 shares of our common stock with exercise prices of
$7.20 and $7.39 per share, respectively. Total revenue increased
approximately 6.2% from the quarter ended September 30,
2006 to the quarter ended December 31, 2006 and the number
of clients and the number of physicians live on athenaNet also
increased by 72 clients and 313 physicians, respectively, during
that same period. Additionally, during this period we announced
several strategic partner alliances and we first began to offer
our athenaClinicals service offering.
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On May 3, 2007, we granted options to purchase an aggregate
of 52,900 shares of our common stock with an exercise price
of $9.30 per share. Total revenue increased approximately 5.3%
from the quarter ended December 31, 2006 to the quarter
ended March 31, 2007 and the number of clients and the
number of physicians live on athenaNet also increased by 31
clients and 265 physicians, respectively, during that same
period. In addition, new client implementations during this
period occurred at a rate above those experienced during any
previous period. Also, in April 2007 the Certification
Commission for Healthcare Information Technology, or CCHIT, an
independent, industry recognized accreditation organization
created to certify EMR applications, certified our
athenaClinicals service offering as meeting the CCHIT ambulatory
electronic health record (EHR) criteria for 2006.
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On July 27, 2007, we granted options to purchase an
aggregate of 89,500 shares of our common stock with an
exercise price of $15.27 per share. In determining this
significant increase in fair value from May 3, 2007, our
board of directors took into account significant progress in our
business since the
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earlier date in terms of continuing revenue growth and
increasing client acceptance of our athenaClinicals service
offering. Specifically:
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total revenue increased approximately 11.6% from the quarter
ended March 31, 2007 to the quarter ended June 30,
2007 and the number of clients and the number of physicians live
on athenaNet also increased by 68 clients and 504
physicians, respectively, during that same period;
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in the month of June 2007, our income from operations surpassed
breakeven for the first time in our company’s history with
revenues for the month surpassing $8.5 million for the
first time in our company’s history;
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on May 24, 2007 we signed a marketing and sales agreement
with PSS World Medical Shared Services, Inc., or PSS, for
the marketing and sales of athenaClinicals and athenaCollector,
and during this period we announced that one of the
nation’s leading academic health care organizations,
comprised of nearly 200 physicians, selected athenaCollector for
its physician organization, representing one of the largest
client additions in our company’s history;
|
| |
| |
•
|
the number of physicians using our athenaClinicals service
offering exceeded 100, an important milestone for this new
service offering;
|
| |
| |
•
|
on June 29, 2007, certain of our existing stockholders sold
to PSS an aggregate of 1,470,589 shares of our previously
issued and outstanding convertible preferred stock for an
aggregate purchase price of $22.5 million, equating to a
per share price of $15.30 per share; and
|
| |
| |
•
|
finally, in late June 2007, we filed a registration statement
with the Securities and Exchange Commission for our initial
public offering.
|
Based on an assumed initial public offering price of
$ , which is the midpoint of the
price range set forth on the cover page of this prospectus, the
intrinsic value of the options outstanding at
June 30,
2007, was $ million, of which
$ million related to vested
options and $ million related
to unvested options.
Income
Taxes
We are subject to federal and various state income taxes in the
United States, and we use estimates in determining our provision
and related deferred tax assets. At
December 31, 2006, our
deferred tax assets consisted primarily of federal and state net
operating loss carry forwards, research and development credit
carry forwards, and temporary differences between the book and
tax bases of certain assets and liabilities.
We assess the likelihood that deferred tax assets will be
realized, and we recognize a valuation allowance if it is more
likely than not that some portion of the deferred tax assets
will not be realized. This assessment requires judgment as to
the likelihood and amounts of future taxable income by tax
jurisdiction. At
December 31, 2006, we had a full valuation
allowance against our deferred tax assets. Although we believe
that our tax estimates are reasonable, the ultimate tax
determination involves significant judgment that is subject to
audit by tax authorities in the ordinary course of business.
45
Consolidated
Results of Operations
The following table sets forth our consolidated results of
operations as a percentage of total revenue for the periods
shown:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
June 30,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business services
|
|
|
90.0
|
%
|
|
|
91.4
|
%
|
|
|
93.2
|
%
|
|
|
92.9
|
%
|
|
|
93.2
|
%
|
|
Implementation and other
|
|
|
10.0
|
|
|
|
8.6
|
|
|
|
6.8
|
|
|
|
7.1
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
|
|
52.7
|
|
|
|
51.4
|
|
|
|
48.2
|
|
|
|
49.4
|
|
|
|
47.7
|
|
|
Selling and marketing
|
|
|
19.6
|
|
|
|
21.8
|
|
|
|
20.6
|
|
|
|
21.0
|
|
|
|
17.9
|
|
|
Research and development
|
|
|
3.8
|
|
|
|
5.5
|
|
|
|
9.1
|
|
|
|
7.1
|
|
|
|
7.8
|
|
|
General and administrative
|
|
|
21.9
|
|
|
|
29.0
|
|
|
|
21.6
|
|
|
|
22.0
|
|
|
|
20.6
|
|
|
Depreciation and amortization
|
|
|
8.1
|
|
|
|
10.3
|
|
|
|
8.2
|
|
|
|
8.4
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
106.1
|
|
|
|
118.0
|
|
|
|
107.7
|
|
|
|
107.9
|
|
|
|
100.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6.1
|
)
|
|
|
(18.0
|
)
|
|
|
(7.7
|
)
|
|
|
(7.9
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
Interest expense
|
|
|
(3.5
|
)
|
|
|
(3.5
|
)
|
|
|
(3.6
|
)
|
|
|
(3.4
|
)
|
|
|
(3.5
|
)
|
|
Other expense
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.9
|
)
|
|
|
(0.9
|
)
|
|
|
(9.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(3.2
|
)
|
|
|
(3.3
|
)
|
|
|
(4.0
|
)
|
|
|
(3.9
|
)
|
|
|
(12.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
change in accounting principle
|
|
|
(9.3
|
)
|
|
|
(21.3
|
)
|
|
|
(11.7
|
)
|
|
|
(11.8
|
)
|
|
|
(13.1
|
)
|
|
Cumulative effect of change in
accounting principle
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.5
|
)
|
|
|
(1.1
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9.3
|
)%
|
|
|
(21.3
|
)%
|
|
|
(12.2
|
)%
|
|
|
(12.9
|
)%
|
|
|
(13.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
|
(unaudited)
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
%
|
|
|
|
|
Business services
|
|
$
|
32,822
|
|
|
|
92.9
|
%
|
|
$
|
43,268
|
|
|
|
93.2
|
%
|
|
$
|
10,446
|
|
|
|
31.8
|
%
|
|
Implementation and other
|
|
|
2,517
|
|
|
|
7.1
|
|
|
|
3,172
|
|
|
|
6.8
|
|
|
|
655
|
|
|
|
26.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,339
|
|
|
|
100.0
|
%
|
|
$
|
46,440
|
|
|
|
100.0
|
%
|
|
$
|
11,101
|
|
|
|
31.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Total revenue from business services
for the six months ended
June 30, 2007 was
$46.4 million, an increase of $11.1 million, or 31.4%,
over revenue of $35.3 million for the six months ended
June 30, 2006.
Business Services. Revenue from business
services for the six months ended
June 30, 2007 was
$43.3 million, an increase of $10.5 million, or 32%,
over revenue of $32.8 million for the six months ended
June 30, 2006. This increase was primarily due to the
growth in the number of physicians using our services. The
average number of physicians using our services during the six
months ended
June 30, 2007 was 7,834, an increase of 1,559
or 25%. Also contributing to this increase was the growth in
related collections on behalf of these physicians. Total
collections generated by these providers which was posted for
the six months ended
June 30, 2007 was $1.3 billion an
increase of $345 million, or 37%, over posted collections
of $927 million for the six months ended
June 30, 2006.
Implementation and Other. Revenue from
implementations and other sources was $3.2 million for the
six months ended
June 30, 2007, an increase of
$0.7 million, or 26%, over revenue of $2.5 million for
the six months ended
June 30, 2006. This increase was
driven by new client implementations and increased professional
services for our larger client base.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
|
|
(unaudited)
|
|
|
|
|
(in thousands)
|
|
|
|
|
Direct operating expense
|
|
$
|
17,458
|
|
|
|
49.4
|
%
|
|
$
|
22,168
|
|
|
|
47.7
|
%
|
|
$
|
4,710
|
|
|
|
27.0
|
%
|
Direct operating expense. Direct operating
expense for the six months ended
June 30, 2007 was
$22.2 million, an increase of $4.7 million, or 27%,
over costs of $17.5 million for the six months ended
June 30, 2006. 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 salary and benefits expense.
Additionally, beginning in the six months ended
June 30,
2007 we are now allocating costs to direct operating expense
related to our launch of athenaClinicals which was previously
included with research and development. The amount of
collections processed for the six months ended
June 30,
2007 was $1.3 billion, which was 37% higher than for the
six months ended
June 30, 2006.
47
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
|
(unaudited)
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
%
|
|
|
|
|
Selling and marketing
|
|
$
|
7,435
|
|
|
|
21.0
|
%
|
|
$
|
8,314
|
|
|
|
17.9
|
%
|
|
$
|
879
|
|
|
|
11.8
|
%
|
|
Research and development
|
|
|
2,509
|
|
|
|
7.1
|
|
|
|
3,599
|
|
|
|
7.8
|
|
|
|
1,090
|
|
|
|
43.4
|
|
|
General and administrative
|
|
|
7,771
|
|
|
|
22.0
|
|
|
|
9,571
|
|
|
|
20.6
|
|
|
|
1,800
|
|
|
|
23.2
|
|
|
Depreciation and amortization
|
|
|
2,952
|
|
|
|
8.4
|
|
|
|
3,048
|
|
|
|
6.6
|
|
|
|
96
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,667
|
|
|
|
58.5
|
%
|
|
$
|
24,532
|
|
|
|
52.9
|
%
|
|
$
|
3,865
|
|
|
|
18.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and Marketing Expense. Selling and
marketing expense for the six months ended
June 30, 2007
was $8.3 million, an increase of $0.9 million, or 12%,
over costs of $7.4 million for the six months ended
June 30, 2006. This increase was primarily due to increases
in sales commissions and salaries and benefits.
Research and Development Expense. Research and
development expense for the six months ended
June 30, 2007
was $3.6 million, an increase of $1.1 million, or 43%,
over research and development expense of $2.5 million for
the six months ended
June 30, 2006. This increase was
primarily due to $0.7 million increase in salaries and
benefits and $0.4 million increase in consulting fees.
General and Administrative Expense. General
and administrative expense for the six months ended
June 30, 2007 was $9.6 million, an increase of
$1.8 million, or 23%, over general and administrative
expenses of $7.8 million for the six months ended
June 30, 2006. This increase was primarily due to
$1.2 million increase in salaries and benefits and a
$0.3 million increase in facility fees and a
$0.3 million increase in professional fees.
Depreciation and Amortization. Depreciation
and amortization expense for the six months ended
June 30,
2007 was $3.0 million, an increase of $0.1 million, or
3%, from depreciation and amortization of $2.9 million for
the six months ended
June 30, 2006. This increase was
primarily due to the larger base of depreciable assets.
Other income (expense). Interest expense, net
for the six months ended
June 30, 2007 was
$1.4 million, an increase of $0.3 million, or 27%,
over other income (expense), of $1.1 million for the six
months ended
June 30, 2006. The increase is related to an
increase in bank debt, a working capital line of credit and an
equipment line of credit during 2007. The unrealized loss on
warrant liability for the six months ended
June 30, 2007
was $3.7 million an increase of $3.4 million from
$0.3 million for the six months ended
June 30, 2006,
as a result of the change in the fair value of the warrants.
This change in the fair value of the warrant is attributable to
the appreciation in the fair value of our common stock during
this period, which increased from $5.26 to $9.30 per share.
These warrants will convert to warrants to purchase shares of
common stock upon the consummation of this offering, at which
time the existing liability will be reclassified to additional
paid-in-capital.
Also included in other expense for the six months ended
June 30, 2007, was $0.1 million in loss on disposal of
assets and $0.6 million of financial advisor fees paid by
shareholders.
48
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
|
(in thousands)
|
|
|
|
|
Business services
|
|
$
|
48,958
|
|
|
|
91.4
|
%
|
|
$
|
70,652
|
|
|
|
93.2
|
%
|
|
$
|
21,694
|
|
|
|
44.3
|
%
|
|
Implementation and other
|
|
|
4,582
|
|
|
|
8.6
|
|
|
|
5,161
|
|
|
|
6.8
|
|
|
|
579
|
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
53,540
|
|
|
|
100.0
|
%
|
|
$
|
75,813
|
|
|
|
100.0
|
%
|
|
$
|
22,273
|
|
|
|
41.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Total revenue for 2006 was
$75.8 million, an increase of $22.3 million, or 42%,
over revenue of $53.5 million for 2005. This increase was
almost entirely due to an increase in business services revenue.
Business Services Revenue. Revenue from
business services for 2006 was $70.7 million, an increase
of $21.7 million, or 44%, over revenue of
$49.0 million for 2005. This increase was primarily due to
the growth in the number of physicians using our services. The
average number of active physicians using our services in 2006
was 6,718, an increase of 1,521, or 29%, over the 5,197
physicians in 2005. Also contributing to this increase was
growth in collections on behalf of these physicians. These
providers generated collections posted in 2006 of
$2.0 billion, which was a 45% increase over
$1.4 billion posted collections in 2005.
Implementation and Other Revenue. Revenue from
implementations and other sources was $5.2 million, an
increase of $0.6 million, or 13%, over revenue of
$4.6 million for 2005. This increase was primarily due to
the expansion of our client base, which required additional
implementation services.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
Change
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
|
|
|
|
Amount
|
|
Revenue
|
|
Amount
|
|
Revenue
|
|
Amount
|
|
%
|
|
|
|
(in thousands)
|
|
|
|
Direct operating expense
|
|
$
|
27,545
|
|
|
|
51.4
|
%
|
|
$
|
36,530
|
|
|
|
48.2
|
%
|
|
$
|
8,985
|
|
|
|
32.6
|
%
|
Direct operating expense. Direct operating
expense for 2006 was $36.5 million, an increase of
$9.0 million, or 33%, over direct operating expense of
$27.5 million for 2005. 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 salary and benefits expense.
The amount of collections processed for our clients in 2006 was
$2.0 billion, which was 45% higher than in 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
|
(in thousands)
|
|
|
|
|
Selling and marketing
|
|
$
|
11,680
|
|
|
|
21.8
|
%
|
|
$
|
15,645
|
|
|
|
20.6
|
%
|
|
$
|
3,965
|
|
|
|
33.9
|
%
|
|
Research and development
|
|
|
2,925
|
|
|
|
5.5
|
|
|
|
6,903
|
|
|
|
9.1
|
|
|
|
3,978
|
|
|
|
136.0
|
|
|
General and administrative
|
|
|
15,545
|
|
|
|
29.0
|
|
|
|
16,347
|
|
|
|
21.6
|
|
|
|
802
|
|
|
|
5.2
|
|
|
Depreciation and amortization
|
|
|
5,483
|
|
|
|
10.3
|
|
|
|
6,238
|
|
|
|
8.2
|
|
|
|
755
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,633
|
|
|
|
66.6
|
%
|
|
$
|
45,133
|
|
|
|
59.5
|
%
|
|
$
|
9,500
|
|
|
|
26.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and Marketing Expense. Selling and
marketing expense for 2006 was $15.6 million, an increase
of $4.0 million, or 34%, over sales and marketing expense
of $11.7 million for 2005. This increase was primarily due
to a $1.7 million increase in salaries and benefits, a
$1.7 million increase in marketing programs and a
$0.5 million increase in travel and other expenses.
Research and Development Expense. Research and
development expense for 2006 was $6.9 million, an increase
of $4.0 million, or 136%, over research and development
expense of $2.9 million for 2005. This increase was
primarily due to a $2.8 million increase in salaries and
benefits related to the development of our
49
athenaClinicals product and other product and business
development initiatives, a $0.6 million increase in
consulting fees, a $0.4 million increase in expenses
related to the expansion of Athena Net India and a
$0.2 million increase in travel and other expenses of our
research team.
General and Administrative Expense. General
and administrative expense for 2006 was $16.3 million, an
increase of $0.8 million, or 5%, over general and
administrative expense of $15.5 million for 2005. This
increase was primarily due to an increase in salaries and
benefits.
Depreciation and Amortization
Expense. Depreciation and amortization expense
for 2006 was $6.2 million, an increase of
$0.8 million, or 14%, from depreciation and amortization
expense of $5.5 million for 2005. This increase was
primarily due to the larger base of depreciable assets in 2006.
Other Income (Expense). Interest expense, net,
for 2006 was $2.3 million, an increase of
$0.5 million, or 31%, over interest expense, net, of
$1.8 million for 2005. This increase was related to an
increase in bank debt, a working capital line of credit and an
equipment line of credit during 2006, offset by an increase in
interest income associated with an increase in cash, cash
equivalents and short-term investments. The unrealized loss on
warrant liability for 2006 was $0.7 million and represents
the remeasurement of the fair value of warrants.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
|
2005
|
|
|
Change
|
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
|
(in thousands)
|
|
|
|
|
Business services
|
|
$
|
35,033
|
|
|
|
90.0
|
%
|
|
$
|
48,958
|
|
|
|
91.4
|
%
|
|
$
|
13,925
|
|
|
|
39.7
|
%
|
|
Implementation and other
|
|
|
3,905
|
|
|
|
10.0
|
|
|
|
4,582
|
|
|
|
8.6
|
|
|
|
677
|
|
|
|
17.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,938
|
|
|
|
100.0
|
%
|
|
$
|
53,540
|
|
|
|
100.0
|
%
|
|
$
|
14,602
|
|
|
|
37.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Total revenue for 2005 was
$53.5 million, an increase of $14.6 million, or 38%,
over revenue of $38.9 million for 2004. This increase was
due almost entirely to an increase in business services revenue.
Business Services Revenue. Revenue from
business services for 2005 was $49.0 million, an increase
of $13.9 million, or 40%, over revenue of
$35.0 million for 2004. This increase was primarily due to
the growth in the number of physicians using our services. The
average number of active physicians using our services in 2005
was 5,197, an increase of 1,453, or 39%, over 3,744 physicians
in 2004. Also contributing to this increase was growth in
collections on behalf of these physicians. These providers
generated posted collections of $1.4 billion in 2005, which
was a 39% increase over $972 million posted collections in
2004.
Implementation and Other Revenue. Revenue from
implementations and other sources was $4.6 million, an
increase of $0.7 million, or 17%, over revenue of
$3.9 million for 2004. This increase was primarily due to
the expansion of our client base and increased professional
services provided to that base.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
|
2005
|
|
|
Change
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
|
(in thousands)
|
|
|
|
|
Direct operating expense
|
|
$
|
20,512
|
|
|
|
52.7
|
%
|
|
$
|
27,545
|
|
|
|
51.4
|
%
|
|
$
|
7,033
|
|
|
|
34.3
|
%
|
Direct Operating Expense. The direct operating
expense for 2005 was $27.5 million, an increase of
$7.0 million, or 34%, over direct operating expense of
$20.5 million for 2005. 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 salary and benefits expense.
The amount of collections processed in 2005 was
$1.4 billion or 39% higher than 2004.
50
