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EX-23.02 - CONSENT OF PRICEWATERHOUSECOOPERS LLP - VOCERA COMMUNICATIONS, INC.d206702dex2302.htm
EX-23.03 - CONSENT OF PRICEWATERHOUSECOOPERS LLP - VOCERA COMMUNICATIONS, INC.d206702dex2303.htm
EX-10.03 - 2006 STOCK OPTION PLAN, AS AMENDED, AND FORM OF STOCK OPTION AGREEMENT - VOCERA COMMUNICATIONS, INC.d206702dex1003.htm
EX-23.04 - CONSENT OF PERSHING YOAKLEY & ASSOCIATES, P.C. - VOCERA COMMUNICATIONS, INC.d206702dex2304.htm
Table of Contents

As filed with the Securities and Exchange Commission on September 14, 2011

Registration No. 333-175932

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

under

The Securities Act of 1933

 

 

VOCERA COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   3669   94-3354663
(State or other jurisdiction of
incorporation or organization)
  (Primary standard industrial
code number)
  (I.R.S. employer identification no.)

 

 

525 Race Street

San Jose, CA 95126

(408) 882-5100

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Robert J. Zollars

Chairman and Chief Executive Officer

Vocera Communications, Inc.

525 Race Street

San Jose, CA 95126

(408) 882-5100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Gordon K. Davidson, Esq.

Daniel J. Winnike, Esq.

Fenwick & West LLP

801 California Street

Mountain View, CA 94041

(650) 988-8500

 

Jay M. Spitzen, Esq.

General Counsel and Corporate Secretary

Vocera Communications, Inc.

525 Race Street

San Jose, CA 95126

(408) 882-5100

 

Eric C. Jensen, Esq.

Matthew B. Hemington, Esq.

John T. McKenna, Esq.

Cooley LLP

Five Palo Alto Square

3000 El Camino Real

Palo Alto, CA 94304

(650) 843-5000

 

 

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, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨            

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨            

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨            

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨   Accelerated filer  ¨   

Non-accelerated filer  x

(Do not check if a smaller reporting company)

  Smaller reporting company  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered   Proposed Maximum
Aggregate Offering  Price(1)
  Amount of
Registration Fee(2)

Common Stock, par value $0.0003 per share .

  $80,000,000   $9,288.00

 

 

 

(1)   Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2)   Previously paid.

 

 

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 that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


Table of Contents

The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may 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 neither we nor the selling stockholders are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated September 14, 2011

Prospectus

            shares

LOGO

Common stock

This is an initial public offering of shares of common stock of Vocera Communications, Inc. We are selling              shares of common stock, and the selling stockholders are selling              shares of common stock. The estimated initial public offering price is between $             and $            per share.

We have applied for the listing of our common stock on the New York Stock Exchange under the symbol “VCRA.”

 

      Per share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds to us, before expenses

   $         $     

Proceeds to selling stockholders

   $         $     

We have granted the underwriters an option for a period of 30 days to purchase up to          additional shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders.

Investing in our common stock involves a high degree of risk. See “Risk factors” beginning on page 13.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

J.P. Morgan       Piper Jaffray
Baird   William Blair & Company     Morgan Keegan   

                    , 2011


Table of Contents

LOGO

 

VOCera

Communication solutions for healthcare professionals

The Vocera Communication Platform

Caregiver

Patient

Vocera

Nurses

Doctors

Support Services

Vocera helps hospitals improve patient safety and experience, caregiver satisfaction, and hospital workflow e_ciency and productivity.


Table of Contents

Table of contents

 

     Page  

Prospectus summary

     1   

Risk factors

     13   

Special note regarding forward-looking statements and industry data

     35   

Use of proceeds

     36   

Dividend policy

     36   

Capitalization

     37   

Dilution

     39   

Unaudited pro forma consolidated financial information

     42   

Selected consolidated financial data

     47   

Management’s discussion and analysis of financial condition and results of operations

     51   

Business

     77   

Management

     92   

Executive compensation

     102   

Certain relationships and related person transactions

     123   

Principal and selling stockholders

     126   

Description of capital stock

     129   

Shares eligible for future sale

     134   

Material U.S. federal income tax consequences to non-U.S. holders

     137   

Underwriting

     142   

Legal matters

     148   

Experts

     148   

Where you can find additional information

     148   

Index to financial statements

     F-1   

 

i


Table of Contents

Prospectus summary

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including “Risk factors” and our consolidated financial statements and related notes, before making an investment decision.

Overview

We are a provider of mobile communication solutions focused on addressing critical communication challenges facing hospitals today. We help our customers improve patient safety and satisfaction, and increase hospital efficiency and productivity through our Voice Communication solution and new Messaging and Care Transition solutions. Our Voice Communication solution, which includes a lightweight, wearable, voice-controlled communication badge and a software platform, enables users to connect instantly with other hospital staff simply by saying the name, function or group name of the desired recipient. Our Messaging solution securely delivers text messages and alerts directly to and from smartphones, replacing legacy pagers. Our Care Transition solution is a hosted voice and text based software application that captures, manages and monitors patient information when responsibility for the patient is transferred or “handed-off” from one caregiver to another.

Effective communication is extremely important in hospitals but is difficult to achieve given their mobile and widely dispersed staff. Nurses, doctors and other caregivers have responsibilities throughout the hospital, from the emergency department, operating rooms and patient recovery rooms to nursing stations and other locations inside and outside the hospital. Communication challenges are compounded by the critical nature of the information conveyed, and the need for around-the-clock patient care and seamless patient transitions at shift change and in transfers between departments.

Hospital communications are typically conducted through disparate components, including overhead paging, pagers and mobile phones, often relying on written records of who is serving in specific roles during a particular shift. These legacy communication methods are inefficient, often unreliable, noisy and do not provide “closed loop” communication (in which a caller knows if a message has reached its intended recipient). These communication deficiencies can negatively impact patient safety, delay patient care and result in operational inefficiencies. Our communication platform helps hospitals increase productivity and reduce costs by streamlining operations, and improves patient and staff satisfaction by creating a differentiated “Vocera hospital” experience.

At the core of our Voice Communication solution is a patent-protected software platform that we introduced in 2002. We have significantly enhanced and added features and functionality to this solution through ongoing development based on frequent interactions with our customers. Our software platform is built upon a scalable architecture and recognizes more than 100 voice commands. Users can instantly communicate with others using the Vocera communication badge, the Vocera Wi-Fi smartphone or through Vocera client applications available for BlackBerry, iPhone and Android smartphones and other mobile devices. Our Voice Communication solution can also be integrated with nurse call and other clinical systems to immediately and efficiently alert hospital workers to patient needs.

 

 

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Our solutions are deployed in over 750 hospitals and healthcare facilities, including large hospital systems and small and medium-sized local hospitals, as well as in over 100 non-healthcare facilities. We sell our solutions to healthcare customers primarily through our direct sales force in the United States, and through direct sales and select distribution channels in international markets. In 2010, we generated revenue of $56.8 million, representing growth of 38.1% over 2009, and net income of $1.2 million. In the first six months of 2011, we generated revenue of $37.4 million, representing 45.9% growth over the first six months of 2010, and a net loss of $1.3 million.

Industry overview

Effective communication is extremely important among mobile and widely dispersed healthcare professionals in hospitals. As of March 31, 2011, there were over 6,800 hospitals in the United States. We believe that a combination of policy changes through healthcare reform, demographic trends and downward pressure on healthcare reimbursement is increasing financial pressure on hospitals and other healthcare providers. Furthermore, the nursing shortage in the United States, with over 115,000 openings, can detract from the patient experience and place further strain on hospital operations. Patients are increasingly selecting hospitals and healthcare providers based on quality of care, cost and overall experience with the provider. In addition, healthcare reform initiatives incorporate financial incentives for hospitals to improve the quality of care and patient satisfaction. These forces are driving hospitals to manage their operations more efficiently and to seek ways to improve staff and patient satisfaction through process improvements and technology solutions.

The primary communication methods used in hospitals have changed very little in decades. Traditionally, communication inside of a hospital has followed a hub and spoke model in which caregivers are required to leave the patient’s bedside and return to the nursing station in order to attempt to speak with other healthcare professionals. Communication challenges are compounded by the critical nature of the information conveyed, and the need for around-the-clock patient care and seamless patient transitions at shift change and in transfers between departments.

Traditional methods of hospital communication create several impediments to effective care and can degrade patient and caregiver satisfaction:

 

 

Time away from the bedside.    We believe that inefficient communication processes are one of the main factors that take the nurse away from the patient, which can be both stressful to the patient and frustrating to the nurse, potentially impacting safety and quality of care.

 

 

Inability to reach the appropriate caregiver in a timely manner.    With numerous people involved in the delivery of patient care in a hospital, valuable time can be lost identifying, locating and contacting the appropriate nurse, physician or other caregiver.

 

 

Noisy environments.    Traditional communication methods, which rely on overhead paging and device alarms, create noise in the hospital that can result in increased patient stress levels and staff frustration. Excessive noise can prevent patients from getting uninterrupted sleep and lengthen recovery time, resulting in an increased length of hospital stay.

 

 

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Lack of closed loop communication.    Confirmation that the appropriate caregiver has received the transmitted information is typically not provided by traditional communication methods, adversely affecting patient care through delays and miscommunication.

Shortcomings in hospital communication not only cause inconvenience and frustration, but can also lead to medical errors and hospital inefficiencies. The Joint Commission, an independent healthcare accreditation organization, reported that in reports of over 800 sentinel events in hospitals in 2010, communication issues were involved in 82% of the events. In addition, communication problems can lead to delays in preparing, or identifying the availability of, critical hospital resources such as operating rooms or emergency rooms, leading to lost revenue opportunities. A 2010 University of Maryland study found that U.S. hospitals waste over $12 billion annually as a result of communication inefficiency among care providers.

Benefits of our solutions

We believe our solutions provide the following key benefits:

 

 

Improve patient safety.    The ability for users of our solutions to instantly connect with the right resources in a closed loop communication process can help reduce medical errors and accidental deaths.

 

 

Enhance patient experience.    Hospitals can improve patient satisfaction through reduced noise levels, more caregiver time at the patient’s bedside, faster response times and improved communication links between the patient and nurse.

 

 

Improve caregiver job satisfaction.    By replacing the traditional hub and spoke communication model, our Voice Communication solution enables caregivers to communicate more efficiently, spend more time caring for the patient at the bedside and walk fewer miles per shift, thus improving job satisfaction and employee retention.

 

 

Increase revenue and reduce expenses.    Hospital resources can be used more efficiently by improving workflow processes, such as increasing operating room turnover, which can lead to higher revenue and lower operating expenses.

Our strengths

We believe that we have the following key competitive strengths:

 

 

Unified communication solutions focused on the requirements of healthcare providers.    We provide solutions tailored to address communication and workflow challenges within hospitals. These solutions can be integrated with many of our customers’ clinical systems. Our healthcare market focus has led to the development of a platform that facilitates point-of-care communication, improves patient safety and satisfaction and increases hospital efficiency and productivity.

 

 

Comprehensive proprietary communication solutions.    Since our founding in 2000, we have built a unique, comprehensive unified communication solution consisting of our software platform, wearable communication badge, Wi-Fi smartphone and mobile applications. We believe our Voice Communication solution, which features a wearable, hands-free badge, is the

 

 

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only voice-controlled communication system designed for hospitals. Our proprietary platform, leveraging third-party speech recognition and voiceprint verification software, is a proven and scalable client-server solution. Our Voice Communication solution is protected by 13 issued U.S. patents, and eight U.S. patent applications are pending. We recently expanded our portfolio to include solutions that improve communication during patient care transitions and enable secure and reliable messaging.

 

 

Broad and loyal customer base.    We have a broad and diverse customer base ranging from large hospital systems to small local hospitals and other healthcare facilities. Our customers represent an aggregate of over 750 separate hospitals and other healthcare facilities. We have a growing U.S. customer base and are expanding to hospitals in other English-speaking countries. After an initial sale, our customers frequently expand the deployment of our solutions to additional departments and functional groups. In each quarter of 2010 and the first two quarters of 2011, over 85% of our revenue came from existing customers, demonstrating the loyalty of our customer base.

 

 

Recognized and trusted brand.    Our brand is recognized and endorsed among healthcare professionals as a trusted provider of healthcare communication solutions. Even among non-Vocera hospitals, we have a very strong brand reputation. In a survey we commissioned in 2010, we were the vendor most frequently mentioned by chief information officers, clinicians and other information technology decision makers at non-Vocera hospitals, when asked who they would consider for voice communication solutions. In addition, we have received the exclusive endorsement of AHA Solutions, a subsidiary of the American Hospital Association, for our Voice Communication and Care Transition solutions.

 

 

Experienced management team.    Our management team has developed a culture of innovation with a focus on delivering value and service for our customers. Our management team includes industry executives with operational experience, understanding of the U.S. and international healthcare and technology markets and extensive relationships with hospitals, which we believe provides us with significant competitive advantages.

Our strategy

Our goal is to extend our leadership position as a provider of communication solutions in the healthcare market. Key elements of our strategy include:

 

 

Expand our business to new U.S. healthcare customers.    As of June 30, 2011, our solutions were deployed in approximately 9% of U.S. hospitals. We plan to continue to expand our direct sales force to win new customers among hospitals of all sizes.

 

 

Further penetrate our existing installed customer base.    Typically, our customers initially deploy our Voice Communication solution in a few departments of a hospital and gradually expand to additional departments, or additional hospitals within a healthcare system, as they come to fully appreciate the value of our solutions. A key part of our sales strategy includes promoting further adoption of our Voice Communication solution and demonstrating the value of our new Messaging and Care Transition solutions to our existing customers.

 

 

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Extend our technology advantage and create new product solutions.    We intend to continue our investment in research and development to enhance the functionality of our communication solutions and increase the value we provide to our customers. We plan to invest in product upgrades, product line extensions and new solutions to enhance our portfolio, such as our recent introduction of client applications for the BlackBerry, iPhone and Android mobile platforms.

 

 

Pursue acquisitions of complementary businesses, technologies and assets.    In 2010, we completed four small acquisitions to expand our offerings, demonstrating that we can successfully source, acquire and integrate complementary businesses, technologies and assets. We intend to continue to pursue acquisition opportunities that we believe can accelerate the growth of our business.

 

 

Grow our international healthcare presence.    In addition to our core U.S. market, we sell primarily into other English-speaking markets, including Canada, the United Kingdom, Australia, the Republic of Ireland and New Zealand. As of June 30, 2011, our solutions were deployed in over 90 healthcare facilities outside the United States. We plan to utilize our direct sales force and leverage channel partners to expand our presence in other English-speaking markets and enter non-English speaking countries.

 

 

Expand our communication solutions in non-healthcare markets.    While our current focus is on the healthcare market, we believe that our communication solutions can also provide value in non-healthcare markets, such as hospitality, retail and libraries.

Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks highlighted in the section titled “Risk factors” following this prospectus summary before making an investment decision. These risks include:

 

 

We have incurred significant losses since our inception, and if we cannot achieve and maintain profitability, our business will be harmed and our stock price could decline.

 

 

We depend on sales of our Voice Communication solution in the healthcare market for substantially all of our revenue, and any decrease in its sales would harm our business.

 

 

If we fail to offer high-quality services and support for our Voice Communication solution, our ability to sell our solution could be harmed.

 

 

We depend on a number of sole source and limited source suppliers for several hardware and software components of our Voice Communication solution and on a single contract manufacturer. If we are unable to obtain these components or encounter problems with our contract manufacturer, our business and operating results could be harmed.

 

 

If we fail to successfully develop and introduce new solutions and features to existing solutions, our revenue, operating results and reputation could suffer.

 

 

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Corporate information

We were incorporated in Delaware in February 2000. Our principal executive offices are located at 525 Race Street, San Jose, CA 95126, and our telephone number is (408) 882-5100. Our website address is www.vocera.com. The information on, or that can be accessed through, our website is not incorporated by reference into this prospectus and should not be considered to be a part of this prospectus.

Unless otherwise indicated, the terms “Vocera,” “we,” “us” and “our” refer to Vocera Communications, Inc., a Delaware corporation, together with its consolidated subsidiaries.

Vocera® and ExperiaHealth® are our primary registered trademarks in the United States. Other trademarks appearing in this prospectus are the property of their respective holders.

 

 

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Table of Contents

The offering

 

Common stock offered by us

             shares

 

Common stock offered by the selling stockholders

             shares

 

Over-allotment option

             shares

 

Common stock to be outstanding after this offering

             shares

 

Use of proceeds

We expect to use the net proceeds from this offering for general corporate purposes, including repayment in full of outstanding borrowings under our credit facility and working capital. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, technologies or assets. We will not receive any of the proceeds from the sale of shares by the selling stockholders.

 

Risk Factors

You should carefully read the section titled “Risk factors” together with all of the other information set forth in this prospectus before deciding to invest in shares of our common stock.

 

Proposed NYSE symbol

VCRA

The shares of our common stock to be outstanding after this offering are based on 100,417,134 shares of our common stock outstanding as of June 30, 2011 and exclude:

 

 

19,868,147 shares issuable upon the exercise of stock options outstanding as of June 30, 2011, with a weighted average exercise price of $0.40 per share

 

 

1,280,379 shares issuable upon the exercise of warrants outstanding as of June 30, 2011, with a weighted average exercise price of $1.03 per share

 

 

             shares to be reserved for issuance under our 2011 Equity Incentive Plan and our 2011 Employee Stock Purchase Plan, each of which will become effective on the first day that our common stock is publicly traded and contains provisions that will automatically increase its share reserve each year, as more fully described in “Executive compensation—Employee benefit plans”

Unless otherwise noted, all information in this prospectus assumes:

 

 

no exercise of the underwriters’ over-allotment option

 

 

the conversion of all outstanding shares of our preferred stock into an aggregate of 77,498,252 shares of our common stock immediately upon the closing of this offering

 

 

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a             -for-             reverse split of our capital stock, to be effected prior to the closing of this offering

 

 

the filing of our restated certificate of incorporation, which will occur immediately upon the closing of this offering

 

 

no exercise of options, warrants or rights outstanding as of the date of this prospectus

 

 

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Summary consolidated financial data

The following tables summarize our consolidated financial data and should be read together with “Selected consolidated financial data,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes, each included elsewhere in this prospectus.

We derived the consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010 from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the six months ended June 30, 2010 and 2011 and the consolidated balance sheet data as of June 30, 2011 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that in our opinion are necessary to state fairly the financial information set forth in those statements. Our historical results are not necessarily indicative of the results we expect in the future, and our interim results should not necessarily be considered indicative of results we expect for the full year.

We derived the pro forma share and per share data for the year ended December 31, 2010 and the six months ended June 30, 2011 from the unaudited pro forma net income (loss) per share information in Note 3 of our “Notes to consolidated financial statements” in our audited financial statements included elsewhere in this prospectus. The pro forma share and per share data give effect to (i) the reclassification of our preferred stock warrant liability to additional paid-in capital upon conversion of our preferred stock warrants to common stock warrants, (ii) the conversion of all outstanding shares of our convertible preferred stock into shares of our common stock and (iii) the repayment in full of outstanding borrowings under our credit facility using proceeds from this offering as if all such transactions had occurred on January 1, 2010.

 

 

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     Years ended
December 31,
    Six months ended
June 30,
 
(in thousands, except per share data)   2008     2009     2010     2010     2011  

 

 

Consolidated statements of operations data:

         

Revenue

         

Product

  $ 28,352      $ 25,985      $ 35,516      $ 16,019      $ 23,561   

Service

    11,474        15,154        21,287        9,616        13,835   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    39,826        41,139        56,803        25,635        37,396   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

         

Product

    15,542        11,546        13,004        5,873        8,187   

Service

    4,225        4,320        8,171        3,220        6,199   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    19,767        15,866        21,175        9,093        14,386   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    20,059        25,273        35,628        16,542        23,010   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

         

Research and development

    7,353        5,992        6,698        3,272        4,591   

Sales and marketing

    15,394        16,468        20,953        8,772        13,175   

General and administrative

    3,456        3,489        6,723        1,989        5,081   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    26,203        25,949        34,374        14,033        22,847   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (6,144     (676     1,254        2,509        163   

Interest income

    182        52        33        19        8   

Interest expense

    (143     (141     (77     (42     (122

Other income (expense), net

    (208     (227     (367     (251     (1,217
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (6,313     (992     843        2,235        (1,168

Benefit (provision) for income taxes

                  367        (21     (174
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (6,313   $ (992   $ 1,210      $ 2,214      $ (1,342
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share

         

Basic and diluted

  $ (0.52   $ (0.08   $ 0.00      $ 0.00      $ (0.07
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

         

Basic

    12,085        12,234        13,342        12,981        18,989   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    12,085        12,234        17,080        16,052        18,989   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share (unaudited)

         

Basic

      $          $     
     

 

 

     

 

 

 

Diluted

      $          $     
     

 

 

     

 

 

 

Pro forma weighted average shares outstanding (unaudited)

         

Basic

         
     

 

 

     

 

 

 

Diluted

         
     

 

 

     

 

 

 

Other financial data:

         

Adjusted EBITDA(1)

  $ (4,800   $ 578      $ 3,821      $ 3,073      $ 1,773   

 

 
(1)   Please see ”Adjusted EBITDA” below for more information and for a reconciliation of net income (loss) to adjusted EBITDA.

 

 

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Consolidated balance sheet data as of June 30, 2011 are presented below:

 

 

on an actual basis

 

 

on a pro forma basis to reflect the reclassification of the preferred stock warrant liability to additional paid-in capital upon conversion of our preferred stock warrants to common stock warrants and the conversion of all outstanding shares of our preferred stock into 77,498,252 shares of our common stock, each immediately upon the closing of this offering as if the reclassification and conversion had occurred on June 30, 2011

 

 

on a pro forma as adjusted basis to further reflect (i) the sale by us of              shares of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; and (ii) the application of $             million of the net proceeds from this offering to repay in full outstanding borrowings under our credit facility

 

June 30, 2011

(in thousands)

   Actual     Pro forma      Pro forma as
adjusted(1)
 

 

 

Consolidated balance sheet data:

       

Cash and cash equivalents

   $ 11,835      $ 11,835       $     

Total assets

     45,318        45,318      

Total borrowings

     9,333        9,333      

Convertible preferred stock warrant liability

     2,073             

Convertible preferred stock

     53,013             

Total stockholders’ equity (deficit)

     (50,065     5,021      

 

 

 

(1)   Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, respectively, our cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

Adjusted EBITDA

To provide investors with additional information about our financial results, we disclose within this prospectus adjusted EBITDA, a non-GAAP financial measure. We present adjusted EBITDA because it is used by our board of directors and management to evaluate our operating performance, and we consider it an important supplemental measure of our performance. In addition, adjusted EBITDA is a financial measure used by the compensation committee of the board of directors to pay bonuses under our executive bonus plan. For 2010, the compensation committee made adjustments in addition to those reflected in the table below.

Our management uses adjusted EBITDA:

 

 

as a measure of operating performance to assist in comparing performance from period to period on a consistent basis

 

 

as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations

 

 

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Adjusted EBITDA is not in accordance with, or an alternative to, measures prepared in accordance with GAAP. In addition, this non-GAAP measure is not based on any comprehensive set of accounting rules or principles. As a non-GAAP measure, adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. In particular:

 

 

Adjusted EBITDA does not reflect interest income we earn on cash and cash equivalents, interest expense, or the cash requirements necessary to service interest or principal payments, on our debt.

 

 

Adjusted EBITDA does not reflect the amounts we paid in taxes or other components of our tax provision.

 

 

Adjusted EBITDA does not reflect all of our cash expenditures, or future requirements for capital expenditures.

 

 

Adjusted EBITDA does not include amortization expense from acquired intangible assets.

 

 

Adjusted EBITDA does not include the impact of stock-based compensation.

 

 

Others may calculate adjusted EBITDA differently than we do and these calculations may not be comparable to our adjusted EBITDA metric.

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net income (loss) and our financial results presented in accordance with GAAP.

The table below presents a reconciliation of net income (loss) to adjusted EBITDA for each of the periods indicated:

 

      Years ended
December 31,
    Six months ended
June 30,
 
(in thousands)    2008     2009     2010     2010     2011  

 

 

Net income (loss)

   $ (6,313   $ (992   $ 1,210      $ 2,214      $ (1,342

Interest income

     (182     (52     (33     (19     (8

Interest expense

     143        141        77        42        122   

Provision (benefit) for income taxes

                   (367     21        174   

Depreciation and amortization

     809        754        732        368        309   

Amortization of purchased intangibles

                   223               502   

Stock-based compensation

     481        492        508        238        378   

Acquisition related costs(1)

                   1,047                 

Change in fair value of warrant and option liabilities

     262        235        424        209        1,638   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (4,800   $     578      $  3,821      $  3,073      $ 1,773   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(1)   Acquisition related costs consist of third-party costs we incurred in connection with acquisitions we completed in 2010.

 

 

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Risk factors

You should carefully consider the risks described below and all other information contained in this prospectus before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected if any of the following risks, or other risks and uncertainties that are not yet identified or that we currently think are immaterial, actually occur. In that event, the trading price of our shares may decline, and you may lose part or all of your investment.

Risks related to our business and industry

We have incurred significant losses since inception, and may incur losses in the future.

We have incurred significant losses since our inception and may incur losses in the future as we continue to grow our business. As of December 31, 2010 and June 30, 2011, we had an accumulated deficit of $54.4 million and $55.7 million, respectively. We expect our expenses to increase due to the hiring of additional personnel and the additional operational and reporting costs associated with being a public company. If we cannot achieve and maintain profitability, our business will be harmed and our stock price could decline.

Our ability to achieve and maintain profitability in the future depends upon continued demand for our communication solutions from existing and new customers. Further market adoption of our solutions, including increased penetration within our existing customers, depends upon our ability to improve patient safety and satisfaction and increase hospital efficiency and productivity. In addition, our profitability will be affected by, among other things, our ability to execute on our business strategy, the timing and size of orders, the pricing and costs of our solutions, and the extent to which we invest in sales and marketing, research and development and general and administrative resources.

We depend on sales of our Voice Communication solution in the healthcare market for substantially all of our revenue, and any decrease in its sales would harm our business.

To date, substantially all of our revenue has been derived from sales of our Voice Communication solution to the healthcare market and, in particular, hospitals. Any decrease in revenue from sales of our Voice Communication solution would harm our business. For 2010 and the six months ended June 30, 2011, sales of our Voice Communication solution to the healthcare market accounted for 97.8% and 98.0% of our revenue, respectively. In addition, we obtained a significant portion of these sales from existing hospital customers. We only recently began offering our Messaging and Care Transition solutions, and we anticipate that sales of our Voice Communication solution will represent a significant portion of our revenue for the foreseeable future. While we are evaluating new solutions for non-healthcare markets, we may not be successful in applying our technology to these markets. In any event, we do not anticipate that sales of our Voice Communication solution in non-healthcare markets will represent a significant portion of our revenue for the foreseeable future.

Our success depends in part upon the deployment of our Voice Communication solution by new hospital customers, the expansion and upgrade of our solution at existing customers, and our ability to continue to provide on a timely basis cost-effective solutions that meet the requirements of our hospital customers. Our Voice Communication solution requires a substantial

 

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upfront investment by customers. Typically, our hospital customers initially deploy our solutions for specific users in specific departments before expanding our solution into other departments or for other users. The cost of the initial deployment depends on the number of users and departments involved, the size and age of the hospital and the condition of the existing wireless infrastructure, if any, within the hospital. During 2010, the initial purchase order for new hospital deployments of our Voice Communication solution ranged from approximately $75,000 to approximately $1.2 million, with an average initial deployment cost of approximately $250,000, which amounts do not include any additional investment in wireless infrastructure that may have been required in order to implement our solution.

Even if hospital personnel determine that our Voice Communication solution provides compelling benefits over their existing communications methods, their hospitals may not have, or may not be willing to spend, the resources necessary to install and maintain wireless infrastructure to initially deploy and support our solution or expand our solution to other departments or users. Hospitals are currently facing significant budget constraints, ever increasing demands from a growing number of patients, and impediments to obtaining reimbursements for their services. We believe hospitals are currently allocating funds for capital and infrastructure improvements to benefit from recently enacted electronic medical records incentives, which may impact their ability to purchase and deploy our solutions. We might not be able to sustain or increase our revenue from sales of our Voice Communication solution, or achieve the growth rates that we envision, if hospitals continue to face significant budgetary constraints and reduce their spending on communications systems.

Our sales cycle can be lengthy and unpredictable, which may cause our revenue and operating results to fluctuate significantly.

Our sales cycles can be lengthy and unpredictable. Our sales efforts involve educating our customers about the use and benefits of our solutions, including the technical capabilities of our solutions and the potential cost savings and productivity gains achievable by deploying them. Customers typically undertake a significant evaluation process, which frequently involves not only our solutions but also their existing communications methods and those of our competitors, and can result in a lengthy sales cycle of nine to 12 months or more. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce any sales. In addition, purchases of our solutions are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. As a result, our revenue and operating results may vary significantly from quarter to quarter.

If we fail to increase market awareness of our brand and solutions, and expand our sales and marketing operations, our business could be harmed.

We intend to continue to add personnel and expend resources in sales and marketing as we focus on expanding awareness of our brand and solutions and capitalize on sales opportunities with new and existing customers. Our efforts to improve sales of our solutions will result in an increase in our sales and marketing expense and general and administrative expense, and these efforts may not be successful. Some newly hired sales and marketing personnel may subsequently be determined to be unproductive and have to be replaced, resulting in operational and sales delays and incremental costs. If we are unable to significantly increase the awareness of our brand and solutions or effectively manage the costs associated with these efforts, our business, financial condition and operating results could be harmed.

 

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If we fail to offer high-quality services and support for our Voice Communication solution, our ability to sell our solution will be harmed.

Our ability to sell our Voice Communication solution is dependent upon our professional services and technical support teams providing high-quality services and support. Our professional services team assists our customers with their wireless infrastructure assessment, clinical workflow design, communication solution configuration, training and project management during the pre-deployment and deployment stages. Once our solution is deployed within a customer’s facility, the customer typically depends on our technical support team to help resolve technical issues, assist in optimizing the use of our solution and facilitate adoption of new functionality. If we do not effectively assist our customers in deploying our solution, succeed in helping our customers quickly resolve technical and other post-deployment issues, or provide effective ongoing support services, our ability to expand the use of our solution with existing customers and to sell our solution to new customers will be harmed. If deployment of our solution is unsatisfactory, as has been the case with certain third-party deployments in the past, we may incur significant costs to attain and sustain customer satisfaction. As we rapidly hire new services and support personnel, we may inadvertently hire underperforming people who will have to be replaced, leading in some instances to slower growth, additional costs and poor customer relations. In addition, the failure of channel partners to provide high-quality services and support in markets outside the United States could also harm sales of our solution.

We depend on a number of sole source and limited source suppliers, and if we are unable to source our components from them, our business and operating results could be harmed.

We depend on sole and limited source suppliers for several hardware components of our Voice Communication solution, including our batteries and integrated circuits. We purchase inventory generally through individual purchase orders. Any of these suppliers could cease production of our components, experience capacity constraints, material shortages, work stoppages, financial difficulties, cost increases or other reductions or disruptions in output, cease operations or be acquired by, or enter into exclusive arrangements with, a competitor. These suppliers typically rely on purchase orders rather than long-term contracts with their suppliers, and as a result, even if available, the supplier may not be able to secure sufficient materials at reasonable prices or of acceptable quality to build our components in a timely manner. Any of these circumstances could cause interruptions or delays in the delivery of our solutions to our customers, and this may force us to seek components from alternative sources, which may not have the required specifications, or be available in time to meet demand or on commercially reasonable terms, if at all. Any of these circumstances may also force us to redesign our solutions if a component becomes unavailable in order to incorporate a component from an alternative source.

Our solutions incorporate multiple software components obtained from licensors on a non-exclusive basis, such as voice recognition software, software supporting the runtime execution of our software platform, and database and reporting software. Our license agreements can be terminated for cause. In many cases, these license agreements specify a limited term and are only renewable beyond that term with the consent of the licensor. If a licensor terminates a license agreement for cause, objects to its renewal, or conditions renewal on modified terms and conditions, we may be unable to obtain licenses for equivalent software components on reasonable terms and conditions, including licensing fees, warranties or protection from infringement claims. Some licensors may discontinue licensing their software to us or support of the software version used in our solutions. In such circumstances, we may need

 

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to redesign our solutions at substantial cost to incorporate alternative software components or be subject to higher royalty costs. Any of these circumstances could adversely affect the cost and availability of our solutions.

Third-party licensors generally require us to incorporate specific license terms and conditions in our agreements with our customers. If we are alleged to have failed to incorporate these license terms and conditions, we may be subject to claims by these licensors, incur significant legal costs defending ourselves against such claims and, if such claims are successful, be subject to termination of licenses, monetary damages, or an injunction against the continued distribution of one or more of our solutions.

Because we depend upon a contract manufacturer, our operations could be harmed and we could lose sales if we encounter problems with this manufacturer.

We do not have internal manufacturing capabilities and rely upon a contract manufacturer, SMTC Corporation, to produce the primary hardware component of our Voice Communication solution. We have entered into a manufacturing agreement with SMTC that is terminable by either party with advance notice and that may also be terminated for a material uncured breach. We also rely on original design manufacturers, or ODMs, to produce accessories, including batteries, chargers and attachments. If SMTC or an ODM is unable or unwilling to continue manufacturing components of our solutions in the volumes that we require, fails to meet our quality specifications or significantly increases its prices, we may not be able to deliver our solution to our customers with the quantities, quality and performance that they expect in a timely manner. As a result, we could lose sales and our operating results could be harmed.

SMTC or ODMs may experience problems that could impact the quantity and quality of components of our Voice Communication solution, including disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, component or material shortages and cost increases. SMTC and these ODMs generally rely on purchase orders rather than long-term contracts with their suppliers, and as a result, may not be able to secure sufficient components or other materials at reasonable prices or of acceptable quality to build components of our solutions in a timely manner. The majority of the components of our Voice Communication solution are manufactured in Asia or Mexico and adverse changes in political or economic circumstances in those locations could also disrupt our supply and quality of components of our solutions. SMTC and our ODMs also manufacture products for other companies. Generally, our orders represent a relatively small percentage of the overall orders received by SMTC and these ODMs from their customers; therefore, fulfilling our orders may not be a priority in the event SMTC or an ODM is constrained in its ability to fulfill all of its customer obligations. In addition, if SMTC or an ODM is unable or unwilling to continue manufacturing components of our solutions, we may have to identify one or more alternative manufacturers. The process of identifying and qualifying a new contract manufacturer or ODM can be time consuming, and we may not be able to substitute suitable alternative manufacturers in a timely manner or at an acceptable cost. Additionally, transitioning to a new manufacturer may cause us to incur additional costs and delays if the new manufacturer has difficulty manufacturing components of our solutions to our specifications or quality standards.

 

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If we fail to forecast our manufacturing requirements accurately, or fail to properly manage our inventory with our contract manufacturer, we could incur additional costs and experience manufacturing delays, which can adversely affect our operating results.

We place orders with our contract manufacturer, SMTC, and we and SMTC place orders with suppliers based on forecasts of customer demand. Because of our international low cost sourcing strategy, our lead times are long and cause substantially more risk to forecasting accuracy than would result were lead times shorter. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates affecting our ability to meet our customers’ demands for our solutions. If demand for our solutions increases significantly, we may not be able to meet demand on a timely basis, and we may need to expend a significant amount of time working with our customers to allocate limited supply and maintain positive customer relations, or we may incur additional costs in order to expedite the manufacture and delivery of additional inventory. If we underestimate customer demand, our contract manufacturer may have inadequate materials and subcomponents on hand to produce components of our solutions, which could result in manufacturing interruptions, shipment delays, deferral or loss of revenue, and damage to our customer relationships. Conversely, if we overestimate customer demand, we and SMTC may purchase more inventory than required for actual customer orders, resulting in excess or obsolete inventory, thereby increasing our costs and harming our operating results.

If hospitals do not have and are not willing to install the wireless infrastructure required to operate our Voice Communication solution, then they may experience technical problems or not purchase our solution at all.

The effectiveness of our Voice Communication solution depends upon the quality and compatibility of the communications environment of our healthcare customers. Our solutions require voice-grade wireless, or Wi-Fi, installed through large enterprise environments, which can vary from hospital to hospital and from department to department within a hospital. Many hospitals have not installed a voice-grade wireless infrastructure. If potential customers do not have a wireless network that can properly and fully interoperate with our Voice Communication solution, then such a network must be installed, or an existing Wi-Fi network must be upgraded, for example, by adding access points in stairwells, for our Voice Communication solution to be fully functional. The additional cost of installing or upgrading a Wi-Fi network may dissuade potential customers from installing our solution. Furthermore, if changes to a customer’s physical or information technology environment cause integration issues or degrade the effectiveness of our solution, or if the customer fails to upgrade its environment as may be required for software releases or updates, the customer may not be able to fully utilize our solution or may experience technical problems. If such circumstances arise, prospective customers may not purchase or existing customers may not expand their use of or deploy upgraded versions of our Voice Communication solution, thereby harming our business and operating results.

We plan to opportunistically expand our communications solutions in non-healthcare markets, but this expansion may not be successful.

We are currently focused on selling our communications solutions to the healthcare market. We are evaluating how to further serve non-healthcare markets, but we plan to address non-healthcare markets opportunistically. We may not be successful in further penetrating the current non-healthcare markets we serve or in selling our solutions to new markets. For the six months ended June 30, 2011, we had over 100 customers in non-healthcare verticals, including hospitality, retail and libraries, accounting for 2.0% of our revenue. If we cannot maintain these

 

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customers by providing communications solutions that meet their requirements, if we cannot successfully expand our communications solutions in non-healthcare markets, or if our solutions are adopted more slowly than we anticipate, we may not obtain significant revenue from these markets. We may experience challenges as we expand in non-healthcare markets, including pricing pressure on our solutions and technical issues as we adapt our solutions for the requirements of new markets. Our communications solutions also may not contain the functionality required by these non-healthcare markets or may not sufficiently differentiate us from competing solutions such that customers can justify deploying our solutions.

If we fail to successfully develop and introduce new solutions and features to existing solutions, our revenue, operating results and reputation could suffer.

Our success depends, in part, upon our ability to develop and introduce new solutions and features to existing solutions that meet existing and new customer requirements. We may not be able to develop and introduce new solutions or features on a timely basis or in response to customers’ changing requirements, or that sufficiently differentiate us from competing solutions such that customers can justify deploying our solutions. We may experience technical problems and additional costs as we introduce new features to our software platform, deploy future models of our wireless badges and integrate new solutions with existing customer clinical systems and workflows. In addition, we may face technical difficulties as we expand into non-English speaking countries and incorporate non-English speech recognition capabilities into our Voice Communication solution. Any new wireless badges may also reduce demand for our existing badges, and we must successfully manage the transition from existing badges, avoid excessive inventory levels and ensure that sufficient supplies of new badges can be delivered to meet customer demand. We also may incur substantial costs or delays in the manufacture of components of new models as we seek to optimize production methods and processes at our contract manufacturer. In addition, we expect that we will at least initially achieve lower gross margins on new models, while endeavoring to reduce manufacturing costs over time. If any of these problems were to arise, our revenue, operating results and reputation could suffer.

If we do not achieve the anticipated strategic or financial benefits from our acquisitions or if we cannot successfully integrate them, our business and operating results could be harmed.

We have acquired, and in the future may acquire, complementary businesses, technologies or assets that we believe to be strategic, such as our four acquisitions completed in 2010. We may not achieve the anticipated strategic or financial benefits, or be successful in integrating any acquired businesses, technologies or assets. If we cannot effectively integrate our Voice Communication solution with our new Messaging and Care Transition solutions and successfully market and sell these solutions, we may not achieve market acceptance for, or significant revenue from, these new solutions.

Integrating newly acquired businesses, technologies and assets could strain our resources, could be expensive and time consuming, and might not be successful. Our recent acquisitions expose us, and if we acquire or invest in additional businesses, technologies or assets, we will be further exposed, to a number of risks, including that we may:

 

 

experience technical issues as we integrate acquired businesses, technologies or assets into our existing communications solutions

 

 

encounter difficulties leveraging our existing sales and marketing organizations, and direct sales channels, to increase our revenue from acquired businesses, technologies or assets

 

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find that the acquisition does not further our business strategy, we overpaid for the acquisition or the economic conditions underlying our acquisition decision have changed

 

 

have difficulty retaining the key personnel of acquired businesses

 

 

suffer disruption to our ongoing business and diversion of our management’s attention as a result of transition or integration issues and the challenges of managing geographically or culturally diverse enterprises

 

 

experience unforeseen and significant problems or liabilities associated with quality, technology and legal contingencies relating to the acquisition, such as intellectual property or employment matters

In addition, from time to time we may enter into negotiations for acquisitions that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash, including the proceeds of this offering. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options and warrants, the ownership of existing stockholders would be diluted. In addition, acquisitions may result in the incurrence of debt, contingent liabilities, large write-offs, or other unanticipated costs, events or circumstances, any of which could harm our operating results.

If we are not able to manage our growth effectively, or if our business does not grow as we expect, our operating results will suffer.

We have experienced significant revenue growth in a short period of time. Our revenue increased from $39.8 million for 2008 to $56.8 million for 2010, and from $25.6 million for the six months ended June 30, 2010 to $37.4 million for the six months ended June 30, 2011. During these periods, we significantly expanded our operations. For example, in order to transition, to a direct sales model for the U.S. healthcare market in place of a reseller and indirect sales model, we more than doubled the number of our employees, from 123 as of January 1, 2009 to 268 as of June 30, 2011.

Our rapid growth has placed, and will continue to place, a significant strain on our management systems, infrastructure and other resources. We plan to hire additional direct sales and marketing personnel domestically and internationally, acquire complementary businesses, technologies or assets, and increase our investment in research and development. Our future operating results depend to a large extent on our ability to successfully implement these plans and manage our anticipated expansion. To do so successfully we must, among other things:

 

 

manage our expenses in line with our operating plans and current business environment

 

 

maintain and enhance our operational, financial and management controls, reporting systems and procedures

 

 

integrate acquired businesses, technologies or assets

 

 

manage operations in multiple locations and time zones

 

 

develop and deliver new solutions and enhancements to existing solutions efficiently and reliably

We expect to incur costs associated with these investments before the anticipated benefits or the returns are realized, if at all. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new solutions or enhancements to

 

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existing solutions. We may also fail to satisfy customer requirements, maintain quality, execute our business plan or respond to competitive pressures, which could result in lower revenue and a decline in the share price of our common stock.

We generally recognize revenue from maintenance and support contracts for our Voice Communication solution over the contract term, and changes in sales may not be immediately reflected in our operating results.

We generally recognize revenue from our customer maintenance and support contracts for our Voice Communication solution ratably over the contract term, which is typically 12 months, in some cases subject to an early termination right. For 2010 and the six months ended June 30, 2011, revenue from our maintenance and support contracts accounted for 30.7% and 27.2% of our revenue, respectively. A portion of the revenue we report in each quarter is derived from the recognition of deferred revenue relating to maintenance and support contracts entered into during previous quarters. Consequently, a decline in new or renewed maintenance and support by our customers in any one quarter may not be immediately reflected in our revenue for that quarter. Such a decline, however, will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our services and potential changes in our rate of renewals may not be fully reflected in our operating results until future periods.

Our revenue and operating results have fluctuated, and are likely to continue to fluctuate, which may make our quarterly results difficult to predict, cause us to miss analyst expectations and cause the price of our common stock to decline.

Our operating results may be difficult to predict, even in the near term, and are likely to fluctuate as a result of a variety of factors, many of which are outside of our control. We have historically obtained substantially all of our revenue from the sale of our Voice Communication solution, which we anticipate will represent the most significant portion of our revenue for the foreseeable future, as we only recently began offering our Messaging and Care Transition solutions.

Comparisons of our revenue and operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. Each of the following factors, among others, could cause our operating results to fluctuate from quarter to quarter:

 

 

the financial health of our healthcare customers and budgetary constraints on their ability to upgrade their communications

 

 

changes in the regulatory environment affecting our healthcare customers, including impediments to their ability to obtain reimbursement for their services

 

 

our ability to expand our sales and marketing operations

 

 

the procurement and deployment cycles of our healthcare customers and the length of our sales cycles

 

 

variations in the amount of orders booked in a prior quarter but not delivered until later quarters

 

 

our mix of solutions and pricing, including discounts by us or our competitors

 

 

our ability to forecast demand and manage lead times for the manufacture of our solutions

 

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our ability to develop and introduce new solutions and features to existing solutions that achieve market acceptance

Our success depends upon our ability to attract, integrate and retain key personnel, and our failure to do so could harm our ability to grow our business.

Our success depends, in part, on the continuing services of our senior management and other key personnel, including in particular our executive officers and founder, as identified under “Management—Executive officers and directors,” and our ability to continue to attract, integrate and retain highly skilled personnel, particularly in engineering, sales and marketing. Competition for highly skilled personnel is intense, particularly in the Silicon Valley where our headquarters are located. If we fail to attract, integrate and retain key personnel, our ability to grow our business could be harmed.

The members of our senior management and other key personnel are at-will employees, and may terminate their employment at any time without notice. If they terminate their employment, we may not be able to find qualified individuals to replace them on a timely basis or at all and our senior management may need to divert their attention from other aspects of our business. Former employees may also become employees of a competitor. We may also have to pay additional compensation to attract and retain key personnel. We also anticipate hiring additional engineering, marketing and sales personnel to grow our business. Often, significant amounts of time and resources are required to train these personnel. We may incur significant costs to attract, integrate and retain them, and we may lose them to a competitor or another company before we realize the benefit of our investments in them.

We primarily compete in the rapidly evolving and competitive healthcare market, and if we fail to effectively respond to competitive pressures, our business and operating results could be harmed.

We believe that at this time the primary competition for our Voice Communication solution consists of traditional methods using wired phones, pagers and overhead intercoms. While we believe that our system is superior to these legacy methods, our solution requires a significant infrastructure investment by a hospital and many hospitals may not recognize the value of implementing our solution.

Manufacturers and distributors of product categories such as cellular phones, pagers, mobile radios, and in-building wireless telephones attempt to sell their products to hospitals as components of an overall communication system. Of these product categories, in-building wireless telephones represent the most significant competition for the sale of our solution. The market for in-building wireless phones is dominated by large horizontal communications companies such as Cisco Systems, Ascom and Polycom. In addition, while smartphones and tablets are not at present direct competitors, their proliferation may make them a de facto standard for hospital workflow, thereby making our solution less attractive to customers.

While we do not have a directly comparable competitor that provides a richly featured voice communication system for the healthcare market, we could face such competition in the future. Potential competitors in the healthcare or communications markets include large, multinational companies with significantly more resources to dedicate to product development and sales and marketing. These companies may have existing relationships within the hospital, which may

 

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enhance their ability to gain a foothold in our market. Customers may prefer to purchase a more highly integrated or bundled solution from a single provider or an existing supplier rather than a new supplier, regardless of performance or features.

Accordingly, if we fail to effectively respond to competitive pressures, we could experience pricing pressure, reduced profit margins, higher sales and marketing expenses, lower revenue and the loss of market share, any of which would harm our business, operating results or financial condition.

Our international operations subject us, and may increasingly subject us in the future, to operational, financial, economic and political risks abroad.

Although we derive a relatively small portion of our revenue from customers outside the United States, we believe that non-U.S. customers could represent an increasing share of our revenue in the future. During 2010 and the six months ended June 30, 2011, we obtained 9.7% and 8.4% of our revenue, respectively, from customers outside of the United States, including Canada, the United Kingdom, Australia, the Republic of Ireland and New Zealand. Accordingly, we are subject to risks and challenges that we would not otherwise face if we conducted our business solely in the United States, including:

 

 

challenges incorporating non-English speech recognition capabilities into our solutions as we expand into non-English speaking countries

 

 

difficulties integrating our solutions with wireless infrastructures with which we do not have experience

 

 

difficulties integrating local dialing plans and applicable PBX standards

 

 

challenges associated with delivering support, training and documentation in several languages

 

 

difficulties in staffing and managing personnel and resellers

 

 

the need to comply with a wide variety of foreign laws and regulations, including increasingly stringent data privacy regulations, requirements for export controls for encryption technology, changes in tax laws and tax audits by government agencies

 

 

political and economic instability in, or foreign conflicts that involve or affect, the countries of our customers

 

 

difficulties in collecting accounts receivable and longer accounts receivable payment cycles

 

 

exposure to competitors who are more familiar with local markets

 

 

limited or unfavorable intellectual property protection in some countries

 

 

currency exchange rate fluctuations, which could affect the price of our solutions relative to locally produced solutions

Any of these factors could harm our existing international business, impair our ability to expand into international markets or harm our operating results.

Our Voice Communication solution is highly complex and may contain undetected software or hardware errors that could harm our reputation and operating results.

Our Voice Communication solution incorporates complex technology, is deployed in a variety of complex hospital environments and must interoperate with many different types of devices and

 

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hospital systems. While we test the components of our solutions for defects and errors prior to release, we or our customers may not discover a defect or error until after we have deployed our solution, integrated it into the hospital environment and our customer has commenced general use of the solution. For example, in 2005, the prior model of our wireless badge, the B1000, was affected by chipset compatibility issues with certain wireless access points at customer facilities, resulting in our exchanging a large percentage of deployed badges for new badges. We did this exchange at no cost to our customers, thereby incurring substantial costs. In addition, our solutions in some cases are integrated with hardware and software offered by “middleware” vendors in order to interoperate with nurse call systems, device alarms and other hospital systems. If we cannot successfully integrate our solution with these vendors as needed or if any hardware or software of these vendors contains any defect or error, then our solution may not perform as designed, or may exhibit a defect or error.

Any defects or errors in, or which are attributed to, our solutions, could result in:

 

 

delayed market acceptance of our affected solutions

 

 

loss of revenue or delay in revenue recognition

 

 

loss of customers or inability to attract new customers

 

 

diversion of engineering or other resources for remedying the defect or error

 

 

damage to our brand and reputation

 

 

increased service and warranty costs

 

 

legal actions by our customers and hospital patients

If any of these occur, our operating results and reputation could be harmed.

We face potential liability related to the privacy and security of personal information collected through our solutions.

In connection with our healthcare communications business, we may handle or have access to personal health information subject in the United States to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, regulations issued pursuant to these statutes, state privacy and security laws and regulations, and associated contractual obligations as a “business associate” of healthcare providers. These statutes and regulations impose numerous requirements regarding the use and disclosure of personal health information with which we must comply. Our failure to accurately anticipate the application or interpretation of these laws and regulations as we develop our solutions or a failure by us to comply with their requirements (e.g., evolving encryption and security requirements) could create material civil and/or criminal liability for us, resulting in adverse publicity and negatively affecting our business.

In addition, the use and disclosure of personal health information is subject to regulation in other jurisdictions in which we do business or expect to do business in the future. Those jurisdictions may attempt to apply such laws extraterritorially or through treaties or other arrangements with U.S. governmental entities. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future which may increase the chance that we violate them. Any such developments, or developments stemming from enactment or modification of other laws, or the failure by us to comply with their requirements or to accurately anticipate the application or interpretation of these laws could create material liability to us, result in adverse publicity and negatively affect our business.

 

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For example, the European Union, or EU, adopted the Data Protection Directive, or DPD, imposing strict regulations and establishing a series of requirements regarding the storage of personally identifiable information on computers or recorded on other electronic media. This has been implemented by all EU member states through national laws. DPD provides for specific regulations requiring all non-EU countries doing business with EU member states to provide adequate data privacy protection when receiving personal data from any of the EU member states. Similarly, Canada’s Personal Information and Protection of Electronic Documents Act provides Canadian residents with privacy protections in regard to transactions with businesses and organizations in the private sector and sets out ground rules for how private sector organizations may collect, use and disclose personal information in the course of commercial activities. A finding that we have failed to comply with applicable laws and regulations regarding the collection, use and disclosure of personal information could create liability for us, result in adverse publicity and negatively affect our business.

Any legislation or regulation in the area of privacy and security of personal information could affect the way we operate our services and could harm our business. The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may prevent us from selling our solutions or increase the costs associated with selling our solutions, and may affect our ability to invest in or jointly develop solutions in the United States and in foreign jurisdictions. Further, we cannot assure you that our privacy and security policies and practices will be found sufficient to protect us from liability or adverse publicity relating to the privacy and security of personal information.

Developments in the healthcare industry and governing regulations could negatively affect our business.

Substantially all of our revenue is derived from customers in the healthcare industry, in particular, hospitals. The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory and other influences. Developments generally affecting the healthcare industry, including new regulations or new interpretations of existing regulations, could adversely affect spending on information technology and capital equipment by reducing funding, changes in healthcare pricing or delivery, or creating impediments for obtaining healthcare reimbursements, thereby causing our sales to decline and negatively impacting our business. For example, the profit margins of our hospital customers are modest and pending changes in reimbursement for healthcare costs may reduce the overall solvency of our customers or cause further deterioration in their financial or business condition.

In March 2010, the United States enacted comprehensive healthcare reform legislation through the Patient Protection and Affordable Health Care for America Act and the Health Care and Education Reconciliation Act. The new law is expected to increase the number of Americans with health insurance coverage by approximately 32 million through individual and employer mandates, subsidies offered to lower income individuals with smaller employers and broadening of Medicaid eligibility, and to affect healthcare reimbursement levels for healthcare providers. We cannot predict with certainty what the ultimate effect of federal healthcare reform or any future legislation or regulation, or healthcare initiatives, if any, implemented at the state level, will have on us or our customers. For example, the federal healthcare reform imposes a 2.3% excise tax on medical devices beginning January 2013, to which our company would be subject if any of our communications solutions are classified as medical devices. The impact of the tax, coupled with reform-associated payment reductions to Medicare and Medicaid reimbursement, could harm our business, operating results and cash flows.

 

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In addition, our customers’ expectations regarding pending or potential industry developments may also affect their budgeting processes and spending plans with respect to our communications solutions. The healthcare industry has changed significantly in recent years and we expect that significant changes will continue to occur. However, the timing and impact of developments in the healthcare industry are difficult to predict. We cannot assure you that the markets for our solutions will continue to exist at current levels or that we will have adequate technical, financial and marketing resources to react to changes in those markets.

Our use of open source and non-commercial software components could impose risks and limitations on our ability to commercialize our solutions.

Our solutions contain software modules licensed under open source and other types of non-commercial licenses, including the GNU Public License, the GNU Lesser Public License, the Apache License and others. We also may incorporate open source and other licensed software into our solutions in the future. Use and distribution of such software may entail greater risks than use of third-party commercial software, as licenses of these types generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some of these licenses require the release of our proprietary source code to the public if we combine our proprietary software with open source software in certain manners. This could allow competitors to create similar products with lower development effort and time and ultimately result in a loss of sales for us.

The terms of many open source and other non-commercial licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions. In such event, in order to continue offering our solutions, we could be required to seek licenses from alternative licensors, which may not be available on a commercially reasonable basis or at all, to re-engineer our solutions or to discontinue the sale of our solutions in the event we cannot obtain a license or re-engineer our solutions on a timely basis, any of which could harm our business and operating results. In addition, if an owner of licensed software were to allege that we had not complied with the conditions of the corresponding license agreement, we could incur significant legal costs defending ourselves against such allegations. In the event such claims were successful, we could be subject to significant damages, be required to disclose our source code, or be enjoined from the distribution of our solutions.

Claims of intellectual property infringement could harm our business.

Vigorous protection and pursuit of intellectual property rights has resulted in protracted and expensive litigation for many companies in our industry. Although claims of this kind have not materially affected our business to date, there can be no assurance of the absence of such claims in the future. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements, any of which could harm our business and operating results.

Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain that we will be successful in defending ourselves against intellectual property claims. In addition, we currently have a limited portfolio of issued patents compared to many other industry participants, and therefore may not be able to effectively utilize our intellectual property portfolio to assert defenses or counterclaims in

 

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response to patent infringement claims or litigation brought against us by third parties. Further, litigation may involve patent holding companies or other adverse patent owners who have no relevant products and against whom our potential patents may provide little or no deterrence. Many potential litigants have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. Furthermore, a successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from distributing certain solutions or performing certain services. We might also be required to seek a license and pay royalties for the use of such intellectual property, which may not be available on commercially acceptable terms or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful.

If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.

Our success depends, in part, on our ability to protect our proprietary technology. We protect our proprietary technology through patent, copyright, trade secret and trademark laws in the United States and similar laws in other countries. We also protect our proprietary technology through licensing agreements, nondisclosure agreements and other contractual provisions. These protections may not be available in all cases or may be inadequate to prevent our competitors from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or solutions in an unauthorized manner. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. In addition, third parties may seek to challenge, invalidate or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the foregoing. Our competitors may independently develop technologies that are substantially equivalent, or superior, to our technology or design around our proprietary rights. In each case, our ability to compete could be significantly impaired.

To prevent unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement or misappropriation of our proprietary rights. Any such action could result in significant costs and diversion of our resources and management’s attention, and there can be no assurance that we will be successful in such action. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing or misappropriating our intellectual property.

While we plan to continue to protect our intellectual property with, among other things, patent protection, there can be no assurance that:

 

 

current or future U.S. or foreign patent applications will be approved

 

 

our issued patents will protect our intellectual property and not be held invalid or unenforceable if challenged by third parties

 

 

we will succeed in protecting our technology adequately in all key jurisdictions in which we or our competitors operate

 

 

others will not independently develop similar or competing products or methods or design around any patents that may be issued to us

 

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Our failure to obtain patents with claims of a scope necessary to cover our technology, or the invalidation of our patents, or our inability to protect any of our intellectual property, may weaken our competitive position and harm our business and operating results.

We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may harm our business, operating results and financial condition.

Our solutions could be subject to regulation by the U.S. Food and Drug Administration or similar foreign agencies, which could increase our operating costs.

We provide devices that may be, or may become, subject to regulation by the U.S. Food and Drug Administration, or FDA, and similar agencies in other countries, or the jurisdiction of these agencies could be expanded in the future to include our solutions. The FDA regulates certain products, including software-based products, as “medical devices” based, in part, on the intended use of the product and the risk the device poses to the patient should the device fail to perform properly. Although we have concluded that our wireless badge is a general-purpose communications device not subject to FDA regulation, the FDA could disagree with our conclusion, or changes in our solutions or the FDA’s evolving regulation could lead to FDA regulation of our solutions. Many other countries in which we sell or may sell our solutions could also have similar regulations applicable to our solutions, some of which may be subject to change or interpretation. We may incur substantial operating costs if we are required to register our solutions or components of our solutions as regulated medical devices under U.S. or foreign regulations, obtain premarket approval from the FDA or foreign regulatory agencies, and satisfy the extensive reporting requirements. In addition, failure to comply with these regulations could result in enforcement actions and monetary penalties.

Product liability or other liability claims could cause us to incur significant costs, adversely affect the sales of our solutions and harm our reputation.

Our solutions are utilized by healthcare professionals and others in the course of providing patient care. It is possible that patients, family members, physicians or others may allege we are responsible for harm to patients due to defects in, or the malfunction of, our solutions. Any such allegations could harm our reputation and ability to sell our solutions. Components of our solutions utilizing Wi-Fi also emit radio frequency, or RF, energy. RF emissions have been alleged, in connection with cellular phones, to have adverse health consequences. While these components of our solutions comply with guidelines applicable to such emissions, some may allege that these components of our solutions cause adverse health consequences or applicable guidelines may change making these components of our solutions non-compliant. In addition, regulatory agencies in the United States and other countries in which we do or plan to do business may implement regulations concerning RF emissions standards. Any such allegations or non-compliance, or any regulatory changes affecting the transmission of radio signals could negatively impact the sales of our solutions, require costly modifications to our solutions and harm our reputation.

Although our customer agreements contain terms and conditions, including disclaimers of liability, that are intended to reduce or eliminate our potential liability, we could be required to spend significant amounts of management time and resources to defend ourselves against

 

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product liability, tort, warranty or other claims. If any such claims were to prevail, we could be forced to pay damages, comply with injunctions or stop distributing our solutions. Even if potential claims do not result in liability to us, investigating and defending against these claims could be expensive and time consuming and could divert management’s attention away from our business. We maintain general liability insurance coverage, including coverage for errors and omissions; however, this coverage may not be sufficient to cover large claims against us or otherwise continue to be available on acceptable terms. Further, the insurer could attempt to disclaim coverage as to any particular claim.

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problems such as power disruptions or terrorism.

Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity, and many critical components of our solutions are sourced in Asia, a region that has also suffered natural disasters. A significant natural disaster, such as an earthquake, fire or a flood, occurring at our headquarters, our other facilities or where our contract manufacturer or its suppliers are located, could harm our business, operating results and financial condition. In addition, acts of terrorism could cause disruptions in our business, the businesses of our customers and suppliers, or the economy as a whole. We also rely on information technology systems to communicate among our workforce located worldwide, and in particular, our senior management, general and administrative, and research and development activities that are coordinated with our corporate headquarters in the San Francisco Bay Area. Any disruption to our internal communications, whether caused by a natural disaster or by manmade problems, such as power disruptions, in the San Francisco Bay Area or Asia could delay our research and development efforts, cause delays or cancellations of customer orders or delay deployment of our solutions, which could harm our business, operating results and financial condition.

We may require additional capital to support our business growth, and such capital may not be available.

We intend to continue to make investments to support business growth and may require additional funds to respond to business challenges, which include the need to develop new solutions or enhance existing solutions, enhance our operating infrastructure, expand our sales and marketing capabilities, expand into non-healthcare markets, and acquire complementary businesses, technologies or assets. Accordingly, we may need to engage in equity or debt financing to secure funds in addition to our current debt facility. Equity and debt financing, however, might not be available when needed or, if available, might not be available on terms satisfactory to us. If we raise additional funds through equity financing, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. If we are unable to obtain adequate financing or financing on terms satisfactory to us, our ability to continue to support our business growth and to respond to business challenges could be significantly limited as we may have to delay, reduce the scope of or eliminate some or all of our initiatives, which could harm our operating results.

We will incur increased costs as a result of operating as a public company and our management will have to devote substantial time to public company compliance obligations.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and our stock exchange, has

 

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imposed various 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 compliance requirements and any new requirements that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may impose on public companies. Moreover, these rules and regulations, along with compliance with accounting principles and regulatory interpretations of such principles, have increased and will continue to increase our legal, accounting and financial compliance costs and have made and will continue to make some activities more time-consuming and costly. For example, we expect these 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 accept reduced policy limits and coverage or incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees, or as executive officers. We will evaluate the need to hire additional accounting and financial staff with appropriate public company experience and technical accounting and financial knowledge. We estimate the additional costs we expect to incur as a result of being a public company to be approximately $2.0 million annually.

If we do not remediate material weaknesses in our internal control over financial reporting or are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

A material weakness is defined under the standards issued by the Public Company Accounting Oversight Board as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected and corrected on a timely basis.

In connection with our preparation of the financial statements for the year ended December 31, 2010 and for the six months ended June 30, 2011, our independent registered public accounting firm identified control deficiencies that constituted two material weaknesses. These related to the design and operation of controls for the preparation of the provision for income taxes and for the preparation of the statement of cash flows.

The material weakness relating to the provision for income taxes resulted from insufficient technical expertise in the area of tax accounting for acquisitions. This material weakness resulted in audit adjustments to our income tax provision for the year ended December 31, 2010 to properly account for the tax aspects of the acquisitions we completed in 2010. We plan to remediate this material weakness through the replacement of the firm we have historically retained for this purpose with a firm with the requisite expertise in the area of income taxes.

The material weakness relating to the preparation of the statement of cash flows resulted from the insufficient review of supporting schedules used in the preparation of the statement for unpaid purchases of property and equipment. This material weakness resulted in revisions to the statement of cash flows for the six months ended June 30, 2011 to reclassify amounts between cash flows from investing activities to cash flows from operating activities. In order to remediate this material weakness, we are in the process of implementing improved controls over the preparation and review of reports used in the preparation of the statement of cash flows.

The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and disclosure controls and procedures quarterly. In particular, beginning with the year ending on December 31, 2012, we must perform

 

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system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, 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 accounting firm, that must be performed for 2012 may reveal other material weaknesses or that the material weaknesses described above have not been fully remediated. If we do not remediate the material weaknesses described above, other material weaknesses are identified or we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could be materially misstated or could be restated, we could receive an adverse opinion regarding our controls from our accounting firm and we could be subject to investigations or sanctions by regulatory authorities, which would require additional financial and management resources, and the market price of our stock could decline.

Risks related to this offering

The market price of our common stock may be volatile, and your investment in our stock could suffer a decline in value.

We will determine the initial public offering price through negotiations with the underwriters and such price may not be indicative of future prices of our common stock, which may fluctuate significantly. There has been significant volatility in the market price and trading volume of equity securities, which is often unrelated or disproportionate to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our common stock. The market price of our common stock could fluctuate significantly in response to the factors described above and other factors, many of which are beyond our control, including:

 

 

actual or anticipated variation in anticipated operating results of us or our competitors

 

 

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections

 

 

announcements by us or our competitors of new solutions, new or terminated significant contracts, commercial relationships or capital commitments

 

 

failure of securities analysts to maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors

 

 

developments or disputes concerning our intellectual property or other proprietary rights

 

 

commencement of, or our involvement in, litigation

 

 

announced or completed acquisitions of businesses, technologies or assets by us or our competitors

 

 

changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular

 

 

price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole

 

 

rumors and market speculation involving us or other companies in our industry

 

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any major change in our management

 

 

unfavorable economic conditions and slow or negative growth of our markets

 

 

other events or factors, including those resulting from war or incidents of terrorism

In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

No public market for our common stock currently exists, and an active trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for our common stock. Our common stock does not have any prior trading history. An active trading market may not develop following the closing of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

If securities or industry analysts issue an adverse or misleading opinion regarding our stock or do not publish research or reports about our business, our stock price could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us and our business. We do not control these analysts or the content and opinions included in their reports. The price of our common stock could decline if one or more analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one or more analysts cease coverage of our company or fail to regularly publish reports about our company, we could lose visibility in the financial market, which in turn could cause our stock price to decline. Further, securities or industry analysts may elect not to provide research coverage of our common stock and such lack of research coverage may adversely affect the market price of our common stock.

The concentration of our capital stock ownership with insiders upon the closing of this offering will likely limit your ability to influence corporate matters.

We anticipate that our executive officers, directors, current 5% or greater stockholders and entities affiliated with any of them will together beneficially own approximately     % of our common stock outstanding after this offering, assuming the underwriters do not exercise their option to purchase additional shares. These stockholders, if they act together, will have significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and may take actions that may not be in the best interests of our other stockholders. This concentration of ownership could also limit stockholders’ ability to influence corporate matters. Accordingly, corporate actions might be taken even if other stockholders, including those who purchase shares in this offering, oppose them, or may not be taken even if other stockholders view them as in the best interests of our stockholders. This concentration of ownership may have the effect of delaying or preventing a

 

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change of control of our company, may make the approval of certain transactions difficult or impossible without the support of these stockholders and might adversely affect the market price of our common stock.

Our management will have broad discretion over the use of proceeds from this offering and might not apply the proceeds of this offering in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds to us from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds, without the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The failure of our management to apply the net proceeds of our initial public offering effectively could harm our business, financial condition and operating results, and may not increase the value of your investment.

We have not allocated these net proceeds for specific purposes other than to repay in full outstanding borrowings under our credit facility. We intend to use the net proceeds from this offering for general corporate and working capital purposes as outlined in the section titled “Use of proceeds” elsewhere in this prospectus. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, technologies or assets, but at this time, we have no current understandings, agreements or commitments to do so. Our management might not be able to yield a significant return or any return on any investment of these net proceeds.

Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, or if it is perceived by the market that these sales might occur, the trading price of our common stock could decline. Based upon the number of shares outstanding as of                     , 2011, upon the closing of this offering, we will have              shares of common stock outstanding, assuming no exercise of our outstanding options and warrants.

All of the common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, referred to as the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. The remaining              shares of common stock outstanding after this offering, based on shares outstanding as of                     , 2011, will be restricted as a result of applicable securities laws, lock-up agreements or other contractual restrictions that restrict transfers for at least 180 days after the date of this prospectus, subject to certain extensions.

J.P. Morgan Securities LLC and Piper Jaffray & Co. may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements with the underwriters prior to expiration of the lock-up period.

The holders of              shares of common stock, and holders of warrants to purchase 1,280,379 shares of common stock will be entitled to rights with respect to registration of such shares under the Securities Act pursuant to an investor rights agreement between such holders and us. If such holders, by exercising their registration rights, sell a large number of shares, they could adversely affect the market price for our common stock. If we file a registration statement for the purpose of selling additional shares to raise capital and are required to include shares held by these holders pursuant to the exercise of their registration rights, our ability to raise capital may be impaired.

 

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We intend to file a registration statement under the Securities Act to register              shares for issuance under our equity incentive and employee stock purchase plans. Each of our 2011 Equity Incentive Plan and 2011 Employee Stock Purchase Plan provides for annual automatic increases in the shares reserved for issuance under the plan without stockholder approval, which would result in additional dilution to our stockholders. Once we register these shares, they can be freely sold in the public market upon issuance and vesting, subject to any applicable lock-up period or other restrictions provided under the terms of the applicable plan and/or the option agreements entered into with option holders.

You will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

The assumed initial public offering price is substantially higher than the net tangible book value per share of our outstanding common stock will be immediately after this offering. If you purchase our common stock in this offering, you will suffer immediate and substantial dilution of $             per share based on the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus. If outstanding options and warrants to purchase our common stock are exercised, you will experience additional dilution. For a further description of the dilution that you will experience immediately after this offering, see the section titled “Dilution.”

We have never paid cash dividends on our capital stock, and we do not anticipate paying any dividends in the foreseeable future.

We have never paid cash dividends on any of our classes of capital stock and currently intend to retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future. In addition, our credit facility and security agreement restrict our ability to pay dividends.

Our charter documents and Delaware law could discourage, delay or prevent a change of control of our company or change in our management that stockholders consider favorable and cause our stock price to decline.

Certain provisions of our restated certificate of incorporation and restated bylaws to be effective upon the closing of this offering and Delaware law could discourage, delay or prevent a change of control of our company or change in our management that the stockholders of our company consider favorable. These provisions:

 

 

authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt

 

 

prohibit stockholder action by written consent, requiring all stockholder actions to be taken at a meeting of stockholders

 

 

establish advance notice procedures for nominating candidates to our board of directors or proposing matters that can be acted upon by stockholders at stockholder meetings

 

 

limit the ability of our stockholders to call special meetings of stockholders

 

 

prohibit stockholders from cumulating their votes for the election of directors

 

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permit newly created directorships resulting from an increase in the authorized number of directors or vacancies on our board of directors to be filled only by majority vote of our remaining directors, even if less than a quorum is then in office

 

 

provide that our board of directors is expressly authorized to make, alter or repeal our bylaws

 

 

establish a classified board of directors so that not all members of our board are elected at one time

 

 

provide that our directors may only be removed only for “cause” and only with the approval of 66 2/3rds of our stockholders

 

 

require super-majority voting to amend certain provisions in our certificate of incorporation and bylaws

Section 203 of the Delaware General Corporation Law may also discourage, delay or prevent a change of control of our company.

 

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Special note regarding forward-looking statements and industry data

This prospectus contains forward-looking statements that are based on our beliefs and assumptions regarding future events and circumstances, including statements regarding our strategies, our opportunities, developments in the healthcare market, our relationships with our customers and contract manufacturer and other matters. These statements are principally contained in the sections titled “Prospectus summary,” “Risk factors,” “Use of proceeds,” “Management’s discussion and analysis of financial condition and results of operations,” “Business,” “Executive compensation—Compensation discussion and analysis,” and “Shares eligible for future sale.” Forward-looking statements include statements that are not historical facts and can be identified by words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “continue,” “should,” “would,” “could,” “potentially,” “will” or “may,” or other similar words and phrases.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These risks, uncertainties and factors include those we discuss in this prospectus in the section titled “Risk factors.” You should read these risk factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. It is not possible for us to predict all risks that could affect us, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Moreover, new risks emerge from time to time.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

You should read this prospectus and the documents we reference in this prospects and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

This prospectus also contains estimates and other statistical data that we obtained from industry publications, surveys, forecasts and reports. These industry publications generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. Although we have not independently verified the accuracy or completeness of the data contained in these industry publications and reports, based on our industry experience we believe that the publications are reliable and the conclusions contained in the publications and reports are reasonable.

 

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Use of proceeds

We estimate that we will receive net proceeds from the sale of              shares of common stock that we are selling in this offering of approximately $             million, based on an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise in full their option to purchase additional shares, we estimate that our net proceeds will be approximately $             million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

Each $1.00 increase or decrease in the assumed initial public offering price would increase or decrease, as applicable, the net proceeds to us by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

The principal purposes of this offering are to obtain additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets. As of the date of this prospectus, we cannot specify with certainty all of the particular uses of the net proceeds of this offering. We expect to use $9.3 million of the net proceeds of the offering to repay in full outstanding borrowings under our credit facility. Aggregate borrowings under the facility were $9.3 million as of June 30, 2011, of which $4.8 million bore interest at a rate of 4.75% per annum and $4.5 million bore interest at a rate of 4.25% per annum. We expect to use the balance of the net proceeds for general corporate purposes, including working capital. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, technologies or assets. However, we have no present understandings, commitments or agreements to enter into any acquisitions or make any investments.

Our management will have significant flexibility in applying the net proceeds from this offering, and investors will be relying on the judgment of our management regarding the application of these net proceeds. Pending the uses described above, we intend to invest the net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States government. The goal with respect to the investment of these net proceeds will be capital preservation and liquidity so that these funds are readily available to fund our operations.

Dividend policy

We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend upon, among other factors, our financial condition, operating results, current and anticipated cash needs, plans for expansion and other factors that our board of directors may deem relevant. In addition, our credit facility and security agreement restrict our ability to pay dividends.

 

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2011:

 

 

on an actual basis

 

 

on a pro forma basis to reflect the reclassification of our preferred stock warrant liability to additional paid-in capital upon conversion of our preferred stock warrants to common stock warrants and the conversion of all outstanding shares of our preferred stock into 77,498,252 shares of our common stock, each immediately upon the closing of this offering as if the reclassification and conversion had occurred on June 30, 2011

 

 

on a pro forma as adjusted basis to further reflect (i) the sale by us of              shares of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; (ii) the application of $9.3 million of the net proceeds from this offering to repay in full outstanding borrowings under our credit facility and (iii) the restatement of our certificate of incorporation immediately upon the closing of this offering

You should read this table together with the section titled “Management’s discussion and analysis of financial condition and results of operations” and our financial statements and related notes appearing elsewhere in this prospectus.

 

June 30, 2011
(in thousands, except share and per share amounts)
   Actual     Pro forma     Pro forma
as adjusted(1)
 

 

 

Cash and cash equivalents

   $ 11,835      $ 11,835      $                
  

 

 

   

 

 

   

 

 

 

Total borrowings

   $ 9,333      $ 9,333      $   

Preferred stock warrant liability

     2,073                 

Convertible preferred stock, $0.0003 par value, 156,082,458 shares authorized, 73,031,612 shares issued and outstanding; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     53,013                 
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity (deficit)

      

Preferred stock, $0.001 par value; no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted

                     

Common stock, $0.0003 par value, 182,539,785 shares authorized, 22,918,882 shares issued and outstanding, actual; 100,417,134 shares issued and outstanding, pro forma;              shares issued and outstanding, pro forma as adjusted

     7        30     

Additional paid-in capital

     5,652        60,715     

Accumulated deficit

     (55,724     (55,724  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (50,065     5,021     
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 14,354      $ 14,354      $     
  

 

 

   

 

 

   

 

 

 

 

 

 

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(1)   If the underwriters exercise in full their option to purchase additional shares, the amount of pro forma as adjusted additional paid-in capital, total stockholders’ equity (deficit) and total capitalization would increase by approximately $             million and we would have              shares of common stock issued and outstanding.

The shares of our common stock to be outstanding after this offering are based on 100,417,134 shares of our common stock outstanding as of June 30, 2011 and exclude:

 

 

19,868,147 shares issuable upon the exercise of stock options outstanding as of June 30, 2011, with a weighted average exercise price of $0.40 per share

 

 

1,280,379 shares issuable upon the exercise of warrants outstanding as of June 30, 2011, with a weighted average exercise price of $1.03 per share

 

 

             shares to be reserved for issuance under our 2011 Equity Incentive Plan and our 2011 Employee Stock Purchase Plan, each of which will become effective on the first day that our common stock is publicly traded and contains provisions that automatically increase its share reserve each year, as more fully described in “Executive compensation—Employee benefit plans”

 

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Dilution

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price of our common stock and the net tangible book value of our common stock after this offering. As of June 30, 2011, our pro forma net tangible book value was $             million, or $             per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of our outstanding shares of common stock, after giving effect to the reclassification of our preferred stock warrant liability to additional paid-in capital and the conversion of all outstanding shares of our preferred stock into shares of our common stock.

After giving effect to the sale by us of              shares of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and the estimated offering expenses payable by us and $9.3 million of the net proceeds from this offering to repay in full outstanding borrowings under our credit facility, our pro forma as adjusted net tangible book value as of June 30, 2011 would have been $             million, or $             per share. This represents an immediate increase in pro forma net tangible book value of $             per share to existing stockholders and an immediate dilution of $             per share to new investors purchasing shares at the initial public offering price. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

            $                

Pro forma net tangible book value per share as of June 30, 2011

   $                   

Increase in pro forma net tangible book value per share attributable to new investors

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to new investors

      $     
     

 

 

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $             would increase or decrease our pro forma as adjusted net tangible book value per share after this offering by $             per share and the dilution to new investors by $             per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. If the underwriters exercise in full their option to purchase              additional shares from us, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $             per share, representing an immediate increase to existing stockholders of $            , and immediate dilution to investors in this offering of $             per share.

 

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The following table summarizes, as of June 30, 2011, on the pro forma as adjusted basis described above, the difference between our existing stockholders and the purchasers of shares of common stock in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share paid to us, based on an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

      Shares purchased     Total consideration    

Average
price per

share

 
     Number    Percent     Amount      Percent    

 

 

Existing stockholders

               $                             $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100.0   $                      100.0  
  

 

  

 

 

   

 

 

    

 

 

   

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease, respectively, total consideration paid by new investors by $             million and increase or decrease the percent of total consideration paid to us by new investors by     %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The sale of              shares of common stock to be sold by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to              shares, or     % of the total shares outstanding, and will increase the number of shares held by investors participating in this offering to              shares, or     % of the total shares outstanding.

If the underwriters exercise in full their option to purchase                      additional shares from us, the following will occur:

 

 

the percentage of shares of common stock held by existing stockholders after the closing of this offering, and after giving effect to the sale by the selling stockholders of              shares in this offering, will be approximately     % of the total number of shares of our common stock outstanding after this offering

 

 

the number of shares held by new investors after the closing of this offering will be                    , or approximately    % of the total number of shares of our common stock outstanding after this offering

The shares of our common stock to be outstanding after this offering are based on 100,417,134 shares of our common stock outstanding as of June 30, 2011 and exclude:

 

 

19,868,147 shares issuable upon the exercise of stock options outstanding as of June 30, 2011, with a weighted average exercise price of $0.40 per share

 

 

1,280,379 shares issuable upon the exercise of warrants outstanding as of June 30, 2011, with a weighted average exercise price of $1.03 per share

 

 

             shares to be reserved for issuance under our 2011 Equity Incentive Plan and our 2011 Employee Stock Purchase Plan, each of which will become effective on the first day that our common stock is publicly traded and contains provisions that automatically increase its share reserve each year, as more fully described in “Executive compensation—Employee benefit plans”

 

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The above discussion and tables assume no exercise of stock options or warrants outstanding as of June 30, 2011. If all of these options and warrants were exercised, then:

 

 

there would be an additional $             per share of dilution to new investors

 

 

our existing stockholders, including the holders of these options and warrants, would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon the closing of this offering

 

 

our existing stockholders, including the holders of these options and warrants, would have paid     % of total consideration, at an average price per share of $            , and our new investors would have paid     % of total consideration

 

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Unaudited pro forma consolidated financial information

The following tables present our unaudited consolidated statement of operations for the year ended December 31, 2010 on a pro forma basis to give effect to (i) the acquisition of Integrated Voice Solutions, Inc., or IVS, which was completed on September 15, 2010, and the OptiVox product line of the White Stone Group, Inc., or OptiVox, which was completed on October 8, 2010 and (ii) the following changes to our capitalization that we expect upon closing of this offering: a) the reclassification of our preferred stock warrant liability to additional paid-in capital upon conversion of our preferred stock warrants to common stock warrants, b) the conversion of all outstanding shares of our preferred stock into shares of our common stock and c) the repayment in full of outstanding borrowings under our credit facility using proceeds from this offering as if all such transactions had occurred on January 1, 2010. In connection with the acquisitions, all of the acquired assets and assumed liabilities were revised to reflect their fair values on the date of acquisition, based upon our allocation of the overall purchase price to the underlying net assets acquired. The following tables also present our unaudited consolidated statement of operations for the six months ended June 30, 2011 on a pro forma basis to give effect to the changes in capitalization, as discussed above as if all such transactions had occurred on January 1, 2010.

The unaudited pro forma financial information is based on our historical financial statements and the historical financial statements of IVS and OptiVox, and certain adjustments which we believe to be reasonable, to give effect to these transactions, which are described in the accompanying notes.

The unaudited pro forma consolidated statement of operations for the year ended December 31, 2010 does not give effect to our acquisitions of ExperiaHealth, which was completed on November 3, 2010, and Wallace Wireless, Inc., which was completed on December 17, 2010, as their pre-acquisition results are not significant. The unaudited pro forma consolidated statements of operations are presented for informational purposes only and contain recurring adjustments that we believe to have a continuing impact. They do not purport to represent the results of our operations that would have been achieved had the acquisitions been completed as of the date indicated.

The unaudited pro forma consolidated statements of operations should be read in conjunction with:

 

 

the accompanying notes to the unaudited pro forma consolidated statements of operations

 

 

our unaudited consolidated financial statements for the six months ended June 30, 2011, and related notes, included elsewhere in this prospectus

 

 

our audited consolidated financial statements for the year ended December 31, 2010, and related notes, included elsewhere in this prospectus

 

 

the audited consolidated financial statements of IVS for the period from January 1, 2010 through September 15, 2010, and related notes, included elsewhere in this prospectus

 

 

the audited consolidated financial statements of OptiVox for the period from January 1, 2010 through October 7, 2010, and related notes, included elsewhere in this prospectus

 

 

the sections titled “Selected historical consolidated financial data” and “Management’s discussion and analysis of financial condition and results of operations,” included elsewhere in this prospectus

 

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The impact of the acquisitions of IVS and OptiVox is reflected in our consolidated balance sheet as of December 31, 2010. See the section titled “Capitalization” for additional information regarding the effects of the change in capitalization and the issuance and sale of shares of common stock in this offering on our cash and cash equivalents, borrowings, preferred stock warrant liability, convertible preferred stock and stockholders’ equity (deficit).

 

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Vocera Communications, Inc.

Unaudited pro forma consolidated statement of operations

for the year ended December 31, 2010

 

(in thousands, except per share data)    Vocera
historical
    IVS and OptiVox
adjustments (A)
    Other
adjustments
    Pro forma  

 

 

Revenue

        

Product

   $ 35,516      $      $      $ 35,516   

Service

     21,287        2,443               23,730   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     56,803        2,443               59,246   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

        

Product

     13,004                      13,004   

Service

     8,171        977               9,148   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     21,175        977               22,152   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     35,628        1,466               37,094   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Research and development

     6,698        302               7,000   

Sales and marketing

     20,953        543               21,496   

General and administrative

     6,723        1,500               8,223   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     34,374        2,345               36,719   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     1,254        (879            375   

Interest income

     33        7          40   

Interest expense

     (77            6 (B)      (71

Other income (expense), net

     (367            325 (C)      (42
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     843        (872     331        302   

Benefit (provision) for income taxes

     367        308 (D)      (116 )(D)      559   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 1,210      $ (564   $ 215      $ 861   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share

        

Basic

   $ 0.00      $ (0.04   $        $     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.00      $ (0.04   $        $     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     13,342                 (E)   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     17,080                 (E)   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

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Vocera Communications, Inc.

Unaudited pro forma consolidated statement of operations

for the six months ended June 30, 2011

 

(in thousands, except per share data)    Vocera
historical
    Adjustments     Pro forma  

 

 

Revenue

      

Product

   $ 23,561      $      $ 23,561   

Service

     13,835               13,835   
  

 

 

   

 

 

   

 

 

 

Total revenue

     37,396               37,396   
  

 

 

   

 

 

   

 

 

 

Cost of revenue

      

Product

     8,187               8,187   

Service

     6,199               6,199   
  

 

 

   

 

 

   

 

 

 

Total cost of revenue

     14,386               14,386   
  

 

 

   

 

 

   

 

 

 

Gross profit

     23,010               23,010   
  

 

 

   

 

 

   

 

 

 

Operating expenses

      

Research and development

     4,591               4,591   

Sales and marketing

     13,175               13,175   

General and administrative

     5,081               5,081   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     22,847               22,847   
  

 

 

   

 

 

   

 

 

 

Income from operations

     163               163   

Interest income

     8               8   

Interest expense

     (122     122 (B)        

Other income (expense), net

     (1,217     1,201 (C)      (16
  

 

 

   

 

 

   

 

 

 

Income (loss) before income

     (1,168     1,323        155   

Provision for income taxes

     (174     (463 )(D)      (637
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (1,342   $ 860      $ (482
  

 

 

   

 

 

   

 

 

 

Net loss per share

      

Basic

   $ (0.07   $                   $                
  

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.07   $        $     
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

      

Basic

     18,989          (E)   
  

 

 

   

 

 

   

 

 

 

Diluted

     18,989          (E)   
  

 

 

   

 

 

   

 

 

 

 

 

 

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Notes to unaudited pro forma consolidated statement of operations

IVS and OptiVox adjustments

 

(A)   The table below includes the historical operating results of IVS from January 1, 2010 to September 15, 2010, and OptiVox from January 1, 2010 to October 7, 2010. The results of IVS and OptiVox’s operations subsequent to the acquisition dates of September 15, 2010 and October 7, 2010, respectively, have been included in our audited consolidated historical financial statements included elsewhere in this prospectus.

 

(in thousands)   IVS
historical
    IVS
purchase
accounting
and other
    Total IVS
adjustments
    OptiVox
historical
   

OptiVox

purchase
accounting
and other

    Total
OptiVox
adjustments
    Total
IVS and
OptiVox
adjustments
 

 

 

Revenue

             

Product

  $      $      $      $      $      $      $   

Service

    1,436               1,436        1,007               1,007        2,443   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    1,436               1,436        1,007               1,007        2,443   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

             

Product

                                                

Service

    426        47 (A.1)      473        471        33 (A.1)      504        977   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    426        47        473        471        33        504        977   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,010        (47     963        536        (33     503        1,466   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

             

Research and development

    302               302                             302   

Sales and marketing

    290        107 (A.1)      397        120        26 (A.1)      146        543   

General and administrative

    763        (424 )(A.2)      339        1,375        (214 )(A.2)      1,161        1,500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    1,355        (317     1,038        1,495        (188     1,307        2,345   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (345     270        (75     (959     155        (804     (879

Interest income

    7               7                             7   

Interest expense

                         (132     132 (A.3)               

Other income (expense), net

                        

  
   

  
             
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  $ (338   $ 270      $ (68   $ (1,091   $ 287      $ (804   $ (872
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

  (A.1)   Reflects amortization expense for the intangible assets we recognized in connection with the IVS and OptiVox acquisitions. Capitalized customer relationships are amortized over eleven to twelve years, capitalized trademarks are amortized over seven years, and capitalized acquired developed technology is amortized over four to seven years. The incremental amortization expense from the pro forma presentation results in an additional $0.2 million in amortization expense for the year ended December 31, 2010.

 

  (A.2)   Reflects the elimination of acquisition related costs of $0.4 million and $0.2 million we incurred in connection with the acquisitions of IVS and OptiVox, respectively.

 

  (A.3)   Reflects the elimination of interest expense for pre-acquisition liabilities not acquired.

 

(B)   Reflects the elimination of interest expense on our outstanding borrowings under our credit facility that are expected to be repaid in full using proceeds from this offering.

 

(C)   Reflects an adjustment to remove the gains and losses resulting from remeasurements of the preferred stock warrant liability as the warrants will be reclassified to additional paid-in capital and no longer remeasured following this offering.

 

(D)   Reflects the income tax impact of the pro forma adjustments calculated at the statutory rate.

 

(E)   Weighted average common shares outstanding have been adjusted to:

 

  Ÿ  

reflect the assumed conversion of the convertible preferred stock into 77,393,821 and 77,394,629 weighted average shares of common stock for the year ended December 31, 2010 and the six months ended June 30, 2011, respectively, immediately upon the closing of an initial public offering of Vocera, and

 

  Ÿ  

reflect an increase of              shares to the outstanding shares by the amount of shares required to be sold, calculated at the midpoint of the range set forth on the cover of this prospectus, to repay in full our outstanding borrowings under our credit facility, which were $9.3 million as of June 30, 2011.

 

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Selected consolidated financial data

You should read the selected consolidated financial data below in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

The following table presents selected consolidated financial data. We derived the statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the balance sheet data as of December 31, 2009 and 2010 from our audited financial statements included elsewhere in this prospectus. We derived the statement of operations data for the years ended December 31, 2006 and 2007 and the balance sheet data as of December 31, 2006, 2007 and 2008 from our audited financial statements that do not appear in this prospectus. We derived the statement of operations data for the six months ended June 30, 2010 and 2011 and the balance sheet data as of June 30, 2011 from our unaudited interim financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary to state fairly the financial information set forth in those financial statements. Our historical results are not necessarily indicative of the results to be expected in the future, and our interim results should not necessarily be considered indicative of results we expect for the full year.

We derived the pro forma share and per share data for the year ended December 31, 2010 and the six months ended June 30, 2011 from the unaudited pro forma net income (loss) per share information in Note 3 of our "Notes to consolidated financial statements" in our audited financial statements included elsewhere in this prospectus. The pro forma share and per share data give effect to (i) the reclassification of our preferred stock warrant liability to additional paid-in capital upon conversion of our preferred stock warrants to common stock warrants, (ii) the conversion of all outstanding shares of our convertible preferred stock into shares of our common stock and (iii) the repayment in full of outstanding borrowings under our credit facility using proceeds from this offering as if all such transactions had occurred on January 1, 2010.

 

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     Years ended
December 31,
    Six months ended
June 30,
 
(in thousands, except per share data)   2006     2007     2008     2009     2010     2010     2011  

 

 

Consolidated statements of operations data:

             

Revenue

             

Product

  $ 19,818      $ 27,332      $ 28,352      $ 25,985      $ 35,516      $ 16,019      $ 23,561   

Service

    4,318        7,125        11,474        15,154        21,287        9,616        13,835   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    24,136        34,457        39,826        41,139        56,803        25,635        37,396   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

             

Product

    8,264        12,587        15,542        11,546        13,004        5,873        8,187   

Service

    2,946        3,735        4,225        4,320        8,171        3,220        6,199   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    11,210        16,322        19,767        15,866        21,175        9,093        14,386   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    12,926        18,135        20,059        25,273        35,628        16,542        23,010   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

             

Research and development

    5,844        6,613        7,353        5,992        6,698        3,272        4,591   

Sales and marketing

    11,162        12,226        15,394        16,468        20,953        8,772        13,175   

General and administrative

    2,248        3,010        3,456        3,489        6,723        1,989        5,081   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    19,254        21,849        26,203        25,949        34,374        14,033        22,847   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (6,328     (3,714     (6,144     (676     1,254        2,509        163   

Interest income

    145        468        182        52        33        19        8   

Interest expense

    (341     (423     (143     (141     (77     (42     (122

Other income (expense), net

    (301     (33     (208     (227     (367     (251     (1,217
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (6,825     (3,702     (6,313     (992     843        2,235        (1,168

Benefit (provision) for income taxes

                                367        (21     (174
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (6,825   $ (3,702   $ (6,313   $ (992   $ 1,210      $ 2,214      $ (1,342
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share

             

Basic and diluted

  $ (0.83   $ (0.34   $ (0.52   $ (0.08   $ 0.00      $ 0.00      $ (0.07
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

             

Basic

    8,270        10,773        12,085        12,234        13,342        12,981        18,989   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    8,270        10,773        12,085        12,234        17,080        16,052        18,989   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share (unaudited)

             

Basic

          $          $     
         

 

 

     

 

 

 

Diluted

          $          $     
         

 

 

     

 

 

 

Pro forma weighted average shares outstanding (unaudited)

             

Basic

             
         

 

 

     

 

 

 

Diluted

             
         

 

 

     

 

 

 

Other financial data:

             

Adjusted EBITDA(1)

  $ (5,859   $ (2,688   $ (4,800   $ 578      $ 3,821      $ 3,073      $ 1,773   

 

 
(1)   Please see “Adjusted EBITDA” below for more information and for a reconciliation of net income (loss) to adjusted EBITDA.

 

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     December 31,     June 30,  
(in thousands)   2006     2007     2008     2009     2010     2011  

 

 

Consolidated balance sheet data:

 

Cash and cash equivalents

  $ 8,275      $ 11,101      $ 6,193      $ 8,931      $ 8,642      $ 11,835   

Total assets

    17,251        21,447        19,385        19,801        33,933        45,318   

Total borrowings

    5,659        2,758        1,661        1,777        5,405        9,333   

Convertible preferred stock warrant liability

    285        305        567        802        1,127        2,073   

Convertible preferred stock

    46,692        52,758        52,758        52,758        52,758        53,013   

Total stockholders’ deficit

    (44,123     (47,101     (52,902     (53,372     (50,364     (50,065

 

 

Adjusted EBITDA

To provide investors with additional information about our financial results, we disclose within this prospectus adjusted EBITDA, a non-GAAP financial measure. We present adjusted EBITDA because it is used by our board of directors and management to evaluate our operating performance, and we consider it an important supplemental measure of our performance. In addition, adjusted EBITDA is a financial measure used by the compensation committee of the board of directors to pay bonuses under our executive bonus plan. For 2010, the compensation committee made adjustments in addition to those reflected in the table below.

Our management uses adjusted EBITDA:

 

 

as a measure of operating performance to assist in comparing performance from period to period on a consistent basis

 

 

as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations

Adjusted EBITDA is not in accordance with, or an alternative to, measures prepared in accordance with GAAP. In addition, this non-GAAP measure is not based on any comprehensive set of accounting rules or principles. As a non-GAAP measure, adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. In particular:

 

 

Adjusted EBITDA does not reflect interest income we earn on cash and cash equivalents, interest expense, or the cash requirements necessary to service interest or principal payments, on our debt.

 

 

Adjusted EBITDA does not reflect the amounts we paid in taxes or other components of our tax provision.

 

 

Adjusted EBITDA does not reflect all of our cash expenditures, or future requirements for capital expenditures.

 

 

Adjusted EBITDA does not include amortization expense from acquired intangible assets.

 

 

Adjusted EBITDA does not include the impact of stock-based compensation.

 

 

Others may calculate adjusted EBITDA differently than we do and these calculations may not be comparable to our adjusted EBITDA metric.

 

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Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net income (loss) and our financial results presented in accordance with GAAP.

The table below presents a reconciliation of net income (loss) to adjusted EBITDA for each of the periods indicated:

 

     Years ended
December 31,
    Six months
ended June 30,
 
(in thousands)   2006     2007     2008     2009     2010     2010     2011  

 

 

Net income (loss)

  $ (6,825   $ (3,702   $ (6,313   $ (992   $ 1,210      $ 2,214      $ (1,342

Interest income

    (145     (468     (182     (52     (33     (19     (8

Interest expense

    341        423        143        141        77        42        122   

Provision (benefit) for income taxes

                                (367     21        174   

Depreciation and amortization

    615        648        809        754        732        368        309   

Amortization of purchased intangibles

                                223               502   

Stock-based compensation

    71        391        481        492        508        238        378   

Acquisition related costs(1)

                                1,047                 

Change in fair value of warrant and option liabilities

    84        20        262        235        424        209        1,638   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (5,859   $ (2,688   $ (4,800   $ 578      $ 3,821      $ 3,073      $ 1,773   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(1)   Acquisition related costs consist of third-party costs we incurred in connection with acquisitions we completed in 2010.

 

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Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements wherever they appear in this prospectus. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under the section titled “Risk factors” and elsewhere in this prospectus.

Business overview

We are a provider of mobile communication solutions focused on addressing critical communication challenges facing hospitals today. We help our customers improve patient safety and satisfaction, and increase hospital efficiency and productivity through our Voice Communication solution and new Messaging and Care Transition solutions. Our Voice Communication solution, which includes a lightweight, wearable, voice-controlled communication badge and a software platform, enables users to connect instantly with other hospital staff simply by saying the name, function or group name of the desired recipient. Our Messaging solution securely delivers text messages and alerts directly to and from smartphones, replacing legacy pagers. Our Care Transition solution is a hosted voice and text based software application that captures, manages and monitors patient information when responsibility for the patient is transferred or “handed-off” from one caregiver to another.

At the core of our Voice Communication solution is a patent-protected software platform that we introduced in 2002. We have significantly enhanced and added features and functionality to this solution through ongoing development based on frequent interactions with our customers. Our software platform is built upon a scalable architecture and recognizes more than 100 voice commands. Users can instantly communicate with others using the Vocera communication badge, the Vocera Wi-Fi smartphone or through Vocera client applications available for BlackBerry, iPhone and Android smartphones and other mobile devices. Our Voice Communication solution can also be integrated with nurse call and other clinical systems to immediately and efficiently alert hospital workers to patient needs. We have shipped over 300,000 communication badges to our customers.

Through March 2009, we employed a channel distribution strategy, utilizing value added resellers to sell our products in the United States and internationally. The resellers sold our products and maintenance services to end users and controlled the price at which the products and maintenance were sold. They also sold end users their own professional services related to the deployment of our products. In April 2009, we began transitioning to a direct sales model in the United States and United Kingdom, and this process was substantially completed by mid-2009. As a result of this transition, we now primarily sell products and maintenance services directly to end users in these markets at a higher price than the price at which we had previously sold to resellers. In addition, we began to substantially increase the professional services that we offer.

 

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We outsource the manufacturing of our products. Our outsourced manufacturing model allows us to scale our business without the significant capital investment and on-going expenses required to establish and maintain manufacturing operations. We work closely with our contract manufacturer, SMTC Corporation, and key suppliers to manage the procurement, quality and cost of components. We seek to maintain an optimal level of finished goods inventory to meet our forecasted sales and unanticipated shifts in sales volume and mix.

To date, substantially all of our revenue has been derived from sales of our Voice Communication solution, including product maintenance and related services. Revenue grew 38.1% from $41.1 million in 2009 to $56.8 million in 2010. Revenue grew 45.9% from $25.6 million in the six months ended June 30, 2010 to $37.4 million in the six months ended June 30, 2011. We generated net income for 2010 of $1.2 million, which included $1.0 million of expenses associated with the completion of four acquisitions and $1.1 million of expenses relating to non-recurring post-acquisition consulting fees to former employees of the acquired businesses. For the six months ended June 30, 2011, we recorded a net loss of $1.3 million compared with net income of $2.2 million for the six months ended June 30, 2010.

Our diverse customer base ranges from large hospital systems to small local hospitals, as well as other healthcare facilities and customers in non-healthcare markets. We have very low customer revenue concentration. For 2010, our largest customer represented only 2.1% of revenue. Through June 30, 2011, 37 healthcare systems and 23 independent hospitals have each spent over $1.0 million on our products and services since their initial deployment. While we have international customers in other English speaking countries such as Canada, the United Kingdom and Australia, most of our customers are located in the United States. International customers represented 9.7% and 8.4% of our revenue in 2010 and for the six months ended June 30, 2011, respectively. We are developing plans to expand our presence in other English speaking markets and enter non-English speaking markets.

Acquisitions

During the last four months of 2010, we completed four acquisitions, for total purchase consideration of $10.0 million. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the respective acquisition date. We recorded $4.4 million as identifiable intangible assets and $5.6 million as goodwill. We also incurred $1.0 million in acquisition related expenses, which was recorded in general and administrative expense. These acquisitions did not contribute significantly to our revenue in 2010.

The acquisitions of Integrated Voice Systems and of the OptiVox product line enhanced our product offerings by incorporating solutions designed to streamline patient hand-offs, enabling caregivers to capture and transfer important information in a secure, manageable, web-enabled manner. The acquisition of Wallace Wireless provided us with smartphone messaging solutions enabling the secure delivery of text messages, alerts and other information directly to and from smartphones, complementing our Voice Communication solution. The acquisition of DS Consulting Associates, d/b/a ExperiaHealth, enabled us to provide patient experience consulting services to help hospitals improve patient experience and safety.

Components of operating results

Revenue.    We generate revenue from the sale of products and services. As discussed further in the section titled “Critical accounting policies and estimates—Revenue recognition and deferred

 

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revenue” below, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable.

Revenue is comprised of the following:

 

 

Product.    Our solutions include both hardware and software. We refer to hardware revenue as device revenue, which includes revenue from sales of our communication badges, badge accessories, including batteries, battery chargers, lanyards, clips and other ancillary badge components, and our Vocera smartphone. Software revenue is derived primarily from the sale of perpetual licenses to our Voice Communication solution. We derive additional software revenue from the sale of term licenses which can be renewed on a subscription basis. Product revenue is generally recognized upon shipment of hardware and perpetual licenses and, in the case of term licenses, ratably over the applicable term.

 

 

Service.    We receive service revenue from sales of software maintenance, extended warranties and professional services. Software maintenance is typically invoiced annually in advance, recorded as deferred revenue, and recognized as revenue ratably over the service period. Our professional services revenue is primarily based on time and materials, and recognized as the service are provided. Extended warranties are invoiced in advance, recorded as deferred revenue, and recognized ratably over the extended warranty period.

Cost of revenue.    Cost of revenue is comprised of the following:

 

 

Cost of product.    Cost of product is comprised primarily of materials costs, software license costs, warranty, and manufacturing overhead for test engineering, material requirements planning and our shipping and receiving functions. Cost of product also includes facility costs and write-offs for excess and obsolete inventory, as well as depreciation and amortization expenses. As we introduce new products, we expect material costs will increase as a percent of revenue for a period of time.

 

 

Cost of service.    Cost of service is comprised primarily of employee wages, benefits and related personnel expenses of our technical support team, our professional consulting personnel and our training teams. Cost of service also includes facility and information technology costs. We expect our cost of service will increase as we continue to invest in support services to meet the needs of our customer base.

Operating expenses.    Operating expenses are comprised of the following:

 

 

Research and development.    Research and development expenses consist primarily of employee wages, benefits and related personnel expenses, hardware materials, and consultant fees and expenses related to the design, development, testing and enhancements of our solutions. We intend to continue to invest in improving the functionality of our solutions and the development of new solutions. As a result, we expect research and development expense to increase for the foreseeable future.

 

 

Sales and marketing.    Sales and marketing expenses consist primarily of employee wages, benefits and related personnel expenses, as well as trade shows, marketing and public relations programs and advertising. Sales commissions are earned when an order is received from a customer, and as a result, in some cases these commissions are expensed in an earlier period

 

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than the period in which the related revenue is recognized. Historically, our bookings have tended to peak in the fourth quarter of each year driving higher sales commissions, and to be lowest in the first quarter. We intend to continue to expand our direct sales force for the foreseeable future and, accordingly, expect sales and marketing expenses to increase.

 

 

General and administrative.    General and administrative expenses consist primarily of employee wages, benefits and related personnel expenses, consulting, audit fees, legal fees, and other general corporate expenses. We expect general and administrative expense to increase for the foreseeable future due to the significant costs we expect to incur as we continue to build and maintain the infrastructure necessary to comply with the regulatory requirements of being a public company and as we add personnel to support our growth.

Interest income, interest expense, and other income (expense), net.

 

 

Interest income.    Interest income consists primarily of interest income earned on our cash and cash equivalent balances. Our interest income will vary each reporting period depending on our average cash and cash equivalent balances during the period and market interest rates.

 

 

Interest expense.    Interest expense includes interest expense related to debt and financing obligations resulting from our credit facility and security agreement. We expect interest expense to fluctuate in the future with changes in our borrowings.

 

 

Other income (expense), net.    Other income (expense), net consists primarily of the change in the fair value of our convertible preferred stock warrants. Our outstanding convertible preferred stock warrants are classified as liabilities and, as such, are marked-to-market at each balance sheet date with the corresponding gain or loss from the adjustment recorded as other income (expense), net. We will continue to record adjustments to the fair value of the warrants until they are exercised, converted into warrants to purchase common stock or expire, at which time the warrants will no longer be remeasured at each balance sheet date. Upon the closing of this offering, these warrants will convert into warrants to purchase common stock. Other income (expense), net also includes any foreign exchange gains and losses.

Provision for income taxes.    We are subject to income taxes in the countries where we sell our solutions. Historically, we have primarily been subject to taxation in the United States because we have sold the majority of our solutions to customers in the United States. We anticipate that in the future as we expand our sale of solutions to customers outside the United States, we will become subject to taxation based on the foreign statutory rates in the countries where these sales took place and our effective tax rate could fluctuate accordingly. Currently, each of our international subsidiaries is operating under cost plus agreements where the U.S. parent company reimburses the international subsidiary for its costs plus a profit.

Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Changes in valuation allowances are reflected as component of provision for income taxes.

 

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Results of operations

The following table is a summary of our consolidated statements of operations. We derived the data for 2008, 2009 and 2010 from our audited consolidated financial statements which are included elsewhere in this prospectus. We have derived the data for the six months ended June 30, 2010 and 2011 from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary to state fairly the financial information set forth in those statements.

 

     Years ended
December 31,
    Six months ended
June 30,
 
(in thousands)   2008     2009     2010     2010     2011  

 

 

Consolidated statements of operations data:

         

Revenue

         

Product

  $ 28,352      $ 25,985      $ 35,516      $ 16,019      $ 23,561   

Service

    11,474        15,154        21,287        9,616        13,835   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    39,826        41,139        56,803        25,635        37,396   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

         

Product

    15,542        11,546        13,004        5,873        8,187   

Service

    4,225        4,320        8,171        3,220        6,199   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    19,767        15,866        21,175        9,093        14,386   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    20,059        25,273        35,628        16,542        23,010   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

         

Research and development

    7,353        5,992        6,698        3,272        4,591   

Sales and marketing

    15,394        16,468        20,953        8,772        13,175   

General and administrative

    3,456        3,489        6,723        1,989        5,081   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    26,203        25,949        34,374        14,033        22,847   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (6,144     (676     1,254        2,509        163   

Interest income

    182        52        33        19        8   

Interest expense

    (143     (141     (77     (42     (122

Other income (expense), net

    (208     (227     (367     (251     (1,217
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (6,313     (992     843        2,235        (1,168

Benefit (provision) for income taxes

                  367        (21     (174
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (6,313   $ (992   $ 1,210      $ 2,214      $ (1,342
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Six months ended June 30, 2010 compared to June 30, 2011

Revenue:

 

      Six months ended June 30,         
     2010     2011     Change  
(in thousands)    Amount      % Revenue     Amount      % Revenue     Amount      %  

 

 

Revenue

               

Product

   $ 16,019         62.5   $ 23,561         63.0   $ 7,542         47.1

Service

     9,616         37.5        13,835         37.0        4,219         43.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenue

   $ 25,635         100.0   $ 37,396         100.0   $ 11,761         45.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

Total revenue increased $11.8 million, or 45.9%, from the six months ended June 30, 2010 to the six months ended June 30, 2011.

Product revenue increased $7.5 million, or 47.1%. Device revenue, which consists primarily of badge sales, increased $5.0 million, or 40.6%, and software revenue increased $2.5 million, or 68.6%. The increase in revenue was driven by an increase in unit sales, as the list prices for our products did not change substantially in the six months ended June 30, 2011. The increase in device revenue was a result of customers replacing badges, customers ordering new badges as they expanded deployments within their facilities to new departments and users, and new customers making initial purchases. During the six months ended June 30, 2011, our new Care Transition and Messaging solutions accounted for $1.3 million of the increase in software revenue. The remaining $1.2 million increase in software revenue was from an increase in the sale of licenses of our Voice Communication solution to existing and new customers. Over time, we expect device revenue to grow at a rate higher than software revenue as our installed base purchases badges both for replacement and upgrade purposes and for small incremental deployments that do not require additional licenses.

Service revenue increased $4.2 million, or 43.9%. Software maintenance and support revenue increased $1.8 million, or 21.9%, primarily as a result of a larger customer base. Professional services revenue increased $2.3 million, or 171.0%. Prior to our transition to a direct sales strategy, our reseller channel primarily provided the professional services associated with new deployments and expansions. We substantially expanded the capacity of our professional services organization from 15 professionals at June 30, 2010 to 37 at June 30, 2011. A portion of the professional services revenue recorded in 2011 was due to the completion of services that we were not able to complete in 2010 due to the limited size of our staff. As such, we do not expect our professional services revenue to continue to grow at the same rate in the future as it did in the 2011 period. Approximately $0.4 million of the growth in professional service revenue was attributable to acquisitions completed in the second half of 2010.

 

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Cost of revenue:

 

      Six  months
ended June 30,
        
     2010     2011     Change  
(in thousands)    Amount     Amount     Amount     %  

 

 

Cost of revenue

        

Product

   $ 5,873      $ 8,187      $ 2,314        39.4

Service

     3,220        6,199        2,979        92.5   
  

 

 

   

 

 

   

 

 

   

Total cost of revenue

   $ 9,093      $ 14,386      $ 5,293        58.2   
  

 

 

   

 

 

   

 

 

   

Gross margin

        

Product

     63.3     65.3     2.0     

Service

     66.5        55.2        (11.3  

Total gross margin

     64.5        61.5        (3.0  

 

 

Cost of product revenue increased $2.3 million, or 39.4%, from the six months ended June 30, 2010 to the six months ended June 30, 2011 due to higher product revenue. Product gross margin improved due to lower per unit material and manufacturing costs, largely due to increased unit volume.

Cost of service revenue increased $3.0 million, or 92.5%, from the six months ended June 30, 2010 to the six months ended June 30, 2011. This increase was primarily due to an increase in our professional services personnel to support the direct delivery of services that had previously been provided largely by our resellers, and the related costs associated with providing these services with our own personnel. Headcount in our professional services organization increased from 15 employees at June 30, 2010 to 37 employees at June 30, 2011.

Operating expenses:

 

      Six months ended June 30,         
     2010     2011     Change  
(in thousands)    Amount      % Revenue     Amount      % Revenue     Amount      %  

 

 

Operating expenses

               

Research and development

   $ 3,272         12.8   $ 4,591         12.3   $ 1,319         40.3

Sales and marketing

     8,772         34.2        13,175         35.2        4,403         50.2   

General and administrative

     1,989         7.8        5,081         13.6        3,092         155.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total operating expenses

   $ 14,033         54.7   $ 22,847         61.1   $ 8,814         62.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

Research and development expense.    Research and development expense increased $1.3 million, or 40.3%, from the six months ended June 30, 2010 to the six months ended June 30, 2011. This increase was primarily due to employee wages and other personnel costs and facility and other expenses associated with the 2010 acquisitions of $0.8 million, a $0.3 million increase in other employee wages and other personnel costs, and a $0.2 million increase in outside service costs. Headcount in our research and development organization increased from 26 employees at June 30, 2010 to 45 employees at June 30, 2011, of which 14 employees were the result of the 2010 acquisitions.

Sales and marketing expense.    Sales and marketing expense increased $4.4 million, or 50.2%, from the six months ended June 30, 2010 to the six months ended June 30, 2011. This increase

 

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was primarily due to a $2.4 million increase in employee wages and other personnel costs to support corporate marketing efforts and a $0.4 million increase in commission costs. These expenses also increased by $1.5 million as a result of employee wages and other personnel costs and facility and other expenses associated with the 2010 acquisitions. Headcount in our sales and marketing organization increased from 63 employees at June 30, 2010 to 90 employees at June 30, 2011, of which 12 employees were the result of the 2010 acquisitions.

General and administrative expense.    General and administrative expense increased $3.1 million, or 155.5%, from the six months ended June 30, 2010 to the six months ended June 30, 2011. This increase was primarily due to a $0.9 million increase in employee wages and other personnel costs, a $0.4 million increase in the change in fair value of the options recorded as a liability, a $1.0 million increase in outside services costs as we prepared to become a public company and additional employee and other personnel costs and facility and other expenses of $0.7 million as a result of the 2010 acquisitions.

 

      Six months ended June 30,         
             2010             2011    

Change

 

 

 

Interest income

   $ 19      $ 8      $ (11

Interest expense

     (42     (122     (80

Other income (expense), net

     (251     (1,217     (966

 

 

Interest income.    Interest income was essentially flat for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.

Interest expense.    Interest expense was essentially flat for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.

Other income (expense), net.    The $1.0 million increase in other expense from the six months ended June 30, 2010 to the six months ended June 30, 2011 was due to the change in fair market value of our preferred stock warrants.

Years ended December 31, 2009 compared to December 31, 2010

Revenue:

 

      Years ended December 31,         
     2009     2010     Change  
(in thousands)    Amount     % Revenue     Amount     % Revenue     Amount      %  

 

 

Revenue

             

Product

   $ 25,985        63.2   $ 35,516        62.5   $ 9,531         36.7

Service

     15,154        36.8        21,287        37.5        6,133         40.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Total revenue

   $ 41,139        100.0   $ 56,803        100.0   $ 15,664         38.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

Total revenue increased $15.7 million, or 38.1%, from 2009 to 2010.

Product revenue increased $9.5 million, or 36.7%, from 2009 to 2010. Device revenue increased $6.5 million, or 32.2%, and software revenue increased $3.0 million, or 52.3%. The increase in revenue was primarily driven by the transition to a direct sales model from resellers in 2009. We believe our direct sales model is more effective than the reseller strategy we employed prior to our transition in 2009. As a result of this transition, we generally now sell our solutions directly to end users at higher prices than we sold to resellers. In addition, we believe that revenue in 2009 was initially adversely affected by this transition.

 

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Service revenue increased $6.1 million, or 40.5%, from 2009 to 2010. Maintenance and support revenue increased $3.7 million, or 26.8%. The increase was primarily driven by a larger installed customer base, and was also affected by the transition to the direct sales model as we began to sell maintenance and support services directly to end users at a higher price than we had previously sold to resellers. Professional services revenue increased $2.4 million, or 174.5%, due to our offering the professional services associated with new and expanded deployments of our Voice Communication solution that had primarily been provided by our resellers. While professional services revenue grew at a rate higher than our overall revenue growth rate, we were constricted in our ability to provide the requested levels of professional services in 2010 as the expansion of our professional services staff was underway throughout 2010 and into 2011.

Cost of revenue:

 

      Years ended
December 31,
        
     2009     2010     Change  
(in thousands)    Amount     Amount     Amount     %  

 

 

Cost of revenue

        

Product

   $ 11,546      $ 13,004      $ 1,458        12.6

Service

     4,320        8,171        3,851        89.1   
  

 

 

   

 

 

   

 

 

   

Total cost of revenue

   $ 15,866      $ 21,175      $ 5,309        33.5   
  

 

 

   

 

 

   

 

 

   

Gross margin

        

Product

     55.6     63.4     7.8     

Service

     71.5        61.6        (9.9  

Total gross margin

     61.4        62.7        1.3     

 

 

Cost of product revenue increased $1.5 million, or 12.6%, from 2009 to 2010 due to higher product revenue. Product gross margin improved as a result of lower material and manufacturing costs and higher average prices due to the transition to direct sales.

Cost of service revenue increased $3.9 million, or 89.1%, from 2009 to 2010. This increase was primarily due to an increase in the size of our professional services organization to support the direct delivery of services that had previously been provided largely by our resellers, and to related costs associated with providing these services with our own personnel. Headcount in our professional services organization increased from 7 employees at December 31, 2009 to 27 employees at December 31, 2010.

Operating expenses:

 

      Years ended December 31,         
     2009     2010     Change  
(in thousands)    Amount      % Revenue     Amount      % Revenue     Amount      %  

 

 

Operating expenses

               

Research and development

   $ 5,992         14.6   $ 6,698         11.8   $ 706         11.8

Sales and marketing

     16,468         40.0        20,953         36.9        4,485         27.2   

General and administrative

     3,489         8.5        6,723         11.8        3,234         92.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total operating expenses

   $ 25,949         63.1   $ 34,374         60.5   $ 8,425         32.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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Research and development expense.    Research and development expense increased $0.7 million, or 11.8%, from 2009 to 2010. This increase was due to a $0.7 million increase in employee wages and other personnel costs primarily associated with employees retained from our 2010 acquisitions, and a $0.3 million increase in consultant and other outside service costs, offset by a $0.3 million decrease in facility and information technology expenses.

Sales and marketing expense.    Sales and marketing expense increased $4.5 million, or 27.2%, from 2009 to 2010. The change from an indirect to direct sales strategy in 2009 required the hiring of additional personnel in our sales and marketing departments. As of December 31, 2009 and 2010, the headcounts in these functional areas were 57 and 84, respectively. The $4.5 million increase was primarily due to a $2.4 million increase in employee wages and commission costs, a $1.0 million increase in outside service costs, a $0.4 million increase in office and equipment costs, a $0.4 million increase in recruiting costs and a $0.2 million increase in travel expenses.

General and administrative expense.    General and administrative expense increased $3.2 million, or 92.7%, from 2009 to 2010. This increase was primarily due to a $1.3 million increase in outside service costs, $1.0 million in acquisition related expenses, a $0.6 million increase in employee wages and other personnel costs and a $0.3 million increase in office and equipment costs.

 

      Years ended December 31,         
             2009             2010    

Change

 

 

 

Interest income

   $ 52      $ 33      $ (19

Interest expense

     (141     (77     64   

Other income (expense), net

     (227     (367     (140

 

 

Interest income.    Interest income was less than $0.1 million in both 2009 and 2010. Interest income declined slightly from 2009 to 2010 as a result of our lower cash balances.

Interest expense.    Interest expense was less than $0.2 million in both 2009 and 2010.

Other income (expense), net.    The $0.1 million increase in other expense from 2009 to 2010 was primarily due to the change in fair market value of the preferred stock warrants.

Years ended December 31, 2008 compared to December 31, 2009

Revenue:

 

      Years ended December 31,                
     2008     2009     Change  
(in thousands)    Amount     % Revenue     Amount     % Revenue     Amount     %  

 

 

Revenue

            

Product

   $ 28,352        71.2   $ 25,985        63.2   $ (2,367     (8.3 )% 

Service

     11,474        28.8        15,154        36.8        3,680        32.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total revenue

   $ 39,826        100.0   $ 41,139        100.0   $ 1,313        3.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

Total revenue increased $1.3 million, or 3.3%, from 2008 to 2009.

Product revenue decreased $2.4 million, or 8.3%, from 2008 to 2009. Software revenue decreased $2.4 million, or 29.7%, primarily due to our transition to a direct sales model beginning in April 2009 which required us to rebuild our pipeline of sales opportunities. Device revenue remained unchanged as customers replaced badges and ordered new badges as they expanded deployments within their facilities.

 

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Service revenue increased $3.7 million, or 32.1%, from 2008 to 2009. This increase was primarily due to a $3.6 million increase in software maintenance and support revenue as a result of a larger customer base.

Cost of revenue:

 

      Years ended December 31,                
                   2008                   2009     Change  
(in thousands)    Amount     Amount     Amount     %  

 

 

Cost of revenue

        

Product

   $ 15,542      $ 11,546      $ (3,996     (25.7 )% 

Service

     4,225        4,320        95        2.2   
  

 

 

   

 

 

   

 

 

   

Total cost of revenue

   $ 19,767      $ 15,866      $ (3,901     (19.7
  

 

 

   

 

 

   

 

 

   

Gross margin

        

Product

     45.2     55.6     10.4     

Service

     63.2        71.5        8.3     

Total gross margin

     50.4        61.4        11.0     

 

 

Cost of product revenue decreased $4.0 million, or 25.7%, from 2008 to 2009 due to the decrease in product revenue and lower manufacturing costs. Product gross margin improved due to our contract manufacturer shifting production from a facility in the San Francisco Bay Area to Mexico, and as a result of lower material costs.

Cost of services increased $0.1 million, or 2.2%, from 2008 to 2009. This increase was due to a slight increase in headcount to support the 32.1% increase in service revenue.

Operating expenses:

 

      Years ended December 31,                
     2008     2009     Change  
(in thousands)    Amount     % Revenue     Amount     % Revenue     Amount     %  

 

 

Operating expenses

            

Research and development

   $ 7,353        18.5   $ 5,992        14.6   $ (1,361     (18.5 )% 

Sales and marketing

     15,394        38.7        16,468        40.0        1,074        7.0   

General and administrative

     3,456        8.7        3,489        8.5        33        1.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total operating expenses

   $ 26,203        65.8   $ 25,949        63.1   $ (254     (1.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

Research and development expense.    Research and development expense decreased $1.4 million, or 18.5%, from 2008 to 2009. This decrease was primarily due to a $0.7 million decrease in employee wages and other personnel costs primarily as a result of lower headcount, a $0.2 million decrease in consultant and other outside service costs, a $0.2 million decrease in facility and information technology expenses and a $0.2 million decrease in outside service expenses.

Sales and marketing expense.    Sales and marketing expense increased $1.1 million, or 7.0%, from 2008 to 2009. The transition to direct sales from resellers in 2009 required the hiring of additional sales personnel. The increase in sales and marketing expense was primarily due to a

 

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$1.6 million increase in employee wages and other personnel costs due to higher headcount, a $0.2 million increase in facility and information technology expenses, offset by a $0.2 million decrease in outside service costs, a $0.2 million decrease in travel expenses, a $0.3 million decrease in office and equipment costs and a $0.2 million decrease in market development costs.

General and administrative expense.    General and administrative expense increased less than $0.1 million, or 1.0%, from 2008 to 2009. This increase was primarily due to a $0.4 million increase in outside service expenses offset by a $0.2 million decrease in employee wages and other personnel costs and a $0.1 million decrease in facility and information technology expenses.

 

      Years ended December 31,         
(in thousands)                  2008                   2009    

Change

 

 

 

Interest income

   $ 182      $ 52      $ (130

Interest expense

     (143     (141     2   

Other income (expense), net

     (208     (227     (19

 

 

Interest income.    Interest income decreased $0.1 million from 2008 to 2009. The decrease is consistent with lower average cash balances during 2009 as compared to 2008 and lower interest rates on our money market cash balances.

Interest expense.    We incurred interest expense of $0.1 million in both 2008 and 2009. Current and long-term borrowing balances remained relatively consistent during the periods.

Other income (expense), net.    Other income was $0.2 million in both 2008 and 2009. Amounts include gains or losses on fixed asset disposals, changes in the fair market value of the preferred stock warrants, and foreign exchange gains or losses.

Liquidity and capital resources

 

      Years ended
December 31,
    Six months
ended June 30,
 
(in thousands)    2008     2009     2010     2010     2011  

 

 

Consolidated statements of cash flow data:

          

Net cash provided by (used in) operating activities

   $ (3,105   $ 2,997      $ 4,782      $ 849      $ (1,246

Net cash used in investing activities

     (737     (403     (9,449     (142     (920

Net cash provided by (used in) financing activities

     (1,066     144        4,378        (253     5,359   

 

 

As of June 30, 2011, we had cash and cash equivalents of $11.8 million, consisting of cash and money market accounts. Other than $0.2 million of restricted cash pledged as security deposits, we did not have any short-term or long-term investments.

Prior to 2009, we financed the majority of our operations and capital expenditures through private sales of preferred stock. Specifically, we received aggregate net proceeds from the issuance of preferred stock of $39.8 million in the years prior to 2006 and net proceeds from the issuance of preferred stock of $6.9 million in 2006 and $6.1 million in 2007.

We have also financed a portion of our operations and acquisitions with term loans, equipment lines of credit and revolving lines of credit. In January 2009, we entered into a loan and security agreement with Comerica Bank, N.A., or Comerica, which was subsequently amended in February 2010 and December 2010. These amendments renewed the working capital line of credit for $5.0 million, and increased the term loan facility from $2.0 million to $5.0 million.

 

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We are not a capital-intensive business, nor do we expect to be in the future. During 2008, 2009 and 2010, our purchases of property and equipment were $0.9 million, $0.2 million and $0.7 million, respectively. The expenditures in 2008 primarily related to leasehold improvements and computer equipment as we relocated our headquarters to the current San Jose, California location.

We believe that our available cash resources and anticipated future cash flow from operations will provide sufficient cash resources to meet our contractual obligations and our currently anticipated working capital and capital expenditure requirements for at least the next 12 months. Our future liquidity and capital requirements will depend upon numerous factors, including our rate of growth, the rate at which we add personnel to generate and support future growth, and potential future acquisitions.

In the future, we may seek to sell additional equity securities or borrow funds. The sale of additional equity or convertible securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or other borrowings, these securities or borrowings could have rights senior to those of our common stock and could contain covenants that could restrict our operations. Any required additional capital may not be available on reasonable terms, if at all.

Credit facility

We have a credit facility with Comerica for both a revolving line of credit and a term loan. Our credit facility with Comerica imposes various limitations on us, and also contains certain customary representations and warranties, covenants, notice and indemnification provisions, and events of default, including changes of control, cross defaults to other debt, judgment defaults and material adverse changes to our business. In addition, the term loan requires that we maintain specified liquidity ratios and minimum net income levels. As of December 31, 2010 and June 30, 2011, we were in compliance with the agreement other than the covenant specifying the quarterly net income amount. Comerica waived this violation at December 31, 2010 and June 30, 2011. Subsequent to June 2011, the Bank amended the financial covenant to remove the requirement to maintain minimum quarterly net income levels.

Revolving line of credit:

We can borrow up to $5.0 million under our working capital line of credit based on the amount of our working capital. Interest is payable monthly with the principal due at maturity.

Borrowings under the line of credit bear interest at the bank’s prime rate plus 1.0%, providing that in no event will the prime rate be deemed to be less than the 30-day LIBOR rate plus 2.5%. As of December 31, 2010 and as of June 30, 2011, we had drawn $0.0 million and $4.5 million, respectively. This line of credit will expire in January 2012.

Term loan facility:

On December 13, 2010, we borrowed the full $5.0 million available on the term loan facility. Approximately $1.0 million of this borrowing was used to pay off a previous term loan. The remaining proceeds were used to finance an acquisition completed in December 2010 and for working capital following the use of cash for acquisitions previously completed in 2010. Commencing in June 2011, the new loan will be repaid by 30 principal payments of $167,000 plus monthly interest payments at the bank’s prime rate plus 1.5%, provided that in no event will the prime rate be deemed to be less than the 30-day LIBOR rate plus 2.5%. The term loan matures in December 2013.

 

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Operating activities

Cash used in operating activities was $1.2 million for the six months ended June 30, 2011, which was primarily attributable to changes in the valuation of warrant and option liabilities of $1.6 million, net loss of $1.3 million, stock-based compensation expense of $0.4 million, depreciation and amortization of $0.3 million, amortization of intangible assets of $0.5 million offset by net changes in current assets and liabilities of $2.8 million. Within current assets and liabilities, accounts receivable increased $6.0 million during the six months ended June 30, 2011 due to the increase in volume and the timing of product shipments during the 2011 period. We expect accounts receivable balances will fluctuate over time depending on the timing of product shipments within the given period. Prepaid expenses increased by $1.1 million primarily due to expenditures related to our anticipated initial public offering.

Cash provided by operating activities was $0.8 million for the six months ended June 30, 2010, which was primarily attributable to net income of $2.2 million and stock-based compensation expense of $0.2 million, changes in the valuation of preferred stock warrants of $0.2 million, depreciation and amortization of $0.4 million offset by net changes in current assets and liabilities of $2.2 million. In particular, inventories increased by $1.4 million as we elected to build inventory prior to our transition to a new contract manufacturer.

Cash provided by operating activities was $4.8 million in 2010, which was primarily attributable to net income of $1.2 million plus stock-based compensation expense of $0.5 million, changes in the valuation of warrant and option liabilities of $0.4 million, depreciation and amortization of $0.7 million, amortization of intangible assets of $0.2 million and net changes in current assets and liabilities of $1.7 million. Inventory increased by $1.7 million as we elected to build inventory prior to our transition to a new contract manufacturer.

Cash provided by operating activities was $3.0 million in 2009, which was primarily attributable to the net loss of $1.0 million offset by stock-based compensation expense of $0.5 million, changes in the valuation of preferred stock warrants of $0.2 million, depreciation and amortization of $0.8 million and net changes in current assets and liabilities of $2.5 million.

Cash used in operating activities was $3.1 million in 2008, which was primarily attributable to the net loss of $6.3 million, reduced by a gain on asset disposals of $0.1 million, offset by stock-based compensation expense of $0.5 million, changes in the valuation of preferred stock warrants of $0.3 million, depreciation and amortization of $0.8 million and net changes in current assets and liabilities of $1.8 million.

Investing activities

Cash used in investing activities was $0.9 million for the six months ended June 30, 2011, which was primarily attributable to the purchase of property and equipment and leasehold improvements related to expansion of our corporate offices. Our purchases of property and equipment during this period were higher than normal as we procured additional manufacturing tools and equipment. We do not expect this level of investment to continue through the remainder of 2011.

Cash used in investing activities was $0.1 million for the six months ended June 30, 2010, which was primarily attributable to the purchase of property and equipment.

Cash used in investing activities was $9.4 million in 2010, which was primarily attributable to the $8.8 million in cash, net of cash received, used for four acquisitions we completed in the last four months of 2010, and the purchase of property and equipment in the amount of $0.7 million.

 

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Cash used in investing activities was $0.4 million in 2009, which was primarily attributable to the purchase of property and equipment in the amount of $0.2 million and an increase of $0.2 million in a security deposit.

Cash used in investing activities was $0.7 million in 2008, which was primarily attributable to the purchase of property and equipment in the amount of $0.9 million, offset by proceeds of $0.1 million relating to fixed asset disposals and a $0.1 million reduction in long-term deposits.

Financing activities

Cash provided by financing activities was $5.4 million for the six months ended June 30, 2011, which was primarily attributable to a $3.9 million net increase in debt and $1.8 million in proceeds from the exercise of stock options and preferred stock warrants. In June 2011, we drew $4.5 million on the revolving line of credit for general corporate purposes as we added headcount and continued to invest in our operations for future growth.

Cash used in financing activities was $0.3 million in the six months ended June 30, 2010, which was primarily attributable to a $0.4 million net decrease in debt, offset by $0.2 million in proceeds from the exercise of stock options.

Cash provided by financing activities was $4.4 million in 2010, which was primarily attributable to a $3.1 million net increase in debt and $1.2 million in proceeds from the exercise of stock options. The net increase in debt includes a new $5.0 million term loan used to partially finance the four acquisitions during the year.

Cash provided by financing activities was $0.1 million in 2009, which was primarily attributable to a net increase in debt.

Cash used in financing activities was $1.1 million in 2008, which was primarily attributable to net repayments of debt.

Contractual obligations

The following table summarizes our contractual obligations as of December 31, 2010:

 

(in thousands)    Total      Less than 1
year
     1-3 years      3-5 years      More than
5 years
 

 

 

Operating leases(1)

   $ 6,972       $ 1,243       $ 3,988       $ 1,741       $         —   

Non-cancelable purchase commitments(2)

     2,123         2,097         26                   

Long-term debt(3)

     5,810         1,628         4,182                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,905       $ 4,968       $ 8,196       $ 1,741       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

(1)   Consists of contractual obligations from non-cancelable office space under operating leases.

 

(2)   Consists of minimum purchase commitments with our independent contract manufacturer and other vendors.

 

(3)   Consists of principal and interest amounts due under our credit facility.

Our uncertain tax liabilities are recorded against our deferred tax assets and are, therefore, not included in the table above.

Off-balance sheet arrangements

During 2008, 2009, 2010 and the six months ended June 30, 2011, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

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Critical accounting policies and estimates

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We evaluate our estimates on an ongoing basis, including those related to revenue recognition, stock-based compensation, accounting for business combinations and the provision for income taxes. We base our estimates and judgments on our historical experience, knowledge of factors affecting our business and our belief as to what could occur in the future considering available information and assumptions that we believe to be reasonable under the circumstances.

The accounting estimates we use in the preparation of our consolidated financial statements will change as events occur, more experience is acquired, additional information is obtained and our operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in our reported results of operations and, if material, the effects of changes in estimates are disclosed in the notes to our consolidated financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these estimates.

While our significant accounting policies are more fully described in Note 2 of our “Notes to consolidated financial statements” included elsewhere in this prospectus, we believe the following reflect our critical accounting policies and our more significant judgments and estimates used in the preparation of our financial statements.

Revenue recognition

We derive revenue from the sales of communication badges, smartphones, perpetual software licenses for software that is essential to the functionality of the communication badges, software maintenance, extended warranty and professional services. We also derive revenue from the sale of licenses for software that is not essential to the functionality of the communication badges.

Revenue is recognized when

 

 

there is persuasive evidence that an arrangement exists, in the form of a written contract, amendments to that contract, or purchase orders from a third party

 

 

delivery has occurred or services have been rendered

 

 

the price is fixed or determinable after evaluating the risk of concession

 

 

collectability is probable and/or reasonably assured based on customer creditworthiness and past history of collection

A typical sales arrangement involves multiple elements, such as sales of communications badges