S-1/A 1 d206702ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on March 13, 2012

Registration No. 333-175932

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3

to

FORM S-1

REGISTRATION STATEMENT

under

The Securities Act of 1933

 

 

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

 

Amount

to be

Registered(1)

 

Proposed Maximum

Aggregate

Offering Price

Per Share

 

Proposed

Maximum
Aggregate

Offering Price(2)

  Amount of
Registration Fee(3)

Common Stock, par value $0.0003 per share .

  6,612,500  

$14.00

  $92,575,000.00   $10,729.10

 

 

 

(1)   Includes 862,500 shares that the underwriters have the option to purchase.
(2)   Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3)   The registration fee is equal to the sum of (a) the product of (i) the proposed maximum aggregate offering price of $80,000,000, as previously proposed on the initial filing of this Registration Statement on August 1, 2011 and (ii) the then-current statutory rate of $116.10 per $1,000,000 ($9,288.00 was previously paid) and (b) the product of (i) the marginal increase of $12,575,000 in the proposed maximum aggregate offering price hereunder and (ii) the current statutory rate of $114.60 per $1,000,000 (an additional $1,441.10 is being paid in conjunction with this filing).

 

 

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.


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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 March 13, 2012

Prospectus

5,750,000 shares

 

LOGO

Common stock

This is an initial public offering of shares of common stock of Vocera Communications, Inc. We are selling 5,000,000 shares of common stock, and the selling stockholders are selling 750,000 shares of common stock. The estimated initial public offering price is between $12.00 and $14.00 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

   $         $     

The selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to 862,500 additional shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders.

Certain entities associated with GGV Capital and Venrock, certain of our directors and an executive officer, each of which are existing securityholders, have indicated an interest in purchasing up to an aggregate of approximately $6.3 million of our common stock in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, these existing securityholders may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to such securityholders. The underwriters will receive the same discount from any shares of our common stock so purchased as they will from any other shares of our common stock sold to the public in this offering.

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   Wells Fargo Securities   Leerink Swann

                    , 2012


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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 efficiency and productivity.


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Table of contents

 

     Page  

Prospectus summary

     1   

Risk factors

     13   

Special note regarding forward-looking statements and industry data

     36   

Use of proceeds

     37   

Dividend policy

     37   

Capitalization

     38   

Dilution

     40   

Selected consolidated financial data

     43   

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

     47   

Business

     77   

Management

     93   

Executive compensation

     104   

Certain relationships and related person transactions

     129   

Principal and selling stockholders

     132   

Description of capital stock

     136   

Shares eligible for future sale

     141   

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

     144   

Underwriting

     149   

Legal matters

     155   

Experts

     155   

Where you can find additional information

     155   

Index to financial statements

     F-1   

 

i


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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, or when the patient is discharged from the hospital.

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 or through Vocera Connect client applications available for BlackBerry, iPhone and Android smartphones, as well as Cisco wireless IP phones and other mobile devices. Our Voice

 

 

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Communication solution can also be integrated with nurse call and other clinical systems to immediately and efficiently alert hospital workers to patient needs.

Our solutions are deployed in over 800 hospitals and healthcare facilities, including large hospital systems, small and medium-sized local hospitals, and a small number of clinics, surgery centers and aged-care 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 2011, we generated revenue of $79.5 million, representing growth of 40.0% over 2010, and a net loss of $2.5 million.

Industry overview

Effective communication is extremely important among mobile and widely dispersed healthcare professionals in hospitals. As of December 31, 2011, there were over 6,900 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 of over 2,600 sentinel events reported from 2009 through the third quarter of 2011, communication issues were identified as one of the root causes in 69% 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 and mobile applications. We believe our Voice Communication solution, which features a wearable, hands-free badge, is the only voice-

 

 

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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 15 issued U.S. patents, and six 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 800 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 2010 and 2011, our quarterly revenue from existing customers was on average over 85% of our revenue, 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 December 31, 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. In October 2011, we introduced the Vocera B3000 badge, our fourth generation communication badge.

 

 

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 December 31, 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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The offering

 

Common stock offered by us

5,000,000 shares

 

Common stock offered by the selling stockholders

750,000 shares

 

Over-allotment option offered by the selling stockholders

862,500 shares

 

Common stock to be outstanding after this offering

21,735,208 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

Certain entities associated with GGV Capital and Venrock, certain of our directors and an executive officer, each of which are existing securityholders, have indicated an interest in purchasing up to an aggregate of approximately $6.3 million of our common stock in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, these existing securityholders may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to such securityholders. The underwriters will receive the same discount from any shares of our common stock so purchased as they will from any other shares of our common stock sold to the public in this offering.

Any shares purchased by these existing securityholders will be subject to lock-up restrictions described in “Shares eligible for future sale.”

The shares of our common stock to be outstanding after this offering are based on 16,696,908 shares of our common stock outstanding as of December 31, 2011 and exclude:

 

 

3,808,222 shares issuable upon the exercise of stock options outstanding as of December 31, 2011, with a weighted average exercise price of $3.57 per share (including 28,976 shares of our common stock that will be issued and sold in this offering by a certain selling stockholder upon the net exercise of options at the closing of this offering, assuming an initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus)

 

 

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213,305 shares issuable upon the exercise of warrants outstanding as of December 31, 2011, with a weighted average exercise price of $6.18 per share (including 9,324 shares of our common stock that will be issued and sold in this offering by certain selling stockholders upon the net exercise of warrants for common stock at the closing of this offering, assuming an initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus)

 

 

24,152 shares of common stock subject to restricted stock awards granted February 9, 2012

 

 

934,445 shares to be reserved for issuance under our 2012 Equity Incentive Plan (including 57,239 shares issuable upon the exercise of options granted since December 31, 2011, with a weighted average exercise price of $12.42 per share) and 166,666 shares to be reserved for issuance under our 2012 Employee Stock Purchase Plan, both of which will become effective on the first day that our common stock is publicly traded and contain 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 12,916,418 shares of our common stock immediately upon the closing of this offering

 

 

a 1-for-6 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, except for 38,300 shares of common stock expected to be issued and sold in this offering upon the net exercise of stock options and warrants by certain selling stockholders

 

 

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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, 2009, 2010 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. 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, 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, 2011.

 

 

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     Years ended December 31,  
(in thousands, except per share data)   2009     2010     2011  

 

 

Consolidated statements of operations data:

     

Revenue

     

Product

  $ 25,985      $ 35,516      $ 50,322   

Service

    15,154        21,287        29,181   
 

 

 

   

 

 

   

 

 

 

Total revenue

    41,139        56,803        79,503   
 

 

 

   

 

 

   

 

 

 

Cost of revenue

     

Product

    11,546        12,222        17,465   

Service

    4,320        8,953        14,042   
 

 

 

   

 

 

   

 

 

 

Total cost of revenue

    15,866        21,175        31,507   
 

 

 

   

 

 

   

 

 

 

Gross profit

    25,273        35,628        47,996   
 

 

 

   

 

 

   

 

 

 

Operating expenses

     

Research and development

    5,992        6,698        9,335   

Sales and marketing

    16,468        20,953        28,151   

General and administrative

    3,489        6,723        11,316   
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    25,949        34,374        48,802   
 

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (676     1,254        (806

Interest income

    52        33        17   

Interest expense

    (141     (77     (332

Other income (expense), net

    (227     (367     (1,073
 

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (992     843        (2,194

Benefit (provision) for income taxes

           367        (285
 

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (992   $ 1,210      $ (2,479
 

 

 

   

 

 

   

 

 

 

Net income (loss) per common share

     

Basic and diluted

  $ (0.49   $ 0.00      $ (0.74
 

 

 

   

 

 

   

 

 

 

Weighted average shares used to compute net income (loss) per common share

     

Basic

    2,039        2,223        3,370   
 

 

 

   

 

 

   

 

 

 

Diluted

    2,039        2,846        3,370   
 

 

 

   

 

 

   

 

 

 

Pro forma net loss per share (unaudited)

     

Basic and diluted

      $ (0.07
     

 

 

 

Pro forma weighted average shares used to compute net loss per common share (unaudited)

     

Basic

        16,918   
     

 

 

 

Diluted

        16,918   
     

 

 

 

Other financial data:

     

Adjusted EBITDA(1)

  $ 578      $ 3,821      $ 3,020   

 

 
(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 December 31, 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 12,916,418 shares of our common stock, each immediately upon the closing of this offering as if the reclassification and conversion had occurred on December 31, 2011

 

 

on a pro forma as adjusted basis to further reflect (i) the sale by us of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 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 sale of 38,300 shares of common stock in this offering upon the net exercise of stock options and warrants by certain selling stockholders; and (iii) the application of a portion of the proceeds from this offering to repay in full outstanding borrowings under our credit facility, which were $8.3 million at December 31, 2011

 

December 31, 2011

(in thousands)

   Actual     Pro forma      Pro forma as
adjusted(1)
 

 

 

Consolidated balance sheet data:

       

Cash and cash equivalents

   $ 14,898      $ 14,898       $ 64,265   

Total assets

     49,818        49,818         99,185   

Total borrowings

     8,333        8,333           

Convertible preferred stock warrant liability

     1,853                  

Convertible preferred stock

     53,013                  

Total stockholders’ equity (deficit)

     (49,399     5,467         63,167   

 

 

 

(1)   Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 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 $4.7 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 2011, 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,  
(in thousands)    2009     2010     2011  

 

 

Net income (loss)

   $ (992   $ 1,210      $ (2,479

Interest income

     (52     (33     (17

Interest expense

     141        77        332   

Provision (benefit) for income taxes

            (367     285   

Depreciation and amortization

     754        732        1,004   

Amortization of purchased intangibles

            223        1,006   

Stock-based compensation

     492        508        1,458   

Acquisition related costs(1)

            1,047          

Change in fair value of warrant and option liabilities

     235        424        1,431   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $     578      $  3,821      $ 3,020   
  

 

 

   

 

 

   

 

 

 

 

 

 

(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, 2011, we had an accumulated deficit of $56.9 million. 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 2011, sales of our Voice Communication solution to the healthcare market accounted for 96.9% and 90.4% 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 upfront investment by customers. Typically, our hospital customers initially deploy our solutions

 

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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 2011, the initial purchase order for new hospital deployments of our Voice Communication solution ranged from approximately $50,000 to approximately $2.7 million, with an average initial deployment cost of approximately $360,000, 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. In October 2011, we introduced the B3000 badge. Initial production of this product has commenced with SMTC in the United States, with production transitioning to Mexico in 2012. Companies occasionally encounter unexpected difficulties in ramping up to volume production of new products, and we may experience such difficulties with the B3000 badge. 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.

If we fail to achieve certification for certain U.S. federal standards, our sales to U.S. government customers will suffer.

We believe that a significant opportunity exists to sell our products to healthcare facilities in the Veterans Administration and Department of Defense, or DoD. These customers require independent certification of compliance with particular requirements relating to encryption, security, interoperability and scalability. These requirements include compliance with Federal Information Processing Standard, or FIPS, 140-2 and, as to DoD facilities, certification by the Joint Interoperability and Test Command, or JITC, of DoD and under the DoD Information Assurance

 

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Certification and Accreditation Process, or DIACAP. We are in the process of completing full certification of our Voice Communication solution under these standards for use with the B2000 badge, and will undertake to achieve certification for the B3000 badge and future products as well. A failure on our part to comply in a timely manner with these requirements, both as to current products and as to new product versions, could adversely impact our revenue.

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. Our Voice Communication solution has been deployed in over 100 customers in non-healthcare markets, including hospitality, retail and libraries. Total revenue from non-healthcare customers accounted for 2.9% of our revenue in 2011. If we cannot maintain these 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. Our recently introduced B3000 badge will reduce demand for our existing B2000 badges, and we must therefore 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 the B3000 badge and any additional new products or 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.

 

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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

 

 

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 $41.1 million for 2009 to $79.5 million for 2011. During these periods, we significantly expanded our operations and more than doubled the number of our employees from 129 as of January 1, 2009 to 290 as of December 31, 2011.

 

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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 anticipate implementing a new enterprise resource planning application, or ERP, beginning in 2012. We may experience difficulties in implementing the ERP, and we may fail to gain the efficiencies the implementation is designed to produce. The implementation could also be disruptive to our operations, including the ability to timely ship and track product orders to our customers, project inventory requirements, manage our supply chain and otherwise adequately service our customers.

We expect to incur costs associated with the investments made to support our growth 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 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 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 ratably over the contract term, which is typically 12 months, in some cases subject to an early termination right. For 2010 and 2011, revenue from our maintenance and support contracts accounted for 30.7% and 27.0% 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

 

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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

 

 

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 co-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.

 

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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 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 2011, we obtained 9.7% and 7.3% 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

 

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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 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, a 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.

 

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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.

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.

 

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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.

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.

 

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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 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

 

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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

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

 

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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 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

 

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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 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 are not able to maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

We have had material weaknesses in our internal control over financial reporting in the past. A material weakness is defined under the standards issued by the Public Company Accounting

 

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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 the six months ended June 30, 2011, our independent registered public accounting firm identified adjustments to our financial statements which resulted from control deficiencies that we considered to be two material weaknesses in our internal control over financial reporting. These related to controls for the preparation of (1) the provision for income taxes, resulting from insufficient technical expertise in the area of tax accounting for acquisitions and resulted in audit adjustments to our income tax provision for the year ended December 31, 2010 and (2) the statement of cash flows, resulting from the insufficient review of supporting schedules used in the preparation of the statement for unpaid purchases of property and equipment, and resulted in revisions to the statement of cash flows for the six months ended June 30, 2011.

We remediated these material weaknesses by (1) replacing the firm we have historically retained for tax accounting with a firm with the requisite expertise and enhancing the level of review by our recently appointed corporate controller who has the requisite technical expertise and experience; and (2) implementing additional controls relating to the compilation of the underlying schedules and cash flow statement and adding more detailed reviews of the underlying cash flow statement schedules by our SEC reporting manager, and our recently appointed corporate controller.

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, 2013, we must perform 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. If other material weaknesses are identified in the future 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.

The market size estimate included in this prospectus may prove to be inaccurate, and, as such, may not be reflective of our capacity for future growth.

The healthcare market has not yet broadly adopted an intelligent voice communication system similar to our Voice Communication solution. This being the case, although the market size estimate included in this prospectus is based on assumptions and estimates we believe to be reasonable, this estimate may not prove to be accurate. This is particularly the case with respect to estimating the size of the international component of the market. Even if the market is of the size we estimate, this market size may not be a meaningful estimate of the market opportunity that will prove to be available to us for a number of reasons, including those matters identified in these risk factors.

 

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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

 

 

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.

 

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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.

If certain of our existing securityholders purchase an aggregate of approximately $6.3 million of our common stock in this offering as described in this prospectus, our executive officers, directors, current 5% or greater stockholders and entities affiliated with any of them will together beneficially own approximately 60.2% of our common stock outstanding after this offering, assuming the underwriters do not exercise their option to purchase additional shares. If these existing securityholders do not purchase shares in this offering, then our executive officers, directors, current 5% or greater stockholders and entities affiliated with any of them will together beneficially own approximately 58.2% of our common stock outstanding upon closing of 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 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.

 

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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.

Participation in this offering by certain of our existing securityholders would reduce the available public float for our shares.

Certain entities associated with GGV Capital and Venrock, certain of our directors and an executive officer, each of which are existing securityholders, have indicated an interest in purchasing up to an aggregate of approximately $6.3 million of our common stock in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, these existing securityholders may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to such securityholders. The underwriters will receive the same discount from any shares of our common stock so purchased as they will from any other shares of our common stock sold to the public in this offering.

If these existing securityholders are allocated all or a portion of the shares in which they have indicated an interest in this offering and purchase any such shares, such purchases would reduce the available public float for our shares because these securityholders would be restricted from selling the shares pursuant to the lock-up agreements they have entered into with the underwriters in this offering. As a result, any such purchases may reduce the liquidity of our common stock relative to what it would have been had these shares been purchased by investors that were not affiliated with us.

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 December 31, 2011, immediately after the closing of this offering, we will have 21,735,208 shares of common stock outstanding, assuming no exercise of our outstanding options and warrants, except for 38,300 shares of common stock expected to be issued and sold in this offering upon the net exercise of stock options and warrants by certain selling stockholders.

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

 

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Act, except for any shares held or purchased in this offering by our affiliates (as defined in Rule 144 under the Securities Act). The remaining 15,985,208 shares of common stock outstanding after this offering, based on shares outstanding as of December 31, 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. In addition, any shares purchased by our existing securityholders in this offering will be subject to lock-up agreements with the underwriters.

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 12,493,854 shares of common stock and holders of warrants to purchase 200,637 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.

We intend to file a registration statement under the Securities Act to register 4,742,414 shares for issuance under our equity incentive and employee stock purchase plans. Each of our 2012 Equity Incentive Plan and 2012 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 $10.49 per share based on the assumed initial public offering price of $13.00 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.

 

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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

 

 

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 or derived 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 5,000,000 shares of common stock that we are selling in this offering of approximately $57.7 million, based on an assumed initial public offering price of $13.00 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. 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 $4.7 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 a portion of the proceeds of the offering to repay in full outstanding borrowings under our credit facility. Aggregate borrowings under the facility were $8.3 million as of December 31, 2011, of which $3.8 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 December 31, 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 12,916,418 shares of our common stock, each immediately upon the closing of this offering as if the reclassification and conversion had occurred on December 31, 2011

 

 

on a pro forma as adjusted basis to further reflect (i) the sale by us of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 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 issuance and sale of 38,300 shares of common stock in this offering upon the net exercise of stock options and warrants by certain selling stockholders; (iii) the application of a portion of the proceeds from this offering to repay the outstanding borrowings under our credit facility, which were $8.3 million at December 31, 2011; and (iv) 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.

 

December 31, 2011
(in thousands, except share and per share amounts)
   Actual     Pro forma     Pro forma
as adjusted
 

 

 

Cash and cash equivalents

   $ 14,898      $ 14,898      $ 64,265   
  

 

 

   

 

 

   

 

 

 

Total borrowings

   $ 8,333      $ 8,333      $   

Preferred stock warrant liability

     1,853                 

Convertible preferred stock, $0.0003 par value, 26,013,743 shares authorized, 12,171,980 shares issued and outstanding; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     53,013                 
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity (deficit)

      

Preferred stock, $0.0003 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, 30,423,297 shares authorized, 3,780,490 shares issued and outstanding, actual; 16,696,908 shares issued and outstanding, pro forma; 21,735,208 shares issued and outstanding, pro forma as adjusted

     1        5        7   

Additional paid-in capital

     7,461        62,323        120,021   

Accumulated deficit

     (56,861     (56,861     (56,861
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (49,399     5,467        63,167   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 13,800      $ 13,800      $ 63,167   
  

 

 

   

 

 

   

 

 

 

 

 

 

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The shares of our common stock to be outstanding after this offering are based on 16,696,908 shares of our common stock outstanding as of December 31, 2011 and exclude:

 

 

3,808,222 shares issuable upon the exercise of stock options outstanding as of December 31, 2011, with a weighted average exercise price of $3.57 per share (including 28,976 shares of our common stock that will be issued and sold in this offering by a certain selling stockholder upon the net exercise of options at the closing of this offering, assuming an initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus)

 

 

213,305 shares issuable upon the exercise of warrants outstanding as of December 31, 2011, with a weighted average exercise price of $6.18 per share (including 9,324 shares of our common stock that will be issued and sold in this offering by certain selling stockholders upon the net exercise of warrants for common stock at the closing of this offering, assuming an initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus)

 

 

24,152 shares of common stock subject to restricted stock awards granted February 9, 2012

 

 

934,445 shares to be reserved for issuance under our 2012 Equity Incentive Plan (including 57,239 shares issuable upon the exercise of options granted since December 31, 2011, with a weighted average exercise price of $12.42 per share) and 166,666 shares to be reserved for issuance under our 2012 Employee Stock Purchase Plan, both of which will become effective on the first day that our common stock is publicly traded and contain 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 December 31, 2011, our pro forma net tangible book value was $(3.2) million, or $(0.19) 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 (i) the sale by us of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 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; (ii) the sale of 38,300 shares of common stock expected to be issued and sold in this offering upon the net exercise of stock options and warrants by certain selling stockholders; and (iii) the outstanding borrowings under our credit facility, which were $8.3 million at December 31, 2011, which we intend to pay in full, our pro forma as adjusted net tangible book value as of December 31, 2011 would have been $54.5 million, or $2.51 per share. This represents an immediate increase in pro forma net tangible book value of $2.70 per share to existing stockholders and an immediate dilution of $10.49 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

           $ 13.00   

Pro forma net tangible book value per share as of December 31, 2011

   $ (0.19  

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

     2.70     
  

 

 

   

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

       2.51   
    

 

 

 

Dilution per share to new investors

     $ 10.49   
    

 

 

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $13.00 would increase or decrease our pro forma as adjusted net tangible book value per share after this offering by $0.21 per share and the dilution to new investors by $0.79 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.

 

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The following table summarizes, as of December 31, 2011, on the pro forma as adjusted basis described above, assuming our existing securityholders do not purchase shares of our common stock in this offering, 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 $13.00 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

     16,735,208         77.0   $ 57,309,000         46.9   $ 3.42   

New investors

     5,000,000         23.0        65,000,000         53.1        13.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     21,735,208         100.0   $ 122,309,000         100.0     5.63   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share would increase or decrease, respectively, total consideration paid by new investors by $5.0 million and increase or decrease the percent of total consideration paid to us by new investors by 2.0%, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

Assuming the underwriters exercise their over-allotment option in full and if certain of our existing securityholders purchase an aggregate of approximately $6.3 million of our common stock in this offering, the number of shares held by existing stockholders will be reduced to 16,357,323 shares, or 75.3% of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors will be increased to 5,377,885 shares, or 24.7% of the total number of shares outstanding after this offering. Assuming the underwriters exercise their over-allotment option in full and if certain of our existing securityholders do not purchase an aggregate of approximately $6.3 million of our common stock in this offering, the number of shares held by existing stockholders will be reduced to 15,872,708 shares, or 73.0% of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors will be increased to 5,862,500 shares, or 27.0% of the total number of shares outstanding after this offering.

The shares of our common stock to be outstanding after this offering are based on 16,696,908 shares of our common stock outstanding as of December 31, 2011 and exclude:

 

 

3,808,222 shares issuable upon the exercise of stock options outstanding as of December 31, 2011, with a weighted average exercise price of $3.57 per share (including 28,976 shares of our common stock that will be issued and sold in this offering by a certain selling stockholder upon the net exercise of options at the closing of this offering, assuming an initial public offering price of $13.00 per share , the midpoint of the price range set forth on the cover page of this prospectus)

 

 

213,305 shares issuable upon the exercise of warrants outstanding as of December 31, 2011, with a weighted average exercise price of $6.18 per share (including 9,324 shares of our common stock that will be issued and sold in this offering by certain selling stockholders upon the net exercise of warrants for common stock at the closing of this offering, assuming an initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus)

 

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24,152 shares subject to restricted stock awards granted on February 9, 2012

 

 

934,445 shares to be reserved for issuance under our 2012 Equity Incentive Plan (including 57,239 shares issuable upon the exercise of options granted since December 31, 2011, with a weighted average exercise price of $12.42 per share) and 166,666 shares to be reserved for issuance under our 2012 Employee Stock Purchase Plan, both of which will become effective on the first day that our common stock is publicly traded and contain provisions that automatically increase its share reserve each year, as more fully described in “Executive compensation—Employee benefit plans”

The above discussion and tables assume no exercise of stock options or warrants outstanding as of December 31, 2011, except for 38,300 shares of common stock expected to be issued and sold in this offering upon the net exercise of stock options and warrants by certain selling stockholders. If all of these options and warrants were exercised, then:

 

 

there would be an additional $0.39 per share of dilution to new investors

 

 

our existing stockholders, including the holders of these options and warrants, would own 80.6% and our new investors would own 19.4% 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 52.6% of total consideration, at an average price per share of $3.48, and our new investors would have paid 47.4% of total consideration

 

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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, 2009, 2010 and 2011 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, 2007 and 2008 and the balance sheet data as of December 31, 2007, 2008 and 2009 from our audited financial statements that do not appear in this prospectus. 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, 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, 2011.

 

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     Years ended December 31,  
(in thousands, except per share data)   2007     2008     2009     2010     2011  

 

 

Consolidated statements of operations data:

         

Revenue

         

Product

  $ 27,332      $ 28,352      $ 25,985      $ 35,516      $ 50,322   

Service

    7,125        11,474        15,154        21,287        29,181   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    34,457        39,826        41,139        56,803        79,503   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

         

Product

    12,587        15,542        11,546        12,222        17,465   

Service

    3,735        4,225        4,320        8,953        14,042   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    16,322        19,767        15,866        21,175        31,507   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    18,135        20,059        25,273        35,628        47,996   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

         

Research and development

    6,613        7,353        5,992        6,698        9,335   

Sales and marketing

    12,226        15,394        16,468        20,953        28,151   

General and administrative

    3,010        3,456        3,489        6,723        11,316   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    21,849        26,203        25,949        34,374        48,802   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (3,714     (6,144     (676     1,254        (806

Interest income

    468        182        52        33        17   

Interest expense

    (423     (143     (141     (77     (332

Other income (expense), net

    (33     (208     (227     (367     (1,073
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (3,702     (6,313     (992     843        (2,194

Benefit (provision) for income taxes

                         367        (285
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (3,702   $ (6,313   $ (992   $ 1,210      $ (2,479
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share

         

Basic and diluted

  $ (2.06   $ (3.13   $ (0.49   $ 0.00      $ (0.74
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used to compute net income (loss) per common share

         

Basic

    1,795        2,014        2,039        2,223        3,370   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    1,795        2,014       
2,039
  
    2,846        3,370   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share (unaudited)

         

Basic and diluted

          $ (0.07
         

 

 

 

Pro forma weighted average shares used to compute net loss per common share (unaudited)

         

Basic

            16,918   
         

 

 

 

Diluted

            16,918   
         

 

 

 

Other financial data:

         

Adjusted EBITDA(1)

  $ (2,688   $ (4,800   $ 578      $ 3,821      $ 3,020   

 

 
(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,  
(in thousands)   2007     2008     2009     2010     2011  

 

 

Consolidated balance sheet data:

 

Cash and cash equivalents

  $ 11,101      $ 6,193      $ 8,931      $ 8,642      $ 14,898   

Total assets

    21,447        19,385        19,801        33,933        49,818   

Total borrowings

    2,758        1,661        1,777        5,405        8,333   

Convertible preferred stock warrant liability

    305        567        802        1,127        1,853   

Convertible preferred stock

    52,758        52,758        52,758        52,758        53,013   

Total stockholders’ deficit

    (47,101     (52,902     (53,372     (50,364     (49,399

 

 

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 2011, 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.

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.

 

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

 

     Years ended December 31,  
(in thousands)       2007     2008     2009     2010     2011  

 

 

Net income (loss)

    $ (3,702   $ (6,313   $ (992   $ 1,210      $ (2,479

Interest income

      (468     (182     (52     (33     (17

Interest expense

      423        143        141        77        332   

Provision (benefit) for income taxes

                           (367     285   

Depreciation and amortization

      648        809        754        732        1,004   

Amortization of purchased intangibles

                           223        1,006   

Stock-based compensation

      391        481        492        508        1,458   

Acquisition related costs(1)

                           1,047          

Change in fair value of warrant and option liabilities

      20        262        235        424        1,431   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    $ (2,688   $ (4,800   $ 578      $ 3,821      $ 3,020   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(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, or when the patient is discharged from the hospital.

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, or through Vocera Connect client applications available for BlackBerry, iPhone and Android smartphones, as well as Cisco wireless IP phones 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 400,000 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 40.0% from $56.8 million in 2010 to $79.5 million in 2011. Revenue grew 38.1% from $41.1 million in 2009 to $56.8 million in 2010. For the year ended December 31, 2011, we recorded a net loss of $2.5 million, which included $1.0 million of additional outside service costs as we prepared to become a public company. 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.

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 2011, our largest end customer represented only 2.8% of revenue. Through December 31, 2011, 76 healthcare systems and 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 7.3% of our revenue in 2010 and 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 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

 

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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 reasonable 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 2009, 2010 and 2011 from our audited consolidated financial statements which are included elsewhere in this prospectus.

 

     Years ended December 31,  
(in thousands)   2009     2010     2011  

 

 

Consolidated statements of operations data:

     

Revenue

     

Product

  $ 25,985      $ 35,516      $ 50,322   

Service

    15,154        21,287        29,181   
 

 

 

   

 

 

   

 

 

 

Total revenue

    41,139        56,803        79,503   
 

 

 

   

 

 

   

 

 

 

Cost of revenue

     

Product

    11,546        12,222        17,465   

Service

    4,320        8,953        14,042   
 

 

 

   

 

 

   

 

 

 

Total cost of revenue

    15,866        21,175        31,507   
 

 

 

   

 

 

   

 

 

 

Gross profit

    25,273        35,628        47,996   
 

 

 

   

 

 

   

 

 

 

Operating expenses

     

Research and development

    5,992        6,698        9,335   

Sales and marketing

    16,468        20,953        28,151   

General and administrative

    3,489        6,723        11,316   
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    25,949        34,374        48,802   
 

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (676     1,254        (806

Interest income

    52        33        17   

Interest expense

    (141     (77     (332

Other income (expense), net

    (227     (367     (1,073
 

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (992     843        (2,194

Benefit (provision) for income taxes

           367        (285
 

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (992   $ 1,210      $ (2,479
 

 

 

   

 

 

   

 

 

 

 

 

 

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Years ended December 31, 2010 compared to December 31, 2011

Revenue:

 

 

 
      Years Ended December 31,     
     2010   2011   Change

(in thousands)

   Amount   % Revenue   Amount   % Revenue   Amount                %

Revenue

                         

Product

       $35,516            62.5       $50,322          63.3       $14,806           41.7

Service

       21,287           37.5         29,181         36.7         7,894          37.1  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

      

Total revenue

     $ 56,803         100.0 %     $ 79,503         100.0 %     $ 22,700          40.0  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

      
                                                               

Total revenue increased $22.7 million, or 40.0%, from 2010 to 2011.

Product revenue increased $14.8 million, or 41.7%. Device revenue increased $10.4 million, or 38.8%, and software revenue increased $4.4 million, or 50.6%. The increase in device revenue, which related entirely to our Voice Communication solution, was driven by an increase in unit sales of badges and related accessories from new customers making initial purchases, existing customers expanding deployments within their facilities to new departments and users, and customers replacing badges. The list prices for our products did not change substantially in 2011. The increase in software revenue was comprised of $2.4 million from acquisitions completed in the second half of 2010 and $2.0 million from an increase in the sale of licenses of our Voice Communication solution to new and existing customers. Over time, we expect software revenue to grow at a rate comparable to device revenue as we introduce new software solutions to complement our installed base.

Service revenue increased $7.9 million, or 37.1%. Software maintenance and support revenue increased $4.0 million, or 22.9%, and professional services and training revenue increased $3.9 million, or 101.6%. The increase in software maintenance and support revenue was primarily a result of a larger customer base but also included $0.4 million from acquisitions completed in the second half of 2010. The increase in professional services and training revenue included $2.7 million as a result of an increase in the number of new deployments and expansions of our Voice Communication solution. The remaining increase in professional services and training revenue of $1.2 million was from acquisitions completed in the second half of 2010. 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 32 professionals at December 31, 2010 to 40 professionals at December 31, 2011. A portion of the professional services and training 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 and training revenue to continue to grow at the same rate in the future as it did in 2011.

 

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Cost of revenue:

 

      Years  Ended
December 31,
    
     2010   2011   Change

(in thousands)

   Amount   Amount   Amount               %

Cost of revenue

                

Product

     $ 12,222       $ 17,465       $ 5,243         42.9 %

Service

       8,953         14,042         5,089         56.8  
    

 

 

     

 

 

     

 

 

     

Total cost of revenue

     $ 21,175       $ 31,507       $ 10,332         48.8  
    

 

 

     

 

 

     

 

 

     

Gross margin

                

Product

       65.6 %       65.3 %       (0.3 )%    

Service

       57.9         51.9         (6.1 )    
                

Total gross margin

       62.7         60.4         (2.4 )    
                                          

Cost of product revenue increased $5.2 million, or 42.9%, from 2010 to 2011. This increase was primarily due to the higher product revenue. We recorded a provision for excess inventory of the Vocera Wi-Fi smartphone in 2011 due to a strategic shift to emphasize the Vocera Connect client application. This resulted in a charge of $0.6 million. Excluding the excess inventory charge, product gross margins would have improved due to lower per unit material and manufacturing costs, largely due to increased unit volume. We anticipate that our product gross margins will be affected in 2012 by the higher manufacturing costs we expect to incur initially for the B3000 badge that we introduced in the fourth quarter of 2011.

Cost of service revenue increased $5.1 million, or 56.8%, from 2010 to 2011. This increase was primarily due to a $2.7 million increase in employee wages and other personnel costs in our professional services organization to support growth in customer deployments. Cost of service revenue also increased $1.3 million as a result of personnel costs and other expenses associated with the 2010 acquisitions. Headcount in our services organization increased from 60 employees at December 31, 2010 to 71 employees at December 31, 2011.

Operating expenses:

 

      Years Ended December 31,     
     2010   2011   Change

(in thousands)

   Amount    % Revenue   Amount    % Revenue   Amount                %

Operating expenses:

                           

Research and development

     $ 6,698          11.8 %     $ 9,335          11.7 %     $ 2,637          39.4 %

Sales and marketing

       20,953          36.9         28,151          35.4         7,198          34.4  

General and administrative

       6,723          11.8         11,316          14.2         4,593          68.3  
    

 

 

          

 

 

          

 

 

      

Total operating expenses

     $ 34,374          60.5       $ 48,802          61.4       $ 14,428          42.0  
    

 

 

          

 

 

          

 

 

      
                                                                 

Research and development expense. Research and development expense increased $2.6 million, or 39.4%, from 2010 to 2011. This increase was primarily due to personnel costs and other expenses associated with the 2010 acquisitions of $1.5 million, an increase in employee wages and other personnel costs of $0.7 million, and a $0.4 million increase in outside service and development costs. Headcount in our research and development organization increased from 42 employees at December 31, 2010 to 50 employees at December 31, 2011.

 

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Sales and marketing expense. Sales and marketing expense increased $7.2 million, or 34.4%, from 2010 to 2011. This increase was primarily due to a $3.2 million increase in employee wages and other personnel costs to support corporate marketing and sales efforts, a $1.3 million increase in expenses related to brand and product launch expenses, and a $0.5 million increase in equipment and supplies related expenses. Sales and marketing expenses also increased $2.2 million as a result of personnel costs and other expenses associated with the 2010 acquisitions. Headcount in our sales and marketing organization increased from 95 employees at December 31, 2010 to 115 employees at December 31, 2011.

General and administrative expense. General and administrative expense increased $4.6 million, or 68.3%, from 2010 to 2011. This increase was due to a $2.5 million increase in employee wages and other personnel costs, a $0.8 million increase in stock compensation expense, and a $0.7 million increase in outside services costs as we prepared to become a public company. General and administrative expenses also increased $0.4 million as a result of personnel costs and other expenses due to the 2010 acquisitions. Headcount in our general and administrative organization increased from 24 employees at December 31, 2010 to 35 employees at December 31, 2011.

 

         Years Ended December 31,            
(in thousands)   2010        2011        Change  

 

 

Interest income

  $ 33         $ 17         $ (16

Interest expense

    (77        (332        (255

Other income (expense), net

    (367        (1,073        (706

 

 

Interest income. Interest income decreased slightly from 2010 to 2011 due to a lower return on cash balances.

Interest expense. Interest expense increased $0.3 million from 2010 to 2011 due to increased borrowings.

Other income (expense), net. The $0.7 million increase in other expense from 2010 to 2011 is due primarily to the change in fair market value of the convertible 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      $ 12,222      $ 676        5.9

Service

     4,320        8,953        4,633        107.2   
  

 

 

   

 

 

   

 

 

   

Total cost of revenue

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

 

 

   

 

 

   

 

 

   

Gross margin

        

Product

     55.6     65.6     10.0  

Service

     71.5        57.9        (13.6  

Total gross margin

     61.4        62.7        1.3     

 

 

Cost of product revenue increased $0.7 million, or 5.9%, 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 $4.6 million, or 107.2%, 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 9 employees at December 31, 2009 to 32 employees at December 31, 2010. The increase in cost of service revenue also includes a $0.8 million increase associated with extended warranty service contracts.

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 95, 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,         
(in thousands)            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.

 

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Quarterly results of operations

The following table sets forth our unaudited quarterly consolidated statement of operations data for each of the eight quarters ended December 31, 2011. The data presented below has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus, and in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for any future period.

 

(in thousands)

(unaudited)

  March     June     September     December     March     June     September     December  
  2010     2010     2010     2010    

2011

   

2011

   

2011

    2011  

 

 

Revenue

               

Product

  $ 7,328      $ 8,691      $ 8,967      $ 10,530      $ 11,636      $ 11,925      $ 13,087      $ 13,674   

Service

    4,535        5,081        5,605        6,066        6,687        7,148        7,314        8,032   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    11,863        13,772        14,572        16,596        18,323        19,073        20,401        21,706   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

               

Product

    2,615        2,863        3,218        3,526        3,652        4,026        4,290        5,497   

Service

    1,664        1,951        2,229        3,109        3,162        3,546        3,861        3,473   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    4,279        4,814        5,447        6,635        6,814        7,572        8,151        8,970   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    7,584        8,958        9,125        9,961        11,509        11,501        12,250        12,736   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

               

Research and development

    1,670        1,602        1,664        1,762        2,158        2,433        2,379        2,365   

Sales and marketing

    4,127        4,645        5,068        7,113        6,473        6,702        7,542        7,434   

General and administrative

    983        1,006        1,607        3,127        2,239        2,842        3,197        3,038   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    6,780        7,253        8,339        12,002        10,870        11,977        13,118        12,837   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    804        1,705        786        (2,041     639        (476     (868     (101

Interest income

    9        10        9        5        5        3        5        4   

Interest expense

    (15     (27     (17     (18     (61     (61     (112     (98

Other income (expense), net

    (17     (234     (58     (58     (465     (752     132        12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    781        1,454        720        (2,112     118        (1,286     (843     (183

Benefit from (provision for) income taxes

    (60     39        218        170        37        (211     (57     (54
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 721      $ 1,493      $ 938      $ (1,942   $ 155      $ (1,497   $ (900   $ (237
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

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The following table sets forth a reconciliation of net income (loss) to adjusted EBITDA for each of the eight quarters ended December 31, 2011. Please see “Selected consolidated financial data – Adjusted EBITDA” for more information.

 

(in thousands)

(unaudited)

  March     June     September     December     March     June     September     December  
  2010     2010     2010     2010    

2011

   

2011

   

2011

    2011  

 

 

Net income (loss)

  $ 721      $ 1,493      $ 938      $ (1,942   $ 155      $ (1,497   $ (900   $ (237

Interest income

    (9     (10     (9     (5     (5     (3     (5     (4

Interest expense

    15        27        17        18        61        61        112        98   

Provision (benefit) for income taxes

    60        (39     (218     (170     (37     211        57        54   

Depreciation and amortization

    184        184        186        178        161        148        212        483   

Amortization of purchased intangibles

                         223        251        251        253        251   

Stock based compensation

    118        120        132        138        153        225        645        435   

Acquired based costs(1)

                  337        710                               

Change in fair value of warrant and option liabilities

           209        66        149        650        988        (309     102   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 1,089      $ 1,984      $ 1,449      $ (701   $ 1,389      $ 384      $ 65      $ 1,182   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Our quarterly revenue increased each quarter primarily due to new customer acquisition and expansions of our solutions in our installed base of customers. We completed four acquisitions in the last four months of 2010, which also contributed to incremental revenue growth. The timing of customer acquisition and expansions is not uniform from quarter to quarter, which contributes to fluctuations in product revenue across the quarters presented. A majority of service revenue is associated with software maintenance and support contracts, which is recognized ratably over the service period, resulting in less variability in revenue across quarters.

Cost of revenue increased in each quarter as compared with the same quarter in the prior year primarily due to an increase in product shipments and the growth of our support and professional services organization to support increases in our installed base. While costs have increased along with the associated revenue, gross profit also generally increased in each quarter. Gross margins ranged from 65% in the quarter ended June 30, 2010 to 59% in the quarter ended December 31, 2011. Gross margins declined in the quarter ended December 31, 2010 compared to the first three quarters of 2010 primarily due to an increased investment in our services organization to support customer growth and incremental cost of operations related to the acquisitions completed in that quarter. Gross margins were generally lower in 2011 compared to 2010 due to continued investments in our professional services organization to support growth in customer deployments, a provision for excess inventory recorded in the quarter ended December 31, 2011, and the introduction of our new B3000 badge in the quarter ended December 31, 2011.

Total operating expenses increased in each quarter as compared with the same quarter in the prior year primarily due to the addition of personnel in connection with the expansion of our business. Operating expenses increased significantly in the quarter ended December 31, 2010 due to expenses associated with the acquisitions completed in the last four months of 2010. The intangible assets due to the acquisitions also increased operating expenses throughout 2011. In addition, beginning in the quarter ended June 30, 2011, we began to incur additional expenses to build the infrastructure necessary to become a public company. Interest expense increased in 2011 due to an increase in borrowings in the fourth quarter of 2010 and the second quarter of 2011. Other expenses generally increased in 2011 due primarily to the change in fair market value of the convertible preferred stock warrants. The tax benefit in the quarter ended

 

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September 30, 2010 reflects the release of the valuation allowance on deferred tax assets of $0.4 million used to offset deferred tax liabilities that we recognized as a result of the acquisition made in the quarter.

Liquidity and capital resources

 

      Years ended December 31,  
(in thousands)    2009     2010     2011  

 

 

Consolidated statements of cash flow data:

      

Net cash provided by operating activities

   $ 2,997      $ 4,782      $ 5,512   

Net cash used in investing activities

     (403     (9,449     (2,454

Net cash provided by financing activities

     144        4,378        3,198   

 

 

As of December 31, 2011, we had cash and cash equivalents of $14.9 million, consisting of cash and money market accounts. Other than $0.3 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.

We are not a capital-intensive business, nor do we expect to be in the future. During 2009, 2010 and 2011, our purchases of property and equipment were $0.2 million, $0.7 million and $2.4 million, respectively. The expenditures in 2011 primarily related to leasehold improvements and computer equipment to support the increase in our headcount, and B3000 production equipment.

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.

 

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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, 2011, we were in compliance with the agreement.

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 2011, we had drawn $0.0 million and $4.5 million, respectively. This line of credit will expire in April 2012.

Term loan facility:

On December 13, 2010, we borrowed $5.0 million from 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. From June to December 2011, we repaid an aggregate of $1.3 million on this loan, which represented 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.

Operating activities

Cash provided by operating activities was $5.5 million in 2011, which was primarily due to an increase in deferred revenue of $6.3 million as a result of the increased sales for the year, the change in accounts payable of $3.0 million, an increase in accrued liabilities of $0.9 million, stock-based compensation expense of $1.5 million and changes in the valuation of preferred stock warrants and option liabilities of $1.4 million, amortization of intangible assets of $1.0 million and depreciation and amortization of $1.0 million. This was offset by a net loss of $2.5 million and change in accounts receivable of $6.7 million due to the increase in volume and the timing of product shipments during 2011. We expect accounts receivable balances will fluctuate over time depending on the timing of product shipments within the given period. Inventory increased $1.1 million as we began transitioning to the B3000 badge.

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 $1.7 million as we elected to build inventory prior to our transition to a new contract manufacturer.

 

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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.

Investing activities

Cash used in investing activities was $2.5 million in 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 the year were higher than normal as we expanded our leasehold improvements and procured additional computer equipment to support the increase in headcount. We also invested in manufacturing tools and equipment to support our newly introduced B3000 badge.

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.

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.

Financing activities

Cash provided by financing activities was $3.2 million in 2011, which was primarily attributable to a $2.9 million net increase in debt and $1.8 million in proceeds from the exercise of stock options and preferred stock warrants offset by $1.5 million of expenses related to this offering. 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 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.

Contractual obligations

The following table summarizes our contractual obligations as of December 31, 2011:

 

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

 

 

Operating leases(1)

   $ 5,729       $ 1,231       $ 4,148       $ 350       $         —   

Non-cancelable purchase commitments(2)

     4,888         4,888                           

Long-term debt(3)

     8,516         6,639         1,877                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,133       $ 12,758       $ 6,025       $ 350       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

(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.

 

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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 2009, 2010 and 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.

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

 

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A typical sales arrangement involves multiple elements, such as sales of communications badges, perpetual software licenses, professional services and maintenance services which entitle customers to unspecified upgrades, bug fixes, patch releases and telephone support. Revenue from the sale of communication badges and perpetual software licenses is recognized upon shipment or delivery at the customers’ premises as the contractual provisions governing sales of these products do not include any provisions regarding acceptance, performance or general right of return or cancellation or termination provisions adversely affecting revenue recognition. Revenue from the sale of maintenance services on software licenses is recognized over the period during which the services are provided, which is generally one year. Revenue from professional services is recognized on a time and materials basis as the services are provided, generally over a period of two to eight weeks.

For contracts that were signed prior to January 1, 2010 and were not materially modified after that date, we recognize revenue on such arrangements in accordance with the discussion under ASC 985-605, Software Revenue Recognition, for all elements under such arrangements, as our software licenses sold as part of such multiple element arrangements are considered essential to the functionality of the communications system. The arrangement consideration is allocated between each element in a multiple element arrangement based on vendor-specific objective evidence, or VSOE, of fair value. We applied the residual method whereby only the fair value of the undelivered element, based on VSOE, is deferred and the remaining residual fee is recognized when delivered. We established VSOE of fair value for maintenance services based on actual renewal rates. The VSOE of fair value for professional services is based on the rates charged for those services when sold independently from a software license.

In October 2009, the FASB amended the guidance for revenue recognition for tangible products containing software components that function together to deliver the products essential functionality and also amended the accounting guidance for multiple element arrangements. We concluded that both standards were applicable to our products and arrangements and elected to early adopt these standards on a prospective basis for revenue arrangements entered into or materially modified after January 1, 2010. Under the new guidance, tangible products, containing both software and nonsoftware components that function together to deliver a tangible product’s essential functionality, will no longer be subject to software revenue accounting.

The amended guidance for multiple element arrangements:

 

 

provides updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated and how the consideration should be allocated

 

 

requires an entity to allocate revenue in an arrangement using best evidence of selling price, or BESP, if a vendor does not have vendor specific evidence, or VSOE, of fair value or third party evidence, or TPE, of fair value

 

 

eliminates the use of the residual method and require an entity to allocate revenue using the relative selling price method

Under the new guidance, tangible products and the essential software licenses that work together with such tangible products to provide them their essential functionality are now not subject to software revenue recognition accounting rules (non-software elements), while nonessential software licenses are still governed under software revenue recognition rules

 

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(software elements). In such multiple element arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the non-software elements. For our multiple-element arrangements, we allocate revenue to each element based on a selling price hierarchy at the arrangement inception. The selling price for each element is based upon the following selling price hierarchy: VSOE if available, third party evidence, or TPE, if VSOE is not available, or best estimate of selling price, or BESP, if neither VSOE nor TPE are available. We then further allocate consideration within the software group to the respective elements within that group following the guidance in ASC 985-605 and our policies as described above.

We allocate revenue to all deliverables based on their relative selling prices, which for the majority of our products and services is based on VSOE of fair value. We have established VSOE of fair value for our communication badges, smartphones, software maintenance, extended warranty, and professional services. VSOE of fair value is established based on selling prices when the elements are sold separately and such selling prices fall within a relatively narrow band or through actual maintenance renewal rates. We establish best evidence of selling price, or BESP, considering multiple factors including normal pricing and discounting practices, which considers market conditions, internal costs and gross margin objectives. We established BESP for perpetual licenses based on a range of actual discounts off list price, as the actual selling prices for perpetual licenses fall within a relatively narrow range.

Each element is accounted for as a separate unit of accounting provided the following criteria are met: the delivered products or services have value to the customer on a standalone basis; and for an arrangement that includes a general right of return relative to the delivered products or services, delivery or performance of the undelivered product or service is considered probable and is substantially controlled by us. We consider a deliverable to have standalone value if the product or service is sold separately by us or another vendor or could be resold by the customer. Further, our revenue arrangements do not include a general right of return. We limit the amount of revenue recognized for delivered elements to an amount that is not contingent upon future delivery of additional products or services or meeting of any specified performance conditions. The adoption of the amended revenue recognition guidance did not result in any significant changes to the individual deliverables to which we allocate revenue as the fair value for most of the deliverables is based on VSOE, or the timing of revenue recognized from the individual deliverables.

We also derive revenue from the provision of hosted services on a subscription basis and software sold under term licenses. Revenue from such arrangements is recognized ratably over the term of the arrangement.

Stock-based compensation

We record all stock-based awards, which consist of stock option grants, at fair value as of the grant date and recognize the expense over the requisite service period (generally over the vesting period of the award). The expenses relating to these awards have been reflected in our financial statements. Stock options granted to our employees vest over periods of 12 to 48 months. With the exception of stock options granted in connection with the acquisition of ExperiaHealth, which vest upon certain milestones being met, stock options granted to non-employees generally vest on the date of grant.

 

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We use the Black-Scholes option-pricing model to calculate the fair value of stock options on their grant date. This model requires the following major inputs: the estimated fair value of the underlying common stock, the expected life of the option, the expected volatility of the underlying common stock over the expected life of the option, the risk-free interest rate and expected dividend yield. The following assumptions were used for each respective period for employee stock-based compensation:

 

      Years ended December 31,  
     2009      2010      2011  

 

 

Risk-free interest rate

     1.89% - 2.73%         1.90% - 2.63%         0.98% - 2.48%   

Expected life (years)

     5.57         5.77         5.49 - 5.73  

Expected volatility

     45.30% - 46.20%         44.03% - 44.52%         44.68% - 47.60%   

Dividend yield

     0.0%         0.0%         0.0%   

 

 

Based upon the assumed initial public offering price of $13.00 per share, the midpoint of the range set forth on the cover page of this prospectus, the aggregate intrinsic value of options outstanding as of December 31, 2011 was $35.9 million, of which $23.9 million related to vested options and $12.0 million related to unvested options.

Because our securities are not publicly traded, the risk-free rate for the expected term of the option was based on the U.S. Treasury Constant Maturity Rate as of the grant date. The computation of expected life was determined based on the historical exercise and forfeiture behavior of our employees, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The expected stock price volatility for our common stock was estimated based on the historical volatility of a group of comparable companies for the same expected term of our options. The comparable companies were selected based on industry and market capitalization data. We intend to continue to consistently apply this process using the same or similar companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us. In this latter case, more suitable companies whose share prices are publicly available would be utilized in the calculation. We assumed the dividend yield to be zero, as we have never declared or paid dividends and do not expect to do so in the foreseeable future.

Stock-based compensation expense is recognized based on a straight-line amortization method over the respective vesting period of the award and has been reduced for estimated forfeitures. We estimated the expected forfeiture rate based on our historical experience, considering voluntary termination behaviors, trends of actual award forfeitures, and other events that will impact the forfeiture rate. To the extent our actual forfeiture rate is different from our estimate, the stock-based compensation expense is adjusted accordingly.

 

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Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock option vests, or if fully vested, on the date of grant. For stock options issued to non-employees with specific performance criteria, we make a determination at each balance sheet date whether the performance criteria are probable of being achieved. Compensation expense is recognized until such time as the performance criteria are met or when it is probable that the criteria will not be met. The fair value of the stock options granted to non-employees was calculated using the Black-Scholes option-pricing model with the following assumptions:

 

     As of December 31,  
    2009     2010     2011  

 

 

Risk-free interest rate

    1.72%        2.43%        1.63% - 3.41%   

Expected life

    10        10        8.83 - 10   

Expected volatility

    45.0%        46.0%        45.0% - 54.0%   

Dividend yield

    0%        0%        0%   

 

 

 

 

   

 

 

   

 

 

 

Since January 1, 2010, we have granted options to purchase shares of common stock as follows:

 

Grant date   Number of options
granted
    Option exercise
price
    Fair value of
common stock
per share
    Fair value of
common stock
options
per share
    Grant date
fair value
(in thousands)
 

 

 

February 26, 2010

    18,246      $ 1.62      $ 1.62      $ 0.73      $ 13   

March 31, 2010

    99,999        1.62        1.62        0.73        92   

July 16, 2010

    19,747        2.04        2.04        0.92        17   

September 7, 2010

    144,331        2.22        2.22        0.97        140   

November 3, 2010

    83,333        2.22        2.22        1.32        110   

December 23, 2010

    314,472        2.16        2.16        0.95        300   

March 31, 2011

    363,415        4.68        4.68        2.07        752   

May 5, 2011

    420,404        5.04        5.04        2.02        943   

June 14, 2011

    1,250        5.04        11.10        8.12        11   

June 14, 2011

    45,696        5.04        11.10        7.41        338   

July 28, 2011

    71,326        11.10        11.10        4.84        345   

September 15, 2011

    66,666        11.10        10.68        6.72        447   

October 3, 2011

    200,000        11.10        11.10        4.95        991   

October 26, 2011

    83,241        11.10        11.10        4.95        412   

December 20, 2011

    112,239        11.10        11.10        4.96        557   

February 9, 2012

    57,239        12.42        12.42        5.53        317   

 

 

In addition, on February 9, 2012 we granted 24,152 shares of restricted common stock to certain non-employee directors with a fair value of $12.42 per share.

Because our common stock is not publicly traded, our board of directors exercises significant judgment in determining the fair value of our common stock on the date of grant based on a number of objective and subjective factors. Factors considered by our board of directors included:

 

 

our stage of development

 

 

our financial condition and historical operating performance

 

 

our future financial projections and the risk of achieving these projections

 

 

changes in the company and in the industry since the last time the board made a determination of fair value

 

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impact of acquisitions on the business, including risks associated with the integration of the acquired operations

 

 

the financial performance and range of market multiples of comparable companies and comparable acquisitions

 

 

market and regulatory conditions affecting our industry

 

 

the rights, preferences, privileges and restrictions of each security in our capital structure

 

 

the expected timing and likelihood of achieving a liquidity event, such as an initial public offering or sale of our company given prevailing market conditions

 

 

the illiquid nature of our common stock

Since January 2009, we have obtained periodic third-party valuations of our common stock performed in a manner consistent with the AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. These valuations involved estimating our enterprise value, or EV, and then allocating the EV to each element of our capital structure (e.g., preferred stock, common stock, warrants and options). Our EV was estimated using a combination of two generally accepted approaches: the income approach using the discounted cash flow method, or DCF, and the market-based approach using two comparable company methods. The DCF estimated our enterprise value based on the present value of estimated future net cash flows our business is expected to generate over a forecasted period and an estimate of the present value of cash flows beyond that period, which is referred to as terminal value. The future cash flows used in the DCF were approved by our board of directors quarterly and considered the changes that had taken place in our business since the last valuation. The estimated present value was then calculated by applying a discount rate known as the weighted average cost of capital, which accounts for the time value of money and the appropriate degree of risks inherent in the business, and to our cash flow projections.

Under the market-based approach we considered analyses for both comparable companies and comparable acquisitions. In the comparable company analysis of the market approach, we considered EV, to last twelve months, or LTM, revenue, to next calendar year, or CY, revenue, to two-year forward revenue, and to two-year forward EBITDA as presented in the table below. Since we have not yet achieved a normalized level of operating profit, LTM EBITDA multiples were not used and forward EBITDA multiples were applied only in certain valuations. EV is defined and computed as the market value of equity (also referred to as market capitalization, computed as fully-diluted shares outstanding multiplied by trading price), plus preferred stock, plus minority interest, plus debt, less cash (cash, cash equivalents and marketable securities). Over time, the comparable companies we considered evolved to reflect the shift in our product offering and strategy. In selecting appropriate multiples, we gave consideration to the fact that the comparable companies we identified were larger, more mature and more diversified than us, and most were profitable, whereas we are smaller and less diversified, have not yet achieved positive or normalized (depending on the valuation date) operating margins, but are growing faster than the comparable companies. Over time, the selected multiples evolved as a result of movements in comparable companies’ stock prices and financial results, as well as our historical and expected future performance relative to that of the comparable companies.

 

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The comparable acquisitions analysis of the market approach was considered at each fair value assessment date, but only utilized to derive an indication of value since the December 31, 2010 valuation. Prior to that, we determined that our LTM metrics alone were not sufficient to imply an indication of value under the comparable acquisition approach. Starting with the December 31, 2010 valuation, we concluded an indication of value from the comparable acquisitions approach based upon EV-to-LTM revenue multiples ranking near the mean and median of the comparable companies, after excluding outliers and considering differences in size and margins.

The major inputs and assumptions used in the market approaches for each valuation date are presented in the table below:

 

     12/31/09     3/31/10     6/30/10     9/30/10     12/31/10     3/31/11     6/30/11     9/30/11     10/20/11     12/31/11     2/2/12  

 

 

Comparable public company analysis

                     

EV/LTM revenue range

   
 
1.00x-
1.20x
 
  
                                                                     

EV/next CY revenue range

   
 
0.90x-
1.10x
 
  
   
 
1.00x-
1.25x
 
  
   
 
1.00x-
1.25x
 
  
   
 
1.00x-
1.20x
 
  
   
 
1.50x-
2.00x
 
  
   
 
1.50x-
2.00x
 
  
   
 
3.00x-
3.50x
 
  
   
 
3.00x-
3.50x
 
  
   
 
3.00x-
3.50x
 
  
   
 
2.25x-
2.75x
 
  
   
 
2.25x-
2.75x
 
  

EV/two-year forward revenue range

          
 
0.75x-
1.00x
 
  
   
 
0.75x-
1.00x
 
  
   
 
0.90x-
1.10x
 
  
   
 
1.00x-
1.50x
 
  
   
 
1.00x-
1.50x
 
  
   
 
2.75x-
3.25x
 
  
   
 
2.50x-
3.00x
 
  
   
 
2.50x-
3.00x
 
  
   
 
1.75x-
2.25x
 
  
   
 
1.75x-
2.25x
 
  

EV/two-year forward EBITDA range

                        
 
6.5x-
7.5x
 
  
   
 
7.0x-
9.0x
 
  
   
 
8.0x-
10.0x
 
  
   
 
12.0x-
14.0x
 
  
                           

Comparable acquisitions analysis

                     

EV/LTM revenue range

                               
 
2.00x-
2.50x
 
  
   
 
2.00x-
2.50x
 
  
   
 
3.00x-
3.50x
 
  
   
 
3.00x-
3.50x
 
  
   
 
3.00x-
3.50x
 
  
   
 
3.00x-
3.50x
 
  
   
 
3.00x-
3.50x
 
  

 

 

For periods with more than one multiple indicated, we weighted each measure equally in determining our EV.

Once calculated, the DCF, the comparable company approach, and the comparable acquisitions approach (when utilized) were then equally weighted to determine our EV. Our EV at each valuation date was allocated to the components of our capital structure using two option pricing methods, one representing a sale or merger exit scenario and one representing an IPO scenario, weighted for the relative probabilities of either a sale or merger, or an IPO. As time passed and the prospects of an IPO became more favorable, the weight we assigned to the IPO scenario increased, thereby increasing the value allocated to our common stock.

A brief narrative of the specific factors considered by our board of directors or compensation committee in determining the grant date fair value of our common stock, as of the date of each grant since January 1, 2010, is set forth below.

 

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February 2010

On February 26, 2010, our board of directors granted 18,246 options at an exercise price of $1.62 per share. This exercise price was based upon our board of directors’ determination of the fair value of our common stock on such date. In reaching this decision, the board considered that there were no significant changes in our equity structure nor any significant business milestones that impacted the fair value of our common stock since the previous valuation in the fourth quarter of 2009. Additionally, the board considered a third-party valuation analysis as of December 31, 2009, which was received on February 25, 2010 and utilized cash flow assumptions and other qualitative inputs available through January 2010. The valuation analysis estimated the fair value of our common stock to be $1.62 per share and used a non-marketability discount of 33.3% and a scenario weight of 25.0% for an IPO and 75.0% for a sale or merger. The Black-Scholes option inputs to the model were: 55.0% for volatility; 1.7% for the risk-free interest rate and a term of 3.0 years.

March 2010

On March 31, 2010, our board of directors granted 99,999 options at an exercise price of $1.62 per share. This exercise price was based upon our board of directors’ determination of the fair value of our common stock on such date. In reaching this decision, the board considered that there were no significant changes in either our equity structure or our future cash flow projections since the prior grant in February 2010.

July 2010

On July 16, 2010, our compensation committee granted 19,747 options at an exercise price of $2.04 per share. This exercise price was based upon our board of directors’ determination of the fair value of our common stock on such date. In reaching this decision, the compensation committee considered that there were no significant changes in our equity structure or any significant business milestones that impacted the fair value of our common stock since the previous valuation. Additionally, it considered a third-party valuation analysis as of March 31, 2010, which was received on July 13, 2010 and utilized slightly improved cash flow assumptions and other qualitative inputs available through April 30, 2010. The valuation analysis estimated the fair value of our common stock to be $2.04 per share and used a non-marketability discount of 29.0% and a scenario weight of 25.0% for an IPO and 75.0% for a sale or merger. The Black-Scholes option inputs to the model were 55.0% for volatility; 1.02% for the risk-free interest rate and a term of 2.0 years.

September 2010

On September 7, 2010, our compensation committee granted 144,331 options at an exercise price of $2.22 per share. This exercise price was based upon our board of directors’ determination of the fair value of our common stock on such date. In reaching this decision, the compensation committee considered that there were no significant changes in our equity structure or any significant business milestones that impacted the fair value of our common stock since the previous valuation. Additionally, it considered a third-party valuation analysis as of June 30, 2010, which was received on September 1, 2010 and utilized slightly improved cash flow assumptions and other qualitative inputs available through July 29, 2010. The valuation analysis estimated the fair value of our common stock

 

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to be $2.22 per share and used a non-marketability discount of 27.8% and a scenario weight of 25.0% for an IPO and 75.0% for a sale or merger. The Black-Scholes option inputs to the model were 55.0% for volatility; 0.54% for the risk-free interest rate and a term of 1.75 years.

In the third and fourth quarters of 2010, revenue and operating results from our Voice Communication solution improved modestly. However, our capital structure changed significantly with the net addition of $4.0 million in debt plus significant cash expenses associated with our four 2010 acquisitions, which laid the groundwork for expanding our Messaging and Care Transition solutions in 2011.

November 2010

On November 3, 2010, we granted options to purchase up to 83,333 shares of our common stock, at an exercise price of $2.22 per share, as contingent consideration for the acquisition of ExperiaHealth. The exercise price was based on the board of directors’ determination of the fair value of our common stock on the date of grant. In reaching this decision, the board considered our most recent third-party valuation analysis. Please see “Note 4” to our consolidated financial statements for more information regarding these options and our acquisition of ExperiaHealth.

December 2010

On December 23, 2010, our board of directors granted 314,472 options at an exercise price of $2.16 per share. This exercise price was based upon our board of directors’ determination of the fair value of our common stock on such date. In reaching this decision, the board considered a third-party valuation analysis as of September 30, 2010, which was received on December 17, 2010 and utilized cash flow assumptions and other qualitative inputs available through November 11, 2010. The valuation specifically considered the significant cash expenditures we incurred in connection with the first two of our 2010 acquisitions as well as the uncertainty that existed in our ability to generate sustained future positive cash flow from these acquisitions. The valuation analysis estimated the fair value of our common stock to be $2.16 per share and used a non-marketability discount of 21.4% and a scenario weight of 25.0% for an IPO and 75.0% for a sale or merger. The Black-Scholes option inputs were 45.0% for volatility; 0.35% for the risk-free interest rate and a term of 1.5 years.

March 2011

On March 31, 2011, our board of directors granted 363,415 options at an exercise price of $4.68 per share. This exercise price was based upon our board of directors’ determination of the fair value of our common stock on such date. In reaching this decision, the board considered a third-party valuation analysis as of December 31, 2010, which was received on March 22, 2011 and utilized cash flow assumptions and other qualitative inputs available through February 17, 2011. The valuation considered increasing future cash flow projections, since the last valuation, due to the expansion of our Messaging and Care Transition product lines that occurred in 2011 resulting from the integration of our 2010 acquisitions, including decisions around product line management and sales strategies. The valuation analysis estimated the fair value of our common stock to be $4.68 per share, and used a non-marketability discount of 21.3% and a scenario weight of 30.0% for an IPO and 70.0% for a sale or merger. The Black-Scholes option inputs were 45.0% for volatility; 0.45% for the risk-free interest rate and a term of 1.5 years.

 

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May 2011

On May 5, 2011, our board of directors granted 420,404 options at an exercise price of $5.04 per share. This exercise price was based upon our board of directors’ determination of the fair value of our common stock on such date. In reaching this decision, the board considered a third-party valuation analysis as of March 31, 2011, which was received on May 4, 2011 and utilized cash flow assumptions and other qualitative inputs available through April 30, 2011. The valuation included upward revisions in our financial projections as we continued to integrate our acquisitions, as well as a reduction of time anticipated for a potential IPO. The valuation analysis estimated the fair value of our common stock to be $5.04 per share and used a non-marketability discount of 19.5% and a scenario weight of 40.0% for an IPO and 60.0% for a sale or merger. The Black-Scholes option inputs were 45.0% for volatility; 0.43% for the risk-free interest rate and a term of 1.25 years.

June 2011

On June 14, 2011, our board of directors granted 1,250 options to a non-employee and 45,696 options to employees at an exercise price of $5.04 per share. In July 2011, we received a third-party valuation analysis as of June 30, 2011 which utilized cash flow assumptions and other qualitative inputs available through June 23, 2011. The valuation analysis estimated the fair value of our common stock to be $11.10 per share and used a non-marketability discount of 14.7% and a scenario weight of 60.0% for an IPO and 40.0% for a sale or merger. The Black-Scholes option inputs used for the IPO scenario were 45.0% for volatility; 0.10% for the risk-free interest rate and a term of 0.33 years. The Black-Scholes option inputs used for the sale or merger scenario were 45.0% for volatility; 0.32% for the risk-free interest rate and a term of 1.50 years. The increase in estimated fair value of our common stock to $11.10 per share at June 30, 2011 from $5.04 per share at March 31, 2011 was primarily attributable to upward revisions in our expected growth as we continued to execute on our business plan, and the expected benefits from our acquisitions began to materialize and favorably impacted our future expectations. Additionally, we noted a significant rebound in the market for technology company IPOs in this period. The confluence of all of these factors had a pervasive impact on key assumptions in our valuation analyses. We reduced the discount rate we used in our DCF analysis from 30% to 20%, and we increased the terminal value expectation in our DCF from 8x to 10x forecasted EBITDA. We also selected higher multiples for our market-based approaches due to our increase in expected growth and a decrease in our risk profile, as described above. Additionally, we increased the weighting we applied for a potential IPO scenario to our valuation models from 40% at March 31, 2011 to 60% at June 30, 2011 after holding our IPO organizational meeting. Because of the proximity of the June 14, 2011 grant to the valuation as of June 30, 2011, the fair value of the underlying common stock used to calculate the fair value of the options on the grant date for financial statement reporting purposes was determined to be $11.10 per share.

July 2011

On July 28, 2011, our board of directors granted 71,326 options at an exercise price of $11.10 per share. This exercise price was based upon our board of directors’ determination of the fair value of our common stock on such date. In reaching this decision, the board considered the June 30, 2011 valuation described above.

 

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September and October 2011

Between September 1 and October 19, 2011 our board of directors granted 66,666 options to a non-employee and 200,000 options to an employee, each at an exercise price of $11.10 per share. Subsequently, we received a third-party valuation analysis as of September 30, 2011. The valuation analysis estimated the fair value of our common stock to be $10.86 per share and used a non-marketability discount of 14.7% and a scenario weight of 70.0% for an IPO and 30.0% for a sale or merger. The Black-Scholes option inputs used for the IPO scenario were 45.0% for volatility; 0.06% for the risk-free interest rate and a term of 0.5 years. The Black-Scholes option inputs used for the sale or merger scenario were 45.0% for volatility; 0.16% for the risk-free interest rate and a term of 1.25 years. During the period from June 30, 2011 to September 30, 2011, we noted a significant decrease in both the market for technology company IPOs and the broader U.S. equity markets. For example, during this period the Dow Jones Industrial Average and the NASDAQ market index decreased 13% and 14%, respectively. Consequently, we considered this factor in our determination of stock price fair value, which included using lower market multiples for our market-based valuation approaches during this period. Prior to receiving our third-party valuation as of September 30, 2011, our board of directors estimated the grant date fair value of our common stock for the non-employee grant to be $10.68 per share and the grant date fair value of our common stock for the employee stock option grants to be $11.10 per share. These estimations considered preliminary indicators of value we received from the third-party valuation firm that were generally consistent with the final September 30, 2011 valuation we subsequently received. After receiving the September 30, 2011 valuation, we concluded that the difference between the share prices of $10.68 and $11.10, and the $10.86 valuation were not significant.

On October 26, 2011, our board of directors granted 83,241 options at an exercise price of $11.10 per share. This exercise price was based upon our board of directors’ determination of the fair value of our common stock on such date, which was consistent with the valuation used for the employee grant on October 3, 2011. Subsequently, we received a third-party valuation analysis as of October 20, 2011 which estimated the fair value of our common stock to be $10.92 per share. The key assumptions in this valuation were generally consistent with the assumptions used in the September 30, 2011 valuation.

December 2011

On December 20, 2011, our board of directors granted 112,239 options at an exercise price of $11.10 per share. In January 2012, we received a third-party valuation analysis as of December 31, 2011. The valuation estimated the fair value of our common stock to be $11.70 per share and used a non-marketability discount of 11.1% and a scenario weight of 80.0% for an IPO and 20.0% for a sale or merger. The Black-Scholes option inputs used for the IPO scenario were 45.0% for volatility; 0.02% for the risk-free interest rate and a term of 0.25 years. The Black-Scholes option inputs used for the sale or merger scenario were 45.0% for volatility; 0.15% for the risk-free interest rate and a term of 1.25 years. Prior to receiving the third-party valuation as of December 31, 2011, our board of directors estimated the grant date fair value of our common stock to be $11.10 per share. This estimation considered the information we used to estimate the fair value of our common stock in October 2011, as discussed above, as well as preliminary indicators of value we received from the third-party valuation firm. After receiving the December 31, 2011 valuation, we concluded that the difference between the $11.10 share price and $11.70 valuation was not significant.

 

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February 2012

On February 9, 2012, our board of directors granted 57,239 employee options at an exercise price of $12.42 per share and 24,152 shares of restricted common stock to certain non-employee directors with a fair value of $12.42 per share. The option exercise price was based upon our board of directors’ determination of the fair value of our common stock on such date. We received a third-party valuation analysis as of February 2, 2012 to assist in determining the fair value of our common stock for these grants. The valuation analysis estimated the fair value of our common stock to be $12.42 per share and used a non-marketability discount of 8.48% and a scenario weight of 90.0% for an IPO and 10.0% for a sale or merger. The Black-Scholes option inputs used for the IPO scenario were 45.0% for volatility; 0.06% for the risk-free interest rate and a term of 0.17 years. The Black-Scholes option inputs used for the sale or merger scenario were 45.0% for volatility; 0.15% for the risk-free interest rate and a term of 1.17 years.

March 2012

On March 7, 2012 our board of directors approved the issuance of 33,333 options to a newly appointed director and 3,250 options to six newly hired employees. All of these options will be formally granted upon the pricing of our common stock to be sold in this offering at an option exercise price per share equal to the initial public offering price. Until such time the options are granted, we will not record expense for the options in our consolidated financial statements.

In March 2012, we determined the estimated initial public offering price per share to be between $12.00 and $14.00 per share. Our board of directors made this determination after evaluating and discussing several factors with our management and the managing underwriters in this offering. These factors include the valuation and recent performance of healthcare technology companies that we expect will be viewed by potential investors as comparable to us, the aftermarket performance of companies that recently completed their initial public offerings, the third-party valuation that we received in February 2012 and the continuing volatility in the financial markets. Based upon the nature of our evaluation, we are not able to quantify the amount that any particular factor contributed to the determination of the estimated initial public offering price range.

The following table summarizes stock-based compensation charges for 2009, 2010 and 2011 (in thousands):

 

      Year ended December 31,  
(in thousands)        2009          2010      2011  

 

 

Employee stock-based compensation expense

   $ 492       $ 507       $ 1,001   

Non-employee stock-based compensation expense

             100         907   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 492       $ 607       $ 1,908   
  

 

 

    

 

 

    

 

 

 

 

 

At December 31, 2011, there was $3.7 million of unrecognized net compensation cost related to options which is expected to be recognized over a weighted-average period of 3.7 years.

Goodwill and intangible assets

We allocate the purchase price of any acquisitions to tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of

 

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the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on information obtained from management of the acquired companies and historical experience. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur which affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities.

Goodwill

Goodwill is tested for impairment at the reporting unit level at least annually or more often if events or changes in circumstances indicate the carrying value may not be recoverable. No impairment was recorded in 2010 or 2011. As of December 31, 2011, no changes in circumstances indicate that goodwill carrying values may not be recoverable. Application of the goodwill impairment test requires judgment. Circumstances that could affect the valuation of goodwill include, among other things, a significant change in our business climate and buying habits of our customers along with changes in the costs to provide our products and services. We have identified two operating segments (products and services) which we also consider to be reporting units.

Intangible assets

In connection with the acquisitions we made in 2010, we recorded intangible assets. We applied an income approach to determine the values of these intangible assets; the income approach measures the value of an asset based on the future cash flows it expects to generate over its remaining life. The application of the income approach requires estimates of future cash flows based upon, among other things, certain assumptions about expected future operating performance and an appropriate discount rate determined by our management. In applying the income approach, we used the excess earnings method to value our customer relationships and in-process research and development intangible assets and the relief from royalty method to value our developed technology and trade name intangible assets. We used the with and without method to value a non-compete intangible asset. The cash flows expected to be generated by each intangible asset were discounted to their present value equivalent using rates believed to be indicative of market participant discount rates.

Intangible assets are amortized over their estimated useful lives. Upon completion of development, acquired in process research and development assets are generally considered amortizable, finite-lived assets and are amortized over their estimated useful lives. Finite-level intangible assets consist of customer contracts, trademarks, and non-compete agreements. We evaluate our intangible assets for impairment by assessing the recoverability of these assets whenever adverse events or changes in circumstances or business climate indicate that expected undiscounted future cash flows related to such intangible assets may not be sufficient to support the net book value of such assets. An impairment is recognized in the period of identification to the extent the carrying amount of an asset exceeds the fair value of such asset. No impairment was recorded in 2010 or 2011.

 

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Significant judgments required in assessing the impairment of goodwill and intangible assets include the identification of reporting units, identifying whether events or changes in circumstances require an impairment assessment, estimating future cash flows, determining appropriate discount and growth rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value as to whether an impairment exists and, if so, the amount of that impairment.

Income taxes

We use the asset and liability method of accounting for income taxes. Under this method, we record deferred income taxes based on temporary differences between the financial reporting and tax bases of assets and liabilities and use enacted tax rates and laws that we expect will be in effect when we recover those assets or settle those liabilities, as the case may be, to measure those taxes. In cases where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, we provide for a valuation allowance. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

We have deferred tax assets, resulting from deductible temporary differences that may reduce taxable income in future periods. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax-planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be impacted by changes in tax laws, changes in statutory tax rates and future taxable income levels. If we were to determine that we would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. Due to the amount of net operating losses available for income tax purposes through December 31, 2011, we had a full valuation reserve against our deferred tax assets. We continue to evaluate the realizability of our U.S. and Canadian deferred tax assets. If our financial results improve, we will reassess the need for a full valuation allowance each quarter and, if we determine that it is more likely than not the deferred tax assets will be realized, we will adjust the valuation allowance.

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon our management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the highest amount of tax benefit with a greater than 50.0% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our financial statements.

We include interest and penalties with income taxes on the accompanying statement of operations. Our tax years after 2006 are subject to tax authority examinations. Additionally, our net operating losses and research credits prior to 2007 are subject to tax authority adjustment.

 

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Provision for income taxes

We recorded a provision for income taxes of $285,000 for the year ended December 31, 2011 compared to a benefit from income taxes of $367,000 for the year ended December 31, 2010. The difference primarily related to benefits realized in 2010 related to the release of the valuation allowance on deferred tax assets used to offset deferred tax liabilities that we recognized as a result of the acquisitions made in 2010.

Quantitative and qualitative disclosures about market risk

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, historically we have invested in money market funds. To minimize the exposure due to an adverse shift in interest rates, we invest in short-term securities and maintain an average portfolio duration of one year or less.

Historically our operations have consisted of research and development and sales activities in the United States. As a result, our financial results have not been materially affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets. In the fourth quarter of 2010, we acquired Wallace Wireless, Inc., a company based in Toronto, Canada. At the date of acquisition, this company had 16 employees. We expect to generate future revenue and incur future expenses associated with operating our Canadian subsidiary relating to this acquisition. We are developing plans to expand our international presence. Accordingly, we expect that our exposure to changes in foreign currency exchange rates and economic conditions will increase in future periods.

Recently issued accounting guidance

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures. ASU 2010-06 requires disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers, beginning in the first quarter of 2010. Additionally, these amended standards require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), beginning in the first quarter of 2011. The adoption of this new standard did not have a significant impact on our consolidated financial statements.

In June 2011, the FASB issued new disclosure guidance related to the presentation of the Statement of Comprehensive Income. This guidance eliminates the current option to report other comprehensive income and its components in the consolidated statement of stockholders’ equity. The requirement to present reclassification adjustments out of accumulated other comprehensive income on the face of the consolidated statement of income has been deferred. We will adopt this accounting standard upon its effective date for periods beginning on or after December 15, 2011, and we anticipate that this adoption will not have any impact on our financial position or results of operations but will impact our financial statement presentation.

In September 2011, the FASB issued new accounting guidance that simplifies goodwill impairment tests. The new guidance states that a “qualitative” assessment may be performed to determine whether further impairment testing is necessary. We will adopt this accounting standard upon its effective date for periods beginning on or after December 15, 2011, and do not anticipate that this adoption will have a significant impact on our financial position or results of operations.

 

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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, or when the patient is discharged from the hospital.

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 or through Vocera Connect client applications available for BlackBerry, iPhone and Android smartphones, as well as Cisco wireless IP phones 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.

Our solutions are deployed in over 800 hospitals and healthcare facilities, including large hospital systems, small and medium-sized local hospitals, and a small number of clinics, surgery centers and aged-care 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 2011, we generated revenue of $79.5 million, representing growth of 40.0% over 2010, and a net loss of $2.5 million.

 

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Industry overview

Improving communication among the mobile and highly dispersed healthcare professionals in hospitals is extremely important. According to Billians HealthData, an independent provider of healthcare business information, there were 6,928 hospitals in the United States as of December 31, 2011. The Bureau of Labor Statistics reports that in 2008 there were a total of five million workers at these hospitals, including 1.6 million nurses. Hospitals face a growing shortage of qualified nurses. The American Hospital Association estimates there were over 115,000 open positions for registered nurses in hospitals in the United States as of July 2007, and the nursing shortfall is expected to continue to grow substantially. The inadequate coverage of patients by qualified nurses can detract from the patient experience and impact hospitals’ financial performance as patients are increasingly selecting hospitals and providers based on quality of care, cost and overall experience with the provider. The increasing focus on improving patients’ experience is supported by the healthcare reform initiative, which incorporates financial incentives for hospitals to improve the quality of care and patient satisfaction. These forces are driving hospitals to invest in technology and process improvements to manage their operations more efficiently and to improve staff and patient satisfaction. As a result, the world healthcare information technology, or IT, market will grow from $99.6 billion in 2010 to $162.2 billion in 2015, at a compound annual growth rate of 10.2%, according to MarketsandMarkets, a global market research and consulting company based in the United States.

Hospitals have difficulty achieving effective communications among 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 transitions between caregivers’ at shift change and patient transfers between departments within the hospital.

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, where the nursing station represents the hub and physicians, specialists and nurses represent the spokes. 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. Information about the various caregivers to be contacted for each individual patient, and the different telephone numbers at which they are reachable at different times, are traditionally kept on a sheet of paper or white board at the nursing station. The nurse or other caregiver may be required to leave the bedside to access this information, which can be out of date, illegible or inaccurate.

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

 

 

Time away from the bedside.    A 2005-2006 study of nurses in 36 hospitals in 17 healthcare systems indicated that less than one-third of nursing time was spent in patient rooms. 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, and the individuals performing particular

 

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roles often changing each shift, nurses and other caregivers do not know at any given time which person is providing care to each and every patient. 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. A 2005 study of hospital noise levels by acoustic engineers found that since 1960 daytime hospital noise levels around the world rose from 57 decibels to 72 and nighttime levels increased from 42 decibels to 60, all of which exceeded the World Health Organization’s 1995 hospital noise guidelines, which suggest that sound levels in patient rooms should not exceed 35 decibels. Hospitals are increasingly seeking to reduce the ambient noise levels to which their patients and staff are subjected.

 

 

Lack of closed loop communication.    In a closed loop communication system, the person transmitting information receives confirmation that it was received by the intended recipient. Traditional hospital communication methods do not inherently provide for closed loop communication. The phrase, “I never received the page,” is commonly heard in traditional hospitals. This can waste caregiver time in seeking to confirm receipt of important patient information and can adversely affect patient care if it is incorrectly assumed that the transmitted information has been received and processed.

Shortcomings in hospital communication not only cause inconvenience and frustration, but can also lead to medical errors and hospital inefficiencies:

 

 

Miscommunication causes medical errors.    In a study released in October 2010, the Joint Commission’s Center for Transforming Healthcare found that more than 37% of patient hand-offs were defective and did not allow the new caregiver to safely care for the patient. Subsequently, in October 2011, the Joint Commission, an independent healthcare accreditation organization, released a report regarding sentinel events, which it defines as unexpected occurrences involving death or serious physical or psychological injury, or the risk thereof. The Joint Commission documented that in hospitals’ voluntary reports of over 2,600 sentinel events studied from 2009 through the third quarter of 2011, communication issues were identified as one of the root causes in 69% of the events. It further reported that when the cause for the sentinel event was a delay in treatment, communication issues were the most frequently identified reason for the delay, appearing in 518 of the 646 cases, or over 80%, occurring from 2004 through the third quarter of 2011.

 

 

Communication difficulties impact hospital economics.    Inefficient communication systems can adversely affect hospital revenue and operating costs. 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 for the hospital. 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.

To address these deficiencies, hospitals are seeking more effective alternatives for improving communication. We believe hospitals will increasingly turn to communication technologies to help improve patient safety and satisfaction, productivity and caregiver satisfaction and retention. We believe our solutions are at the convergence of the healthcare IT market and the

 

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enterprise communications and collaboration market. According to a report by Synergy Research Group, a source of market information for the networking and telecommunications industries, the enterprise communications and collaboration market reached $22.3 billion in 2010.

We estimate the worldwide hospital market opportunity for the full deployment of our Voice Communication solution to be over $6 billion on an aggregate basis. This aggregate market opportunity excludes ongoing maintenance and replacement products and is based on the amount spent for similar deployments by our existing customers in the United States calculated on a per bed and per staff member basis, and reflects our estimate of potential spending in select international markets adjusted for local market demographics.

Benefits of our solutions

We believe our solutions provide the following key benefits:

 

 

Improve patient safety.    The direct communication capabilities of our system improve caregivers’ ability to respond rapidly to critical events. The ability for users to instantly connect with the right resources in a closed loop communication process can help reduce medical errors and accidental deaths. Our Care Transition solution provides secure, repeatable and documented delivery of information during patient transfers, enabling accurate, timely communication that helps prevent treatment delays, medical errors and unsafe practices that may lead to sentinel events. After installing our Voice Communication solution, a hospital with over 500 beds reduced average telemetry alarm notification closure times from over nine minutes to under 40 seconds.

 

 

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. For example, a study that we commissioned at a hospital with over 300 beds revealed that after adopting our Voice Communication solution up to 94% of overhead pages were eliminated. A graduate study conducted at a cardiac care facility with over 50 beds reported that nurse call system response times were reduced by approximately 37% after the installation of our system. We believe that patient experience is important not only to the patient but to the hospital as well. A study published in 2010 indicates notable associations between measures of patient experiences and technical quality and safety in hospitals. Starting in 2012, 1% of hospitals’ Medicare and Medicaid reimbursement will be withheld and redistributed based on the quality of their patients’ experience, with the amount increasing to 2% in 2017. Performance will be measured by evaluation of certain core measures and by patient satisfaction scores on the Hospital Consumer Assessment of Healthcare Providers and Systems, or HCAHPS, survey evaluation. Two of the questions on the survey cover areas where our solutions can have a direct impact on survey results.

 

 

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. One customer, a teaching and research hospital, was able to reduce the time spent on common communication activities by 25% and the time spent looking for others by 45% after implementing our solution.

 

 

Increase revenue and reduce expenses.    Improved communication facilitated by our solutions can enable hospitals to increase revenue and reduce expenses through more efficient use of

 

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their resources, directly impacting profitability. With our solutions, hospitals can reduce nurse overtime expense and increase job satisfaction, thereby improving nurse recruiting and retention. In addition, improvements in patient safety and reduction in errors can lead to reduced liability cost for hospitals. Reports from customers indicate that our Voice Communication solution has enabled them to make more efficient use of high value areas of the hospital, such as operating rooms, which positions them to increase financial performance by achieving more surgeries per day. In an academic research study that we commissioned of a hospital in the Midwest, with five operating room suites, researchers measured a time savings of 5% (approximately 15 minutes) per surgery case after implementing our Voice Communication solution. According to the study, this time savings and corresponding increased throughput could enable one additional surgery per day, representing approximately $2 million in additional annual patient revenue. A hospital with nearly 400 beds reported that after deployment of our solution it measured an 80% reduction in “diversion hours” for the emergency department (during which emergency patients were diverted to another facility due to insufficient available capacity), which positioned it to achieve an annual increase of $3 million in net patient revenue as a result of improved emergency department throughput.

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. In some new hospital deployments, entire workflows and care processes have been designed around the use of our solutions. For example, one new hospital did not install an overhead paging system because it uses our Voice Communication solution instead. Other hospitals have designed workflows using our “broadcast to a group” feature in order to organize the cleaning of operating rooms, urgently assemble key resources during a stroke alert or notify staff when the number of patients in the emergency department has reached critical levels. We believe that the ability to be integrated into hospitals’ workflows in this manner increases the mission-critical nature of our platform and serves as a key competitive advantage.

 

 

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 and mobile applications. We believe our Voice Communication solution, which features a wearable, hands-free badge, is the 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 15 issued U.S. patents, and six U.S. patent applications are pending. This system has been certified as compliant with the FIPS 140-2 standard, delivering the wireless security required by the Veterans Administration and the Department of Defense. We believe this to be a significant barrier to entry for competing solutions. 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 800 separate hospitals and other healthcare facilities. We have

 

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a growing U.S. customer base and are expanding to hospitals in other English-speaking countries. For 2011, our largest end customer represented only 2.8% of revenue. After an initial sale, our customers frequently expand the deployment of our solutions to additional departments and functional groups. In 2010 and 2011, our quarterly revenue from existing customers (that is, customers from whom we had received revenue in a prior quarter) was on average over 85% of our revenue, 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. For example, one customer prominently features our Voice Communication badges in its nurse recruiting materials. 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 December 31, 2011, our solutions were deployed in approximately 9% of U.S. hospitals. We believe our unified communication platform can provide significant value to both large and small hospitals that currently do not deploy our solutions. We plan to continue to expand our direct sales force to win new customers among hospitals of all sizes. We have structured and incentivized our sales organization to focus on sales to new customer sites, particularly within large health systems.

 

 

Further penetrate our existing installed customer base.    Typically, our customers initially deploy our Voice Communication solutions in a few departments of a hospital and gradually expand to additional departments as they come to fully appreciate the value of our solutions. We recognize the significant opportunity to up-sell and cross-sell to our existing customers, including into new hospitals that are part of healthcare system where our systems are deployed in one or more other hospitals. Key sales strategies include promoting further adoption of our Voice Communication solution and demonstrating the value of our new Messaging and Care Transition solutions to our existing customers. We plan to continue expanding the number of account managers focused on our existing customers in order to grow our revenue and maintain and improve customer experience.

 

 

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 further differentiate them from other competing solutions. 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.

 

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Pursue acquisitions of complementary businesses, technologies and assets.    We completed four small acquisitions to expand our solutions offering, 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.    Today, 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 December 31, 2011, our solutions were deployed in over 90 healthcare facilities outside the United States. We plan both 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. Recently we began a pilot deployment utilizing a French language product in a hospital in Lyon, France.

 

 

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. Our Voice Communication solution has been deployed in over 100 customers in non-healthcare markets where there are large numbers of mobile workers, including hospitality, retail and libraries. Currently, this is not a material portion of our business, but longer term, we believe these markets could represent potential opportunities for growth.

Our products, technology and services

Our solutions consist of our Voice Communication, Messaging and Care Transition solutions. To complement our solutions, we provide services and support capabilities to help our customers optimize the benefits of our solutions.

Voice Communication solution

Our Voice Communication solution is comprised of a unique software platform that connects communication devices, including our hands-free, wearable, voice-controlled communication badges, Vocera-branded smartphones and third-party mobile devices that use our software applications to become part of the Vocera system. The system transforms the way mobile workers communicate by enabling them to instantly connect with the right person simply by saying the name, function or group name of the person they want to reach, often while remaining at the point-of-care. Our system responds to over 100 voice commands.

Some examples of common commands are shown below.

 

Action    Spoken commands

 

Call by name

   Call John Smith.

Call a group member

   Call an Anesthesiologist.

Dial a phone number or extension

   Dial extension 3145.

Initiate a broadcast to a group

   Broadcast to Emergency Response Team.

Locate nearest member of a group

   Where is the nearest member of Security?

Send a voice message

   Record a message for Pediatric Nursing.

 

 

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Components of the Voice Communication solution include:

 

 

Software platform.    At the heart of our Voice Communication solution is a patent-protected enterprise-class software platform that runs on our customers’ Windows-based servers. The intelligence of our client-server system is contained primarily within our server-software. This platform contains an optimized speech recognition engine and call management functionality. In addition, it controls the calling and messaging functions of the mobile client devices and maintains profiles for users and groups that enable customization of workflow patterns for each customer. Our scalable software platform can support multiple geographic sites and multiple facilities within a healthcare system to help clinicians stay connected to the latest status of their patients.

In addition to the primary system server, our software platform includes usage and diagnostic reporting tools, as well as our telephony software to interface to customers’ existing phone systems. Our solution is further embedded into the clinical workflow of the hospital through the ability to integrate with over 40 third-party clinical systems, including nurse call, patient monitoring and electronic medical record systems. These integrated solutions enable the immediate delivery of alerts to hospital workers, helping to improve patient safety and satisfaction.

 

 

Communication badge.    Our communication badge is a wearable device weighing less than two ounces that operates over customers’ industry-standard Wi-Fi networks, the use of which has become increasingly prevalent in hospitals. The badge is worn clipped to a shirt or on a lanyard. It can be used to conduct hands-free communication and is the only hands-free device of its kind. It enables instant two-way voice conversations without the need to remember a phone number or use a handset. An over-the-air update mechanism seamlessly updates device software. Our badge also incorporates automatic diagnostic mechanisms that feed data on wireless network performance back to the software platform for reporting and diagnosis of problems. In October 2011, we introduced the Vocera B3000 badge, our fourth generation communication badge. This badge offers improved durability, a louder speaker for noisy environments and proprietary acoustic noise reduction technology to improve speech recognition by eliminating background noise.

 

 

Vocera Connect mobile applications.    Vocera Connect mobile applications allow Vocera customers to enable authorized users to access the voice calling capability of our system on third-party mobile devices, including BlackBerry, iPhone, Android and Windows Mobile devices. In 2012, we added Cisco wireless IP phones to the list of mobile devices we support. When used in a Wi-Fi environment, the Vocera Connect mobile application enables non-Vocera devices to receive voice communication initiated within the Vocera system, including role-based calls and group broadcasts. Onscreen presence information enables users to see the status of other users and instantly connect with particular individuals, functional roles or entire groups using voice commands or our select-to-connect functionality.

Messaging solution

Our Messaging solution securely delivers text messages, alerts and other information, directly to and from smartphones. It is designed to replace paging and unsecure short message service, or SMS, systems. Our solution is comprised of an enterprise-grade software platform and client applications that run on BlackBerry, iPhone or Android devices. The software platform provides the central intelligence, database of users and contacts and monitoring controls that display a

 

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real-time dashboard of delivery, receipt confirmations and responses. Our Messaging solution includes a range of client applications, including Alert, Chat and Commander, to meet the specific needs of hospitals and other enterprise environments.

Our Vocera Alert application is a smartphone client application that works in conjunction with our messaging platform to ensure timely, reliable and encrypted delivery (as recommended by applicable HIPAA regulations) and acknowledgement of critical messages, including pages, lab test results and other alerts. Users can send messages to the smartphones of other users or groups from a smartphone, web console or automatically through integration with third-party clinical systems, like nurse call and patient monitoring systems. Recipients can reply with multiple choice answers or custom responses, and a reporting tool tracks and stores all of the transactions for auditing purposes. Our Alert application replaces unreliable pagers that have been used in hospitals for decades with reliable closed loop message delivery.

Care Transition Solution

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. Our platform, which includes modules for patient transfers, shift changes, physician sign-outs and patient and family information exchanges, allows hospitals to effectively standardize and monitor patient hand-offs. The solution streamlines patient hand-offs in a secure, manageable, web-enabled manner that enables caregivers to capture and transfer important information about patients in either written or voice recorded formats from any phone or PC.

Our secure web interface provides real-time monitoring of hand-off quality, compliance and throughput. Caregivers can access the application through a variety of end-points, including computers, smartphones and other wireless devices. The solution alerts the receiving unit of the patient’s anticipated arrival, along with care instructions left by the previous caregiver. This eliminates phone tag and paperwork and reduces miscommunication that can cause delays and errors in patient transfers.

Our Care Transition solution can be deployed through either a hosted software-as-a-service model or as a server-on-site model and has been deployed by over 120 hospitals.

Services

Our customer-centric strategy is supported by our services and support capabilities, which help customers optimize their Vocera experience. Our services organization consists of the following:

 

 

ExperiaHealth.    ExperiaHealth is a consulting organization focused on improving patient experience. ExperiaHealth works with hospitals and other healthcare organizations to improve clinical and operational performance that results in improved efficiency, work flow and enhanced patient experience. Services offered by ExperiaHealth include: consulting with customers to improve organizational alignment around patient experience strategy and priorities, analyzing a customer’s highest priority service lines and developing a process improvement plan to increase patient and caregiver satisfaction and providing training modules on topics such as physician leadership coaching, clinical service line experience mapping, leading patient experience improvement and service recovery training.

 

 

Professional services.    Our professional services are key to helping customers successfully deploy, manage, update and/or expand their Vocera systems in order to gain the full benefits

 

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of our solutions. As of December 31, 2011, our professional services team consisted of 40 professionals with expertise in wireless communication, clinical workflow, end-user training, speech science and project management, as well as nurses who are at the forefront of understanding and dealing with clinical communication issues. We offer a full suite of services, including clinical workflow design, wireless assessment, solution configuration, training and project management, enabling customers to integrate our solutions and improve workflow efficiency and staff productivity. We also provide a classroom-based curriculum for systems administrators, information technology professionals and clinical educators.

 

 

Technical support.    We provide 24x7 technical support to our customers through our support centers in San Jose, California, and Reading, United Kingdom. As of December 31, 2011, our technical support team consisted of 31 technical support professionals with expertise in wireless, telephony, integration, servers and client devices. Our team utilizes remote diagnostic tools to proactively assess the performance of customer systems. In addition, we assign technical account management resources to our largest accounts to help them expand the use of our solutions and facilitate adoption of new functionality.

Sales and marketing

Sales

We use a direct sales model to call on hospitals and healthcare systems in the United States, the United Kingdom and Australia. As of December 31, 2011, we had 74 sales employees, an increase of 12 since the end of 2010. The sales team is organized to allow us to better serve our customers and to support the different elements of our sales strategy. Certain members of the sales team focus on the development of new customer relationships with large integrated health systems and government healthcare facilities. As of December 31, 2011, we had 35 sales team members whose primary responsibility is developing business at new customers. Our compensation is structured to incentivize new account development, including a bonus commission paid for new customers. We supplement our sales organization by utilizing a U.S. government-authorized reseller to facilitate our sales to Veterans Administration and Department of Defense healthcare facilities. Sales team members also focus on new customer development with smaller systems and individual hospitals. The sales team further includes account managers who focus on service and additional sales to existing customers. We enhance our sales efforts by including in our sales staff individuals with nursing backgrounds to address clinical uses with, and provide utilization advice to, customers and potential customers. We have also staffed our sales team with system engineers who focus on the technical elements of system optimization, particularly wireless, and overall product configuration.

We strive to hire sales people with at least 10 years of experience selling enterprise solutions in healthcare and who have experience selling in competitive and complex environments with multiple decision makers. In markets outside the United States, our sales efforts are supplemented by a select group of resellers and distributors.

In addition, as of December 31, 2011, we had 21 employees responsible for sales and services support.

Marketing

Our marketing efforts focus on product management, demand generation, sales support and brand management. We believe continuing to increase our brand recognition is important for the growth of our business. As of December 31, 2011, we had 20 employees in marketing and business development.

 

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Our product roadmap and requirements are driven by both primary and secondary research that is continually validated with current and prospective customers. We collect customer feedback through surveys and focus groups, customer visits, a customer advisory board, user forums and participation in industry standards organizations. Our customer-centric marketing strategy is key to generating new sales leads as word of mouth advertising and testimonials are some of our most valuable marketing tools. A number of our customers have agreed to participate in video testimonials, white papers and case studies that validate the efficacy and the financial benefits of our solutions. We have been featured in numerous articles and on network television demonstrating increased patient satisfaction, streamlined h