##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from

to
 Commission file number 0-51149
 EMAGEON INC.
  Delaware
    
    63-1240138(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)1200 Corporate Drive, Suite 200Birmingham, Alabama
    
    35242(Address of principal executive offices)
    
    (Zip Code)
 (205) 980-9222
 
   þ o
  o þ o
  o þ




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##### 



Index
  
 Page No.PART I FINANCIAL INFORMATIONItem 1. Unaudited Financial Statements
    
    3Consolidated Balance Sheets at September 30, 2007 and December 31, 2006
    
    3Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006
    
    4Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006
    
    5Notes to Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    19Item 4. Controls and Procedures
    
    19PART II OTHER INFORMATIONItem 1A. Risk Factors
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    20Item 6. Exhibits
    
    20SIGNATURES
    
    21EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 EMAGEON INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share amounts)
 (Unaudited)September 30, 2007
    
    
    December 31, 2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    17,830
    
    
    $
    23,008Trade accounts receivable, net of allowances of $270 at
September 30, 2007 and $277 at December 31, 2006
    
    
    21,325
    
    
    
    26,706Inventories
    
    
    7,210
    
    
    
    8,579Prepaid expenses and other current assets
    
    
    5,311
    
    
    
    4,459Total current assets
    
    
    51,676
    
    
    
    62,752PROPERTY AND EQUIPMENT,net
    
    
    15,581
    
    
    
    18,362RESTRICTED CASH
    
    
    1,000
    
    
    
    445OTHER NONCURRENT ASSETS
    
    
    1,299
    
    
    
    1,363INTANGIBLE ASSETS,net
    
    
    28,344
    
    
    
    30,090TOTAL ASSETS
    
    $
    97,900
    
    
    $
    113,012LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    9,006
    
    
    $
    9,738Accrued payroll and related costs
    
    
    1,720
    
    
    
    3,770Deferred revenue
    
    
    16,910
    
    
    
    23,953Other accrued expenses
    
    
    2,257
    
    
    
    2,946Current portion of long-term debt and capital lease obligations
    
    
    56
    
    
    
    953Total current liabilities
    
    
    29,949
    
    
    
    41,360LONG-TERM DEFERRED REVENUE
    
    
    5,634
    
    
    
    5,851OTHER LONG-TERM LIABILITIES
    
    
    477
    
    
    
    686LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS
    
    
    63
    
    
    
    8TOTAL LIABILITIES
    
    
    36,123
    
    
    
    47,905STOCKHOLDERS EQUITY:Common stock, $0.001 par value, 165,050 shares authorized;
21,574 shares and 21,458 shares issued, and 21,398 shares and
21,282 shares outstanding at September 30, 2007 and December
31, 2006, respectively
    
    
    22
    
    
    
    21Additional paid-in capital
    
    
    125,162
    
    
    
    122,538Accumulated other comprehensive income
    
    
    710
    
    
    
    262Deficit
    
    
    (63,842
    )
    
    
    (57,439
    )62,052
    
    
    
    65,382Treasury stock, 176 shares, at cost
    
    
    (275
    )
    
    
    (275
    )Total stockholders equity
    
    
    61,777
    
    
    
    65,107TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    97,900
    
    
    $
    113,012
 The accompanying notes are an integral part of these financial statements.
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EMAGEON INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 UnauditedThree Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUE:System sales
    
    $
    10,706
    
    
    $
    19,370
    
    
    $
    35,609
    
    
    $
    54,240Support services
    
    
    12,022
    
    
    
    13,641
    
    
    
    40,045
    
    
    
    35,788Total revenue
    
    
    22,728
    
    
    
    33,011
    
    
    
    75,654
    
    
    
    90,028COST OF REVENUE:System sales
    
    
    6,327
    
    
    
    10,712
    
    
    
    21,359
    
    
    
    33,973Support services
    
    
    7,311
    
    
    
    6,187
    
    
    
    21,365
    
    
    
    18,939Total cost of revenue
    
    
    13,638
    
    
    
    16,899
    
    
    
    42,724
    
    
    
    52,912GROSS PROFIT
    
    
    9,090
    
    
    
    16,112
    
    
    
    32,930
    
    
    
    37,116OPERATING EXPENSES:Research and development
    
    
    5,567
    
    
    
    4,601
    
    
    
    15,374
    
    
    
    12,763Sales and marketing
    
    
    4,121
    
    
    
    4,435
    
    
    
    13,013
    
    
    
    13,026General and administrative
    
    
    3,549
    
    
    
    4,495
    
    
    
    9,968
    
    
    
    12,668Amortization of intangible assets related to
Camtronics acquisition
    
    
    346
    
    
    
    885
    
    
    
    1,036
    
    
    
    2,655Integration costs related to Camtronics acquisition
    
    
    
    
    
    
    2,062
    
    
    
    
    
    
    
    4,343Restructuring charge
    
    
    
    
    
    
    
    
    
    
    578
    
    
    
    Total operating expenses
    
    
    13,583
    
    
    
    16,478
    
    
    
    39,969
    
    
    
    45,455OPERATING LOSS
    
    
    (4,493
    )
    
    
    (366
    )
    
    
    (7,039
    )
    
    
    (8,339
    )INTEREST INCOME
    
    
    232
    
    
    
    157
    
    
    
    711
    
    
    
    473INTEREST EXPENSE
    
    
    (19
    )
    
    
    (64
    )
    
    
    (75
    )
    
    
    (257
    )NET LOSS
    
    $
    (4,280
    )
    
    $
    (273
    )
    
    $
    (6,403
    )
    
    $
    (8,123
    )NET LOSS PER SHARE  BASIC AND DILUTED
    
    $
    (0.20
    )
    
    $
    (0.01
    )
    
    $
    (0.30
    )
    
    $
    (0.39
    )WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
    
    
    21,382
    
    
    
    21,013
    
    
    
    21,342
    
    
    
    20,822
 The accompanying notes are an integral part of these financial statements.
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EMAGEON INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Nine Months EndedSeptember 30,2007
    
    
    2006OPERATING ACTIVITIESNet loss
    
    $
    (6,403
    )
    
    $
    (8,123
    )Adjustments
to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    4,747
    
    
    
    5,320Amortization of intangible assets
    
    
    2,290
    
    
    
    3,677Stock-based compensation expense
    
    
    2,091
    
    
    
    2,348Loss on disposal of fixed assets
    
    
    328
    
    
    
    411Changes in operating assets and liabilities, net
    
    
    (4,853
    )
    
    
    (6,389
    )Net cash used in operations
    
    
    (1,800
    )
    
    
    (2,756
    )INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (2,225
    )
    
    
    (4,330
    )Maturities of marketable securities
    
    
    
    
    
    
    5,000Capitalized software development costs
    
    
    (112
    )
    
    
    (551
    )Other investing activities
    
    
    (125
    )
    
    
    55Net cash (used in) provided by investing activities
    
    
    (2,462
    )
    
    
    174FINANCING ACTIVITIESProceeds of issuance of common stock, net of issue costs
    
    
    534
    
    
    
    2,906Payment of debt and capital lease obligations
    
    
    (911
    )
    
    
    (2,083
    )Increase in restricted cash
    
    
    (555
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (932
    )
    
    
    823EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    16
    
    
    
    1NET DECREASE IN CASH
    
    
    (5,178
    )
    
    
    (1,758
    )CASH at beginning of period
    
    
    23,008
    
    
    
    15,520CASH at end of period
    
    $
    17,830
    
    
    $
    13,762
 The accompanying notes are an integral part of these financial statements.
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EMAGEON INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
       NOTE 2. RESTRUCTURING CHARGE AND EXIT LIABILITY
   6




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Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2007Beginning liability balance
    
    $
    852
    
    
    $
    1,057Lease payments
    
    
    (76
    )
    
    
    (251
    )Reduction in estimated liability
    
    
    (116
    )
    
    
    (116
    )Payment of related expenses, net
    
    
    (6
    )
    
    
    (36
    )Ending liability balance
    
    $
    654
    
    
    $
    654
  NOTE 3 . ACQUISITIONS AND INTANGIBLE ASSETS
    7




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September 30, 2007
    
    
    December 31, 2006Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Total
    
    
    Carrying
    
    
    Carrying
    
    
    Total
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAcquired technology
    
    $
    5,240
    
    
    $
    4,296
    
    
    $
    944
    
    
    $
    5,240
    
    
    $
    3,404
    
    
    $
    1,836Customer relationships
    
    
    8,010
    
    
    
    2,648
    
    
    
    5,362
    
    
    
    10,028
    
    
    
    3,629
    
    
    
    6,399Trade names
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    501
    
    
    
    501
    
    
    
    Software development
costs
    
    
    1,562
    
    
    
    1,166
    
    
    
    396
    
    
    
    1,451
    
    
    
    806
    
    
    
    645Goodwill
    
    
    21,642
    
    
    
    
    
    
    
    21,642
    
    
    
    21,210
    
    
    
    
    
    
    
    21,210Total
    
    $
    36,454
    
    
    $
    8,110
    
    
    $
    28,344
    
    
    $
    38,430
    
    
    $
    8,340
    
    
    $
    30,090
   Remainder of 2007
    
    $
    7222008
    
    
    2,3452009
    
    
    1,3812010
    
    
    1,3352011 and thereafter
    
    
    919Total
    
    $
    6,702
 NOTE 4. INVENTORIES
  September 30, 2007
    
    
    December 31, 2006Third-party components
    
    $
    2,971
    
    
    $
    2,716Work-in-process
    
    
    401
    
    
    
    336Completed systems
    
    
    3,838
    
    
    
    5,527Total
    
    $
    7,210
    
    
    $
    8,579
  8




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NOTE 5. SUPPLEMENTARY CASH FLOW INFORMATION
  Nine Months Ended September 30,2007
    
    
    2006(Increase) decrease in:Trade accounts receivable, net
    
    $
    5,381
    
    
    $
    (533
    )Inventories, net
    
    
    1,369
    
    
    
    (1,844
    )Prepaid expenses and other current assets
    
    
    (852
    )
    
    
    (722
    )Other noncurrent assets
    
    
    189
    
    
    
    (228
    )Increase (decrease) in:Accounts payable
    
    
    (732
    )
    
    
    (3,911
    )Accrued payroll and related costs
    
    
    (2,050
    )
    
    
    (657
    )Other accrued expenses
    
    
    (898
    )
    
    
    333Deferred revenue
    
    
    (7,260
    )
    
    
    1,173Net changes in operating assets and liabilities
    
    $
    (4,853
    )
    
    $
    (6,389
    )
  NOTE 6. COMPUTATION OF NET LOSS PER SHARE
  NOTE 7. STOCK BASED COMPENSATION
   9




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Three
Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    50.0
    %
    
    
    70.9
    %
    
    
    50.0
    %
    
    
    70.9
    %Risk-free interest rate
    
    
    4.59
    %
    
    
    5.02
    %
    
    
    4.62
    %
    
    
    4.87
    %Expected life of options, in years
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    Three
Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Stock options:Grants, in shares
    
    
    325
    
    
    
    31
    
    
    
    675
    
    
    
    501Weighted average grant
date fair value, per share
    
    $
    4.48
    
    
    $
    9.38
    
    
    $
    5.16
    
    
    $
    10.09Exercises, in shares
    
    
    19
    
    
    
    154
    
    
    
    93
    
    
    
    613Proceeds of exercises
    
    $
    68
    
    
    $
    782
    
    
    $
    534
    
    
    $
    2,906Restricted stock units:Grants, in shares
    
    
    4
    
    
    
    5
    
    
    
    65
    
    
    
    83Weighted average grant
date fair value, per share
    
    $
    9.19
    
    
    $
    15.05
    
    
    $
    12.27
    
    
    $
    16.30Shares vested in the period
    
    
    8
    
    
    
    8
    
    
    
    23
    
    
    
    16
  10




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NOTE 8. COMPREHENSIVE LOSS
  NOTE 9. INCOME TAXES
 Accounting For Uncertainty In Income Taxes Accounting For Income Taxes
     NOTE 10. WARRANTY OBLIGATION
  11




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Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2007Beginning liability balance
    
    $
    535
    
    
    $
    700Additions charged to expense
    
    
    82
    
    
    
    423Deductions for claim resolution
    
    
    (155
    )
    
    
    (661
    )Ending liability balance
    
    $
    462
    
    
    $
    462
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
   12




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COMPANY OVERVIEW
  RESULTS SUMMARY
     Revenue and Gross Margin
  13




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(In Thousands)Three Months Ended Sept. 30,
    
    
    Nine Months Ended Sept. 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:System sales
    
    $
    10,706
    
    
    $
    19,370
    
    
    $
    35,609
    
    
    $
    54,240Support services
    
    
    12,022
    
    
    
    13,641
    
    
    
    40,045
    
    
    
    35,788Total
    
    $
    22,728
    
    
    $
    33,011
    
    
    $
    75,654
    
    
    $
    90,028Cost of Revenue:System sales
    
    $
    6,327
    
    
    $
    10,712
    
    
    $
    21,359
    
    
    $
    33,973Support services
    
    
    7,311
    
    
    
    6,187
    
    
    
    21,365
    
    
    
    18,939Total
    
    $
    13,638
    
    
    $
    16,899
    
    
    $
    42,724
    
    
    $
    52,912Gross Profit:System sales
    
    $
    4,379
    
    
    $
    8,658
    
    
    $
    14,250
    
    
    $
    20,267Support services
    
    
    4,711
    
    
    
    7,454
    
    
    
    18,680
    
    
    
    16,849Total
    
    $
    9,090
    
    
    $
    16,112
    
    
    $
    32,930
    
    
    $
    37,116Gross Margin:System sales
    
    
    40.9
    %
    
    
    44.7
    %
    
    
    40.0
    %
    
    
    37.4
    %Support services
    
    
    39.2
    %
    
    
    54.6
    %
    
    
    46.6
    %
    
    
    47.1
    %Total
    
    
    40.0
    %
    
    
    48.8
    %
    
    
    43.5
    %
    
    
    41.2
    %
 Summary
   14




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System Sales Revenue
     System Sales Gross Margin
    Support Services Revenue
  15




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Support Services Gross Margin
   Research & Development, Sales & Marketing, and General & Administrative Expenses
    Research and Development Expenses
   16




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Sales and Marketing Expenses
   General and Administrative Expenses
   LIQUIDITY AND CAPITAL RESOURCES
 Summary
  Cash Used In Operating Activities
  17




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Cash From Investing Activities
    Cash From Financing Activities
   Contractual Cash Obligations
  Available Credit
  18




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
  19




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PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description31.1*
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under
the Securities Exchange Act of 193431.2*
    
    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
under the Securities Exchange Act of 193432*
    

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith 20




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SIGNATURES
  EMAGEON INC.By:
    /s/ Charles A. Jett. Jr.Charles A. Jett, Jr.Chairman, Chief Executive Officer, and President
(Principal Executive Officer)By:
    /s/ W. Randall PittmanW. Randall PittmanChief Financial Officer and Treasurer
(Principal Financial Officer) 21