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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 March 31, 2006,
 or
 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
    
    (I.R.S. Employer Identification No.)or 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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##### 



EMAGEON INC.
FORM 10-Q
March 31, 2006
 Table of Contents
  
 Page No.PART I. Financial InformationItem 1. Unaudited Financial Statements
    
    
    1Consolidated Balance Sheets at March 31, 2006
and December 31, 2005
    
    
    1Consolidated Statements of Operations for the
Quarters Ended March 31, 2006 and 2005
    
    
    2Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 2006 and 2005
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
    
    
    21Item 6. Exhibits
    
    
    21SIGNATURESEX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32 SECTION 906, CERTIFICATION OF THE CEO AND CFO




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PART I: FINANCIAL INFORMATION
 
 ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
 EMAGEON INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share data)
 (Unaudited)March 31,
    
    
    December 31,2006
    
    
    2005ASSETS:Current assets:Cash and cash equivalents
    
    $
    15,597
    
    
    $
    15,520Marketable securities
    
    
    
    
    
    
    4,951Trade accounts receivable, net
    
    
    28,558
    
    
    
    29,261Prepaid expenses and other current assets
    
    
    3,663
    
    
    
    3,052Inventories
    
    
    9,726
    
    
    
    8,031Total current assets
    
    
    57,544
    
    
    
    60,815Property and equipment, net
    
    
    21,102
    
    
    
    21,433Other noncurrent assets
    
    
    1,471
    
    
    
    1,419Intangible assets, net
    
    
    32,929
    
    
    
    34,277Total assets
    
    $
    113,046
    
    
    $
    117,944LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    11,672
    
    
    $
    13,196Accrued payroll and related costs
    
    
    2,835
    
    
    
    4,104Deferred revenue
    
    
    27,395
    
    
    
    25,312Other accrued expenses
    
    
    6,440
    
    
    
    4,723Current portion of long-term debt
and capital lease obligations
    
    
    2,668
    
    
    
    2,763Total current liabilities
    
    
    51,010
    
    
    
    50,098Long-term deferred revenue
    
    
    2,899
    
    
    
    3,221Long-term debt and capital lease obligations
    
    
    395
    
    
    
    986Total liabilities
    
    
    54,304
    
    
    
    54,305Stockholders equity:Common stock, $0.001 par value, 23,965
shares authorized; 20,974 shares and 20,629
shares issued, and 20,799 shares and 20,453
shares outstanding at March 31, 2006 and
December 31, 2005, respectively
    
    
    21
    
    
    
    21Additional paid in capital
    
    
    117,305
    
    
    
    115,215Accumulated other comprehensive income
    
    
    91
    
    
    
    85Accumulated
deficit
    
    
    (58,400
    )
    
    
    (51,407
    )59,017
    
    
    
    63,914Treasury stock, 176 shares, at cost
    
    
    (275
    )
    
    
    (275
    )Total stockholders equity
    
    
    58,742
    
    
    
    63,639Total liabilities and stockholders equity
    
    $
    113,046
    
    
    $
    117,944
 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)
 UnauditedQuarter Ended March 312006
    
    
    2005Revenue:System sales
    
    $
    17,269
    
    
    $
    7,719Support services
    
    
    9,309
    
    
    
    3,617Total revenue
    
    
    26,578
    
    
    
    11,336Cost of revenue:System sales
    
    
    13,284
    
    
    
    4,823Support services
    
    
    5,795
    
    
    
    3,083Total cost of revenue
    
    
    19,079
    
    
    
    7,906Gross profit
    
    
    7,499
    
    
    
    3,430Operating expenses:Research and development
    
    
    4,130
    
    
    
    2,534Sales and marketing
    
    
    4,002
    
    
    
    2,804General and administrative
    
    
    4,318
    
    
    
    2,291Amortization of intangible assets related
to Camtronics acquisition
    
    
    885
    
    
    
    Acquisition and reorganization costs related to
Camtronics acquisition
    
    
    1,204
    
    
    
    Total operating expenses
    
    
    14,539
    
    
    
    7,629Operating loss
    
    
    (7,040
    )
    
    
    (4,199
    )Interest income
    
    
    156
    
    
    
    232Interest expense
    
    
    (109
    )
    
    
    (851
    )Net loss
    
    $
    (6,993
    )
    
    $
    (4,818
    )Net loss per share-basic and diluted
    
    $
    (0.34
    )
    
    $
    (0.42
    )Weighted average shares outstanding-basic
and diluted
    
    
    20,583
    
    
    
    11,532
 The accompanying notes are an integral part of these financial statements.
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EMAGEON, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 UnauditedQuarter Ended March 31,2006
    
    
    2005Operating activitiesNet loss
    
    $
    (6,993
    )
    
    $
    (4,818
    )Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:Depreciation
    
    
    1,731
    
    
    
    1,151Amortization of intangible assets
    
    
    1,293
    
    
    
    214Write-off of subordinated debt discount
    
    
    
    
    
    
    646Stock-based compensation expense
    
    
    575
    
    
    
    282Other operating activities
    
    
    36
    
    
    
    69Changes in operating assets and liabilities, net
    
    
    (1,089
    )
    
    
    4,298Net cash (used in) provided by operations
    
    
    (4,447
    )
    
    
    1,842Investing activitiesPurchases of property, plant and equipment
    
    
    (1,413
    )
    
    
    (2,714
    )Purchases of marketable securities
    
    
    
    
    
    
    (29,582
    )Maturities of marketable securities
    
    
    5,000
    
    
    
    Capitalized software development costs
    
    
    (109
    )
    
    
    (88
    )Other investing activities
    
    
    219
    
    
    
    Net cash provided by (used in) investing activities
    
    
    3,697
    
    
    
    (32,384
    )Financing activitiesProceeds of issuance of common stock, net of issue costs
    
    
    1,516
    
    
    
    69,349Proceeds of issuance of preferred stock, net of issue costs
    
    
    
    
    
    
    54Payment of debt and capital lease obligations
    
    
    (686
    )
    
    
    (4,615
    )Other financing activities
    
    
    
    
    
    
    374Net cash provided by financing activities
    
    
    830
    
    
    
    65,162Effect of exchange rate changes on cash
    
    
    (3
    )
    
    
    Net increase in cash
    
    
    77
    
    
    
    34,620Cash at beginning of period
    
    
    15,520
    
    
    
    5,994Cash at end of period
    
    $
    15,597
    
    
    $
    40,614
 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
      4




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NOTE 2  INITIAL PUBLIC OFFERING
  NOTE 3  ACQUISITIONS AND INTANGIBLE ASSETS
    5




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Weighted
    
    
    March 31, 2006
    
    
    December 31, 2005Average
    
    
    Gross
    
    
    
    
    
    
    GrossAmortization
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedPeriod (Yrs.)
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAcquired
technology
    
    
    4.6
    
    
    $
    5,240
    
    
    $
    2,510
    
    
    $
    5,240
    
    
    $
    2,212Customer
relationships
    
    
    4.9
    
    
    
    10,028
    
    
    
    1,296
    
    
    
    10,028
    
    
    
    518Trade names
    
    
    1.2
    
    
    
    501
    
    
    
    179
    
    
    
    501
    
    
    
    72Software
development costs
    
    
    1.3
    
    
    
    857
    
    
    
    626
    
    
    
    798
    
    
    
    567Goodwill
    
    
    
    
    
    
    20,914
    
    
    
    
    
    
    
    21,079
    
    
    
    Total
    
    
    
    
    
    $
    37,540
    
    
    $
    4,611
    
    
    $
    37,646
    
    
    $
    3,369
  2006
    
    $
    4,9562007
    
    
    2,6382008
    
    
    2,0272009
    
    
    1,3812010 and thereafter
    
    
    2,255Total
    
    $
    13,257
 NOTE 4  MARKETABLE SECURITIES
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NOTE 5  INVENTORIES
  March 31,
    
    
    December 31,2006
    
    
    2005Third-party components
    
    $
    636
    
    
    $
    497Work-in-process
    
    
    190
    
    
    
    345Completed systems
    
    
    8,900
    
    
    
    7,189Total
    
    $
    9,726
    
    
    $
    8,031
 NOTE 6  SUPPLEMENTARY CASH FLOW INFORMATION
  Quarter Ended March 31,2006
    
    
    2005(Increase) decrease in:Trade accounts receivable, net
    
    $
    670
    
    
    $
    3,384Inventories, net
    
    
    (1,695
    )
    
    
    9Prepaid expenses and other current assets
    
    
    (745
    )
    
    
    (148
    )Other noncurrent assets
    
    
    (5
    )
    
    
    (54
    )Increase (decrease) in:Accounts payable
    
    
    (1,522
    )
    
    
    2,384Accrued payroll and related costs
    
    
    (1,270
    )
    
    
    (620
    )Other accrued expenses
    
    
    1,717
    
    
    
    (2,168
    )Deferred revenue
    
    
    1,761
    
    
    
    1,511Net changes in operating assets
and liabilities
    
    $
    (1,089
    )
    
    $
    4,298
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NOTE 7  COMPUTATION OF NET LOSS PER SHARE
  8




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NOTE 8  STOCK-BASED COMPENSATION
  Share-Based Payment Accounting for Stock Issued to Employees
      Net loss:As reported
    
    $
    (4,818
    )Add: Stock-based employee compensation reported in net loss
    
    
    282Deduct: Stock-based employee compensation under the fair
value method for all awards
    
    
    (478
    )Pro forma net loss
    
    $
    (5,014
    )Basic and diluted net loss per share:As reported
    
    $
    (0.42
    )Add: Stock-based employee compensation reported in net loss
    
    
    0.02Deduct: Stock-based employee compensation under the fair
value method for all awards
    
    
    (0.04
    )Pro forma net loss per share
    
    $
    (0.44
    )
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Stock Options
  Dividend yield
    
    
    0.0
    %Expected volatility
    
    
    70.9
    %Risk-free interest rate
    
    
    3.7
    %Expected life of options (in years)
    
    
    5.0Weighted-average grant-date fair value
    
    $
    9.40
    Weighted-AverageNumber of
    
    
    Weighted-Average
    
    
    RemainingShares
    
    
    Exercise Price
    
    
    Contractual LifeOptions at beginning of period
    
    
    2,129
    
    
    $
    5.91Granted
    
    
    
    
    
    
    Exercised
    
    
    (333
    )
    
    
    4.40Forfeited
    
    
    (54
    )
    
    
    6.63Outstanding at end of period
    
    
    1,742
    
    
    $
    6.17
    
    
    7.05 yearsExercisable at end of period
    
    
    1,071
    
    
    $
    4.50
    
    
    6.03 years
   Weighted-AverageNumber of Shares
    
    
    Exercise PriceNonvested stock options at beginning of period
    
    
    866
    
    
    $
    8.53Granted
    
    
    
    
    
    
    Vested
    
    
    (141
    )
    
    
    5.29Forfeited
    
    
    (54
    )
    
    
    6.63Nonvested stock options at end of period
    
    
    671
    
    
    $
    9.05
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NOTE 9  COMPREHENSIVE LOSS
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
   11




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COMPANY OVERVIEW
  RESULTS SUMMARY
   12




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1)
    
    Expenses of $1.2 million, or $0.06 per share, related to the acquisition and
reorganization of Camtronics and its integration with the Company,2)
    
    Non-cash expenses of $1.0 million, or $0.05 per share, in amortization of intangible
assets acquired in the Camtronics acquisition, and3)
    
    Non-cash expenses of $0.6 million, or $0.03 per share, for stock options-based
compensation after the Companys adoption of Statement of Financial Accounting Standards
No. 123R as of January 1, 2006.
    Quarter Ended March 31, 2005(in thousands)Weighted average shares outstanding
    
    
    11,532Effects of:Conversion of preferred stock
    
    
    5,301Required exercise of warrants
    
    
    263Release of escrowed common stock at completion
of initial public offering
    
    
    84Issuance of common stock in initial public offering
    
    
    2,844Total pro forma shares outstanding
    
    
    20,024Pro forma net loss per share
    
    $
    0.24
 Revenue
  Three Months EndedMarch 31,Change2006
    
    
    2005
    
    
    Change
    
    
    (%)(in
thousands)System sales
    
    $
    17,269
    
    
    $
    7,719
    
    
    $
    9,550
    
    
    
    123.7
    %Percentage of total revenue
    
    
    65.0
    %
    
    
    68.1
    %Support services
    
    $
    9,309
    
    
    $
    3,617
    
    
    $
    5,692
    
    
    
    157.4
    %Percentage of total revenue
    
    
    35.0
    %
    
    
    31.9
    %Total revenue
    
    $
    26,578
    
    
    $
    11,336
    
    
    $
    15,242
    
    
    
    134.5
    %
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Cost of Revenue
  14




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Three Months EndedMarch 31,Change2006
    
    
    2005
    
    
    Change
    
    
    (%)(in thousands)Cost of system sales revenue
    
    $
    13,284
    
    
    $
    4,823
    
    
    $
    8,461
    
    
    
    175.4
    %Percentage of system sales revenue
    
    
    76.9
    %
    
    
    62.5
    %Cost of support services revenue
    
    $
    5,795
    
    
    $
    3,083
    
    
    $
    2,712
    
    
    
    88.0
    %Percentage of support services revenue
    
    
    62.3
    %
    
    
    85.2
    %Total cost of revenue
    
    $
    19,079
    
    
    $
    7,906
    
    
    $
    11,173
    
    
    
    141.3
    %Percentage of total revenue
    
    
    71.8
    %
    
    
    69.7
    %
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Gross Margin Percentage
  OPERATING EXPENSES
    Research and Development Expenses
 16




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Sales and Marketing Expenses
  General and Administrative Expenses
  LIQUIDITY AND CAPITAL RESOURCES
 Summary
 17




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Cash Used In Operating Activities
   Cash From Investing Activities
 Cash From Financing Activities.
 18




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Contractual Cash Obligations
 Available Credit
  
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  19




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ITEM 4: CONTROLS AND PROCEDURES
  
 PART II.
 
 ITEM 1A. RISK FACTORS
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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 18U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith 21




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SIGNATURES
  Emageon Inc.By:
    
    /s/ Charles A. Jett, Jr.Charles A. Jett, Jr.Chairman, Chief ExecutiveOfficer, and President(Principal Executive Officer)By:
    
    /s/ W. Randall PittmanW. Randall PittmanChief Financial Officerand Treasurer(Principal Financial andAccounting Officer)
 22