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GWAY > SEC Filings for GWAY > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for GREENWAY MEDICAL TECHNOLOGIES INC

Form 10-Q for GREENWAY MEDICAL TECHNOLOGIES INC


13-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Form 10-Q, contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. The forward-looking statements are contained principally in Part I, Item 2-"Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A-"Risk Factors," but appear throughout this Form 10-Q. Forward-looking statements may include, but are not limited to, statements relating to our outlook or expectations for earnings, revenues, expenses, asset quality, volatility of our common stock, financial condition or other future financial or business performance, strategies, expectations, or business prospects, or the impact of legal, regulatory or supervisory matters on our business, results of operations or financial condition.

Forward-looking statements can be identified by the use of words such as "estimate," "plan," "project," "forecast," "intend," "expect," "anticipate," "believe," "seek," "target" or similar expressions. Forward-looking statements reflect our judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included elsewhere in this Form 10-Q and in our other SEC filings, including our Annual Report on Form 10-K filed with the SEC on September 24, 2012. Additionally, there may be other factors that could preclude us from realizing the predictions made in the forward-looking statements. We operate in a continually changing business environment and new factors emerge from time to time. We cannot predict such factors or assess the impact, if any, of such factors on our financial position or results of operations. All forward-looking statements included in this Form 10-Q speak only as of the date of this Form 10-Q and you are cautioned not to place undue reliance on any such forward-looking statements. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

Business overview

We are a leading provider of integrated information technology solutions and managed business services to ambulatory healthcare providers throughout the United States. At the core of our suite of solutions and services is PrimeSUITE, our award-winning, fully-integrated EHR, PM and interoperability solution. PrimeSUITE integrates clinical, financial and administrative data in a single database to enable comprehensive views of patient records and efficient workflow throughout each patient encounter, reduce clinical and administrative errors, and allow for the seamless exchange of data between our customers and the broader healthcare community. We augment our solutions by offering managed business services such as clinically-driven revenue cycle and EHR-enabled research services. By integrating clinical, financial and administrative data processes, our solutions and services allow providers to deliver advanced care and improve their efficiency and profitability.

Our technology solutions and services are designed to address the needs of providers in all ambulatory settings: independent physician practices, group practices, hospital-affiliated and hospital-owned clinics and practices, retail clinics, employer clinics, university and academic centers, federally-qualified health centers ("FQHCs"), community health centers ("CHCs"), accountable care communities ("ACCs") and accountable care organizations ("ACOs"), and integrated delivery networks ("IDNs"). Our single database technology platform, which reflects over 13 years of development, is scalable to serve the needs of ambulatory providers of any size. As providers' needs evolve, our platform allows for the efficient development and integration of new solutions, which we refer to as our innovation platform. Our solutions are available on either a cloud-based or premise-based model.

The ambulatory EHR market has historically been underpenetrated and installed systems have been underutilized. Adoption of these technologies has been low for several reasons, including providers' resistance to making the required investment as well as concerns that electronic records would disrupt clinical and administrative workflows. Adoption of EHR solutions is accelerating as more providers realize the possible return on investment from adoption of solutions such as PrimeSUITE. Government initiatives and legislation have provided financial incentives and implementation support for ambulatory providers to adopt EHR solutions.

In order for us to continue to deliver on this commitment to our providers we are committed to investing in our innovation platform and managed business services to address the trends and challenges we believe will affect our providers now and in the future. We will invest in the development of new products and enhancements to existing products that we believe present opportunities for substantial efficiencies to ourselves and our providers' businesses. In responding to the acceleration of EHR adoption, government regulations such as the HITECH Act and ARRA, and other market trends such as increasing consumerism, the shift to quality-based reimbursement and the focus on improving the coordination of care among providers, we also face the following opportunities, challenges and risks, which could impact our business:

? Maintaining Adequate Capacity to Satisfy Potential Increased Demand. We have taken steps to position ourselves to take advantage of expected increased demand by increasing our direct sales force, enhancing our relationships with strategic alliance partners with established sales forces and increasing our systems installation capacity by utilizing third-party training and implementation specialists certified in PrimeSUITE deployment. While we believe these steps are sufficient to satisfy expected demand, additional investments and steps may be required.


? Ensuring Continued Certification of Our Solutions. In order to qualify for government incentives for EHR adoption, our solutions must continue to meet various and changing requirements for product certification and must enable our providers to achieve "meaningful use" as defined by existing and new regulations. We will continue to invest significant resources to ensure compliance of our solutions and to train and consult with our providers to enable them to navigate "meaningful use" regulations. Our ability to achieve certification under applicable standards from time to time and the length and cost of related solutions development and enhancement could materially impact our ability to take advantage of increased demand and require larger research and development investments than anticipated.

? Ensuring Our Ability to Address Emerging Demand Trends. Trends toward community-based purchasing decisions where individuals, hospitals, health systems and IDNs subsidize the purchase of EHR solutions for their affiliated physicians in order to expand connectivity within their provider community, and government-funded providers and initiatives, such as RECs, to encourage and support the implementation of EHR, could result in longer sales cycles and installation periods. This may also increase the need for additional training and implementation specialists because of the size and complexity of those sales. As a result, while we expect these trends to result in increased demand for our solutions and managed business services, they may require additional investment by us and may have unintended or unexpected consequences that could impact our business.

? Demand by Smaller Providers Could Accelerate Transition to Subscription Pricing Model. The adoption of EHR by the large untapped market of smaller provider customers and their greater need to minimize capital outlays could accelerate adoption of subscription-based arrangements as opposed to perpetual licensing arrangements. While additional subscription arrangements will result in increased recurring revenue over a longer period of time than we have achieved historically, near-term revenue would be reduced as a result while costs associated with these sales would still be expensed currently.

? Uncertain Impact of Recent Legislation. Recently enacted public laws reforming the U.S. healthcare system may impact our business. The Patient Protection and Affordable Care Act ("PPACA") and The Health Care and Education and Reconciliation Act of 2010 (the "Reconciliation Act"), which amends the PPACA (collectively the "Health Reform Laws"), were signed into law in March 2010. The Health Reform Laws contain various provisions that may impact the Company and our customers. Some of these provisions may have a positive impact, by expanding the use of electronic health records in certain federal programs, for example, while others, such as reductions in reimbursement for certain types of providers, may have a negative impact due to fewer available resources. Increases in fraud and abuse penalties may also adversely affect participants in the health care sector, including the Company.

Sources of Revenue and Expenses

Revenue

We derive our revenue primarily from sales of our PrimeSUITE platform of proprietary solutions, related hardware and professional services to providers in ambulatory settings. Currently, a sizable percentage of our solution sales are made as perpetual licenses to our customers; however, our software is currently available in a cloud-based or a premise-based model.

We classify our revenue as: (1) Systems Sales, (2) Training and Consulting Services, (3) Support Services, and (4) Electronic Data Interchange and Business Services. Systems Sales are products comprised of software licenses, primarily PrimeSUITE, and related hardware and third-party software. Training and Consulting Services include implementation, training and consulting associated with Systems Sales. Support Services includes solutions we offer on a per user or transaction basis, such as PrimeSUITE and PrimeEXCHANGE services for connectivity to third-parties and third-party database charges. Electronic Data Interchange and Business Services include third-party charges for patient claims, statements and eligibility, and clinically-driven RCM and EHR-enabled research services.

As our installed customer base continues to grow, we anticipate that Support Services and Electronic Data Interchange and Business Services, which are recurring in nature, will expand as a percentage of our total revenue. Historically, we have experienced moderate seasonality to our annual revenue with the smallest percentage of sales typically occurring in our first fiscal quarter due primarily to provider purchasing patterns. See "Results of Operations" for more information.


Cost of Revenue.

Cost of revenue for Systems Sales consists primarily of third-party hardware and software costs and amortization of capitalized software development costs and acquired technology. Cost of revenue for Training and Consulting Services consists primarily of compensation (including stock-based compensation) and benefits of our billable professionals and fees to third-party specialists for deployment, implementation and training, and travel costs. Cost of revenue for Support Services consists primarily of compensation (including stock-based compensation) and benefits of support specialists, and fees to third-parties for database services and services from our managed services partners. Cost of revenue for Electronic Data Interchange consists primarily of fees to third-parties for processing claims, statements and eligibility requests; cost of revenue for Business Services consists primarily of compensation (including stock-based compensation) and benefits of personnel who deliver our revenue cycle management services and various third-party costs associated with our EHR-enabled clinical research services. As higher-margin recurring revenue increases as a percentage of total revenue, we believe overall gross margin will also increase over time.

Sales, General and Administrative Expenses

Sales, general and administrative ("SG&A") expenses consist primarily of compensation (including stock-based compensation) and benefits, commissions, travel, professional fees, advertising and other administrative and general expenses, including depreciation and amortization of equipment and leasehold improvements, for the Company's sales and marketing functions; executive offices, administration, human resources, corporate information technology support, legal, finance and accounting, and other corporate services. We intend to invest in our infrastructure as appropriate to expand our market share and accommodate our growing customer base. We expect to incur additional expenses associated with being a public company, including increased legal and accounting costs, investor relations costs and compliance costs under the Sarbanes-Oxley Act and the requirements of our listing exchange. As a result, we expect SG&A expenses to increase as we grow, but remain relatively constant as a percentage of revenue and ultimately decline as we achieve leverage from our infrastructure investments.

Research and Development Expenses

Research and development expenses consist primarily of compensation (including stock-based compensation) and benefits, third-party contractor costs and other facility and administrative costs, including depreciation of equipment directly related to development of new products and upgrading and enhancing existing products. In accordance with GAAP, research and development costs related to new application development and enhancements to existing products are expensed until technological feasibility is established. Once technological feasibility is established such costs are capitalized until the product or enhancement is ready for market, at which point capitalization ceases. We capitalize research and development costs under these criteria including the compensation-related costs of personnel and related third-party contractors working directly on specific projects. We intend to invest in our innovation platform to maintain cutting-edge technology for the benefit of our customers as well as to meet evolving requirements of the market, including certifications and standards.

Provision for Income Taxes

In preparing our financial statements, we estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred income tax assets and liabilities.


Results of Operations

The following table sets forth revenue and cost of revenue by category for the
three and nine months ended September 30, 2012, as compared to the comparable
periods of the prior year:

                                            Three Months Ended September 30,                                        Change
                                       2012                                   2011                           Increase (Decrease)
                         Amount (000's)         Percentage      Amount (000's)       Percentage       Amount (000's)         Percentage
Revenue:
System sales            $          9,035                 28 %   $         6,648               26 %   $          2,387                  36 %
Training and
consulting services                6,863                 21 %             6,603               26 %                260                   4 %
Support services                  10,292                 31 %             7,056               27 %              3,236                  46 %
Electronic data
interchange and
business services                  6,584                 20 %             5,343               21 %              1,241                  23 %
Total revenue                     32,774                100 %            25,650              100 %              7,124                  28 %
Cost of revenue:
System sales                       3,007                 33 %             1,847               28 %              1,160                  63 %
Training and
consulting services                4,602                 67 %             4,431               67 %                171                   4 %
Support services                   3,125                 30 %             2,257               32 %                868                  38 %
Electronic data
interchange and
business services                  4,194                 64 %             3,821               72 %                373                  10 %
Total cost of revenue             14,928                 46 %            12,356               48 %              2,572                  21 %

Revenue. Total revenue was $32.8 million for the three months ended September 30, 2012, compared to $25.7 million for the three months ended September 30, 2011, an increase of $7.1 million or 28%. Systems sales grew by 36% and accounted for $2.4 million or 34% of total revenue growth during the period. Training and consulting services grew by 4% and accounted for $260,000 or 4% of total revenue growth during the period. Support services and electronic data interchange and business services grew 46% and 23%, respectively, during the period, accounting for the remaining 62% of growth in total revenue.

Systems sales, including training and consulting services, are one-time in nature and the substantial growth is attributable to our increased share in a growing market and is reflective of an increase in both the number and size of transactions completed in the current quarter and the year to date. The current quarter compared with the preceding quarter reflects the impact of some seasonality regarding purchasing patterns of customers that is typically experienced in our first fiscal quarter. Support services, electronic data interchange and business services are recurring and growth in this revenue is largely attributable to our growing customer base. Our ability to sell additional products and services to our existing customer base also benefitted revenue growth in the three months ended September 30, 2012, compared to the same period of the prior year.

Cost of Revenue. Total cost of revenue was $14.9 million for the three months ended September 30, 2012, compared to $12.4 million for the three months ended September 30, 2011, an increase of $2.6 million or 21%. Cost of systems sales increased by 63% and accounted for $1.2 million or 45% of the total increase in cost of revenue during the period. Cost of training and consulting services increased by 4% and accounted for $171,000 or 7% of the total increase in cost of revenue during the period. Cost of support services and electronic data interchange and business services increased 38% and 10%, respectively, during the period, accounting for the remaining 48% of the increase in total cost of revenue. On an overall basis, gross profit margins were 54% for the three months ended September 30, 2012, as compared to 52% for the same period of the prior year. This improvement in the quarter is a combination of factors; margins improved due to sales mix with higher-margin systems sales and support services revenue contributing almost 79% of the total increase in revenue for the period. Benefits were also attained by the improved margin profiles of support services and electronic data interchange and business services. Improved support services margins are attributable to customers' adoption of higher-margin innovations and to improvements in margin profiles of various services that involve third parties. These beneficial effects were partly offset by $1.2 million in increased amortization of software development costs and recently-acquired technology.


Sales, General and Administrative. Total SG&A expenses were $13.3 million for the three months ended September 30, 2012, compared to $10.7 million for the three months ended September 30, 2011, an increase of $2.6 million or 25%. Growth in SG&A is largely a result of the required infrastructure to support the overall growth in the business. We have increased headcount and related costs and other investments in sales, marketing and advertising which we believe positions us to capture increased market share in what we believe will be an expanding market over the next several years. Additionally, implementation of our long-term equity incentive plan increased stock-based compensation $629,000 for the three months ended September 30, 2012 as compared to the year-ago period. Further, growth in our headcount and professional services related to implementation of a new suite of business tools has increased SG&A costs for subscription to these services. As a percentage of revenue, SG&A was 41% for the three months ended September 30, 2012, compared to 42% for the three months ended September 30, 2011. As indicated by this comparison, we believe that investments in our growth and related infrastructure can be leveraged to maintain our sales growth in future years without a proportionate increase in cost.

Research and Development Expenses. Research and development expenses were $4.8 million for the three months ended September 30, 2012, compared to $3.2 million for the three months ended September 30, 2011, an increase of $1.6 million or 51%. The increases are largely related to compensation, benefits and related costs for additional headcount and to increased professional fees for projects outsourced to third parties, offset in part by a reduction in stock-based compensation costs. Our innovation platform requires continuing investment in research and development, which evolves to meet the needs of our customers, our market and industry regulators. In addition to research and development to support our innovation platform, we develop new products and enhance functionality of existing products. These application development costs are capitalized once technological feasibility is attained and capitalization ceases once the technology is available for market. Capitalized software development costs were approximately $2.9 million and $3.0 million for the three months ended September 30, 2012 and 2011, respectively. Amortization of capitalized software development costs totaled approximately $1.0 million and $63,000 for the three months ended September 30, 2012 and 2011, respectively.

Interest and Other Expenses. Interest income, net of interest expense, was approximately $289,000 for the three months ended September 30, 2012, compared to net interest expense of $(9,000) for the three months ended September 30, 2011. The change in net interest is related principally to funds available to invest, which increased substantially in February 2012 when net proceeds of our IPO were received. Investment yields owing to market conditions have been flat to declining from 2011.

Other income (expense) net, principally bank fees, was approximately $(24,000) and $(38,000) for the three months ended September 30, 2012 and 2011, respectively.

Income Taxes. The Company has available net operating losses and credits for research and development to offset taxable income and tax expense. These and other temporary differences result in net deferred tax assets. The tax provision for the current quarter and the tax benefit for the 2011 quarter are effective tax rates of 47% and 32%, respectively, which reflect expensing payments made to various state jurisdictions for prior periods.

Liquidity and Capital Resources

Our principal capital requirements are to fund operations. We have typically funded our capital needs from operating cash flow augmented by proceeds from the exercise of warrants in connection with the 2009 completion of a tender offer made by our institutional investors and the recently completed initial public offering of our common stock. We also repaid all outstanding indebtedness and, in March 2011, entered into a new loan agreement with Bank of America, N.A. This facility provides financing up to $5.0 million (based on eligible receivables) with interest at LIBOR plus 275 basis points, is secured by a pledge of the Company's assets and contains customary provisions regarding covenants. The financial covenants require us to maintain a leverage ratio not exceeding 2:1 and an EBITDA to interest expense ratio of at least 3:1. At September 30, 2012, we were in compliance with these covenants and there were no amounts outstanding on the credit facility.

We are not a capital-intensive business. Our capital expenditures heretofore have comprised technology, fixtures and equipment to accommodate our growth and we acquired and renovated a building placed into service in 2011. Additionally, we capitalize the application development costs for new technology and enhancements to our innovation platform. Funding for all of these expenditures came from existing resources. We are completing construction of new facilities to accommodate the growth of our business. We estimate this facility will cost approximately $12.0 million and will be completed by the end of fiscal 2013. We believe that our current cash, short-term investments and funds available under our credit facility or, if required, other financing combined with our anticipated cash flow from operations and the proceeds of our recently-completed initial public offering will be sufficient to meet our working capital and capital expenditure needs for the next 12 months and for a reasonable period thereafter.


Cash Flow Summary

Cash and cash equivalents were $5.0 million at September 30, 2012, as compared with $5.6 million at June 30, 2012. As of September 30, 2012, and June 30, 2012, we also had $29.7 and $29.4 million, respectively, in short-term investments classified as available for sale.

Operating Activities

Cash provided by operating activities was $2.4 million for the three months ended September 30, 2012, comprised primarily of net stock compensation expense of $1.1 million, depreciation and amortization of $1.8 million and provision for bad debts of $345,000 combined with net income of $8,000. Net changes in working capital required $873,000 cash from operations, attributable principally to a $4.2 million decrease in accounts receivable offset by a $3.9 million decrease in accounts payable and accrued liabilities, a $542,000 decrease in deferred revenue, and increases in inventory, prepaids and other assets of $639,000.

Cash provided by operating activities was $811,000 for the three months ended September 30, 2011, comprised primarily of $406,000 net loss and a $227,000 deferred tax benefit offset by $1.1 million net stock compensation expense, $460,000 depreciation and amortization and $256,000 provision for bad debts. Net changes in working capital required $327,000 from cash provided by operating activities including $1.1 million from increased inventory, prepaids and other assets, $593,000 million decreased accounts payable and accrued liabilities offset by $1.0 million in decreased accounts receivables and $369,000 in decreased deferred revenue.

Investing Activities

As of September 30, 2012, we had net short-term investments of $29.7 million. Our policy is to invest only in fixed income instruments denominated and payable . . .

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