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Form 10-Q ATHENAHEALTH INC For: Mar 31

April 30, 2015 4:37 PM EDT

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
or
¨
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 001-33689
athenahealth, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
04-3387530
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
311 Arsenal Street,
Watertown, Massachusetts
 
02472
(Address of principal executive offices)
 
(Zip Code)
617-402-1000
Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company)
 
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
At April 28, 2015, the registrant had 38,553,342 shares of common stock, par value $0.01 per share, outstanding.




INDEX

 
PART I - FINANCIAL INFORMATION
Page
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II - OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 



i


PART I - FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements (unaudited)

athenahealth, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except per share amounts)
 
 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
32,593

 
$
73,787

Marketable securities
 
27,160

 
40,950

Accounts receivable, net
 
118,656

 
121,710

Deferred tax asset, net
 
13,614

 

Prepaid expenses and other current assets
 
26,931

 
22,627

Total current assets
 
218,954

 
259,074

Property and equipment, net
 
282,837

 
271,552

Capitalized software costs, net
 
85,305

 
56,574

Purchased intangible assets, net
 
144,249

 
139,422

Goodwill
 
230,147

 
198,049

Investments and other assets
 
7,455

 
7,327

Total assets
 
$
968,947

 
$
931,998

Liabilities & Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
9,982

 
$
9,410

Accrued compensation
 
41,164

 
71,768

Accrued expenses
 
43,377

 
37,033

Line of credit
 

 
35,000

Long-term debt
 

 
15,000

Deferred revenue
 
34,283

 
28,949

Deferred tax liability, net
 

 
8,449

Total current liabilities
 
128,806

 
205,609

Deferred rent, net of current portion
 
22,281

 
19,412

Line of credit
 
95,000

 

Long-term debt, net of current portion
 
170,000

 
158,750

Deferred revenue, net of current portion
 
54,892

 
54,473

Long-term deferred tax liability, net
 
25,576

 
10,417

Other long-term liabilities
 
8,640

 
8,214

Total liabilities
 
505,195

 
456,875

Commitments and contingencies (Note 6)
 

 

Stockholders’ equity:
 
 
 
 
     Preferred stock, $0.01 par value: 5,000 shares authorized; no shares issued and outstanding at March 31, 2015 and December 31, 2014
 

 

     Common stock, $0.01 par value: 125,000 shares authorized; 39,766 shares issued and 38,488 shares outstanding at March 31, 2015; 39,402 shares issued and 38,124 shares outstanding at December 31, 2014
 
398

 
395

Additional paid-in capital
 
449,415

 
443,259

Treasury stock, at cost, 1,278 shares
 
(1,200
)
 
(1,200
)
Accumulated other comprehensive income
 
15,490

 
24,188

Retained (deficit) earnings
 
(351
)
 
8,481

Total stockholders’ equity
 
463,752

 
475,123

Total liabilities and stockholders’ equity
 
$
968,947

 
$
931,998

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


athenahealth, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, amounts in thousands, except per share amounts)
 
 
 
Three Months Ended March 31,
 
 
 
2015
 
2014
Revenue:
 
 
 
 
 
Business services
 
 
$
197,763

 
$
154,502

Implementation and other
 
 
8,671

 
8,533

Total revenue
 
 
206,434

 
163,035

Expense:
 
 
 
 
 
Direct operating
 
 
84,557

 
72,148

Selling and marketing
 
 
53,365

 
43,227

Research and development
 
 
23,728

 
15,155

General and administrative
 
 
36,212

 
29,357

Depreciation and amortization
 
 
20,352

 
14,249

Total expense
 
 
218,214

 
174,136

Operating loss
 
 
(11,780
)
 
(11,101
)
Other (expense) income:
 
 
 
 
 
Interest expense
 
 
(1,059
)
 
(1,265
)
Other income (expense)
 
 
44

 
(171
)
Total other expense
 
 
(1,015
)
 
(1,436
)
Loss before income tax benefit
 
 
(12,795
)
 
(12,537
)
Income tax benefit
 
 
3,963

 
4,482

Net loss
 
 
$
(8,832
)
 
$
(8,055
)
Net loss per share – Basic
 
 
$
(0.23
)
 
$
(0.21
)
Net loss per share – Diluted
 
 
$
(0.23
)
 
$
(0.21
)
Weighted average shares used in computing net loss per share:
 
 
 
 
 
Basic
 
 
38,278

 
37,484

Diluted
 
 
38,278

 
37,484

The accompanying notes are an integral part of these condensed consolidated financial statements.


2


athenahealth, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, amounts in thousands)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net loss
 
$
(8,832
)
 
$
(8,055
)
Other comprehensive (loss) income
 
 
 
 
Unrealized (loss) gain on securities, net of tax of $5,194 and ($27,534) for the three months ended March 31, 2015 and 2014, respectively
 
(8,596
)
 
45,636

Unrealized (loss) gain on change in fair value of interest rate swap, net of tax of $140 and ($8) for the three months ended March 31, 2015 and 2014, respectively
 
(231
)
 
12

Foreign currency translation adjustment
 
129

 
103

Total other comprehensive (loss) income
 
(8,698
)
 
45,751

Comprehensive (loss) income
 
$
(17,530
)
 
$
37,696

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


athenahealth, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net loss
 
$
(8,832
)
 
$
(8,055
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
26,541

 
21,459

Deferred income tax
 
(4,219
)
 
(4,605
)
Stock-based compensation expense
 
15,874

 
12,351

Other reconciling adjustments
 
102

 
171

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
4,183

 
325

Prepaid expenses and other current assets
 
(4,491
)
 
(1,627
)
Other long-term assets
 
58

 
(945
)
Accounts payable
 
1,139

 
3,913

Accrued expenses and other long-term liabilities
 
6,683

 
2,951

Accrued compensation
 
(30,027
)
 
(13,529
)
Deferred revenue
 
3,314

 
1,255

Deferred rent
 
2,599

 
402

Net cash provided by operating activities
 
12,924

 
14,066

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Capitalized software development costs
 
(38,492
)
 
(11,057
)
Purchases of property and equipment
 
(22,815
)
 
(5,325
)
Payments on acquisitions, net of cash acquired
 
(40,165
)
 

Change in restricted cash
 

 
2,806

Net cash used in investing activities
 
(101,472
)
 
(13,576
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from issuance of common stock under stock plans and warrants
 
6,287

 
9,000

Taxes paid related to net share settlement of stock awards
 
(15,310
)
 
(19,464
)
Proceeds from line of credit
 
60,000

 

Payments for long-term debt
 
(3,750
)
 
(3,750
)
Net cash provided by (used in) financing activities
 
47,227

 
(14,214
)
Effect of exchange rate changes on cash and cash equivalents
 
127

 
(15
)
Net decrease in cash and cash equivalents
 
(41,194
)
 
(13,739
)
Cash and cash equivalents at beginning of period
 
73,787

 
65,002

Cash and cash equivalents at end of period
 
$
32,593

 
$
51,263

Non-cash transactions
 
 
 
 
Property, equipment and purchased software recorded in accounts payable and accrued expenses
 
$
9,557

 
$
3,753

Non-cash leasehold improvements
 
$
105

 
$

Taxes to be paid related to net share settlement of stock units in accrued compensation
 
$

 
$
2,209

Additional disclosures
 
 
 
 
Cash paid for interest, net
 
$
252

 
$
1,474

Cash (refunded) paid for taxes
 
$
136

 
$
(761
)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

athenahealth, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands, except per share amounts)


1. BASIS OF PRESENTATION
General The accompanying unaudited condensed consolidated financial statements have been prepared by athenahealth, Inc. (the “Company” or “we” or “our”) in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of March 31, 2015, the results of operations for the three months ended March 31, 2015, and 2014, and cash flows for the three months ended March 31, 2015, and 2014. The results of operations for the three month period ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year. When preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material.
We consider events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements.
Related Party Transactions – We have a long-term investment in a vendor. The total expense related to this vendor for the three months ended March 31, 2015, and 2014 was $4.3 million and $1.3 million, respectively, and the total amount payable to this vendor at March 31, 2015 and December 31, 2014 was $1.6 million and $1.3 million, respectively.
New Accounting Pronouncements – In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance, which changes the presentation of debt issuance costs in financial statements. Under this guidance, an entity will present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. We have evaluated this ASU and determined that its adoption will not have a material effect on our financial position or earnings. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for all entities for financial statements that have not been previously issued.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the current revenue recognition guidance, including industry-specific guidance. In addition, the ASU provides guidance on accounting for certain revenue-related costs including, but not limited to, when to capitalize costs associated with obtaining and fulfilling a contract. ASU 2014-09 provides companies with two implementation methods. Companies can choose to apply the standard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application (modified retrospective application). We are currently in the process of evaluating this new guidance. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In April 2015, the FASB proposed a one-year delay in the effective date of the standard to January 1, 2018, with an option that would permit companies to adopt the standard as early as the original effective date. Early adoption prior to the original effective date is not permitted.
Debt Commitment Letter On March 6, 2015, we entered into a commitment letter for a new senior credit facility (the “2015 Senior Credit Facility”) which will include a revolving facility and a term loan facility and replace our existing Senior Credit Facility. The contemplated 2015 Senior Credit Facility will have no current payment obligations and, as such, we have excluded our existing debt obligations from current liabilities. We anticipate closing on the 2015 Senior Credit Facility during the three months ending June 30, 2015.

5


2. ACQUISITIONS
webOMR
On January 23, 2015, we signed an agreement to purchase a suite of internally-developed clinical applications and an electronic health record system from Beth Israel Deaconess Medical Center, Inc. (“BIDMC”) referred to as webOMR for $22.0 million in cash. The agreement also provides for up to an additional $18.0 million in contingent payments upon achievement of certain milestones in the future. In connection with the purchase of the webOMR technology, the parties also entered into a two-year collaboration agreement under which BIDMC will provide ongoing consultation services with respect to the webOMR technology and provide one of its facilities as a testing site for a new inpatient service offering. We purchased webOMR to accelerate our entry into the inpatient market.
RazorInsights
On January 13, 2015, we acquired Razor Insights, LLC (“RazorInsights”), a provider of cloud-based billing and electronic health record (“EHR”) software services to rural and community hospitals, for $40.2 million in cash. We acquired RazorInsights for the assembled workforce, technology, customer base and to accelerate our entrance into serving the inpatient segment. The fair value of net assets acquired was $8.1 million, including purchased intangible assets of $7.0 million related to Technology acquired and $4.0 million related to customer relationships. The $32.1 million excess of purchase consideration over the fair value of net assets acquired is allocated to goodwill, which is deductible for U.S. income tax purposes. We incurred transaction costs in connection with the acquisition of $0.3 million, which are included in general and administrative expenses.
The fair values assigned to assets acquired and liabilities assumed were based on information that was available as of the date of the acquisition. Certain items, such as the working capital adjustments to the purchase price and the value of the purchased intangible assets, are subject to change as additional information is received about facts and circumstances that existed at the date of acquisition.
3. NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding and potentially dilutive securities outstanding during the period under the treasury stock method. Potentially dilutive securities include stock options, restricted stock units, and shares to be purchased under the employee stock purchase plan. Under the treasury stock method, dilutive securities are assumed to be exercised at the beginning of the periods and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Securities are excluded from the computations of diluted net (loss) income per share if their effect would be anti-dilutive to earnings per share; therefore, in periods of net loss, shares used to calculate basic and dilutive net loss per share are equivalent.
The following table reconciles the weighted average shares outstanding for basic and diluted net loss per share for the periods indicated:
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net loss
 
$
(8,832
)
 
$
(8,055
)
Weighted average shares used in computing basic and diluted net loss per share
 
38,278

 
37,484

Net loss per share – basic and diluted
 
$
(0.23
)
 
$
(0.21
)

6

athenahealth, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands, except per share amounts)

4. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of March 31, 2015 and December 31, 2014, the carrying amounts of cash and cash equivalents, receivables, accounts payable, and accrued expenses approximated their estimated fair values because of the short-term nature of these financial instruments. As of March 31, 2015, we had $170.0 million outstanding on our term loan facility and $95.0 million outstanding on our revolving credit facility. As of December 31, 2014, we had $173.8 million outstanding on our term loan facility and $35.0 million outstanding on our revolving credit facility. The facility carries a variable interest rate set at current market rates, and as such the carrying value approximates fair value.
Our More Disruption Please (“MDP”) Accelerator portfolio is a program designed to cultivate heath care information technology start-ups and expand services offered to our physician network. Our investments of $0.8 million as of March 31, 2015 and December 31, 2014 are in the form of short-term convertible notes receivable, and are included in prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets. At March 31, 2015, as there is no indication of performance risk and no conversion is currently contemplated, we estimate that the fair value of these notes receivable approximate cost, based on inputs including the original transaction price, our own recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investments, subsequent rounds of financing, and changes in financial ratios or cash flows (Level 3).
Marketable equity securities are valued using a market approach based upon the quoted market prices of identical instruments when available or other observable inputs such as trading prices of identical instruments in inactive markets or similar securities.
Our interest rate swap agreement was designed to manage exposure to interest rates on our variable rate indebtedness. We have designated the interest rate swap agreement as a cash flow hedge. For the three months ended March 31, 2015, no amount was recognized in earnings for our interest rate swap. There was no ineffectiveness associated with the interest rate swap during the three months ended March 31, 2015, nor was any amount excluded from ineffectiveness testing. We do not expect that any of the $0.4 million of pre-tax unrealized losses included in accumulated other comprehensive income at March 31, 2015, will be reclassified into earnings within the next 12 months. This amount will vary due to fluctuations in interest rates. We are exposed to credit loss in the event of non-performance by the swap counterparty.
The estimated fair value of our interest rate swap agreement with a certain financial institution at March 31, 2015 and December 31, 2014 was a liability of $0.6 million and $0.2 million, respectively, based on inputs other than quoted prices that are observable for the interest rate swap (Level 2). Inputs include present value of fixed and projected floating rate cash flows over the term of the swap contract.
The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, and fair values determined by Level 2 inputs utilize quoted prices (unadjusted) in inactive markets for identical assets or liabilities obtained from readily available pricing sources for similar instruments. The fair values determined by Level 3 inputs are unobservable values which are supported by little or no market activity. It is our policy to recognize transfers between levels of the fair value hierarchy, if any, at the end of the reporting period; however, there have been no such transfers during any of the periods presented.

7

athenahealth, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands, except per share amounts)

 
 
Fair Value Measurements as of March 31, 2015, Using
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Available-for-sale investments:
 
 
 
 
 
 
 
 
Marketable equity securities
 
$
27,160

 
$

 
$

 
$
27,160

Debt securities
 
 
 
 
 
 
 
 
MDP Accelerator portfolio
 
$

 
$

 
$
750

 
$
750

Total assets
 
$
27,160

 
$

 
$
750

 
$
27,910

Interest rate swap liability (a)
 
$

 
$
(615
)
 
$

 
$
(615
)
Total liabilities
 
$

 
$
(615
)
 
$

 
$
(615
)
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements as of December 31, 2014, Using
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Available-for-sale investments:
 
 
 
 
 
 
 
 
Marketable equity securities
 
$
40,950

 
$

 
$

 
$
40,950

Debt securities
 
 
 
 
 
 
 
 
MDP Accelerator portfolio
 
$

 
$

 
$
750

 
$
750

Total assets
 
$
40,950

 
$

 
$
750

 
$
41,700

Interest rate swap liability (a)
 
$

 
$
(244
)
 
$

 
$
(244
)
Total liabilities
 
$

 
$
(244
)
 
$

 
$
(244
)
(a) 
Recorded in other long-term liabilities on the Condensed Consolidated Balance Sheets.
The following table presents our financial instruments measured at fair value using unobservable inputs (Level 3) as of March 31, 2015:
 
 
Fair Value Measurements Using Unobservable Inputs (Level 3)
 
 
March 31, 2015
Balance, January 1, 2015
 
$
750

     Reductions
 

     Additions
 

Balance, March 31, 2015
 
$
750


8

athenahealth, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands, except per share amounts)

5. INVESTMENTS
We had the following available-for-sale securities as of March 31, 2015:

 
Cost
 
Gross 
Unrealized Gain
 
Fair Value
Marketable equity securities
 
$
1,100

 
$
26,060

 
$
27,160


We had the following available-for-sale securities as of December 31, 2014:
 
 
Cost
 
Gross 
Unrealized Gain
 
Fair Value
Marketable equity securities
 
$
1,100

 
$
39,850

 
$
40,950


6. COMMITMENTS AND CONTINGENCIES
We are engaged from time to time in certain legal disputes arising in the ordinary course of business, including employment discrimination claims and challenges to our intellectual property. We believe that we have adequate legal defenses and that the likelihood of a loss contingency relating to the ultimate disposition of any of these claims is remote. When the likelihood of a loss contingency becomes at least reasonably possible with respect to any of these disputes, or, as applicable in the future, if there is at least a reasonable possibility that a loss exceeding amounts already recognized may have been incurred, we will revise our disclosures in accordance with the relevant authoritative guidance.
Additionally, we will accrue a liability for loss contingencies when we believe that it is both probable that a liability has been incurred and that we can reasonably estimate the amount of the loss. We will review these accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained, and our views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in our accrued liabilities would be recorded in the period in which such determination is made.

9


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are forward-looking statements, including those regarding the increased levels of automation and volume of our services; implementation services provided by external service providers; expanded sales and marketing efforts; increased cross-selling efforts among our service offerings; market trends; investments to support continued growth, new service offerings, and infrastructure expansion; activity of stock option exercises and withholding of shares to cover taxes; acceleration of our entry into the inpatient market through use of the webOMR technology and integration of Razor Insights, LLC; changes in expenses related to operations, selling, marketing, research and development, general and administrative matters, and depreciation and amortization; liquidity matters; and the expected performance period and estimated term of our client relationships, as well as more general statements regarding our management’s expectations for future financial and operational performance and expenditure, profitability, and business outlook. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue;” the negative of these terms; or other comparable terminology.
Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from those anticipated by such statements. These factors include, among other things, those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, under the heading Part I, Item 1A, “Risk Factors,” and any set forth below in this Quarterly Report on Form 10-Q under Part II, Item 1A, “Risk Factors.”
Although we believe that the expectations reflected in the forward-looking statements contained in this Quarterly Report on Form 10-Q are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to update or revise any of such forward-looking statements, whether as a result of new information, future events, or otherwise, after the date of this Quarterly Report on Form 10-Q.
Overview
athenahealth provides cloud-based business services that help health care providers achieve and sustain financial health by collecting more revenue and greatly reducing their administrative work burden. These services are designed to minimize the hassles that health care providers and their staff face from complex billing rules, quality measurement and reporting, clinical documentation and data exchange, patient communication and referrals, and many related tasks that can take attention away from delivering care. Our athenahealth-branded services are delivered and consumed through a single instance of our cloud-based platform, athenaNet, which we continuously update to improve our services. These integrated service offerings include: athenaCollector for revenue cycle management and medical billing; athenaClinicals for electronic health record (“EHR”) management; athenaCommunicator for patient engagement and communication; and athenaCoordinator for care coordination.
Each service is supported by a model comprised of three distinct but interconnected components: cloud-based software, networked knowledge, and back-office work. The software is provided at no extra charge to users but is the primary conduit through which we exchange information among clients, payers, trading partners, and our staff of experts. Knowledge is infused into each service via our rules engine as we work with clients, payers, and other partners to codify rules associated with reimbursement, clinical quality measures, and other factors related to our clients’ performance, making the network “smarter” and more powerful for all clients. The network’s shared knowledge and transparency also allows clients to monitor and benchmark their performance against those of other clients across the network. The third component to each service is the work that we perform on behalf of our clients. Wherever possible, we replace manual processes with automation, but where automation is not possible, we perform the work on our clients’ behalf. These services range from receiving, scanning, and delivering incoming faxes to tracking claims with insurance payers. This unique service model of software, knowledge, and work is the core of our aligned success model.
We also provide clients in the health care industry (e.g., pharmaceutical companies, managed care companies, and market research firms) the opportunity to sponsor clinical information and decision support services in order to engage with Epocrates’ member network, and offer the sale of subscriptions to Epocrates’ premium drug and clinical reference tools to health care professionals.
For the three months ended March 31, 2015, we generated revenue of $206.4 million from the sale of our services compared to $163.0 million for the three months ended March 31, 2014. Given the scope of our market opportunity, we have also increased our spending each year on growth, innovation, and infrastructure.
Our revenue is predominately derived from core athenahealth-branded business services, which excludes revenue from Epocrates-branded services, third-party tenant revenue, and other non-core revenue. In most cases, we charge clients a percentage of payments collected by us on behalf of our clients, connecting our financial results directly to that of our clients

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and our ability to drive revenue to medical groups and health systems. Therefore, the key drivers of our revenue include growth in the number of physicians and other health care providers working within our client accounts, the collections of these physicians, and the number of services purchased. To provide these services, we incur expenses in several categories, including direct operating, selling and marketing, research and development, general and administrative, and depreciation and amortization expense. In general, our direct operating expense increases as our volume of work increases, whereas our selling and marketing expense increases in proportion to our intended growth rate of adding new accounts to our network of physician clients. Our research and development, general and administrative, and depreciation and amortization expense categories are less directly related to growth of revenues and relate more to our planning for the future, our overall business management activities, and our infrastructure. We manage our cash and our use of credit facilities to ensure adequate liquidity and to ensure adherence to related financial covenants.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). In connection with the preparation of our condensed consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors we believe to be relevant at the time we prepare our condensed consolidated financial statements. The accounting estimates used in the preparation of our condensed consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. On a regular basis, we review the accounting policies and assumptions, and update our assumptions, estimates, and judgments to ensure that our condensed consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Critical accounting policies are those policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. For a more detailed discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission (“SEC”) on February 9, 2015.
Financial Operations Overview
Revenue. We derive our revenue from two sources: business services, and implementation and other services. Business services includes revenue from our revenue cycle and practice management service (athenaCollector); EHR management service (athenaClinicals); patient engagement and communication service (athenaCommunicator); care coordination service (athenaCoordinator); subscriptions, sponsored clinical information, and decision support services for our point of care clinical application (Epocrates); and consulting, training, and go-live support. No customers accounted for a significant amount of revenues for the three months ended March 31, 2015 and 2014.
Business services revenue accounted for 96% of our total revenues for the three months ended March 31, 2015 and 95% of our total revenues for the three months ended March 31, 2014. Business services revenue for athenahealth-branded services is typically 2% to 8% of a practice’s total collections depending upon the services purchased, the size, complexity, and other characteristics of the practice, plus a per statement charge for certain billing statements that are generated for patients. Accordingly, business services revenue is largely driven by: the number of physician practices and other service providers we serve, the number of physicians and other medical providers working in those physician practices, the volume of activity and related collections of those physicians, the mix of our services used by those physician practices and other medical providers, and our contracted rates. There is moderate seasonality in the activity level of physician practices. Typically, discretionary use of physician services declines in the late summer and during the holiday season, which leads to a decline in collections by our physician clients about 30 to 50 days later. Our pharmaceutical clients’ budgeting process impacts the timing of revenue related to sales of sponsored clinical information and decision support services, which has historically been highest in the fourth quarter. Additionally, the volume of activity and related collections vary from year to year based in large part on the severity, length and timing of the onset of the flu season. While we believe that the severity, length and timing of the onset of the cold and flu season will continue to impact collections by our physician clients, there can be no assurance that our future sales of these services will necessarily follow historical patterns.
Implementation and other services revenue consists primarily of the amortization of deferred revenue on implementation services, as well as third-party tenant and other non-core revenue. We expect the amortization of deferred implementation fees to decline, as we have begun to include implementation fees into our ongoing monthly rate in 2014 and charge separately for training and go-live services, which can also be purchased from a third-party vendor. Additionally, we expect third-party tenant and other non-core revenue to decline in the foreseeable future as tenants vacate and we occupy the previously rented space.

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Direct Operating Expense. Direct operating expense consists primarily of compensation expense (including stock-based compensation) related to personnel who provide services, including implementation of clients, and claim processing costs. We expense implementation costs as incurred. We include in direct operating expense all service costs incurred to fulfill our customer contracts. We expect to increase our overall level of automation as we become a larger operation, with higher volumes of work in particular functions, geographies, and medical specialties. Although we expect that direct operating expense will increase in absolute terms for the foreseeable future, direct operating expense is expected to decline as a percentage of revenue as we increase automation. Direct operating expense also includes costs associated with third-party tenant and other non-core revenue. Direct operating expense does not include allocated amounts for rent, occupancy costs, depreciation, or amortization, except for amortization related to certain purchased intangible assets.
Selling and Marketing Expense. Selling and marketing expense consists primarily of compensation expense (including stock-based compensation) for sales and marketing employees and marketing programs (including trade shows, brand messaging, and online initiatives). Although we recognize substantially all of our revenue when services have been delivered, we recognize a large portion of our sales commission expense at the time of contract signature and at the time our services commence. Accordingly, we incur a portion of our sales and marketing expense prior to the recognition of the corresponding revenue. We have increased our sales and marketing expenses from year to year and we expect to continue to increase our investment in sales and marketing by hiring additional direct sales personnel and support personnel to add new clients and increase sales to our existing clients and to expand awareness through paid search and other similar initiatives. We also plan to expand our marketing activities, such as attending trade shows, expanding user groups, and creating new printed materials. As a result, we expect that, in the near-term, selling and marketing expense will increase in line with revenue growth. As we begin to leverage lower cost sales channels, we expect selling and marketing expense to decline as a percentage of revenue over time. Selling and marketing expense does not include allocated amounts for rent, occupancy costs, depreciation, or amortization, except for amortization related to certain purchased intangible assets.
Research and Development Expense. Research and development expense consists primarily of compensation expense (including stock-based compensation) for research and development employees and consulting fees for third-party developers. We expect that, in the near-term, research and development expenditures will increase in absolute terms and will likely increase as a percentage of revenue as we develop and enhance new and existing services; however, the amount of expenditures that should be capitalized as software development costs versus expensed as research and development could vary based on the specific projects we undertake. Research and development expense does not include allocated amounts for rent, occupancy costs, depreciation, or amortization.
General and Administrative Expense. General and administrative expense consists primarily of compensation expense (including stock-based compensation) for administrative employees, occupancy and other indirect costs (including building maintenance and utilities), and outside professional fees for accountants, lawyers, and consultants. We expect that general and administrative expense will increase in absolute terms as we invest in infrastructure to support our growth. Though expenses are expected to continue to rise in absolute terms, we expect general and administrative expense to decline as a percentage of revenue over time.
Depreciation and Amortization Expense. Depreciation and amortization expense consists primarily of depreciation of fixed assets over the determined useful life and amortization of capitalized software development over a two to three-year period from the time it is ready for its intended use. As we grow, we will continue to make capital investments in the infrastructure of the business and we will continue to capitalize software that we develop. We expect depreciation and amortization expense to increase as we make investments to support our continued growth, new service offerings, and infrastructure expansion.
Interest Expense. Interest expense consists primarily of interest costs related to our term and revolving loans under our credit facility and the amortization of deferred financing fees.
Income Tax Benefit. Income tax benefit relates to federal and state jurisdictions in the United States and India. The difference between our effective tax rate and our statutory rate is mainly related to the fact that we have certain permanent items which include, but are not limited to, transaction costs associated with stock acquisitions, the treatment of Incentive Stock Options (“ISOs”) and the Employee Stock Purchase Plan, the impact of certain tax deduction limits related to certain of our highly compensated officers, lobbying, and meals and entertainment. Transaction costs related to stock acquisitions are primarily non-tax deductible. The treatment of disqualifying dispositions related to ISOs are also treated as discrete items, which means that they are recorded in the quarter in which they occur and could cause significant differences between the quarterly and annual effective tax rate. We substantially ceased issuing ISOs in 2009, but we expect continued volatility related to these options since we cannot anticipate when disqualifying dispositions related to these stock options will occur.
Recent Developments
webOMR

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On January 23, 2015, we signed an agreement to purchase a suite of internally-developed clinical applications and an electronic health record system from BIDMC referred to as webOMR for $22.0 million in cash. The agreement also provides for up to an additional $18.0 million in contingent payments upon achievement of certain milestones in the future. In connection with the purchase of the webOMR technology, the parties also entered into a two-year collaboration agreement under which BIDMC will provide ongoing consultation services with respect to the webOMR technology and provide one of its facilities as a testing site for a new inpatient service offering.
RazorInsights
On January 13, 2015, we acquired RazorInsights, a provider of cloud-based billing and electronic health record software services to rural and community hospitals, for $40.2 million in cash. The fair value of net assets acquired was $8.1 million, including purchased intangibles of $7.0 million related to Technology acquired and and $4.0 million related to customer relationships. The $32.1 million excess of purchase consideration over the fair value of net assets acquired is allocated to goodwill, which is deductible for U.S. income tax purposes. We incurred transaction costs in connection with the acquisition of $0.3 million, which are included in general and administrative expenses.
We purchased webOMR and acquired RazorInsights to accelerate our entry into the inpatient market.
New Accounting Standards
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance, which changes the presentation of debt issuance costs in financial statements. Under this guidance, an entity will present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. We have evaluated this ASU and determined that its adoption will not have a material effect on our financial position or earnings. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for all entities for financial statements that have not been previously issued.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In addition, the ASU provides guidance on accounting for certain revenue-related costs including, but not limited to, when to capitalize costs associated with obtaining and fulfilling a contract. ASU 2014-09 provides companies with two implementation methods. Companies can choose to apply the standard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application (modified retrospective application). We are currently in the process of evaluating this new guidance. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In April 2015, the FASB proposed a one-year delay in the effective date of the standard to January 1, 2018, with an option that would permit companies to adopt the standard as early as the original effective date. Early adoption prior to the original effective date is not permitted.
Results of Operations
Comparison of the Three Months Ended March 31, 2015 and 2014
 
 
Three Months Ended March 31,
 
Change
 
 
2015
 
2014
 
Amount
 
Percent
 
 
(in thousands)
 
 
 
 
Business services revenue
 
$
197,763

 
$
154,502

 
$
43,261

 
28
%
Implementation and other revenue
 
8,671

 
8,533

 
138

 
2
%
Total
 
$
206,434

 
$
163,035

 
$
43,399

 
27
%
Total revenue for the three months ended March 31, 2015 increased primarily due to an increase in business services revenue.
The increase in business services revenue is primarily driven by the growth in the number of physicians and providers using our services. The increases in the number of physicians and providers using our revenue cycle and practice management service, athenaCollector; EHR management service, athenaClinicals; and patient engagement and communication management service, athenaCommunicator; are as follows:

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As of March 31,
 
 
 
 
 
 
 
2015
 
2014
 
Change
 
 
 
Amount
 
Amount
 
Amount
 
Percent
athenaCollector
Physicians
 
47,062

 
37,663

 
9,399

 
25
%
Providers
 
64,648

 
52,886

 
11,762

 
22
%
athenaClinicals
Physicians
 
19,796

 
13,521

 
6,275

 
46
%
Providers
 
26,166

 
18,343

 
7,823

 
43
%
athenaCommunicator
Physicians
 
33,578

 
24,030

 
9,548

 
40
%
Providers
 
43,770

 
31,707

 
12,063

 
38
%
Also contributing to this increase was the growth in related collections on behalf of these physicians and providers. The amount of collections processed is as follows:
 
 
Three Months Ended March 31,
 
Change
 
 
2015
 
2014
 
Amount
 
Percent
 
 
(in millions)
 
 
 
 
Collections processed
 
$4,111.0
 
$3,172.1
 
$
938.9

 
30
%

 
 
Three Months Ended March 31,
 
Change
 
 
2015
 
2014
 
Amount
 
Percent
 
 
(in thousands)
 
 
 
 
Direct operating
 
$84,557
 
$72,148
 
$
12,409

 
17
%
Direct Operating Expense. Direct operating expense increased primarily due to employee-related costs, including stock-based compensation, which increased $6.9 million in the three months ended March 31, 2015, as a result of a 22% increase in headcount from March 31, 2014. We increased headcount due to the increase in the number of providers added to the network during the three months ended March 31, 2015.
In addition, costs associated with our business partner outsourcing arrangements and clearing house increased $3.1 million, as the number of claims that we processed on behalf of our clients increased during the three months ended March 31, 2015. The total claims submitted on behalf of clients are as follows:
 
 
Three Months Ended March 31,
 
Change
 
 
2015
 
2014
 
Amount
 
Percent
 
 
(in millions)
 
 
 
 
Total claims submitted
 
32.8

 
25.8

 
7.0

 
27
%

 
 
Three Months Ended March 31,
 
Change
 
 
2015
 
2014
 
Amount
 
Percent
 
 
(in thousands)
 
 
 
 
Selling and marketing
 
$
53,365

 
$
43,227

 
$
10,138

 
23
%
Research and development
 
23,728

 
15,155

 
8,573

 
57
%
General and administrative
 
36,212

 
29,357

 
6,855

 
23
%
Depreciation and amortization
 
20,352

 
14,249

 
6,103

 
43
%
Total
 
$
133,657

 
$
101,988

 
$
31,669

 
31
%
Selling and Marketing Expense. The increase in selling and marketing expense was in part due to compensation costs, including stock-based compensation expense, internal sales commissions and external channel partner commissions, which increased $6.6 million for the three months ended March 31, 2015, largely due to an 18% increase in headcount from March 31, 2014. We hired additional sales personnel to focus on adding new customers and increasing penetration within our existing markets. Also contributing to the increase in selling and marketing expense was a $2.0 million increase in our core marketing programs for the three months ended March 31, 2015, compared to the three months ended March 31, 2014. The increase in our marketing spend is intended to drive a higher volume of sales meetings.

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Research and Development Expense. The increase in research and development expense was primarily due to higher compensation costs, including stock-based compensation expense, which increased $7.1 million for the three months ended March 31, 2015, largely due to a 42% increase in headcount from March 31, 2014. The additional research and development personnel were necessary in order to upgrade and expand our service offerings and develop new technologies.
General and Administrative Expense. General and administrative expense increased in the three months ended March 31, 2015, primarily due to lease termination costs and facilities-related expenses. General and administrative expense increased by $4.2 million as a result of lease termination costs incurred as a result of our growth. Facilities-related expenses, which include rent expense, increased $2.1 million for the three months ended March 31, 2015.
Depreciation and Amortization Expense. Depreciation and amortization expense increased for the three months ended March 31, 2015. This increase was partially due to $4.1 million of amortization related to an increase in our software development costs for the three months ended March 31, 2015, and $2.0 million of depreciation from higher fixed asset expenditures for the same period.
 
 
Three Months Ended March 31,
 
Change
 
 
2015
 
2014
 
Amount
 
Percent
 
 
(in thousands)
 
 
 
 
Income tax benefit
 
$
3,963

 
$
4,482

 
$
(519
)
 
(12)%
Effective tax rate
 
31.0
%
 
35.8
%
 

 
 
Income Tax Benefit. The difference in our effective tax rate for the three months ended March 31, 2015, compared to the three months ended March 31, 2014, is primarily due to an increase in permanent and discrete items.
Liquidity and Capital Resources
Sources of Liquidity
As of March 31, 2015, our principal sources of liquidity consisted of cash, cash equivalents, and marketable securities of $59.8 million compared to $125.5 million as of March 31, 2014. As of March 31, 2015, we have outstanding indebtedness of $265.0 million compared to $220 million as of March 31, 2014.
On May 10, 2013, we entered into a five-year $325.0 million senior credit facility consisting of a $200.0 million unsecured term loan facility and a $125.0 million unsecured revolving credit facility (the “Senior Credit Facility”). The Senior Credit Facility replaced our previous revolving credit facility. The Senior Credit Facility contains terms and conditions that are customary to facilities of this nature, and may be used to refinance existing indebtedness, to finance the acquisition of the Arsenal on the Charles, and for working capital and other general corporate purposes. We may increase the Senior Credit Facility up to an additional $100.0 million subject to certain terms, including obtaining lender commitments. As of March 31, 2015, we had $170.0 million outstanding on the unsecured term loan facility and $95.0 million outstanding on the unsecured revolving credit facility. As of March 31, 2015, we had $30.0 million available on the unsecured revolving credit facility. As of March 31, 2015, we were in compliance with our covenants under the Senior Credit Facility.
On March 6, 2015, we entered into a commitment letter for the 2015 Senior Credit Facility, which will include a revolving facility and a term loan facility and replace our existing Senior Credit Facility. The contemplated 2015 Senior Credit Facility will have no current payment obligations. We anticipate closing on the 2015 Senior Credit Facility in the three months ending June 30, 2015.
We believe our current and committed sources of liquidity will be sufficient to sustain operations, to make payments on our contractual obligations, and to purchase property and equipment in the foreseeable future. Our contemplated amendment and extension of the credit facility will provide additional flexibility to pursue strategic initiatives in the future, if needed. Our analysis is supported by the growth in our new client base and a high rate of renewal with our existing clients and the corresponding increase in billings and collections. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under these credit facilities or obtain additional financing.
Commitments
We enter into various purchase commitments with vendors in the normal course of business. We believe that our existing sources of liquidity will be adequate to fund these purchases during the 2015 fiscal year. In the normal course of business, we make representations and warranties that guarantee the performance of services under service arrangements with clients. Historically, there have been no material losses related to such guarantees.

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Operating Cash Flow Activities
Cash flows provided by operations decreased $1.1 million during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014. Cash used to satisfy accrued compensation in 2015 was $16.5 million higher due primarily to a larger corporate bonus, which is paid annually in the three months ended March 31, driven by overall headcount growth. This use of cash was offset by decreases in accounts receivable of $3.9 million due to timing of payments and seasonality.
These changes were offset by an increase in non-cash adjustments to net income of $8.9 million driven by increases in stock-based compensation expense as a result of our growing headcount and depreciation and amortization.
Investing Cash Flow Activities
Net cash used in investing activities increased $87.9 million during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014 due primarily to our acquisition of RazorInsights for $40.2 million in cash which is included in payments for acquisitions and our purchase of webOMR for $22.0 million which is included in capitalized software development costs.
We increased our investments in property and equipment in 2015 by $17.5 million, primarily related to investments in computer equipment to support our data centers and continued improvements to our owned properties as well as expansion in our leased facilities.
We continue to increase our investment in software development costs in 2015 and we expect investments to continue to increase as we develop and enhance new and existing services.
Financing Cash Flow Activities
Net cash provided by (used in) financing activities increased $61.4 million for the three months ended March 31, 2015, compared to the three months ended March 31, 2014, primarily due to our draw of $60.0 million on the unsecured revolving credit facility, which was used primarily to fund the acquisition of RazorInsights and our purchase of webOMR.
For the foreseeable future, we anticipate that income taxes paid for the net settlement of restricted stock unit awards will be greater than the cash received for stock option exercises because of the recent increase in our stock price and the increase in the issuance of restricted stock units compared to stock options.
Contractual Obligations
There have been no material changes outside the normal course of business to our contractual obligations since December 31, 2014. Refer to Contractual Obligations in Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2014.

Off-Balance Sheet Arrangements
As of March 31, 2015 and December 31, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose” entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Other than our operating leases, which are primarily for office space and data centers, we do not engage in off-balance sheet financing arrangements.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk. Our results of operations and cash flows are subject to fluctuations due to changes in the Indian rupee. None of our consolidated revenues are generated outside of the United States. None of our vendor relationships, including our contracts with our offshore service providers for work performed in India and the Philippines, is denominated in any currency other than the U.S. dollar. For the three months ended March 31, 2015 and 2014, approximately 1% of our expenses occurred in our direct subsidiary in Chennai, India, and was incurred in Indian rupees. We therefore believe that the risk of a significant impact on our operating income from foreign currency fluctuations is not likely.
Interest Rate Risk. We had $265.0 million of outstanding borrowings under our Senior Credit Facility at March 31, 2015. The Senior Credit Facility bears interest at the British Bankers Association London Interbank Offered Rate (“LIBOR”) plus an applicable margin. Accordingly, we are exposed to fluctuations in interest rates on borrowings under the Senior Credit Facility. A one hundred basis point change in the interest rate on our borrowings outstanding as of March 31, 2015 would result in a change in interest expense of approximately $1.5 million annually.
During the three months ended March 31, 2015, we utilized an interest rate swap to manage exposure to interest rates on the variable rate of our indebtedness. Our interest rate swap is with a major financial institution and is not used for speculative or trading purposes. We have designated our interest rate swap as a cash flow hedge and changes in the fair value of the interest rate swap are recognized in other comprehensive (loss) income. Hedge ineffectiveness, if any, associated with the interest rate swap will be reported in interest expense. We recorded the interest rate swap at fair value, which amounted to a liability of $0.6 million at March 31, 2015.
Item 4.
Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. As of March 31, 2015 (the “Evaluation Date”), our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Chief Executive Officer and Chief Financial Officer have concluded based upon the evaluation described above that, as of the Evaluation Date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control
There have been no changes in our internal control over financial reporting for the three months ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
On July 28, 2011, a complaint was filed by PPS Data, LLC naming us in a patent infringement case (PPS Data, LLC v. athenahealth, Inc., Civil Action No. 3:11-cv-00746, United States District Court for the Middle District of Florida). The complaint alleges that we have infringed U.S. Patent No. 6,343,271 with a listed issue date of January 29, 2002, entitled “Electronic Creation, Submission, Adjudication, and Payment of Health Insurance Claims” (the “‘271 Patent”). The complaint seeks an injunction enjoining infringement, damages, pre- and post-judgment costs and interest, and attorneys’ fees. On September 8, 2011, we filed a motion to dismiss, or, in the alternative, a motion for summary judgment. On October 18, 2011, the plaintiff filed a motion for leave to amend its complaint to allege that we have infringed on U.S. Patent No. 6,341,265 with a listed issue date of January 22, 2002, entitled “Provider claim editing and settlement system,” and U.S. Patent No. 7,194,416 with a listed issue date of March 20, 2007, entitled “Interactive creation and adjudication of health care insurance claims.” The Court granted the plaintiff’s motion for leave to amend its complaint on December 21, 2011, and on December 23, 2011, the plaintiff filed its amended complaint. On December 27, 2011, we filed a motion to dismiss, or, in the alternative, a motion for summary judgment of non-infringement with respect to the ‘271 Patent. On December 29, 2011, the United States Patent and Trademark Office granted our request for reexamination of the ‘271 Patent. On January 9, 2012, we filed a motion to stay the case pending completion of the patent reexamination, and on March 1, 2012, the Court granted our motion to stay the case. On March 27, 2015, the parties filed a joint motion to dismiss the case with prejudice, and the Court entered a dismissal with prejudice on April 7, 2015.
On March 1, 2013, a complaint was filed in the United States District Court for the Northern District of California captioned Police and Fire Retirement System of the City of Detroit v. Epocrates, Inc. et al., Case No. 5:13-cv-945, on behalf of a putative class of Epocrates’ stockholders against Epocrates and its former officers and directors. The complaint asserted claims under sections 11, 12 and 15 of the Securities Act of 1933 on behalf of all stockholders that purchased Epocrates stock in its initial public offering (“IPO”) and claims under sections 10(b) and 20 of the Securities Exchange Act of 1934 on behalf of all stockholders that purchased shares between February 2, 2011 (the day after the IPO) and August 9, 2011. On October 8, 2013, plaintiffs filed an amended complaint, alleging only claims under the Securities Exchange Act of 1934 and voluntarily dismissing a number of the individual defendants. Plaintiffs allege that Epocrates made false or misleading statements with respect to the fact that Epocrates’ pharmaceutical clients were awaiting guidance from the Food and Drug Administration on the use of advertising and social media, which caused the clients to delay marketing and negatively impacted the timing of Epocrates’ sales and revenue growth. The complaint seeks certification as a class action, compensatory damages in an unspecified amount, plaintiffs’ costs, attorneys’ fees, and such other and further relief as the court may deem just and proper. On December 9, 2013, we filed a motion to dismiss the amended complaint. On June 4, 2014, the court issued an order dismissing the complaint and granting plaintiffs leave to amend their complaint. On June 30, 2014, plaintiffs filed a second amended complaint, which asserts substantially similar claims as those set forth in the first amended complaint. On July 14, 2014, we filed a motion to dismiss the second amended complaint. On October 2, 2014, the court granted plaintiffs leave to file a third amended complaint by October 23, 2014, and denied the motion to dismiss as moot. Plaintiffs filed their third amended complaint on October 23, 2014, which asserts substantially similar claims on behalf of all stockholders that purchased shares between February 1, 2011, and August 9, 2011. We filed a motion to dismiss the third amended complaint on November 10, 2014, and the court denied the motion on March 13, 2015. On April 8, 2015, the court approved the parties’ stipulation, which noted that the parties will mediate the case on June 23, 2015. The court set a date to answer the third amended complaint on April 27, 2015, but delayed further deadlines until after the date of the mediation. We deny the allegations in the third amended complaint and will contest the claims vigorously.
In addition, from time to time we may be subject to other legal proceedings, claims, and litigation arising in the ordinary course of business. We do not, however, currently expect that the ultimate costs to resolve any pending matter will have a material effect on our consolidated financial position, results of operations, or cash flows.
Item 1A.
Risk Factors
During the three months ended March 31, 2015, there were no material changes to the risk factors that were disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.

17


Item 3.
Defaults Upon Senior Securities
Not applicable.
Item 4.
Mine Safety Disclosures
None.
Item 5.
Other Information
None.
Item 6.
Exhibits
Exhibit
No.
 
Exhibit Description
 
 
10.1†
 
Employment Agreement by and between the Registrant and Jeremy Delinsky, dated July 1, 2010
 
 
 
10.2
 
Amendment No. 3 to Office Lease Agreement by and between the Registrant and JAMESTOWN Ponce City Market, L.P., dated February 27, 2015
 
 
 
31.1
 
Rule 13a-14(a) or 15d-14 Certification of Chief Executive Officer
 
 
31.2
 
Rule 13a-14(a) or 15d-14 Certification of Chief Financial Officer
 
 
32.1*
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350
 
 
 
101
 
XBRL (eXtensible Business Reporting Language). The following materials from athenahealth, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, formatted in XBRL:
 
 
(i) the Condensed Consolidated Balance Sheets
 
 
(ii) the Condensed Consolidated Statements of Income
 
 
(iii) the Condensed Consolidated Statements of Comprehensive Income
 
 
(iv) the Condensed Consolidated Statements of Cash Flows
 
 
(v) the Notes to Condensed Consolidated Financial Statements
*
Furnished herewith.
Indicates a management contract or any compensatory plan, contract, or arrangement.


18


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
ATHENAHEALTH, INC.
 
 
By:
 
/s/    Jonathan Bush
 
 
Jonathan Bush
 
 
Chief Executive Officer, President, and Chairman
 
 
By:
 
/s/    Kristi A. Matus
 
 
Kristi A. Matus
 
 
Executive Vice President, Chief Financial and Administrative Officer
Date: April 30, 2015


19

EMPLOYMENT AGREEMENT
v7.4
THIS EMPLOYMENT AGREEMENT (“Agreement’) is made and entered into as of July 1, 2010 by and between ATHENAHEALTH, INC. (the “Company”), and the undersigned Employee (“Employee”).
The parties hereby agree as follows:
1.Employment; Term.
(a)    The Company employs Employee, and Employee accepts employment with the Company, upon the terms and conditions contained in this Agreement.
(b)    The Company and Employee acknowledge that Employee’s employment is at-will, and is for no definite period of time. Employee acknowledges and agrees that this Agreement will govern the terms of Employee’s employment with Company, even though compensation levels may be adjusted by Company from time to time by assent of the parties hereto.
2.    Duties.
During the period that Employee is employed under this Agreement (the “Employment Period”), Employee will serve in the position set forth in the attached Schedule A or in such other positions and with such other duties and responsibilities as Company will from time to time assign to employee. Employee will perform the duties of Employee’s position faithfully for the Company and in accordance’ with the reasonable directives of the Company. Employee will comply with procedures and policies as established by the Company from time to time. Employee will devote substantially all of Employee’s business time and effort to the performance of Employee’s duties to the Company. Employee acknowledges that execution of Employee’s duties in a timely, consistent and prudent manner is vital to the successful operations of the Company and that it is essential that Employee conduct the duties of this position with constant and watchful attention. Employee will participate in Company’s compliance training and act in accordance with the Company’s Compliance Principles and its Code of Conduct, in conformity with the Company’s compliance and integrity plan.
3.    Compensation.
Employee’s compensation will be as set forth in the attached Schedule A.
4.    Expenses; Benefits.
(a)    The Company agrees to reimburse Employee, in accordance with the Company’s policies as amended b the Company from time to time, for reasonable expenses paid or incurred by Employee in connection with the performance of Employee’s duties for the Company hereunder.
(b)    Employee will be entitled to vacation, sick days and leave of absence in accordance with Company policies, as amended by the Company from time to time.
(c)    Employee will be entitled to participate in health, life, or disability insurance, and retirement, pension, or profit-sharing plans that may be instituted by the Company for the benefit of its mid-level management Employees generally, upon such terms contained therein.
5.    Termination.
(a)    Since Employee’s employment is at-will employment, either Employee or the Company may terminate Employee’s employment at any time for any reason or for no reason.
(b)    Upon the termination of Employee’s employment for any reason, the parties will have no further obligations under this Agreement, except that the obligations of Employee under Sections 6, 7, 8, 9 and 10 and the provisions of Sections 12 and 13 will remain in effect and be binding upon the parties after termination.
6.    Effect of Termination.




(a)    The Company will have no liability or obligation to Employee upon Employee’s termination other than as specifically set forth in Sections 5(b) and 6, or as provided by law.
(b)    Upon the termination of Employee’s employment, Employee will be entitled to receive only such portion (if any) of the Base Salary as may have accrued but be unpaid on the date of termination, any accrued and unpaid vacation pay, outstanding expenses reimbursable under the Company’s then applicable policies, and other benefits which may be owing through the date of termination.
(c)    Upon the termination of Employee’s employment for any reason, Employee will immediately surrender to the Company all Company property in the possession, custody or control of Employee, including but not limited to all computer hardware, software, computer disks and/or data storage devices, notes, data, sketches, drawings, manuals, documents, records, data bases, programs, blueprints, memoranda, specifications, customer lists, financial reports, and equipment and will also immediately surrender to the Company all documents and other media containing any Confidential Information (as defined in Section 7 hereof).
7.    Confidential Information.
(a)    Except as specifically provided in this Section 7(a), “Confidential Information” means all information or material that relates to any of the Company’s products or services or any phase or aspect of its operations, business or financial affairs that: (i) is not generally known to the public, (ii) that is designated by the Company as Confidential, or (iii) that a reasonable person familiar with the Company’s business would understand is confidential to the Company or would harm the Company if not kept confidential. Employee acknowledges and agrees that Confidential Information includes, but is not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing): Company Inventions (as defined below), trade secrets, specifications, know-how, processes, formulas, models, work flows, software completed or in various stages of development, source codes, object codes, research and development procedures, test results, marketing techniques and materials, marketing and development plans, price lists, pricing policies, business plans, information relating to customers’ and/or suppliers’ identities or characteristics or agreements, financial information and projections and personnel files. Confidential Information also includes, but is not limited to, any information described above which the Company obtains from another party and which the Company treats and/or has an obligation to treat as confidential or designates as Confidential Information, whether or not developed by the Company. Confidential Information comprises information in all forms, spoken, written, recorded or contained in any media whatsoever, whether now in existence or to be invented in the future. (The term “Company,” in this Section 7(a), means not only athenahealth, Inc., but also any company, partnership or entity which, directly or indirectly, controls, is controlled by or is under common control with athenahealth, Inc.)
(b)    Employee recognizes and acknowledges that Company is regulated as a Covered Entity under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). Employee recognizes and acknowledges that Employee may have access to Protected Health Information (“PHI”) as defined under HIPAA in the course of employment and that such PHI is Confidential Information, subject to strict confidentially and security restrictions under HIPAA, under applicable Company policies and under other applicable law.
(c)    All Confidential Information and all documents and other media that contain Confidential Information (whether obtained or created before, during or after the Employment Period) including but not limited to information relating to all Company Inventions pursuant to the provisions of Section 8(a) below will remain the property of the Company and not the Employee and will be delivered to the Company at any time upon the Company’s request and upon the termination of Employee’s employment.
(d)    All Confidential Information will be held confidential by Employee. During the Employment period the Employee will not (nor will Employee assist any other person to), directly or indirectly: (i) reveal, report, publish or otherwise disclose such Confidential Information to any person, firm, corporation, association or other entity for any reason or purpose whatsoever except as necessary in the course of carrying out Employee’s duties hereunder or as expressly authorized by the Company; or, (ii) use such Confidential Information except for the benefit of the Company and in the course of Employee’s employment with the Company. In all cases, all disclosure and use of Confidential Information will, in addition to the foregoing: (i) be limited to and in conformity with all applicable




Company policies and procedures, including but not limited to documentation of non-disclosure and confidentiality obligations; and, (ii) limited to the amount of information necessary for the reason or purpose justifying the disclosure or use. After the Employment Period, Employee will not disclose or use Confidential Information without prior written consent of the Company that explicitly specifies the disclosure or use; and, any such disclosure or use will be subject to all obligations and restrictions set forth in this Agreement as if made during the Employment Period. Both during the Employment Period and at all times thereafter Employee will not render any services to any person, firm, corporation, association or other entity to whom any such Confidential Information, in whole or in part, has been disclosed or is threatened to be disclosed contrary to the provisions of this Section 7(d). This Section 7(d) will not apply to the extent Employee is required to disclose any Confidential Information by applicable law or legal process provided that Employee promptly notifies the Company of such pending disclosure and consults with and cooperates with the Company prior to such disclosure concerning the advisability of seeking a protective order or other means of preserving the confidentiality of the Confidential Information.
8.    Company Inventions.
(a)    During the Employment Period and thereafter, Employee will disclose promptly to the Company any and all Company Inventions (as defined below). Employee hereby assigns, and agrees during the Employment Period and thereafter to assign, to the Company all of Employee’s right, title and interest in any Company Inventions and in any and all applications and registrations for any form of intellectual property applicable to any Company Inventions. Employee acknowledges that all Company Inventions consisting of Works are intended to be “works made for hire”, as that term is defined in Section 101 of the United States Copyright Act of 1976 (the “Act”), and will be automatically the sole property of the Company within the meaning of the Act. If the copyright to any such Works will not be the property of the Company by operation of law, Employee will, without further consideration, assign to the Company all of my right, title and interest in such the copyright to such Works. Employee hereby waives, to the extent permitted by law, all claims to moral rights in any Company Inventions.
(i)    “Company Inventions” will mean any and all Inventions and Works in whole or in part conceived, made or reduced to practice by Employee (either solely or in conjunction with others) during or after the Employment Period that (A) are made through the use of any of the Company’s Confidential Information, Company Inventions, equipment, facilities, supplies, funds or proprietary rights or other property of the Company, (B) relate to the Company’s business or the Company’s actual or demonstrably anticipated research and development or business, or (C) result from any work performed by Employee for the Company.
(ii)    “Inventions” will mean any ideas, designs, concepts, techniques, inventions and discoveries, whether or not patentable or protectable by copyright and whether or not reduced to practice, including, but not limited to, devices, processes, methods, techniques, algorithms, trade secrets, and know-how.
(iii)    “Works” will mean any and all original works of authorship in any written, electronic, video, or audio records (or any other tangible medium, existing now or in the future, on which information is fixed), including without limitation all mask works, software, computer files, computer programs (in both object and source code), computer interfaces, documentation, and databases together with any improvements thereon or thereto, derivative works therefrom.
(iv)    “Prior Inventions” will mean any and all Inventions made, conceived or first reduced to practice by Employee, under Employee’s direction or jointly with others prior to Employee’s employment with the Company, which Employee owns or controls, either solely or jointly with others.
(v)    Employee represents that the attached Schedule B contains a complete list of all Prior Inventions which Employee desires to exclude from assignment to the Company hereunder. If there is no such Schedule B attached hereto, or if it is left blank, Employee represents that there are no such Prior Inventions. Employee agrees that, if in the course of my employment with the Company, Employee incorporates into a Company product, process or machine a Prior Invention or Work owned by Employee or in which Employee has an interest (regardless whether such Prior Invention is listed on Schedule B), or if the manufacture, use, sale, or import of any Company product or machine or the practice of any Company process would infringe any such Prior Invention or Work, the Company will automatically be granted and will have a non-exclusive, royalty-




free, fully-paid, irrevocable, transferable, perpetual world-wide license under such Prior Invention or Work to make, have made, modify, use, import, and/or sell such Company product or machine or to practice such process or Prior Invention or Work.
(vi)    Employee will keep and maintain adequate and current written records (in the form of notes, sketches, drawings or such other form(s) as may be specified by the Company) of all Company Inventions made by Employee during the Employment Period or thereafter (including but not limited to information relating to all Company Inventions which belong exclusively to the Company pursuant to the provisions of this Section 8(a)), which records will be available at all times to the Company and will remain the sole property of the Company. In the event that (A) any Company Invention is made, conceived of or reduced to practice by Employee, either solely or in conjunction with others, during the Employment Period, or (B) any Company Invention is made, conceived of or reduced to practice by Employee after the Employment Period which belongs exclusively to the Company pursuant to the provisions of this Section 8(a), Employee will promptly give notice and fully disclose in writing such Company Invention to the Chairman of the Board and the Board of Directors of the Company.
(vii)    Employee will assist the Company (at the Company’s expense), either during or subsequent to the Employment Period, to obtain and enforce for the Company’s benefit, patents, copyrights, and mask work protection in any country for any and all Company Inventions made by Employee, in whole or in part, the rights to which belong to or have been assigned to the Company pursuant to the provisions of Section 8(a) hereof. Employee agrees to execute all applications, assignments, instruments and papers and perform all acts as the Company or its counsel may deem necessary or desirable to obtain any patents, copyrights or mask work protection in such Company Inventions and otherwise to protect the interests of the Company therein. In the event the Company is unable to secure Employee’s signature on any document necessary to apply for, prosecute, obtain, or enforce any patent, copyright, or other right or protection relating to any Company Invention, whether due to mental or physical incapacity or any other cause, Employed hereby irrevocably designates and appoints the Company and each of its duly authorized officers and agents as Employee’s agents and attorney-in-fact, to act for and in Employee’s behalf and stead to execute and file any such document and to do all other lawfully permitted acts to further the prosecution, issuance, and enforcement of patents, copyrights, or other right or protections with the same force and effect as if executed and delivered by Employee.
9.    Covenant Against Competition; Non-Solicitation.
Employee covenants and agrees that:
(a)    During the Non-Compete Period (as hereinafter defined), Employee shall not: (i) engage in any business competitive in the Geographic Area (as hereinafter defined) with the Company Business (as hereinafter defined), (ii) render any services in any capacity to any person or entity engaged in any business competitive in the Geographic Area with the Company Business; or, (iii) be or become the Affiliate of any business competitive in the Geographic Area with the Company Business.
(b)    During the Non-Compete Period and for an additional 12 months, Employee shall not, without the prior written consent of the Company, directly or indirectly, on behalf of himself or any other person or entity, solicit or encourage any Employee of the Company or any of its Affiliates to leave the employment of the Company or any of its Affiliates, or hire any Employee who has left the employment of the Company or any of its Affiliates within one year of the termination of such Employee’s employment with the Company or any of its Affiliates.
(c)    During the Non-Compete Period, Employee shall not, in the Geographic Area, directly or indirectly: (i) solicit or encourage any customer or client of the Company to purchase or use services or items competitive with the Company Business; (ii) accept orders or business competitive with the Company Business with respect to any customer or client of the Company or offer or agree to provide services competitive with the Company Business to any customer or client of the Company; or (iii) solicit or encourage any person or entity with which Employee had contact on behalf of the Company to purchase or use services or items of a business competitive with the Company Business.




(d)    As used herein:
(i)    A person or entity is an “Affiliate” of another if: (a) it directly or indirectly controls, is controlled by, or is under common control with the other; (b) it directly or indirectly owns any interest in the other (except as a passive investment of less than 5% interest of an entity that is traded on a national securities exchange), is owned in any part by or shares common ownership in any part with the other; (c) it is a joint venturer, partner, director, officer, principal, manager, member, agent, or trustee of the other or associated with the other in any other capacity in which it owes to the other any fiduciary duty or duty of fidelity; or, (d) it holds itself out as providing a joint, coordinated or integrated service, item or combination of service(s) and item(s) with the other.
(ii)    “Company Business” includes the services and items developed or sold by the Company during the Employment Period. Company Business will also include services and items planned by the Company during the Employment period to be developed or sold by it if Employee has been materially involved in such planning, development or sale. Without limiting the foregoing definition, Company Business includes the business of providing, selling, contracting for or arranging for provision, in whole or in part, of medical revenue cycle or medical record software, software functionality or services.
(iii)    Without limitation, a business, service or item will be deemed competitive with the Company Business if a reasonable customer or client of that competitive business, service, item would on account of such business, service or item likely forego all or any material part of the services or items included in the Company Business.
(iv)    “Geographic Area” will be the United States.
(v)    “Non-Compete Period” will mean the period during which Employee is employed by the Company and an additional period equal to six months immediately following the termination of Employee’s employment with the Company, provided that if Employee has been employed for more than six months by the Company, the additional period following termination will be one year.
10.    Enforcement by Injunction.
Employee acknowledges and agrees that the Company will be immediately, substantially and irreparably damaged if Employee fails to comply with the provisions of Sections 7, 8 or 9. Accordingly, the Company will be entitled to bring action in court for (i) an injunction or any other appropriate decree of specific performance (without the necessity of posting any bond or other security in connection therewith) in case of any breach or threatened breach of Employee’s covenants and obligations under Sections 7, 8 or 9, (ii) damages in an amount equal to all compensation, profits, monies, accruals, increments or other benefits derived or received by Employee (or any associated party deriving such benefits, including but not limited to any future employer of Employee) as a result of any such breach of Employee’s covenants and obligations under Sections 7, 8 or 9, and (iii) indemnification against any other losses, damages, costs and expenses, including actual attorneys’ fees and court costs, incurred by the Company in obtaining any damages and/or injunctive relief as set forth in subsections (i) or (ii) above. Such remedies will not be exclusive and will be in addition to any other remedy, at law or in equity, which the Company may have for any breach or threatened breach of Sections 7, 8 or 9 by Employee. Any action permitted under this Section 10 may be brought in any court having jurisdiction of the parties, and the parties irrevocably consent to the jurisdiction and venue of the state courts of Massachusetts and the Federal District Court for the District of Massachusetts for that purpose. Employee hereby acknowledges and agrees that any breach by Employee of covenants and obligations under this Agreement will cause damage to the Company in Massachusetts and that consent to jurisdiction and venue in Massachusetts is reasonable and fair.
11.    Notices.
Any and all notices or other communications required or permitted to be given under any of the provisions of this Agreement will be in writing and will be deemed to have been duly given (a) when personally delivered, (b) on the third business day after deposit in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid), (c) on the next day business day after timely delivery to an overnight courier, or (d) upon confirmation




of receipt by facsimile or e-mail; in each case addressed to the parties at the addresses set forth below their signatures hereto (or at such other address as any party may specify by notice to all other parties given as aforesaid).
12.    Arbitration.
Except with respect to remedies and rights set forth in Section 10, any dispute or controversy arising under this Agreement or concerning Employee’s employment with the Company (including, without limitation, any controversy as to the arbitrability of any dispute), including but not limited to any claims arising out of Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and/or Massachusetts General Laws Chapter 151B, will be settled exclusively by arbitration to be held in Boston, Massachusetts, before a single arbitrator in accordance with the rules of the American Arbitration Association then in effect relating to the arbitration of employment disputes. Judgment may be entered on the arbitrator’s award in any court having jurisdiction, and the parties irrevocably consent to the jurisdiction of the Massachusetts courts for that purpose.
13.    Miscellaneous.
(a)    If any provision of Sections 7, 8 or 9 is held to be unenforceable or overly broad, it is the intention of the parties that the court or tribunal making such determination will modify such provision so that the provision will be enforceable to the broadest extent permitted under the law, and that such provision will then be applicable in such modified form. The provisions of the various limitations in Sections 7, 8 and 9 will be construed to be cumulative, and the scope or interpretation of one limitation will not be construed to nullify or reduce the limiting effect of another limitation.
(b)    Employee warrants and agrees that the restrictions set forth in Section 9 are reasonable and necessary to preserve to the Company valuable proprietary and confidential information that gives the Company advantage over its competitors and that violation by Employee of that Section will naturally, necessarily and inevitably result in the disclosure of such information to the competitors of the Company, to its irreparable and material damage.
(c)    To the extent, if any, that Employee possesses or has knowledge of information that is proprietary to a third party or that is subject to confidentiality restrictions properly placed upon it by a third party that would prevent Company from having access to such information (collectively “Third Party Information”), Employee will not disclose such information to Company or to any Company personnel nor will Employee use such information in the conduct of Employee’s employment hereunder. Employee’s duties hereunder expressly exclude use or disclosure of such information. Company expressly disclaims any request or requirement that Employee disclose or use Third Party Information in connection with employment hereunder; and, if Employee encounters such request or requirement, Employee will not make such disclosure or use but will instead promptly report such request or requirement to the Company’s acting compliance officer.
(d)    To the extent that Employee has been employed or retained by any third party in the past whereby Employee has come into possession of Third Party Information, Employee warrants and represents that Employee’s duties for Company as they have been described by Company in negotiation of this Agreement are not substantially similar to those duties that Employee undertook for any such third party such that any Third Party Information would naturally, necessarily or inevitably be used or disclosed by Employee in performing his or her duties for the Company.
(e)    Employee warrants and represents to the Company that Employee is not party to any agreement or understanding (including but not limited to any non-compete, non-disclosure, non-solicitation or similar agreement) that would prohibit, restrict or impair the ability of Employee to work in any capacity or position at the Company.
(f)    Any and all undertakings by the Company in this Agreement (including Schedule A or any amendment of Schedule A) with respect to any future grant of shares or options to purchase shares of stock of the Company are undertakings only to recommend such grant to the Board of Directors or its designee; and, all such grants are subject to and contingent upon separate prior approval of the Board of Directors of the Company or its designee (which approval may be withheld for any reason or for no reason), subject to determination by the Board of Directors or its designee with respect to strike price and vesting schedule and subject to the terms and conditions in the Company’s applicable stock option or stock benefit plan and in the Company’s stock option or stock benefit agreement forms




that are current at the time of approval. Notwithstanding any provision in this Agreement or any other document or statement to the contrary, no grant to Employee of any option to purchase shares of stock of the Company will be deemed compensation for past work or for past performance of Employee under any circumstances but will instead be solely an incentive to potential future performance from the date of vesting forward of such right; and, Employee will have no rights, entitlement or expectation of rights with respect to any such option or with respect to the stock subject to any such option except as explicitly set forth in the Company’s applicable stock option plan and stock option agreement forms.
(g)    This writing constitutes the entire agreement of the parties with respect to the subject matter hereof and may not be modified, amended or terminated except by a written agreement signed by all parties hereto, provided however that compensation levels may be adjusted by assent of the parties, which assent of Company will be in writing and signed on behalf of Company stating the adjusted level and which assent of Employee may be established by acceptance by Employee of compensation at such adjusted level.
(h)    This Agreement will be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation with which, or into which, the Company may be merged or which may succeed to the Company’s assets or business, provided, however, that the obligations of the Employee are personal and will not be assigned by him or her.
(i)    No waiver by the Company of any breach or default hereunder will be considered valid unless in writing signed by all parties hereto, and no such waiver will be deemed a waiver of any subsequent breach or default of a similar nature.
(j)    If any provisions of this Agreement will be held unenforceable, such unenforceability will attach only to such provisions and will not render unenforceable any other severable provisions of this Agreement, and this Agreement will be carried out as if any such unenforceable provisions were not contained herein, unless the unenforceability of such provisions substantially impairs the benefits of the remaining portions of this Agreement.
(k)    This Agreement may be executed in two or more counterparts, each of which will be deemed one original.
(l)    This Agreement will be deemed to be a contract that is made in Massachusetts, under the laws of the Commonwealth of Massachusetts; and, for all purposes this Agreement will be construed and enforced in accordance with the internal laws of Massachusetts, without regard to conflicts of laws principles, provided that to the extent permitted by Federal law the provisions for arbitration hereunder will be under and governed by the Federal Arbitration Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.
Employee signature:

/s/Jeremy E. Delinsky
Print name: Jeremy E. Delinsky                                     
Print address: 4 Indian Spring Road                             
                       Natick, MA 01760                                  
athenahealth, Inc.

By: /s/Jonathan J. Bush Jr.                                          
Print name: Jonathan J. Bush Jr.                                 
Title: President & CEO                                               
311 Arsenal St., Watertown, MA 02472

        




SCHEDULE A TO EMPLOYMENT AGREEMENT
Position: CTO

Compensation: Employee’s base salary will be at an annual gross rate of 200,000 (the “Base Salary”). The Base Salary shall be payable in accordance with the Company’s payroll practices, as in effect from time to time, and shall be subject to required federal, state and local taxes and withholdings. Employee will be entitled to annual consideration for a bonus based on Employee’s and the Company’s performance. Such bonus, if any, shall be determined by the Company in its sole discretion, and shall be paid as and according to the schedule determined by the Company.



















SCHEDULE B TO EMPLOYMENT AGREEMENT
The following is a complete list of all Prior Inventions.
ü        No Prior Inventions
See below description of Prior Inventions (reference and attach additional, initialed sheets if necessary)







Initials of Employee for Schedules A and B: JD




AMENDMENT NO. 3 TO OFFICE LEASE AGREEMENT
THIS AMENDMENT NO. 3 TO OFFICE LEASE AGREEMENT (this “Amendment”) is made as of the 27th day of February, 2015 by and between JAMESTOWN PCM Master Tenant, L.P., a Delaware limited partnership (“Landlord”) and athenahealth, Inc., a Delaware corporation (“Tenant”).
RECITALS:
JAMESTOWN Ponce City Market, L.P., a Delaware limited partnership (“JPCM”) and Tenant entered into that Office Lease Agreement dated March 7, 2013 (the “Original Lease”), as amended by that certain Amendment No. 1 to Office Lease Agreement dated April 23, 2014 (the “First Amendment”), and as amended by Amendment No. 2 to Office Lease Agreement dated August 18, 2014 (the “Second Amendment,” and the Original Lease, as amended, is referred to herein as the “Lease”) for certain premises known as Suite 9000 (the “Demised Premises”) in that certain mixed use commercial project located at 675 Ponce de Leon Avenue, NE, Atlanta, Georgia. JPCM has assigned its interest in the Lease to Landlord.
The parties desire to amend the Lease to revise the timing for delivery of the 20,000 Expansion Space, in accordance with the terms hereof.
NOW, THEREFORE, for and in consideration of Ten and No/100 Dollars ($10.00) and for other good and valuable consideration, the adequacy, receipt and sufficiency of which are hereby acknowledged, the parties do hereby covenant and agree as follows:

1.Defined Terms. Any defined term used in this Amendment and not defined herein shall have the definition set forth in the Lease.
2.Delivery Date of 20,000 Expansion Space. The Lease is hereby amended so that:
(a)    the “20,000 Expansion Delivery Date” shall be March 1, 2015; and
(b)    the “20,000 Expansion Commencement Date” shall be the earlier of the date upon which Tenant commences operations in the 20,000 Expansion Space, or July 1, 2015.
3.    Rent. From the 20,000 Expansion Commencement Date through the first day of the 2nd Lease Year, Tenant shall pay to Landlord Base Rent in the amount of $44,954.38 per month. Thereafter, Tenant shall pay to Landlord Base Rent in the amounts set forth in Section 4(e) of the Second Amendment. Tenant’s Proportionate Share shall be increased as of the 20,000 Expansion Commencement Date pursuant to Section 4(d) of the Second Amendment.

4.    Tenant Allowance. Landlord and Tenant hereby confirm that the “Tenant Allowance” for the 20,000 Expansion Space is One Million Four Hundred Sixty-Eight Thousand Five Hundred Nine and 58/100 Dollars ($1,468,509.58), and the FF&E and Rent Cap for the 20,000 Expansion Space shall be ten percent (10%) thereof.


2882870-3 11723.0024904



5.    Ratification. Except as amended hereby, the Lease is ratified and confirmed, and in full force and effect.

IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the date written above.
LANDLORD:

JAMESTOWN PCM Master Tenant, L.P., a Delaware limited partnership

By: JT PCM GP, L.P., a Delaware limited
partnership, its general partner

By: JT Ponce City Market GP, LLC, a Georgia limited liability company, its general partner


By: /s/Molly Mackenzie
Name: Molly Mackenzie
Title: Authorized Person


 
 
TENANT:
 
 
athenahealth, Inc., a Delaware corporation



By:   /s/Bridger McGaw                       
Name:     Bridger McGaw                    
Title:   Director, athenaEnvironment    





2
2882870-3 11723.0024904


EXHIBIT 31.1
Certification
I, Jonathan Bush, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of athenahealth, Inc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
 
 
 
 
Date:
April 30, 2015
 
 
/s/ Jonathan Bush
 
 
 
 
Chief Executive Officer




EXHIBIT 31.2
Certification
I, Kristi A. Matus, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of athenahealth, Inc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
 
 
 
 
Date:
April 30, 2015
 
 
/s/ Kristi A. Matus
 
 
 
 
Executive Vice President, Chief Financial and Administrative Officer




EXHIBIT 32.1
The following certification is being made to the Securities and Exchange Commission solely for purposes of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). This certification is not to be deemed a part of the Report, nor is it deemed to be “filed” for any purpose whatsoever.
In accordance with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 USC 1350), each of the undersigned hereby certifies, to our knowledge, that:
(i) this Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, which this statement accompanies, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(ii) the information contained in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, fairly presents, in all material respects, the financial condition and results of operations of athenahealth, Inc.
Dated as of this 30th day of April 2015,

 
 
 
 
 
s/ Jonathan Bush
 
 
 
/s/ Kristi A. Matus
Jonathan Bush
Chief Executive Officer
 
 
 
Kristi A. Matus
Chief Financial Officer




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