EICU Visicu (MM)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 000-51865

Visicu, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		52-2107238 (I.R.S. Employer Identification No.)

217 East Redwood Street, Suite 1900
Baltimore, Maryland 21202-3315
(Address of principal executive offices, including zip code)

(410) 276-1960

(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  o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o                     Accelerated filer  o                     Non-accelerated filer  þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o      No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding Shares at November 1, 2007
Common Stock, $.0001 par value per share		33,153,664 shares

 

 

VISICU, INC.

INDEX

				Page
PART I —		FINANCIAL INFORMATION
Item 1.		Financial Statements			3
		Balance Sheets — as of September 30, 2007 (unaudited) and December 31, 2006			3
		Statements of Operations — Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)			4
		Statements of Cash Flows — Nine Months Ended September 30, 2007 and 2006 (unaudited)			5
		Notes to Financial Statements (unaudited)			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			8
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			17
Item 4.		Controls and Procedures			17
PART II —		OTHER INFORMATION
Item 1.		Legal Proceedings			17
Item 1A.		Risk Factors			18
Item 4.		Submission of Matters to a Vote of Security Holders			19
Item 6.		Exhibits			20
		Signatures			21

PART I — FINANCIAL INFORMATION

(1)     Amounts include non-cash stock-based compensation expense as follows:
Cost of services		$	49			$	22			$	129			$	104
Sales and marketing expense			44				214				314				412
Research and development expense			41				143				295				425
General and administrative expense			327				483				952				1,347
Total non-cash stock-based compensation expense		$	461			$	862			$	1,690			$	2,288

See accompanying notes to financial statements.

See accompanying notes to financial statements.

VISICU, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation

     The accompanying unaudited financial statements of Visicu, Inc., or the Company, and the notes thereto have been prepared in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission, or SEC. These unaudited financial statements do not include all of the information and disclosures required by U.S. generally accepted accounting principles. However, such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of results for the interim periods presented.

     The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of annual results. The Company manages its business as one reportable segment.

     The unaudited financial statements included herein should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2006 that are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 13, 2007.

2. Marketable Securities

     The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents and investments with original maturities of greater than 90 days to be marketable securities. Cash and cash equivalents generally consist of cash, money market funds and federal agency notes. At September 30, 2007, the Company had marketable securities that were classified as held-to-maturity and reported at amortized cost. Held-to-maturity securities consist of debt securities issued by the U.S. Treasury and other government corporations and agencies.

     These marketable securities have expiration dates ranging from October 2007 to August 2008. At September 30, 2007, the estimated fair value of each investment approximated its amortized cost, and, therefore there were no significant unrealized gains or losses.

3. Stock-Based Compensation

      Summary of Stock-Based Compensation Expense

     For the nine months ended September 30, 2006 and 2007, the Company recorded $1.7 million and $2.3 million, respectively, of stock-based compensation expense. Prior to 2006, stock-based compensation expense was accounted for using the intrinsic value method prescribed by APB Opinion No. 25. On January 1, 2006, the Company adopted the fair value method of accounting for share-based payments prescribed by SFAS No. 123(R) using the prospective transition method. Accordingly, stock-based compensation expense includes expense associated with unvested awards at December 31, 2005 measured using the grant-date intrinsic value originally applied to those awards, and the expense associated with 2006 and 2007 grants measured using the fair value method.

      Summary of Stock Option Activity

     A summary of stock option activity for the nine months ended September 30, 2007 is presented below:

     The weighted-average fair value of options granted during the nine months ended September 30, 2007 was $4.16. The total fair value of shares vested during the nine months ended September 30, 2007 was $2.3 million.

4. Net Income Per Share

     A reconciliation of basic and diluted income per share is as follows (in thousands, except per share amounts):

5. Income Taxes

     The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48, on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $63,000 increase to unrecognized tax benefits. This increase was accounted for as an adjustment to the beginning balance of retained earnings. At January 1, 2007, the Company had $483,000 of unrecognized tax benefits, the recognition of which would reduce income tax expense. There were no significant changes to this amount during the first nine months of 2007, nor are any anticipated during the remainder of 2007.

     The Company is subject to U.S. federal income tax as well as income tax in multiple state and local jurisdictions. The Company began business in 1998 and, because of net operating loss carryforwards, all tax years from 1998 to the present remain subject to examination by taxing authorities. Currently, no Federal or state income tax returns are under examination.

     The Company’s policy is to classify interest and penalties related to uncertain tax positions in income tax expense. The amounts recorded to date and the amounts anticipated to be recorded during the remainder of 2007 are insignificant.

     The Company expects its 2007 effective income tax rate to be approximately 36%. Estimates of the annual effective tax rate at the end of interim periods are, of necessity, based on evaluations of possible future events and transactions and may be subject to subsequent refinement or revision.

6. Concentrations of Credit Risk

     Throughout the periods presented, the Company had deposits in financial institutions in excess of federally insured amounts. These amounts were invested primarily in commercial paper, money market funds and municipal bonds. The Company has not experienced any losses on its deposits.

     The Company has three customers that represented 23%, 18% and 12% of accounts receivable as of September 30, 2006. The Company has four customers that represented 19%, 16%, 11% and 11% of accounts receivable as of September 30, 2007. The Company has no customers that represented more than 10% of revenues for the three and nine months ended September 30, 2006 and 2007.

7. Contingencies

     The Company’s first U.S. patent is the subject of ongoing legal proceedings. Cerner Corporation has filed a lawsuit against the Company in which it seeks as one of its remedies a declaration that the patent is invalid and unenforceable. Also, the Company is a co-defendant in a lawsuit filed against a customer and several physicians claiming negligent treatment and care of a patient in the customer’s intensive care unit. The Company believes that the claims against it in the foregoing lawsuits are without merit and the Company is defending the lawsuits vigorously. The Company is unable to predict the outcome of any of the foregoing lawsuits and proceedings, or to quantify any effect that they might have on its business, financial condition or operating results. If the outcome of one or more of these lawsuits or proceedings is unfavorable to the Company, its business and financial results could be materially adversely affected.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and related notes appearing in Item 1 of this Part I. The following discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Forward-looking Statements” below, our actual results may differ materially from those anticipated in these forward-looking statements. You should also consider the risks and uncertainties discussed under the “Risk Factors” heading in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Unless the context requires otherwise, references in this report to “Visicu,” “we,” “us” and “our” refer to the registrant, Visicu, Inc.

Overview

     We are a healthcare information technology and clinical solutions company focused on transforming the delivery of care to the highest acuity patients in the hospital through our eICU Program. Our eICU Program is an advanced remote monitoring system for ICUs that allows hospitals to help improve patient outcomes, reduce costs, increase capacity, improve the quality of life of critical care professionals and increase revenue potential. We sell our eICU Program primarily to multi-hospital systems and networks of community and rural hospitals. We have implemented our eICU Program with some of the largest multi-facility healthcare providers in the United States.

     Our eICU Program consists of our eCareManager suite of software products and clinical solutions and services. We supplement the eCareManager software with comprehensive technical and clinical implementation services and ongoing product and program support and reporting services.

     We were founded in March 1998. We implemented our first eICU Program in June 2000. Our revenue growth has been driven by the increase in our customer base and from additional sales to existing customers to expand their use of our eICU Program. As of December 31, 2006, we had contractual commitments for approximately 9% of the estimated 60,000 adult ICU beds in over 180 hospitals in the United States.

     Our current strategy for long-term, sustained growth in our revenue consists of increasing our sales and marketing efforts to both new and current customers in the United States, enhancing our solution offerings, evaluating opportunities to expand the eICU Program model within the hospital setting and pursuing international market opportunities.

      Sources of Revenue

     Our principal sources of revenues are license, implementation and customer support service fees. We derive our revenues under multiple element arrangements with our customers. Under these arrangements, we provide our customers with a perpetual license of our software, professional services over a scheduled implementation plan and support services following implementation over a three-year support agreement. Our scheduled implementation plan ranges from seven to nine months for an initial implementation for a new customer and from four to nine months for an additional implementation for an existing customer. Our support agreements are typically renewable for additional three-year terms.

     Our software license fees typically are based on a combination of the number of eICU Centers a customer operates and the number of ICU beds that the customer monitors with the eICU Program. Our implementation fees typically are based on an implementation plan developed in conjunction with the customer. Our support fees typically are calculated as a percentage of license fees. Under most of our existing customer agreements, if we offer a lower price on license fees to new customers making comparable purchases from us, we must offer that same lower price to those existing customers. Some of our existing customer agreements also expressly require us to refund or credit license fees previously paid by the existing customer if we offer a lower price on license fees to new customers making comparable purchases. We expect to maintain the principal terms of our existing customer contracts and include our standard principal contract terms in contracts that we sign with new customers.

     We typically invoice our license fees based on contract milestones that trigger license payment obligations by our customers. These milestones typically include execution of the contract and customer activation of our eICU Program. We typically invoice our professional service implementation fees based on contract milestones that trigger implementation payment obligations by our customers. These milestones typically include execution of the contract, interim implementation milestones and achievement of fully operational status of our eICU Program. We typically invoice our customer support service fees quarterly in advance throughout the three-year term of the support agreement, commencing upon the expiration of the warranty period which is typically sixty days after activation. Our customer agreements typically require payment within 30 days to 45 days from the date of invoice. As described below in “—Critical Accounting Policies—Revenue Recognition,” we currently recognize revenues from license, implementation and support service fees ratably over the term of the customer’s support agreement, beginning when our eICU Program is fully operational at the customer site. As a result, to the extent we have not yet recognized any of the invoiced fees described above as revenue, we record those unrecognized amounts on our balance sheet as deferred revenues.

     Our eICU Program has a lengthy sales cycle, which is at least nine months and typically takes longer. As a result, it is difficult for us to predict the quarter in which a particular sale may occur. We believe that many of our current customers would be considered early adopters of innovative technologies. As we seek more widespread market acceptance of the eICU Program, we are experiencing a longer sales cycle. Accordingly, our sales may vary significantly from quarter to quarter. In addition, because we currently recognize revenues from customer contracts ratably over the term of our support agreements, a change in new customer sales or renewals of support agreements in any one quarter or series of quarters may not be immediately reflected in our financial results and may negatively affect our revenue in future quarters.

     Our backlog of contractually committed future revenues is a result of our multi-year customer support agreements combined with our ratable revenue recognition methodology. As of September 30, 2007, our revenue backlog, which we determine by totaling the minimum fees payable over the term of each customer contract and subtracting revenues recognized to date, amounted to $61.2 million. As of December 31, 2006, our revenue backlog amounted to $71.6 million, of which we expect to recognize approximately 49% of in 2007. As of December 31, 2005, our revenue backlog amounted to $70.2 million, of which 40% was recognized in 2006. Our backlog will decrease as we recognize revenues under existing contracts, and it will increase if we sign more contracts for new customers and additional beds for existing customers. The decrease in our backlog since December 31, 2006 is the result of an increase in revenues recognized in 2007 combined with a decrease in sales to new customers which the company believes is the result of a lengthening of the sales cycle for our eICU Program. Our backlog would also decrease if any of our customers are unable to fulfill their obligations under their agreements with us or terminate their agreement with us prior to expiration. Our customers may terminate their agreements if we breach any material term and fail to cure the breach within a specified time after receipt of written notice of the breach, which is typically 30 days.

           Direct Cost of Revenues

     The direct cost of our revenues consists primarily of:

	•		salaries, benefits and stock-based compensation for personnel to provide professional and support services to customers;
	•		cost of customer-related services provided by subcontractors;
	•		billable and non-billable travel, lodging and other out-of -pocket customer-related expenses; and
	•		license fees for third-party software used to enhance our program.

     We capitalize direct and incremental costs of revenues for which revenue has been deferred, primarily labor costs for professional implementation service fees, and recognize those costs ratably over the related period of revenue recognition.

Operating Expenses

      Sales and Marketing. Sales and marketing expense consists primarily of:

	•		salaries, benefits and stock-based compensation related to sales and marketing personnel;
	•		commissions;
	•		travel, lodging and other out-of -pocket expenses; and
	•		marketing programs such as trade shows and advertising campaigns.

     Although we currently recognize substantially all of our revenues ratably over the term of our customer support agreements, we recognize sales commissions at the time a customer agreement is executed. Accordingly, we incur a portion of our sales and marketing expense prior to the recognition of the corresponding revenue. We recently hired a new Vice President of Sales and a new Vice President of Marketing, and we plan to continue to invest in sales and marketing by increasing the number of direct sales personnel in order to add new customers and increase sales to our existing customers. We also plan to expand our marketing activities. As a result, we expect to incur increased sales and marketing expenses in future periods.

      Research and Development. Research and development expense consists primarily of salaries, benefits and stock-based compensation related to personnel who work on the development of new products, enhancement of existing products, quality control and testing. We expect to incur increased research and development expenses in future periods.

      General and Administrative. General and administrative expense consists primarily of:

	•		salaries, benefits and stock-based compensation related to general and administrative personnel;
	•		professional fees; and
	•		facilities and other related overhead.

     We expect that general and administrative expenses will increase in absolute terms and as a percentage of revenue in the foreseeable future as we invest in infrastructure to support our growth and incur additional expenses related to account management personnel and professional service fees, including audit, tax and legal costs.

      Legal and Regulatory Proceedings

     Our first issued U.S. patent is the subject of regulatory and legal proceedings. With regards to the regulatory proceedings, the U.S. Patent Office issued a reexamination certificate in October 2007 allowing all 26 amended claims of our patent in the second reexamination proceeding filed by iMDsoft. Additionally, in October 2007 the U.S. Patent Office initially rejected the interference claim filed by iMDsoft Ltd. requesting that the U.S. Patent Office declare an interference and that the patent be revoked and a patent with identical claims be issued to iMDsoft.

With regards to the legal proceedings pertaining to the patent, , in November 2004 Cerner Corporation has filed a lawsuit against us in which it seeks as one of its remedies a declaration that the first patent is invalid and unenforceable. In addition, in October 2007 we filed a lawsuit against iMDsoft, Ltd. and one of its customers asserting the parties have participated in activities that infringe upon both of our U.S. issued patents.

Lastly, we are a co-defendant in a lawsuit filed against a customer and several physicians claiming negligent treatment and care of a patient in the customer’s intensive care unit.

We believe that the claims against us in the foregoing lawsuits are without merit and we are defending the lawsuits vigorously. We are unable to predict the outcome of any of the foregoing lawsuits and proceedings, or to quantify any effect that they might have on our business, financial condition or operating results. If the outcome of one or more of these lawsuits or proceedings is unfavorable to us, our business and financial results could be materially adversely affected.

Critical Accounting Policies

     We prepare our financial statements in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

     We believe that of our significant accounting policies the following policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical in fully understanding and evaluating our financial condition and results of operations.

           Revenue Recognition

     We derive our revenues under multiple element arrangements with our customers. Under these arrangements, we license software, provide professional services and provide post-contract customer support services for our eICU Program. We recognize revenue for software licenses and services in accordance with the American Institute of Certified Public Accountants’ Statement of Position, or SOP, No. 97-2, Software Revenue Recognition , as amended. Under SOP No. 97-2, revenues from software license and service agreements are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. We allocate the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables based on vendor specific objective evidence (“VSOE”). Evidence of fair value is limited to the price or fee for the deliverable when we sell it separately from other deliverables. In the absence of evidence of the fair value of a delivered element, we allocate revenue first to the undelivered elements based on evidence of fair value, and then allocate residual revenue to the delivered elements. If evidence of the fair value of the undelivered elements is not known, we defer the revenue until such time as the only remaining undelivered element is post-contract customer support services, at which time we recognize revenue ratably over the term of the support agreement.

     License revenues consist of contracted license fees for our eICU Program as well as third-party software embedded in our eICU Program. Service revenues consist of contracted implementation service fees, post-contract support fees, travel and other direct cost reimbursements.

     We do not yet have objective and reliable evidence of the fair value of each of the elements of our arrangements with customers, including our post-contract customer support services. Accordingly, we recognize revenue from customer arrangements ratably over the post-contract customer support service period, which is typically three years. If we are able to establish VSOE related to our post-contract customer support services, we would begin to recognize revenue for our combined software and implementation services upon delivery. Accordingly, for customer arrangements that we would enter into after we are able to establish VSOE related to our post-contract customer support services, we would recognize the revenue from the software and implementation services when delivered, under the residual method of SOP 97-2, and not ratably over the post-contract customer support service period. The impact of this change on our financial results, which could be significant, will ultimately depend on the volume and timing of new customer arrangements entered into after we establish VSOE related to our post-contract customer support services and by the timing of their implementation, neither of which can be determined or estimated at this time.

     Through September 30, 2007, support agreements for five eICU Centers were renewed for additional support terms. Support agreements are subject to renewal for four eICU Centers during the remainder of 2007 and 13 eICU Centers in 2008. If customers renew their support agreements at a consistent renewal rate with similar terms, we may be able to objectively and reliably determine the fair value of the post-contract customer support services during the fourth quarter of 2007 or the first quarter of 2008.

           Allowance for Doubtful Accounts

     Our accounts receivable consist primarily of payments due from customers under license and support agreements. We specifically analyze accounts receivable for collectibility based on the creditworthiness of each customer and our customer payment history. We provide an allowance for doubtful accounts when we determine that the collection of an outstanding customer receivable is not probable.

     Historically, we have recorded insignificant amounts of bad debt expense. We may determine in future periods that additional allowances for uncollectible accounts receivable are required, based on changes in conditions and trends or customer payment history.

           Deferred Contract Costs

     We capitalize direct and incremental implementation costs specifically attributable to customer contracts for which revenue has been deferred. These costs consist principally of labor costs related to the implementation of our eICU Program. We recognize these costs ratably over the related period of revenue recognition.

           Software Development Costs

     We account for costs of software developed to be sold or licensed to our customers under SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Under SFAS No. 86, we expense the costs of research, including our predevelopment efforts prior to establishing technological feasibility and costs incurred for training and maintenance. We capitalize software development costs when technological feasibility has been established until the product is available for general release and anticipated future revenues assure recovery of the capitalized amounts. Our determination of when technological feasibility has been established requires a judgment in assessing a number of complex factors involving the technical status of our development projects. We amortize capitalized costs over the estimated useful life of the asset.

     We reported approximately $74,000 of capitalized software costs, net of accumulated amortization, in other assets in our balance sheet as of September 30, 2007 and approximately $177,000 as of December 31, 2006. We are generally amortizing these costs over a three-year period.

           Stock-Based Compensation

     For stock option grants prior to November 29, 2005, the date that we originally filed our registration statement for the initial public offering of our shares, we accounted for our employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, we recorded compensation expense for stock options issued to employees in fixed amounts and with fixed exercise prices only to the extent that the exercise prices were less than the fair value of our common stock at the date of the grant. We made disclosure in our financial statements regarding employee stock-based compensation using the minimum value method in accordance with Statement of Financial Accounting Standards, or SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS 123 and related interpretations.

     In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-Based Payment, or SFAS No. 123(R), which is a revision of SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their estimated fair values. Pro forma disclosure is no longer an alternative. We adopted the provisions of SFAS No. 123(R) on January 1, 2006 using the prospective transition method. We did not grant any stock options between November 29, 2005 and December 31, 2005. We will continue to account for unvested stock-based awards issued prior to November 29, 2005 using the intrinsic value method originally applied to those awards. Our adoption of SFAS No. 123(R) fair value method may have a significant impact on our results of operations, although it will have no impact on our overall financial position.

     Prior to January 31, 2006, we granted our employees options to purchase our common stock at exercise prices equal to the estimated fair value of the underlying common stock at the date of each grant, as determined by either our board of directors or retrospective or contemporaneous valuations by an unrelated valuation specialist. In connection with our preparation of our 2005 audited financial statements and solely for the purposes of accounting for stock-based compensation, our board of directors and management reconsidered the fair value of the common stock underlying the stock options that we granted to employees after January 1, 2004. Our board and management reexamined the approaches that had been taken and the assumptions that had been relied upon in our valuation specialist’s valuation reports in light of our business achievements and our progress in connection with our pending IPO at that time. In particular, our board and management noted the disparities between the fair values of the common stock as determined in the retrospective and contemporaneous valuations prepared by our valuation specialist and the original midpoint of the price range published for the IPO. As a result, our board and management reviewed and, where appropriate, reassessed the estimates of fair value of our common stock after January 1, 2004.

     As a result of our reassessment of the fair value of our common stock underlying stock option grants to employees, we will record stock-based compensation expense ratably for each stock option granted during the reassessed periods based upon the difference between the retrospectively determined fair value of our common stock at the date of the stock option grant and the exercise price of the stock option. Additionally, for stock option grants subsequent to December 31, 2005, we account for stock-based compensation relating to stock options granted to non-employees based on the fair value of the options granted, using the Black-Scholes-Merton option-pricing model. We measure the fair value of the option issued to a non-employee as of the earlier of the performance commitment date or the date the services required under the arrangement with the non-employee have been completed. We recognize estimated amounts of stock-based compensation expense as the non-employee performs under the arrangement. We adjust our estimates as of the final measurement date. For the nine months ended September 30, 2007, we recorded $2.3 million of stock-based compensation expense compared to $1.7 million for the nine months ended September 30, 2006.

     Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of highly subjective assumptions, including the expected life of the stock-based payment awards and stock price volatility. We use the Black-Scholes-Merton option-pricing model to value stock-based compensation expense for all options granted subsequent to 2005. The assumptions used in calculating the fair value of post-2005 stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

           Income Taxes

     We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflects the change in the period such determination is made.

     We have concluded that it is more likely than not that we will realize the $12.0 million of net deferred tax assets that we reported at September 30, 2007. In order to realize these assets, we will need to generate sufficient taxable income in the periods in which the deductible temporary differences or tax credit and loss carryforwards represented by these deferred tax assets are reported in our income tax returns. We only recently began to report taxable income, and accordingly our estimates of the realization of these assets could change in future periods if our operating results deteriorate.

     Our tax positions are also subject to review and audit by tax authorities. Although we believe that our tax filings comply with the tax laws and regulations in the jurisdictions in which we operate, tax laws and regulations are frequently complex and subject to new and varying interpretations by relevant authorities. Accordingly, our estimates of taxes payable from our operations may change in future periods as additional information becomes known to us.

     The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48, on January 1, 2007. As a result of the implementation of FIN 48 the Company recognized a $63,000 increase to unrecognized tax benefits. For more information regarding our accounting for uncertain tax positions, see Note 5 to the accompanying financial statements, “Income Taxes.”

Three Months Ended September 30, 2007 and 2006

      Revenues. Total revenues for the three months ended September 30, 2007 were $10.1 million, an increase of $1.9 million, or 23%, over total revenues of $8.2 million for the three months ended September 30, 2006.

     The increase in revenues was primarily attributable to an increase in: 1) the number of activated ICU beds by existing customers, 2) an increase in the number of activated customer eICU Centers, and 3) the recognition of $0.6 million in revenue for previously recorded deferred license, service and support revenue under a contract with a customer for which the company has determined, as of September 30, 2007, it has no remaining contractual obligations. The increase in revenue from additional activated beds was the result of our existing customers expanding the use of our eICU Program throughout their health systems. The increase in revenue from eICU Centers results primarily from the increase in the number of customers activated in 2004, 2005 and 2006 versus the number of customers activated in 2003, 2004 and 2005. The increase in activated customer eICU Centers during this period was the result of the addition of sales personnel, increased marketing activity and broader market recognition and acceptance of our eICU Program.

     We currently record revenue attributable to our eICU Centers monthly, on a pro rata basis, over the initial post-contract customer support period, which typically is three years and begins after the eICU Center is activated. An eICU Center that is activated early in any reporting period contributes more to revenues during that period than a comparable eICU Center that is activated late in that reporting period. In addition, when the initial post-contract customer support period for an eICU Center expires, revenues recognized in future support periods for the eICU Center typically represent only the ongoing support fees. As a result, the increase in revenues for any reporting period does not directly correlate to the increase in the number of total activated eICU Centers.

     In addition, we record revenue attributable to additional activations by existing customers who expand their use of our eICU Program over the remaining life of the support agreement in place at the time of the order for the expansion. As a result, the increase in revenues from additional activations for any period compared to the prior period depends upon when additional activations occur relative to the remaining term of the support agreement in place at the time of the order for the expansion.

     Due to our revenue recognition policy, a substantial portion of the revenue that we recognize in a particular fiscal period may not be based on, and therefore not necessarily indicative of, sales activity during that period, but instead may relate to sales executed in prior periods. Please see the section titled “—Critical Accounting Policies—Revenue Recognition” for a description of our revenue recognition policy. Our eICU Program has a lengthy sales cycle, which is at least nine months and typically takes longer. We believe that many of our current customers would be considered early adopters of innovative technologies. As we seek more widespread market acceptance of the eICU Program, we are experiencing a longer sales cycle.

     Total deferred revenue decreased from $46.4 million as of September 30, 2006 to $39.8 million as of September 30, 2007. The decrease in deferred revenue was primarily due to the recognition of portions of deferred revenue as revenue without a corresponding amount of billings booked, pursuant to our revenue recognition policy, as deferred revenue.

      Direct Cost of Revenues. Total direct cost of revenues for the three months ended September 30, 2007 was $1.8 million, an increase of $239,000, or 16%, over total direct cost of revenues of $1.5 million for the three months ended September 30, 2006. The increase was primarily due to increased support costs of $141,000 and increased third-party licenses of $121,000. These increases were a direct result of the growth in the number of activated eICU Centers and beds. We had 42 full-time equivalent employees who provided technical, clinical and post-contract support services at September 30, 2007 compared to 38 full-time equivalent employees at September 30, 2006.

     Total deferred contract costs decreased from $4.6 million as of September 30, 2006 to $4.2 million as of September 30, 2007.

      Gross Profit. Gross profit increased from $6.6 million, or 81% of total revenues, for the three months ended September 30, 2006 to $8.3 million, or 82% of total revenues, for the three months ended September 30, 2007. The increase in gross profit as a percentage of total revenues was primarily due to the recognition of revenue from a customer’s contract that expired in the third quarter of 2007 discussed above under Revenues . The remaining value of unamortized direct costs of this contract was minimal as a percentage of the revenue recognized in the third quarter of 2007.

      Sales and Marketing Expense. Sales and marketing expenses for the three months ended September 30, 2007 were $1.0 million, an increase of $204,000, or 24%, over sales and marketing expenses of $834,000 for the three months ended September 30, 2006. The increase in sales and marketing expenses was primarily due to increased employee-related expenses of $184,000, including increased non-cash stock-based compensation expense of $170,000 and decreased commission expense of $125,000. We had 17 full-time equivalent sales and marketing employees at September 30, 2007 compared to 11 full-time equivalent employees at September 30, 2006.

      Research and Development Expense. Research and development expenses for the three months ended September 30, 2007 were $1.4 million, an increase of $116,000, or 9%, over research and development expenses of $1.3 million for the three months ended September 30, 2006. The increase was primarily due to increased employee salaries and contractor related expenses of $107,000, including increased non-cash stock-based compensation expense of $102,000. We had 37 full-time equivalent research and development employees at September 30, 2007 and September 30, 2006.

      General and Administrative Expense. General and administrative expenses for the three months ended September 30, 2007 were $3.0 million, an increase of $536,000, or 22%, over general and administrative expenses of $2.5 million for the three months ended September 30, 2006. The increase in general and administrative expenses was primarily due to increased salaries and other employee-related expenses of $309,000, including increased non-cash stock-based compensation expense of $156,000 and increased professional support service personnel costs of $115,000 included in general and administrative expense, increased professional fees of $127,000, and increased recruiting expenses of $69,000. We had 11 full-time equivalent general and administrative employees at September 30, 2007 compared to 14 full-time equivalent employees at September 30, 2006.

      Other Income. Other income remained level at $1.6 million for the three months ended September 30, 2007 and the three months ended September 30, 2006.

      Income Taxes. Our income tax expense for the three months ended September 30, 2007 was $1.6 million, compared to $1.1 million for the three months ended September 30, 2006. The increase is due to income before income taxes of $4.4 million for the three months ended September 30, 2007 compared to income before income taxes of $3.6 million for the three months ended September 30, 2006 net of the impact of a decrease in the effective tax rate. The effective tax rate for the three months ended September 30, 2007 was 35%, compared to 30% for the three months ended September 30, 2006. The difference is primarily due to a $500,000 tax benefit during the third quarter of 2006 based on a research and development tax credit study performed for the eight year period from 1998 to 2005.

Nine Months Ended September 30, 2007 and 2006

      Revenues. Total revenues for the nine months ended September 30, 2007 were $27.8 million, an increase of $5.5 million, or 25%, over total revenues of $22.4 million for the nine months ended September 30, 2006.

     The increase in revenues was primarily attributable to an increase in: 1) the number of activated ICU beds by existing customers, 2) an increase in the number of activated customer eICU Centers, and 3) the recognition of $0.6 million in revenue for previously recorded deferred license, service and support revenue under a contract with a customer for which the company has determined, as of September 30, 2007, it has no remaining contractual obligations. The increase in revenue from additional activated beds was the result of our existing customers expanding the use of our eICU Program throughout their health systems. The increase in revenue from eICU Centers results primarily from the increase in the number of customers activated in 2004, 2005 and 2006 versus the number of customers activated in 2003, 2004 and 2005. The increase in activated customer eICU Centers during this period was the result of the addition of sales personnel, increased marketing activity and broader market recognition and acceptance of our eICU Program.

     We currently record revenue attributable to our eICU Centers monthly, on a pro rata basis, over the initial post-contract customer support period, which typically is three years and begins after the eICU Center is activated. An eICU Center that is activated early in any reporting period contributes more to revenues during that period than a comparable eICU Center that is activated late in that reporting period. In addition, when the initial post-contract customer support period for an eICU Center expires, revenues recognized in future support periods for the eICU Center typically represent only the ongoing support fees. As a result, the increase in revenues for any reporting period does not directly correlate to the increase in the number of total activated eICU Centers.

     In addition, we record revenue attributable to additional activations by existing customers who expand their use of our eICU Program over the remaining life of the support agreement in place at the time of the order for the expansion. As a result, the increase in revenues from additional activations for any period compared to the prior period depends upon when additional activations occur relative to the remaining term of the support agreement in place at the time of the order for the expansion.

     Due to our revenue recognition policy, a substantial portion of the revenue that we recognize in a particular fiscal period may not be based on, and therefore not necessarily indicative of, sales activity during that period, but instead may relate to sales executed in prior periods. Please see the section titled “—Critical Accounting Policies—Revenue Recognition” for a description of our revenue recognition policy. Our eICU Program has a lengthy sales cycle, which is at least nine months and typically takes longer. We believe that many of our current customers would be considered early adopters of innovative technologies. As we seek more widespread market acceptance of the eICU Program, we are experiencing a longer sales cycle.

     Total deferred revenue decreased from $46.4 million as of September 30, 2006 to $39.8 million as of September 30, 2007. The decrease in deferred revenue was primarily due to the recognition of portions of deferred revenue as revenue without a corresponding amount of billings booked, pursuant to our revenue recognition policy, as deferred revenue.

      Direct Cost of Revenues. Total direct cost of revenues for the nine months ended September 30, 2007 was $5.1 million, an increase of $761,000, or 17%, over total direct cost of revenues of $4.4 million for the nine months ended September 30, 2006. The increase was primarily due to increased third-party licenses of $380,000, increased support costs of $261,000, and increased implementation costs of $120,000. These increases were a direct result of the growth in the number of activated eICU Centers and beds. We had 42 full-time equivalent employees who provided technical, clinical and post-contract support services at September 30, 2007 compared to 38 full-time equivalent employees at September 30, 2006.

     Total deferred contract costs decreased from $4.6 million as of September 30, 2006 to $4.2 million as of September 30, 2007.

      Gross Profit. Gross profit increased from $18.0 million, or 80% of total revenues, for the nine months ended September 30, 2006 to $22.7 million, or 82% of total revenues, for the nine months ended September 30, 2007. The increase in gross profit as a percentage of total revenues was primarily due to three factors. First, we realized efficiency gains in the cost of ongoing support services as a result of an increasing customer and revenue base. Second, our costs of implementation declined as a percentage of revenue as we became more experienced in the implementation process. Third, the recognition of revenue from a customer’s contract that expired in the third quarter of 2007 discussed above under Revenues . The remaining value of unamortized direct costs of this contract was minimal as a percentage of the revenue recognized in the third quarter of 2007.

      Sales and Marketing Expense. Sales and marketing expenses for the nine months ended September 30, 2007 were $3.5 million, an increase of $227,000, or 7%, over sales and marketing expenses of $3.3 million for the nine months ended September 30, 2006. The increase in sales and marketing expenses was primarily due to increased employee related expenses of $217,000, including increased non-cash stock-based compensation expense of $98,000 and decreased commission expense of $59,000. We had 17 full-time equivalent sales and marketing employees at September 30, 2007 compared to 11 full-time equivalent employees at September 30, 2006.

      Research and Development Expense. Research and development expenses for the nine months ended September 30, 2007 were $4.6 million, an increase of $390,000, or 9%, over research and development expenses of $4.2 million for the nine months ended September 30, 2006. The increase was primarily due to increased employee salaries and contractor related expenses of $263,000, including increased non-cash stock-based compensation expense of $130,000. We had 37 full-time equivalent research and development employees at September 30, 2007 and September 30, 2006.

      General and Administrative Expense. General and administrative expenses for the nine months ended September 30, 2007 were $8.7 million, an increase of $1.7 million, or 25%, over general and administrative expenses of $7.0 million for the nine months ended September 30, 2006. The increase in general and administrative expenses was primarily due to increased salaries and other employee-related expenses of $925,000, including increased non-cash stock-based compensation expense of $395,000 and increased professional support service personnel costs of $360,000 included in general and administrative expense, increased recruiting expenses of $407,000, and increased professional fees of $210,000. We had 11 full-time equivalent general and administrative employees at September 30, 2007 compared to 14 full-time equivalent employees at September 30, 2006.

      Other Income. Other income for the nine months ended September 30, 2007 was $4.9 million, compared to $2.9 million for the nine months ended September 30, 2006. The increase was due to increased interest income earned on our cash, cash equivalents and marketable securities balances, which increased significantly as a result of our initial public offering in April 2006.

      Income Taxes. Our income tax expense for the nine months ended September 30, 2007 was $3.9 million, compared to $2.4 million for the nine months ended September 30, 2006. The increase is due to income before income taxes of $10.9 million for the nine months ended September 30, 2007 compared to income before income taxes of $6.4 million for the nine months ended September 30, 2006 net of the impact of a decrease in the effective tax rate. The effective tax rate for the nine months ended September 30, 2007 was 36%, compared to 37% for the nine months ended September 30, 2006.

Liquidity and Capital Resources

     At September 30, 2007, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $131.0 million and accounts receivable of $8.7 million.

     Net cash provided by operating activities was $6.3 million for the nine months ended September 30, 2007, compared to $10.0 million for the comparable 2006 period.

     Net cash provided by investing activities was $30.4 million for the nine months ended September 30, 2007, which consisted primarily of maturities of marketable securities, compared to net cash used in investing activities of $34.0 million for the nine months ended September 30, 2006, which consisted primarily of purchases of marketable securities.

     Net cash provided by financing activities was $2.1 million for the nine months ended September 30, 2007, compared to net cash provided by financing activities of $101.6 million for the nine months ended September 30, 2006. The significant decrease was a result of our receipt of the proceeds from our initial public offering in the second quarter of 2006.

     We intend to fund our operating expenses and capital expenditures primarily through cash flows from operations. We believe that our current cash, cash equivalents and marketable securities together with our expected cash flows from operations will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for at least the next 12 months.

Forward-looking Statements

     This report contains forward-looking statements that are made pursuant to the provisions of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements involve a number of risks and uncertainties. Investors are cautioned that statements in this report that are not strictly historical statements constitute forward-looking statements. It is important to note that the company’s performance, and actual results, financial condition or business could differ materially from those expressed in the forward-looking statements. The words “may”, “could”, “would”, “should”, “outlook”, “positions us”, “guidance”, “expects”, “estimates”, “intends”, “plans”, “projects”, “anticipates”, “believes”, “predicts”, “potential” or the negative of these words, variations thereof or similar expressions are intended to identify such forward-looking statements. You should not place undue reliance on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, levels of activity, performance or achievements. Factors that could cause results to differ materially from current expectations include, but are not limited to:

	•		market acceptance of our principal product offering and any new product releases;
	•		the price, performance and reliability of our products and services;
	•		our ability to attract and retain new customers and renewal rates of our existing customers;
	•		unanticipated delays or problems in releasing new products and services;
	•		financial and budget constraints of hospitals, changes in our pricing practices or our competitors’ pricing practices and changes in the healthcare industry;
	•		the introduction or availability of competing products or services and other competitive factors;
	•		changes in the government regulation of our products and services;
	•		the loss of intellectual property protection;
	•		the loss of key management personnel; and
	•		the possibility of unfavorable outcomes in regulatory and legal proceedings.

     Additional discussion of these and other factors affecting our business is contained under the “Risk Factors” heading in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and in our other periodic filings with the Securities and Exchange Commission. We undertake no obligation to update forward-looking statements to reflect changed assumptions the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.

     In November 2004, iMDsoft filed an application with the U.S. Patent Office for the purpose of having the U.S. Patent Office declare an interference and requesting that our ‘656 patent be revoked and a patent with identical claims be issued to iMDsoft. In October 2007, the U.S. Patent Office initially rejected the interference application filed by iMDsoft, Ltd.

     In October 2007, we filed a lawsuit against iMDsoft, Ltd. and one of its customers in the United States District Court for the Eastern District of Pennsylvania. In this lawsuit, we have asserted that iMDsoft’s customer is infringing both our ‘656 patent and our new patent, United States Patent No. 7,256,708, which the U.S. Patent Office issued on August 14, 2007, and that iMDsoft is inducing and contributing to the infringement of these patents.

     In May 2006, we were named a co-defendant in a lawsuit filed against a customer and several physicians claiming negligent treatment and care of a patient in the customer’s intensive care unit.

     Other than the foregoing, we are not currently a party to any material legal proceedings.

Item 1A. Risk Factors.

     In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. There are no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2006 other than changes to the risk factor entitled, “ If we are required to change the way in which we recognize revenue in the future, our financial results could fluctuate significantly, which may result in volatility in the price of our common stock ,” which risk factor is updated and replaced by the risk factor set forth below. The risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2006 and in this report are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us, that we currently deem immaterial or that are similar to those faced by other companies in our industry or business in general, also could impair our business operations or adversely affect our business, financial condition or future results.

If we are required under generally accepted accounting principles to change the way in which we recognize revenue in the future, our financial results could fluctuate significantly, which may result in volatility in the price of our common stock.

     We provide our customers with a perpetual license of our software, clinical and technical implementation services and ongoing post-contract customer support services under a three-year support agreement. We do not yet have objective and reliable evidence of the fair value of each of the elements of our arrangements with our customers, including ongoing support services. Accordingly, we currently recognize all revenue from customer arrangements, including the revenue from the software and implementations services, ratably over the term of the support agreement.

     If customers renew their support agreements at a consistent renewal rate with similar terms, we may be able to objectively and reliably determine the fair value of the post-contract customer support services during the fourth quarter of 2007 or the first quarter of 2008.

     Accordingly, for customer arrangements that we enter into after we are able to establish VSOE related to our post-contract customer support services, we will recognize the revenue from the software and implementation services when delivered, under the residual method of SOP 97-2, and not ratably over the term of the support agreement. As a result, our future financial results may vary significantly from our historical financial results, and comparisons of our operating results on a period-over-period basis may not be meaningful to investors. In addition, any such change in the way in which we recognize revenue, combined with our uncertain and lengthy sales cycle, may cause our financial results to fluctuate significantly from quarter to quarter, which may result in volatility in the price of our common stock.

Item 4. Submission of Matters to a Vote of Security Holders.

     We held our 2007 Annual Meeting of Stockholders on July 26, 2007. At the 2007 annual meeting, our stockholders voted on the election of three Class I directors identified below. The terms of the Class II directors, John A. Clarke, Thomas G. McKinley and Ralph Sabin, and the Class III directors, Stuart Altman, Frances M. Keenan and Frank T. Sample, continued following the meeting and will expire at the annual meetings of stockholders to be held in 2008 and 2009, respectively. In addition to the election of the Class I directors, two additional proposals were submitted to a vote of our stockholders at the 2007 annual meeting. All of the proposals, including the election of the Class I directors, were approved by stockholders at the 2007 annual meeting. The voting results on each of the three proposals submitted to stockholders at the 2007 annual meeting are presented below.

Proposal One : The election of three Class I directors. The vote with respect to each nominee was as follows:

	(1)		29,848,082 votes were cast for the election of Michael G. Bronfein as a Class I director, and 527,977 votes were withheld;
	(2)		29,711,505 votes were cast for the election of Van R. Johnson as a Class I director, and 664,554 votes were withheld; and
	(3)		26,685,530 votes were cast for the election of Brian A. Rosenfeld as a Class I director, and 3,690,529 votes were withheld.

Proposal Two : The approval of an increase in the number of shares of our common stock that may be issued under the Visicu, Inc. Equity Incentive Plan, for specific awards in 2007 only. The vote with respect to this approval was as follows:

20,989,354 votes were cast for the approval of an increase in the number or our common stock that may be issued under the Visicu, Inc. Equity Incentive Plan, for specific awards in 2007 only, 1,757,918 against, 130,873 abstentions and 7,497,914 broker non-votes.

Proposal Three : The ratification of independent registered public accounting firm for 2007. The vote with respect to Ernst & Young LLP was as follows:

30,270,953 votes were cast for the ratification of Ernst & Young LLP as our independent registered accounting firm, 2,449 against, and 102,657 abstentions.

Item 6. Exhibits.

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.

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