UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

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

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

Commission file number 0-22019

HEALTH GRADES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		62-1623449 (I.R.S. Employer Identification No.)
500 Golden Ridge Road, Suite 100
GOLDEN, CO		80401
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (303) 716-0041

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class		Name of each exchange on which registered
Common Stock, $0.001 par value per share		The Nasdaq Stock Market LLC
		(Nasdaq Global Select Market)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 has submitted electronically and posted on its corporate website, 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 o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 (check one):

Large Accelerated Filer o		Accelerated Filer þ		Non-Accelerated Filer o		Smaller Reporting Company o
				(Do not check if a smaller reporting company)

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

As of June 30, 2009, the aggregate market value of the Common Stock held by non-affiliates of the registrant was $68,385,141. Such aggregate market value was computed by reference to the closing sale price of the Common Stock as reported on the Nasdaq Global Select Market on such date. For purposes of making this calculation only, the registrant has defined “affiliates” as including all executive officers, directors and beneficial owners of more than five percent of the registrant’s Common Stock.

On March 1, 2010, 29,824,514 shares of the registrant’s Common Stock were outstanding.

Certain parts of the registrant’s definitive Proxy Statement for its 2010 Annual Meeting are incorporated by reference in to Part III of this report.

 

 

TABLE OF CONTENTS

PART I
Item 1. Business			3
Item 1A. Risk Factors			16
Item 1B. Unresolved Staff Comments			23
Item 2. Properties			24
Item 3. Legal Proceedings			24
Item 4. Reserved			27
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			28
Item 6. Selected Financial Data			31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			39
Item 8. Financial Statements and Supplementary Data			40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			66
Item 9A. Controls and Procedures			66
Item 9B. Other Information			68
PART III
Item 10. Directors, Executive Officers and Corporate Governance			68
Item 11. Executive Compensation			68
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			68
Item 13. Certain Relationships and Related Transactions, and Director Independence			68
Item 14. Principal Accounting Fees and Services			68
PART IV
Item 15. Exhibits and Financial Statement Schedules			69
Exhibit 10.6
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Special Note Regarding Forward-Looking Statements

This report contains forward-looking statements that address, among other things, the availability of healthcare data, sufficiency of available funds, anticipated future revenues, anticipated capital expenditures, exercises of stock options and impact of interest rates in our investment account. These statements may be found under “Item 1-Business,” “Item 1A-Risk Factors,” and “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in this Report generally. We generally identify forward-looking statements in this report using words like “believe,” “intend,” “expect,” “may,” “will,” “should,” “plan,” “project,” “contemplate,” “anticipate” or similar statements. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including: non-renewal or cancellation of contracts, unanticipated capital expenditures, failure to achieve anticipated revenue increases, decline in our stock price, and material changes in our balances of cash, cash equivalents and short-term investments. In addition, other factors that could cause actual events or results to differ materially from those discussed in the forward-looking statements are addressed in “Risk Factors” in Item 1A and matters set forth in this report generally. We undertake no obligation to update publicly any forward-looking statements.

PART I

Item 1.		Business

BUSINESS

Overview

Health Grades, Inc. (“HealthGrades”, the “Company”, “us”, “we” or “our”) provides proprietary, objective ratings of hospitals, nursing homes and home health agencies. We also provide detailed information on physicians, including name, address, phone number, years in practice, information on whether they are board certified, whether they are free of state and federal sanctions and many other items. We provide our clients with healthcare information, including information relating to quality of service and detailed profile information on physicians, which enables our clients to measure, assess, enhance and market healthcare quality. Our clients include hospitals, employers, benefits consulting firms, payers, insurance companies, consumers, advertisers, and media and web portals.

We operate in one business segment. See our Financial Statements in Item 8 for our revenue, profits and losses and total assets for the last three years.

On our website at www.healthgrades.com, we currently provide ratings or profile information relating to the following healthcare providers:

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Over 5,500 hospitals;

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Over 800,000 physicians in more than 125 specialties;

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Over 175,000 dentists in 10 specialties;

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Over one million alternative specialty providers (e.g., acupuncturists, chiropractors, mental health professionals) in more than 40 specialties; and

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Over 15,000 nursing homes.

We offer services to hospitals in three major capacities: 1) professional services that help hospitals build a quality perception with their internal staff, consumers, and physicians; 2) professional services that help hospitals improve their clinical process and quality; and 3) online marketing programs through our web properties that provide brand awareness for client hospitals. For hospitals that have received high ratings, we offer the opportunity to license our ratings and trademarks and provide professional services within a hospital’s marketing programs at an institutional level (e.g., hospital clinical excellence and exceptional experience regarding the overall number and type of patient safety incidents within a hospital), at a service line level (e.g. cardiac, pulmonary, vascular) and at a medical issue level (e.g., within the cardiac service line-coronary bypass surgery, heart attack, heart failure). In our clinical process and quality improvement services, we offer physician-led quality improvement engagements and other quality improvement analyses and services for any hospitals that are seeking to understand how to improve their clinical processes and how to sustain the improvements over time. The online marketing programs enable hospitals to sponsor physician profiles, promote their hospital brand and facilitate a real-time, local connection between online patients and providers.

In addition, we provide basic and detailed profile information on a variety of providers and facilities. We make this information available to consumers, employers, benefits consulting firms and payers to assist them in selecting healthcare providers. Basic profile information for certain providers is available free of charge on our website, www.healthgrades.com. For a fee, we offer healthcare quality reports with respect to hospitals, nursing homes and physicians. These paid reports provide more detailed information than is available free of charge on our website. Included in fee-based physician reports are Five-Star Doctor designations. These designations identify leading physicians based on their affiliation with a recognized hospital related to the physician’s specialty, state or federal sanctions, malpractice and board certification. Report pricing and content varies based upon the type of provider, type of report and whether the user is a consumer or a healthcare professional (for example, a medical professional underwriter).

We also provide the Connecting Point™ and Patient Direct Connect^TM programs under which a hospital, hospital system or single specialty provider can sponsor applicable physician profiles. Services to our clients and the sponsored physicians include assistance in creating and enhancing their professional and marketing information displayed in certain categories of the HealthGrades proprietary search site accessible at www.healthgrades.com. For a fee, our clients receive sponsored physician enhanced listings and profiles, client banner advertisements and sponsored links on sponsored physician profiles and client profiles, and client banner advertisements on search results pages. Physician Quality Reports™ for physicians who are participating in these programs are made available to consumers without charge. These programs are designed to give physicians and their sponsoring entity an opportunity to engage in a cost-effective complement to other traditional marketing mediums such as telephone directories, newspapers, radio and billboards. In addition, unlike many of the traditional marketing mediums, we provide the ability to measure the success of these online marketing efforts through our performance reporting, which tracks, among other things, the number of consumers who view the physician’s premium profile and, for Patient Direct Connect, appointment requests and telephone calls.

Additionally, we provide detailed online healthcare quality information for employers, benefits consulting firms, payers and other organizations that license our Health Management Suite of products, which include the following modules: Hospital Quality Guide™, Physician Quality Guide™, Nursing Home Quality Guide™, Home Health Quality Guide™ and Treatment Cost Calculator. This information can be customized so that, for example, an employee can have online access to quality data relating to healthcare providers within the provider network who are available under the employee’s particular health plan. We also license our hospital and physician data for health plans to integrate their own provider directories and for internal analytics.

Our internet advertising platform generates additional revenue from traffic at our website, www.healthgrades.com. We earn revenues from sales of advertisements on our websites through impression-based advertising (fees earned from the number of times an advertisement appears in pages viewed by users of our website) and activity-based advertising (fees earned when our users click on an advertisement or text link to visit the websites of our merchant partners).

In October 2008, we acquired the websites www.WrongDiagnosis.com and www.CureResearch.com in connection with our acquisition of certain operating assets of Adviware Pty Ltd. (“Adviware”).This acquisition increased our on-line presence by adding these websites to our healthcare properties. These websites provide detailed information for users to research symptoms (e.g., pain, fever, rash), diseases (e.g., diabetes, cancer, depression) and diagnoses. Also, in late 2008, we expanded beyond remnant advertising networks, including Google AdSense, to expand the channels through which our inventory is sold, increasing the overall value of that inventory. This includes direct sales to advertising agencies that represent the pharmaceutical and medical device industries along with in-text advertising and contracting with advertising networks.

Healthcare Provider Quality Information

We compile comprehensive information regarding various healthcare providers and distill the information to meet the requirements of consumers, employers, payers and other customers. While we provide certain information without charge on our website, we charge users for more detailed information. Our revenues are generated, in part, through the provision of healthcare information derived from our databases in a manner that can be useful to consumers, employers, benefits consulting firms, payers and others.

The www.healthgrades.com website is a healthcare information website that provides rating and other profile information regarding a variety of providers and facilities, among others. Our goal is to provide healthcare information that enables consumers to locate and connect with the right provider at their time of need.

Hospital Specialty and Programmatic Ratings — We currently provide risk-adjusted hospital quality ratings for 28 medical issues. In addition, users can compare hospitals utilizing our programmatic ratings for maternity care. We have termed these “programmatic ratings” because our maternity care ratings are based in part upon the presence or absence in a hospital’s maternity care program, of specified attributes, described below, and not solely on mortality or complication rates at a discrete medical issue level as is the case with our other ratings.

For each particular medical issue chosen by the user, other than those relating to maternity care, women’s health, bariatric surgery and appendectomy, we provide a rating system of five stars, three stars or one star (five stars is the highest rating) for virtually every hospital in the United States. We base all of our ratings, except ratings on maternity care, bariatric surgery, and appendectomy, on the three most currently available years of Medicare Provider Analysis and Review (MedPAR) data that we license from the Centers for Medicare and Medicaid Services (CMS). MedPAR and state databases contain the inpatient records of Medicare patients and all patients in the states that allow the use of their data, respectively. We apply transparent, but proprietary, algorithms to the data to account for variations in risk in order to make the data comparable from hospital to hospital. In the initial analysis of the data, a separate data set is created for each group of patients who have a specific procedure or diagnosis (e.g., coronary bypass surgery, total hip replacement), based on International Classification of Diseases, Clinical Modification (ICD-9-CM) coding. The ICD-9-CM is the widely adopted system of assigning codes to diagnoses and procedures associated with hospital utilization in the United States. The quality measure for some procedures or diagnoses is mortality, while the quality measure for others is major complications.

Generally, 70% to 80% of hospitals studied are classified as three stars. The three star rating is applied when there is no statistical difference between a hospital’s predicted and actual performance. Approximately 10% to 15% of hospitals are rated five stars, which indicates their performance is statistically better than expected. Approximately 10% to 15% of hospitals are rated one star, meaning that their performance was statistically worse than expected.

For our maternity care, bariatric surgery and appendectomy ratings, which also are subject to the five star rating system, we use state all-payer files from 19 individual states derived from the inpatient records of persons who utilize hospitals in those states. The 19 states represented on the site are: Arizona, California, Florida, Iowa, Maine, Maryland, Massachusetts, Nevada, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Texas, Utah, Vermont, Virginia, Washington and Wisconsin. This data are derived from all discharges for these 19 states from 2004-2008. For maternity care, we analyzed several factors, such as neonatal mortality, rate of vaginal and cesarean delivery complications, volume of vaginal and cesarean deliveries and “patient choice” or non-clinically indicated cesarean delivery complications for each hospital within these 19 states. We then developed a system that assigned a weight to each factor based on our assessment of its importance to the quality of maternity care. Based upon the application of this system, the top 15% of hospitals in these 19 states receive five stars, the middle 70% receive three stars and the bottom 15% receive one star.

For the women’s health ratings, the ratings are based upon Medicare outcomes for female patients in 16 diagnoses and procedures. Bariatric surgery and appendectomy ratings are based on the presence of major complications. These ratings are created using the same methodology as the MedPAR ratings, but are based on the state all-payer files available in these 19 states.

Institutional and Service Line Hospital Awards — We recognize exceptional quality outcomes at an institutional level (e.g., hospital clinical excellence and patient safety) as well as at a service line level. Hospitals that achieve distinction from us for their exceptional quality outcomes receive our Distinguished Hospital Award for Clinical Excellence™ (DHA-CE). This is an annual award that we typically announce at the beginning of each calendar year. In February 2010, 269 hospitals nationwide received the DHA-CE designation, which identifies hospitals with clinical outcomes in the top 5% in the country.

To be considered for the DHA-CE, a hospital had to have received star ratings in at least 19 of the 26 HealthGrades procedures and diagnoses ratings using MedPAR data. After creating a list of hospitals that met the above criteria, we took the following steps to determine the DHA-CE recipients for 2010:

1.

Calculated the average overall star rating for each hospital by averaging all their MedPAR-based ratings.

2.

Calculated the average z-score (standard score) for each hospital by averaging all their MedPAR-based z-scores.

3.

Ranked hospitals in descending order by their average star rating.

4.

Broke ranking ties by average z-score.

5.

Selected the top 269 hospitals as 2010 DHA-CE recipients.

Hospitals that have received a DHA-CE award for the most consecutive years of the eight years we have designated this award are awarded HealthGrades’ America’s 50 Best Hospital Award. To identify America’s 50 Best Hospitals, we used a two-step process:

1.

Hospitals that were DHA-CE recipients for all of the last seven or eight years were identified.

2.

Hospitals that were DHA-CE recipients for all of the last six years were identified.

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The six-year recipients were sorted by z-score, using the average z-score from the most recent DHA-CE analysis.

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The top hospitals from this list were then added to the list from step 1 to create a list of America’s 50 Best Hospitals.

For the 2010 award year, hospitals were segregated into two groups: teaching and non-teaching. Teaching status was primarily determined based on information in the Medicare Cost Reports, with additional input from Indirect Medical Education payments and the Council of Teaching Hospitals.

Hospitals that achieve distinction from us for their exceptional patient safety performance receive our annual Patient Safety Excellence Award™ (PSEA). This distinction is based on 12 of the Agency for Healthcare Research and Quality’s (AHRQ) Patient Safety Indicators (PSI’s) (including, among others, post-operative hip fracture, post-operative hemorrhage or hematoma and post-operative sepsis) and recognizes exceptional experience regarding the number and type of patient safety incidents within a hospital. We utilize the PSI software developed by AHRQ to determine the patient safety rates for each individual PSI. We then create an overall patient safety score for every hospital utilizing the PSI software developed by AHRQ. For our 2009 and 2010 award years, we segregated hospitals between teaching and non-teaching. In order to achieve distinction, hospitals were required to have an average overall HealthGrades star rating of at least 2.5, have a HealthGrades star rating in a minimum number of 16 of the 26 medical issues we rate using MedPAR data and 9 of 12 PSI’s. The top 15%, or 238 hospitals, that met these criteria, ranked in descending order by their average overall patient safety score, from each of the groups (teaching and non-teaching) were awarded the PSEA designation.

In 2009, recipients of the PSEA represented less than 5% of the total hospitals evaluated. Nationwide, 112 teaching hospitals and 130 non-teaching hospitals received the PSEA designation in 2009.

Hospitals that rank in the top 15% nationally in patient experience receive our Outstanding Patient Experience Award™ (OPEA). The ratings are based on patient satisfaction survey results that hospital patients provide as part of a new federal initiative to increase public reporting of hospital performance. For the 2010 award year, we analyzed patient satisfaction data for over 2,500 hospitals in the United States using Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) hospital survey data obtained from the CMS. The HCAHPS data cover patients discharged between July 2007 and June 2008. To be considered for the OPEA, a hospital had to have:

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More than 100 survey responses;

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At least 50 acute care beds; and

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A minimum HealthGrades average star rating of 2.5.

Each year we issue Specialty Excellence Awards™ to hospitals performing in the top ten percent in the United States in clinical excellence in each of the following 17 specialty care areas: bariatric surgery, cardiac care, cardiac surgery, critical care, coronary intervention, gastrointestinal, gastrointestinal surgery, general surgery, joint replacement, orthopedic, prostatectomy, pulmonary, spine surgery, stroke, vascular, maternity care and women’s health.

Our Transplant Excellence Award™ identifies hospitals that are among the best in the United States in transplantation. We used risk-adjusted data distributed by the Scientific Registry of Transplant Recipients (SRTR) Program to identify the top organ transplantation centers for the following four organs: heart, kidney, liver and lung. To be considered for our Transplant Excellence Award, a transplant center had to meet the following qualifications using SRTR data:

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Three-year patient survival — Hospitals must have a statistically higher than expected three-year patient survival rate.

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Waitlist mortality rate — Hospitals must have a waitlist mortality rate that is statistically lower or not statistically different than expected.

Physician Quality Reports — We provide quality information on over 800,000 physicians. This information includes, to the extent available through our data sources, primary and secondary specialty areas, medical school attended, years since medical school, residency, memberships, fellowships, address, telephone number, board certification, malpractice data, hospital affiliation and federal or state medical board sanction information. This data is compiled from a variety of public and private data sources. As not all physician information is identified by a specific physician identifier (e.g., Unique Physician Identification Number, or UPIN), we have developed an extensive matching process designed to properly match the various data elements that we compile from numerous data sources to the appropriate physician. Currently, our Physician Quality Report is available to consumers for $12.95 per physician report. A second physician report is free within the same order and any additional reports after the second report may be purchased for $9.95. Consumers who purchase a Physician Quality Report receive a report for the selected physician and, for comparative purposes, five additional randomly selected reports of physicians practicing in the same specialty and geographic area. Consumers have the option to add a Medical Cost Report to their purchase for an additional $4.95. Consumers may also purchase a Medical Malpractice Report for $7.95. Malpractice Reports are available for physicians practicing in the following states: California, Connecticut, Florida, Georgia, Idaho, Illinois, Indiana, Maryland, Massachusetts, New Jersey, New York, North Dakota, Oregon, Tennessee, Texas, Vermont, Virginia, and West Virginia. We utilize online media to attract a significant percentage of the visitors to our website. Currently, the majority of the traffic to our website is derived through major search engines and is displayed as part of the “free” search engine results. However, we also pay for certain keywords that enable our website to be displayed in certain “paid” search results.

Included in our physician quality reports are the Five-Star Doctor designation. To help consumers evaluate and compare physicians, we analyzed objective physician data to identify leading physicians in 23 separate specialties across the U.S. The Five-Star Doctor designation identifies leading physicians based on their affiliation with a recognized hospital related to the physician’s specialty, state or federal sanctions, malpractice and board certification. To make the Five-Star list, a physician must:

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Be affiliated with a hospital that is highly rated for quality of care by us, or recognized by the National Cancer Institute or Commission on Cancer, in the clinical area related to the physician’s specialty.

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Not had their license on probation, suspended, surrendered or revoked since 2000.

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Be free of state or federal disciplinary actions or sanctions for the last five years.

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Be free of malpractice judgments, adverse arbitration awards or monetary settlements for the last five years.

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Be board certified in their practice specialty by the American Board of Medical Specialties®, the American Osteopathic Association Bureau of Osteopathic Specialists or the American Board of Facial Plastic and Reconstructive Surgery.

WatchDog Subscription — Along with our Physician Quality Reports, we offer a 14-day free trial in our WatchDog notification services. This subscription provides email notifications to patients to allow them to track any changes to their physicians’ profiles including data included in the Physician Quality Reports and patient surveys. Currently, our WatchDog notification service is available for $9.95 per subscriber per month with no limit to the number of physicians the subscriber may track.

Connecting Point — This program is designed to increase the efficiency and profitability of participating sponsoring entities and physicians through marketing and patient education. Under this program, we design a premium profile for the physician that incorporates our source-verified information (e.g., board certification, years in practice) as well as information provided directly from the physician (e.g., practice philosophy, office hours). This premium profile is then made available, without charge, to all consumers searching our website. The Connecting Point program is designed to give applicable sponsoring entities and their physicians an opportunity to engage in a cost-effective complement to other traditional marketing mediums such as telephone directories, newspapers, radio and billboards. In addition, unlike many of the traditional marketing mediums, we provide the ability to measure the success of these online marketing efforts through our performance reporting which tracks, among other things, the number of consumers who view the physician’s premium profile.

Patient Direct Connect — Patient Direct Connect is viewed as an alternative to traditional hospital marketing activities. This program facilitates a real-time, local connection between online patients and providers. Under the Patient Direct Connect program, a hospital or hospital system purchases advertising placements on HealthGrades’ website, www.healthgrades.com. Program services to our clients include assistance in creating and enhancing our hospital clients’ professional and marketing information displayed in certain categories of the site. For a fee, our clients are provided with the opportunity to engage and assist patients searching for provider information. Physician Quality Reports for physicians who are participating in our Patient Direct Connect program are made available to consumers without charge.

Nursing Home Ratings — We provide ratings of the performance of nursing homes across the United States that are Medicare or Medicaid certified and active in these programs. We typically update these ratings on a monthly basis. In preparing the ratings, we analyze licensing survey data from CMS’s Online Survey Certification and Reporting (OSCAR) database and complaint survey data from CMS’s Skilled Nursing Facility Complaint database. Licensing surveys are inspections that assess compliance with standards of patient care such as staffing, quality of care and cleanliness. Complaint surveys are investigations of complaints and serious problems. We exclude nursing homes whose most recent survey date was more than 20 months prior to the date the data was received by us. Stand-alone Medicare and/or Medicaid nursing homes are analyzed apart from Medicare, hospital-based nursing homes. We do not rate Medicare, hospital-based nursing homes because these facilities are designed for short-term patient care. In addition, nursing homes with only one licensing survey are not included in our analysis. The ratings are assigned on a state by state basis, rather than nationally, because the surveys from which information is derived are conducted by state agencies and there may be variations between the states’ survey processes and results. The highest rated 30% of nursing homes receive five stars, the middle 40% receive three stars, and the bottom 30% receive one star.

Information and Related Services for Hospitals, Employers, Consumers, Benefits Consulting Firms, Payers, Professionals, and Pharmaceutical and Medical Device Solutions

The information provided on our www.healthgrades.com website, and the database from which this information is derived, form the basis of our marketing efforts. While some information is provided free of charge on our website, we seek to generate revenues from hospitals, as well as employers, consumers and others as described below:

Services for Hospitals — We offer professional services that provide business development tools and marketing assistance for hospitals seeking to distinguish themselves with respect to their clinical quality. We also provide physician-led professional services and analytical products for hospitals seeking to understand and improve their quality. Our programs, described in more detail below, primarily cover the following clinical service lines:

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Cardiac;

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Orthopedics;

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Vascular;

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Pulmonary;

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Neurosciences;

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Gastrointestinal;

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Critical care;

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General surgery;

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Bariatric surgery;

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Prostate surgery;

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Maternity care; and

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Women’s health.

Strategic Quality Initiative (SQI). The SQI program provides business development and marketing tools to hospitals that are highly rated by us. Under our SQI program, we license the commercial use of the our corporate mark, applicable data and multiple marketing messages that may be used by hospitals to demonstrate third party validation of excellence, and our online marketing services, including, among other things:

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Our name, logo, stars and current ratings data including performance score;

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National designation (e.g., Top 5% in the Nation, Top 10% in the Nation) as applicable;

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Specialty Excellence Award for a licensed service line as applicable;

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State rank (e.g., Best in State, Best in Region) as applicable (not available for maternity care or women’s health);

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Marketing messages developed and approved by HealthGrades;

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Quality Ratings Analysis (QRA) to help hospitals understand the data methodology underlying their ratings and what they can do to continue to improve their quality;

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Ratings comparisons developed and approved by us;

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Detailed analysis of client outcomes to understand individual star ratings; and

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Competitive comparisons to use in service line market positioning.

We offer our SQI program to highly rated providers only after our ratings are completed. We do not adjust our ratings based on whether a provider is willing to license with us. The license may be in a single service line (e.g., cardiac) or multiple service lines (for example, cardiac, neurosciences and orthopedics). In addition, the SQI program provides ongoing access to our marketing services and resources, including our in-house healthcare consultants, tailored to the hospital’s specific needs.

Strategic Quality Partnership (SQP). The SQP program recognizes clinical excellence in hospitals across our range of service lines. Hospitals that contract with us for the SQP program receive all of the SQI features described above with respect to all of the service areas we rate. In addition, hospitals can reference the additional DHA-CE designation. Hospital clients are provided with additional marketing and planning assistance with respect to the DHA-CE designation as well as a trophy for display at the hospital. This program also includes a quality analysis module to help hospitals understand their ratings and how they can continue to improve their quality.

America’s 50 Best Hospitals. Hospitals that are one of the America’s 50 Best Hospitals and that contract with us receive the following:

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All of the SQP features described above;

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Either the America’s 50 Best Hospitals trophy or the standard DHA-CE trophy;

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Customized video featuring a HealthGrades executive congratulating the hospital on the America’s 50 Best Hospitals Award;

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One additional on-site visit by a HealthGrades senior consultant for Chief Executive Officer media training; and

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Services for the client’s Chief Executive Officer to help the client learn how to best discuss quality with the media.

Patient Safety Excellence Award (PSEA). Under our PSEA program, we license the commercial use of our corporate mark and applicable data and marketing messages that may be used by hospitals to demonstrate third party validation of excellence, including:

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HealthGrades name and logo;

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Patient Safety Excellence Award designation and trophy for that year; and

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Marketing messages developed by HealthGrades.

This program also includes a quality analysis module to assist hospitals in understanding their ratings and what they can do to continue to improve their quality.

Outstanding Patient Experience Award (OPEA). The OPEA recognizes hospitals for their patient satisfaction based on their patients’ experiences in their hospital. Under our OPEA program, we provide business development and consulting services, which include, among other services, the development of an image advertising strategy and hospital marketing consultation.

Quality Assessment and Implementation (QAI). Our QAI program is principally designed to help a hospital improve the quality of its care in particular service lines. Using our database and on-site interviews, we measure how well the hospital performs relative to national and regional best practices and help identify measures to improve quality. Detailed quality comparisons are also available at the hospital, physician group and individual physician level. Our physician-led consultants work on-site with the hospital staff and physicians to present the data and assist in the quality analysis and quality improvement. Under our QAI program, with respect to the areas licensed by the hospital, we provide services such as the following: four onsite visits per year; chart review to facilitate root cause analysis of quality problems; detailed analysis of the last two years of the client’s all-payer data; and hospital and individual quality profiles for high volume physicians.

Quality Assessment (QA). The QA program involves onsite interviews, chart review, and a presentation to administrative, physician and quality improvement staff on our findings and recommendations related to quality improvement. Upon completion of the QA program the client has the option, at a reduced fee, to participate in a QAI program for the licensed service line.

Quality Report for Hospital Professionals™ — Clinical Service Line. We provide hospitals with a comprehensive report that enables them to improve quality of care by benchmarking their outcomes against national five-star hospitals and local competitors, detailing the strengths and weaknesses of their public quality profile and analyzing their quality data underlying their specific star ratings.

Quality Report for Hospital Professionals™ — Patient Safety. We provide reports that analyze hospitals’ performance within 12 patient safety indicators established by the AHRQ, compare their performance against the best practice benchmark, the national average and their state average and detail the strengths and weaknesses of their patient safety profile.

Health Management Suite — We license access to, and customize our database for, employers, benefits consulting firms, payers and others. We offer our customers these modules in a standard format without customization for specific geographic areas or provider networks, through our Health Management Suite product. For an additional fee, customers can integrate our modules within their online provider directories, and we can customize our database for specific geographic areas and provider networks as well as modify the look and feel of the modules. Depending on the client’s needs, we can customize our content for the intended users. Modules currently available are as follows:

Find a High-Quality Provider:

Hospitals — Interactive, fully searchable hospital quality information for the nation’s over 5,500 hospitals rated by us. Reports feature one, three and five-star hospital ratings based on mortality and complication rates up to 180 days after hospitalization and include the hospital’s average cost for each procedure.

Physicians — Online profiles of over 800,000 physicians covering 125 different specialties with numerous data elements, including the doctor’s board certifications, malpractice history and sanction information. Data also include the average cost of services as well as patient experience survey results from those who have visited with the physician.

Nursing Homes — Compare nursing homes side-by-side with inspection data for over 15,000 facilities nationwide and state licensing survey information that outlines a facility’s overall quality.

Home Health — Ratings for more than 8,000 home health agencies nationwide based on four consecutive years of data including complaint investigation information and violations.

Estimate Healthcare Costs:

Treatment Cost Calculator — Featuring costs for 56 procedures, 200 tests including diagnostic x-rays, pathology and laboratory tests, and cost information including list prices, negotiated rates and out-of-pocket-expenses to help individuals plan healthcare spending.

Healthcare Quality Reports for Professionals — We offer comprehensive quality information to organizations that need current and historical quality information on nursing homes and hospitals. Our primary customers are medical professional liability insurers and underwriters. In addition, we offer reports on physicians that contain detailed information with respect to education, professional licensing history and other items.

Nursing Home Quality Report for Professionals™ — We currently offer the following three categories of reports on nursing homes: Nursing Home Quality Report; Executive Summary Report and Risk Assessment Report. Our Nursing Home Quality Report contains detailed information on ownership, certification history, staffing and patient demographics as well as performance and ranking data from health, state complaint and licensing surveys. Our Executive Summary Report summarizes this information. Our Risk Assessment Report is a textual analysis of the Nursing Home Quality Report that highlights potential problem areas within a facility that require risk management.

Hospital Quality Report for Professionals™ — Our Hospital Reports contain detailed information on ownership, services provided and clinical performance outcomes. Some of the features of our reports include:

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Risk and severity-adjusted performance measures for cardiac, neurosciences, stroke, vascular, orthopedics and pulmonary service lines, as well as the underlying medical issue for each service line;

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Programmatic ratings for women’s health and obstetrics;

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Comparative statistics and state/national benchmarks;

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Infections, complication and mortality rates; and

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“Cases At Risk” analysis, which projects how many cases are likely to have adverse outcomes based upon our proprietary mortality or complication rate analysis.

Healthcare Quality Reports for Consumers — We offer comprehensive quality reports to consumers that provide current and historical quality information on hospitals and nursing homes. In addition, we offer reports on physicians that contain detailed information with respect to education, professional licensing history and other items.

Hospital Quality Report™ for Consumers — Our Hospital Quality Reports for Consumers include:

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Ratings for all procedures and diagnoses rated by HealthGrades for the hospital;

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Survey data prepared in connection with the Leapfrog Group;

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Our methodology and helpful hints for choosing a hospital; and

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Cost data.

Nursing Home Quality Report™ for Consumers — Our Nursing Home Quality Reports for Consumers include:

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Our rating for the particular nursing home;

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Health survey history with descriptions and severity of the deficiencies for the last four licensing surveys;

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Instances of repeated deficiencies;

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How the nursing home compares to others in the state; and

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Our methodology and helpful hints for choosing a nursing home.

Physician Quality Report™ for Consumers — Our Physician Quality Reports for Consumers include (where available):

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Addresses and phone numbers;

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Specialties;

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Board certification information;

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Education information, including medical school, year graduated and residency, fellowships and internships;

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Physician memberships and associations;

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Malpractice data;

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State and federal sanction information (if any) within the last 5 years;

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Name and address of area hospitals and affiliated hospitals;

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Group practice;

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Gender;

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Languages spoken;

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National comparative statistics in board certification, years in practice and sanction activity regarding physicians in the same specialty field; and

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Information on how to choose a physician with a checklist and guide.

Currently, our physician profiles include the following tabs:

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Physician profile (free) — includes physician’s name, specialties and health plans accepted among other items;

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Office locations (free) — includes address, phone number and other physicians practicing at the same office;

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Ratings (free) — experience surveys completed by our users;

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Hospital ratings (free) — hospital name and our ratings by clinical services area for hospitals at which the physician is affiliated;

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Awards and recognition (fee-based) — displays HealthGrades Five-Star and Recognized recognition, as well as memberships (i.e., AMA);

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Education (fee-based) — displays medical school and residency;

	•		Background check (fee-based) — a premium physician quality report that includes information on board certification, malpractice history, federal and state sanctions from all 50 states, among other items; and,
	•		Procedure costs (fee-based) — detailed cost information for a variety of medical procedures.

Content and Data Licensing. We offer to web property owners and operators a license to specific portions of our healthcare-related content and resources which provide users access to our proprietary or licensed rating and other information regarding hospitals and physicians.

Pharmaceutical and Medical Device Solutions — In addition to reaching consumers at the point of a medical decision, we believe the demographics for HealthGrades’ consumers are highly relevant for pharmaceutical and medical device brands that want to grow market share.

Internet Advertising — We currently display advertisements on the majority of our physician profile pages utilizing Google AdSense and DoubleClick’s advertising network. DoubleClick is our ad serving engine. In October 2008, we acquired certain operating assets of Adviware, which increased our on-line presence by adding the websites www.WrongDiagnosis.com and www.CureResearch.com to our healthcare properties. Also, in late 2008, we expanded beyond remnant advertising networks, including Google AdSense, to expand the channels through which our inventory is sold, increasing the overall value of that inventory. This includes direct sales to advertising agencies that represent the pharmaceutical and medical device industries along with in-text advertising and contracting with advertising networks.

Competition

With respect to our quality services for hospitals, we face competition from data providers such as Thomson Reuters and healthcare consulting companies such as Deloitte, Thomson Reuters (Solucient), SG2 and Marshall Steele that offer certain consulting services to hospitals. Many of these companies have well established consulting practices with a large number of employees dedicated to these services. The ability to demonstrate the value of quality improvement consulting programs, name brand recognition and cost are the principal factors that affect our competitive position.

We face competition with respect to our service offerings to employers, benefits consulting firms, payers, consumers and others from companies that provide online information and decision support tools regarding healthcare providers and physicians. Several companies currently offer online healthcare information and support tools such as WebMD and Ingenix. WebMD has a well-established web platform which is widely known as the most trafficked healthcare website on the internet today for general healthcare content. However, we believe that the approximately 19,000,000 unique consumers who visit our websites (www.healthgrades.com, www.WrongDiagnosis.com and www.CureResearch.com) each month are active consumers who are searching for targeted information such as selection of a healthcare provider. We believe that the ability to provide accurate and comprehensive healthcare information in a manner that is cost-effective to the client is the principal factor that affects competition in this area.

We compete, with respect to internet advertising, with online health publishers, such as WebMD and UCompareHealthcare and internet advertising companies, as well as companies that offer traditional media advertising opportunities. We face competition from numerous other companies, both in attracting internet users and in generating revenue from advertisers and sponsors. Competition for users includes websites that provide health-related information, both commercial and not-for-profit sites, and sites that publish healthcare and user generated content. Additionally, we compete for advertisers and sponsors with both healthcare-related and non-healthcare related content and services. Non-healthcare related advertising segments we compete in include travel, automotive, retail and consumer package goods.

Company History

We are a Delaware corporation incorporated in December 1995 under the name Specialty Care Network, Inc. Upon commencement of operations in 1996, we principally managed physician practices engaged in musculoskeletal care, which is the treatment of conditions relating to bones, joints, muscles and connective tissues. During 1998, we began to focus on the provision of healthcare information through the establishment of our healthcare provider quality ratings and profile information, which we first introduced on our website. Since that time, we have expanded the scope of our healthcare information services to encompass the additional services described above. In November 2000, we changed our name to Health Grades, Inc.

Government Regulation

The delivery of healthcare services has become one of the most highly regulated of professional and business endeavors in the United States. Both the federal government and the individual state governments are responsible for overseeing the activities of individuals and businesses engaged in the delivery of healthcare services. The focus of federal regulation of healthcare businesses and professionals is based primarily upon their participation in the Medicare and Medicaid programs. Each of these programs is financed, at least in part, with federal funds. State jurisdiction is based upon its financing of healthcare as well as the states’ authority to regulate and protect the health and welfare of its citizens.

A provision of the federal Social Security Act, commonly known as the Anti-Kickback Statute, prohibits kickbacks, rebates and bribes in return for referrals of federal healthcare program services. This law provides an extremely broad base for finding violations. Indeed, any remuneration, direct or indirect, offered, paid, solicited, or received, in return for referrals of patients or business for which payment may be made in whole or in part under Medicare, or a state healthcare program (Medicaid) could be considered a violation of law. The language of the Anti-Kickback Statute also prohibits payments made to anyone to induce them to “recommend purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part” by a federal healthcare program. Criminal penalties under the Anti-Kickback Statute include fines up to $25,000, imprisonment for up to 5 years, or both. In addition, acts constituting a violation of the Anti-Kickback Statute may lead to additional civil penalties, such as fines, assessments and exclusion from participation in the Medicare and Medicaid programs.

To provide more direct guidance on the interpretation of the Anti-Kickback Statute, the Office of Inspector General, or OIG, of the Department of Health and Human Services (DHHS) has developed regulations regarding what types of business arrangements are not to be considered violative of the law and to develop criteria to be applied to any new arrangement to determine whether it is acceptable under the law. The regulations are known as “Safe Harbors” and address activities that may technically violate the Anti-Kickback Statute, but are not to be considered as illegal when structured to conform to the proposed regulation. The OIG has also set forth specific procedures by which the DHHS, through the OIG, in consultation with the Department of Justice (DOJ), will issue advisory opinions to outside parties regarding the interpretation and applicability of anti-kickback and certain other statutes relating to federal and state healthcare programs.

Whenever an arrangement exists with an entity capable of providing services reimbursed by Medicare or Medicaid, the arrangement must be analyzed to determine if the Anti-Kickback Statute is implicated (i.e., can the arrangement be characterized as involving remuneration intended to induce referrals for the provision of covered services). Because our customers will, in some instances, be healthcare providers, we must be mindful of state and federal laws; that is, we want to be sure that any payments to us will not be considered a payment for a referral of patients or business from HealthGrades.

The only payments made to us by providers and practitioners will be for access to information, to make their HealthGrades’ profiles available to consumers without cost, or for evaluation and consulting services — not to induce referrals. Nevertheless, federal courts have interpreted the anti-kickback provisions very broadly to prohibit even those payments made in return for legitimate services, if the intent to induce referrals can be inferred from the arrangement. Where the payments made under an agreement represent fair market value or reasonable remuneration for the goods, services or other consideration being received, however, there should be less factual support for any inference that payments are in exchange for referrals.

There is a potential that our arrangements could fall within the personal services and management agreement safe harbor regulation enacted under the anti-Kickback Statute. The personal services and management agreement safe harbors provide that payments under such agreements will not constitute remuneration under the Anti-Kickback Statute if the payments meet seven criteria, including that the agreement is set out in writing and is signed by the parties, and that aggregate compensation is set in advance, is consistent with fair market value and does not take into account the volume or value of any referrals or business generated between the parties. Unless an arrangement meets all of the terms of a safe harbor, the government could attempt to draw an inference that payments made constitute remuneration and that at least one purpose of the remuneration is to induce referrals. However, failure to meet the safe harbors does not render an arrangement per se unlawful. We believe that our operations comply with applicable legal regulatory requirements of the Anti-Kickback Statute’s personal services and/or management agreement safe harbor. However, some of these laws have been applied to payments by physicians for marketing and referral services and could constrain our relationships, including financial and marketing relationships with customers such as hospitals. It also is possible that additional or changed laws, regulations or guidelines could be adopted in the future that could affect our business.

Many states have laws that prohibit payment of kickbacks or other payment of remuneration to those in a position to control the referral of patients similar to the Anti-Kickback Statute, but the prohibitions may apply to remuneration related to the referral of business or patients covered by any healthcare payer, including commercial insurance. Therefore, it is possible that our activities may be found not to comply with these laws. Noncompliance with such laws could subject us to penalties and sanctions. We do not believe that we are in violation of any legal requirements under such state laws.

In addition to the Anti-Kickback Statute, filing of false claims to the federal government is prohibited by federal criminal and civil statutes. Criminal provisions prohibit knowingly filing false claims, making false statements or claims to be made by others. Civil provisions under the federal False Claims Act (FCA) prohibit the filing of claims, or causing the filing of claims, that the person filing knew were false. Criminal penalties include fines and imprisonment. Civil penalties under the FCA include fines up to $11,000 per claim, plus treble damages, for each claim filed. In addition, under the Deficit Reduction Act of 2005, states are encouraged to enact their own false claims laws, which could increase the number of false claims suits at the state level. Although we are not filing claims ourselves, liability under the FCA can extend to those who cause the filings of claims. In May 2009, the President signed the Fraud Enforcement and Recovery Act which amended the FCA, granting the government and whistleblowers greater enforcement latitude. To the extent that consulting advice provided to our customers could be construed as aiding or abetting the presentation of false claims to the government by our customers, there could be false claims liability, although we endeavor to provide advice that cannot be so construed.

A federal law know as the “Stark Law” prohibits a physician from referring a Medicare patient for certain designated health services (DHS) to an entity with which the physician or an immediate family member has a financial relationship, unless the referral is protected by one or more exceptions provided by law. DHS includes a wide range of ancillary healthcare services in a number of broad categories, including all inpatient and outpatient hospital services. Violations of the Stark Law may result in a number of penalties, including Medicare nonpayment of claims for DHS provided as a result of a prohibited referral, an obligation to refund amounts paid as a result of a prohibited referral and civil monetary penalties for knowing violations. While the Stark Law does not apply to our business, our hospital and physician customers must comply with the Stark Law. We do not believe that our business subjects our customers to risk under the Stark Law, though interpretations of the Stark Law are constantly evolving and changes in the law itself or the regulatory guidance could impair our business.

Health Care Legislation. It is our belief that the Medicare Prescription Drug Improvement and Modernization Act of 2003 has not had a major impact on our arrangements with providers. Future legislation, including the healthcare reform proposals currently under consideration by Congress, may be introduced and considered by Congress and state legislatures that is designed to change access to and payment for healthcare services in the United States. We can make no prediction as to whether future legislation will be enacted or, if enacted, the effect that such legislation will have on us.

Privacy of Information and the Health Insurance Portability and Accountability Act of 1996 (HIPAA)

Consumers sometimes enter private information about themselves or their family members when using our services. Also, our systems record use patterns when consumers access our databases that may reveal health related information or other private information about the user. In addition, information regarding employee usage of healthcare providers and facilities can also be compiled by our systems in connection with services we offer to employers and other payers. Numerous federal and state laws and regulations govern collection, dissemination, use and confidentiality of patient-identifiable health information, including:

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state privacy and confidentiality laws;

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state laws regulating healthcare professionals, such as physicians, pharmacists and nurse practitioners;

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Medicaid laws;

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the U.S. Health Insurance Portability and Accountability Act of 1996, or HIPAA, as described in detail below, and related rules promulgated by the United States Department of Health and Human Services (HHS); and

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CMS standards for electronic transmission of health data

Under HIPAA, Congress set national standards for the protection of health information created, maintained or transmitted by health plans, healthcare clearinghouses and certain healthcare providers (“covered entities”). Under the law and regulations known collectively as the Privacy and Security Rules, covered entities must implement standards to protect and guard against the misuse of individually identifiable health information. Although we are not a covered entity, we believe that we have complied with the applicable standards. Failure to timely implement these standards could, under certain circumstances, trigger the imposition of civil or criminal penalties.

The Privacy and Security Rules do not replace federal, state, or other laws that grant individuals even greater privacy protections, and covered entities are free to retain or adopt more protective policies or practices.

Most healthcare providers and payers do not carry out all of their healthcare activities and functions by themselves. Instead, they often use the services of a variety of other persons or businesses. The Privacy and Security Rules allow covered entities to disclose protected health information to business associates if the covered entities obtain satisfactory assurances that the business associate will use the information only for the purposes for which it was engaged, will safeguard the information from misuse, and will comply with certain other requirements under the Privacy and Security Rules. Covered entities may disclose protected health information to an entity in its role as a business associate only to help the covered entity carry out its healthcare functions — not for the business associate’s independent use or purposes, except as needed for the proper management and administration of the business associate. Although we are not a covered entity, we may be asked to enter into business associate agreements with covered entities. A portion of the American Recovery and Reinvestment Act of 2009, known as the Health Information Technology for Economic and Clinical Health Act (the HITECH Act), expanded the scope and application of HIPAA, including among other things, applying certain privacy and security provisions directly to business associates. Application of these rules to business associates is a significant change. Previously, if a breach involving a business associate occurred, the covered entity could just terminate the contract if the breach was not remedied. Responsibility and liability rested with the covered entity. Under the HITECH Act, the business associate now has responsibility and liability directly for a breach.

Under the HITECH Act, covered entities and business associates will face criminal and civil liability for failure to comply with HIPAA. Criminal penalties may be imposed against persons who obtain or disclose protected health information without authorization. In addition, a state’s Attorney General can bring civil actions against a person on behalf of residents adversely affected by violations of either HIPAA or the HITECH Act. The Attorney General can either seek to enjoin further violations or obtain monetary damages on behalf of the residents harmed. DHSS is also beginning to perform periodic audits of healthcare providers to ensure that required policies under the HITECH Act are in place. Finally, individuals harmed by violations will be able to recover a percentage of monetary penalties or a monetary settlement based upon methods established by DHHS for this private recovery. To the extent we have entered into such agreements, we believe that we are in compliance with the requirements of those agreements.

If a covered entity finds out about a material breach or violation of the privacy related provisions of the contract by the business associate, it must take reasonable steps to cure the breach or end the violation, and, if unsuccessful, terminate the contract with the business associate. If termination is not feasible (e.g., where there are no other viable business alternatives for the covered entity), the covered entity must report the problem to the Department of Health and Human Services Office for Civil Rights.

Government Regulation of the Internet, Data and Privacy

The internet is currently the subject of a number of statutes and regulations, and the trend for the future could include an increase in the quantity and the complexity of regulation. Any new or revised law or regulation pertaining to the internet, or the application or interpretation of existing laws and regulations, could decrease demand for our services, increase our cost of doing business, decrease the availability of the data we obtain and use from third parties, increase the costs of online marketing, or otherwise cause our business to suffer.

Laws and regulations have been adopted in the United States and throughout the world, and additional laws and regulations may be adopted in the future, that address internet, data and privacy-related issues, including online content, privacy, online marketing, unsolicited commercial e-mail, pricing and quality of products and services. This legislation could increase our cost of doing business and negatively affect our business. Moreover, it will take many years to determine the full extent to which older laws and regulations governing issues like property ownership, libel, negligence, taxes, and personal privacy are applicable to the internet.

Currently, U.S. privacy law consists of numerous disparate state and federal statutes regulations and enforcement actions regulating specific industries that collect personal data, or particular types or uses of personal data. For example, HIPAA consists of a large body of statutory provisions and regulations that control the disclosure, use, and transfer of personal health information in digital form by providers and others. One recent trend is the enactment of privacy and security statutes that require the disclosure to authorities and to data subjects of any breach of security of a database of personal information. Several other privacy laws and regulations predate and therefore do not specifically address online activities. In addition, a number of comprehensive legislative and regulatory privacy proposals have taken effect or are now under consideration by federal, state and local governments in the United States. All such privacy laws may decrease access to the raw data that we use, adversely impact our ability to use data currently in our possession and may increase our costs of compliance with such laws and regulations in the conduct of our business.

In addition, the regulation of the internet outside the United States may affect our cost of doing business, directly or indirectly, in the long run. For example, privacy law in the European Union and in a number of other countries is far more restrictive then U.S. privacy law in terms of how personal information may be collected, stored, processed, transmitted, and shared with others. As a result, we may not be able to profitably expand our business to the European Union or other countries that have similar laws, and we may not be able to realize the benefits of reducing costs by outsourcing any of our operations that involve the processing of personal information to such countries. Further, the more restrictive privacy and other internet-related laws and regulations in other countries have served as a model for newer and more restrictive privacy and other internet-laws and regulations in the United States.

Intellectual Property

We regard the protection of our intellectual property rights to be important. We rely on a combination of copyright, trademark, trade secret restrictions and contractual provisions to protect our intellectual property rights. We require selected employees to enter into confidentiality and invention assignment agreements as well as non-competition agreements. The contractual provisions and other steps we have taken to protect our intellectual property may not prevent misappropriation of our technology or deter third parties from developing similar or competing technologies.

We own federal trademark registrations for the marks HealthGrades, HealthGrades Checkmark & Star Logo, and the phrase, “Guiding America to Better Healthcare.” We have also registered with the United States Copyright Office the HealthGrades Hospital Ratings Database, HealthGrades Hospital Awards Database, and HealthGrades Hospital Patient Safety Database. These Database Copyright registrations are updated on a quarterly basis. We applied for and received a copyright for the HealthGrades Checkmark & Star Logo.

There is significant uncertainty regarding the scope of protection offered under existing laws regarding matters such as property ownership and other intellectual property rights with respect to the internet and databases. The vast majority of these laws were adopted prior to the advent of the internet and, as a result, may not fully contemplate or address the unique issues of the internet, databases and related technologies. In addition, new laws that regulate activities on the internet have been passed and may be passed, which may have unanticipated effects.

For further information, see “Risk Factors — Our proprietary rights may not be fully protected.”

Employees

As of December 31, 2009, we had 209 employees, most of whom were located at our corporate offices in Golden, Colorado. Of these employees, 87 were engaged in sales and marketing, client consulting or client administrative support, 90 in product development (including information technology/web development) and 32 in general and administrative (including finance, accounting and IT infrastructure). We are not subject to any collective bargaining agreements.

Available Information

Our internet address is www.healthgrades.com. We make available on our website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with or furnish it to the Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the “Investor Relations” section of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC.

Item 1A.		Risk Factors

Our short and long-term success is subject to many factors beyond our control. If any of the following risks, as well as any risks described elsewhere in this Form 10-K, actually occur, our business, financial condition or results of operations could suffer. Other risks not presently known to us or not presently thought to be material could also affect our business, our financial condition or results of operations. Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

RISKS RELATED TO OUR BUSINESS

Our business will suffer if we are not able to obtain reliable data as a basis for our healthcare information.

To provide our healthcare information, we must have comprehensive, reliable data. We obtain this data from a number of public and private sources. Currently, the information we utilize to compile our hospital ratings is acquired from CMS and 19 individual states. For the year ended December 31, 2009, revenues derived from SQP, SQI, and QAI products accounted for approximately 60% of our total ratings and advisory revenue. These products are based exclusively on our hospital ratings. Moreover, some of our Health Management Suite modules are based on information acquired from CMS. Our business could suffer if CMS or our other data sources began charging for use or access to this data, or cease to make such information available, and suitable alternative sources were not identified on a timely basis. Moreover, our ability to attract and retain customers depends on the reliability of the information that we use and license. If our information is inaccurate or otherwise erroneous, our reputation and customer following could be damaged. In the past, we have had disputes with two providers of information who sought to terminate our arrangements based on allegations, which we denied, that our use of the information violated the terms of our agreements with the providers. We have located alternate sources of information or modified the scope of information provided in response to these disputes. Nevertheless, our failure to obtain suitable information, if needed to use in place of information provided by a source that stops providing information or that charges substantially more for such data, could hurt our business.

Failure to effectively manage the growth of our operations and infrastructure could disrupt our operations and prevent us from maintaining or increasing profitability.

We have expanded meaningfully in the past few years and we continue to seek to increase our sales efforts, attract new clients, maintain existing clients and develop new products. To manage our growth, we must successfully attract qualified personnel and successfully integrate new personnel into our operations. Our failure to manage personnel and otherwise appropriately manage expansion of our business could adversely affect our business and future growth. If our website traffic continues to grow and we do not maintain the appropriate infrastructure to support the growth and new technologies, our business will be harmed.

Our proprietary rights may not be fully protected.

If we fail to adequately protect our intellectual property rights, our business could be harmed by making it easier for our competitors to duplicate our products and services. While we have certain trademarks and copyrights that have been registered with the U.S. Patent and Trademark Office and the U.S. Copyright Office, respectively, such trademarks and copyrights may not offer adequate protection. In addition, we require some of our employees to enter into confidentiality and invention assignment agreements and, in more limited cases, non-competition agreements. Nevertheless, our efforts to establish and protect our proprietary rights may be inadequate to prevent imitation of our services or branding by others or may be subject to challenge by others. Furthermore, our ability to protect some of our proprietary rights is uncertain because legal standards relating to the validity, enforceability and scope of intellectual property rights in internet-related industries are uncertain and are still evolving. In addition, although we have obtained copyright registrations for some of our databases, such registrations and existing laws may not allow us to adequately protect the underlying data contained in such databases. Accordingly, third parties may contend they are free to use portions of the data contained in such databases. Also, our current rights and existing laws do not preclude competitors from independently developing businesses with functionality or features substantially equivalent or superior to our business. Any infringement, misappropriation or third-party development could have a material adverse effect on us.

The nature of our business and our reliance on intellectual property subjects us to the risk of litigation.

From time to time, it has been necessary for us to resort to litigation and threats of litigation to enforce and protect our intellectual property rights. The results of litigation are inherently uncertain and may result in adverse rulings or decisions. We may enter into settlements or be subject to judgments that may, individually or in the aggregate, have a material adverse effect on us. The litigation, regardless of its outcome, diverts management resources, may be expensive, and may not effectively protect our intellectual property.

In addition to the risk of failing to adequately protect our proprietary rights, there is a risk that we may become subject to claims that we infringe upon the proprietary rights of others. The possibility of inadvertently infringing upon the proprietary rights of others is increased for businesses such as ours because there is significant uncertainty regarding the applicability to the internet of existing laws regarding matters such as copyrights and other intellectual property rights. A claim of intellectual property infringement may cause us to incur significant expenses to defend against the claim. If we are not successful in defending against an infringement claim, we could be liable for substantial damages or may be prevented from offering some aspects of our services. We may be required to make royalty payments, which could be substantial, to a party claiming that we have infringed their rights. These events could damage our business. Any significant litigation could cause us to incur substantial expense to protect our rights.

We may lose business if hospitals and others utilize our name and ratings without our permission.

In order for a hospital to use our name and ratings information, we require them to enter into a marketing agreement with us. However, some hospitals, the media and others have taken the position that certain use of our ratings is “fair use” and not proprietary. We will need to continue to enforce the protection of our proprietary information and aggressively pursue selected hospitals and others that utilize our name and ratings information without our permission. If our enforcement efforts are unsuccessful, our business may be adversely affected.

We may be sued for information we obtain or information retrieved from our websites or otherwise provided to employers and others.

We may be subjected to claims for defamation, negligence, copyright or trademark or patent infringement, personal injury or other legal theories relating to the information we publish on our websites or otherwise provide to customers. These types of claims have been brought, sometimes successfully, against online services as well as print publications in the past. We have received threats from some providers that they will assert defamation and other claims in connection with the information posted on our www.healthgrades.com website.

We have had disputes with certain physicians with respect to the accuracy of their data that is included in reports we sell or otherwise provide to consumers and professionals, and have settled litigation with some of these physicians. Continuing to improve the accuracy of our data by both internal process measures and by obtaining data from various sources for comparative purposes will continue to be important for us.

Patients who file lawsuits against providers often name as defendants all persons or companies with any nexus to the providers. As a result, patients may file lawsuits against us based on, among other things, treatment provided by hospitals or other facilities that are highly rated by us, or by doctors who are identified on our website. In addition, a court or government agency may take the position that our delivery of health information directly, or information delivered by a third-party website that a consumer accesses through our website, exposes us to malpractice or other personal injury liability for wrongful delivery of healthcare services or erroneous health information. Such exposure may adversely affect our business. Moreover, the amount of insurance we maintain may not be sufficient to cover all of the losses we might incur from these claims and legal actions. In addition, insurance for some risks is difficult, impossible or too costly to obtain, and as a result, we may not be able to purchase insurance for some types of risks.

If we do not strengthen recognition of our brand name, our ability to expand our business will be impaired.

To expand our audience of online users, increase our online traffic and increase interest in our other healthcare information services, we must strengthen recognition of our brand name. To be successful in this effort, consumers must perceive us as a trusted source of healthcare information; hospitals and other providers must perceive us as an effective marketing and sales channel for their services and products; and employees, payers, insurers, and others must perceive us as a source of valuable information that can be used to enhance the quality and cost-effectiveness of healthcare. We may be required to increase our marketing budget substantially in our efforts to strengthen brand name recognition. This will increase our costs, and our business will suffer if our efforts are not productive.

If we were to lose the services of Kerry Hicks or other members of our executive management team, we may not be able to execute our business strategy.

Our future success depends in a large part upon the continued service of key members of our executive management team. In particular, our Chief Executive Officer (CEO), Kerry Hicks, is critical to the overall management of HealthGrades as well as the development of our technology, our culture and our strategic direction. All of our executive officers, with the exception of Kerry Hicks, our CEO, and David Hicks, one of our Executive Vice Presidents, are at-will employees. We do not maintain any key-person life insurance policies. The loss of any of our management or key personnel could seriously harm our business.

Our business will suffer if we are unable to attract, retain and motivate highly skilled employees.

Our ability to execute our business plan and be successful depends upon our ability to attract, retain and motivate highly skilled employees when needed. As we expand our business, we will need to hire additional personnel to support our information technology operations in particular. We may be unable to retain our key employees or attract or retain other highly qualified employees in the future. If we do not succeed in attracting new personnel as needed and retaining and motivating our current personnel, our business will suffer.

We may experience system failures that could interrupt our services.

The success of our websites and activities related to the websites will depend on the capacity, reliability and security of our network infrastructure. We rely on telecommunications providers to provide the external telecommunications infrastructure necessary for internet communications. We also depend on providers of online content and services for some of the content and applications that we make available through www.healthgrades.com and www.WrongDiagnosis.com. Any significant interruptions in our services or increases in response time could result in the loss of potential or existing users or customers. Although we maintain insurance for our business, we cannot guarantee that our insurance will be adequate to compensate us for losses that may occur or to provide for costs associated with business interruptions.

We must be able to operate our website 24 hours a day, 7 days a week, without material interruption. To operate without interruption, we and our telecommunication and content providers must guard against:

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damage from fire, power loss and other natural disasters;

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communications failures;

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software and hardware errors, failures or crashes;

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security breaches, computer viruses and similar disruptive problems; and

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other potential interruptions.

Our websites may be required to accommodate a high volume of traffic and deliver frequently updated information. Users of our websites may experience slower response times or system failures due to increased traffic on our websites or a variety of other reasons. We could experience disruptions or interruptions in service due to the failure or delay in the transmission or receipt of this information. Any significant interruption of our website operations could damage our business.

Failure by third party vendors of technology.

Our business depends on continued and unimpeded access to the internet by us and our users. Internet access providers may be able to block, degrade or charge for access to certain of our products and services, which could lead to additional expenses and the loss of users and advertisers. Our business also depends on the ability of our users to access the internet, and certain of our data offerings require significant bandwidth to work effectively. Currently, this access is provided by a company with significant market power in the broadband and internet access marketplace. While interference with access to our website seems unlikely, such carrier interference could result in a loss of existing users and advertisers and increased costs, and could impair our ability to attract new users and advertisers, thereby harming our revenue and growth.

We may rely on third parties to supplement or provide ancillary content for our website. The availability of such content could be restricted or terminated by such third parties or substantial fees may be imposed for our continued use.

We may lose business if we are unable to keep up with rapid technological or other changes.

The markets in which we compete are characterized by rapidly changing technology, evolving technological standards in the industry, frequent new service and product announcements and changing consumer demand. If we are unable to keep up with changing technology and other factors related to our market, we may be unable to attract and retain users or customers, which would reduce our revenues. Our future success will depend on our ability to adapt to these changes, and to continuously improve the content, features and reliability of our services in response to competitive service and product offerings and the evolving demands of the marketplace. In addition, the widespread adoption of new internet networking, telecommunications or development technologies, or other technological changes could require us to incur substantial expenditures to modify or adapt our website or infrastructure, which might negatively affect our ability to remain profitable.

Our rating and measuring systems, data and content may not be protected by intellectual property laws. We may not be able to prevent our competitors and others from developing and using similar rating and measuring systems or from reproducing or publishing our data and content.

We rely largely on advertising and search engine placement to generate traffic to our website.

We rely on online media to attract a significant percentage of the visitors to our website. Prices for online advertising could increase as a result of increased demand for advertising inventory, which would cause our expenses to increase and could result in lower margins. Our advertising contracts with online search engines are typically short-term. If one or more search engines on which we rely for advertising modifies or terminates its relationship with us, our expenses could increase, the number of visitors we generate could decrease and our revenues or margins could decline. Additionally, changes to our position within search engine search results could cause visits to our website and the number of reports ordered from our website to decline.

We may be unsuccessful in our efforts to increase advertising and sponsorship revenue.

We began to offer advertising on our website at www.healthgrades.com in the latter half of 2007. Our ability to realize revenue from this initiative is subject to substantial uncertainty including, but not limited, to the following:

•		Our advertising initiative is in its early stages. Many of our competitors have greater financial, technical, product development and other resources than we do. These organizations may be better known than we are and have more customers or users than we do. We cannot provide assurance that we will be able to compete successfully against these organizations or any alliances they have formed or may form. As there are no substantial barriers to entry into the online advertising market, we expect that competitors will continue to enter this market.
•		Our websites face competition from numerous other companies, both in attracting users and in generating revenue from advertisers and sponsors. We compete for users with online services and websites that provide health-related information, including both commercial sites and not-for-profit sites. We also compete for advertisers and sponsors with providers of both healthcare-related and non-healthcare related content and services.
•		There are numerous items outside of our control that may limit our ability to accurately forecast or generate revenues from this area, including, but not limited to: advertisers’ budgets and buying patterns, the time between the initial contact with an advertising network, agency or potential advertiser or sponsor and the execution of a contract, which may be lengthy, and seasonal factors relating to the prevalence of specific health conditions that may affect the timing of promotional campaigns for specific products, among other items.
•		If unable to provide quality graphics and content to attract users and advertisers to our websites, our advertising revenues may be adversely affected.
•		Technologies have been developed that can block the display of our ads.
•		We are exposed to the risk of fraudulent clicks and other invalid clicks on our ads from a variety of potential sources. Invalid clicks are clicks that we have determined are not intended by the user to link to the underlying content. Click fraud occurs when a user intentionally clicks on an ad displayed on a website for a reason other than to view the underlying content. If we are unable to stop these invalid clicks, we will be required to provide refunds to our advertisers, which would negatively affect our profitability and our reputation.

Failure to effectively compete for online advertising may have a material adverse effect on our revenues and results of operations.

Our online business has a limited operating history.

Our online business has a limited operating history and participates in relatively new and rapidly changing markets. Many companies with business plans based on providing healthcare information and related services through the internet have failed to be profitable and some have filed for bankruptcy and/or ceased operations. Even if demand from users exists, we cannot assure this aspect of our business will continue to be profitable.

Our business will suffer if we are not able to compete successfully.

The market for healthcare information is rapidly evolving and competitive. We expect competition to increase significantly, and our business will be adversely affected if we are unable to compete successfully. We currently compete, or potentially compete, with many providers of healthcare information services and products, both online and through traditional means. We compete, directly and indirectly, for users and customers principally with:

•		data providers that provide detailed utilization and outcomes information to hospitals;
•		healthcare consulting companies;

•		companies or organizations that provide or maintain online healthcare information;
•		vendors of healthcare information, products and services distributed through other means, including direct sales, mail and fax messaging;
•		companies and organizations that provide or maintain general purpose consumer online services that provide access to healthcare content and services;
•		companies and organizations that provide or maintain public sector and non-profit websites that provide healthcare information and services without advertising or commercial sponsorships;
•		companies and organizations that provide or maintain web search and retrieval services and other high-traffic websites; and
•		publishers and distributors of traditional media, some of which have established or may establish websites.

Some of these competitors are larger, have greater financial, marketing, technical and product development resources and have more experience in providing healthcare information than us. These competitors may also be better known than us. We cannot assume that we will be able to compete successfully against these competitors.

The recent global economic downturn may impact our business, operating results or financial condition.

The recent global economic downturn has caused disruptions and volatility in the global financial markets and increased rates of default and bankruptcy, and has impacted the levels of consumer spending. These and other macroeconomic developments could negatively affect our business, operating results or financial conditions. For example, current or potential customers, such as hospitals, may delay or decrease spending with us or may not pay us or may delay payments for previously purchased products or services. If consumer spending continues to decrease, this may result in fewer clicks on our advertisers’ ads displayed on our websites and fewer purchases of our consumer reports. Reduction in healthcare spending, as in elective surgeries, may adversely affect our business. Also, if the banking system or the financial markets remain volatile, our investment portfolio may be impacted and the values and liquidity of our investments could be adversely affected.

Acquisitions could be risky and may place significant strain on our management systems and resources, which could negatively impact our operations.

In 2008 we acquired certain operating assets of Adviware, and may acquire other companies or businesses in the future. Acquisitions of companies entail numerous risks, including:

•		potential inability to successfully integrate acquired operations and products or to realize cost savings or other anticipated benefits from integration;
•		loss of key employees of acquired operations;
•		the difficulty of assimilating geographically dispersed operations and personnel of the acquired companies;
•		the potential disruption of our ongoing business;
•		unanticipated expense related to acquisitions, including significant transaction costs, which, under accounting rules, are required to be expensed rather than capitalized;
•		the impairment of relationships with employees and customers of either an acquired company or our own business;
•		the potential for acquisitions to result in dilutive issuances of our equity securities; and
•		the potential unknown liabilities associated with acquired business.

As a result of such acquisitions, we may have significant assets that include goodwill and other purchased intangibles. The testing of this goodwill and intangibles for impairment under established accounting guidelines requires significant use of judgment and assumptions. Changes in business conditions could require adjustments to the valuation of these assets. In addition, losses incurred by a company in which we have an investment may have a direct impact on our financial statements or could result in our having to write-down the value of such investment. Any such problems in integration could harm our growth strategy and distract our management, and could place a significant strain on our management systems and resources.

RISKS RELATED TO HEALTHCARE INFORMATION AND THE INTERNET

Healthcare reform and the cost of regulatory compliance could negatively affect our business.

The healthcare industry is heavily regulated. In the ordinary course of business, healthcare entities and companies that do business with them are subject to state and federal regulatory scrutiny, supervision, oversight and control. These various laws, regulations and guidelines affect, among other matters, the provision, licensing, labeling, marketing, promotion and reimbursement of healthcare services and products. Our failure or the failure of our customers to comply with any applicable legal or regulatory requirements, or any investigation or audit of our or our customers’ practices could:

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result in limitation or prohibition of business activities;

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subject us or our customers to legal fees and expenses and adverse publicity; or

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increase the costs of regulatory compliance and, if found by a court of competent jurisdiction to have engaged in improper practices, subject us or our customers to criminal or civil monetary fines or other penalties

A federal law commonly known as the Anti-Kickback Statute prohibits kickbacks, rebates and bribes in return for referrals of federal healthcare program services. This law provides an extremely broad base for finding violations. Any remuneration, direct or indirect, offered, paid, solicited or received in return for referrals of patients or business for which payment may be made in whole or in part under Medicare or Medicaid could be considered a violation of the law. The statute also prohibits payments made to anyone to induce them to “recommend purchasing, leasing or ordering any good, facility, service or item for which payment may be made in whole or in part” by Medicare. Similar laws exist in some states.

We believe that our operations comply with applicable legal regulatory requirements of the Anti-Kickback Statute. Nevertheless, some of these laws have been applied to payments by physicians for marketing and referral services and could constrain our relationships, including financial and marketing relationships with customers such as hospitals. Absent specific guidance from the OIG, our regulatory compliance cannot be prospectively confirmed. It also is possible that additional or more restrictive laws, regulations or guidelines could be adopted in the future.

A federal law know as the “Stark Law” prohibits a physician from referring a Medicare patient for certain DHS to an entity with which the physician or an immediate family member has a financial relationship, unless the referral is protected by one or more exceptions provided by law. DHS includes a wide range of ancillary healthcare services in a number of broad categories, including all inpatient and outpatient hospital services. Violations of the Stark Law may result in a number of penalties, including Medicare nonpayment of claims for DHS provided as a result of a prohibited referral, an obligation to refund amounts paid as a result of a prohibited referral and civil monetary penalties for knowing violations. While the Stark Law does not apply to our business, our hospital and physician customers must comply with the Stark Law. We do not believe that our business subjects our customers to risk under the Stark Law, though interpretations of the Stark Law are constantly evolving and changes in the law itself or the regulatory guidance could impair our business.

Federal criminal statutes prohibit knowingly filing false claims or making false statements or causing false statements to be made by others, and certain civil statutes prohibit the filing of claims or causing the filing of claims that one knows were false. Criminal penalties include fines and imprisonment. Civil penalties under the FCA include fines of up to $11,000 per claim plus treble damages, for each filed claim. Although we are not filing claims ourselves, liability under the FCA can extend to those who cause claims to be filed. In addition, under the Deficit Reduction Act of 2005, states are encouraged to enact their own false claims laws, which could increase the number of false claims suits at the state level. To the extent that consulting advice provided to our customers could be construed as aiding or abetting the presentation of false claims by the customers, we could be subject to false claims liability.

In addition to the Anti-Kickback Statute, filing of false claims to the federal government is prohibited by federal criminal and civil statutes. Criminal provisions prohibit knowingly filing false claims, making false statements or claims to be made by others. Civil provisions under the FCA prohibit the filing of claims, or causing the filing of claims, that the person filing knew were false. Criminal penalties include fines and imprisonment. Civil penalties under the FCA include fines up to $11,000 per claim, plus treble damages, for each claim filed. In addition, under the Deficit Reduction Act of 2005, states are encouraged to enact their own false claims laws, which could increase the number of false claims suits at the state level. Although we are not filing claims ourselves, liability under the FCA can extend to those who cause the filings of claims. In May 2009, the President signed the Fraud Enforcement and Recovery Act which amended the FCA, granting the government and whistleblowers greater enforcement latitude. To the extent that consulting advice provided to our customers could be construed as aiding or abetting the presentation of false claims to the government by our customers, there could be false claims liability, although we endeavor to provide advice that cannot be so construed.

The internet is subject to many legal uncertainties and potential government laws and regulations that may decrease usage of our websites, increase our cost of doing business or otherwise have a damaging effect on our business.

Laws and regulations in jurisdictions throughout the world have been adopted and will likely continue to be adopted in the future that address internet, data and privacy related issues, including online content, user privacy, pricing, and quality of products and services. This legislation and related enforcement activities could increase our cost of doing business and negatively affect our business. Moreover, the manner in which laws and regulations passed prior to the popular use of the internet may be interpreted to govern issues like property ownership, libel, negligence and personal privacy are applicable to the internet may continue to evolve over time. Currently, U.S. privacy law consists of disparate state and federal statutes regulating specific industries that collect personal data. Some of these laws predate and therefore do not specifically address online activities and information. From time to time, comprehensive legislative and regulatory privacy proposals have been offered for consideration by federal, state and local governments in the United States and may be adopted in the future. Laws and regulations in countries outside the United States restrict the availability of new markets in other countries where those markets would otherwise be available for expansion. Moreover, restrictive privacy and other laws outside the United States serve as a model for new and more restrictive laws inside the United States at both the federal and the state levels. Any new law or regulation pertaining to the internet, or the application or interpretation of existing laws, could decrease usage of our websites, increase our cost of doing business or otherwise cause our business to suffer.

We may be subject to claims brought against us as a result of content we provide.

Consumers access health-related information through our online services, including information regarding particular medical conditions and possible adverse reactions or side effects from medications. If our content, or content we obtain from third parties, contains inaccuracies, it is possible that consumers, health plan members or others may sue us under various causes of action. We may also be sued by physicians or other healthcare providers for claims like libel, slander, defamation and other claims of injury as the result of our content.

If we fail to comply with current or future laws or regulations governing the collection, dissemination, use and confidentiality of patient health information, our business could suffer.

Consumers sometimes enter private information about themselves or their family members when using our services. Also, our systems record use patterns when consumers access our databases that may reveal health-related information or other private information about the user. In addition, information regarding employee usage of healthcare providers and facilities can also be compiled by our systems in connection with services we offer to employers and other payers. Numerous federal and state laws and regulations govern collection, dissemination, use and confidentiality of patient-identifiable health information, including:

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state privacy and confidentiality laws;

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state laws regulating healthcare professionals, such as physicians, pharmacists and nurse practitioners;

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Medicaid and Medicare laws;

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HIPAA and related rules proposed by the Healthcare Financing Administration; and

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CMS standards for electronic transmission of health data.

Congress may consider future legislation that would establish more strict standards for protection and use of health information. While we are not gathering patient health information at this time and we are not a covered entity under HIPAA, other third-party websites that consumers access through our websites and employees, payers and other customers may not maintain systems to safeguard any health information they may be collecting. In some cases, we may place our content on computers that are under the physical control of others, which may increase the risk of an inappropriate disclosure of information. For example, we contract out the hosting of our websites to a third-party. A portion of the American Recovery and Reinvestment Act of 2009, known as the Health Information Technology for Economic and Clinical Health Act (the HITECH Act), expanded the scope and application of HIPAA, including among other things, applying certain privacy and security provisions directly to business associates. Application of these rules to business associates is a significant change. Previously, if a breach involving a business associate occurred, the covered entity could just terminate the contract if the breach was not remedied. Responsibility and liability rested with the covered entity. Under the HITECH Act, the business associate now has responsibility and liability directly for a breach.

Under the HITECH Act, covered entities and business associates will face criminal and civil liability for failure to comply with HIPAA. Criminal penalties may be imposed against persons who obtain or disclose protected health information without authorization. In addition, a state’s Attorney General can bring civil actions against a person on behalf of residents adversely affected by violations of either HIPAA or the HITECH Act. The Attorney General can either seek to enjoin further violations or obtain monetary damages on behalf of the residents harmed. DHSS is also beginning to perform periodic audits of healthcare providers to ensure that required policies under the HITECH Act are in place. Finally, individuals harmed by violations will be able to recover a percentage of monetary penalties or a monetary settlement based upon methods established by DHHS for this private recovery. In addition, future laws or changes in current laws may necessitate costly adaptations to our systems.

Online security breaches could harm our business.

Our security measures may not prevent security breaches. Substantial or ongoing security breaches on our system or other internet-based systems could reduce user confidence in our websites, causing reduced usage that would adversely affect our business. The secure transmission of confidential information over the internet is essential to maintain confidence in our websites. We believe that consumers generally are concerned with security and privacy on the internet, and any publicized security problems could inhibit the growth of our provision of healthcare information on the internet.

We will need to incur significant expense to protect and remedy against security breaches when we identify a significant business risk. Currently, we do not store sensitive information, such as patient information or credit card information, on any public-facing server. If we launch services that require us to gather sensitive information, our security expenditures will increase significantly.

A party that is able to circumvent our security systems could steal proprietary information or cause interruptions in our operations. Security breaches could also damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies may not be adequate to reimburse us for losses caused by security breaches. We also face risks associated with security breaches affecting third parties conducting business over the Internet or customers and others who license our data.

OTHER RISKS

Our certificate of incorporation and bylaws include anti-takeover provisions that may deter or prevent a change of control.

Some provisions of our certificate of incorporation and bylaws and provisions of Delaware law may deter or prevent a takeover attempt, including an attempt that might result in a premium over the market price for our common stock. Our certificate of incorporation requires the vote of 66 2/3% of the outstanding voting securities in order to effect certain actions, including a sale of substantially all of our assets, certain mergers and consolidations and our dissolution or liquidation, unless these actions have been approved by a majority of our directors. Our certificate of incorporation also authorizes our Board of Directors to issue up to 2,000,000 shares of preferred stock having such rights as may be designated by our Board of Directors, without stockholder approval. Our bylaws provide that stockholders must follow an advance notification procedure for certain nominations of candidates for the Board of Directors and for certain other stockholder business to be conducted at a stockholders meeting. The General Corporation Law of Delaware also restricts certain business combinations with interested stockholders upon their acquisition of 15% or more of our common stock.

All of these provisions could make it more difficult for a third party to acquire, or could discourage a third party from attempting to acquire, control of us, and thereby could prevent our stockholders from receiving a premium for their shares. In addition, the foregoing provisions could impair the ability of existing stockholders to remove and replace our management and/or our Board of Directors.

We have no intention to pay dividends on our common stock.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain all future earnings to finance the expansion of our business. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors. As a result, the success of an investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

Item 1B.		Unresolved Staff Comments

None

Item 2.		Properties

We lease approximately 60,400 square feet of office space which includes our corporate headquarters, and ancillary space, in Golden, Colorado, with expirations on May 31, 2011 and December 31, 2010, respectively. We are in the process of evaluating our needs to accommodate our anticipated future growth.

Item 3.		Legal Proceedings

Indemnification of our Chief Executive Officer and Derivative Complaint

For the year ended December 31, 2009, we provided indemnification to our Chief Executive Officer, Kerry R. Hicks, for legal fees totaling approximately $1.0 million. The legal proceedings arose from loans that Mr. Hicks and three other executive officers provided to us in December 1999 in the amount of $3,350,000 (including $2,000,000 individually loaned by Mr. Hicks). These loans enabled us to purchase in December 1999 a minority interest in an internet healthcare rating business that has become our current healthcare provider rating and advisory services business. This purchase was critical to our business because we had agreed with the minority interest holder that if we failed to purchase the holder’s interest by December 31, 1999, we would relinquish control and majority ownership to the holder. In March 2000, the executive officers converted our obligations to them (including the $2,000,000 owed to Mr. Hicks) into our equity securities in order to induce several private investors to invest an aggregate of $14,800,000 in our equity securities.

The executive officers personally borrowed money from our principal lending bank in order to fund the December 1999 loans to us. In early 2001, the bank claimed that Mr. Hicks was obligated to pay amounts owed to the bank by a former executive officer who was unable to fully repay his loan; Mr. Hicks denied this obligation. In October 2002, the bank sold the note to an affiliate of a collection agency (the collection agency and the affiliate are collectively referred to as the “collection agency”). Although the bank informed the collection agency in July 2003 of the bank’s conclusion that Mr. Hicks was not obligated under the former executive’s promissory note issued to the bank, the collection agency commenced litigation in September 2003 in Tennessee federal district court to collect the remaining balance of approximately $350,000 on the note and named Mr. Hicks as a defendant. On motion by Mr. Hicks, the court action was stayed, and Mr. Hicks commenced an arbitration proceeding against the collection agency in October 2003, seeking an order that he had no liability under the note and asserting claims for damages. The bank was added as a party in March 2004.

The bank repurchased the note from the collection agency in December 2003 and resold the note to another third party in February 2004, so that Mr. Hicks’ obligation to repay the note was no longer at issue. The remaining claims included, among others, claims by the bank against Mr. Hicks for costs and expenses of collection of the loan, claims by the collection agency against Mr. Hicks for abuse of process and tortious interference with the relationship between the bank and the collection agency, and claims by Mr. Hicks against the bank for breach of fiduciary duty and fraud, and against the collection agency for abuse of process and defamation. Mr. Hicks also commenced litigation in Colorado state court against the other parties, as well as two individuals affiliated with the collection agency (together with the collection agency, the “collection agency parties”), based on similar claims. That case was removed to federal court by the defendants. Mr. Hicks later filed an amended complaint against the collection agency parties in federal district court for abuse of process, defamation and intentional infliction of emotional distress. The federal district court determined that Mr. Hicks’ claims should be submitted to the arbitration proceeding, but in January 2005, the arbitrator stayed Mr. Hicks’ federal court claims and the collection agency’s claims against Mr. Hicks for abuse of process and tortious interference until the other pending claims were considered. An arbitration hearing was held in February 2005 on the other claims submitted by the parties.

In April 2005, the arbitrator ruled that the collection agency was liable to Mr. Hicks in the amount of $400,000 for emotional distress and other maladies as well as attorneys’ fees in the amount of $15,587 with interest as a result of the collection agency’s abuse of process in initiating the action in Tennessee federal district court. The arbitrator determined that the bank had no liability.

The collection agency sought reconsideration of the ruling by the arbitrator, who denied the request. Mr. Hicks filed a motion with the federal district court to confirm the arbitration award, and the court confirmed the award in October 2005. The collection agency appealed the federal district court’s confirmation of the arbitration award entered in favor of Mr. Hicks. In February 2007, the 10th Circuit Court of Appeals affirmed the district court’s confirmation of the April 2005 award entered in favor of Mr. Hicks. This award has not been paid to Mr. Hicks.

The hearing on the remaining matters in the arbitration was held in February and March 2006. The arbitrator who heard these claims died unexpectedly a few days after the arbitration hearing concluded. A new arbitrator was appointed, and the remaining matters were again heard by the new arbitrator in October 2006. Final briefings on the remaining matters in the arbitration were concluded in April 2007. In May 2007, the arbitrator entered an award in favor of Mr. Hicks in connection with his claims of defamation and outrageous conduct. For these claims, the arbitrator awarded Mr. Hicks compensatory damages from the collection agency parties totaling $950,000. The arbitrator also awarded Mr. Hicks punitive damages totaling $950,000 against Daniel C. Cadle, Buckeye Retirement Co., LLC, Ltd and The Cadle Company and $10,000 against William Shaulis, Buckeye Retirement Co., LLC, Ltd. and The Cadle Company. Additionally, the arbitrator awarded Mr. Hicks prejudgment interest in the approximate amount of $300,000. With respect to the collection agency parties’ claims against Mr. Hicks, the arbitrator ruled in favor of Mr. Hicks. The arbitrator ruled against Mr. Hicks with respect to his abuse of process claim. In July 2008, the U.S. District Court confirmed the arbitrator’s May 2007 order and subsequent final award in favor of Mr. Hicks, with the exception of the award of prejudgment interest. This award has not been paid to Mr. Hicks. We do not know what other actions the collection agency parties may take, when Mr. Hicks will be paid the awards, or when we may receive reimbursement for any or all of the indemnification expenses we have incurred and continue to incur in these matters.

On July 10, 2007, a U.S. District Court Judge entered an order precluding Daniel C. Cadle, one of the collection agency parties, from engaging in 13 acts that the arbitrator found to be outrageous. On July 20, 2007, a County Court Judge in Jefferson County, Colorado, entered a Permanent Civil Protection Order against Daniel C. Cadle. The Protection Order requires that Mr. Cadle stay at least 250 yards from Mr. Hicks, his residences and our headquarters. On July 26, 2007, Mr. Cadle appealed the Civil Protection Order entered by the County Court Judge in Jefferson County, Colorado, to the State District Court. On January 15, 2008, the State District Court affirmed the Civil Protection Order entered by the County Court. On December 2, 2008, the Colorado Supreme Court denied Mr. Cadle’s request for further review. Thus, the Permanent Civil Protection Order remains in effect.

In July 2007, Mr. Hicks filed a motion for leave to file a second amended complaint and to refer claims to arbitration in which he alleged that certain of the collection agency parties, after the October 2006 arbitration hearing, continued to engage in conduct substantially similar to that upon which the arbitrator entered his compensatory and punitive damages order in May 2007. The collection agency parties opposed the relief sought by Mr. Hicks. On October 17, 2007, the court granted Mr. Hicks’ motion for leave to file a second amended complaint. A supplemental complaint asserting claims for defamation and outrageous conduct against certain of the collection agency parties was filed on October 29, 2007, in accordance with the court’s order. Those claims have been referred to arbitration. The claims Mr. Hicks asserts in the arbitration are for defamation and outrageous conduct against the collection agency parties. Mr. Hicks has filed motions to attempt to narrow the issues to be heard based upon the findings made by the arbitrator in his May 2007 ruling. The collection agency parties have raised claims against Mr. Hicks for abuse of process, “frivolous and spurious lawsuit” and “attorneys’ fees.” Mr. Hicks filed a motion to dismiss the counterclaims. All counterclaims have been dismissed voluntarily or by order of the arbitrator, except the Buckeye Respondents’ counterclaim for abuse of process. The hearing on these claims commenced on August 10, 2009 for one week. Additional hearing days were added and the presentation of evidence concluded in December 2009. By Order dated February 18, 2010, the arbitrator found in favor of Mr. Hicks in connection with his defamation and outrageous conduct claims against Daniel C. Cadle and awarded Mr. Hicks compensatory and punitive damages in the amount of $3.2 million. The arbitrator found that the corporate collection agency parties were not responsible for this award. The arbitrator found in favor of Mr. Hicks in connection with the counterclaim for abuse of process that was brought against him. On February 25, 2010, Mr. Hicks filed a motion with the arbitrator seeking post-award, pre-judgment interest.

This arbitration award, like the two prior arbitration awards entered in favor of Mr. Hicks, will be subject to the confirmation process. We understand that Mr. Hicks will file a motion to confirm the arbitration award.

On October 7, 2008, the U.S. District Court entered judgment in favor of Mr. Hicks on both arbitration awards and certified the judgment as immediately appealable. The District Court reversed the arbitrator’s award of prejudgment interest. On October 14, 2008, the Clerk of Courts entered judgment as follows: in favor of Mr. Hicks and against The Cadle Company, Buckeye Retirement Co., LLC. Ltd., jointly and severally, in the amount of $415,587; against The Cadle Company, Buckeye Retirement Co., LLC. Ltd., and Daniel C. Cadle, jointly and severally, for compensatory and punitive damages in the amount of $1.7 million; and against The Cadle Company, Buckeye Retirement Co., LLC. Ltd., and William E. Shaulis, jointly and severally, for compensatory and punitive damages in the amount of $210,000; with post judgment interest accruing at the legal rate of 1.59%. The collection agency parties have appealed the judgment to the 10th Circuit Court of Appeals, and Mr. Hicks has appealed the denial of his award of prejudgment interest.

On February 11, 2009, the U.S. District Court in Colorado permitted registration of the judgment in the Northern District of Ohio, where Mr. Hicks believes there are assets of the collection agency parties. Mr. Hicks retained counsel in Ohio to collect on the judgment. On February 27, 2009, the collection agency parties posted a cash supersedeas bond in an amount exceeding $2.3 million with the U.S. District Court in Colorado.

On December 7, 2009, the 10th Circuit Court of Appeals affirmed the District Court’s entry of judgment in favor of Mr. Hicks and further ordered that he be awarded approximately $400,000 in post-award, pre-judgment interest. The collection agency parties thereafter sought further review before the 10th Circuit, which was rejected by Order dated February 8, 2010. On February 18, 2010, the U. S. District Court amended its judgment to include the award of post-award, pre-judgment interest, making the total judgment slightly in excess of $2.7 million. We understand that Mr. Hicks will continue to collect the amounts due him under the amended judgment, including collecting on the bond and taking other appropriate action.

Our Board of Directors initially agreed to indemnify Mr. Hicks in December 2004. The determination to indemnify Mr. Hicks was based on, among other things, the fact that the dispute related to Mr. Hicks’ efforts and personal financial commitment to provide funds to us in December 1999, without which we likely would not have remained viable. Mr. Hicks has advised us that he intends to reimburse us for all indemnification expenses we have incurred and continue to incur from the proceeds of any final awards paid to him, net of any income taxes payable by him resulting from the awards.

By a letter to our Board of Directors dated February 13, 2006, Daniel C. Cadle made allegations directed at us, Mr. Hicks, the attorneys representing Mr. Hicks in the arbitration and the late arbitrator. The principal allegations appear to be that we, Mr. Hicks, and the attorneys conspired to enter into an illegal arrangement with an account officer of the bank whose loan was the initial subject of the arbitration, without the bank’s knowledge, that enabled us to indirectly obtain funds from the bank and, in conspiracy with the late arbitrator, prevented the collection agency parties from reporting the alleged conduct to government authorities. Mr. Cadle threatened suit if he was not paid $10.3 million. We believe these allegations are absurd and completely without merit. To our knowledge, neither Mr. Cadle nor any of the other collection agency parties has sought to assert any such “claims” against us in the arbitration. We will vigorously contest any such litigation that may be brought against us by the collection agency parties.

In addition, in September and October 2006, our Board of Directors and our counsel received communications from counsel to Daniel C. Cadle demanding a review of the indemnification payments made by us on Mr. Hicks’ behalf and raising certain other issues. In December 2006, Daniel C. Cadle filed a putative shareholder derivative complaint in the U.S. District Court for the District of Colorado against several of our current and former members of our Board of Directors, Mr. Hicks and our Chief Financial Officer (collectively, the “defendants”). Mr. Cadle alleged, among other items, that the defendants wasted and continued to waste corporate assets and opportunities by permitting the indemnification described above, that Mr. Hicks converted assets properly belonging to us and our stockholders to his own use and benefit by accepting the indemnification payments and that the defendants violated Colorado and Delaware state and federal law by concealing material information or making materially misleading statements in our quarterly and annual financial reports regarding these matters. Mr. Cadle sought a recovery to our company of the attorneys fees paid to indemnify Mr. Hicks, participatory damages to himself personally as well as any attorneys’ fees he incurred in this matter. Mr. Cadle also sought injunctive relief to prevent us from continuing to indemnify Mr. Hicks. In April 2007, the defendants filed a motion to dismiss the shareholder derivative complaint. The defendants’ motion to dismiss the shareholder derivative complaint was granted by the U.S. District Court in June 2007, and the plaintiff appealed the dismissal of the complaint to the 10th Circuit Court of Appeals. In April 2008, the 10th Circuit Court of Appeals affirmed the dismissal of the shareholder derivative complaint. In June 2008, the U.S. District Court denied our motion for attorneys’ fees in this case.

Gotham/Primarius Complaint

In March 2007, Gotham Holdings, LP, Primarius Partners LP, Primarius Offshore Partners LTD., Primarius Focus LP and Primarius China Fund LP (collectively, the “Plaintiffs”) commenced an action in the United States District Court, Southern District of New York against us, MDB Capital Group (“MDB”) and Essex Woodlands Health Ventures (“Essex”). The case relates to sales made by Essex in December 2005 and February 2006 of approximately 9.1 million shares of our common stock to a number of investors, including the Plaintiffs. These sales occurred under a registration statement that we initially filed with the Securities and Exchange Commission (the “SEC”) in May 2005. Essex engaged a broker, MDB, in connection with the sales. We did not receive any proceeds from these sales.

The Plaintiffs allege claims under Section 10(b) of the Exchange Act and Rule 10b-5, Section 12 of the Securities Act, fraud with respect to alleged material misrepresentations and/or omissions of material fact and negligent misrepresentation in connection with the Plaintiffs’ purchase of our common stock. As they relate to us, the claims arise out of our SEC filings and presentations made by Company management at the request of Essex, to Plaintiffs (or parties allegedly related to the Plaintiffs) in December 2005 and February 2006. Specifically, the claims relate to alleged misrepresentations by Company management regarding the likelihood that an agreement we had with Hewitt Associates would move to full implementation.

In July 2007, we filed a motion to dismiss the Gotham/Primarius complaint. The Plaintiffs responded by filing a first amended complaint in August 2007. In the first amended complaint, the Plaintiffs asserted the same four claims against us that they had made in the original complaint, and three new entities were added as Plaintiffs (Willow Creek Capital Partners, LP, Willow Creek Capital Partners II, LP, and Willow Creek Offshore, Ltd.). We filed a motion to dismiss the first amended complaint in September 2007. In October 2007, the court granted our motion to dismiss the first amended complaint, with leave given to the Plaintiffs to file a second amended complaint.

In October 2007, the Plaintiffs filed a second amended complaint against us, which contained allegations that were substantially similar to those pled in the first amended complaint. We filed a motion to dismiss the second amended complaint in December 2007.

The court conducted oral argument on the motion to dismiss the second amended complaint in January 2008, at which time it denied our motion to dismiss the common law fraud and Section 10(b) claims, but deferred a decision on the Section 12 and negligent misrepresentation claims. In February 2008, the court issued an opinion dismissing the Section 12 claim, but maintaining the negligent misrepresentation claim because dismissal at that time was premature. We will have an opportunity to renew our argument once the court has decided which state’s law applies.

In December 2008, Plaintiffs moved to file a third amended complaint. Following argument on the motion, the court granted the Plaintiffs leave to file an amended complaint. Plaintiffs filed the third amended complaint on February 17, 2009. The third amended complaint adds Kerry Hicks, our Chief Executive Officer, as a defendant and asserts claims against him for violation of Section 20(a) of the Exchange Act and for fraud. Aside from the addition of Mr. Hicks as defendant, the substantive allegations of the third amended complaint are the same as the second amended complaint. Discovery in the matter is ongoing. Documents have been exchanged, but no depositions have yet taken place. There are numerous outstanding discovery disputes pending before the court. Most recently, the Plaintiffs filed a motion asking the court to order the parties to mediation, which we have opposed.

We are subject to other legal proceedings and claims that arise in the ordinary course of our business. In the opinion of management, these actions are unlikely to materially affect our financial position.

Item 4.		Reserved

Executive Officers of the Registrant

The following table sets forth certain information concerning our executive officers as of December 31, 2009. The executive officers are elected by our Board of Directors to serve for one year or until their successors are duly elected and qualified.

NAME		AGE				POSITION
Kerry R. Hicks			50			Chairman, President and Chief Executive Officer
David G. Hicks			51			Executive Vice President
Samantha Collier, MD			42			Executive Vice President and Chief Medical Officer
Wes Crews			46			Chief Operating Officer
Allen Dodge			41			Executive Vice President, Chief Financial Officer, Secretary and Treasurer
Andrea Pearson			41			Executive Vice President

KERRY R. HICKS, one of our founders, has served as our Chief Executive Officer and one of our directors since our inception in 1995. He has served as Chairman of the Board since December 2004. He also served as our President from our inception until November 1999 and since March 2002.

DAVID G. HICKS has served as our Executive Vice President since November 1999. He was Senior Vice President of Information Technology from May 1999 to November 1999 and Vice President of Management Information Systems from March 1996 until May 1999.

SAMANTHA COLLIER, MD has served as our Executive Vice President and Chief Medical Officer since March 2009. She was Senior Vice President of Medical Affairs from January 2005 to March 2009 and a Provider Services Consultant from March 2002 to January 2005.

WES CREWS has served as our Chief Operating Officer since April 2009. Prior to joining us, he was employed with OnTargetjobs, the leading niche job board company that provides online career services, serving as Executive Vice President and General Manager from October 2008 to April 2009, Chief Executive Officer of BioSpace from November 2005 to October 2008, and Chief Executive Officer of Hcareers from January 2008 to October 2008 (BioSpace and Hcareers were business units within OnTargetjobs). From May 2002 to November 2005, he was President and Chief Executive Officer of Infotrieve. Mr. Crews was Chief Operating Officer of The Gale Group, a subsidiary of the Thomson Corporation, from October 1998 to November 2001.

ALLEN DODGE has served as our Executive Vice President since July 2006 and as Chief Financial Officer since May 2001. He was Senior Vice President — Finance from May 2001 to July 2006 and Vice President — Finance/Controller from March 2000 to May 2001. He also served as Corporate Controller from September 1997 to March 2000.

ANDREA PEARSON has served as our Executive Vice President since December 2009. From December 2008 to December 2009, she served as Senior Vice President of Internet Strategy and Operations. Prior to joining HealthGrades, she was employed with Mapquest.com, serving as Vice President and General Manager at MapQuest.com from 2006 to 2008 and Director and General Manager from 2005 to 2006.

Kerry R. Hicks and David G. Hicks are brothers.

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is traded on the Nasdaq Global Select Market under the symbol “HGRD”. The following table sets forth for the indicated periods the high and low sales prices for our common stock as reported on the Nasdaq Global Select Market.

		HIGH				LOW
Year Ended December 31, 2008 First Quarter		$	6.13			$	5.00
Second Quarter			5.80				4.29
Third Quarter			4.54				2.81
Fourth Quarter			3.10				1.16
Year Ended December 31, 2009 First Quarter		$	2.82			$	1.90
Second Quarter			4.49				1.63
Third Quarter			5.30				3.76
Fourth Quarter			5.08				3.99

Holders of Record

As of February 10, 2010, there were approximately 204 holders of record of our common stock, and the closing price of our common stock was $4.47 per share as reported by the Nasdaq Global Select Market. Because many of our shares of common stock are held by brokers and other institutional investors on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

Dividend Policy

We have never paid or declared any cash dividends and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain any future earnings for use in our business.

Performance Graph

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) or incorporated by reference into any filing of HealthGrades under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by the specific reference in such filing.

This graph assumes an investment of $100 in our common stock, the Nasdaq Stock Market (US) and the Nasdaq Computer & Data Processing Index on December 31, 2004, and covers the period from December 31, 2004 through December 31, 2009 and dividend reinvestment has been assumed. We have never paid dividends on our common stock and have no present plans to do so. Such returns are based on historical results and are not intended to suggest future performance.

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

		12/31/04				12/30/05				12/29/06				12/31/07				12/31/08				12/31/09
Health Grades, Inc.		$	100.00			$	217.97			$	154.82			$	205.16			$	71.04			$	147.92
		$	(2.90	)*		$	(6.32	)*		$	(4.49	)*		$	(5.95	)*		$	(2.06	)*		$	(4.29	)*
Nasdaq Stock Market (US)		$	100.00			$	102.13			$	112.18			$	121.67			$	58.64			$	84.30
Nasdaq Computer & Data Processing Index		$	100.00			$	103.39			$	116.07			$	141.83			$	81.65			$	133.45

On June 22, 2006, our Board of Directors authorized the repurchase of up to 3,000,000 shares of our common stock under a stock repurchase program that does not have an expiration date and may be limited or terminated at any time without prior notice. On March 19, 2008, our Board of Directors approved an increase of an additional 500,000 shares to be repurchased under the current repurchase program. On July 22, 2008, our Board of Directors increased the stock repurchase authorization from 3,500,000 shares to 5,000,000 shares. Under the repurchase program, purchases may be made at management’s discretion from time to time at prevailing prices, subject to certain restrictions on volume, pricing and timing. During the twelve months ended December 31, 2009, we did not repurchase any shares of our common stock under the stock repurchase program. From the inception of the repurchase program through December 31, 2009, we have repurchased 4,242,202 shares of our common stock recorded as treasury stock at an average purchase price per share of $4.61, for an aggregate cost of $19,572,461, which includes commissions and fees of $169,936.

The following table provides information regarding common stock purchases by us for the three months ended December 31, 2009.

Issuer Purchases of Equity Securities

Total

Number of

Maximum

Shares

Number of

Purchased

Shares That

as Part of

May Yet Be

Total

Publicly

Purchased

Number of

Average

Announced

Under the

Shares

Price Paid

Plans or

Plans or

Period

Purchased (1)

per Share

Programs

Programs

October 1, 2009 through October 31, 2009

2,917

$

4.78

—

757,798

November 1, 2009 through November 30, 2009

463

4.34

—

757,798

December 1, 2009 through December 31, 2009

16,344

4.13

—

757,798

Total

19,724

$

4.23

—

757,798

Item 6.		Selected Financial Data

Statement of Operations Data

		Year Ended December 31,
		2009				2008				2007				2006				2005
Ratings and advisory revenue		$	52,498,159			$	39,663,384			$	32,741,610			$	27,764,021			$	20,794,173
Income from operations			10,466,547				6,685,521				9,198,853	(1)			4,817,122				3,942,424
Net income		$	7,102,688			$	4,690,769			$	6,748,171	(2)		$	3,181,510			$	4,139,853	(4)
Net income per common share (basic)		$	0.26			$	0.17			$	0.23	(3)		$	0.11			$	0.15
Weighted average number of common shares used in computation (basic)			27,618,892				28,405,348				29,053,717				28,883,381				27,039,057
Net income per common share (diluted)		$	0.23			$	0.14			$	0.20	(3)		$	0.09			$	0.12
Weighted average number of common shares and common share equivalents used in computation (diluted)			31,195,096				32,836,987				34,060,414				34,079,526				34,833,521

EPS information for all years presented incorporates accounting guidance regarding unvested share-based payment awards with non-forfeitable dividend rights are to be considered participating securities.

Balance Sheet Data

		DECEMBER 31, 2009				DECEMBER 31, 2008				DECEMBER 31, 2007				DECEMBER 31, 2006				DECEMBER 31, 2005
Working capital (deficit)		$	5,578,246			$	(2,059,954	) (1)		$	10,222,065			$	7,027,821			$	5,024,057
Total assets			46,877,938				35,085,170				36,935,329				31,019,585				23,844,473
Total long-term debt			—				984				2,387				3,863				5,254

Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

In evaluating our financial results and financial condition, management has focused principally on revenue growth and client retention, which we believe are key factors affecting both our results of operations and our cash flow from operations. Our increased revenue for the year ended December 31, 2009, as compared to the year ended December 31, 2008, reflected our success in several Provider Services and Internet Business Group product areas. For our Provider Services business group, we continued adding new hospital clients to our Strategic Quality Partnership (“SQP”), Strategic Quality Initiative (“SQI”), Quality Assessment (“QA”) and Quality Assessment and Improvement (“QAI”) programs and improved our retention rate for existing clients. For our Internet Business Group, we have experienced significant growth as a result of increased traffic to our websites, which include www.healthgrades.com and www.WrongDiagnosis.com. The increase in traffic has led to increased revenue from internet advertising and our quality reports and associated subscription services for physicians and hospitals.

Provider Services

In the current economic environment, both our hospital clients and prospective clients are facing significant financial challenges. In a recent study published by a leading hospital association, 55% of all hospitals are experiencing a moderate to severe decrease in inpatient admissions and 59% are experiencing a moderate to severe decrease in elective procedures. The challenges hospitals are facing affect us through a lengthening of the sales cycle and through hospitals that would typically purchase our products choosing not to do so for budgetary reasons.

As our base of hospital clients grows, one of our principal objectives is to achieve a high rate of retention of these clients. An obstacle to maintaining high retention rates for our SQP and SQI clients is that clients may have lost their high quality ratings on any given contract anniversary date. In addition, for our contracts with hospitals that have also been awarded an overall hospital designation, such as our Distinguished Hospital Award for Clinical Excellence, we have found that in many cases the hospitals terminate their contracts with us if they lose the overall hospital designation. For example, hospitals that contract with us for the SQP program typically have been awarded our Distinguished Hospital Award for Clinical Excellence. In addition, the contracts give hospitals the ability to utilize any additional marketing messages they have for our individual service lines. However, if a hospital does not achieve the Distinguished Hospital Award for Clinical Excellence each year of its agreement, it may not place as much value on the individual service line messages and, therefore, may terminate its agreement with us. We have continued to enhance the services provided in our agreements as well as add service line awards that are designed to increase our ability to retain these clients.

We typically receive a non-refundable payment for the first year of the contract term, which is typically three years, subject to a cancellation right that may be exercised by either the client or us on each annual anniversary date, upon contract execution. Because we typically receive payment in advance for each year of the term of these agreements, if we cannot continue to attract new hospital clients and retain a significant portion of our current clients, our cash flow from operations could be adversely affected.

For the years ended December 31, 2009 and 2008, we retained or signed new contracts representing approximately 80% of the annual contract value of hospitals whose contracts had first or second year anniversary dates. For contracts that expired at the end of their three-year term, our retention rate is lower, especially with respect to our QAI clients, than our retention rate for contracts at their first or second anniversary dates, when hospitals may exercise their cancellation option. Some of our QAI clients view a three-year term as the culmination of their improvement efforts rather than a starting point. The increase in our contract prices over the last several years also has caused some hospitals to decline renewal. Because we give our clients a fixed annual contract price during the three-year term, our price points for renewals may have increased significantly by the expiration of the contract.

Internet Business Group

Revenue from our Internet Business Group includes internet advertising and sponsorship, quality report sales and our Connecting Point and Patient Direct Connect offerings. Our Connecting Point and Patient Direct Connect programs are designed to increase the efficiency and profitability of participating sponsoring entities and physicians through marketing and patient education. Revenue from our Internet Business Group is dependent upon the traffic and perception of our websites. We continue to add staff with expert knowledge in search engine optimization (“SEO”) and internet advertising. Our efforts have led us to successfully monetize this increased traffic. As of February 2010, we have approximately 19,000,000 unique visitors per month of combined traffic from our principal web properties, www.healthgrades.com and www.WrongDiagnosis.com. This traffic ranks us fifth in the overall health site properties by ComScore, a global leader in measuring the digital world and the preferred source of digital marketing intelligence. This rank according to ComScore’s hybrid site measurement, which uses both the traditional panel of user measurement plus measurement beacons we set on our pages. In addition to our SEO efforts and licensing our data to other web publishers, the addition of www.WrongDiagnosis.com has contributed significantly to our growth.

We earn revenue from sales of advertisements on our websites through impression-based advertising (fees earned from the number of times an advertisement appears in pages viewed by users of our website) and activity based advertising (fees earned when our users click on an advertisement or text link to visit the websites of our merchant partners). Advertisements are served via direct placement, agency or ad network relationships. We believe that we have been gaining traction securing advertising in the medical device and pharmaceutical industries and have begun running direct advertising campaigns, which have premium market pricing.

Critical Accounting Estimates

In preparing our financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, revenues and expenses. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. We discuss below the most significant estimates and related assumptions used in the preparation of our financial statements, specifically those relating to our stock-based compensation.

We account for stock-based compensation in accordance with the fair value recognition provisions of accounting guidance. Share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating expected volatility. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited.

If actual results were to differ significantly from the estimates made, the reported results could be materially affected. Compensation cost we recognized under the fair value recognition provisions is recorded in the respective income statement categories based on the offered employees (e.g. sales and marketing, product development).

REVENUE AND EXPENSE COMPONENTS

The following descriptions of the components of revenues and expenses apply to the comparison of results of operations.

Ratings and advisory revenue. We currently operate in one business segment. We provide proprietary, objective healthcare provider ratings and advisory services to our clients. We generate revenue by providing our clients with information and other assistance that enable them to measure, assess, enhance and market healthcare quality. Our target clients include hospitals, employers, benefits consulting firms, payers, insurance companies and consumers. We typically receive a non-refundable payment from our hospital clients at the beginning of each year of the contract term (which is typically three years, subject to a cancellation right by either the client or us, on each annual anniversary date, with certain exceptions). We record the cash payment as deferred revenue that is then amortized to revenue on a straight-line basis over the respective year of the term. Certain of our products represent a one-time delivery of data. For these arrangements, we recognize revenue at the time that the data is delivered.

We also derive revenue from advertising displayed on our primary web properties, www.healthgrades.com and www.WrongDiagnosis.com. We recognize revenue from the sale of impression-based advertisements on our websites in the period in which the advertisements are delivered. The arrangements are evidenced by insertion orders that stipulate the types of advertising to be delivered and the pricing of such advertising. Our customers are billed based on pricing as determined by the insertion order, which may include certain discounts from list price.

We refer to the fees generated by users and charged to merchants based on the number of users who click on an advertisement or text link to visit the websites of our merchant partners as “activity-based advertising.” The arrangements for activity-based advertising are evidenced by a contract that stipulates the fee per activity. The fee becomes fixed and determinable upon a user clicking on an advertisement. These revenues are recognized in the period in which the activity occurs.

We expanded beyond remnant advertising networks, including Google AdSense, to expand the channels through which our inventory is sold, increasing the overall value of that inventory. This includes direct sales to advertising agencies that represent the pharmaceutical and medical device industries along with implementing in-text advertising and contracting with advertising networks.

Cost of ratings and advisory revenue. Cost of ratings and advisory revenue consists primarily of the costs associated with the delivery of services related to our SQI, SQP and QAI programs, as well as the costs incurred to acquire the data utilized in connection with these and other services such as our Health Management Suite of products. The cost of delivery of services relates primarily to the client consultants and support staff who provide our services. Also included in cost of ratings and advisory revenue are ad serving fees, which relate to the cost of displaying advertising on our websites.

Sales and marketing costs. Sales and marketing costs include salaries, wages and commission expenses related to our sales efforts, as well as other direct sales and marketing costs. For our SQP, SQI and QAI agreements, we pay our sales personnel commissions as we receive payment from our hospital clients. We typically receive a non-refundable payment for the first year (and subsequent years on each anniversary date) of the three-year contract term. In addition, we record the commission expense in the period it is earned, which is typically upon contract execution for the first year of the agreement and on each anniversary date for clients that do not cancel in the second or third year of the contract term. We record the commission expense in this manner because once a contract is signed, the salesperson has no remaining obligations to perform during the agreement in order to earn the commission.

Product development costs. We incur product development costs related to the development and support of our website and the development of applications to support data compilation and extraction for our consulting services. These costs are expensed as incurred unless the criteria for capitalization are met.

General and administrative expenses. General and administrative expenses consist primarily of salaries, employee benefits and other expenses for employees that support our infrastructure such as finance and accounting personnel, certain information technology employees and some of our support staff, facility costs, legal, accounting and other professional fees and insurance costs.

RESULTS OF OPERATIONS

Ratings and Advisory Revenue Overview

		Year ended				Year ended				Year ended
Product Area		December 31, 2009				December 31, 2008				December 31, 2007
Provider Services		$	31,696,825			$	29,261,442			$	25,130,997
Internet Business Group			18,557,246				8,392,948				6,132,250
Strategic Health Solutions			2,244,088				2,008,994				1,478,363
Total		$	52,498,159			$	39,663,384			$	32,741,610

YEAR ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008

Ratings and advisory revenue. Total ratings and advisory revenue for the year ended December 31, 2009 increased 32% to $52.5 million from $39.7 million for the year ended December 31, 2008 as a result of strong growth from both Provider Services and the Internet Business Group. For the years ended December 31, 2009 and 2008, approximately 50% and 62%, respectively, of our ratings and advisory revenue was derived from our marketing services to hospitals. Revenues from our marketing services to hospitals increased by $1.8 million to $26.4 million for the year ended December 31, 2009. This increase is principally due to the addition of new clients, as well as our continued success selling additional services to existing hospitals. For 2009, sales of additional services to existing hospitals accounted for nearly 33% of total new contracted sales. Approximately 35% and 21% of our ratings and advisory revenue was derived from sales of our website advertising and sponsorship, quality reports to consumers and Connecting Point and Patient Direct Connect programs for the years ended December 31, 2009 and 2008, respectively. Approximately 9% and 11% of our ratings and advisory revenue was derived from the sale of our quality improvement services to hospitals for the years ended December 31, 2009 and 2008, respectively. Finally, sales of our quality information to employers, benefits consulting firms, and health plans accounted for approximately 4% and 5% of our ratings and advisory revenue for the year ended December 2009 and 2008, respectively.

Provider Services. For the year ended December 31, 2009, Provider Services revenue, which principally includes sales of hospital marketing products and quality improvement products, was $31.7 million, an increase of $2.4 million, or 8% over the year ended December 31, 2008. This increase principally reflects sales of our marketing products to new hospital clients and increased sales to existing clients. For 2009, nearly 33% of all our new sales in our Provider Services area were to existing clients. For the years ended December 31, 2009 and 2008, we retained, or signed new contracts representing approximately 80% of the annual contract value of hospitals whose contracts had first or second year anniversary dates.

Internet Business Group. For the year ended December 31, 2009, Internet Business Group revenue, which includes sales of internet advertising and sponsorship, quality reports to consumers and revenue from our Connecting Point and Patient Direct Connect offerings, was $18.6 million, an increase of $10.2 million, or 121% over the year ended December 31, 2008. This increase in revenue is a result of strong growth from all products within the Internet Business Group, including the contribution from the www.WrongDiagnosis.com website we acquired in October 2008. For the year ended December 31, 2009, our internet advertising and sponsorship revenue included $4.7 million from www.WrongDiagnosis.com. Our revenue from quality reports to consumers increased to $4.5 million for the year ended December 31, 2009, compared to $2.4 million for the twelve months ended December 31, 2008, due mainly to sales of our Watchdog subscription service. In addition, for the year ended December 31, 2009, revenue from Connecting Point included approximately $2.0 million related to our agreement with Fresenius Medical Care North America, signed in June 2008, compared to approximately $1.1 million for the year ended December 31, 2008.

Strategic Health Solutions. For the year ended December 31, 2009, Strategic Health Solutions revenue, which includes sales of our quality information to employers, benefit consultants, health plans and others and sales of our data, was $2.2 million, an increase of $0.2 million, or 12% over the year ended December 31, 2008.

Cost of ratings and advisory revenue. For the years ended December 31, 2009 and 2008, cost of ratings and advisory revenue was $7.8 million and $6.8 million, respectively, or approximately 15% and 17%, respectfully, of ratings and advisory revenue. The increase in cost of ratings and advisory was due in part to an increase in the number of employees providing support services to our products, including the increase resulting from the growth in website advertising and sponsorship.

Sales and marketing costs. Sales and marketing costs for the year ended December 31, 2009 increased to $13.1 million from $10.8 million for the year ended December 31, 2008. As a percentage of sales, sales and marketing costs decreased to 25% for the year ended December 31, 2009, compared to 27% for the year ended December 31, 2008. The increase in sales and marketing costs for the year ended December 31, 2009 is primarily due to increased sales personnel, travel, SEO costs and investments we have made in our sponsorship and advertising business. In addition, sales and marketing expenses increased due to costs related to the www.WrongDiagnosis.com and www.CureResearch.com websites, which we acquired in October 2008.

Product development costs. Product development costs for the year ended December 31, 2009 increased to $9.4 million from $7.3 million for the year ended December 31, 2008. This increase is primarily due to additional personnel hired to support product development efforts, including both the improvement of existing products and the development of new product offerings. In particular, we added personnel to focus on advertising development initiatives, as well as several projects that are in process with our search engine partners. We also continue to invest in initiatives to both improve our existing data and bring new and actionable data to consumers. We maintain physician data relating to over 800,000 physicians. We continue to acquire new physician data and refine our data-matching process to improve both the impact and the accuracy of its information.

General and administrative expenses. For the year ended December 31, 2009, general and administrative expenses were $11.7 million, an increase of $3.6 million from general and administrative expenses of $8.1 million for the year ended December 31, 2008. This increase is mainly due to increased personnel costs and new hires, software expenses, and the write-off of our investment in Healthcare Credit Solutions. Upon the dissolution of Healthcare Credit Solutions, we wrote-off $0.2 million of certain assets including fixed assets, the non-competition agreement and our investment in the subsidiary.

Other Income. For the year ended December 31, 2009, other income represents a legal settlement in the amount of $0.2 million. No other income was recorded for the year ended December 31, 2008.

Interest income. We maintain cash in an overnight investment account that includes short-term U.S. government obligations with maturities not exceeding three months and investments in a short-term investment account that includes U.S. government and government agency debt securities with original maturities not exceeding three months. As of December 31, 2009, our total investment in these accounts totaled to $15.4 million. This amount is included within the cash and cash equivalents line item of our balance sheet. For the year ended December 31, 2009, interest earned on this account was $18,000. Interest income in 2009 decreased by $0.4 million or 96% from the year ended December 31, 2008, principally due to lower average cash balances and lower investment yields resulting from a decrease in market interest rates earned on invested cash. Any further decrease in interest rates in either of these investment accounts would not have a material impact on our financial position.

YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007

Ratings and advisory revenue. Total ratings and advisory revenue for the year ended December 31, 2008 increased 21% to $39.7 million from $32.7 million for the year ended December 31, 2007 as a result of strong growth from Provider Services and the Internet Business Group. Sales of our suite of marketing and quality assessment and improvement products to hospitals were the principal reason for this increase. For the years ended December 31, 2008 and 2007, approximately 62% and 66%, respectively, of our ratings and advisory revenue was derived from our marketing services to hospitals. Revenues from our marketing services to hospitals increased by $3.1 million to $24.6 million for the year ended December 31, 2008. This increase is principally due to the addition of new clients, as well as our continued success selling additional services to existing hospitals. For 2008, sales of additional services to existing hospitals accounted for nearly 34% of total new contracted sales. Approximately 21% and 19% of our ratings and advisory revenue was derived from sales of our quality reports to consumers, Connecting Point program and website advertising and sponsorship revenue for the years ended December 31, 2008 and 2007, respectively. Approximately 11% and 10% of our ratings and advisory revenue was derived from the sale of our quality improvement services to hospitals for the years ended December 31, 2008 and 2007, respectively. Finally, sales of our quality information to employers, benefits consulting firms, and health plans accounted for approximately 5% of our ratings and advisory revenue for the years ended December 31, 2008 and 2007.

Provider Services. For the year ended December 31, 2008, Provider Services revenue, which principally includes sales of hospital marketing products and quality improvement products, was $29.3 million, an increase of $4.1 million, or 16% over the year ended December 31, 2007. This increase principally reflects sales of our marketing products to new hospital clients and increased sales to existing clients. For 2008, nearly 34% of all our new sales in our Provider Services area were to existing clients. For the years ended December 31, 2008 and 2007, we retained, or signed new contracts representing approximately 80% and 70%, respectively, of the annual contract value of hospitals whose contracts had first or second year anniversary dates.

Internet Business Group. For the year ended December 31, 2008, Internet Business Group revenue, which includes the sale of our quality reports to consumers, revenue from our Connecting Point program and website advertising and sponsorship revenue, was $8.4 million, an increase of $2.3 million, or 37% over the year ended December 31, 2007. This increase in revenue was principally due to our Connecting Point agreement with Fresenius Medical Care North America signed in June 2008, which generated $1.1 million of revenue in 2008. The Company’s internet and sponsorship revenue increased in part due to the contribution from the www.WrongDiagnosis.com we acquired in October 2008. Also contributing to the increase in internet and sponsorship revenue was a full year of advertising revenue on www.healthgrades.com, as compared to revenues only in the second half of 2007. These increases were partially offset by a slight decrease in sales of quality reports to consumers.

Strategic Health Solutions. For the year ended December 31, 2008, Strategic Health Solutions revenue, which includes sales of our quality information to employers, benefit consultants, health plans and others and sales of our data, was $2.0 million, an increase of $0.5 million, or 36% over the year ended December 31, 2007.

Cost of ratings and advisory revenue. For the years ended December 31, 2008 and 2007, cost of ratings and advisory revenue was $6.8 million and $5.3 million, respectively, or approximately 17% and 16%, respectively, of ratings and advisory revenue. The increase in cost of ratings and advisory revenue as a percentage of ratings and advisory revenue was due in part to an increase in the number of employees providing support services to our Provider Services products.

Other Revenue. Other revenue for the year ended December 31, 2007 primarily represents $3.4 million of the $4.5 million total award granted to us by the panel of arbitrators with respect to our claims against Hewitt regarding an agreement between us and Hewitt that was entered into in July 2005. The panel’s award was based upon the three-year minimum annual revenue guarantee to us under the Hewitt agreement. This guarantee was $3.0 million annually for 2007, 2008 and 2009. The panel reduced this amount by its estimate of expected costs of generating these revenues. After deriving a net revenue amount, the panel performed a present value calculation of the net revenue amount utilizing a discount rate of 15%.

Sales and marketing costs. Sales and marketing costs for the year ended December 31, 2008 increased to $10.8 million from $9.1 million for the year ended December 31, 2007. As a percentage of sales, sales and marketing costs increased to 27% for the year ended December 31, 2008, compared to 25% for the year ended December 31, 2007. The increase in sales and marketing for the year ended December 31, 2008 is primarily due to the increase in commission expenses, which are recorded upon contract execution. In addition, sales and marketing costs increased to promote an internet advertising platform that we launched in the second half of 2007.

Product development costs. Product development costs for the year ended December 31, 2008 increased to $7.3 million from $5.5 million for the year ended December 31, 2007. This increase is principally due to additional personnel hired to support our product development efforts, including both the improvement of existing products as well as the development of new product offerings. In particular, we added personnel to focus on advertising initiatives, as well as several projects that are in process with our search engine partners. In addition, we continue to invest in the improvement of our physician data.

General and administrative expenses. For the year ended December 31, 2008, general and administrative expenses were $8.1 million, an increase of $1.1 million from general and administrative expenses of $7.0 million for the year ended December 31, 2007. Included as a reduction in general and administrative expenses for the year ended December 31, 2007 is $0.9 million in legal fees awarded to us by the panel of arbitrators in the Hewitt arbitration that was recorded as a reduction to expenses.

Interest income. We maintain cash in an overnight investment account that includes short-term U.S. government obligations with maturities not exceeding three months and investments in a short-term investment account that includes U.S. government and government agency debt securities with original maturities not exceeding three months. As of December 31, 2008, our total investment in these accounts totaled $9.8 million. This amount is included within the cash and cash equivalents line item of our balance sheet. For the year ended December 31, 2008, interest earned on this account was $0.4 million. Interest income in 2008 decreased by $0.9 million or 68% from the year ended December 31, 2007 principally due to lower cash balances and lower investment yields resulting from a decrease in market interest rates earned on invested cash. Also included in interest income for the year ended December 31, 2007 is $0.2 million from the Hewitt arbitration award. Any further decrease in interest rates in either of these investment accounts would not have a material impact on our financial position.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2009, we had $19.2 million in cash and cash equivalents, a 69% increase from the balance of $11.3 million as of December 31, 2008. The increase is due to $9.2 million of cash provided by operations, which was partially offset by $1.9 million used for purchases of property and equipment during the year ended December 31, 2009.

As of December 31, 2009, we had working capital of $5.6 million, an increase of $7.6 million from a working capital deficit of $2.1 million as of December 31, 2008. Included in current liabilities as of December 31, 2009 is $20.2 million in deferred revenue, which principally represents contract payments for future marketing and quality improvement services to hospitals. These amounts will be reflected in revenue upon provision of the related services.

On April 13, 2009, we entered into a Loan and Security Agreement with Silicon Valley Bank for a revolving line of credit of up to $5.0 million maturing on April 13, 2011. We may borrow, repay and re-borrow under the revolving line of credit at any time. The amount that we are able to borrow under the line of credit will vary based on the availability amount, as defined in the Loan and Security Agreement. The line of credit facility bears interest at the greater of 5% or the bank’s prime rate plus 0.5%. The bank’s prime rate was 4% at March 16, 2010. The line of credit is collateralized by substantially all of our assets and requires us to comply with customary affirmative and negative covenants principally relating to the use and disposition of assets, satisfaction of a quick ratio test, and minimum operating income. In addition, the Loan and Security Agreement contains customary events of default. Upon occurrence of an uncured event of default, among other things, the bank may declare that all amounts owed under the line of credit are immediately due and payable. As of December 31, 2009, we had $0 outstanding on the line of credit and we were in compliance with all such covenants.

As of December 31, 2009, we also had a standby letter of credit with Silicon Valley Bank in the amount of $45,000, which was provided in January 2005 in connection with our entry into a lease for our office in Golden, Colorado. In February 2010, the standby letter of credit expired. We currently have no other credit arrangements.

For the year ended December 31, 2009, cash provided by operations was $9.2 million compared to $6.4 million for the year ended December 31, 2008, an increase of $2.8 million. Net cash flow used in investing activities was $1.9 million for the year ended December 31, 2009, compared to $8.5 million for the year ended December 31, 2008, a decrease of cash used of $6.7 million. In October 2008, we completed our acquisition of Adviware for a purchase price of $6.7 million. During the years ended December 31, 2009 and 2008, we incurred $1.9 million in capital expenditures. The majority of these expenditures were principally for the purchase and development of computer hardware and software. For the year ended December 31, 2009, net cash flow provided by financing activities was $0.5 million. For the year ended December 31, 2008, net cash flow used in financing activities was $9.9 million.

Included in cash flow used in financing activities for the year ended December 31, 2008 was $10.9 million in purchases of treasury stock that were primarily made under our stock repurchase program. We did not repurchase any shares of our common stock under our stock repurchase program during the year ended December 31, 2009. Since June 22, 2006 and through December 31, 2009, under a stock repurchase program approved by our Board of Directors, we have repurchased 4,242,202 shares of our common stock for an aggregate purchase price of $19,572,461, which includes commissions and fees of $169,936. As of December 31, 2009, we have 757,798 shares available for repurchase under the stock repurchase program.

During the year ended December 31, 2009, the number of issued and outstanding shares of our common stock increased by 592,445 shares due to the exercise of stock options by our employees. We received $451,000 in cash from the exercise of these stock options. As of December 31, 2009, there are outstanding options to purchase approximately 4.0 million shares of our common stock at a weighted average exercise price of $0.36 per share. Therefore, we anticipate that additional options will be exercised.

We anticipate that our total 2010 capital expenditures will be between $3.0 million and $3.5 million. For the year ended December 31, 2009, we incurred $1.9 million of capital expenditures. We expect to fund all capital expenditures through operations.

We are obligated to pay contingent consideration to Adviware with respect to the acquisition of the websites www.WrongDiagnosis.com and www.CureResearch.com of up to $1.2 million in each of 2009 and 2010 based on levels of page views and revenue targets. As these contingent payments are based on the achievement of performance targets, actual payments may be substantially lower. Future payments will be recorded as goodwill when paid. The maximum payment for page views in 2009 and 2010 is $0.6 million, and the maximum payment for revenue is $0.6 million. As of December 31, 2009, we accrued $0.9 million of contingent consideration obligation for targets achieved in 2009. This amount was paid on February 25, 2010.

We anticipate that we have sufficient funds available to support ongoing operations at their current level. As noted above, upon execution of our SQI, SQP and QAI agreements, we typically receive a non-refundable payment for the first year of the contract term (which is typically three years, subject to a cancellation right that may be exercised by either the client or us on each annual anniversary date, with certain exceptions). We record the cash payment as deferred revenue, which is a current liability on our balance sheet that is then amortized to revenue on a straight-line basis over the first year of the term. Annual renewal payments, which are made in advance of the year to which the payment relates, are treated in the same manner during each of the following two years. As a result, our operating cash flow is substantially dependent upon our ability to continue to sign new agreements, and to continue to maintain a high rate of client retention. Our current operating plan includes growth in new sales from these agreements. A significant failure to achieve sales targets in the plan would have a material negative impact on our financial position and cash flow.

CONTRACTUAL OBLIGATIONS

The following table sets forth our contractual obligations as of December 31, 2009:

		Payments Due by Period
						Less than 1												More than
		Total				year				1-3 years				3-5 years				5 years
Capital Lease Obligations		$	1,000			$	1,000			$	—			$	—			$	—
Operating Lease Obligations			1,866,199				1,252,204				613,995				—				—
Employee Contracts			878,835				638,991				239,844				—				—
Purchase Obligations			332,258				248,258				84,000				—				—
Total		$	3,078,292			$	2,140,453			$	937,839			$	—			$	—

Operating lease obligations relate principally to our office space leases. Employee contracts include obligations for employment agreements that provide two executives with minimum base pay, annual incentive awards and other fringe benefits. Purchase obligations include certain licensing and other agreements with various parties to access and use data from these parties for the purpose of providing health information on our websites.

NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In May 2009, the Financial Accounting Standards Board (FASB) issued guidance that sets forth the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events or transactions that occurred after the balance sheet date in its financial statements and the disclosures that an entity shall make about the events or transactions that occurred after the balance sheet date. This guidance became effective for us on June 30, 2009. The adoption of the guidance did not have a material impact on our financial position, cash flows or results of operations.

In June 2008, the FASB issued guidance which concludes that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and must be included in the computation of basic earnings per share using the two-class method. We retrospectively adopted this guidance on January 1, 2009. The adoption of this guidance decreased our previously reported basic earnings per share for the year ended December 31, 2007 by $0.01 and decreased our previously reported diluted earnings per share for the year ended December 31, 2008 by $0.01.

In April 2008, the FASB issued guidance that amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. The intent of this guidance is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under other Generally Accepted Accounting Principles (GAAP) measures. This guidance became effective for us on January 1, 2009. The adoption of this guidance did not have a material impact on our financial position, cash flows or results of operations.

In December 2007, the FASB issued guidance that establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. This guidance also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This guidance became effective for us on January 1, 2009. The adoption of this guidance did not have a material impact on our financial position, cash flows or results of operations.

In April 2009, the FASB issued guidance that amends and clarifies accounting provisions related to business combinations to address application issues raised by preparers, auditors and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This guidance became effective for us on January 1, 2009. The adoption of this guidance did not have a material impact on our financial position, cash flows or results of operations.

In December 2007, the FASB issued guidance that establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This guidance also establishes disclosure requirements that clearly identify and distinguish between the interest of the parent and the interests of the noncontrolling owners. We adopted this guidance on January 1, 2009 via retrospective application of the presentation and disclosure requirements. The noncontrolling interest recorded in our consolidated balance sheets relates to a third party’s interest in our majority owned subsidiary, Healthcare Credit Solutions LLC. At December 31, 2008, the noncontrolling interest balance of $0 that was previously recorded as a minority interest in the mezzanine section of the consolidated Balance Sheets was reclassified to noncontrolling interest in the equity section of the consolidated Balance Sheets. Noncontrolling interest for the year ended December 31, 2008 and 2007 in the amount of $304,004 and $327,835, respectively, on the consolidated statements of income was originally presented before income tax expense. The retrospective presentation of this guidance requires the noncontrolling interest to be presented after income tax expense. There was no impact on net income attributable to Health Grades, Inc. or the net income used in computing earnings per share.

In May 2008, the FASB issued guidance that identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with GAAP for nongovernmental entities. This guidance was issued to include the GAAP hierarchy in the accounting literature established by the FASB. This guidance became effective for us on January 1, 2009. The adoption of this guidance did not have a material impact on our financial position, cash flows or results of operations.

Recently Issued Accounting Pronouncements Not Yet Adopted

In October 2009, the FASB issued guidance on revenue arrangements with multiple deliverables stating that when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. This guidance was effective for us January 1, 2011. We do not expect the application of this guidance will have a material impact on our financial position, cash flows or operating results.

In June 2009, the FASB issued guidance that significantly changes the criteria for determining whether the consolidation of a variable interest entity is required. This guidance also addresses the effect of changes required by other guidance, and concerns regarding the application of certain provisions related to accounting for variable interest entities, including concerns that the accounting and disclosures under the guidance does not always provide timely and useful information about an entity’s involvement in a variable interest entity. This guidance will be effective for us January 1, 2010. We do not expect the application of this guidance will have a material impact on our financial position, cash flows or operating results.

There were no other new accounting pronouncements issued during the year ended December 31, 2009 that had a material impact or are anticipated to have a material impact on our financial position, operating results or disclosures.

Item 7A.		Quantitative and Qualitative Disclosures about Market Risk

The primary objective of our investment activities is to preserve principal, maintain substantial liquidity and to achieve an acceptable rate of return. This objective is accomplished by adherence to our investment policy, which establishes guidelines of eligible types of securities and credit requirements for each investment.

Changes in prevailing interest rates will cause the market value of our investments to fluctuate. To minimize this risk, we maintain cash in an overnight investment account that includes short-term U.S. government obligations with maturities not exceeding three months and investments in a short-term investment account that includes U.S. government and government agency debt securities with original maturities not exceeding three months. As of December 31, 2009, our total investment in these accounts amounted to $15.4 million. This amount is included in the cash and cash equivalents on our consolidated balance sheet. For the year ended December 31, 2009, interest earned on these accounts was $18,000.

We have not utilized derivative financial instruments in our investment portfolio and are not subject to interest rate risks on any borrowings.

Item 8.		Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

HEALTH GRADES, INC.:
Report of Independent Registered Public Accounting Firm			41
Consolidated Balance Sheets			42
Consolidated Statements of Income			43
Consolidated Statements of Stockholders’ Equity			44
Consolidated Statements of Cash Flows			45
Notes to Consolidated Financial Statements			46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Health Grades, Inc.

We have audited the accompanying consolidated balance sheets of Health Grades, Inc. and subsidiary (collectively, the “Company”) (a Delaware corporation) as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 16, 2010 expressed an unqualified opinion.

/s/ GRANT THORNTON LLP

Denver, Colorado
March 16, 2010

Health Grades, Inc. and Subsidiary

Consolidated Balance Sheets

As of Ended December 31,

		2009				2008
ASSETS
Cash and cash equivalents		$	19,160,529			$	11,327,741
Accounts receivable, net			11,389,295				9,563,163
Prepaid income taxes			93,451				12,603
Deferred income taxes			68,416				—
Prepaid expenses and other current assets			1,923,000				1,087,914
Total current assets			32,634,691				21,991,421
Property and equipment, net			3,214,974				2,451,210
Intangible assets, net			481,102				854,613
Goodwill			10,015,770				9,104,060
Deferred income taxes			531,401				683,866
Total assets		$	46,877,938			$	35,085,170
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable		$	208,437			$	224,252
Accrued payroll, incentive compensation and related expenses			4,199,848				3,352,294
Accrued expenses			2,143,317				629,359
Current portion of capital lease obligations			984				1,898
Current portion of deferred rent			254,797				—
Deferred revenue			20,249,062				19,713,079
Deferred income taxes			—				130,493
Total current liabilities			27,056,445				24,051,375
Long-term portion of capital lease obligations			—				984
Long-term portion of deferred rent			36,427				309,131
Total liabilities			27,092,872				24,361,490
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value, 2,000,000 shares authorized, no shares issued or outstanding			—				—
Common stock, $0.001 par value, 100,000,000 shares authorized, and 54,137,333 and 52,744,438 shares issued as of December 31, 2009 and 2008, respectively			54,137				52,743
Additional paid-in capital			100,415,961				98,242,403
Accumulated deficit			(46,923,476	)			(54,026,164	)
Treasury stock, 24,418,730 and 23,982,694 shares as of December 31, 2009 and 2008, respectively			(33,761,556	)			(33,545,302	)
Total stockholders’ equity			19,785,066				10,723,680
Total liabilities and stockholders’ equity		$	46,877,938			$	35,085,170

See accompanying notes to consolidated financial statements.

Health Grades, Inc. and Subsidiary

Consolidated Statements of Income

Years ended December 31,

		2009				2008				2007
Revenue:
Ratings and advisory revenue		$	52,498,159			$	39,663,384			$	32,741,610
Other			21,867				24,952				3,425,465
			52,520,026				39,688,336				36,167,075
Cost of revenue:
Cost of ratings and advisory revenue			7,839,463				6,759,233				5,323,672
Gross margin			44,680,563				32,929,103				30,843,403
Operating expenses:
Sales and marketing			13,143,398				10,845,768				9,147,911
Product development			9,376,357				7,279,283				5,491,725
General and administrative			11,694,261				8,118,531				7,004,914
Income from operations			10,466,547				6,685,521				9,198,853
Other:
Other income			183,038				—				—
Interest income			18,052				429,757				1,330,903
Interest expense			(1,705	)			(2,912	)			(1,771	)
Equity earnings of investment			34,000				—				—
Income before income taxes			10,699,932				7,112,366				10,527,985
Income tax expense			3,914,152				2,725,601				4,107,649
Net income			6,785,780				4,386,765				6,420,336
Net loss attributable to noncontrolling interest			316,908				304,004				327,835
Net income attributable to Health Grades, Inc.		$	7,102,688			$	4,690,769			$	6,748,171
Net income per common share (basic)		$	0.26			$	0.17			$	0.23
Weighted-average number of common shares used in computation (basic)			27,618,892				28,405,348				29,053,717
Net income per common share (diluted)		$	0.23			$	0.14			$	0.20
Weighted-average number of common shares used in computation (diluted)			31,195,096				32,836,987				34,060,414

See accompanying notes to consolidated financial statements.

Health Grades, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

Years ended
December 31, 2009, 2008 and 2007

		HEALTH GRADES, INC. STOCKHOLDERS
		COMMON STOCK								ADDITIONAL
		$0.001 PAR VALUE								PAID-IN				ACCUMULATED				TREASURY				NONCONTROLLING
		SHARES				AMOUNT				CAPITAL				DEFICIT				STOCK				INTEREST				TOTAL
Balance at January 1, 2007			48,775,357			$	48,775			$	94,604,033			$	(65,465,104	)		$	(17,044,656	)		$	—			$	12,143,048
Stock-based compensation expense			—				—				961,715				—				—				—				961,715
Employee stock option exercise			704,184				704				568,921				—				—				—				569,625
Restricted stock awards			1,416,082				1,416				(1,416	)			—				—				—				—
Tax benefit from exercise of stock options			—				—				898,597				—				—				—				898,597
1,102,326 shares repurchased			—				—				—				—				(5,612,566	)			—				(5,612,566	)
Noncontrolling member capital contribution			—				—				—				—				—				404,000				404,000
Change in ownership of noncontrolling interest			—				—				(171,846	)			—				—				171,846				—
Noncontrolling interest			—				—				—				—				—				(327,835	)			(327,835	)
Net income			—				—				—				6,748,171				—				—				6,748,171
Balance at December 31, 2007			50,895,623				50,895				96,860,004				(58,716,933	)			(22,657,222	)			248,011				15,784,755
Stock-based compensation expense			—				—				450,627				—				—				—				450,627
Employee stock option exercise			1,272,034				1,272				595,565				—				—				—				596,837
Restricted stock awards			576,781				576				(576	)			—				—				—				—
Tax benefit from exercise of stock options			—				—				336,783				—				—				—				336,783
2,558,458 shares repurchased			—				—				—				—				(10,888,080	)			—				(10,888,080	)
Noncontrolling member capital contribution			—				—				—				—				—				56,000				56,000
Noncontrolling interest			—				—				—				—				—				(304,011	)			(304,011	)
Net income			—				—				—				4,690,769				—				—				4,690,769
Balance at December 31, 2008			52,744,438				52,743				98,242,403				(54,026,164	)			(33,545,302	)			—				10,723,680
Stock-based compensation expense			—				—				1,620,696				—				—				—				1,620,696
Employee stock option exercise			592,445				593				450,258				—				—				—				450,851
Restricted stock awards			800,450				801				(801	)			—				—				—				—
Warrants issued			—				—				100,000				—				—				—				100,000
Tax benefit from exercise of stock options			—				—				269,473				—				—				—				269,473
436,036 shares repurchased			—				—				—				—				(216,254	)			—				(216,254	)
Change in ownership of noncontrolling interest			—				—				(266,068	)			—				—				316,908				50,840
Noncontrolling interest			—				—				—				—				—				(316,908	)			(316,908	)
Net income			—				—				—				7,102,688				—				—				7,102,688
Balance at December 31, 2009			54,137,333			$	54,137			$	100,415,961			$	(46,923,476	)		$	(33,761,556	)		$	—			$	19,785,066

See accompanying notes to consolidated financial statements.

Health Grades, Inc. and Subsidiary

Consolidated Statements of Cash Flows

Years ended December 31,

		2009				2008				2007
OPERATING ACTIVITIES
Net income attributable to Health Grades, Inc.		$	7,102,688			$	4,690,769			$	6,748,171
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,712,850				1,226,164				1,046,254
Bad debt expense			112,459				20,000				—
Loss on disposal of assets			258,841				1,061				25,996
Loss on dissolution of subsidiary			50,840				—				—
Stock based compensation expense			1,620,696				450,627				961,715
Tax benefit from stock option exercises			(269,542	)			(308,329	)			(871,469	)
Deferred income taxes			(46,444	)			22,346				(238,570	)
Noncontrolling interest			(316,908	)			(304,011	)			(327,835	)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable			(1,938,591	)			(2,647,822	)			1,960,368
Prepaid expenses and other current assets			(839,409	)			(210,265	)			(124,201	)
Accounts payable			(15,815	)			(101,787	)			(14,703	)
Accrued payroll, incentive compensation and related expenses			847,554				1,129,324				384,688
Accrued expenses			195,072				159,661				113,461
Income taxes payable			188,625				310,337				836,152
Deferred revenue			535,983				1,973,927				1,841,778
Deferred rent			(13,584	)			6,943				(45,601	)
Net cash provided by operating activities			9,185,315				6,418,945				12,296,204
INVESTING ACTIVITIES
Purchases of property and equipment			(1,854,038	)			(1,860,066	)			(788,346	)
Business acquisition			(730	)			(6,670,983	)			—
Sale of property and equipment			—				—				10,000
Net cash used in investing activities			(1,854,768	)			(8,531,049	)			(778,346	)
FINANCING ACTIVITIES
Payments under capital lease obligation			(1,898	)			(2,609	)			(1,391	)
Excess tax benefits from stock-based payment arrangements			269,542				308,329				871,469
Purchases of treasury stock			(216,254	)			(10,888,080	)			(5,612,566	)
Exercise of common stock options and warrants			450,851				596,837				569,625
Noncontrolling member capital contribution			—				56,000				—
Net cash provided by (used in) financing activities			502,241				(9,929,523	)			(4,172,863	)
Net increase (decrease) in cash and cash equivalents			7,832,788				(12,041,627	)			7,344,995
Cash and cash equivalents at beginning of period			11,327,741				23,369,368				16,024,373
Cash and cash equivalents at end of period		$	19,160,529			$	11,327,741			$	23,369,368
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid		$	1,705			$	2,912			$	1,771
Income tax paid		$	3,750,538			$	2,397,979			$	3,523,998
NON CASH FINANCING AND INVESTING ACTIVITY
Data acquired with stock warrants		$	100,000			$	—			$	—
Accrued contingent consideration in business combination		$	910,980			$	—			$	—
Property and equipment acquired with capital lease		$	—			$	1,628			$	—
Property and equipment acquired in accounts payable or accrued expenses		$	407,906			$	36,770			$	7,526
Change in ownership interest of subsidiary		$	266,068			$	—			$	171,846
Non-competition agreements contributed to HCS by HealthCo		$	—			$	—			$	404,000