EPOC-9.30.2012-10Q

10-Q 1 epoc-9302012x10q.htm 10-Q EPOC-9.30.2012-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended September 30, 2012


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

For the transition period from to

Commission file number: 001-35062

Epocrates, Inc.

(Exact name of registrant as specified in its charter)



Delaware (State or other jurisdiction of incorporation or organization)		94-3326769 (I.R.S. Employer Identification No.)

1100 Park Place, Suite 300

San Mateo, California 94403

(Address of principal executive offices, including zip code)

(650) 227-1700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No 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 o
Non-accelerated filer x	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 Exchange Act). Yes o No ý

The number of shares of common stock outstanding as of November 6, 2012 was 24,872,339.

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EPOCRATES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

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		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 6.	Exhibits	26

SIGNATURES		27

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PART I. FINANCIAL INFORMATION

Item1. Financial Statements

EPOCRATES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS – UNAUDITED

(in thousands, except for par value)



	September 30, 2012			December 31, 2011
Assets
Current assets
Cash and cash equivalents	$	62,218		$	75,326
Short-term investments	16,915			9,897
Accounts receivable, net of allowance for doubtful accounts of $69 and $85, respectively	22,404			22,748
Deferred tax asset	7,390			7,390
Prepaid expenses and other current assets	4,757			3,218
Total current assets	113,684			118,579
Property and equipment, net	8,022			7,283
Deferred tax asset	482			1,280
Goodwill	17,959			17,959
Other intangible assets, net	3,765			6,771
Other assets	357			352
Total assets	$	144,269		$	152,224
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	1,522		$	3,282
Deferred revenue	42,192			46,429
Other accrued liabilities	7,848			9,600
Total current liabilities	51,562			59,311
Deferred revenue, less current portion	6,004			8,088
Other liabilities	1,470			1,893
Total liabilities	59,036			69,292
Commitments and contingencies (Note 9)	—			—
Stockholders’ equity
Preferred stock: $0.001 par value; 10,000 shares authorized; no shares issued and outstanding at September 30, 2012 and December 31, 2011	—			—
Common stock: $0.001 par value; 100,000 shares authorized; 24,868 and 24,370 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively	25			24
Additional paid-in capital	133,982			129,238
Accumulated other comprehensive loss	(1		)	(2		)
Accumulated deficit	(48,773		)	(46,328		)
Total stockholders’ equity	85,233			82,932
Total liabilities and stockholders’ equity	$	144,269		$	152,224

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

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EPOCRATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME – UNAUDITED

(in thousands, except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Subscription revenues	$	5,045		$	5,143		$	14,472		$	17,446
Interactive services revenues	20,980			21,452			65,908			66,186
Total revenues, net	26,025			26,595			80,380			83,632

Cost of subscription revenues	1,782			1,597			5,480			5,440
Cost of interactive services revenues	9,021			8,686			26,559			24,001
Total cost of revenues	10,803			10,283			32,039			29,441
Gross profit	15,222			16,312			48,341			54,191

Operating expenses:
Sales and marketing	6,871			6,050			19,664			19,650
Research and development	5,369			5,312			15,497			15,386
General and administrative	4,113			4,259			14,333			16,424
Facilities exit costs	—			—			—			618
Gain on settlement and change in fair value of contingent consideration	—			—			—			(5,933		)
Total operating expenses	16,353			15,621			49,494			46,145
(Loss) income from operations	(1,131		)	691			(1,153		)	8,046
Interest income	11			15			22			66
Other income (expense), net	—			3			(1		)	182
(Loss) income before income taxes	(1,120		)	709			(1,132		)	8,294
Benefit from (provision for) income taxes	104			(4		)	392			(3,154		)
(Loss) income from continuing operations	(1,016		)	705			(740		)	5,140
Gain (loss) from discontinued operations, net of tax (year to date includes proceeds from sale of component technology of $1.5 million)	408			(19		)	(1,705		)	(2,186		)
Net (loss) income	$	(608	)	$	686		$	(2,445	)	$	2,954
Unrealized gains (losses) on available-for-sale securities, net	4			(3		)	(1		)	(3		)
Comprehensive (loss) income	$	(604	)	$	683		$	(2,446	)	$	2,951

Net (loss) income attributable to common stockholders – basic and diluted	$	(608	)	$	686		$	(2,445	)	$	2,660

Net (loss) income per share – basic
Continuing operations	$	(0.04	)	$	0.03		$	(0.03	)	$	0.22
Discontinued operations, net of tax	0.02			—			(0.07		)	(0.10		)
Net (loss) income per share attributable to common stockholders	$	(0.02	)	$	0.03		$	(0.10	)	$	0.12

Net (loss) income per share – diluted
Continuing operations	$	(0.04	)	$	0.03		$	(0.03	)	$	0.21
Discontinued operations, net of tax	0.02			—			(0.07		)	(0.10		)
Net (loss) income per share attributable to common stockholders	$	(0.02	)	$	0.03		$	(0.10	)	$	0.11

Weighted average common shares outstanding – basic	24,808			23,644			24,668			21,655
Weighted average common shares outstanding – diluted	25,123			24,926			25,049			23,636

The accounts below include stock-based compensation of the following amounts:



Cost of revenues	$	71	$	(7	)	$	170	$	144
Sales and marketing	186		(8		)	577		1,109
Research and development	191		28			554		558
General and administrative	447		1,114			2,240		3,646
Discontinued operations	—		—			74		—

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

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EPOCRATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

(in thousands)



	Nine Months Ended
	September 30,
	2012			2011
Cash flows from operating activities:
Net (loss) income	$	(2,445	)	$	2,954
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Stock-based compensation	3,615			5,457
Depreciation and amortization	2,953			3,245
Amortization of intangible assets	3,006			3,112
Loss on write-off of property and equipment	121			99
Allowance for doubtful accounts and sales returns reserve	(16		)	(36		)
Facilities exit costs	—			618
Gain on settlement and change in fair value of contingent consideration	—			(7,696		)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable	360			3,851
Deferred tax asset, current and non-current	222			(251		)
Prepaid expenses and other assets	(1,544		)	1,414
Accounts payable	(1,777		)	(997		)
Deferred revenue	(6,321		)	(1,468		)
Other accrued liabilities and other payables	(2,250		)	(2,684		)
Net cash (used in) provided by operating activities	(4,076		)	7,618
Cash flows from investing activities:
Purchase of property and equipment	(3,647		)	(7,944		)
Purchase of short-term investments	(14,497		)	(18,839		)
Sale of short-term investments	—			804
Maturity of short-term investments	7,480			17,550
Net cash used in investing activities	(10,664		)	(8,429		)
Cash flows from financing activities:
Net cash proceeds from issuance of common stock	—			64,189
Payment and settlement of contingent consideration	—			(6,871		)
Payment of accrued dividends on Series B mandatorily redeemable convertible preferred stock	—			(29,586		)
Proceeds from exercise of common stock options	1,632			2,353
Net cash provided by financing activities	1,632			30,085
Net (decrease) increase in cash and cash equivalents	(13,108		)	29,274
Cash and cash equivalents at beginning of period	75,326			35,987
Cash and cash equivalents at end of period	$	62,218		$	65,261
Non-Cash Investing and Financing Activities:
Unrealized loss on available-for-sale securities, net of tax effect	(1		)	—
Accrued purchase of property and equipment and other assets	17			536
Conversion of mandatorily redeemable convertible preferred stock into common stock	—			44,011
Reclassification of costs of issuance of common stock from prepaid expenses and other current assets	—			2,025

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

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EPOCRATES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Background

Epocrates, Inc. (“Epocrates” or the “Company”) was incorporated in California in August 1998 as nCircle Communications, Inc. In September 1999, the Company changed its name to ePocrates, Inc., and in May 2006, the Company reincorporated in Delaware and changed its name to Epocrates, Inc.

The Company is a leading physician platform for essential clinical content, practice tools and health industry engagement at the point of care. Most commonly used on mobile devices, the Company’s products help healthcare professionals make more informed prescribing decisions, enhance patient safety and improve practice productivity. Through the Company’s interactive services, it provides the healthcare industry, primarily pharmaceutical companies, opportunities to engage with its member network through delivery of targeted information and to conduct market research.

Initial Public Offering (“IPO”)

On February 1, 2011, the Company’s registration statement on Form S-1 (File No. 333-168176) was declared effective for its IPO, pursuant to which it registered the offering and sale of 5,360,000 shares of common stock at a public offering price of $16.00 per share and an aggregate offering price of $85.8 million, of which 3,574,285 shares were sold by the Company for an aggregate offering price of $57.2 million, and 1,785,715 shares were sold by the selling stockholders for an aggregate offering price of $28.6 million. On February 3, 2011, the over-allotment option of 804,000 shares was exercised at a price of $16.00 per share for an aggregate of $12.9 million, all of which were sold by the Company, and the offering was completed with all of the shares subject to the registration statement having been sold.

As a result of the Company’s IPO and the exercise of the over-allotment option on February 3, 2011, both of which closed on February 7, 2011, the Company received net proceeds of approximately $62.2 million, after underwriting discounts and commissions of $4.9 million. In addition, the Company incurred other expenses associated with its IPO of approximately $3.0 million. From these proceeds, aggregate cumulative dividends to the holders of Epocrates’ Series B preferred stock were paid in full, in the amount of approximately $29.6 million. Upon the consummation of the IPO, the outstanding shares of the Company’s preferred stock were converted into an aggregate of 11,089,201 shares of common stock.

After the completion of the IPO on February 7, 2011, the Company amended its certificate of incorporation and increased its authorized number of shares of common stock to 100,000,000 and reduced the authorized number of shares of preferred stock to 10,000,000. The Company also established the par value of each share of common and preferred stock to be $0.001 per share.

Common Stock Split

An Amended and Restated Certificate of Incorporation for a 1-for-0.786 reverse split approved by the Company’s Board of Directors on November 18, 2010, was filed with the Delaware Secretary of State on January 28, 2011 and was effected upon the closing of the IPO. All information related to common stock, stock options, restricted stock units (“RSUs”) and earnings per share, as well as all references to preferred stock or preferred stock warrants as converted into common stock, has been retroactively adjusted to give effect to the reverse split.

2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying condensed consolidated financial statements and the notes to the condensed consolidated financial statements as of September 30, 2012, and for the three and nine months ended September 30, 2012 and 2011, are unaudited. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2011, included in the Annual Report on Form 10-K filed with the SEC on March 19, 2012. The condensed consolidated balance sheet as of December 31, 2011 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP.

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The interim financial data as of September 30, 2012, and for the three and nine months ended September 30, 2012 and 2011, is unaudited. In the opinion of management, the interim data includes all adjustments consisting only of normal, recurring adjustments necessary for the fair statement of the results for the interim periods. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2012 or any other future period.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements and accompanying notes. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates, and such differences could be material.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable.

The Company limits its concentration of risk in cash equivalents and short-term investments by diversifying its investments among a variety of industries and issuers. The primary goals of the Company’s investment policy are, in order of priority, preservation of principal, liquidity and current income. The Company’s professional portfolio managers adhere to this investment policy as approved by the Company’s Board of Directors. Cash and cash equivalents and short-term investments are deposited at financial institutions or invested in securities that management believes are of high credit quality.

The Company’s investment policy permits investments only in fixed income instruments denominated and payable in U.S. dollars. Investments in obligations of the U.S. government and its agencies, money market instruments, commercial paper, certificates of deposit, bankers’ acceptances, corporate bonds of U.S. companies, municipal securities and asset-backed securities are allowed. The Company does not invest in auction rate securities, future contracts or hedging instruments. The Company’s policy also dictates that securities of a single issuer valued at cost at the time of purchase should not exceed 5% of the market value of the portfolio, or $1 million, whichever is greater, although securities issued by the U.S. Treasury and U.S. government agencies are specifically exempted from these restrictions. Issue size is typically greater than $50 million for corporate bonds. No single position in any issue can exceed 10% of that issue. The final maturity of each security within the portfolio shall not exceed 24 months.

The Company’s revenue and accounts receivable are derived primarily from clients in the healthcare industry (e.g., pharmaceutical companies, managed care companies and market research firms) within the U.S. For the three and nine months ended September 30, 2012 and 2011, no single client accounted for more than 10% of total revenues.

The Company performs a regular review of its clients’ payment histories and associated credit risks and does not require collateral from its clients. The Company has not historically experienced significant credit losses from its accounts receivable. There was one client that accounted for more than 10% of accounts receivable, net as of September 30, 2012. One client accounted for 15% of accounts receivable, net as of December 31, 2011.

Software Development Costs

Software development costs incurred in conjunction with product development are charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs are capitalized and reported at the lower of unamortized cost or net realizable value of the related product. The Company does not consider a product in development to have passed the technological feasibility milestone until the Company has completed a model of the product that contains essentially all the functionality and features of the final product and has tested the model to ensure that it works as expected. The Company previously capitalized software development costs upon technical feasibility for the electronic health record (“EHR”) solution until it announced its decision to discontinue the EHR business. Capitalized costs incurred in the first quarter of 2012 up until the date of the announcement were reclassified to loss from discontinued operations in the Company’s condensed consolidated statements of comprehensive (loss) income.

Internal Use Software and Website Development Costs

With regard to software developed for internal use and website development costs, the Company expenses all costs incurred that relate to planning and post-implementation phases of development. Costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life which is generally three years. For the three months ended September 30, 2012

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and 2011, the Company capitalized $0.6 million and $0.4 million, respectively, of software development costs related to software for internal use and website development costs. For the nine months ended September 30, 2012 and 2011, the Company capitalized $2.0 million and $2.1 million, respectively, of software development costs related to software for internal use and website development costs. Internal software development costs are generally amortized on a straight-line basis over three years beginning with the date the software is placed into service. Amortization of software developed for internal use was $0.5 million for each of the three months ended September 30, 2012 and 2011. Amortization of software developed for internal use was $1.6 million and $1.4 million for the nine months ended September 30, 2012 and 2011, respectively. Amortization of internal use software is reflected in cost of revenues. Costs associated with minor enhancement and maintenance of the Company’s website are expensed as incurred.

Facilities Exit Costs

The Company vacated the East Windsor, New Jersey office in the first quarter of 2011 and relocated its New Jersey operations to Ewing, New Jersey. The Company had entered into a non-cancellable lease with the landlord for the East Windsor location which does not expire until the end of fiscal year 2012. The Company is, therefore, liable to make monthly lease payments under the contract until the termination of the lease. The liability recorded at fair value is based on the present value of the remaining lease rentals and is reduced for the estimated sublease rentals that could be reasonably obtained for the property. The Company recorded a charge of approximately $0.6 million in the nine months ended September 30, 2011 relating to the East Windsor facility exit costs.

Recent Accounting Developments

In July 2012, the Financial Accounting Standards Board issued new accounting guidance intended to simplify the testing of indefinite-lived intangible assets other than goodwill for impairment. Entities will be allowed to perform a qualitative assessment on indefinite-lived intangible assets (other than goodwill) to determine whether a quantitative assessment is necessary. This guidance will be effective for the Company’s interim and annual periods beginning January 1, 2013. The adoption of this guidance is not expected to have any impact on the Company’s financial position or the results of operations.

Segment Information

Previously, the Company had two reportable segments: (1) Subscriptions and Interactive Services and (2) EHR. On February 24, 2012, the Audit Committee of the Board of Directors of the Company, as authorized by the Board of Directors, approved the discontinuation of Epocrates’ EHR business. Upon such approval, the Company qualified for discontinued operations presentation under GAAP, and at such time, the EHR results were reported in loss from discontinued operations on the Company’s condensed consolidated statements of comprehensive (loss) income. Prior period amounts have been revised in order to conform to the current period presentation. Substantially all of the Company’s revenues and all of the Company’s long-lived assets are located in the U.S.

3. Net (Loss) Income Per Share

In February 2011, all of the Company’s outstanding convertible preferred stock converted into common stock in connection with the IPO. Prior to the conversion, holders of Series A and Series C convertible preferred stock were entitled to receive 8% per annum non-cumulative dividends. Holders of Series B preferred stock were entitled to receive 8% per annum cumulative dividends.

In 2011, basic and diluted net loss per share attributable to common stockholders was presented in conformity with the “two-class method” required for participating securities. Under the two-class method, basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the sum of the weighted average number of common shares outstanding during the period, net of shares subject to repurchase. Net income (loss) attributable to common stockholders is calculated as net income (loss) less the preferred stock dividend for the period. Due to the Company’s presentation of the EHR results in discontinued operations, a similar calculation was performed for the 2011 per share income from continuing operations. Basic income from continuing operations per share is computed by subtracting the preferred stock dividend for the period from income from continuing operations and dividing that amount by the weighted average number of common shares outstanding.

Diluted net loss per share gives effect to the impact of potentially dilutive securities, which consist of convertible preferred stock, stock options, RSUs and warrants. The dilutive effect of outstanding stock options, warrants and RSUs is computed using the treasury stock method. The computation of diluted net loss per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings.

In accordance with U.S. GAAP, the Company does not include dilutive securities in its calculations of per share losses from continuing operations, discontinued operations, net of tax, and net losses attributable to common stockholders. Accordingly, the

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denominator used in these calculations is the weighted average number of common shares outstanding – basic.

The following table presents the calculations of basic and diluted net (loss) income per share (in thousands, except per share data):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Numerator:
(Loss) income from continuing operations	$	(1,016	)	$	705		$	(740	)	$	5,140
Gain (loss) from discontinued operations, net of tax	408			(19		)	(1,705		)	(2,186		)
Net (loss) income	$	(608	)	$	686		$	(2,445	)	$	2,954
Less: Accrued dividend on Series B mandatorily redeemable convertible preferred stock plus an 8% non-cumulative dividend on Series A and Series C mandatorily redeemable convertible preferred stock	—			—			—			294
Net (loss) income attributable to common stockholders	$	(608	)	$	686		$	(2,445	)	$	2,660
Denominator:
Weighted average number of common shares outstanding – basic	24,808			23,644			24,668			21,655
Weighted average number of common shares outstanding – diluted	25,123			24,926			25,049			23,636
Net (loss) income per share – basic
Continuing operations	$	(0.04	)	$	0.03		$	(0.03	)	$	0.22
Discontinued operations	0.02			—			(0.07		)	(0.10		)
Net (loss) income per share attributable to common stockholders	$	(0.02	)	$	0.03		$	(0.10	)	$	0.12
Net (loss) income per share – diluted
Continuing operations	$	(0.04	)	$	0.03		$	(0.03	)	$	0.21
Discontinued operations	0.02			—			(0.07		)	(0.10		)
Net (loss) income per share attributable to common stockholders	$	(0.02	)	$	0.03		$	(0.10	)	$	0.11

For the three and nine months ended September 30, 2012 and 2011, the following securities were not included in the calculation of fully diluted shares outstanding, as the effect would have been anti-dilutive (in thousands):



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2012	2011	2012	2011
Weighted average common stock warrants	17	17	17	2
Weighted average outstanding unexercised options and RSUs	4,292	2,576	4,237	1,085
Weighted average mandatorily redeemable convertible preferred stock	—	—	—	1,300
Total weighted average anti-dilutive shares	4,309	2,593	4,254	2,387

4. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in an orderly transaction between market participants at the measurement date. A three-level hierarchy is applied to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy prioritizes the inputs into three broad levels:

Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level 3 – Inputs are unobservable inputs based on the Company’s assumptions.

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The following table represents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2012, and December 31, 2011, and the basis of that measurement (in thousands):



As of September 30, 2012	Total Fair Value		Level 1		Level 2		Level 3
ASSETS
Money market funds	$	3,288	$	3,288	$	—	$	—
Short-term investments (See Note 5):
Obligations of U.S. government agencies	7,869		7,869		—		—
Obligations of U.S. corporations	4,900		—		4,900		—
Obligations of Non-U.S. corporations	4,146		—		4,146		—
Total short-term investments	16,915		7,869		9,046		—
TOTAL FINANCIAL ASSETS	$	20,203	$	11,157	$	9,046	$	—



As of December 31, 2011	Total Fair Value		Level 1		Level 2		Level 3
ASSETS
Money market funds	$	10,035	$	10,035	$	—	$	—
Agency bonds	275		—		275		—
Short-term investments (See Note 5):
Obligations of U.S. government agencies	6,219		6,219		—		—
Obligations of U.S. corporations	2,630		—		2,630		—
Obligations of Non-U.S. corporations	1,048		—		1,048		—
Total short-term investments	9,897		6,219		3,678		—
TOTAL FINANCIAL ASSETS	$	20,207	$	16,254	$	3,953	$	—

The Company’s financial instruments, including cash equivalents, accounts receivable and accounts payable, are carried at cost, which approximates fair value due to the short-term nature of those instruments.

Money market funds are considered Level 1 investments under the GAAP fair value hierarchy because fair value inputs are unadjusted quoted prices in active markets for identical assets or liabilities. As of June 30, 2012, obligations of U.S. government agencies are also considered Level 1 investments. The remainder of the Company’s short-term investments are considered Level 2 investments under the GAAP fair value hierarchy because the fair value inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

During the quarters ended September 30, 2012, and December 31, 2011, there were no transfers between Level 1 and Level 2 fair value instruments.

5. Short-Term Investments

Marketable securities are classified as available-for-sale. These securities are reported at fair value with any changes in market value reported as a part of comprehensive income. Premiums (discounts) are amortized (accreted) to interest income over the life of the investment. Marketable securities are classified as short-term investments if the remaining maturity from the date of purchase is in excess of 90 days.

The Company determines the fair value amounts by using available market information. As of September 30, 2012, and December 31, 2011, the average contractual maturity was less than 12 months and the contractual maturity of any single investment did not exceed 12 months.

As of September 30, 2012, and December 31, 2011, unrealized gains and losses on available-for-sale securities are summarized as follows (in thousands):

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September 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash, Cash Equivalents and Available-for-Sale Securities
Obligations of U.S. government agencies	$	7,870	$	—	$	(1	)	$	7,869
Obligations of U.S. corporations	4,899		1		—			4,900
Obligations of Non-U.S. corporations	4,147		—		(1		)	4,146
Money market funds	3,288		—		—			3,288
Cash	58,930		—		—			58,930
	$	79,134	$	1	$	(2	)	$	79,133
Amounts included in cash and cash equivalents	$	62,218	$	—	$	—		$	62,218
Amounts included in short-term investments	16,916		1		(2		)	16,915
	$	79,134	$	1	$	(2	)	$	79,133



December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash, Cash Equivalents and Available-for-Sale Securities
Obligations of U.S. government agencies	$	6,219	$	1	$	(1	)	$	6,219
Obligations of U.S. corporations	2,633		—		(3		)	2,630
Obligations of Non-U.S. corporations	1,048		—		—			1,048
Agency bonds	275		—		—			275
Money market funds	10,035		—		—			10,035
Cash	65,016		—		—			65,016
	$	85,226	$	1	$	(4	)	$	85,223
Amounts included in cash and cash equivalents	$	75,326	$	—	$	—		$	75,326
Amounts included in short-term investments	9,900		1		(4		)	9,897
	$	85,226	$	1	$	(4	)	$	85,223

As of September 30, 2012, and December 31, 2011, the Company’s cash equivalents were primarily in the form of money market funds, and the Company had no significant unrealized gains or losses on any of these investments. Cash equivalents were $3.3 million and $10.3 million as of September 30, 2012, and December 31, 2011, respectively.

6. Acquisitions and Dispositions

Caretools, Inc. In connection with the acquisition of Caretools, Inc. on June 23, 2009, the Company recorded contingent consideration of $1.3 million on the acquisition date. This contingent consideration was based on an estimate of revenues to be generated from sales of products developed incorporating Caretools’ technology.

As a result of the Company’s decision to pursue strategic alternatives for the EHR business, the Company recorded an impairment charge to write down the carrying value of the contingent consideration liability associated with the EHR business to an estimated fair value of zero during the fourth quarter of 2011. The change in the fair value of the contingent consideration was primarily due to revised estimates of revenues to be derived from the acquired technologies of Caretools, Inc. As of December 31, 2011, the fair value of the contingent consideration liability was zero due to forecasted revenues of zero for the EHR business.

In June 2012, we sold certain assets related to the EHR iPad application to a third party pursuant to a purchase agreement that was not material to our condensed consolidated financial statements. The consideration received from the sale of the EHR iPad application together with all other miscellaneous wind-down costs resulted in a net gain of approximately $0.4 million for the three months ended September 30, 2012, and a net loss of approximately $1.7 million for the nine months ended September 30, 2012. The results of operations for the EHR business are recorded in gain (loss) from discontinued operations, net of tax, in the condensed consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2012 and 2011. The results of the EHR business for the three and nine months ended September 30, 2012 include tax benefits of $0.2 million and $0.9 million, respectively. Prior period amounts have been revised to conform to the current period presentation.

MedCafe Inc. In connection with the acquisition of MedCafe on February 1, 2010, the Company recorded contingent consideration

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of $14.8 million on the acquisition date. This contingent consideration was based on an estimate of revenues to be generated from sales of products developed incorporating MedCafe technology. In 2011, the Company recorded a decrease in the contingent consideration liability resulting in a gain of approximately $5.9 million for the year ended December 31, 2011. The change in the fair value of the contingent consideration was primarily due to an agreement with the sellers in the second quarter of 2011 to settle the liability for $6.4 million.

7. Intangible Assets

Intangible assets excluding goodwill consisted of the following (in thousands):



	September 30, 2012						December 31, 2011
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Impairment		Net Carrying Amount
Technology	$	11,260	$	7,757	$	3,503	$	11,780	$	5,015	$	448	$	6,317
Client relationships	30		30		—		60		34		26		—
Trademarks and trade name	40		40		—		50		31		9		10
Non-compete agreement	850		588		262		870		423		3		444
	$	12,180	$	8,415	$	3,765	$	12,760	$	5,503	$	486	$	6,771

Amortization of intangible assets was $1.0 million for the three months ended September 30, 2012, and $1.1 million for the three months ended September 30, 2011. Amortization was $3.0 million and $3.1 million for the nine months ended September 30, 2012 and 2011, respectively. Amortization of the acquired intangible assets is reflected in cost of revenues. Amortization for the years ending December 31, 2012 and 2013 is expected to be approximately $4.0 million and $2.7 million, respectively.

8. Income Taxes

For the three months ended September 30, 2012, the Company recorded an income tax benefit of approximately $0.2 million, of which $0.1 million was allocated to continuing operations, with the balance of $0.1 million allocated to discontinued operations. For the three months ended September 30, 2011, the Company recorded an income tax benefit of $0.4 million, which was comprised of a minimal tax provision allocated to continuing operations and a tax benefit of $0.4 million allocated to discontinued operations. The income tax benefit during the three months ended September 30, 2012 represented the federal and state statutory rates adjusted for non-deductible stock compensation expense partially offset by a return-to-provision adjustment. The income tax provision during the three months ended September 30, 2011 reflects the federal and state statutory tax rates adjusted for non-deductible stock compensation expense partially offset by research and development credits.

For the nine months ended September 30, 2012, the Company recorded an income tax benefit of approximately $1.3 million, of which $0.4 million was allocated to continuing operations, with the balance of $0.9 million allocated to discontinued operations. For the nine months ended September 30, 2011, the Company recorded an income tax provision of approximately $1.3 million, which was comprised of a tax provision of approximately $3.2 million allocated to continuing operations and a tax benefit of $1.9 million allocated to discontinued operations. The income tax benefit recorded during the nine months ended September 30, 2012 represented the federal and state statutory rates adjusted for non-deductible stock compensation expense partially offset by a return-to-provision adjustment. The income tax provision recorded during the nine months ended September 30, 2011 reflected the federal and state statutory tax rates adjusted for non-deductible stock compensation expense partially offset by research and development credits.

As of September 30, 2012, the amount of interest and penalties associated with the unrecognized tax benefits were insignificant. The Company does not expect any significant increases or decreases to its unrecognized tax benefits in the next 12 months.

9. Commitments and Contingencies

Legal Matters

From time to time, the Company may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. In accordance with GAAP, the Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements,

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rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. If any unfavorable ruling were to occur in any specific period or if a loss becomes probable and estimable, there exists the possibility of a material adverse impact on the Company’s results of operations, balance sheet or cash flows.

Indemnification

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to the agreements, each party may indemnify, defend and hold the other party harmless with respect to such claim, suit or proceeding brought against it by a third party for certain claims identified in such agreements. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company has not been obligated to make significant payments for these obligations and no liabilities have been recorded for these obligations on the condensed consolidated balance sheets as of September 30, 2012, or December 31, 2011.

The Company also indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company has a Director and Officer Insurance Policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. Historically, the Company has not been obligated to make any payments for these obligations and no liabilities have been recorded for these obligations on the condensed consolidated balance sheets as of September 30, 2012, or December 31, 2011.

Contractual Obligations

The Company's contractual cash obligations and commercial commitments as of September 30, 2012 and the effects such obligations and commitments are expected to have on the Company's liquidity and cash flows in future periods have not changed significantly since December 31, 2011.

10. Equity Award Plans and Stock-Based Compensation

In August 1999, the Company’s Board of Directors adopted and the stockholders approved, the 1999 Stock Option Plan (“1999 Plan”). In May 2009, the Board of Directors adopted and the stockholders approved, an amendment and restatement of the 1999 Plan, the 2008 Equity Incentive Plan (“2008 Plan”). In July 2010, the Company’s Board of Directors adopted the 2010 Equity Incentive Plan (“2010 Plan,” and together with the 1999 Plan and the 2008 Plan, the “Plans”). The 2010 Plan was most recently amended by the Board of Directors on December 22, 2010, and was approved by the Company’s stockholders on January 5, 2011. The 2010 Plan became effective upon the completion of the IPO. Awards granted from May 2009 but before the completion of the IPO continue to be governed by the 2008 Plan. All outstanding stock awards granted prior to May 2009 continue to be governed by the terms of the Company’s 1999 Plan.

The 2010 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSU awards, performance stock awards and other stock awards. In addition, the 2010 Plan provides for the grant of performance cash awards. The Company may issue incentive stock options (“ISOs”) only to its employees. Non-qualified stock options (“NQSOs”) and all other awards may be granted to employees, directors and consultants. ISOs and NQSOs are granted to employees with an exercise price equal to the market price of the Company’s common stock at the date of grant, as determined by the Company’s Board of Directors, or its designee. Stock options granted to employees generally have a contractual term of 10 years and vest over five years of continuous service, with 25% of the stock options vesting on the one-year anniversary of the service inception date or grant date and the remaining 75% vesting in equal monthly installments over the 48-month period thereafter.

The number of shares of the Company’s common stock reserved for issuance under the 2010 Plan will automatically be increased annually on January 1^st of each year, starting on January 1, 2012 and continuing through January 1, 2014, by the lesser of (a) 4% of the total number of shares of common stock outstanding on the last day of the preceding calendar year, (b) 1,965,000 shares of common stock or (c) a number determined by the Company’s Board of Directors that is less than (a) or (b).

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	Options Outstanding
	Number of Options		Weighted Average Exercise Price		Weighted Average Contractual Term (Years)	Aggregate Intrinsic Value
Balances, January 1, 2012	4,684		$	10.85	5.32	$	4,318
Granted	1,824		8.67
Forfeited, cancelled or expired	(1,588	)	—
Exercised	(468	)	—
Balances, September 30, 2012	4,452		$	10.33	6.21	$	9,491
Options vested and expected to vest at September 30, 2012	4,028		$	10.47	5.88	$	8,241
Options exercisable at September 30, 2012	2,579		$	11.02	4.05	$	4,349



	Number of RSUs Outstanding		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Balances, January 1, 2012	137		1.74	$	1,072
Awarded	181
Released	(30	)
Forfeited or cancelled	(68	)
Balances, September 30, 2012	220		2.04	$	2,558
RSUs vested and expected to vest at September 30, 2012	161		1.96	$	1,872

The following table summarizes all stock-based compensation charges for the three and nine months ended September 30, 2012 and 2011 (in thousands):



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012		2011			2012		2011
Stock-based compensation expense	$	874	$	1,930		$	3,558	$	5,866
Stock-based compensation associated with outstanding repriced options	21		(803		)	57		(409		)
Total stock-based compensation	$	895	$	1,127		$	3,615	$	5,457

Stock-based compensation expense for the nine months ended September 30, 2011 includes a charge of approximately $0.5 million related to modification of the terms of the stock options held by certain directors who resigned from the Board of Directors during the three months ended June 30, 2011.

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options and RSUs. This model requires the input of highly subjective assumptions including the expected term of the stock option, expected stock price volatility and expected forfeitures. The Company used the following assumptions:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Dividend yield	—			—			—			—
Expected volatility	56		%	51		%	57		%	51%-52%
Risk-free interest rate	.60%-.71%			.94%-1.12%			.60%-1.09%			.94%-2.14%
Expected life of options (in years)	4.25			5.00			4.25-4.50			4.50-5.00
Weighted-average grant date fair value	$	3.45		$	6.59		$	4.07		$	8.54

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11. Related Party Transactions

The Company recorded revenue from two advertising agencies (on behalf of their clients) whose parent company's Chief Executive Officer is a member of the Company's Board of Directors. The Company recorded revenue from these entities of 0.7 million and $1.7 million for the three months ended September 30, 2012 and 2011, respectively, and $1.9 million and $3.9 million for the nine months ended September 30, 2012 and 2011, respectively. There were accounts receivable from these entities of approximately $1.0 million as of September 30, 2012, and December 31, 2011.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2011, or fiscal year 2011, included in our Annual Report on Form 10-K for fiscal year 2011, or 2011 Annual Report on Form 10-K. References to “Epocrates,” “we,” “our” and “us” are to Epocrates, Inc. unless otherwise specified or the context otherwise requires.

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Terminology such as “believe,” “may,” “might,” “objective,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential” or the negative of these terms or other similar expressions is intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in “Part II — Item 1A. Risk Factors” below, and those discussed in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” included in our 2011 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or SEC, on March 19, 2012. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Business Overview

Epocrates is a leading physician platform for essential clinical content, practice tools and health industry engagement at the point of care. The Epocrates network consists of more than one million healthcare professionals, including 50% of U.S. physicians, who routinely use its solutions and services. Epocrates’ portfolio includes top-ranked medical applications, such as the industry’s #1 medical application among U.S. physicians, which provides convenient, point-of-care access to information such as dosing, drug interactions, pricing and insurance coverage for thousands of brand, generic and over-the-counter drugs. The features available through our unique physician platform are often referenced multiple times per day and help healthcare professionals make more informed prescribing decisions, improve workflow and enhance patient safety. We offer our products on major U.S. mobile platforms including Apple, Android and BlackBerry.

We generate revenue by providing clients in the healthcare industry (e.g., pharmaceutical companies, managed care companies and market research firms) with interactive services to engage with our network of members and through the sale of subscriptions to our premium drug and clinical reference tools to healthcare professionals. Our client base is located almost entirely within the U.S. For the three and nine months ended September 30, 2012 and 2011, no single client accounted for more than 10% of total revenues. There was one client that accounted for more than 10% of accounts receivable, net as of September 30, 2012. One client accounted for 15% of accounts receivable, net as of December 31, 2011.

Recent Developments

As previously reported, the Audit Committee of the Board of Directors of Epocrates, as authorized by the Board of Directors, approved the discontinuation of Epocrates’ Electronic Health Record, or EHR, business in early 2012. In connection with this

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decision, we recorded an impairment charge of approximately $8.5 million in the fourth fiscal quarter of 2011, which represents the write-down of the carrying value of the goodwill, intangible and other long-lived assets related to the EHR product to their estimated fair value of zero. This charge was recorded in Impairment of Long-lived Assets and Goodwill in our consolidated statements of operations for the year ended December 31, 2011.

Upon the Audit Committee's approval, we met the requirements for reporting the EHR segment as discontinued operations for the three months ended March 31, 2012, and the results of this segment are now recorded in gain (loss) from discontinued operations, net of tax on our condensed consolidated statements of comprehensive (loss) income. Prior period results have been revised to conform to the current period presentation.

The Company understated $50 thousand of operating expenses in the three months ended March 31, 2012 and overstated $32 thousand of operating expenses in the three months ended June 30, 2012. The Company recorded correcting adjustments of these same amounts during the three months ended June 30, 2012 and September 30, 2012, respectively. Management does not believe the misstatements or correcting adjustments described above are material to any previously issued interim or annual financial statements or to the expected full year results for 2012.

Highlights

•

For the three months ended September 30, 2012, we recorded total revenues of $26.0 million, a decrease of $0.6 million, or 2%, from the three months ended September 30, 2011. For the nine months ended September 30, 2012, we recorded total revenues of $80.4 million, a decrease of $3.3 million, or 4%, from the nine months ended September 30, 2011. For the nine months ended September 30, 2012, the decrease was primarily due to an unusually high number of unused pharmaceutical license code expirations for which we recognized revenue in the nine months ended September 30, 2011 as well as lower iTunes App Store sales for the nine months ended September 30, 2012.

•

Net loss was $0.6 million for the three months ended September 30, 2012, versus net income of $0.7 million for the three months ended September 30, 2011. Net loss was $2.4 million for the nine months ended September 30, 2012, versus net income of $3.0 million for the nine months ended September 30, 2011. Results for these periods include $0.2 million for the three months ended September 30, 2012, and $1.5 million for the nine months ended September 30, 2012, of proceeds from the sale of the EHR component technology.


•	Net loss per share was $0.02 for the three months ended September 30, 2012, compared to net income per diluted share of $0.03 for the three months ended September 30, 2011. Net loss per share was $0.10 for the nine months ended September 30, 2012, compared to net income per diluted share of $0.11 for the nine months ended September 30, 2011.

•

Loss from continuing operations was $1.0 million for the three months ended September 30, 2012, versus income from continuing operations of $0.7 million for the three months ended September 30, 2011. For the three months ended September 30, 2012, the net loss was primarily due to increased operating expenses as well as decreased revenues and increased cost of revenues. Loss from continuing operations was $0.7 million for the nine months ended September 30, 2012 versus income from continuing operations of $5.1 million for the nine months ended September 30, 2011. Income from continuing operations for the nine months ended September 30, 2011 includes a $6.4 million gain on settlement as a result of an agreement entered into with the sellers of MedCafe, Inc. during June 2011. Excluding the gain on settlement and change in fair value of contingent consideration, results for both the nine months ended September 30, 2012 and 2011 would have been comparable.

•

Loss per share from continuing operations was $0.04 for the three months ended September 30, 2012, compared to income from continuing operations of $0.03 per diluted share for the three months ended September 30, 2011. Loss from continuing operations per share was $0.03 for the nine months ended September 30, 2012, compared to income from continuing operations of $0.21 per diluted share for the nine months ended September 30, 2011.


•	Earnings before interest, taxes, non-cash and other items ("adjusted EBITDA"), as defined in the GAAP to non-GAAP reconciliation provided in "Non-GAAP Financial Measures," was $2.0 million for the three months ended September 30, 2012, compared to adjusted EBITDA of $3.9 million for the three months ended September 30, 2011, or a 50% decrease

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from the prior year. For the nine months ended September 30, 2012, adjusted EBITDA was $9.0 million compared to $15.6 million for the nine months ended September 30, 2011, or a 42% decrease from the prior year. The decrease in adjusted EBITDA for the three and nine months ended September 30, 2012, was primarily attributable to increased operating expenses as well as decreased revenues coupled with an increase in cost of revenues compared to the three and nine months ended September 30, 2011.


•	Total cash, cash equivalents and short-term investments declined by 7% to $79.1 million at September 30, 2012, compared to $85.2 million at December 31, 2011.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S., or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. Our critical accounting policies are those that affect our historical financial statements materially and involve difficult, subjective or complex judgments by management.

There have been no significant changes in our critical accounting policies during the quarter ended September 30, 2012, compared to those previously disclosed in “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2011 Annual Report on Form 10-K.

Results of Operations

The following table summarizes our results of operations for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011 (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Total revenues, net	$	26,025		$	26,595		$	80,380		$	83,632
Total cost of revenues	10,803			10,283			32,039			29,441
Gross profit	15,222			16,312			48,341			54,191
Operating expenses:
Sales and marketing	6,871			6,050			19,664			19,650
Research and development	5,369			5,312			15,497			15,386
General and administrative	4,113			4,259			14,333			16,424
Facilities exit costs	—			—			—			618
Gain on settlement and change in fair value of contingent consideration	—			—			—			(5,933		)
Total operating expenses	16,353			15,621			49,494			46,145
(Loss) income from operations	(1,131		)	691			(1,153		)	8,046
Interest income	11			15			22			66
Other income (expense), net	—			3			(1		)	182
(Loss) income before income taxes	(1,120		)	709			(1,132		)	8,294
Benefit from (provision for) income taxes	104			(4		)	392			(3,154		)
(Loss) income from continuing operations	(1,016		)	705			(740		)	5,140
Gain (loss) from discontinued operations, net of tax	408			(19		)	(1,705		)	(2,186		)
Net (loss) income	$	(608	)	$	686		$	(2,445	)	$	2,954

In 2011, we had two reportable segments: (1) Subscriptions and Interactive Services and (2) EHR. On February 24, 2012, the Audit Committee of our Board of Directors, as authorized by the Board of Directors, approved the discontinuation of Epocrates’ EHR product. In the first quarter of 2012, we qualified for discontinued operations presentation under GAAP, and at such time, the EHR operating segment results were reported in loss from discontinued operations on our condensed consolidated statements of comprehensive (loss) income. Prior period results have been revised in order to conform to the current period presentation.

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Revenues

We generate revenue by providing clients in the healthcare industry with interactive services to engage with our network of members and through the sale of subscriptions to our premium drug and clinical reference tools to healthcare professionals. Revenues from Subscriptions and Interactive Services were as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Subscriptions	$	5,045	$	5,143	$	14,472	$	17,446
Interactive Services	20,980		21,452		65,908		66,186
	$	26,025	$	26,595	$	80,380	$	83,632

Subscriptions. Subscriptions revenue decreased $0.1 million for the three months ended September 30, 2012, and decreased $3.0 million for the nine months ended September 30, 2012. The decrease in subscriptions revenue for the three months ended September 30, 2012 is primarily attributable to a decrease in iTunes App Store sales. The decrease in subscriptions revenue for the nine months ended September 30, 2012 is primarily attributable to an unusually high number of unused license code expirations for which we recognized revenue of $1.8 million in the first nine months of 2011. The decline in subscriptions revenue was additionally impacted by a decrease of approximately $0.6 million in the nine months ended September 30, 2012 in iTunes App Store sales, as we decreased our offering of Modality applications from the prior year. We expect the percentage of members who pay for a subscription to remain unchanged or even decrease over time. As a result, we expect subscription revenue from our premium products to decrease in total and as a percentage of revenue in the future.

Interactive Services. Interactive services revenue decreased $0.5 million for the three months ended September 30, 2012, and decreased $0.3 million for the nine months ended September 30, 2012. The $0.5 million decrease in interactive services revenue for the three months ended September 30, 2012 was primarily due to a $1.5 million decline in pharmaceutical revenues, which was partially offset by a $1.0 million increase in market research services. The $0.3 million decrease in interactive services revenue for the nine months ended September 30, 2012 was the result of a $0.3 million decrease in formulary hosting services, as a $2.1 million increase in market research services was entirely offset by a $2.1 million decline in pharmaceutical revenues.

Cost of revenues

Cost of revenues consists of the costs related to providing services to clients which include salaries and related personnel expenses, stock-based compensation, service support costs, payments to participants for market research surveys we conduct for our clients, third-party royalties and allocated overhead. Third-party royalties consist of fees paid to branded content owners for the use of their intellectual property in our premium drug and reference products. Allocated overhead represents expenses such as rent, occupancy charges and information technology costs that we allocate to all departments based on headcount. We also allocate depreciation and amortization expense to cost of revenues.

The following is a breakdown of cost of revenues related to subscriptions and interactive services for the three and nine months ended September 30, 2012 and 2011 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Subscriptions	$	1,782	$	1,597	$	5,480	$	5,440
Interactive Services	9,021		8,686		26,559		24,001
	$	10,803	$	10,283	$	32,039	$	29,441

Subscriptions. Cost of revenues for subscriptions increased by $0.2 million for the three months ended September 30, 2012, and increased less than $0.1 million for the nine months ended September 30, 2012 versus the comparable period in 2011. As a percentage of subscriptions revenue, cost of subscriptions revenues was 35% for the three months ended September 30, 2012, versus 31% for the three months ended September 30, 2011. As a percentage of subscriptions revenue, cost of subscriptions revenues was 38% for the nine months ended September 30, 2012, versus 31% for the nine months ended September 30, 2011. The increase in cost of subscriptions revenues as a percentage of subscriptions revenues for the three and nine months ended

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September 30, 2012 is due to the decline in subscriptions revenues from the same periods in the prior year.

Interactive Services. Cost of revenues for interactive services increased approximately $0.3 million for the three months ended September 30, 2012, compared to the same period in 2011, primarily due to increases of $0.8 million in honoraria expenses as a result of higher market research activity and $0.2 million in co-location employee-related expenses due to hiring new employees, partially offset by a decrease of $0.7 million for pharmaceutical and third-party content costs.

Cost of interactive services revenues increased approximately $2.6 million for the nine months ended September 30, 2012, compared to the same period in 2011, primarily due to increases of $1.5 million in honoraria expenses as a result of higher market research activity and $0.9 million in increased co-location employee-related expenses as a result of hiring new employees.

Cost of interactive services revenues as a percentage of interactive services revenues was 43% for the three months ended September 30, 2012, and 40% for the three months ended September 30, 2011. Cost of interactive services revenues as a percentage of interactive services revenues was 40% for the nine months ended September 30, 2012, and 36% for the nine months ended September 30, 2011.

Sales and marketing expense

Sales and marketing expense primarily consists of salaries and related personnel expenses, sales commissions, stock-based compensation, trade show expenses, promotional expenses, public relations expenses and allocated overhead.

Sales and marketing expense increased approximately $0.8 million for the three months ended September 30, 2012, versus the same period in 2011. The increase in the three months ended September 30, 2012, compared to the same period in the prior year, was due to an increase of $0.5 million in employee compensation and a $0.2 million increase in stock compensation as a result of several positions being filled during the period, and a $0.2 million increase in marketing related expenses. This was partially offset by a $0.2 million decrease in sales commissions as a result of a revised commission plan for 2012. Sales and marketing expense was $19.7 million for both the nine months ended September 30, 2012 and 2011.

Sales and marketing expense as a percentage of total revenues increased from 23% for the three months ended September 30, 2011, to 26% for the three months ended September 30, 2012, as a result of lower revenues in the three months ended September 30, 2012. Sales and marketing expense as a percentage of total revenues increased from 23% for the nine months ended September 30, 2011, to 24% for the nine months ended September 30, 2012.

Research and development expense

Research and development expense primarily consists of salaries and related personnel expenses, stock-based compensation, allocated overhead, consultant fees and expenses related to the design, development, testing and enhancements of our services.

Research and development expense increased approximately $0.1 million, or 1%, for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. As a percentage of total revenues, research and development expense was 21% for the three months ended September 30, 2012, and 20% for the three months ended September 30, 2011.

Research and development expense increased approximately $0.1 million, or 1%, for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. As a percentage of total revenues, research and development expense was 19% for the nine months ended September 30, 2012, and was 18% for the nine months ended September 30, 2011.

General and administrative expense

General and administrative expense primarily consists of salaries and related personnel expenses, stock-based compensation, consulting, audit fees, legal fees, allocated overhead and other general corporate expenses.

General and administrative expense decreased $0.1 million, or 3%, for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. General and administrative expense as a percentage of total revenues was 16% for both the three months ended September 30, 2012 and 2011.

General and administrative expense decreased $2.1 million, or 13%, for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. This decrease was primarily due to decreases of $1.4 million in stock-based compensation expense and $1.0 million in legal fees. The $1.4 million decrease in stock-based compensation expense was primarily due the departure of certain members of senior management during the nine months ended September 30, 2012 as well as additional

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stock-based compensation expense of $0.7 million in the nine months ended September 30, 2011 that was recorded in connection with the modification of the terms of the stock options held by certain directors who resigned from the Board of Directors during the first quarter of 2011. We incurred significant legal and other professional fees during the nine months ended September 30, 2011, to support our compliance with the subpoena received in connection with the SEC investigation. General and administrative expense as a percentage of total revenues was 18% for the nine months ended September 30, 2012, and was 20% for the nine months ended September 30, 2011.

Facilities exit costs

We recorded a charge of approximately $0.6 million in the nine months ended September 30, 2011, relating to facilities exit costs. We vacated our East Windsor, New Jersey office in the first quarter of 2011 and relocated our New Jersey operations to Ewing, New Jersey. We had signed a non-cancellable lease for the East Windsor location, which does not expire until the end of fiscal 2012, and therefore, we will be liable to make monthly lease rentals under the contract. The liability recorded at fair value is based on the present value of the remaining lease rentals and is reduced for the estimated sub-lease rentals that could be reasonably obtained for the property.

Gain on settlement and change in fair value of contingent consideration

For the nine months ended September 30, 2011, gain on settlement and change in fair value of contingent consideration reflects a $6.4 million gain on settlement as a result of an agreement entered into with the sellers of MedCafe, Inc. during June 2011, offset by an increase in contingent consideration expense of $0.5 million related to revaluing the contingent consideration liability to its fair value as of March 31, 2011.

Benefit from (provision for) income taxes

At September 30, 2012, our estimated annual effective tax rate was approximately 27% versus an estimated annual effective tax rate of 35% at September 30, 2011. The difference in the effective tax rate year over year is primarily due to changes in management's projections of estimated annual income or loss. We determine our interim tax benefit from (provision for) income taxes using an estimated annual effective tax rate methodology. Our annual effective tax rate is affected by our forecasted net income, research tax credits, stock compensation expense related to incentive stock options, or ISOs, and the expected level of other tax benefits. Our annual effective tax rate is difficult to predict because it will be impacted by any disqualifying dispositions of ISOs by our employees. Disqualifying dispositions occur when an employee sells stock that was acquired through the exercise of an ISO within two years of the ISO grant date or one year of the ISO exercise date. Our estimated annual effective tax rate could materially change if there are a significant number of disqualifying dispositions of ISOs during the period.

Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements presented on a U.S. GAAP basis, we use non-GAAP measures, such as adjusted EBITDA, with the intent of providing both management and investors a more complete understanding of our underlying operational results and trends and our marketplace performance. In addition, these adjusted non-GAAP results are

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among the information management uses as a basis for planning and forecasting for future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Adjusted EBITDA is an unaudited number and represents net income before income and expenses unrelated to core business activities, such as: interest income, other income, net and (benefit from) provision for income taxes; non-recurring income and expenses, such as facilities exit costs and gain on sale and change in fair value of contingent consideration; and non-cash charges, such as depreciation and amortization expense (including intangible assets) related to the core business, stock-based compensation and other expenses.

Adjusted EBITDA is not a measure of operating performance or liquidity calculated in accordance with GAAP and should be viewed as a supplement to, and not a substitute for, our results of operations presented on a GAAP basis. Adjusted EBITDA does not purport to represent cash flow provided by, or used in, operating activities as defined by GAAP. Our condensed consolidated statements of cash flows present our cash flow activity in accordance with GAAP. Furthermore, adjusted EBITDA is not necessarily comparable to similarly-titled measures reported by other companies.

We believe adjusted EBITDA is used by, and is useful to, investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that:


•	EBITDA is widely used by investors to measure a company’s operating performance without regard to such items as non-recurring items, interest (income) expense, taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and


•	investors commonly adjust EBITDA information to eliminate the effect of stock-based compensation expenses and other charges, which can vary widely from company to company and impair comparability.

Our management uses adjusted EBITDA:


•	as a measure of operating performance to assist in comparing performance from period to period on a consistent basis;


•	as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations;


•	in communications with the Board of Directors, stockholders, analysts and investors concerning our financial performance; and


•	as a significant performance measurement included in our bonus plan.

The table below sets forth a reconciliation of net (loss) income to adjusted EBITDA (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net (loss) income, as reported	$	(608	)	$	686		$	(2,445	)	$	2,954
Gain (loss) from discontinued operations, net of tax	408			(19		)	(1,705		)	(2,186		)
(Loss) income from continuing operations	$	(1,016	)	$	705		$	(740	)	$	5,140
Add: (Income) expenses unrelated to core business activities
Interest income	(11		)	(15		)	(22		)	(66		)
(Benefit from) provision for income taxes	(104		)	4			(392		)	3,154
Add: Non-recurring and non-cash charges (income)
Depreciation and amortization expense (including intangible assets) related to core business	1,996			1,968			5,959			5,977
Stock-based compensation	895			1,127			3,541			5,457
Gain on settlement and change in fair value of contingent consideration ⁽¹⁾	—			—			—			(5,933		)
Other ⁽²⁾	191			119			667			1,833
Adjusted EBITDA	$	1,951		$	3,908		$	9,013		$	15,562


⁽¹⁾	Includes a $6.4 million gain recognized in the second quarter of 2011 related to the settlement of the contingent consideration

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liability with the sellers of MedCafe, Inc., a company we acquired in 2010.

⁽²⁾

For the three months ended September 30, 2012, represents severance payments. For the three months ended September 30, 2011, represents legal expenses associated with the SEC subpoena and severance payments. For the nine months ended September 30, 2012, represents severance payments and retention bonuses. For the nine months ended September 30, 2011, represents $0.9 million in legal expenses associated with the SEC subpoena, $0.6 million in facilities exit costs and $0.3 million in severance payments.

Note: prior period amounts have been revised to conform to the current period presentation.

The decrease in adjusted EBITDA for the three and nine months ended September 30, 2012 was primarily attributable to increased operating expenses as well as decreased revenues coupled with an increase in cost of revenues compared to the same periods in 2011.

Liquidity and Capital Resources

Our principal sources of liquidity as of September 30, 2012 consisted of cash, cash equivalents and short-term investments of $79.1 million compared to $85.2 million at December 31, 2011. We believe that our available cash resources and anticipated future cash flow from operations will provide sufficient cash resources to meet our contractual obligations and our currently anticipated working capital and capital expenditure requirements for at least the next 12 months. Our future liquidity and capital requirements will depend upon numerous factors, including retention of clients at current volume and revenue levels, our existing and new application and service offerings, competing technological and market developments and potential future acquisitions. In addition, our ability to generate cash flow is subject to numerous factors beyond our control, including general economic, regulatory and other matters affecting our clients and us.

Operating activities

Cash used in operating activities of $4.1 million during the nine months ended September 30, 2012 primarily consisted of a $2.4 million net loss and a $1.5 million increase in prepaid expenses and other assets.

Cash used in operating activities of $4.1 million during the nine months ended September 30, 2012 compared with cash provided by operating activities of $7.6 million during the nine months ended September 30, 2011. The decrease in cash provided by operating activities period over period of $11.7 million was primarily due to a decrease in net income of approximately $5.4 million for the nine months ended September 30, 2012. Additionally, there was a decrease of $3.5 million in cash collections resulting in higher accounts receivable and an increase of $3.0 million in cash outflows for prepaid expenses during the nine months ended September 30, 2012 as compared to the same period in 2011.

Investing activities

Cash used in investing activities was $10.7 million for the nine months ended September 30, 2012, compared with net cash used in investing activities of $8.4 million for the comparable period in 2011. The $2.3 million increase in cash used in investing activities was primarily due to a $6.5 million increase in net purchases of short-term investments, partially offset by a $4.3 million decrease in purchases of property and equipment as a result of the discontinuation of the Company's EHR operations in early 2012.

Financing activities

Cash provided by financing activities was $1.6 million in the nine months ended September 30, 2012, compared with $30.1 million of cash provided by financing activities in the nine months ended September 30, 2011. Cash provided by financing activities of $1.6 million during the nine months ended September 30, 2012 is due to proceeds received from the exercise of common stock options. The $28.5 million decrease in cash provided by financing activities in the nine months ended September 30, 2012 was primarily a result of a net cash inflow of $34.6 million in the nine months ended September 30, 2011 due to $64.2 million of proceeds from the issuance of common stock under our IPO, partially offset by the payment of $29.6 million of aggregate cumulative dividends to the holders of our Series B preferred stock. The decline in cash provided by financing activities in the nine months ended September 30, 2012 was additionally offset by a $6.4 million decline due to the gain on the settlement of a contingent consideration agreement with the sellers of MedCafe, Inc. during the nine months ended September 30, 2011.

Contractual Obligations

Our contractual obligations at September 30, 2012, and the effects that such obligations are expected to have on future liquidity

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and cash flows, have not changed significantly since December 31, 2011.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts.

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Indemnification

See Note 9 – Commitments and Contingencies to the condensed consolidated financial statements of this quarterly report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There are no material changes in market risk from the information presented in Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk,” in our 2011 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our President, Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2012, our President, Chief Executive Officer and Interim Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters which arise in the ordinary course of business. We are not currently involved in any material legal proceedings.

Item 1A. Risk Factors

Due to changes in our business since we last disclosed risk factors in our 2011 Annual Report on Form 10-K, we are updating the following risk factors as set forth below:

We are dependent upon our senior executive management and other highly specialized personnel and the loss or failure to identify, hire, motivate and retain additional highly specialized personnel could negatively impact our ability to grow our business.

Our success and the execution of our growth strategy depend largely on the continued service of our senior executive management team. We have recently had significant turnover in our senior executive management team. In the last year, we have had members of the senior executive management team leave the company and we have retained new members who are part of our current management team. Although these executives have joined us with a significant amount of professional experience, our future success could be hindered by their limited exposure to our business. Moreover, the loss of key members of our management team could have a negative impact on our ability to manage and grow our business effectively. We cannot assure you that in such an event we would be able to replace any member of our management team in a timely manner, or at all, on acceptable terms. In addition, our search for replacements for departed executives may cause uncertainty regarding the future of our business, impact

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employee hiring and retention, increase the volatility in our stock price and adversely impact our revenue, operating results and financial condition.

Our future success and the execution of our growth strategy also depend largely on our continuing ability to identify, hire, develop, motivate and retain highly specialized personnel, including software engineers, clinician authors and other technical, sales and marketing personnel. Our competitors, employers in other industries, healthcare providers, academic institutions and governmental entities and organizations also often seek persons with similar qualifications. We cannot assure you that we will be able to hire or retain a sufficient number of qualified personnel to meet our requirements, or that we will be able to do so at salary and benefit costs that are acceptable to us.

We face potential liability related to the privacy and security of personal information we collect from healthcare professionals through our products and interactive services.

Online user privacy is a major concern in both the United States and abroad. The European Union, or “EU,” adopted the Data Protection Directive, or “DPD,” imposing strict regulations and establishing a series of requirements regarding the collection and use of personally identifiable information online. The DPD provides for specific regulations requiring all non-EU countries doing business with EU member states to provide adequate data privacy protection when receiving personal data from any of the EU member states. Similarly, Canada's Personal Information and Protection of Electronic Documents Act provides Canadian residents with privacy protections in regard to transactions with businesses and organizations in the private sector and sets out ground rules for how private sector organizations may collect, use or disclose personal information in the course of commercial activities. We have privacy policies posted with our services that we believe comply with applicable laws requiring notice to users about our information collection, use and disclosure practices. However, whether and how existing local and international privacy and consumer protection laws in various jurisdictions apply to the Internet and other online technologies is still uncertain and may take years to resolve. United States and international privacy laws and regulations, if drafted or interpreted broadly, could be deemed to apply to the technology we use, and could restrict our information collection methods or decrease the amount and utility of the information that we would be permitted to collect. Any legislation or regulation in the area of privacy of personal information could affect the way we operate our online services and could harm our business. The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may prevent us from selling our products or increase the costs associated with selling our products, and may affect our ability to invest in or jointly develop products in the United States and in foreign jurisdictions. Further, we cannot assure you that the privacy policies and other statements on our applications or our practices will be found sufficient to protect us from liability or adverse publicity relating to the privacy and security of personal information. In the conduct of our market research activities outside the United States, we rely upon a third party to identify and recruit respondents for the market research and to comply with the applicable privacy laws in each jurisdiction in which it operates. If this third party failed to comply with such laws, it could affect its ability to continue to support our business or negatively affect our reputation.

We are additionally deleting the risk factor entitled “We have determined to explore strategic alternatives for our EHR business, and we will receive a negative return on investment whether or not we are able to sell it,” as with the previously disclosed sale of certain assets related to the EHR iPad application, we are no longer in the EHR business.

Except as set forth above, our risk factors have not changed materially from those set forth in our 2011 Annual Report on Form 10-K filed with the SEC on March 19, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Use of Proceeds

On February 1, 2011, our registration statement on Form S-1 (File No. 333-168176) was declared effective for our IPO. As a result of our IPO and the exercise of the over-allotment option on February 3, 2011, both of which closed on February 7, 2011, we received net proceeds of approximately $62.2 million after underwriting discounts and commissions of $4.9 million. In addition, we incurred other expenses associated with our IPO of approximately $3.0 million. The net proceeds were used to pay aggregate cumulative dividends due to the holders of our Series B preferred stock totaling $29.6 million, with the balance being used for general corporate purposes.

There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the

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SEC pursuant to Rule 424(b).

Item 6. Exhibits

See the Exhibit Index which follows the signature page of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

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SIGNATURES

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

Epocrates, Inc.



By:	/s/ ANDREW HURD
	ANDREW HURD
	President, Chief Executive Officer and Interim Chief Financial Officer
	(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

Date: November 9, 2012

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Exhibit Index



Exhibit Number			Description of Document
3.1 (1)			Amended and Restated Certificate of Incorporation dated February 7, 2011.

3.2 (2)			Amended and Restated Bylaws.

4.1 (3)			Specimen common stock certificate.

4.2 (3)			Form of Warrant to purchase Series B convertible preferred stock.

10.1 (4)			2012 Bonus Plan.

10.2 (5)			Employment Agreement, by and between Epocrates, Inc. and Heather Gervais, dated August 6, 2012.

31.1			Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1			Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS			XBRL Taxonomy Instance Document.

101.SCH			XBRL Taxonomy Extension Schema Document.

101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB			XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF			XBRL Taxonomy Extension Definition Linkbase Document.


(1)	Filed as Exhibit 3.1 to our Annual Report on Form 10-K (Reg. No. 001-35062) with the SEC on March 31, 2011, and incorporated herein by reference.


(2)	Filed as Exhibit 3.4 to our Registration Statement on Form S-1, as amended (Reg. No. 333-168176), and incorporated herein by reference.


(3)	Filed as the like-described exhibit to our Registration Statement on Form S-1, as amended (Reg. No. 333-168176), and incorporated herein by reference.


(4)	As described in Item 5.02 of our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 27, 2012 (Reg. No. 001-35062), and incorporated herein by reference.


(5)	Filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 7, 2012 (Reg. No. 001-35062), and incorporated herein by reference.