UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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for
the quarterly period ended March 31, 2008
OR
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from
to
Commission File Number 001-33993
CardioNet, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
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33-0604557
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification Number)
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1010 Second Avenue
San Diego, California 92101
(Address of Principal
Executive Offices, including Zip Code)
(619) 243-7500
(Registrants
Telephone Number, Including Area Code)
N/A
(Former name, former
address and former fiscal year if changed since last report)
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
o
No
x
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 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
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Accelerated
filer
o
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Non-accelerated
filer
x
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Smaller
reporting company
o
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(Do not check if
a smaller reporting company)
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Indicate by check mark
whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934). Yes
o
No
x
As of April 30,
2008, 23,068,332 shares of the registrants common stock, $0.001 par value per
share, were outstanding.
CARDIONET, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2008
TABLE OF CONTENTS
2
PART I
FINANCIAL INFORMATION
Item
1. Financial Statements.
CARDIONET, INC.
CONSOLIDATED BALANCE SHEETS
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March 31, 2008
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(Unaudited)
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December 31, 2007
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Assets
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Current assets:
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Cash and cash
equivalents
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$
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61,973,117
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$
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18,090,636
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Accounts
receivable, net of allowance for doubtful accounts of $10,227,226, and
$7,909,147 at March 31, 2008 and December 31, 2007, respectively
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25,636,175
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22,853,958
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Due from related
parties
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130,206
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142,965
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Prepaid expenses
and other current assets
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1,342,018
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287,284
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Total current
assets
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89,081,516
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41,374,843
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Property and
equipment, net
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15,138,648
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15,094,205
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Intangible
assets, net
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2,560,854
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2,806,950
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Goodwill
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45,999,403
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41,162,835
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Other assets
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1,985,894
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2,600,695
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Total assets
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$
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154,766,315
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$
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103,039,528
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Liabilities
and shareholders equity (deficit)
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Current
liabilities:
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Accounts payable
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$
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2,929,864
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$
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3,971,781
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Accrued
liabilities
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12,005,951
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6,424,886
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Current portion
of debt
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1,489,950
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1,088,528
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Current portion
of capital leases
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48,688
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48,688
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Deferred revenue
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648,850
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465,578
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Total current
liabilities
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17,123,303
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11,999,461
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Long-term debt,
net of current portion
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1,381,976
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1,655,449
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Deferred rent
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849,502
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878,886
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Other noncurrent
liabilities
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60,867
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68,961
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Total
liabilities
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19,415,648
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14,602,757
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Redeemable
convertible preferred stock
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Mandatorily
redeemable convertible preferred stock 0 and 114,883 shares authorized
, 0 and 114,839 issued and outstanding at March 31, 2008 and
December 31, 2007, respectively
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115,301,850
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Shareholders
equity (deficit)
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Series A
0 and 1,563,248 shares authorized, issued and outstanding at March 31,
2008 and December 31, 2007, respectively
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390,812
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Series B
0 and 4,720,347 shares authorized, issued and outstanding at March 31,
2008 and December 31, 2007, respectively
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6,903,969
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Series C
0 and 10,399,011 shares authorized, issued and outstanding at March 31,
2008 and December 31, 2007, respectively
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36,195,991
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Series D
0 and 1,000,000 shares authorized, issued and outstanding at March 31,
2008 and December 31, 2007, respectively
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9,964,933
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Common stock,
$.001 par value and no par value at March 31, 2008 and December 31,
2007, respectively; 200,000,000 and 50,000,000 shares authorized, 22,985,279
and 3,130,054 shares issued, outstanding and vested at March 31, 2008,
and December 31, 2007, respectively
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23,067
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1,399,402
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Paid-in capital
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217,387,993
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Accumulated
deficit
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(82,060,393
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)
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(81,720,186
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)
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Total
shareholders equity (deficit)
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135,350,667
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(26,865,079
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)
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Total
liabilities and shareholders equity (deficit)
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$
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154,766,315
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$
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103,039,528
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See accompanying notes.
3
CARDIONET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
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March 31, 2008
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March 31, 2007
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Revenues:
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Net patient
service revenues
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$
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25,247,977
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$
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10,957,150
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Other revenues
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215,307
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143,361
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Total revenues
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25,463,284
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11,100,511
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Cost of revenues
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9,518,996
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3,790,238
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Gross profit
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15,944,288
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7,310,273
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Operating
expenses:
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Research and
development
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1,141,530
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990,467
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General and
administrative
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9,066,407
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5,200,815
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Sales and
marketing
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5,114,727
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3,319,838
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Integration,
restructuring and other nonrecurring charges
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1,305,555
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Total operating
expenses
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16,628,219
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9,511,120
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Loss from
operations
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(683,931
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)
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(2,200,847
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)
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Other income
(expense):
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Interest income
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178,040
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223,270
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Interest expense
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(65,826
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)
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(1,176,532
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)
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Total other
income (expense)
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112,214
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(953,262
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)
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Loss before benefit
from income taxes
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(571,717
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)
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(3,154,109
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)
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Benefit from
income taxes
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231,510
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Net loss
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(340,207
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)
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(3,154,109
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)
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Dividends on and
accretion of mandatorily redeemable convertible preferred stock
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(2,596,942
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(482,448
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)
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Net loss attributable
to common stockholders
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$
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(2,937,149
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)
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$
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(3,636,557
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)
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Net loss per
common share:
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Basic and
diluted
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$
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(0.63
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)
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$
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(1.22
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)
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Weighted average
number of common shares outstanding:
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Basic and
diluted
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4,694,561
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2,993,061
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See accompanying notes.
4
CARDIONET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended
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March 31, 2008
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March 31, 2007
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Operating
activities
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Net loss
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$
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(340,207
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)
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$
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(3,154,109
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)
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Adjustments to
reconcile net loss to net cash provided by operating activities:
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Depreciation
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1,647,326
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416,248
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Loss on disposal
of property and equipment
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46,313
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10,829
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(Decrease)
increase in deferred rent
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(29,384
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)
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105,010
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Provision for
doubtful accounts
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2,343,544
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1,717,249
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Common stock and
stock options issued for services
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16,200
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Amortization of
debt discount, including recognition of contingent beneficial conversion
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487,292
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Stock-based
compensation
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359,881
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69,363
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Amortization of
intangibles
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246,096
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60,862
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Changes in
operating assets and liabilities:
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Accounts
receivable
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(5,268,726
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)
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(1,730,729
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)
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Due from related
parties
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12,759
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(17,026
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)
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Prepaid expenses
and other current assets
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(911,769
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)
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(132,508
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)
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Other assets
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614,801
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9,514
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Accounts payable
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(1,041,918
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)
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545,030
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Accrued
liabilities
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3,134,542
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2,946,912
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Other noncurrent
liabilities
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(44,862
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)
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Net cash
provided by operating activities
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813,258
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1,305,275
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Investing
activities
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Purchases of
property and equipment
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(1,738,083
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)
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(974,952
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)
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Investment in
subsidiary, net of cash acquired
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(2,608,280
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)
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(45,906,548
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)
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Net cash used in
investing activities
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(4,346,363
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)
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(46,881,500
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)
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Financing
activities
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Net proceeds
from issuance of mandatorily redeemable convertible preferred stock
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102,195,953
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Proceeds from issuance
of common stock
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47,294,052
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2,236
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Proceeds from
issuance of debt
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500,062
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372,997
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Repayment of
debt
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(380,209
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)
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(5,829,840
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)
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Common stock
subject to repurchase
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1,681
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|
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|
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Net cash
provided by financing activities
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47,415,586
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96,741,346
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Net increase in
cash and cash equivalents
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43,882,481
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51,165,121
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Cash and cash
equivalents beginning of period
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18,090,636
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3,909,150
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|
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Cash and cash
equivalents end of period
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$
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61,973,117
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$
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55,074,271
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Supplemental
disclosure of cash flow information
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Cash paid for
interest
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$
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64,010
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$
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2,170,132
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Supplemental
disclosure of non-cash financing activities
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Exercise of
stock options under note receivable arrangements
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$
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$
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276,900
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Mandatorily
redeemable convertible preferred stock issued in connection with bridge loan
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$
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$
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3,303,000
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Mandatorily redeemable convertible preferred stock
issued in consideration for PDSHeart, Inc acquisition
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$
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$
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1,456,000
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See accompanying notes.
5
CARDIONET,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
CardioNet, Inc.
(the Company), a Delaware corporation, provides ambulatory, continuous,
real-time outpatient management solutions for monitoring relevant and timely
clinical information regarding an individuals health. The Company spent seven
years developing a proprietary integrated patient management platform that
incorporates a wireless data transmission network, internally developed
software, FDA-cleared algorithms and medical devices and a 24-hour digital
monitoring service center. The initial focus of the Company is on the diagnosis
and monitoring of cardiac arrhythmias, or heart rhythm disorders, with a
solution that is marketed as the CardioNet System. In September 1999, the
Company was capitalized as CardioNet, a company focused on helping physicians
more rapidly diagnose and more effectively manage therapy for patients with
cardiovascular disease. In February 2002, the Company received FDA 510(k) clearance
for the first and second generation of its core CardioNet System which
automatically detects cardiac rhythm problems and transmits ECG data to a
24/7/365 monitoring center which was opened in Conshohocken, Pennsylvania in July 2002.
The CardioNet Monitoring Center provides analysis and response for all incoming
ECG data. Currently, the Company provides all arrhythmia monitoring services
for the CardioNet System at this location. The Company receives reimbursement
for services provided to patients from Medicare and other third-party payors.
On March 8,
2007, the Company acquired PDSHeart, Inc. (PDSHeart), a leading cardiac
monitoring company, for an aggregate of $51.6 million plus the assumption
of $5.2 million in debt. In
addition to the $51.6 million consideration, the Company agreed to pay
PDSHeart shareholders $5.0 million of contingent consideration in the
event of a qualifying liquidation event, including a public offering or
acquisition. The Companys initial public offering was consummated on March 25,
2008 and, accordingly, the purchase price for the PDSHeart acquisition has been
adjusted to $56.6 million to reflect this payment. PDSHeart, now a wholly-owned
subsidiary of CardioNet, provides event monitoring, Holter monitoring and
pacemaker monitoring services in 48 states, primarily in the southeast. The
acquisition has broadened the Companys geographic coverage and expanded the
service offering to include the complete range of cardiac monitoring services.
On February 25,
2008, the Board of Directors of the Company, subject to stockholder approval,
approved a reverse stock split of the Companys common stock at a ratio of one
share for every two shares previously held. On March 5, 2008, the
stockholders of the Company approved the reverse stock split and the reverse
stock split became effective. All common stock share and per-share data
included in these consolidated financial statements reflect the reverse stock
split.
On March 25,
2008, the Company completed its initial public offering generating net proceeds
to the Company of approximately $46.9 million, after deducting underwriter
commissions and estimated offering expenses.
The underwriters of the offering were Citigroup Global Markets Inc.,
Lehman Brothers Inc., Leerink Swann LLC and Thomas Weisel Partners LLC. Upon the closing of the Companys initial
public offering, all outstanding shares of the Companys mandatorily redeemable
convertible preferred stock and convertible preferred stock converted into
shares of common stock. Therefore, at March 31,
2008, the Company had no shares of preferred stock outstanding.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Data
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles and the
requirements of Form 10-Q and Article 10 of Regulation S-X.
The
accompanying consolidated balance sheet as of March 31, 2008, the
consolidated statements of operations for the three months ended March 31,
2008 and 2007, and the consolidated statements of cash flows for the three
months ended March 31, 2008 and 2007 are unaudited. The unaudited interim
financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all
adjustments, which only include normal recurring adjustments necessary to state fairly the Companys
financial position as of March 31, 2008, and the results of operations and
cash flows for the three months ended March 31, 2008 and 2007. The
financial data and other information disclosed in these notes to the financial
statements related to the three month period are unaudited. The results for the
three months ended March 31, 2008 are not necessarily indicative of the
results to be expected for any future period.
6
Net Loss Attributable to Common Shares
The
Company computes net loss per share in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128,
Earnings
Per Share
(SFAS No. 128). Under SFAS No. 128, basic net
loss per share is computed by dividing net loss per share attributable to
common stockholders by the weighted average number of common shares outstanding
for the period and excludes the effects of any potentially dilutive securities.
Diluted earnings per share, if presented, would include the dilution that would
occur upon the exercise or conversion of all potentially dilutive securities
into common stock using the treasury stock and/or if converted methods, as
applicable.
The
following summarizes the potential outstanding common stock of the Company at March 31,
2008 and March 31, 2007. The
convertible preferred stock, the mandatorily redeemable convertible preferred
stock and the Series D-1 warrants were converted into shares of the
Companys common stock immediately prior to the consummation of the Companys
initial public offering on March 25, 2008.
All share amounts have been adjusted for the one-for-two reverse stock
split effected by the Company on March 5, 2008:
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Convertible
preferred stock (A,B,C,D)
|
|
|
|
8,835,042
|
|
Mandatorily
redeemable convertible preferred stock
|
|
|
|
4,784,958
|
|
Series B
warrants
|
|
6,250
|
|
6,250
|
|
Series D-1
warrants
|
|
|
|
482,090
|
|
Common stock
options outstanding
|
|
1,704,804
|
|
1,562,739
|
|
Common stock
options available for grant
|
|
533,063
|
|
506,033
|
|
Common stock
held by certain employees and unvested
|
|
79,866
|
|
|
|
Common stock
|
|
22,985,279
|
|
3,153,945
|
|
|
|
|
|
|
|
Total
|
|
25,309,262
|
|
19,331,057
|
|
If the
outstanding options, warrants and preferred stock were exercised or converted
into common stock, the result would be anti-dilutive. Accordingly, basic and
diluted net loss attributable to common stockholders per share are identical
for both periods presented in the consolidated statements of operations.
Stock-Based Compensation
SFAS No. 123(R),
Share-Based Payment
, addresses
the accounting for share-based payment transactions in which an enterprise
receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
enterprises equity instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123(R) requires that an entity measure
the cost of equity-based service awards based on the grant-date fair value of
the award and recognize the cost of such awards over the period during which
the employee is required to provide service in exchange for the award (the
vesting period). SFAS No. 123(R) requires that an entity measure the
cost of liability-based service awards based on current fair value that is
re-measured subsequently at each reporting date through the settlement date.
The Company accounts for equity awards issued to non-employees in accordance
with EITF 96-18,
Accounting for Equity
Investments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with, Selling Goods or Services
.
7
Prior
to 2006, the Company accounted for grants made under its stock option plan in
accordance with APB Opinion No. 25,
Accounting
for Stock Options Issued to Employees
, as permitted under SFAS No. 123.
Under APB Opinion No. 25, the Company was only required to recognize compensation
expenses for options granted to employees for the difference between the fair
value of the underlying common stock and the exercise price of the option at
the date of grant. The fair value of these options was determined using the
minimum value option pricing model. Since the exercise price of the Companys
stock option grants issued prior to 2006 was equal to the estimated fair value
of the underlying stock on the grant date, no compensation expense related to
options granted to employees was recognized in prior years.
The
Companys income before income taxes for the quarters ended March 31, 2008
and 2007 was $360,000 and $69,000 lower, respectively, and the Companys
after-tax net income for quarters ended March 31, 2008 and 2007 was $211,000
and $69,000 lower, respectively, as a result of stock-based compensation
expense incurred. The impact of stock-based compensation expense was $(0.04)
and $(0.02) on the basic or diluted earnings per share for the quarters ended March 31,
2008 and 2007, respectively.
The
Company utilized the Black-Scholes valuation model for estimating the fair
value of the stock options granted after the adoption of SFAS 123R with
the following weighted average assumptions:
|
|
Quarter ended
March 31, 2008
|
|
Quarter ended
March 31, 2007
|
|
Expected
dividend yield
|
|
0
|
%
|
0
|
%
|
Expected
volatility
|
|
50
|
%
|
50
|
%
|
Risk-free
interest rate
|
|
2.71
|
%
|
5.0
|
%
|
Expected life
|
|
6.25 years
|
|
6.25 years
|
|
The
dividend yield of zero is based on the fact that the Company has never paid
cash dividends and has no present intention to pay cash dividends. Since the
Companys stock was not publicly traded prior to the closing of its initial
public offering, the expected volatility was calculated for each date of grant
based on an alternative method. The Company identified similar public entities
for which share price information was available and considered the historical
volatility of these entities share price in estimated expected volatility. The
risk-free interest rate is derived from the U.S. Federal Reserve rate in effect
at the time of grant. The expected life calculation is based on the observed
and expected time to the exercise of options by the Companys employees based
on historical exercise patterns for similar options. Based on the Companys
historical experience of options that cancel before becoming fully vested, the
Company has assumed an annualized forfeiture rate of 15% for all options. Under
the true-up provision of SFAS 123R, the Company will record additional
expense if the actual forfeiture rate is lower than estimated, and will record
a recovery of prior expense if the actual forfeiture rate is higher than
estimated.
Based
on the above assumptions, the per share weighted average fair value of the
options granted under the stock option plan for the quarters ended March 31,
2008 and 2007 was $12.19 and $5.04, respectively.
The following table
summarizes activity under all stock award plans from December 31, 2007
through March 31, 2008:
|
|
|
|
Options Outstanding
|
|
|
|
Shares
|
|
|
|
Weighted
|
|
|
|
Available
|
|
Number
|
|
Average
|
|
|
|
for Grant
|
|
of Shares
|
|
Exercise Price
|
|
Balance
December 31, 2007
|
|
617,534
|
|
1,641,616
|
|
$
|
6.38
|
|
Granted
|
|
(307,875
|
)
|
307,875
|
|
$
|
12.19
|
|
Canceled
|
|
223,404
|
|
(223,404
|
)
|
$
|
5.74
|
|
Exercised
|
|
|
|
(21,283
|
)
|
$
|
1.26
|
|
|
|
|
|
|
|
|
|
Balance
March 31, 2008
|
|
533,063
|
|
1,704,804
|
|
$
|
7.58
|
|
Additional information
regarding options outstanding is as follows:
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Range of
exercise price (per option)
|
|
$
|
0.70 - $18.30
|
|
$
|
0.70 - $9.50
|
|
Weighted average
remaining contractual life (years)
|
|
9.22
|
|
9.28
|
|
|
|
|
|
|
|
|
|
8
New Accounting Pronouncements
In September 2006,
the FASB issued SFAS No. 157,
Fair
Value Measurements
, which defines fair value, establishes a
framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS No. 157
applies to other accounting pronouncements that require or permit fair value
measurements. The new guidance is effective for the Company beginning January 1,
2008. The Company adopted SFAS No. 157 on January 1, 2008 and it did not
have a material effect on the consolidated financial statements.
In February 2007,
the FASB issued SFAS No. 159,
The Fair
Value Option for Financial Assets and Financial Liabilities-Including an
Amendment of FASB Statement No. 115
. SFAS 159 permits
entities to choose fair value measurement for many financial instruments and
certain other items as of specified election dates. Business entities will
thereafter report in earnings the unrealized gains and losses on items for
which the fair value option has been chosen. The fair value option may be
applied instrument by instrument but may not be applied to portions of
instruments and is irrevocable unless a new elections date occurs. The Company
did not elect the fair value option of SFAS 159 and thus, the adoption of
SFAS No. 159 had no impact on the Company.
In December 2007,
the FASB issued SFAS No. 141(R),
Business
Combinations
and SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB No. 151
.
SFAS 141(R) establishes new principles and requirements for
accounting for business combinations, including recognition and measurement of
identifiable assets acquired, goodwill acquired, liabilities assumed and
noncontrolling financial interests. SFAS 160 requires all entities to
report noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements. These new standards will significantly
change the accounting for and reporting of business combination transactions
and noncontrolling (minority) interests in consolidated financial statements.
SFAS 141(R) and SFAS 160 are required to be adopted
simultaneously and are effective for fiscal years beginning on or after December 15,
2008. Earlier adoption is prohibited. The Company is currently evaluating the
potential effect of adoption of SFAS 141(R) and SFAS 160.
3. Acquisition - PDSHeart, Inc.
On March 8,
2007, the Company acquired all of the outstanding capital stock of PDSHeart for
an aggregate purchase price of $51.6 million. The $51.6 million
purchase price was comprised of $44.3 million cash at closing,
$5.2 million in assumed debt, $1.4 million of transaction expenses
and the assumption of a $0.7 million liability related to payments due to
certain key employees of PDSHeart upon the one year anniversary of the closing.
Approximately $1.5 million of the assumed debt was satisfied through the
issuance of 1,456 shares of mandatorily redeemable convertible preferred stock
(MRCPS) at a value of $1,000 per share. In addition to the $51.6 million
consideration, the Company agreed to pay PDSHeart shareholders
$5.0 million of contingent consideration in the event of a qualifying
liquidation event, including a public offering or acquisition. The Companys
initial public offering was consummated on March 25, 2008 and,
accordingly, the purchase price for the PDSHeart acquisition has been adjusted
to $56.6 million to reflect this payment.
The
acquisition has been included within the consolidated results of operations
from March 8, 2007. The Company believes that the acquisition will
accelerate its market expansion strategy by providing immediate access to a
sales force with existing physician relationships capable of marketing the
CardioNet System in areas of the country where it had previously not been sold.
A significant portion of the purchase price has been allocated to goodwill. The
most significant reason is that 75% of PDSHeart revenues are received as
patient reimbursement from medical insurers and Medicare; however the patients
are the customers as they determine the economic relationship. There is no
long-term intangible asset associated with these patients so no value has been
assigned to this revenue stream.
Under
the purchase method of accounting, the total purchase price is allocated to
tangible and identifiable intangible assets acquired and liabilities assumed
based on their estimated fair values. The following is a summary of the
purchase price allocation:
Cash and cash
equivalents
|
|
$
|
509,000
|
|
Accounts
receivable, net
|
|
5,168,000
|
|
Property, plant
and equipment
|
|
4,136,000
|
|
Other assets
|
|
505,000
|
|
Goodwill
|
|
45,999,000
|
|
Intangible
assets:
|
|
|
|
Trade name
|
|
1,810,000
|
|
Customer
relationships
|
|
1,551,000
|
|
Non compete
agreements
|
|
245,000
|
|
Other accruals
|
|
(344,000
|
)
|
Other
liabilities assumed
|
|
(2,984,000
|
)
|
|
|
|
|
Net assets
acquired
|
|
$
|
56,595,000
|
|
The
intangible assets with definite lives are being amortized on a straight-line
basis over lives ranging from two to six years.
9
In
connection with the acquisition of PDSHeart, the Company initiated exit plans
for acquired activities that are redundant to the Companys existing
operations. The plan includes the closure of a facility and the elimination of
58 positions in the areas of sales, finance, service and management. In
connection with the plan, the Company established reserves of $510,000 included
in the purchase price allocation. As of March 31, 2008, none of the
positions had been eliminated and the facility has not been closed. The reserve
is included in accrued liabilities in the accompanying consolidated balance
sheet.
A
summary of the reserve activity related to the PDSHeart acquisition integration
plan as of March 31, 2008 is as follows:
|
|
Initial Reserves
Recorded in
Purchase Accounting
|
|
Payments/Adjustments
through
March 31, 2008
|
|
Balance as of
March 31, 2008
|
|
Severance and
employee related costs
|
|
$
|
366,000
|
|
$
|
166,000
|
|
$
|
200,000
|
|
Rent Abandonment
|
|
$
|
144,000
|
|
$
|
|
|
$
|
144,000
|
|
Total:
|
|
$
|
510,000
|
|
$
|
166,000
|
|
$
|
344,000
|
|
Additionally,
the Company incurred expenses of $274,000 in the first quarter of 2008 and
expects to incur an additional $625,000 of expense to integrate these
functions. These costs will be expensed
as incurred in accordance with the SFAS No. 146,
Accounting for Exit or Disposal Activities
.
4. Mandatorily Redeemable Convertible
Preferred Stock and Shareholders Equity (Deficit)
Mandatorily Redeemable Convertible Preferred Stock
In March 2007,
the Company sold 110,000 shares of its mandatorily redeemable convertible
preferred stock, or MRCPS, which generated net proceeds to the Company of
$102,119,142 ($110,000,000 less offering costs of $7,880,858). The Company also
issued 3,383 shares of MRCPS upon conversion of an outstanding bridge loan and
1,456 shares as consideration to a major shareholder of PDSHeart as
consideration in the PDSHeart acquisition. Accrued dividends were
$6.1 million at March 25, 2008.
The MRCPS original purchase price plus accrued dividends were converted
to common shares on March 25, 2008 in connection with the Companys
initial public offering.
Series A, B, C and D Convertible Preferred
Stock
From
1999 to 2004, the Company issued convertible preferred stock which generated
net proceeds to the Company of $53.5 million. All Series A, B, C and D
preferred stock converted to common stock on March 25, 2008 in connection
with the Companys initial public offering.
Preferred Stock Warrants
In
connection with a borrowing arrangement provided by a bank, the Company issued
a warrant in August 2000 to purchase 12,500 shares of Series B
preferred stock at a price of $1.47 per share. The warrant may be exercised at
any time on or before August 9, 2010.
In connection with the closing of the Companys initial public offering
on March 25, 2008, this warrant became exercisable for 6,250 shares of the
Companys common stock at a price of $2.94 per share.
In
2005 and 2006, the Company issued 964,189 warrants to purchase shares of its
preferred stock at a price of $3.50 per share to the participants in certain
bridge financing transactions and to a stockholder in connection with entering
into the Amended and Restated Subordinated Promissory Note with a stockholder.
As a result of the MRCPS financing, the warrants became exercisable for shares
of the Companys Series D-1 preferred stock. These warrants were
automatically net exercised for common stock on March 25, 2008 in
connection with the Companys initial public offering.
10
5.
San Diego Restructuring
During
the first quarter of 2008, the Company initiated plans to consolidate its
Finance and Human Resource functions in Pennsylvania. This plan involves the
elimination of 7 positions in San Diego. The Company incurred expenses of $0.1
million in the first quarter of 2008 and expects also to incur an additional
$0.3 million of expenses to consolidate these functions, which it
currently expects to be substantially completed by September 30, 2008.
These costs will be expensed as incurred in accordance with the SFAS No. 146,
Accounting for Exit or Disposal Activities
.
6.
Income Taxes
The
Companys effective tax rate of 41.4% is based on its estimated fiscal 2008
pretax income and does not take into account the utilization of the Companys
net operating loss, credit carryforwards or other deferred income tax assets
because the Company is still in the process of determining the timing and
manner in which it can utilize such carryforwards and deductions due to
limitations in the Internal Revenue Code applicable to changes in ownership of
corporations. The Company is currently
conducting an analysis to determine the timing and manner of the utilization of
the net operating loss carryforwards. Following the completion of its analysis
of the availability of such carryforwards and future income tax deductions, the
Company will adjust its tax rate accordingly in future quarters.
The
Company has net deferred income tax assets totaling approximately
$31.2 million at the end of 2007, consisting primarily of federal and
state net operating loss and credit carryforwards. The federal and state net
operating loss carryforwards, if unused, will begin to expire in 2010. The
federal and state credit carryforwards, if unused, will expire in 2026. Due to
uncertainty regarding the ultimate realization of these net operating loss and
credit carryforwards and other deferred income tax assets, the Company has
established a valuation allowance for most of these assets and will recognize
the benefits only as reassessment indicates the benefits are realizable.
Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Overview
We are
the leading provider of ambulatory, continuous, real-time outpatient management
solutions for monitoring relevant and timely clinical information regarding an
individuals health. We incorporated in the state of California in March 1994,
but did not actively begin developing our product platform until April 2000.
From 2000 through 2002, we devoted substantially all of our resources to
developing an integrated patient monitoring platform that incorporates a
wireless data transmission network, internally developed software, FDA-cleared
algorithms and medical devices, and a 24-hour monitoring service center.
In February 2002,
we received FDA 510(k) clearance for the first and second generation of
our core CardioNet System (Mobile Cardiac Outpatient Telemetry). We opened the
CardioNet Monitoring Center in Conshohocken, Pennsylvania in July 2002 and
currently provide all of our CardioNet System arrhythmia monitoring at that
location. We established our relationship with QUALCOMM Incorporated, which
provides us its wireless cellular data connectivity solution and data hosting
and queuing services, in May 2003. Pursuant to our agreement with
QUALCOMM, we have no fixed or minimum financial commitment. However, in the
event that we fail to maintain an agreed-upon number of active cardiac
monitoring devices on the QUALCOMM network, QUALCOMM has the right to terminate
this agreement.
In November 2006,
we received FDA 510(k) clearance for our third generation product, or C3,
which we have begun to incorporate as part of our monitoring solution. We had
previously received FDA 510(k) clearance for the proprietary algorithm
included in our C3 system in October 2005.
In September 2002,
we were approved as an Independent Diagnostic Testing Facility for Medicare.
The local Medicare carrier in Pennsylvania sets the terms for reimbursement of
our CardioNet System for approximately 40 million covered lives. We have
also worked to secure contracts with commercial payors. We increased the number
of contracts with commercial payors from six at year-end 2003 to 41 at year-end
2004 to 97 at year-end 2005 to 144 at year-end 2006 and to 170 at March 31,
2008. Over this period of time, we estimate that the number of covered
commercial lives increased from six million at year-end 2003 to
32 million at year-end 2004 to 70 million at year-end 2005 to
102 million at year-end 2006 and to 176 million at March 31,
2008. The current estimated total of 176 million Medicare and commercial
lives for which we had reimbursement contracts as of March 31, 2008
represents approximately 74% of the total covered lives in the United States.
The majority of the remaining covered lives are insured by a relatively small
number of large commercial insurance companies that, beginning in 2003, deemed
the CardioNet System to be experimental and investigational and do not
currently reimburse us for services provided to their beneficiaries.
On March 8,
2007, we acquired all of the outstanding capital stock of PDSHeart for an
aggregate purchase price of $51.6 million. The $51.6 million purchase
price was comprised of $44.3 million in cash at closing, $5.2 million
in assumed debt, $1.4 million of transaction expenses and the assumption
of a $0.7 million liability related to payments due to certain key
employees of PDSHeart on March 8, 2008. Approximately $1.5 million of
the assumed debt was satisfied through the issuance of 1,456 shares of our
mandatorily redeemable convertible preferred stock at an original issue price
per share of $1,000. In addition to the $51.6 million of consideration,
the Company agreed to pay PDSHeart shareholders $5.0 million of contingent
consideration in the event of a qualifying liquidation event, including a
public offering or acquisition. The
Companys initial public offering was consummated on March 25, 2008 and,
accordingly, the purchase price for the PDSHeart acquisition has been adjusted
to $56.6 million to reflect this payment. The acquisition has been included in
our consolidated results of operations since March 8, 2007. PDSHeart, now a wholly-owned subsidiary of
CardioNet, provides event, Holter and pacemaker monitoring services to patients
in 48 states, with a concentration of sales in the Southeast. The acquisition
has broadened our geographic coverage and expanded our service offerings to
include the complete range of cardiac monitoring services.
For
our event, Holter and pacemaker monitoring services, we have established
Medicare reimbursement and we have 106 direct contracts with commercial payors
as of March 31, 2008 representing an estimated 135 million covered
lives.
In March 2007, we
raised $110 million in mandatorily redeemable convertible preferred stock
to, in part, fund the acquisition of PDSHeart.
11
We
have undertaken an initiative to improve our operational efficiency and future
profitability in connection with our acquisition of PDSHeart in March 2007,
mainly through the integration of operational and administrative functions. The
plan, which was approved at the time of the PDSHeart acquisition, includes the
closure of a facility and the elimination of 58 positions in the areas of
sales, finance, service and management. In connection with the plan, the
Company established reserves of $510,000 included in the purchase price
allocation. Additionally, we incurred
expenses of $0.3 million of employee-related costs to integrate these functions
in the first quarter of 2008 and expect to incur an additional
$0.6 million of expenses to integrate these functions. These costs will be
expensed as incurred in accordance with the SFAS No. 146,
Accounting for Exit or Disposal Activities
.
On February 25,
2008, the Board of Directors of the Company, subject to stockholder approval,
approved a reverse stock split of the Companys common stock at a ratio of one
share for every two shares previously held. On March 5, 2008, the
stockholders of the Company approved the reverse stock split and the reverse
stock split became effective.
On March 25,
2008, the Company completed its initial public offering generating net proceeds
of approximately $46.9 million after deducting underwriter commissions and
estimated offering expenses.
Statements of Operations Overview
Revenues
Our
principal source of revenues is patient revenue from cardiac monitoring
services. The amount of revenue generated is based on the number of patients
enrolled through physician prescriptions and the rates reimbursed to us by
commercial payors, physicians, patients and Medicare. Reimbursement rates are
set by the Centers for Medicare and Medicaid Services (CMS) on a case rate
basis for the Medicare program and through negotiations with commercial payors
who typically pay a daily monitoring rate. From 2002 through March 2008,
our average case rate for monitoring Medicare patients has remained relatively
stable. We expect pricing to decline over time in a manner consistent with the
introduction and penetration of a premium priced service due to competition,
introduction of new technologies and the potential addition of larger
commercial payors. Since our CardioNet System services are relatively new and
the reimbursement status is evolving, our revenues are subject to fluctuations
due to increases or decreases in rates and decisions by payors regarding
reimbursement.
For
the event, Holter and pacemaker monitoring market we expect the price to be
flat or declining as the new generation technology gains wider acceptance in
the market. In addition, the established 2007 Medicare rates compared to 2006
for our event monitoring services declined by 3% to 8%, depending on the type
of service, and our Holter monitoring services declined 8%. Based on current
proposed Medicare rates for 2008 through 2010, we expect this downward
reimbursement trend to continue for these services.
We
believe the CardioNet System revenues will increase as a percentage of revenues
going forward as we emphasize this service, continue our geographic expansion
and achieve greater market penetration in existing markets. We expect that the
event, Holter and pacemaker monitoring services revenues will be flat or
declining in absolute terms as the old technology is replaced and therefore,
decrease as a percentage of revenues going forward. Other revenue consists
mainly of web hosting services provided to an affiliate of a stockholder. We
believe that other revenues will be flat or declining in absolute terms and
therefore, decrease as a percentage of revenues going forward. Our revenues are
seasonal, as the volume of prescriptions tends to slow down in the summer
months due to the more limited use of our monitoring solutions as physicians
and patients vacation.
Gross Profit
Gross
profit consists of revenues less the cost of revenues which includes:
·
salaries, benefits and stock-based
compensation for personnel providing various services and customer support to
physicians and patients including patient enrollment and education, monitoring
services, distribution services (scheduling, packaging and delivery of the
monitors and sensors to the patients), device repair and maintenance, and
quality assurance;
·
cost of patient-related services
provided by third-party subcontractors including device transportation to and
from the patient, cellular airtime charges related to transmission of ECGs to
the CardioNet Monitoring Center and cost for in-home customer hook-ups when
necessary;
·
consumable supplies sent to patients
along with the durable components of the CardioNet System;
·
depreciation on our monitors; and
·
service cost related to special
project revenues.
12
For
the quarter ended March 31, 2008, our gross profit margin was 62.6%. In
general, we expect gross profit margins on the CardioNet System services to
remain flat or increase, assuming no changes in reimbursement rates. For our
event and Holter monitoring services, we expect gross profit margins to
decrease as reimbursement rates decline as currently proposed by CMS.
Sales and Marketing
Sales
and marketing expense consists primarily of salaries, benefits and stock-based
compensation related to account executives, marketing personnel and contracting
personnel, account executive commissions, travel and other reimbursable
expenses, and marketing programs such as trade shows and marketing campaigns.
Following
the completion of our randomized clinical trial and the PDSHeart acquisition,
we made a significant investment in sales and marketing by increasing the
number of account executives in new geographies. We had a sales force of 75
account executives as of March 31, 2008 and expect to have 89 account
executives by December 31, 2008. We currently have account executives
covering 48 states. We also plan to increase our marketing activities. As a result,
we expect that sales and marketing expenses will increase in absolute terms,
but will remain flat as a percentage of revenues going forward.
Research and Development
Research
and development expense consists primarily of salaries, benefits and stock-based
compensation of personnel and the cost of subcontractors who work on the
development of the hardware and software for our next generation monitors,
enhance the hardware and software of our existing monitors and provide quality
control and testing. The expenses related to the randomized clinical trial are
also included in research and development expenses. We expect that research and
development expenses will increase in absolute terms but decrease as a
percentage of revenues going forward.
General and Administrative
General
and administrative expense consists primarily of salaries, benefits and stock
based compensation related to general and administrative personnel,
professional fees primarily related to legal and audit fees, facilities
expenses and the related overhead, and bad debt expense. We expect that general
and administrative expenses will increase in absolute terms due to the
significant planned investment in infrastructure to support our growth and the
additional expenses related to becoming a publicly traded company, including
the increased cost of compliance and increased audit fees resulting from the
Sarbanes-Oxley Act. As a percentage of revenues, we expect general and
administrative expenses to decline as we grow.
Income Taxes
We have
net deferred income tax assets totaling approximately $31.2 million at the
end of 2007, consisting primarily of federal and state net operating loss and
credit carryforwards. The federal and state net operating loss carryforwards,
if unused, will begin to expire in 2010. The federal and state credit
carryforwards, if unused, will expire in 2026. Due to uncertainty regarding the
ultimate realization of these net operating loss and credit carryforwards and
other deferred income tax assets, we have established a valuation allowance for
most of these assets and will recognize the benefits only as reassessment
indicates the benefits are realizable. The Company is currently conducting an
analysis to determine the timing and manner of the utilization of the net operating
loss carryforwards and will adjust our tax rate accordingly in future quarters.
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations
are based on our financial statements, which we have prepared in accordance
with generally accepted accounting principles. The preparation of these
financial statements requires us to make estimates and assumptions that affect
the reported amount of assets and liabilities, revenues and expenses and
related disclosures. We base our estimates and judgments on historical
experience and on various other factors that we believe to be reasonable under
the circumstances; however actual results may differ from these estimates. We
review our estimates and judgments on an ongoing basis.
We
believe that our accounting policies and estimates are most critical to a full
understanding and evaluation of our reported financial results. Our significant
accounting policies are more fully described in Managements Discussion and
Analysis of Financial Condition and Results of Operations Critical Accounting
Policies and Estimates in our Final Prospectus filed with the United States
Securities and Exchange Commission pursuant to Rule 424(b) (File No. 333-145547)
on March 19, 2008.
Results of Operations
Quarters Ended March 31, 2008 and 2007
Revenues.
Total revenues for the quarter
ended March 31, 2008 increased to $25.5 million from
$11.1 million for the quarter ended March 31, 2007, an increase of
$14.4 million, or 129.4%. This increase of $14.4 million included an
increase of $14.3 million in patient revenues, of which $3.5 million
was from the event and Holter monitoring business versus the prior year quarter
(full
13
quarter effect in 2008,
as the PDSHeart acquisition was consummated on March 8, 2007) and
$10.7 million was from CardioNet System revenues. In addition, special
project revenue increased by $0.1 million due to increased pass-through costs.
Of the $10.7 million increase in CardioNet System revenues,
$3.6 million was attributed to increased patient revenues from physicians
within the geographies that we historically served and $7.1 was due to
geographic expansion.
Gross Profit.
Gross profit increased to
$15.9 million for the quarter ended March 31, 2008, or 62.6% of
revenues, from $7.3 million for the quarter ended March 31, 2007, or
65.9% of revenues. The increase of $8.6 million is primarily due to increased
revenue from the CardioNet System and the full quarter effect of the PDSHeart
acquisition. As a percentage of revenues, gross profit decreased by 3.3% in the
quarter ended March 31, 2008 versus the same quarter last year, primarily
due to the inclusion of an entire quarter of lower margin PDSHeart event and
Holter monitoring products and a fuel surcharge on device shipments to and from
patients.
Sales and Marketing Expense.
Sales and marketing expenses
were $5.1 million for the quarter ended March 31, 2008 compared to
$3.3 million for the quarter ended March 31, 2007. The increase of
$1.8 million is due to the full quarter effect of the PDSHeart
acquisition. As a percent of total
revenues, sales and marketing expenses were 20.1% for the quarter ended March 31,
2008 compared to 29.9% for the quarter ended March 31, 2007, a decline of
9.8% as the full quarter effect of the PDSHeart acquisition was more than
offset by higher revenue.
Research and Development Expense.
Research and
development expenses increased to $1.1 million for the quarter ended March 31,
2008 compared to $1.0 million for the quarter ended March 31, 2007.
As a percent of total revenues, research and development expenses declined to
4.5% for the quarter ended March 31, 2008 compared to 8.9% for the quarter
ended March 31, 2007, a decline of 4.4% primarily due to higher revenue.
General and Administrative Expense.
General and
administrative expenses (including amortization) increased to $9.1 million
for the quarter ended March 31, 2008 from $5.2 million for the
quarter ended March 31, 2007. This increase of $3.9 million, or
74.3%, was primarily due to an increase in the provision for bad debt
($0.6 million), stock based compensation ($0.3 million), increased
legal fees ($0.7 million), increased infrastructure due to increased growth and
in preparation of becoming a public company ($1.5 million), and amortization of
intangible assets in connection with our acquisition of PDSHeart
($0.2 million). In addition, $0.7 million of this increase was
related to the PDSHeart general and administrative expenses, excluding bad debt
expense, due to the full quarter effect of the PDSHeart acquisition in 2008. As
a percent of total revenues, general and administrative expenses declined to
35.6% for the quarter ended March 31, 2008 compared to 46.9% for the
quarter ended March 31, 2007, a decrease of 11.3% as the increase in
expense was offset by the higher revenue.
Integration, Restructuring and Other Nonrecurring Charges.
The Company has
accrued for integration and restructuring costs as well as $1.0 million related
to the resolution of a legal matter for the quarter ended March 31, 2008. Integration
charges relating to the PDSHeart acquisition were $0.3 million for the quarter
ended March 31, 2008. Restructuring charges relating to consolidating our
Finance and Human Resources functions in Pennsylvania were $0.1 million for the
quarter ended March 31, 2008. We incurred no integration, restructuring or
other nonrecurring charges in the quarter ended March 31, 2007.
In
connection with the acquisition of PDSHeart, the Company initiated exit plans
for acquired activities that are redundant to the Companys existing
operations. The plan includes the closure of a facility and the elimination of
58 positions in the areas of sales, finance, service and management. In
connection with the plan, the Company established reserves of $510,000 included
in the purchase price allocation. As of March 31, 2008, no positions have
been eliminated and approximately $0.3 million of employee-related expenses have
been incurred.
In
addition, in March of 2008, the Company initiated restructuring plans to
consolidate its Finance and Human Resources functions in Pennsylvania. This
plan includes the elimination of 7 positions in California and is currently
anticipated to be completed by September 2008. As of March 31, 2008,
no positions have been eliminated and approximately $0.1 million of
employee-related expenses have been incurred.
Total Interest Income/Expense, Net.
Net interest
income was $0.1 million for the quarter ended March 31, 2008 compared to
net interest expense of $1.0 million for the quarter ended March 31,
2007. This decrease in interest expense on a net basis is due to the payoff of
debt which occurred as a result of a preferred stock financing completed by us
in March 2007.
Income Taxes.
The Companys effective tax
rate was 41.4% for the quarter ended March 31, 2008. This compares to no income tax benefit or
expense for the quarter ended March 31, 2007. The effective tax rate is
based on our estimated fiscal 2008 pretax income and does not take into account
our net operating loss carryforwards and other future income tax deductions
because we are still in the process of determining the timing and manner in
which we can utilize such carryforwards and deductions due to limitations in
the Internal Revenue Code applicable to changes in ownership of corporations.
The Company has approximately $62 million in federal net operating losses as of
December 31, 2007 to offset future taxable income expiring in various
years through 2026. Following the
completion of our analysis of the availability of such carryforwards and future
income tax deductions we will adjust our tax rate accordingly in future
quarters.
14
Net Loss.
Net loss was $0.3 million for
the quarter ended March 31, 2008 compared to a net loss of
$3.2 million for the quarter ended March 31, 2007. As a percent of
total revenues, net loss was 1.0% for the quarter ended March 31, 2008
compared to a net loss of 28.4% for the quarter ended March 31, 2007.
Liquidity and Capital Resources
From
our inception in 1999 through March 31, 2008, we did not generate
sufficient cash flows to fund our operations and the growth of our business. As
a result, prior to the completion of our initial public offering, our
operations were financed primarily through the private placement of equity
securities and both long-term and short-term debt financings. Notably, we completed a financing involving
shares of our mandatorily redeemable convertible preferred stock in March 2007,
in which we received net proceeds of approximately $102.1 million, and
completed our initial public offering in March 2008, in which we received
net proceeds, after underwriting discounts and offering expenses, of
approximately $46.9 million. Through March 31, 2008, we funded our
business primarily through the following:
·
initial public offering that provided
net proceeds of approximately $46.9 million, after deducting underwriting
commissions and estimated offering expenses;
·
issuance of mandatorily redeemable
convertible preferred stock that provided gross proceeds of $110 million,
of which $45.9 million was used to acquire PDSHeart;
·
issuance of preferred stock that
provided gross proceeds of $53.7 million;
·
a term loan of $23.3 million
from Guidant Investment Corporation, which was repaid on August 15, 2007;
and
·
bank debt from Silicon Valley Bank
consisting of a term loan of $3.0 million, which was repaid on April 1,
2008, and a working capital line secured by accounts receivable of
$1.9 million, which was repaid from the proceeds of the mandatorily
redeemable convertible preferred stock.
As of March 31,
2008, our principal source of liquidity was cash totaling $62.0 million and
net accounts receivable of $25.6 million.
Our
cash flow from operations decreased by $0.5 million to $0.8 million in the
first quarter of 2008 from $1.3 million in the first quarter of 2007. The
decrease is primarily due to changes in accounts receivable, accounts payable
and accrued liabilities as a result of our growth, partially offset by
favorable net income growth as adjusted to exclude non-cash depreciation and
amortization.
We
used net cash in investing activities of $4.3 million in the first quarter of
2008, compared to $46.9 million in the first quarter of 2007, a decrease of
$42.6 million. The decrease is primarily due to the consummation of the
PDSHeart acquisition in March 2007 for a net cash effect of $45.9 million,
partially offset by additional cash payments to PDSHeart shareholders in 2008
of $2.6 million as a result of the contingent note payment due as a result of
our initial public offering and additional expenditures of $0.8 million in 2008
to support our growth.
We
generated net cash from financing activities of $47.4 million in the first
quarter of 2008, compared to $96.7 million in the first quarter of 2007, a
decrease of $49.3 million. The decrease is primarily due to the mandatorily
redeemable convertible preferred financing in the first quarter of 2007 which
generated net proceeds of $102.1 million, partially offset by the retirement of
the PDSHeart debt of $5.8 million in 2007 and the initial public offering net
cash proceeds of $47.3 million, excluding offering expenses not yet paid,
generated in the first quarter of 2008.
We
believe that our existing cash and cash equivalent balances and revenues from
our operations will be sufficient to meet our anticipated cash requirements for
the foreseeable future.
Our
future funding requirements will depend on many factors, including:
·
the costs associated with developing,
manufacturing and building our inventory of our future monitoring solutions;
·
the costs of hiring additional
personnel and investing in infrastructure to support future growth;
·
the reimbursement rates associated
with our products and services;
·
actions taken by the FDA and other
regulatory authorities affecting the CardioNet System and competitive products;
·
our ability to secure contracts with
additional commercial payors providing for the reimbursement of our services;
15
·
the emergence of competing
technologies and products and other adverse market developments;
·
the costs of preparing, filing,
prosecuting, maintaining and enforcing patent claims and other intellectual
property rights or defending against claims of infringement by others; and
·
the costs of investing in additional
lines of business outside of arrhythmia monitoring solutions.
To the
extent that we raise additional capital by issuing equity securities, our
stockholders ownership will be diluted. In addition, if we determine that we
need to raise additional capital, such capital may not be available on
reasonable terms, or at all. If we raise additional funds by issuing equity
securities, substantial dilution to existing stockholders would likely result.
If we raise additional funds by incurring additional debt financing, the terms
of the debt may involve significant cash payment obligations as well as
covenants and specific financial ratios that may restrict our ability to
operate our business.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
Our cash and cash
equivalents as of March 31, 2008 consisted primarily of cash and money
market funds with maturities of less than 90 days. The primary objective of our investment
activities is to preserve our capital for the purpose of funding operations
while, at the same time, maximizing the income we receive from our investments without
significantly increasing risk. To achieve this objective, our investment policy
allows us to maintain a portfolio of cash equivalents and short term
investments in a variety of securities including money market funds and
corporate debt securities. Due to the short term nature of our investments, we
believe we have no material exposure to interest rate risk.
Item 4. Controls and Procedures.
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our periodic reports filed with the
Securities and Exchange Commission, or SEC, is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and
forms and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and no evaluation of controls and procedures can provide
absolute assurance that all control issues and instances of fraud, if any,
within a company have been detected. Management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As
required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as
amended, or Exchange Act, prior to the filing of this report we carried out an
evaluation, under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as
of the end of the period covered by this report. Based on their evaluation, our
chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report.
PART II
- OTHER INFORMATION.
Item
1. Legal Proceedings.
On November 26,
2007, we filed a lawsuit against LifeWatch Corp. and certain of its
employees in the United States District Court for the Northern District of
Illinois, Eastern Division. In the action, we allege several causes of action
including trade secret misappropriation, breach of contract, fraud, and unfair
competition arising from actions of LifeWatch and its employees to unlawfully
obtain, use, inspect and test two of our CardioNet System kits. On January 4,
2008, LifeWatch responded by filing counterclaims in the action against us. In
its counterclaims, LifeWatch alleged that we misappropriated trade secrets of
LifeWatch through inspection of a LifeWatch device, and that we have made
misleading advertising and marketing statements relating to LifeWatch. In
May 2008, the parties entered into a settlement agreement pursuant to
which the parties amicably agreed to resolve the lawsuit with dismissal by both
sides of all claims pending in the lawsuit.
16
Item
1A. Risk Factors.
You
should consider carefully the following information about the risks described
below, together with the other information contained in this Quarterly Report
and in our other public filings in evaluating our business. We have marked with
an asterisk (*) those risk factors that reflect substantive changes from the
risk factors included in our final prospectus filed by the Company with the
Securities and Exchange Commission on March 19, 2008 relating to the
Companys Registration Statement on Form S-1/A (File No. 333-145547)
for the Companys initial public offering. If any of the following risks
actually occurs, our business, financial condition, results of operations and
future growth prospects would likely be materially and adversely affected. In
these circumstances, the market price of our common stock would likely decline.
Risks
related to our business and industry
*We have a history of net losses and may never become
profitable.
We have incurred
net losses from our inception through March 31, 2008, including net losses
of $0.3 million for the quarter ended March 31, 2008 and $11.5 million for the
year ended December 31, 2007. As of March 31,
2008, we had total stockholders deficit of approximately $82.1 million. We
expect our operating expenses to increase as we, among other things:
·
expand our sales
and marketing activities;
·
invest in
designing, manufacturing and building our inventory of future generations of
the CardioNet System;
·
hire additional
personnel;
·
invest in
infrastructure; and
·
incur the
additional expenses associated with being a public company.
With increasing
expenses, we will need to continue to substantially increase our revenues to
become profitable. Because of the risks and uncertainties associated with
further developing and marketing the CardioNet System, we are unable to predict
the extent of any future losses or when we will become profitable, if at all.
Our business is dependent upon physicians prescribing our
services; if we fail to obtain those prescriptions, our revenues could fail to
grow and could decrease.
The success of our
business is dependent upon physicians prescribing our services for patients and
cross-selling the respective CardioNet and PDSHeart customer bases. Our success
in obtaining prescriptions and cross-selling will be directly influenced by a
number of factors, including:
·
the ability of
the physicians with whom we work to obtain sufficient reimbursement and be paid
in a timely manner for the professional services they provide in connection
with the use of our arrhythmia monitoring solutions, particularly the CardioNet
System;
·
our ability to
educate physicians regarding, and convince them of, the benefits of the
CardioNet System over existing treatment methods such as Holter monitors and
event monitors; and
·
the perceived
clinical efficacy of the CardioNet System.
If we are unable
to educate physicians regarding the benefits of the CardioNet System, obtain
sufficient prescriptions and cross-sell our respective customer bases, revenues
from the provision of our arrhythmia monitoring solutions could fail to grow
and could decrease.
We and the physicians with whom we work are dependent upon
reimbursement for the fees associated with our services; the absence or
inadequacy of reimbursement would cause our revenues to fail to grow or
decrease.
We receive
reimbursement for our services from commercial payors and from Medicare Part B
carriers where the services are performed on behalf of the Centers for Medicare
and Medicaid Services, or CMS. The Medicare Part B carriers in each state
change from time to time, which may result in changes to our reimbursement
rates, increased administrative burden and reimbursement delays.
17
In addition, our
prescribing physicians receive reimbursement for professional interpretation of
the information provided by our products and services from commercial payors or
Medicare carriers within the state where they practice. The efficacy, safety,
performance and cost-effectiveness of our products and services, on a
stand-alone basis and relative to competing services, will determine the
availability and level of reimbursement we and our prescribing physicians
receive. Our ability to successfully contract with payors is critical to our
business because physicians and their patients will select arrhythmia
monitoring solutions other than ours in the event that payors refuse to
adequately reimburse our technical fees and physicians professional fees.
Many commercial
payors refuse to enter into contracts to reimburse the fees associated with
medical devices or services that such payors determine to be experimental and
investigational. Commercial payors typically label medical devices or services
as experimental and investigational until such devices or services have
demonstrated product superiority evidenced by a randomized clinical trial. We
completed a clinical trial in which the CardioNet System provided higher
diagnostic yield than traditional loop event monitoring. Prior to our clinical
trial, the CardioNet System was labeled experimental and investigational by
21 targeted commercial payors, representing approximately 95 million
covered lives. Subsequent to our trial, three commercial payors, representing
over 26 million covered lives, removed the designation of the CardioNet
System as experimental and investigational. Several of the remaining payors,
however, have informed us that they do not believe the data from this trial
justifies the removal of this designation. Other commercial payors may also
find the data from our clinical trial not compelling. Additional commercial
payors may also label the CardioNet System as experimental and investigational
and, as a result, refuse to reimburse the technical and professional fees
associated with the CardioNet System.
Administration of
the claims process for the many commercial payors is complex. As a result we
sometimes bill payors for services for which we have no reimbursement contract.
These payors may require that we return any funds that they pay in respect of
these claims.
If commercial
payors or Medicare decide not to reimburse our services or the related services
provided by physicians, or the rates of such reimbursement change, or if we
fail to properly administer claims, our revenues could fail to grow and could
decrease.
Reimbursement by Medicare is highly regulated and subject to
change; our failure to comply with applicable regulations, could decrease our
revenues and may subject us to penalties or have an adverse impact on our
business.
We receive
approximately 33% of our revenues as reimbursement from Medicare. The Medicare
program is administered by Centers for Medicare & Medicaid
Services, or CMS, which imposes extensive and detailed requirements on medical
services providers, including, but not limited to, rules that govern how
we structure our relationships with physicians, how and when we submit
reimbursement claims, how we operate our monitoring facilities and how and
where we provide our arrhythmia monitoring solutions. Our failure to comply
with applicable Medicare rules could result in discontinuing our
reimbursement under the Medicare payment program, our being required to return
funds already paid to us, civil monetary penalties, criminal penalties and/or
exclusion from the Medicare program.
In addition,
reimbursement from Medicare is subject to statutory and regulatory changes,
local and national coverage decisions, rate adjustments and administrative
rulings, all of which could materially affect the range of services covered or
the reimbursement rates paid by Medicare for use of our arrhythmia monitoring
solutions. For example, CMS adopted a new payment policy in January 2007
that reduced the rate of reimbursement for a number of services reimbursed by
Medicare. Although this modification to Medicares reimbursement rates did not
affect the amount paid by Medicare for reimbursement of the fees associated
with the CardioNet System, it resulted in the reduction of reimbursement rates
for event services by 3% to 8%, depending on the type of service, and Holter
services by 8% as compared to the corresponding rates in effect in 2006. Based
on current proposed Medicare rates for 2008 through 2010, we expect that
reimbursement for event and Holter services will continue to decline at an
annual rate similar to 2007. In addition, we cannot predict whether future
modifications to Medicares reimbursement policies could reduce or eliminate
the amounts we receive from Medicare for the solutions we provide. In addition,
Medicares reimbursement rates can affect the rate that commercial payors are
willing to pay for our products and services. Consequently, any future
elimination, limitation or reduction in the reimbursement rates provided by
Medicare for our arrhythmia monitoring solutions could result in a reduction in
the rates we receive from commercial payors.
Reimbursement for the CardioNet System by Medicare and other
commercial payors is complicated by the lack of a specific Current Procedural
Terminology, or CPT, code, which may result in lower prescription rates or
varying reimbursement rates.
When we bill
Medicare and certain other commercial payors for the service we provide in
connection with the CardioNet System, we submit the bill using the nonspecific
billing, or CPT, code 93799. Unlike dedicated CPT codes approved by the American
Medical Association, or AMA, and CMS, claims using non-specific codes may
require semi-automated or manual processing, as well as additional review by
payors. The claims processing requirements associated with a nonspecific code
can make our services less attractive to physicians because added time and
effort is often required in order to receive payment for their services.
Furthermore, the Medicare reimbursement rate for non-specific codes is
determined by local Medicare carriers. As a result, the reimbursement rates
relating to our CardioNet System are subject to change without notice.
A request to the
AMA for a specific CPT code that describes our CardioNet System has been made.
The request was discussed and voted upon by the CPT Editorial Panel at its
public October 2007 meeting. The results of the vote are confidential. We
have been informally advised that the CPT Editorial Panel voted in favor of the
request. However, the results of the vote are subject to change
18
until such results
are published in the fall of 2008. If the request is officially approved by the
AMA CPT Editorial Panel, the specific CPT code would be published in the fall
of 2008 and would be available for use in 2009. However, we cannot guarantee
that we will receive a specific CPT code for the CardioNet System in that
timeframe, or ever. Moreover, if we do receive a CPT code, the reimbursement
rate associated with that code, which would be subject to change on an annual
basis through a public notice and comment process, may be lower than our
current reimbursement rates.
*A reduction in sales of our services or a loss of one or
more of our key commercial payors would adversely affect our business and
operating results.
A small number of
commercial payors represent a significant percentage of our revenues. In the
quarter ended March 31, 2008, our top 10 commercial payors by revenues
accounted for approximately 27.8% of our total revenues. Our agreements with
these commercial payors typically allow either party to the contract to
terminate the contract by providing between 60 and 120 days prior written
notice to the other party at any time following the end of the initial term of
the contract. Our commercial payors may elect to terminate or not to renew
their contracts with us for any reason and, in some instances can unilaterally
change the reimbursement rates they pay. In the event any of our key commercial
payors terminate their agreements with us, elect not to renew their agreements
with us or elect not to enter into new agreements with us upon expiration of
their agreements with us on terms as favorable as our current agreements, our
business, operating results and prospects would be adversely affected.
Consolidation of commercial payors could result in payors
eliminating coverage of our CardioNet System or reduced reimbursement rates for
our CardioNet System.
The commercial
payor industry is undergoing significant consolidation. When payors combine
their operations, the combined company may elect to reimburse our CardioNet
System at the lowest rate paid by any of the participants in the consolidation.
If one of the payors participating in the consolidation does not reimburse for
the CardioNet System at all, the combined company may elect not to reimburse
for the CardioNet System. Our reimbursement rates tend to be lower for larger
payors. As a result, as payors consolidate, our average reimbursement rate may
decline.
Our acquisition of PDSHeart, as well as any other companies
or technologies we may acquire in the future, could prove difficult to
integrate and may disrupt our business and harm our operating results and
prospects.
Our acquisition of
PDSHeart involves numerous risks, including the risk that we will not take
advantage of the cross-selling opportunities brought about by the acquisition.
In addition, our acquisition of PDSHeart, as well as acquisitions in which we
may engage in the future, involve risks associated with our assumption of the
liabilities of an acquired company, which may be liabilities that we were or
are unaware of at the time of the acquisition, potential write-offs of acquired
assets and potential loss of the acquired companys key employees or customers.
We may encounter
difficulties in successfully integrating our operations, technologies, services
and personnel with that of the acquired company, and our financial and
management resources may be diverted from our existing operations. For example,
following our acquisition of PDSHeart we have offices in Pennsylvania,
California, Florida, Georgia and Minnesota. Our offices in multiple states
create a strain on our ability to effectively manage our operations and key
personnel. If we elect to consolidate our facilities we may lose key personnel
unwilling to relocate to the consolidated facility, may have difficulty hiring
appropriate personnel at the consolidated facility and may have difficulty
providing continuity of service through the consolidation.
Physician and
patient satisfaction or performance problems with an acquired business,
technology, service or device could also have a material adverse effect on our
reputation. Additionally, potential disputes with the seller of an acquired
business or its employees, suppliers or customers and amortization expenses
related to goodwill and other intangible assets could adversely affect our
business, operating results and financial condition.
We may not be able
to realize the anticipated benefits of the PDSHeart acquisition or any other
acquisition we may pursue or to profitably deploy acquired assets. If we fail
to properly evaluate and execute acquisitions, our business may be disrupted
and our operating results and prospects may be harmed.
*If we are unable to manage our expected growth, our
revenues and operating results may be adversely affected.
Our business plans
call for rapid expansion of our sales and marketing operations and growth of
our research and development, product development and administrative
operations. We had a sales force of 75 account executives at March 31,
2008. We intend to expand our sales force to 89 individuals by December 31,
2008. We expect this expansion will place a significant strain on our
management and operational and financial resources. Our current and planned
personnel, systems, procedures and controls may not be adequate to support our
anticipated growth. To manage our growth we will be required to improve
existing and implement new operational and financial systems, procedures and
controls and expand, train and manage our growing employee base. If we are
unable to manage our growth effectively, revenue growth may not be realized or
may not be sustainable, may not result in improved operating results or
earnings, and our business, financial condition and results of operations could
be harmed.
19
Our business is dependent upon having sufficient monitors
and sensors. If we do not have enough monitors or sensors or experience delays
in manufacturing, we may be unable to fill prescriptions in a timely manner,
physicians may elect not to prescribe the CardioNet System, and our revenues
and growth prospects could be harmed.
When a physician
prescribes the CardioNet System to a patient, our customer service department
begins the patient hook-up process, which includes procuring a monitor and
sensors from our distribution department and sending them to the patient. While
our goal is to provide each patient with a monitor and sensors in a timely
manner, we have experienced and may in the future experience delays due to the
availability of monitors, primarily when converting to a new generation of
monitor or, more recently, in connection with the increase in prescriptions
following our acquisition of PDSHeart.
We may also
experience shortages of monitors or sensors due to manufacturing difficulties.
Multiple suppliers provide the components used in the CardioNet System, but our
facilities in San Diego, California are registered and approved by the United
States Food and Drug Administration, or FDA, as the ultimate manufacturer of
the CardioNet System. Our manufacturing operations could be disrupted by fire,
earthquake or other natural disaster, a work stoppage or other
labor-related disruption, failure in supply or other logistical channels,
electrical outages or other reasons. If there was a disruption to our
facilities in San Diego, we would be unable to manufacture the CardioNet System
until we have restored and re-qualified our manufacturing capability or
developed alternative manufacturing facilities.
Our success in
obtaining future prescriptions from physicians is dependent upon our ability to
promptly deliver monitors and sensors to our patients, and a failure in this
regard would have an adverse effect on our revenues and growth prospects.
Interruptions or delays in telecommunications systems or in
the data services provided to us by QUALCOMM or the loss of our wireless or
data services could impair the delivery of our CardioNet System services.
The success of the
CardioNet System is dependent upon our ability to store, retrieve, process and
manage data and to maintain and upgrade our data processing and communication
capabilities. The monitors we use in connection with the CardioNet System rely
on a third party wireless carrier to transmit data over its data network during
times that the monitor is removed from its base. All data sent by our monitors
via this wireless data network or via landline is routed directly to QUALCOMM
data centers and subsequently routed to our monitoring center. We are dependent
upon these third parties to provide data transmission and data hosting services
to us. We do not have an agreement directly with this third party wireless
carrier. Although we do have an agreement with QUALCOMM that has an initial
termination date in September 2010, QUALCOMM may terminate its agreement
with us if certain conditions occur, including if QUALCOMMs agreement with the
third party wireless carrier terminates or in the event we fail to maintain an
agreed-upon number of active cardiac monitoring devices on the QUALCOMM
network. We have no control over the status of the agreement between QUALCOMM
and the wireless carrier. If we fail to maintain our relationships with
QUALCOMM or if we lose wireless carrier services, we would be forced to seek
alternative providers of data transmission and data hosting services, which
might not be available on commercially reasonable terms or at all.
As we expand our
commercial activities, an increased burden will be placed upon our data
processing systems and the equipment upon which they rely. Interruptions of our
data networks or the data networks of QUALCOMM for any extended length of time,
loss of stored data or other computer problems could have a material adverse
effect on our business, financial condition and results of operations. Frequent
or persistent interruptions in our arrhythmia monitoring services could cause
permanent harm to our reputation and could cause current or potential users of
the CardioNet System or prescribing physicians to believe that our systems are
unreliable, leading them to switch to our competitors. Such interruptions could
result in liability, claims and litigation against us for damages or injuries
resulting from the disruption in service.
Our systems are
vulnerable to damage or interruption from earthquakes, floods, fires, power
loss, telecommunication failures, terrorist attacks, computer viruses,
break-ins, sabotage, and acts of vandalism. Despite any precautions that we may
take, the occurrence of a natural disaster or other unanticipated problems
could result in lengthy interruptions in these services. We do not carry
business interruption insurance to protect against losses that may result from
interruptions in service as a result of system failures. Moreover, the
communications and information technology industries are subject to rapid and
significant changes, and our ability to operate and compete is dependent in
significant part on our ability to update and enhance the communication
technologies used in our systems and services.
The market for arrhythmia monitoring solutions is highly
competitive. If our competitors are able to develop or market monitoring
solutions that are more effective, or gain greater acceptance in the
marketplace, than any solutions we develop, our commercial opportunities will
be reduced or eliminated.
The market for
arrhythmia monitoring solutions is evolving rapidly and becoming increasingly
competitive. Our industry is highly fragmented and characterized by a small
number of large providers and a large number of smaller regional service
providers. These third parties compete with us in marketing to payors and
prescribing physicians, recruiting and retaining qualified personnel, acquiring
technology and developing solutions complementary to our programs. In addition,
as companies with substantially greater resources than ours enter our market,
we will face increased competition. If our competitors are better able to
develop and patent arrhythmia monitoring solutions than us, or develop more
effective and/or less expensive arrhythmia monitoring solutions that render our
solutions obsolete or non-competitive or deploy larger or more effective
marketing and sales resources than ours, our business will be harmed and our
commercial opportunities will be reduced or eliminated.
20
If we need to raise additional funding in the future, we may
be unable to raise such capital when needed, or at all, and the terms of such
capital may be adverse to our stockholders.
We believe that
the net proceeds from our initial public offering, together with our existing
cash and cash equivalent balances, will be sufficient to meet our anticipated
cash requirements for the foreseeable future. However, our future funding
requirements will depend on many factors, including:
·
the costs
associated with manufacturing and building our inventory of our next generation
C3 monitor;
·
the costs of
hiring additional personnel and investing in infrastructure to support future
growth;
·
the
reimbursement rates associated with our products and services;
·
actions taken by
the FDA, CMS and other regulatory authorities affecting the CardioNet System
and competitive products;
·
our ability to
secure contracts with additional commercial payors providing for the
reimbursement of our services;
·
the emergence of
competing technologies and products and other adverse market developments;
·
the costs of
preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights or defending against claims of infringement
by others; and
·
the costs of
investing in additional lines of business outside of arrhythmia monitoring
solutions.
If we need to, or
choose to, raise additional capital in the future, such capital may not be
available on reasonable terms, or at all. If we raise additional funds by
issuing equity securities, substantial dilution to existing stockholders would
likely result. If we raise additional funds by incurring debt financing, the
terms of the debt may involve significant cash payment obligations as well as
covenants and financial ratios that may restrict our ability to operate our
business.
Our manufacturing facilities and the manufacturing
facilities of our suppliers must comply with applicable regulatory
requirements. If we or our suppliers fail to achieve or maintain regulatory
approval of these manufacturing facilities, our growth could be limited and our
business could be harmed.
We currently
manufacture the monitors and sensors for the CardioNet System in San Diego,
California. Monitors used in the provision of services by PDSHeart are
purchased from several third parties. In order to maintain compliance with FDA
and other regulatory requirements, our manufacturing facilities must be
periodically re-evaluated and qualified under a quality system to ensure they
meet production and quality standards. Suppliers of components of and products
used to manufacture the CardioNet System and the manufacturers of the monitors
used in the provision of services by PDSHeart must also comply with FDA and
foreign regulatory requirements, which often require significant resources and
subject us and our suppliers to potential regulatory inspections and stoppages.
We or our suppliers may not satisfy these requirements. If we or our suppliers
do not maintain regulatory approval for our manufacturing operations, our
business would be harmed.
Our dependence on a limited number of suppliers may prevent
us from delivering our devices on a timely basis.
We currently rely
on a limited number of suppliers of components for the CardioNet System. If
these suppliers became unable to provide components in the volumes needed or at
an acceptable price, we would have to identify and qualify acceptable
replacements from alternative sources of supply. Qualifying suppliers is a
lengthy process. Delays or interruptions in the supply of our requirements
could limit or stop our ability to provide sufficient quantities of devices on
a timely basis, meet demand for our services, which could have a material
adverse effect on our business, financial condition and results of operations.
We could be subject to medical liability or product
liability claims which may not be covered by insurance and which would
adversely affect our business and results of operations.
The design, manufacture
and marketing of services of the types we provide entail an inherent risk of
product liability claims. Any such claims against us may require us to incur
significant defense costs, irrespective of whether such claims have merit. In
addition, we provide information to health care providers and payors upon which
determinations affecting medical care are made, and claims
may be made
against us resulting from adverse medical consequences to patients resulting
from the information we provide. In addition, we may become subject to
liability in the event that the monitors and sensors we use fail to correctly
record or transfer patient information or if we provide incorrect information
to patients or health care providers using our services. We have also agreed
21
to indemnify
QUALCOMM for any claims resulting from the provision of our services. If we
incur one or more significant claims
against us, if we
are required to indemnify QUALCOMM as a result of the provision of our
services, or if we are required to undertake remedial actions in response to
any such claims, such claims or actions would adversely affect our business and
results of operations.
Our liability
insurance is subject to deductibles and coverage limitations. In addition, our
current insurance may not continue to be available to us on acceptable terms,
if at all, and, if available, the coverages may not be adequate to protect us
against any future claims. If we are unable to obtain insurance at an
acceptable cost or on acceptable terms with adequate coverage or otherwise
protect against any claims against us, we will be exposed to significant
liabilities, which may harm our business.
*If we do not obtain and maintain adequate protection for
our intellectual property, the value of our technology and devices may be
adversely affected.
Our business and
competitive positions are dependent in part upon our ability to protect our
proprietary technology. To protect our proprietary rights, we rely on a
combination of trademark, copyright, patent, trade secret and other
intellectual property laws, employment, confidentiality and invention
assignment agreements with our employees and contractors, and confidentiality
agreements and protective contractual provisions with other third parties. We
attempt to protect our intellectual property position by filing trademark
applications and U.S., foreign and international patent applications related to
our proprietary technology, inventions and improvements that are important to
the development of our business.
As of March 31,
2008, we had 14 issued U.S. patents, seven foreign patents and 42 pending U.S.,
foreign and international patent applications relating to various aspects of
the CardioNet System. As of March 31, 2008, we also had 14 trademark
registrations and one pending trademark application in the United States for a
variety of word marks and slogans. We do not believe that any single patent,
trademark or other intellectual property right of ours, or combination of our
intellectual property rights, is likely to prevent others from competing with
us using a similar business model. There are many issued patents and patent
applications held by others in our industry and the electronics field. Our
competitors may independently develop technologies that are substantially
similar or superior to our technologies, or design around our patents or other
intellectual property to avoid infringement. In addition, we may not apply for
a patent relating to products or processes that are patentable, we may fail to
receive any patent for which we apply or have applied, and any patent owned by
us or issued to us could be circumvented, challenged, invalidated, or held to
be unenforceable, or rights granted thereunder may not adequately protect our
technology or provide a competitive advantage to us. For example, with respect
to one of our U.S. patents, we have a corresponding foreign patent, the claims
of which were amended substantially more so than in the United States, to
overcome art that was of record in the U.S. patent. If a third-party challenges
the validity of any patents or proprietary rights of ours, we may become
involved in intellectual property disputes and litigation that would be costly
and time-consuming.
Although third
parties may infringe our patents and other intellectual property rights, we may
not be aware of any such infringement, or we may be aware of potential
infringement but elect not to seek to prevent such infringement or pursue any
claim of infringement, and the third party may continue its potentially
infringing activities. Any decision whether or not to take further action in
response to potential infringement of our patent or other intellectual property
rights may be based on any one or more of a variety of factors, such as the
potential costs and benefits of taking such action, and business and legal
issues and circumstances. Litigation of claims of infringement of a patent or
other intellectual property rights may be costly and time-consuming and divert
the attention of key company personnel, and may not be successful or result in
any significant recovery of compensation for any infringement or enjoining of
any infringing activity. Litigation or licensing discussions may also involve
or lead to counterclaims that could be brought by a potential infringer to
challenge the validity or enforceability of our patents and other intellectual
property.
To protect our
trade secrets and other proprietary information, we generally require our
employees, consultants, contractors and outside collaborators to enter into
written nondisclosure agreements. These agreements, however, may not provide
adequate protection to prevent any unauthorized use, misappropriation or
disclosure of our trade secrets, know-how or other proprietary information.
These agreements may be breached, and we may not become aware of, or have
adequate remedies in the event of, any such breach. Also, others may
independently develop the same or substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets.
*Our ability to market our services may be impaired by the
intellectual property rights of third parties.
Our success is
dependent in part upon our ability to avoid infringing the patents or
proprietary rights of others. Our industry and the electronics field are
characterized by a large number of patents, patent filings and frequent
litigation based on allegations of patent infringement. Competitors may have
filed applications for or have been issued patents and may obtain additional
patents and proprietary rights related to devices, services or processes that
we compete with or are similar to ours. We may not be aware of all of the
patents or patent applications potentially adverse to our interests that may
have been or may later be issued to or filed by others. U.S. patent
applications may be kept confidential while pending in the Patent and Trademark
Office. If other companies have or obtain patents relating to our products or
services, we may be required to obtain licenses to those patents or to develop
or obtain alternative technology. We may not be able to obtain any such
licenses on acceptable terms, or at all. Any failure to obtain such licenses
could impair or foreclose our ability to make, use, market or sell our products
and services.
22
Based on the
litigious nature of our industry and the electronics field and the fact that we
may pose a competitive threat to some companies who own or control various
patents, it is always possible that one or more third parties may assert a
patent infringement claim seeking damages and to enjoin the manufacture, use,
sale and marketing of our products and services. If a third-party asserts that
we have infringed its patent or proprietary rights, we may become involved in
intellectual property disputes and litigation that would be costly and
time-consuming and could impair or foreclose our ability to make, use, market
or sell our products and services. For example, a competitor initiated a patent
infringement lawsuit against us in November 2004, which we defended and
ultimately settled in March 2006. Other lawsuits may have already been
filed against us without our knowledge. Additionally, we have received and
expect to continue to receive notices from other third parties suggesting or
asserting that we are infringing their patents and inviting us to license such
patents. We do not believe, however, that we are infringing any third partys
patents or that a license to any such patents is necessary. Should litigation
over such patents arise, which could occur if, for example, a third party
files a lawsuit alleging infringement of such patents or if we file a
lawsuit challenging such patents as being invalid or unenforceable, we intend
to vigorously defend against any allegation of infringement. If we are found to
infringe the patent or intellectual property rights of others, we may be
required to pay damages, stop the infringing activity or obtain licenses or
rights to the patents or other intellectual property in order to use,
manufacture, market or sell our products and services. Any required license may
not be available to us on acceptable terms or at all. If we succeed in
obtaining such licenses, payments under such licenses would reduce any earnings
from our products. In addition, licenses may be non-exclusive and, accordingly,
our competitors may have access to the same technology as that which may be
licensed to us. If we fail to obtain a required license or are unable to alter
the design of our product candidates to make a license unnecessary, we may be
unable to manufacture, use, market or sell our products and services, which
could significantly affect our ability to achieve, sustain or grow our commercial
business. Moreover, regardless of the outcome, patent litigation against or by
us could significantly disrupt our business, divert our managements attention
and consume our financial resources. We cannot predict if or when any third
party will file suit for patent or other intellectual property infringement.
*We are highly dependent on our Executive Chairman,
President and Chief Executive Officer, Chief Financial Officer and other key
employees, and if we are not able to retain them or to recruit and retain
additional qualified personnel, our business may suffer.
We are highly
dependent upon our Executive Chairman, President and Chief Executive Officer,
Chief Financial Officer and other key employees. The loss of their services
could have a material adverse effect on our business, financial condition and
results of operations. In particular, our Executive Chairman, James M. Sweeney,
and our President and Chief Executive Officer, Arie Cohen, are critical to our
operations. The employment of our executive officers and key employees with us
is at will, and each employee can terminate his or her relationship with us
at any time. We do not carry key person life insurance on any of our
employees other than James M. Sweeney, our Executive Chairman.
We will need to
hire additional senior executives and qualified scientific, commercial,
regulatory, sales, quality assurance and control and administrative personnel
as we continue to expand our commercial activities. We may not be able to
attract and retain qualified personnel on acceptable terms given the
competition for such personnel among companies that provide arrhythmia
monitoring solutions. We have offices in Pennsylvania, California, Florida,
Georgia and Minnesota. Competition for personnel with arrhythmia monitoring
experience in each of those areas is intense. If we fail to identify, attract,
retain and motivate these highly skilled personnel, or if we lose current
employees, we may be unable to continue our business operations.
*Our business operations could be significantly disrupted if
we fail to properly integrate our management team.
Our Chief
Executive Officer and Chief Financial Officer recently joined CardioNet and are
being integrated into our management team. Each of these officers will have
significant responsibility for our operations and success, but have only
limited experience with our business. If they do not smoothly and rapidly
develop knowledge of our business and integrate with our existing management,
our business operations could be significantly disrupted.
If we fail to obtain and maintain necessary FDA clearances,
our business would be harmed.
The monitors and
sensors that we manufacture and sell as part of the CardioNet System are
classified as medical devices and are subject to extensive regulation by the
FDA. Further, we maintain establishment registration with the FDA as a
distributor of medical devices. FDA regulations govern manufacturing, labeling,
promotion, distribution, importing, exporting, shipping and sale of these
devices.
The CardioNet
System, including our C3 monitor, and our arrhythmia detection algorithms have 510(k) clearance
status from the FDA. Modifications to the CardioNet System or our algorithms
that could significantly affect safety or effectiveness, or that could
constitute a significant change in intended use, would require a new clearance
from the FDA. If in the future we make changes to the CardioNet System or our
algorithms, the FDA could determine that such modifications require new FDA clearance,
and we may not be able to obtain such FDA clearances in a timely fashion or at
all.
23
We are subject to
continuing regulation by the FDA, including quality regulations applicable to
the manufacture of the CardioNet System and various reporting regulations and
regulations that govern the promotion and advertising of medical devices. The
FDA could find that we have failed to comply with one of these requirements,
which could result in a wide variety of enforcement actions, ranging from a
warning letter to one or more severe sanctions, including the following:
·
fines,
injunctions and civil penalties;
·
recall or
seizure of the CardioNet System;
·
operating
restrictions, partial suspension or total shutdown of production;
·
refusal to grant
510(k) clearance of new components or algorithms;
·
withdrawing 510(k) clearance
already granted to one or more of our existing components or algorithms; and
·
criminal
prosecution.
Any of these
enforcement actions could be costly and significantly harm our business,
financial condition and results of operations.
Enforcement of federal and state laws regarding privacy and
security of patient information may adversely affect our business, financial
condition or operations.
The use and
disclosure of certain health care information by health care providers and
their business associates have come under increasing public scrutiny. Recent
federal standards under the Health Insurance Portability and Accountability Act
of 1996, or HIPAA, establish rules concerning how
individually-identifiable health information may be used, disclosed and
protected. Historically, state law has governed confidentiality issues, and
HIPAA preserves these laws to the extent they are more protective of a patients
privacy or provide the patient with more access to his or her health
information. As a result of the implementation of the HIPAA regulations, many
states are considering revisions to their existing laws and regulations that
may or may not be more stringent or burdensome than the federal HIPAA
provisions. We must operate our business in a manner that complies with all
applicable laws, both federal and state, and that does not jeopardize the
ability of our customers to comply with all applicable laws. We believe that
our operations are consistent with these legal standards. Nevertheless, these laws
and regulations present risks for health care providers and their business
associates that provide services to patients in multiple states. Because these
laws and regulations are recent, and few have been interpreted by government
regulators or courts, our interpretations of these laws and regulations may be
incorrect. If a challenge to our activities is successful, it could have an
adverse effect on our operations, may require us to forego relationships with
customers in certain states and may restrict the territory available to us to
expand our business. In addition, even if our interpretations of HIPAA and
other federal and state laws and regulations are correct, we could be held
liable for unauthorized uses or disclosures of patient information as a result
of inadequate systems and controls to protect this information or as a result
of the theft of information by unauthorized computer programmers who penetrate
our network security. Enforcement of these laws against us could have a
material adverse effect on our business, financial condition and results of
operations.
We may be subject, directly or indirectly, to federal and
state health care fraud and abuse laws and regulations and, if we are unable to
fully comply with such laws, could face substantial penalties.
Our operations may
be directly or indirectly affected by various broad state and federal health
care fraud and abuse laws, including the Federal Healthcare Programs
Anti-Kickback Statute, which prohibits any person from knowingly and willfully
offering, paying, soliciting or receiving remuneration, directly or indirectly,
to induce or reward either the referral of an individual for an item or
service, or the ordering, furnishing or arranging for an item or service, for
which payment may be made under federal health care programs, such as the
Medicare and Medicaid programs. For some of our services, we directly bill
physicians for our services, who in turn bill payors. Although we believe such
payments to be proper and in compliance with laws and regulations, we may be
subject to claims that we are in violation of these laws and regulations. If
our past or present operations are found to be in violation of these laws, we
or our officers may be subject to civil or criminal penalties, including large
monetary penalties, damages, fines, imprisonment and exclusion from Medicare
and Medicaid program participation. If enforcement action were to occur, our
business and results of operations could be adversely affected.
The operation of our call centers and monitoring facilities
is subject to rules and regulations governing Independent Diagnostic
Testing Facilities; failure to comply with these rules could prevent us
from receiving reimbursement from Medicare and some commercial payors.
We have call centers
and monitoring facilities in Pennsylvania, Georgia, Florida, and Minnesota that
analyze the data obtained from arrhythmia monitors and report the results to
physicians. In order for us to receive reimbursement from Medicare and some
commercial payors, we must have a call center certified as an Independent
Diagnostic Testing Facility, or IDTF. Certification as an
24
IDTF requires that we follow strict regulations governing how the
center operates, such as requirements regarding the experience and
certifications of the technicians who review data transmitted from our
monitors. These rules and regulations vary from location to location and
are subject to change. If they change, we may have to change the operating
procedures at our monitoring facilities and call centers, which could increase
our costs significantly. If we fail to obtain and maintain IDTF certification,
our services may no longer be reimbursed by Medicare and some commercial
payors, which could have a material adverse impact on our business.
We may be subject to federal and state false claims laws
which impose substantial penalties.
Many of the
physicians and patients who use our services file claims for reimbursement with
government programs such as Medicare and Medicaid. As a result, we may be
subject to the federal False Claims Act if we knowingly cause the filing of
false claims. Violations may result in substantial civil penalties, including
treble damages. The federal False Claims Act also contains whistleblower or qui
tam provisions that allow private individuals to bring actions on behalf of
the government alleging that the defendant has defrauded the government. In
recent years, the number of suits brought in the medical industry by private
individuals has increased dramatically. Various states have enacted laws
modeled after the federal False Claims Act, including qui tam provisions, and
some of these laws apply to claims filed with commercial insurers.
We are unable to
predict whether we could be subject to actions under the federal False Claims
Act, or the impact of such actions. However, the costs of defending claims
under the False Claims Act, as well as sanctions imposed under the False Claims
Act, could significantly affect our financial performance.
Changes in the regulatory environment may constrain or
require us to restructure our operations, which may harm our revenues and
operating results.
Health care laws
and regulations change frequently and may change significantly in the future.
We may not be able to adapt our operations to address every new regulation, and
new regulations may adversely affect our business. We cannot provide assurance
that a review of our business by courts or regulatory authorities would not result
in a determination that adversely affects our revenues and operating results,
or that the health care regulatory environment will not change in a way that
restricts our operations. In addition, as a result of the focus on health care
reform in connection with the 2008 presidential election, there is risk that
Congress may implement changes in laws and regulations governing health care
service providers, including measures to control costs, or reductions in
reimbursement levels, which may adversely affect our business and results of
operations.
Changes in the health care industry or tort reform could
reduce the number of arrhythmia monitoring solutions ordered by physicians,
which could result in a decline in the demand for our solutions, pricing pressure
and decreased revenues.
Changes in the
health care industry directed at controlling health care costs or perceived
over-utilization of arrhythmia monitoring solutions could reduce the volume of
solutions ordered by physicians. If more health care cost controls are broadly
instituted throughout the health care industry, the volume of cardiac
monitoring solutions could decrease, resulting in pricing pressure and
declining demand for our services, which could harm our operating results. In
addition, it has been suggested that some physicians order arrhythmia
monitoring solutions even when the services may have limited clinical utility
in large part to establish a record for defense in the event of a claim of
medical malpractice against the physician. Legal changes making it more
difficult to bring medical malpractice cases, known as tort reform, could
reduce the amount of our services prescribed as physicians respond to reduced
risks of litigation, which could harm our operating results.
*A write-off of the value of our goodwill or intangible
assets could adversely affect our results of operations.
As of March 31,
2008, we had $46.0 million of goodwill and $2.6 million of intangible assets,
most of which resulted from acquisition of PDSHeart. Current accounting rules require
that goodwill and certain intangible assets be assessed for impairment using
fair value measurement techniques. If the carrying amount of a reporting unit
exceeds its fair value, then a goodwill impairment test is performed to measure
the amount of the impairment loss, if any. The goodwill impairment test
compares the implied fair value of the reporting units goodwill with the
carrying amount of that goodwill. Determining the fair value of the implied
goodwill is judgmental in nature and often involves the use of significant
estimates and assumptions. Any determination requiring the write-off of a
significant portion of goodwill or intangible assets could have a material
adverse effect on the market price of our common stock, and our business,
financial condition and results of operations.
Risks
related to the securities market and investment in our common stock
*Our quarterly operating results and stock price may be
volatile or may decline regardless of our operating performance.
The market price
for our common stock has been and is likely to continue to be volatile and may
fluctuate significantly in response to a number of factors, most of which we
cannot control, including:
25
·
changes in
reimbursement rates or policies by payors;
·
adoption of the
CardioNet System by physicians;
·
changes in
Medicare rules or regulations;
·
the development
of increased compensation for arrhythmia monitoring solutions;
·
price and volume
fluctuations in the overall stock market;
·
changes in
operating performance and stock market valuations of other early stage
companies generally;
·
the seasonal
nature of our revenues, which have typically been moderately lower during
summer months, which we believe may be due to physician and patient vacation
schedules and patient reluctance to initiate cardiac monitoring during months
when patients are more likely to be more active;
·
the financial
projections we may provide to the public, any changes in these projections or
our failure to meet these projections;
·
changes in
financial estimates by any securities analysts who follow our common stock, our
failure to meet these estimates or failure of those analysts to initiate or
maintain coverage of our common stock;
·
ratings
downgrades by any securities analysts who follow our common stock;
·
the publics
response to press releases or other public announcements by us or third
parties, including our filings with the SEC and announcements relating to payor
reimbursement decisions, product development, litigation and intellectual
property impacting us or our business;
·
market
conditions or trends in our industry or the economy as a whole;
·
the development
and sustainability of an active trading market for our common stock;
·
future sales of
our common stock by our officers, directors and significant stockholders;
·
other events or
factors, including those resulting from war, incidents of terrorism, natural
disasters or responses to these events; and
·
changes in
accounting principles.
In addition, the
stock markets, and in particular the Nasdaq Global Market, have experienced
extreme price and volume fluctuations that have affected and continue to affect
the market prices of equity securities of many health care companies. Stock
prices of many health care companies have fluctuated in a manner unrelated or
disproportionate to the operating performance of those companies. In the past,
stockholders have instituted securities class action litigation following
periods of market volatility. If we were involved in securities litigation, we
could incur substantial costs, and our resources and the attention of
management could be diverted from our business.
*Future sales of our common stock or securities convertible
into our common stock may depress our stock price.
Sales of a
substantial number of shares of our common stock or securities convertible into
our common stock in the public market could occur at any time. These sales, or
the perception in the market that the holders of a large number of shares
intend to sell shares, could reduce the market price of our common stock. As of
March 31, 2008, we had 23,065,145 outstanding shares of common stock. Of
these, approximately 18,445,551 shares of common stock are subject to lock-up
agreements that expire on September 14, 2008. Substantially all of the
shares of our common stock subject to lock-up agreements may be sold upon
expiration of such agreements. In addition, we have outstanding warrants to
purchase up to 6,250 shares of our common stock that, if exercised, would
result in these additional shares becoming available for sale upon expiration
of the lock-up agreements.
Effective February 15,
2008, the SEC adopted revisions to Rule 144. Under the newly adopted
revisions:
·
the holding
period for restricted shares of our common stock has been reduced to six months
under specified circumstances;
26
·
the restrictions
on the sale of restricted shares of our common stock held by affiliates and
non-affiliates of ours has been reduced; and
·
certain other
restrictions on resale of the shares of our common stock under Rule 144
were modified to make it easier for our stockholders under specified
circumstances to sell their shares upon the expiration of the lock-up
agreements beginning 180 days after the date of the final prospectus
relating to our initial public offering.
Based on the
number of shares outstanding as of March 31, 2008, holders of up to
approximately 14,016,792 shares of common stock (including shares of our common
stock issuable upon the exercise of a warrant to purchase up to 6,250 shares of
our common stock) will have rights, subject to some conditions, to require us
to file registration statements covering their shares or to include their
shares in registration statements that we may file for ourselves or other
stockholders. These rights will terminate on March 25, 2011, or for any
particular holder with registration rights who holds less than one percent of
our outstanding capital stock, at any time when all securities held by that
stockholder that are subject to registration rights may be sold pursuant to Rule 144
under the Securities Act of 1933, as amended, within a single 90 day
period. We have also registered all shares of common stock that we may issue
after our initial public offering under our equity compensation plans. These
shares can be freely sold in the public market upon issuance, subject to the
lock-up agreements described above.
We agreed to
register the 7,680,902 shares of our common stock that were issued at the
closing of our initial public offering upon conversion of our mandatorily
redeemable convertible preferred stock prior to June 23, 2008, and use
commercially reasonable best efforts to cause the registration statement to
become effective prior to September 21, 2008. Once registered, these
shares will be freely tradable. If we fail to register these shares when and as
required, we will be required to pay liquidated damages at a rate of 0.5% of
the original purchase price of the mandatorily redeemable convertible preferred
stock, plus accrued and unpaid dividends, for the initial failure and 1.0% of
the original purchase price of the mandatorily redeemable convertible preferred
stock, plus accrued and unpaid dividends, for each 30-day period thereafter
that the failure goes uncured. We intend to comply with our obligations
relating to such registration.
If a large number
of our shares of our common stock or securities convertible into our common
stock are sold in the public market after they become eligible for sale, the
sales could reduce the trading price of our common stock and impede our ability
to raise future capital.
*Anti-takeover provisions in our charter documents and
Delaware law might deter acquisition bids for us that our stockholders might
consider favorable.
Our amended and
restated certificate of incorporation and bylaws contain provisions that may
make the acquisition of our company more difficult without the approval of our
board of directors. These provisions:
·
establish a
classified board of directors so that not all members of our board are elected
at one time;
·
authorize the
issuance of undesignated preferred stock, the terms of which may be established
and shares of which may be issued without stockholder approval, and which may
include rights superior to the rights of the holders of common stock;
·
prohibit
stockholder action by written consent, which requires all stockholder actions
to be taken at a meeting of our stockholders;
·
provide that the
board of directors is expressly authorized to make, alter, or repeal our
bylaws; and
·
establish
advance notice requirements for nominations for elections to our board or for
proposing matters that can be acted upon by stockholders at stockholder
meetings.
In addition,
because we are incorporated in Delaware, we are subject to Section 203 of
the Delaware General Corporation Law which, subject to certain exceptions,
prohibits stockholders owning in excess of 15% of our outstanding voting stock
from merging or combining with us. These anti-takeover provisions and other
provisions under Delaware law could discourage, delay or prevent a transaction
involving a change of control of our company, even if doing so would benefit
our stockholders. These provisions could also discourage proxy contests and
make it more difficult for our stockholders to elect directors of their
choosing and cause us to take other corporate actions such stockholders desire.
*Our existing principal stockholders, executive officers and
directors have substantial control over us, which may prevent our stockholders
from influencing significant corporate decisions and may harm the market price
of our common stock.
Including stock
options that are exercisable within 60 days of March 31, 2008, our existing
principal stockholders, executive officers and directors, together with their
affiliates, beneficially own, in the aggregate, approximately 28.2% of our
outstanding common stock. These stockholders may have interests that conflict
with other stockholders and, if acting together, have the ability to
27
determine the outcome of matters submitted to our stockholders for
approval, including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets. In addition,
these stockholders, acting together, may have the ability to control our
management and affairs. Accordingly, this concentration of ownership may harm
the market price of our common stock by:
·
delaying,
deferring or preventing a change of control;
·
impeding a
merger, consolidation, takeover or other business combination involving us; or
·
discouraging a potential acquirer
from making a tender offer or otherwise attempting to obtain control of us.
*We do not expect to pay any cash dividends for the
foreseeable future.
The continued
expansion of our business may require substantial funding. Accordingly, we do
not anticipate that we will pay any cash dividends on shares of our common
stock for the foreseeable future. Even if we were not prohibited from paying
dividends, any determination to do so in the future would be at the discretion
of our board of directors and will depend upon our results of operations,
financial condition, contractual restrictions, restrictions imposed by
applicable law and other factors our board of directors deems relevant.
Accordingly, realization of a gain on your investment will depend on the
appreciation of the price of our common stock, which may never occur. Investors
seeking cash dividends in the foreseeable future should not purchase our common
stock.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent
Sales of Unregistered Securities
From January 1,
2008 to March 31, 2008, we granted stock options to
purchase 307,875 shares of our common stock at a weighted average
exercise price of $12.19 per share to our employees and directors under
our 2003 equity incentive plan. From January 1, 2008 to March 31,
2008, we issued an aggregate of 21,283 shares of our common stock to our
employees, directors and consultants at a weighted average price of
$1.26 per share for an aggregate of $26,740 pursuant to exercises of
options granted under our 2003 equity incentive plan.
The
sales and issuances of securities in the transactions described above were
deemed to be exempt from registration under the Securities Act of 1933, as
amended, in reliance upon Rule 701 promulgated under Section 3(b) of
the Securities Act of 1933, as amended, as transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities issued in these
transactions. All recipients had adequate access, through employment or other
relationships, to information about us. All certificates representing the
securities issued in these transactions included appropriate legends setting
forth that the securities had not been offered or sold pursuant to a
registration statement and describing the applicable restrictions on transfer
of the securities. There were no underwriters employed in connection with any
of the transactions set forth above.
Use of
Proceeds
Our
initial public offering of common stock was effected through a Registration
Statement on Form S-1 (File No. 333-145547) that was declared
effective by the Securities and Exchange Commission on March 18, 2008,
which registered an aggregate of 5,175,000 shares of our common stock,
including 675,000 shares that the underwriters had the option to purchase to
cover over-allotments. On March 25, 2008, 3,000,000 shares of common
stock were sold on our behalf and 1,500,000 shares of common stock were sold on
behalf of a selling stockholder at an initial public offering price of
$18.00 per share, for an aggregate gross offering price of $54,000,000 to
us, and $27,000,000 to the selling stockholders. On April 8, 2008,
1,014,286 shares of common stock were sold on behalf of the selling stockholder
upon a partial exercise of the underwriters over-allotment option, at an
initial public offering price of $18.00 per share, for an aggregate gross
offering price of $1,764,000 to the selling stockholder. The underwriters of
the offering were Citigroup Global Markets Inc., Lehman Brothers Inc., Leerink
Swann LLC and Thomas Weisel Partners LLC. Following the sale of the shares in
connection with the over-allotment closing of our initial public offering, the
offering terminated.
We
paid to the underwriters underwriting discounts and commissions totaling
approximately $3.8 million in connection with the offering. In addition,
we incurred additional costs of approximately $3.2 million in connection
with the offering, which when added to the underwriting discounts and
commissions paid by us, amounts to total fees and costs of approximately
$7.0 million. Thus, the net offering proceeds to us, after deducting
underwriting discounts and commissions and offering costs, were approximately
$46.9 million. No offering costs were paid directly or indirectly to any of our
directors or officers (or their associates) or persons owning ten percent or
more of any class of our equity securities or to any other affiliates.
28
As of March 31,
2008, we had invested $47.3 million, excluding offering expenses not yet paid,
of net proceeds from the offering in money market funds. Through March 31,
2008, we have not used the net proceeds from the offering, other than to repay
our outstanding long-term debt balance of $2.4 million and to pay a success fee
of $200,000 in connection with the offering to the lender of such long-term
debt, and to pay $2.6 million of the $5.0 million owed to former stockholders
of PDSHeart holding certificates of subordinated contingent payment interest to
fully extinguish our obligations under such certificates. We intend to use the
remaining proceeds for research and development, to build our inventory of
future generations of our CardioNet System, to increase our sales and marketing
capabilities for our CardioNet System, to hire additional personnel, to invest
in infrastructure, to pursue new markets and geographies and to acquire or
license products, technologies or businesses, although we currently have no
agreements or commitments relating to material acquisitions or licenses. We
cannot specify with certainty all of the particular uses for the net proceeds
from our initial public offering.
Accordingly, our management will have broad discretion in the
application of the net proceeds.
Item
4. Submission of Matters to a Vote of Security Holders.
On February 21,
2008, our stockholders acted by written consent to approve the
reincorporation of CardioNet, Inc. from a California corporation to a
Delaware corporation and related matters.
Such action was effected pursuant to an action by written consent of our
stockholders in compliance with Section 603 of the California Corporations
Code.
Stockholders
holding an aggregate of 22,138,737 shares approved the above matters and
stockholders holding approximately 2,145,005 shares did not vote with respect
to such matters. The share numbers reported above do not reflect the 1-for-2
reverse stock split of our outstanding common stock effected on March 5,
2008.
On March 5,
2008, our stockholders acted by written consent to approve and adopt an
amendment to our amended and restated certificate of incorporation to be filed
prior to the effectiveness of our initial public offering to implement a
1-for-2 reverse split of our common stock.
Such action was effected pursuant to an action by written consent of our
stockholders in compliance with Section 228 of the Delaware General
Corporation Law.
Stockholders
holding an aggregate of 15,532,133 shares approved the above matters and
stockholders holding approximately 8,753,026 shares did not vote with respect
to such matters. The share numbers reported above do not reflect the 1-for-2
reverse stock split of our outstanding common stock effected on March 5,
2008.
On March 25,
2008, our stockholders acted by written consent to approve the following: (1) the
approval and adoption of our amended and restated certificate of incorporation
to become effective upon the closing of our initial public offering; (2) the
approval and adoption of our amended and restated bylaws to become effective
upon the closing of our initial public offering; (3) the approval and
adoption of our 2008 Equity Incentive Plan; (4) the approval and adoption
of our 2008 Employee Stock Purchase Plan; (5) the approval and adoption of
our 2008 Non-Employee Directors Stock Option Plan; and (6) the approval
of the form of indemnity agreement between us and each of our directors and
executive officers. Such action was effected pursuant to an action by written
consent of our stockholders in compliance with Section 228 of the Delaware
General Corporation Law.
Stockholders
holding an aggregate of 11,262,725 shares approved the above matters and
stockholders holding approximately 8,802,460 shares did not vote with respect
to such matters. The share numbers reported above reflect the 1-for-2 reverse
stock split of our outstanding common stock effected on March 5, 2008.
29
Item
6. Exhibits.
EXHIBIT
INDEX
Exhibit
Number
|
|
|
|
|
|
|
3.1
|
|
|
Amended and Restated
Certificate of Incorporation.(1)
|
|
|
|
|
3.2
|
|
|
Amended and Restated
Bylaws.(1)
|
|
|
|
|
4.1
|
|
|
Form of Common
Stock Certificate.(1)
|
|
|
|
|
4.2
|
|
|
Warrant issued by
Registrant on August 9, 2000 to Silicon Valley Bank.(1)
|
|
|
|
|
10.1
|
|
|
Form of Indemnity
Agreement. (1)
|
10.2
|
|
|
2008 Equity Incentive
Plan and Form of Stock Option Agreement thereunder. (1)
|
10.3
|
|
|
2008 Non-Employee
Directors Stock Option Plan and Form of Stock Option Agreement
thereunder. (1)
|
10.4
|
|
|
2008 Employee Stock
Purchase Plan and Form of Offering Document thereunder. (1)
|
10.5
|
|
|
Form of Letter
Agreement between the Company and the stockholders selling shares of the
Registrants common stock in the initial public offering. (1)
|
31.1
|
|
|
Certification of Chief
Executive Officer pursuant to Rules 13a-14(a) and
15d-14(a) promulgated under the Securities and Exchange Act of 1934, as
amended.
|
31.2
|
|
|
Certification of Chief
Financial Officer pursuant to Rules 13a-14(a) and
15d-14(a) promulgated under the Securities and Exchange Act of 1934, as
amended.
|
32.1
|
|
|
Certification of Chief
Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
(1)
Filed as an exhibit to the Companys Registration
Statement on Form S-1 (File No. 333-145547) originally filed with the
Securities and Exchange Commission on August 17, 2007, as amended, and
incorporated herein by reference.
30
CardioNet, Inc.
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.
|
CARDIONET, INC.
|
|
|
|
|
Date: May 15,
2008
|
By:
|
/s/ Martin P.
Galvan
|
|
|
Martin P. Galvan
|
|
|
Chief
Financial Officer and Chief Operating
Officer, PDSHeart
(Duly Authorized Officer and Principal
Financial Officer)
|
31
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