Table of Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
|
|
for the quarterly period ended June 30, 2008
|
|
|
OR
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the transition period from
to
Commission File Number 001-33993
CardioNet, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
|
|
33-0604557
|
(State or Other Jurisdiction of Incorporation or Organization)
|
|
(I.R.S. Employer Identification Number)
|
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
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
x
|
|
Smaller reporting company
o
|
(Do not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2
of the Securities Exchange Act of 1934).
Yes
o
No
x
As
of August 11, 2008, 23,136,415 shares of the registrants common stock,
$0.001 par value per share, were outstanding.
Table of
Contents
CARDIONET, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2008
TABLE OF CONTENTS
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
CARDIONET, INC.
CONSOLIDATED BALANCE SHEETS
|
|
June 30, 2008
|
|
|
|
|
|
(Unaudited)
|
|
December 31, 2007
|
|
|
|
(In thousands except share and
per share amounts)
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,572
|
|
$
|
18,091
|
|
Accounts receivable, net of allowance for doubtful accounts of
$12,935, and $7,909 at June 30, 2008 and December 31, 2007,
respectively
|
|
29,203
|
|
22,854
|
|
Due from related parties
|
|
98
|
|
143
|
|
Prepaid expenses and other current assets
|
|
1,850
|
|
287
|
|
|
|
|
|
|
|
Total current assets
|
|
85,723
|
|
41,375
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
15,412
|
|
15,094
|
|
Intangible assets, net
|
|
2,315
|
|
2,807
|
|
Goodwill
|
|
45,999
|
|
41,163
|
|
Other assets
|
|
3,394
|
|
2,601
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
152,843
|
|
$
|
103,040
|
|
|
|
|
|
|
|
Liabilities and shareholders equity (deficit)
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,829
|
|
$
|
3,972
|
|
Accrued liabilities
|
|
11,930
|
|
6,425
|
|
Current portion of debt
|
|
321
|
|
1,088
|
|
Current portion of capital leases
|
|
49
|
|
49
|
|
Deferred revenue
|
|
563
|
|
466
|
|
|
|
|
|
|
|
Total current liabilities
|
|
14,692
|
|
12,000
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
25
|
|
1,655
|
|
Deferred rent
|
|
818
|
|
879
|
|
Other noncurrent liabilities
|
|
53
|
|
69
|
|
|
|
|
|
|
|
Total liabilities
|
|
15,588
|
|
14,603
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
Mandatorily redeemable convertible preferred stock 0 and
114,883 shares authorized , 0 and 114,839 issued and outstanding at
June 30, 2008 and December 31, 2007, respectively
|
|
|
|
115,302
|
|
|
|
|
|
|
|
Shareholders equity (deficit)
|
|
|
|
|
|
Series A 0 and 1,563,248 shares authorized, issued and
outstanding at June 30, 2008 and December 31, 2007, respectively
|
|
|
|
391
|
|
Series B 0 and 4,720,347 shares authorized, issued and
outstanding at June 30, 2008 and December 31, 2007, respectively
|
|
|
|
6,904
|
|
Series C 0 and 10,399,011 shares authorized, issued and
outstanding at June 30, 2008 and December 31, 2007, respectively
|
|
|
|
36,196
|
|
Series D 0 and 1,000,000 shares authorized, issued and
outstanding at June 30, 2008 and December 31, 2007, respectively
|
|
|
|
9,965
|
|
Preferred stock, $.001 par value and no par value at June 30,
2008 and December 31, 2007, respectively; 10,000,000 and 0 shares
authorized at June 30, 3008 and December 31, 2007, respectively, 0
shares issued and outstanding at June 30, 2008, and December 31,
2007, respectively
|
|
|
|
|
|
Common stock, $.001 par value and no par value at June 30, 2008
and December 31, 2007, respectively; 200,000,000 and 50,000,000 shares
authorized, 23,065,240 and 3,130,054 shares issued, outstanding and vested at
June 30, 2008, and December 31, 2007, respectively
|
|
23
|
|
1,399
|
|
Paid-in capital
|
|
217,660
|
|
|
|
Accumulated deficit
|
|
(80,428
|
)
|
(81,720
|
)
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
137,255
|
|
(26,865
|
)
|
|
|
|
|
|
|
Total liabilities and shareholders equity (deficit)
|
|
$
|
152,843
|
|
$
|
103,040
|
|
See accompanying notes.
3
Table of
Contents
CARDIONET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
June 30, 2008
|
|
June 30, 2007
|
|
|
|
(In thousands except per share
amounts)
|
|
(In thousands except per share
amounts)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Net patient service revenues
|
|
$
|
29,189
|
|
$
|
17,263
|
|
$
|
54,437
|
|
$
|
28,220
|
|
Other revenues
|
|
151
|
|
156
|
|
366
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
29,340
|
|
17,419
|
|
54,803
|
|
28,519
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
9,834
|
|
5,953
|
|
19,353
|
|
9,743
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
19,506
|
|
11,466
|
|
35,450
|
|
18,776
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
931
|
|
1,019
|
|
2,073
|
|
2,010
|
|
General and administrative
|
|
10,016
|
|
7,080
|
|
19,081
|
|
12,281
|
|
Sales and marketing
|
|
5,412
|
|
4,377
|
|
10,527
|
|
7,696
|
|
Integration, restructuring and other nonrecurring charges
|
|
610
|
|
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
16,969
|
|
12,476
|
|
33,597
|
|
21,987
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
2,537
|
|
(1,010
|
)
|
1,853
|
|
(3,211
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
353
|
|
681
|
|
531
|
|
904
|
|
Interest expense
|
|
(86
|
)
|
(775
|
)
|
(152
|
)
|
(1,951
|
)
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
267
|
|
(94
|
)
|
379
|
|
(1,047
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
2,804
|
|
(1,104
|
)
|
2,232
|
|
(4,258
|
)
|
Income tax (expense) benefit
|
|
(1,172
|
)
|
|
|
(940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
1,632
|
|
(1,104
|
)
|
1,292
|
|
(4,258
|
)
|
|
|
|
|
|
|
|
|
|
|
Dividends on and accretion of mandatorily redeemable convertible
preferred stock
|
|
|
|
(2,362
|
)
|
(2,597
|
)
|
(2,845
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
1,632
|
|
$
|
(3,466
|
)
|
$
|
(1,305
|
)
|
$
|
(7,103
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
$
|
(1.13
|
)
|
$
|
(0.10
|
)
|
$
|
(2.35
|
)
|
Diluted
|
|
$
|
0.07
|
|
$
|
(1.13
|
)
|
$
|
(0.10
|
)
|
$
|
(2.35
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
23,098
|
|
3,054
|
|
13,368
|
|
3,024
|
|
Diluted
|
|
24,191
|
|
3,054
|
|
13,368
|
|
3,024
|
|
See accompanying notes.
4
Table of
Contents
CARDIONET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six Months Ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
Operating activities
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,292
|
|
$
|
(4,258
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
|
|
|
|
|
|
Depreciation
|
|
3,346
|
|
1,267
|
|
Amortization of intangibles
|
|
492
|
|
307
|
|
Loss on disposal of property and equipment
|
|
116
|
|
21
|
|
(Decrease) increase in deferred rent
|
|
(61
|
)
|
210
|
|
Provision for doubtful accounts
|
|
5,089
|
|
3,762
|
|
Common stock and stock options issued for services
|
|
|
|
123
|
|
Amortization of debt discount, including recognition of contingent
beneficial conversion
|
|
|
|
638
|
|
Stock-based compensation
|
|
751
|
|
201
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(11,581
|
)
|
(4,864
|
)
|
Due from related parties
|
|
45
|
|
(17
|
)
|
Prepaid expenses and other current assets
|
|
(1,419
|
)
|
(102
|
)
|
Other assets
|
|
(793
|
)
|
328
|
|
Accounts payable
|
|
(2,143
|
)
|
720
|
|
Accrued liabilities
|
|
5,815
|
|
2,973
|
|
Other noncurrent liabilities
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
949
|
|
1,219
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
Purchases of property and equipment
|
|
(3,779
|
)
|
(4,611
|
)
|
Investment in subsidiary, net of cash acquired
|
|
(5,002
|
)
|
(46,886
|
)
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(8,781
|
)
|
(51,497
|
)
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
Net proceeds from issuance of mandatorily redeemable convertible
preferred stock
|
|
|
|
102,119
|
|
Proceeds from issuance of common stock
|
|
46,728
|
|
42
|
|
Proceeds from issuance of debt
|
|
500
|
|
373
|
|
Repayment of debt
|
|
(2,915
|
)
|
(5,831
|
)
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
44,313
|
|
96,703
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
36,481
|
|
46,425
|
|
Cash and cash equivalents beginning of period
|
|
18,091
|
|
3,909
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
54,572
|
|
$
|
50,334
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
368
|
|
$
|
2,256
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing
activities
|
|
|
|
|
|
Exercise of stock options under note receivable arrangements
|
|
$
|
|
|
$
|
277
|
|
Mandatorily redeemable convertible preferred stock issued in
connection with bridge loan
|
|
$
|
|
|
$
|
3,303
|
|
Mandatorily redeemable convertible preferred stock issued in
consideration for PDSHeart, Inc acquisition
|
|
$
|
|
|
$
|
1,456
|
|
See accompanying notes.
5
Table of
Contents
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 incorporated
in the state of California in March 1994, but did not actively begin
developing its product platform until April 2000. 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 $46.7 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 June 30,
2008, the Company had no shares of preferred stock outstanding.
On
August 6, 2008,
an underwritten secondary public offering of shares of common stock held by
certain of the Companys existing stockholders was completed. The Company did not issue any shares and
received no proceeds in connection with such offering. The Company incurred approximately $0.7
million in offering expenses on behalf of the selling stockholders. The underwriters of the offering were
Citigroup Global Markets Inc., Banc of America Securities LLC, Leerink Swann
LLC, Cowen and Company, LLC and Thomas Weisel Partners LLC
.
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 for interim
financial information and the requirements of Form 10-Q and Article 10
of Regulation S-X. Accordingly, these consolidated financial statements do not
include all of the information and footnotes required by U.S. generally
accepted accounting principles. In the
opinion of management, these consolidated financial statements reflect all
adjustments, which are of normal recurring nature and necessary for a fair
presentation of the Companys financial position as of June 30, 2008 and December 31,
2007, the results of operations for the three and six months ended June 30,
2008 and 2007 and cash flows for the six months ended June 30, 2008 and
2007. The financial data and other information disclosed in these notes to the
financial statements related to the three month and six month periods are
unaudited. The results for the three month and six month periods ended June 30,
2008 are not necessarily indicative of the results to be expected for any
future period.
6
Table
of Contents
Net Income (Loss) Attributable to Common Shares
The
Company computes net income (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 June 30,
2008 and June 30, 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:
|
|
June 30, 2008
|
|
June 30, 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
|
|
1,592,744
|
|
960,895
|
|
Common stock options available for grant
|
|
579,460
|
|
332,563
|
|
Common stock held by certain employees and unvested
|
|
65,572
|
|
|
|
Common stock
|
|
23,130,812
|
|
3,196,102
|
|
|
|
|
|
|
|
Total
|
|
25,374,838
|
|
18,597,900
|
|
If the
outstanding options, warrants and preferred stock were exercised or converted
into common stock, the result would be anti-dilutive for the six months ended June 30,
2008 and June 30, 2007 and the three months ended June 30, 2007.
Accordingly, basic and diluted net loss attributable to common stockholders per
share are identical for those 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
.
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 six months ended June 30,
2008 and 2007 was $0.8 million and $0.2 million lower, respectively, and the
Companys after-tax net income for the six months ended June 30, 2008 and
2007 was $0.4 million and $0.2 million lower, respectively, as a result of
stock-based compensation expense incurred. The impact of stock-based compensation
expense was $(0.03) and $(0.07) on the basic or diluted earnings per share for
the six months ended June 30, 2008 and 2007, respectively.
7
Table
of Contents
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:
|
|
Six months ended
June 30, 2008
|
|
Six months ended
June 30, 2007
|
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Expected volatility
|
|
50
|
%
|
50
|
%
|
Risk-free interest rate
|
|
2.68
|
%
|
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 six months ended June 30,
2008 and 2007 was $8.63 and $3.54, respectively.
The following table
summarizes activity under all stock award plans from December 31, 2007
through June 30, 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
|
|
Granted
|
|
(10,450
|
)
|
10,450
|
|
$
|
20.00
|
|
Canceled
|
|
56,847
|
|
(56,847
|
)
|
$
|
15.46
|
|
Exercised
|
|
|
|
(65,663
|
)
|
$
|
2.21
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2008
|
|
579,460
|
|
1,592,744
|
|
$
|
7.60
|
|
|
|
|
|
|
|
|
|
Additional information
regarding options outstanding is as follows:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Range of exercise price (per option)
|
|
$
|
0.70
- $20.00
|
|
$
|
0.70
- $9.50
|
|
Weighted average remaining contractual life (years)
|
|
8.99
|
|
9.28
|
|
|
|
|
|
|
|
|
|
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.
8
Table
of Contents
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. Upon a future acquisition, the Company
will evaluate 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.
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
35 positions in the areas of sales, finance, service and management. In
connection with the plan, the Company established reserves of $0.5 million
included in the purchase price allocation. As of June 30, 2008, all of the
positions had been eliminated and the Company commenced making arrangements to
close the facility. The reserve is included in accrued liabilities in the
accompanying consolidated balance sheet.
9
Table of
Contents
A
summary of the reserve activity related to the PDSHeart acquisition integration
plan as of June 30, 2008 is as follows:
|
|
Initial Reserves
Recorded in
Purchase Accounting
|
|
Payments/Adjustments
through
June 30, 2008
|
|
Balance as of
June 30, 2008
|
|
Severance and employee related costs
|
|
$
|
366,000
|
|
$
|
280,000
|
|
$
|
86,000
|
|
Rent Abandonment
|
|
$
|
144,000
|
|
$
|
|
|
$
|
144,000
|
|
Total:
|
|
$
|
510,000
|
|
$
|
280,000
|
|
$
|
230,000
|
|
Additionally,
the Company incurred expenses of $0.6 million in the first six months of 2008
and expects to incur an additional $0.2 million of expense through September 2008
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
$102.1 million ($110 million less offering costs of $7.9 million). 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.
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 $0.3
million in the first six months of 2008 and expects also to incur an additional
$0.1 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 42.1% for the first six months of 2008 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.
10
Table of
Contents
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, or in the event that we begin to
utilize the services of a provider of monitoring and communications services
other than QUALCOMM, 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 181 at June 30,
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 177 million at June 30, 2008. The current
estimated total of 177 million Medicare and commercial lives for which we
had reimbursement contracts as of June 30, 2008 represents approximately
70% 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. We believe a primary reason for the experimental
and investigational designation has been a lack of a published peer reviewed
prospective randomized clinical trial that demonstrates the clinical efficacy
of the CardioNet System. As a result, we
significantly slowed our geographic expansion in 2005 and 2006, as we awaited
results of a randomized clinical trial comparing the CardioNet System to
traditional loop event monitors.
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.
11
Table of
Contents
For
our event, Holter and pacemaker monitoring services, we have established
Medicare reimbursement and we have 106 direct contracts with commercial payors
as of June 30, 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.
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 35 positions in the areas of
sales, finance, service and management. In connection with the plan, the
Company established reserves of $0.5 million included in the purchase price
allocation. Additionally, we incurred
expenses of $0.6 million of employee-related costs to integrate these functions
in the first six months of 2008 and expect to incur an additional $0.2 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 $46.7 million after deducting underwriter commissions and
estimated offering expenses.
On
August 6, 2008,
an underwritten secondary public offering of shares of common stock held by certain
of the Companys existing stockholders was completed. The Company did not issue any shares and
received no proceeds in connection with such offering. The Company incurred approximately $0.7 million
in offering expenses on behalf of the selling stockholders. The underwriters of the offering were
Citigroup Global Markets Inc., Banc of America Securities LLC, Leerink Swann
LLC, Cowen and Company, LLC and Thomas Weisel Partners LLC
.
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 June 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.
12
Table of
Contents
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.
For
the quarter ended June 30, 2008, our gross profit margin was 66.5%. 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 81
account executives as of June 30, 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. Expenses related to clinical trials 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.
13
Table of
Contents
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, or SEC, pursuant to Rule 424(b) (File
No. 333-145547) on March 19, 2008.
Results of Operations
Quarters Ended June 30, 2008 and 2007
Revenues.
Total revenues for the quarter
ended June 30, 2008 increased to $29.3 million from
$17.4 million for the quarter ended June 30, 2007, an increase of
$11.9 million, or 68.4%. CardioNet System revenue increased
$12.6 million, of which $5.8 million was attributed to increased
patient revenues from physicians within the geographies that we historically
served and $6.8 was due to geographic expansion.
Gross Profit.
Gross profit increased to
$19.5 million for the quarter ended June 30, 2008, or 66.5% of
revenues, from $11.5 million for the quarter ended June 30, 2007, or
65.8% of revenues. The increase of $8.0 million is due to the increased revenue
from the CardioNet System as well operational efficiencies achieved and cost
reductions negotiated with some of our largest vendors during the quarter.
Sales and Marketing Expense.
Sales and marketing expenses
were $5.4 million for the quarter ended June 30, 2008 compared to
$4.4 million for the quarter ended June 30, 2007. The increase of
$1.0 million is due to the 5% increase in the number of account executives
and the continued building of the sales operations infrastructure. As a percent of total revenues, sales and
marketing expenses were 18.5% for the quarter ended June 30, 2008 compared
to 25.1% for the quarter ended June 30, 2007, a decline of 6.6% due to the
completion of the full integration of the sales force.
Research and Development Expense.
Research and
development expenses decreased to $0.9 million for the quarter ended June 30,
2008 compared to $1.0 million for the quarter ended June 30, 2007. As
a percent of total revenues, research and development expenses declined to 3.2%
for the quarter ended June 30, 2008 compared to 5.9% for the quarter ended
June 30, 2007, a decline of 2.7% primarily due to the higher revenue.
General and Administrative Expense.
General and
administrative expenses (including amortization) increased to
$10.1 million for the quarter ended June 30, 2008 from
$7.1 million for the quarter ended June 30, 2007. This increase of
$3.0 million, or 40.9%, was primarily due to an increase in the provision
for bad debt ($0.7 million), increased bonus accrual ($0.6 million),
increased expense relating to the addition of several key management positions
($0.4 million), stock based compensation ($0.3 million), increased legal
fees ($0.3 million) and increased infrastructure ($0.6 million). As a percent
of total revenues, general and administrative expenses declined to 34.1% for
the quarter ended June 30, 2008 compared to 40.7% for the quarter ended June 30,
2007, a decrease of 6.6% as the increase in expense was offset by the higher
revenue.
Integration, Restructuring and Other Nonrecurring Charges.
Integration
charges relating to the PDSHeart acquisition were $0.4 million for the quarter
ended June 30, 2008. Restructuring charges relating to consolidating our
Finance and Human Resources functions in Pennsylvania were $0.2 million for the
quarter ended June 30, 2008. We incurred no integration, restructuring or
other nonrecurring charges in the quarter ended June 30, 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
35 positions in the areas of sales, finance, service and management. In
connection with the plan, the Company established reserves of $0.5 million
included in the purchase price allocation. For the quarter ended June 30,
2008, all of the positions have been eliminated and approximately $0.4 million
of employee-related expenses have been incurred.
14
Table of Contents
In
addition, in March 2008, the Company initiated restructuring plans to
consolidate its Finance and Human Resources functions in Pennsylvania. This
plan includes the elimination of seven positions in California and is currently
anticipated to be completed by September 2008. For the quarter ended June 30,
2008, no positions have been eliminated and approximately $0.2 million of
employee-related expenses have been incurred.
Total Interest Income/Expense, Net.
Net interest
income was $0.3 million for the quarter ended June 30, 2008 compared to
net interest expense of $0.1 million for the quarter ended June 30,
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 the
Company in March 2007.
Income Taxes.
The Companys effective tax
rate was 41.8% for the quarter ended June 30, 2008. This compares to no income tax benefit or
expense for the quarter ended June 30, 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.
Net Income (Loss).
Net income was $1.6 million
for the quarter ended June 30, 2008 compared to a net loss of
$1.1 million for the quarter ended June 30, 2007. As a percent of
total revenues, net income was 5.6% for the quarter ended June 30, 2008
compared to a net loss of 6.3% for the quarter ended June 30, 2007.
Six Months Ended June 30, 2008 and 2007
Revenues.
Total revenues for the six
months ended June 30, 2008 increased to $54.8 million from
$28.5 million for the six months ended June 30, 2007, an increase of
$26.3 million, or 92.2%. CardioNet System revenue increased
$23.4 million, of which $9.4 million was attributed to increased
patient revenues from physicians within the geographies that we historically
served and $14.0 million was due to geographic expansion. Additionally, revenue
from the event and Holter monitoring business increased $2.8 million versus the
prior year due to the full period effect in 2008 of the PDSHeart acquisition
that was consummated on March 8, 2007.
Gross Profit.
Gross profit increased to
$35.4 million for the six months ended June 30, 2008, or 64.7% of
revenues, from $18.8 million for the six months ended June 30, 2007,
or 65.8% of revenues. The increase of $16.6 million is primarily due to
increased CardioNet System revenue compared to our lower margin event and
Holter business. Gross profit as a percent of revenues decreased by 1.1% due
mainly to the full period effect of the lower margin PDSHeart products in 2008.
Sales and Marketing Expense.
Sales and marketing expenses
were $10.5 million for the six months ended June 30, 2008 compared to
$7.7 million for the six months ended June 30, 2007. The increase of
$2.8 million is due primarily to the full period effect of the PDSHeart
acquisition of $1.8 million and the increased sales force infrastructure
buildup of $1.0 million. As a percent of total revenues, sales and marketing
expenses were 19.2% for the six months ended June 30, 2008 compared to
27.0% for the six months ended June 30, 2007, a decline of 7.8% primarily
due to sales force integration efforts.
Research and Development Expense.
Research and
development expenses increased to $2.1 million for the six months ended June 30,
2008 compared to $2.0 million for the six months ended June 30, 2007.
As a percent of total revenues, research and development expenses declined to
3.8% for the six months ended June 30, 2008 compared to 7.0% for the six
months ended June 30, 2007, a decline of 3.2% primarily due to higher
revenue.
General and Administrative Expense.
General and
administrative expenses (including amortization) increased to
$19.1 million for the six months ended June 30, 2008 from
$12.3 million for the six months ended June 30, 2007. This increase
of $6.8 million, or 55.3%, was primarily due to an increase in the
provision for bad debt ($1.3 million), increased bonus accrual ($0.9
million), increased legal fees ($0.9 million), increased costs related to being
a public company ($0.6 million), stock based compensation ($0.6 million),
increased expense relating to the addition of several key management positions
($0.4 million), increased amortization due to the PDSHeart acquisition ($0.2
million) and increased infrastructure ($1.8 million). As a percent of total
revenues, general and administrative expenses declined to 34.9% for the six
months ended June 30, 2008 compared to 43.2% for the six months ended June 30,
2007, a decrease of 8.3% as the increase in expense was offset by the higher
revenue.
15
Table of
Contents
Integration, Restructuring and Other Nonrecurring Charges.
The Company has
incurred integration and restructuring costs as well as $1.0 million related to
the resolution of intellectual property litigation for the six months ended June 30,
2008. Integration charges relating to
the PDSHeart acquisition were $0.6 million for the six months ended June 30,
2008. Restructuring charges relating to consolidating our Finance and Human
Resources functions in Pennsylvania were $0.3 million for the six months ended June 30,
2008. We incurred no integration, restructuring or other nonrecurring charges
in the quarter ended June 30, 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
35 positions in the areas of sales, finance, service and management. In
connection with the plan, the Company established reserves of $0.5 million
included in the purchase price allocation. As of June 30, 2008, all of the
positions have been eliminated and approximately $0.6 million of
employee-related expenses have been incurred.
In
addition, in March 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 June 30, 2008,
no positions have been eliminated and approximately $0.3 million of
employee-related expenses have been incurred.
Total Interest Income/Expense, Net.
Net interest
income was $0.4 million for the six months ended June 30, 2008 compared to
net interest expense of $1.0 million for the six months ended June 30,
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 the
Company in March 2007.
Income Taxes.
The Companys effective tax
rate was 42.1% for the six months ended June 30, 2008. This compares to no income tax benefit or
expense for the quarter ended June 30, 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.
Net Income (Loss).
Net income was $1.3 million
for the six months ended June 30, 2008 compared to a net loss of
$4.3 million for the six months ended June 30, 2007. As a percent of
total revenues, net income was 2.3% for the six months ended June 30, 2008
compared to a net loss of 15.1% for the six months ended June 30, 2007.
Liquidity and Capital Resources
From
our inception in 1999 through June 30, 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 $46.7 million.
Through June 30, 2008, we funded our business primarily through the
following:
·
initial public offering that provided net proceeds
of approximately $46.7 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.
16
Table of
Contents
As of June 30,
2008, our principal source of liquidity was cash totaling $54.6 million
and net accounts receivable of $29.2 million.
Our
cash flow from operations decreased by $0.3 million to $0.9 million in the
first six months of 2008 from $1.2 million in the first six months 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 $8.8 million in the first six months
of 2008, compared to $51.5 million in the first six months of 2007, a decrease
of $42.7 million. The decrease is primarily due to the consummation of the
PDSHeart acquisition in March 2007 for a net cash effect of $46.9 million,
partially offset by additional cash payments to PDSHeart shareholders in 2008
of $5.0 million as a result of the contingent note payment due as a result of
our initial public offering combined with lower capital expenditures in 2008.
We
generated net cash from financing activities of $44.3 million in the first six
months of 2008, compared to $96.7 million in the first six months of 2007, a
decrease of $52.4 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 compared to the initial public
offering net cash proceeds in 2008 of $46.7 million, excluding offering expenses,
partially offset by $2.9 million in debt repayment mainly attributable to the
retirement of Silicon Valley Bank debt.
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;
·
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 June 30, 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.
17
Table of
Contents
Item 4T.
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 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.
In
addition, management, including our chief executive officer and chief financial
officer, did not identify any change in our internal control over financial
reporting that occurred during our latest fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION.
Item 1. Legal Proceedings.
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.
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
not be able to sustain profitability.
We
incurred net losses from our inception through March 31, 2008. For the quarter ending June 30, 2008, we
realized net income of $1.6 million. As
of June 30, 2008, we had total stockholders deficit of approximately
$80.4 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;
18
Table of
Contents
·
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 increase our revenues to
remain 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 income or
losses.
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.
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.
19
Table of
Contents
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 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 June 30, 2008, our top 10 commercial payors
by revenues accounted for approximately 32.5% 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
20
Table of
Contents
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 81 account executives at June 30,
2008. We intend to further expand our sales force 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.
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.
21
Table of
Contents
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 a termination date in September 2012,
QUALCOMM may terminate its agreement with us if certain conditions occur,
including if QUALCOMMs agreement with the third party wireless carrier
terminates
, in the
event we fail to maintain an agreed-upon number of active cardiac monitoring
devices on the QUALCOMM network or in the event that we begin to utilize the
services of a provider of monitoring and communication services other than
QUALCOMM
. 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.
22
Table of
Contents
*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 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
23
Table of
Contents
patient
information or if we provide incorrect information to patients or health care
providers using our services. We have also agreed 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 July 21, 2008,
we had 14 issued U.S. patents, eight foreign patents and 41 pending U.S.,
foreign and international patent applications relating to various aspects of
the CardioNet System. As of July 21, 2008, we also had 10 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. For example, we believe that LifeWatch Corp. may be infringing our
intellectual property rights. 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.
24
Table of
Contents
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.
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. LifeWatch Corp. has asserted or made
statements suggesting that it believes we are infringing its intellectual
property rights. 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 LifeWatchs or any other 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 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 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. 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
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.
25
Table of
Contents
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.
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.
26
Table of
Contents
*The operation of our call centers and
monitoring facilities is subject to rules and regulations governing
Independent Diagnostic Testing Facilities and state licensure requirements;
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 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.
In order to maintain the
IDTF certification of our call centers we are also required to comply with
certain state requirements. The state of Florida has advised us that we must
obtain a license to operate our call center in that state. If we fail to obtain
a license, we would be required to cease the operations of our Florida call
center, we may be subject to fines and penalties, and we may be required to
refund amounts previously received in connection with our operation of the
Florida call center during the period that we did not have a license. We have
applied for and expect to receive the license, but there can be no assurance
that the license will be received. If we fail to obtain and maintain a license
to operate our call center in Florida or to comply with any other state
requirements to which we are subject, our business and results of operations
could be adversely impacted.
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.
27
Table of
Contents
*A write-off of the value of our goodwill
or intangible assets could adversely affect our results of operations.
As
of June 30, 2008, we had $46.0 million of goodwill and $2.3 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:
·
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.
28
Table of
Contents
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 June 30,
2008, we had 23,065,240 outstanding shares of common stock. Of these,
approximately 7,278,258 shares of common stock are subject to lock-up
agreements that are in force through and including September 14, 2008 and
approximately 5,319,384 shares of our common stock are subject to lock-up
agreements that are in force through and including October 29, 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;
·
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, and these modifications
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.
We
recently filed a registration statement on Form S-1 registering 11,964,196
shares of our common stock for resale, of which 5,750,000 shares were sold
pursuant to an underwritten public offering and of which 6,214,196 shares are
freely tradable, subject to lock-up agreements as described above. 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.
29
Table of
Contents
*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 June 30, 2008,
our existing principal stockholders, executive officers and directors, together
with their affiliates, beneficially owned, in the aggregate, approximately 21%
of our outstanding common stock. These stockholders may have interests that
conflict with other stockholders and, if acting together, have the ability to
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.
*If securities or industry analysts publish inaccurate or
unfavorable research about our business, our stock price and trading volume
could decline.
The trading market for
our common stock will depend in part on the research and reports that securities
or industry analysts publish about us or our business. If one or more of the
analysts who covers us downgrades our stock or publishes inaccurate or
unfavorable research about our business, our stock price would likely decline.
If one or more of these analysts ceases coverage of us or fails to publish
reports on us regularly, demand for our stock could decrease, which could cause
our stock price and trading volume to decline.
*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 March 31,
2008 to June 30, 2008, we granted stock options to
purchase 10,450 shares of our common stock at a weighted average exercise
price of $20.00 per share to our employees and directors under our 2008
equity incentive plan. From March 31, 2008 to June 30, 2008, we
issued an aggregate of 65,663 shares of our common stock to our employees,
directors and consultants at a weighted average price of $2.21 per share
for an aggregate of $144,800 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.
30
Table of
Contents
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 $54.0 million to us, and $27.0 million 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 $1.8 million 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.
As of June 30,
2008, we had invested $46.7 million of net proceeds from the offering in money
market funds. Through June 30, 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 $0.2 million in connection with the
offering to the lender of such long-term debt, and to pay $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 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
|
|
|
Amendment No. 6
dated June 26, 2008 to Communications Voice and Data Services Provider
Agreement dated May 12, 2003 between the Company and QUALCOMM,
Incorporated, as amended.
(2)*
|
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.
(2)
Filed as an exhibit to the Companys Registration
Statement on Form S-1 (File No. 333-151829) originally filed with the
Securities and Exchange Commission on June 23, 2008, as amended, and
incorporated herein by reference.
*
Confidential treatment has been granted with respect
to certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
31
Table of
Contents
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: August 13, 2008
|
By:
|
/s/ Martin P. Galvan
|
|
|
Martin P. Galvan
|
|
|
Chief Financial Officer and Chief
Operating
Officer, PDSHeart
(Duly
Authorized Officer and Principal
Financial Officer)
|
32
HeartBeam (NASDAQ:BEAT)
Historical Stock Chart
From Jun 2024 to Jul 2024
HeartBeam (NASDAQ:BEAT)
Historical Stock Chart
From Jul 2023 to Jul 2024