Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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for
the quarterly period ended March 31, 2009
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OR
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number 001-33993
CardioNet, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
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33-0604557
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(State or Other
Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification Number)
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227 Washington Street
Conshohocken, Pennsylvania 19428
(Address of Principal Executive Offices, including Zip Code)
(610) 729-7000
(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
x
No
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
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Accelerated
filer
o
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Non-accelerated filer
x
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Smaller
reporting company
o
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(Do not check if a smaller
reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
As
of April 22, 2009, 23,754,365 shares of the registrants common stock,
$0.001 par value per share, were outstanding.
Table of
Contents
CARDIONET, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
MARCH 31, 2009
TABLE OF CONTENTS
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
CARDIONET, INC.
CONSOLIDATED BALANCE SHEETS
(
In thousands except share and per
share amounts
)
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(Unaudited)
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December 31, 2008
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March 31, 2009
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Assets
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Current assets:
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Cash and cash equivalents
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$
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58,171
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$
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50,412
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Accounts receivable, net of allowance for doubtful accounts of
$14,426, and $16,879 at December 31, 2008 and March 31, 2009,
respectively
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39,334
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47,751
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Due from related parties
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97
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144
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Prepaid expenses and other current assets
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1,059
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1,853
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Total current assets
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98,661
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100,160
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Property and equipment, net
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18,766
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22,078
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Intangible assets, net
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1,823
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1,585
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Goodwill
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45,999
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45,999
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Other assets
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524
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566
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Total assets
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$
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165,773
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$
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170,388
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Liabilities and shareholders equity
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Current liabilities:
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Accounts payable
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$
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3,838
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$
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4,319
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Accrued liabilities
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10,238
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10,845
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Current portion of debt
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72
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49
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Current portion of capital leases
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49
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49
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Deferred revenue
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461
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586
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Total current liabilities
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14,658
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15,848
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Deferred rent
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965
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973
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Other noncurrent liabilities
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33
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25
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Total liabilities
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15,656
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16,846
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Common stock, $.001 par value; 200,000,000 shares authorized;
23,477,137 and 23,752,292 shares issued and outstanding at December 31,
2008 and March 31, 2009, respectively
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24
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24
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Paid-in capital
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222,608
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226,755
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Accumulated deficit
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(72,515
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)
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(73,237
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)
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Total shareholders equity
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150,117
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153,542
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Total liabilities and shareholders equity
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$
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165,773
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$
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170,388
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See accompanying notes.
3
Table
of Contents
CARDIONET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(
In thousands except share and
per share amounts
)
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Three Months Ended
March 31,
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2008
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2009
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Revenues:
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Net patient service revenues
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$
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25,248
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$
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35,559
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Other revenues
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215
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161
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Total revenues
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25,463
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35,720
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Cost of revenues
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9,519
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11,838
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Gross profit
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15,944
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23,882
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Operating expenses:
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Research and development
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1,141
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1,216
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General and administrative
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9,066
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14,325
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Sales and marketing
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5,115
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7,547
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Integration, restructuring and other charges
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1,306
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2,139
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Total expenses
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16,628
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25,227
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Loss from operations
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(684
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)
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(1,345
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)
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Other income (expense):
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Interest income
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178
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122
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Interest expense
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(66
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(4
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Total other income
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112
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118
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Loss before income taxes
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(572
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(1,227
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Income tax benefit (provision)
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232
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505
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Net loss
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(340
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(722
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Dividends on and accretion of mandatorily redeemable convertible
preferred stock
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(2,597
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Net loss attributable to common stockholders
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$
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(2,937
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)
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$
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(722
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)
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Net loss per common share:
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Basic
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$
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(0.63
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)
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$
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(0.03
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)
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Diluted
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$
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(0.63
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)
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$
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(0.03
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)
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Weighted average number of common shares outstanding:
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Basic
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4,694,561
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23,600,149
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Diluted
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4,694,561
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23,600,149
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See accompanying notes.
4
Table of Contents
CARDIONET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(
In thousands
)
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Three Months Ended
March 31,
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2008
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2009
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Operating activities
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Net loss
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$
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(340
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)
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$
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(722
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)
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Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
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Depreciation
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1,647
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2,271
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Amortization of intangibles
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246
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238
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Loss on disposal of property and equipment
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46
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11
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(Decrease) increase in deferred rent
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(29
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)
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8
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Provision for doubtful accounts
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2,344
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2,453
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Stock-based compensation
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360
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1,660
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Changes in operating assets and liabilities:
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Accounts receivable
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(5,269
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)
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(10,870
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)
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Due from related parties
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13
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(47
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)
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Prepaid expenses and other current assets
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(912
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)
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(794
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)
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Other assets
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613
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(42
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)
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Accounts payable
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(1,042
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)
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481
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Accrued liabilities
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3,135
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607
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Other liabilities
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117
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Net cash provided by operating activities
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812
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(4,629
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)
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Investing activities
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Purchases of property and equipment
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(1,738
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)
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(5,594
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Investment in subsidiary, net of cash acquired
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(2,608
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)
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Net cash used in investing activities
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(4,346
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)
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(5,594
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)
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Financing activities
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Proceeds from issuance of common stock
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47,294
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2,487
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Proceeds from issuance of debt
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500
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Repayment of debt
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(380
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)
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(23
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)
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Repurchase of stock/subject to repurchase
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2
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Net cash provided by financing activities
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47,416
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2,464
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Net increase (decrease) in cash and cash equivalents
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43,882
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(7,759
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)
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Cash and cash equivalents beginning of period
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18,091
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58,171
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Cash and cash equivalents end of period
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$
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61,973
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$
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50,412
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Supplemental disclosure of cash flow information
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Cash paid for interest
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$
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64
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$
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4
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Cash paid for taxes
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$
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$
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1,268
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See accompanying notes.
5
Table of Contents
CARDIONET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
1.
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 necessary for a complete presentation of financial position, results
of operations and cash flows.
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 December 31, 2008 and March 31, 2009, and
the results of operations for the three months ended March 31, 2008 and 2009.
The financial data and other information disclosed in these notes to the
financial statements related to the three month period is unaudited. The
results for the three month period ended March 31, 2009 is not necessarily
indicative of the results to be expected for any future period.
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
. Under SFAS No. 128,
basic net loss per share is computed by dividing net loss per share
attributable to common stockholders by the weighted average number of common
shares outstanding for the period and excludes the effects of any potentially
dilutive securities. Diluted earnings per share, if presented, would include
the dilution that would occur upon the exercise or conversion of all
potentially dilutive securities into common stock using the treasury stock
and/or if converted methods, as applicable.
The following summarizes the potential outstanding
common stock of the Company at March 31, 2008 and 2009. All share amounts
have been adjusted for the one-for-two reverse stock split effected by the
Company on March 5, 2008:
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March 31,
2008
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March 31,
2009
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Series B warrants
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6,250
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Common stock options and restricted stock units outstanding
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1,704,804
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1,847,991
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Common stock options and restricted stock units available for grant
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533,063
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938,255
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Common stock held by certain employees and unvested
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79,866
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31,093
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Common stock
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22,985,279
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23,752,292
|
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Total
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25,309,262
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26,569,631
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If the outstanding vested options or restricted
stock units were exercised or converted into common stock, the result would be
anti-dilutive for the three months ended March 31, 2008 and 2009.
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
.
6
Table
of Contents
The Companys income before income taxes for the
three months ended March 31, 2008 and 2009 was $0.4 million and $1.7
million lower, respectively, and the Companys after-tax net income for the
three months ended March 31, 2008 and 2009 was $0.2 million and $1.0
million lower, respectively, as a result of stock-based compensation expense
incurred. The impact of stock-based compensation expense was $(0.04) on the
basic and diluted earnings per share for the three months ended March 31,
2008 and 2009, respectively.
The Company utilized the Black-Scholes valuation
model for estimating the fair value of the stock options granted after the
adoption of SFAS No. 123R with the following weighted average
assumptions:
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Three months ended
March 31,
|
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|
|
2008
|
|
2009
|
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Expected volatility
|
|
50
|
%
|
50
|
%
|
Risk-free interest rate
|
|
2.7
|
%
|
2.0
|
%
|
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 No. 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 three months ended March 31, 2008 and 2009 was $12.19 and $12.46,
respectively.
The
following table summarizes activity under all stock award plans from December 31,
2008 through March 31, 2009:
|
|
|
|
Options Outstanding
|
|
|
|
Shares
|
|
|
|
Weighted
|
|
|
|
Available
|
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Number
|
|
Average
|
|
|
|
for Grant
|
|
of Shares
|
|
Exercise Price
|
|
Balance December 31, 2008
|
|
340,935
|
|
1,635,205
|
|
$
|
13.67
|
|
Additional options available for grant
|
|
1,024,921
|
|
|
|
$
|
|
|
Granted
|
|
(850,890
|
)
|
850,890
|
|
$
|
24.84
|
|
Canceled
|
|
423,289
|
|
(423,289
|
)
|
$
|
9.63
|
|
Exercised
|
|
|
|
(214,815
|
)
|
$
|
8.25
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2009
|
|
938,255
|
|
1,847,991
|
|
$
|
20.98
|
|
Per
the plan documents, the 2008 Non-Employee Director Stock Option (NEDS) and
Employee Stock Option (ESOP) Plans have an automatic increase in the shares
available for grant every January the Plans are active. The increase in
the shares available for grant under the NEDS plan is equal to the lesser of
the number of shares subject to Options granted during the preceding calendar
year or such number of shares determined by the Board of Directors. The
increase in the shares available for grant under the ESOP plan is equal to 4%
of the total shares outstanding at December 31, 2008.
Additional
information regarding options outstanding is as follows:
|
|
March 31,
2008
|
|
March 31,
2009
|
|
Range of exercise price (per option)
|
|
$0.70
- $18.30
|
|
$1.50
- $31.18
|
|
Weighted average remaining contractual life (years)
|
|
9.22
|
|
9.30
|
|
7
Table of
Contents
Employee
Stock Purchase Plan
On
March 17, 2009, 44,189 shares were purchased in accordance with the
Employee Stock Purchase Plan (ESPP). Net proceeds to the Company from the
issuance of shares of common stock under the ESPP for the three months ended March 31,
2009 were $0.7 million. In January 2009, the number of shares available
for grant was increased by 235,189, per the ESPP plan documents. At March 31,
2009, approximately 379,503 shares remain available for purchase under the
ESPP.
New Accounting Pronouncements
Effective January 1, 2009, the Company
prospectively adopted Statement of Financial Accounting Standards No. 157
(SFAS No. 157),
Fair Value Measurements
,
with respect to fair value measurements required for the Companys nonfinancial
assets and nonfinancial liabilities. The adoption of SFAS 157 with respect to
the Companys nonfinancial assets and nonfinancial liabilities was delayed
until January 1, 2009 by FSP No. 157-2, Effective Date of FASB
Statement No. 157.
The adoption did not have a material effect on
the Companys financial position or results of operations.
Effective January 1, 2009, the Company
prospectively adopted Statement of Financial Accounting Standards No. 141(R) (SFAS
No. 141(R)),
Business Combinations
and Statement of Financial Accounting Standards No. 160 (SFAS No. 160),
Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of ARB No. 151
. SFAS No. 141(R) establishes
the principles and requirements for how an acquirer (i) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree; (ii) recognizes
and measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and (iii) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. Previously any changes in valuation
allowances as a result of income from acquisitions for certain deferred tax assets
would serve to reduce goodwill. Under SFAS 141(R), any changes in the valuation
allowance related to income from acquisitions currently or in prior periods now
serves to reduce income taxes in the period in which the reserve is reversed.
Additionally, under SFAS 141(R), transaction related expenses that were
previously capitalized are now expensed as incurred. As of December 31,
2008, the Company had no deferred transaction related expenses for business
combination transactions in negotiation. All transaction related costs that
have been incurred since the adoptions of SFAS No. 141(R) on January 1,
2009 have been expensed as incurred. SFAS No. 160 establishes accounting
and reporting standards that require (i) noncontrolling interests to be
reported as a component of equity; (ii) changes in a parents ownership
interest while the parent retains its controlling interest to be accounted for
as equity transactions; and (iii) any retained noncontrolling equity
investment upon the deconsolidation of a subsidiary to be initially measured at
fair value. The adoption did not have an effect on the Companys financial
position or results of operations.
In April 2009, the Financial Accounting
Standards Board (FASB) issued FSP SFAS 141(R)-1, Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies, to amend the provisions related to the initial recognition and
measurement, subsequent measurement and disclosure of assets and liabilities
arising from contingencies in a business combination under SFAS 141(R). Under
the new guidance, assets acquired and liabilities assumed in a business
combination that arise from contingencies should be recognized at fair value on
the acquisition date if fair value can be determined during the measurement
period. If fair value cannot be determined, companies should typically account
for the acquired contingencies using existing guidance. The Company adopted FAS 141(R) and FSP
SFAS 141(R)-1 on January 1, 2009.
The adoption did not have a material effect on the Companys financial
position or results of operations.
In April 2009, the FASB issued FSP SFAS
157-4, Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly, which provides additional guidance for estimating fair
value in accordance with FASB Statement No. 157, Fair Value Measurements,
when the volume and level of activity for the asset or liability have significantly
decreased. This FSP also includes guidance on identifying circumstances that
indicate a transaction is not orderly. This pronouncement is effective for
periods ending after June 15, 2009.
The Companys management does not expect this pronouncement to have a
material effect on the Companys financial position or results of operations.
In April 2009, the FASB issued FSP SFAS
115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments, to amend the other-than-temporary impairment guidance in debt
securities to be based on intent to sell instead of ability to hold the
security and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. This pronouncement is effective for periods
ending after June 15, 2009. The
Companys management does not expect this pronouncement to have a material
effect on the Companys financial position or results of operations.
8
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3.
Contingent Payment
On March 8, 2007, the
Company acquired all of the outstanding capital stock of PDSHeart for an
aggregate purchase price of $51.6 million. 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.
4.
Mandatorily Redeemable Convertible Preferred Stock and Shareholders
Equity (Deficit)
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.
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.
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 March 2009, these warrants were fully exercised
through a cashless transaction.
In 2005 and 2006, the Company issued warrants to
purchase 964,189 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.
Integration and
Restructuring Activities
PDSHeart Integration
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 March 31,
2009, all of the positions had been eliminated and the Company vacated the
facility. The reserve is included in accrued liabilities in the accompanying
consolidated balance sheet.
A summary of the reserve activity related to the
PDSHeart acquisition integration plan as of March 31, 2009 is as follows:
|
|
Initial Reserves
Recorded in
Purchase Accounting
|
|
Payments/Adjustments
through
March 31, 2009
|
|
Balance as of
March 31, 2009
|
|
Severance and employee related costs
|
|
$
|
366
|
|
$
|
366
|
|
$
|
|
|
Rent abandonment
|
|
$
|
144
|
|
$
|
108
|
|
$
|
36
|
|
Total:
|
|
$
|
510
|
|
$
|
474
|
|
$
|
36
|
|
The Company did not incur
any expenses in relation to PDSHeart integration during the three months ended March 31,
2009.
The integration was substantially completed as of December 31,
2008.
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
involved the elimination of seven positions in San Diego. The Company
did not incur any restructuring expenses for the three months ended March 31,
2008 or 2009. The integration was substantially completed as of December 31,
2008.
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A summary of the reserve activity related to the San Diego
restructuring plan as of March 31, 2009 is as follows:
|
|
Initial Reserve
Recorded
|
|
Payments
through
March 31,
2009
|
|
Additional
reserves
through
March 31,
2009
|
|
Balance as of
March 31,
2009
|
|
Severance and employee related costs
|
|
$
|
662
|
|
1,048
|
|
501
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
Income Taxes
The Companys effective tax
rate of 41.1% for the three months ended March 31, 2009 is based on its
estimated fiscal 2009 pretax income. The Company has deferred income tax assets
totaling approximately $29.5 million at March 31, 2009, 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.
7.
Subsequent
Events
Merger Agreement with Biotel Inc.
On April 2, 2009, the Company entered into a
merger agreement (the Agreement) with Biotel Inc. (Biotel). Under the
Agreement, a wholly owned subsidiary of the Company will be merged with and
into Biotel, with Biotel continuing after the merger as the surviving
corporation and a wholly owned subsidiary of the Company. At the effective time
of the merger, each issued and outstanding share of Biotels common stock will
be converted into the right to receive consideration of $4.82 in cash, without
interest. The total transaction value is approximately $14 million. In
addition, each holder of an option to purchase shares of Biotel common stock
will be entitled to receive a per share cash payment equal to the amount by
which the merger consideration exceeds the exercise price of such option, less
any applicable withholding taxes. The completion of the merger is subject to
the approval of the merger agreement by Biotels shareholders and customary
covenants and closing conditions. The
Company may be entitled to a $1.0 million break-up fee and reimbursement
of deal related costs of up to $0.4 million if the merger is not completed.
The transaction is not subject to any financing condition.
10
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Item
2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Overview
We are a leading provider of ambulatory, continuous, real-time
outpatient management solutions for monitoring relevant and timely clinical
information regarding an individuals health. We actively began developing our
product platform in 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 MCOT (Mobile Cardiac Outpatient
Telemetry) devices. We opened the CardioNet Monitoring Center in Conshohocken,
Pennsylvania in July 2002 and currently provide all of our MCOT arrhythmia
monitoring at that location. In May 2003, we established our relationship
with QUALCOMM Inc. (QUALCOMM). QUALCOMM provides us its wireless
cellular data connectivity solution and data hosting and queuing services.
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 incorporated 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 (IDTF) for Medicare. The local Medicare carrier in Pennsylvania
sets the terms for reimbursement for MCOT services 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, 97 at year-end 2005, 144 at
year-end 2006, 169 at year-end 2007, 195 at year-end 2008, and 203 at March 31,
2009. 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, 70 million at year-end 2005, 102 million at
year-end 2006, 120 million at year-end 2007, 151 million at year-end
2008, and 155 million at March 31, 2009. The current estimated total of
195 million Medicare and commercial lives for which we had reimbursement
contracts as of March 31, 2009 represents approximately 78% 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 MCOT to be experimental and
investigational and do not currently reimburse us for services provided to
their beneficiaries. We believe the CPT codes and reimbursement rates that we
secured in October 2008 will facilitate future contract negotiations with
these remaining non-contracted payors as the codes will simplify and
standardize the billing and reimbursement process.
On March 8, 2007, we acquired all of the outstanding capital stock
of PDSHeart for an aggregate purchase price of $51.6 million. 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. Through this acquisition,
CardioNet provides event, Holter and pacemaker monitoring services to patients
in 49 states, with a concentration of sales in the Southeast. The acquisition
has broadened our geographic coverage and expanded our service offerings to
include the complete range of cardiac monitoring services. For our event,
Holter and pacemaker monitoring services, we have established Medicare
reimbursement and we have 108 direct contracts with commercial payors as of March 31,
2009 representing an estimated 135 million covered lives.
In March 2007, we raised $110 million in mandatorily
redeemable convertible preferred stock (MRCPS) to, in part, fund the
acquisition of PDSHeart. 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.
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.
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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
$0.9 million in offering expenses on behalf of the selling stockholders.
These expenses were incurred in accordance with the Companys obligations under
a registration rights agreement with the selling stockholders.
In October 2008, the Centers for Medicare and Medicaid Services (CMS)
established reimbursement rates that cover MCOT. The reimbursement rates are
applicable to the Category I CPT codes established by the American Medical
Association (AMA) for Mobile Cardiovascular Telemetry. The codes and rates
are contained in The Medicare Program Final Rule for the calendar year
2009 and become effective on January 1, 2009. We believe that the new
billing codes will allow for automated claims adjudication, substantially
simplifying the reimbursement process for physicians and payors compared to the
current process. Reimbursement prior to the use of the new CPT code was
obtained through non-specific billing codes which require various narratives
that, in most cases, involve semi-automated or manual processing, as well as
additional review by payors.
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 CMS on a case rate basis for the Medicare program and through
negotiations with commercial payors who typically pay a daily monitoring rate.
From 2002 through March 2009, 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 MCOT 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 remain constant or decline as the new generation technology gains wider
acceptance in the market. 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%. The Medicare reimbursement
rates for event and Holter services in 2008 were flat compared to 2007, and
declined 8% in 2009 compared to 2008. We expect 2010 rates to remain consistent
or decline compared with 2009.
We believe MCOT 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 remain constant
or decline 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, which we believe will remain constant or
decline in absolute terms and therefore, decrease as a percentage of revenues
going forward. Our revenues are seasonal, as the volume of prescriptions tends
to slow down in the summer months due to the more limited use of our monitoring
solutions as physicians and patients vacation.
Gross Profit
Gross profit consists of revenues less the cost of revenues. Cost of
revenues 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 MCOT devices;
·
depreciation on our
monitors; and
·
service cost related to
special project revenues.
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For the three months ended March 31, 2009, our gross profit margin
was 66.9%. In general, we expect gross profit margins on MCOT services to
remain flat or increase. For our event and Holter monitoring services, we
expect gross profit margins to remain flat or decline.
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 103 account executives as of March 31, 2009. We currently
have account executives covering 49 states. We also plan to increase our
marketing activities and to invest in and expand our sales organization. As a
result, we expect that sales and marketing expenses will increase in absolute
terms and as a percentage of revenues in 2009. Thereafter, we expect sales and
marketing to increase in absolute terms and decrease as a percentage of
revenues.
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 remain
flat as a percentage of revenue going forward as we continue to focus on new
product development
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.
Integration, Restructuring and Other Charges
During 2008, the Company undertook several initiatives to increase the
efficiency of its operations. These initiatives included the integration and
restructuring of PDSHeart, and the restructuring of the Finance and Human
Resource functions located in our San Diego location. In addition, the
Company settled an intellectual property dispute with a competitor in the first
quarter of 2008. In the first quarter 2009, the Company incurred expenses
related to the termination of certain executives.
Critical Accounting Policies and
Estimates
In our Annual Report on Form 10-K
for the year ended December 31, 2008, we identified the critical accounting
policies which affect our more significant estimates and assumptions used in
preparing our consolidated financial statements. We have not changed these
policies from those previously disclosed in our Annual Report.
Results of Operations
Quarters Ended March 31, 2008 and 2009
Revenues.
Total revenues for
the quarter ended March 31, 2009 increased to $35.7 million from
$25.5 million for the quarter ended March 31, 2008, an increase of
$10.2 million, or 40.3%. MCOT revenue increased $11.3 million, offset
by a decrease in PDS revenue of $1.1 million.
Gross Profit.
Gross profit
increased to $23.9 million for the quarter ended March 31, 2009, or
66.9% of revenues, from $15.9 million for the quarter ended March 31,
2008, or 62.6% of revenues. The increase of $8.0 million, or 49.8%, was due to
the increased revenue from MCOT as well as operational efficiencies achieved
and cost reductions negotiated with vendors during 2009.
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Sales and Marketing Expense.
Sales and marketing
expense was $7.5 million for the quarter ended March 31, 2009
compared to $5.1 million for the quarter ended March 31, 2008. The
increase of $2.4 million was due to the continued building of the sales
force and sales operations infrastructure.
As a percent of total revenues, sales and marketing expense was 21.1%
for the quarter ended March 31, 2009 compared to 20.1% for the quarter ended
March 31, 2008, an increase of 1.0%.
Research and Development Expense.
Research and
development expense remained relatively flat in March 31, 2009 compared to
March 31, 2008, increasing to $1.2 million from $1.1 million. As
a percent of total revenues, research and development expense declined to 3.4%
for the quarter ended March 31, 2009 compared to 4.5% for the quarter
ended March 31, 2008, a decline of 1.1% primarily due to the higher
revenue.
General and Administrative
Expense.
General
and administrative expense increased to $14.3 million for the quarter
ended March 31, 2009 from $9.1 million for the quarter ended March 31,
2008. This increase of $5.2 million, or 58.0%, was primarily due to an
increase in the provision for bad debt of $1.5 million, increase in stock
compensation expense of $1.3 million, increase in the bonus expense of $1.1
million, and $0.9 million of additional expense from the expansion of
infrastructure related to Company growth.
Integration, Restructuring and
Other Nonrecurring Charges.
Severance charges related to executive
employee terminations were $2.1 million for the quarter ended March 31,
2009. For the quarter ended March 31, 2008, the Company initiated exit
plans for certain acquired activities of PDSHeart that were redundant to the
Companys existing operations, and initiated restructuring plans to consolidate
its Finance and Human Resources functions in Conshohocken, Pennsylvania. For
the quarter ended March 31, 2008, the Company incurred $0.3 million
related to PDSHeart integration activities and $0.1 million related to the
consolidation of its Finance and Human Resources functions. Additionally, in
the quarter ended March 31, 2008, the Company incurred expenses of $0.9
million for a legal settlement with one of our competitors.
Total Interest Income/Expense,
Net.
Net
interest income was $0.1 million for the quarter ended March 31, 2008 and
2009.
Income Taxes.
The Companys
effective tax rate was 41.1% for the quarter ended March 31, 2009,
compared to an effective tax rate of 40.6% for the quarter ended March 31,
2008. The effective tax rate is based on our estimated fiscal 2009 pretax
income. The Company has approximately $38.3 million in federal net operating
losses as of March 31, 2009 to offset future taxable income expiring in
various years through 2026.
Net Income (Loss).
Net loss was $0.7
million for the quarter ended March 31, 2009 compared to a net loss of
$0.3 million for the quarter ended March 31, 2008. As a percent of
total revenues, net loss was 2.0% for the quarter ended March 31, 2009
compared to 1.3% for the quarter ended March 31, 2008.
Liquidity and Capital Resources
From our inception in 1999 through March 31,
2009, 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. 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 March 31, 2009, 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 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; and
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·
bank debt from Silicon Valley Bank consisting
of a term loan of $3.0 million, which was repaid on April 1, 2008,
and a working capital line secured by accounts receivable of $1.9 million,
which was repaid from the proceeds of the mandatorily redeemable convertible
preferred stock.
As of March 31, 2009, our principal source of
liquidity was cash and cash equivalents totaling $50.4 million and net
accounts receivable of $47.9 million.
Our cash flow from operations decreased by $5.4
million to a cash outflow of $4.6 million in the first three months of 2009 from
a cash inflow of $0.8 million in the first three months of 2008. The decrease
is due primarily to increases in accounts receivable.
We used net cash in investing activities of $5.6
million in the first three months of 2009, compared to $4.3 million in the
first three months of 2008, an increase of $1.3 million. The increase is
primarily due to investment in medical devices related to the Companys growth
in operations in the three months ended March 31, 2009.
We generated net cash from financing activities of
$2.5 million in the first three months of 2009, compared to $47.4 million in
the first three months of 2008, a decrease of $44.9 million. The decrease is
primarily due to the Company receiving proceeds from its initial public
offering in the first quarter of 2008.
We believe that our existing cash and cash
equivalent balances and revenues from our operations will be sufficient to meet
our anticipated cash requirements for the foreseeable future.
Our future funding requirements will depend on many
factors, including:
·
the costs associated with developing,
manufacturing and building our inventory of our future monitoring solutions;
·
the costs of hiring additional personnel and
investing in infrastructure to support future growth;
·
the reimbursement rates associated with our
products and services;
·
actions taken by the FDA and other regulatory
authorities affecting the MCOT 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;
·
the costs related to business combinations;
and
·
the costs of investing in additional lines of
business outside of arrhythmia monitoring solutions.
To the extent that we raise additional capital by
issuing equity securities, our stockholders ownership will be diluted. In
addition, if we determine that we need to raise additional capital, such
capital may not be available on reasonable terms, or at all. If we raise
additional funds by issuing equity securities, substantial dilution to existing
stockholders would likely result. If we raise additional funds by incurring
additional debt financing, the terms of the debt may involve significant cash
payment obligations as well as covenants and specific financial ratios that may
restrict our ability to operate our business.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
Our
cash and cash equivalents as of March 31, 2009 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.
15
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 MCOT 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.
In evaluating an investment in our common stock,
investors should consider carefully, among other things, the risk factors
previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K
filed with the SEC for the year ended December 31, 2008, as well as the
information contained in this Quarterly Report and our other reports and
registration statements filed with the SEC.
There have been no material changes in the risk factors as previously
disclosed under Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K
with the SEC for the year ended December 31, 2008.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
Not
applicable.
Item 3. Defaults Upon Senior Securities
Not
applicable.
Item 4. Submission of Matters to a Vote of
Security Holders
Not
applicable.
Item 5. Other Information
Not
applicable.
16
Table of
Contents
Item 6. Exhibits.
EXHIBIT INDEX
Exhibit
Number
|
|
|
|
|
|
10.1
|
|
Release and Waiver of
Claims, dated January 25, 2009, by Arie Cohen (Filed as
Exhibit 99.2 to the Companys Current Report on Form 8-K dated
January 28, 2009, and incorporated by reference herein.)
|
10.2
|
|
Letter
Agreement, dated January 28, 2009, between Randy Thurman and the Company
(Filed as Exhibit 99.4 to the Companys Current Report on Form 8-K
dated January 28, 2009, and incorporated by reference herein.)
|
10.3
|
|
Compensation
Program for Non-Employee Directors (Filed as Exhibit 99.5 to the
Companys Current Report on Form 8-K dated January 28, 2009, and
incorporated by reference herein.)
|
10.4
|
|
Employment
Agreement, dated February 24, 2009, between Randy Thurman and the
Company (Filed as Exhibit 99.2 to the Companys Current Report on
Form 8-K dated February 27, 2009, and incorporated by reference
herein.)
|
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.
|
CardioNet, Inc.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
CARDIONET, INC.
|
|
|
|
|
Date: May 15, 2009
|
By:
|
/s/ Martin P. Galvan
|
|
|
Martin P. Galvan, CPA
|
|
|
Chief
Financial Officer
(Principal
Financial Officer)
|
17
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