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, 2009
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)
|
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
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
x
|
|
Smaller reporting company
o
|
(Do not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
As
of August 3, 2009, 23,782,034 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, 2009
TABLE OF
CONTENTS
2
Table of Contents
FORWARD-LOOKING STATEMENTS
This press release includes
certain forward-looking statements within the meaning of the Safe Harbor
provisions of the Private Securities Litigation Reform Act of 1995 regarding,
among other things, our growth prospects, the prospects for our products and
our confidence in the Companys future. These statements may be identified by
words such as expect, anticipate, estimate, intend, plan, believe, promises
and other words and terms of similar meaning. Such forward-looking statements
are based on current expectations and involve inherent risks and uncertainties,
including important factors that could delay, divert, or change any of them,
and could cause actual outcomes and results to differ materially from current
expectations. These factors include, among other things, the potential for
re-evaluation from Highmark or the CMS on reimbursement rates, the success of
our sales and marketing initiatives, our ability to attract and retain talented
executive management and sales personnel, our ability to identify acquisition
candidates, acquire them on attractive terms and integrate their operations
into our business, the commercialization of new products, market factors,
internal research and development initiatives, partnered research and
development initiatives, competitive product development, changes in
governmental regulations and legislation, changes to reimbursement levels for
our products, the continued consolidation of payors, acceptance of our new
products and services and patent protection and litigation. For further details
and a discussion of these and other risks and uncertainties, please see our
most recent Form 10-K filed with the Securities and Exchange Commission,
as well as the information included in this document and as otherwise
enumerated herein or therein. We undertake no obligation to publicly update any
forward-looking statement, whether as a result of new information, future
events, or otherwise.
3
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
CARDIONET, INC.
CONSOLIDATED BALANCE SHEETS
(
In thousands except share and per share
amounts
)
|
|
(Unaudited)
|
|
|
|
|
|
June 30, 2009
|
|
December 31, 2008
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44,566
|
|
$
|
58,171
|
|
Accounts receivable, net of allowance for doubtful
accounts of $21,202 and $14,426, at June 30, 2009 December 31,
2008, respectively
|
|
52,786
|
|
39,334
|
|
Due from related parties
|
|
144
|
|
97
|
|
Prepaid expenses and other current assets
|
|
1,028
|
|
1,059
|
|
|
|
|
|
|
|
Total current assets
|
|
98,524
|
|
98,661
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
25,225
|
|
18,766
|
|
Intangible assets, net
|
|
1,370
|
|
1,823
|
|
Goodwill
|
|
45,999
|
|
45,999
|
|
Other assets
|
|
343
|
|
524
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
171,461
|
|
$
|
165,773
|
|
|
|
|
|
|
|
Liabilities and stockholders
equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,513
|
|
$
|
3,838
|
|
Accrued liabilities
|
|
5,421
|
|
10,238
|
|
Current portion of debt
|
|
25
|
|
72
|
|
Current portion of capital leases
|
|
49
|
|
49
|
|
Deferred revenue
|
|
490
|
|
461
|
|
|
|
|
|
|
|
Total current liabilities
|
|
12,498
|
|
14,658
|
|
|
|
|
|
|
|
Deferred rent
|
|
1,646
|
|
965
|
|
Other noncurrent liabilities
|
|
16
|
|
33
|
|
|
|
|
|
|
|
Total liabilities
|
|
14,160
|
|
15,656
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
Common stock, $.001 par value; 200,000,000 shares
authorized; 23,782,010 and 23,477,137 shares issued and outstanding at
June 30, 2009 and December 31, 2008, respectively
|
|
24
|
|
24
|
|
Paid-in capital
|
|
228,949
|
|
222,608
|
|
Accumulated deficit
|
|
(71,672
|
)
|
(72,515
|
)
|
|
|
|
|
|
|
Total stockholders equity
|
|
157,301
|
|
150,117
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
171,461
|
|
$
|
165,773
|
|
See accompanying notes.
4
Table of Contents
CARDIONET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(
In thousands except share and
per share amounts
)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Net
patient service revenues
|
|
$
|
38,096
|
|
$
|
29,189
|
|
$
|
73,655
|
|
$
|
54,437
|
|
Other
revenues
|
|
168
|
|
151
|
|
330
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
38,264
|
|
29,340
|
|
73,985
|
|
54,803
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
11,993
|
|
9,834
|
|
23,831
|
|
19,353
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
26,271
|
|
19,506
|
|
50,154
|
|
35,450
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
14,134
|
|
10,016
|
|
28,460
|
|
19,081
|
|
Sales
and marketing
|
|
8,440
|
|
5,412
|
|
15,987
|
|
10,527
|
|
Research
and development
|
|
1,768
|
|
931
|
|
2,984
|
|
2,073
|
|
Integration,
restructuring and other charges
|
|
(180
|
)
|
610
|
|
1,959
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
24,162
|
|
16,969
|
|
49,390
|
|
33,597
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
2,109
|
|
2,537
|
|
764
|
|
1,853
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
43
|
|
353
|
|
166
|
|
531
|
|
Interest
expense
|
|
(3
|
)
|
(86
|
)
|
(8
|
)
|
(152
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
other income
|
|
40
|
|
267
|
|
158
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
2,149
|
|
2,804
|
|
922
|
|
2,232
|
|
Income
tax expense
|
|
(584
|
)
|
(1,172
|
)
|
(79
|
)
|
(940
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
1,565
|
|
1,632
|
|
843
|
|
1,292
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on and accretion of mandatorily redeemable convertible preferred stock
|
|
|
|
|
|
|
|
(2,597
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
1,565
|
|
$
|
1,632
|
|
$
|
843
|
|
$
|
(1,305
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
$
|
0.07
|
|
$
|
0.04
|
|
$
|
(0.10
|
)
|
Diluted
|
|
$
|
0.07
|
|
$
|
0.07
|
|
$
|
0.04
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
23,791,989
|
|
23,098,083
|
|
23,695,985
|
|
13,367,699
|
|
Diluted
|
|
23,794,731
|
|
24,191,099
|
|
23,826,831
|
|
13,367,699
|
|
See accompanying notes.
5
Table of Contents
CARDIONET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(
In thousands
)
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
Operating activities
|
|
|
|
|
|
Net income
|
|
$
|
843
|
|
$
|
1,292
|
|
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
|
|
|
|
|
|
Depreciation
|
|
4,866
|
|
3,346
|
|
Amortization of intangibles
|
|
453
|
|
492
|
|
Loss on disposal of property and equipment
|
|
94
|
|
116
|
|
Deferred rent
|
|
681
|
|
(61
|
)
|
Provision for doubtful accounts
|
|
8,444
|
|
5,089
|
|
Stock-based compensation
|
|
3,790
|
|
751
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(21,896
|
)
|
(11,581
|
)
|
Due from related parties
|
|
(47
|
)
|
45
|
|
Prepaid expenses and other current assets
|
|
31
|
|
(1,419
|
)
|
Other assets
|
|
181
|
|
(793
|
)
|
Accounts payable
|
|
2,675
|
|
(2,143
|
)
|
Accrued and other liabilities
|
|
(4,805
|
)
|
5,815
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating
activities
|
|
(4,690
|
)
|
949
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
Purchases of property and equipment
|
|
(11,419
|
)
|
(3,779
|
)
|
Investment in subsidiary, net of cash acquired
|
|
|
|
(5,002
|
)
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(11,419
|
)
|
(8,781
|
)
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
2,551
|
|
46,728
|
|
Proceeds from issuance of debt
|
|
|
|
500
|
|
Repayment of debt
|
|
(47
|
)
|
(2,915
|
)
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
2,504
|
|
44,313
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
(13,605
|
)
|
36,481
|
|
Cash and cash equivalents beginning of period
|
|
58,171
|
|
18,091
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
44,566
|
|
$
|
54,572
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
8
|
|
$
|
368
|
|
Cash paid for taxes
|
|
$
|
6,169
|
|
$
|
|
|
See accompanying notes.
6
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 June 30, 2009 and December 31,
2008, and the results of operations for the three and six months ended June 30,
2009 and 2008. The financial data and other information disclosed in these
notes to the financial statements related to the three and six month periods
are unaudited. The results for the three and six month periods ended June 30,
2009 are 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 Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 260,
Earnings Per Share
. The following summarizes the potential
outstanding common stock of the Company at June 30, 2009 and 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,
2009
|
|
June 30,
2008
|
|
Series B
warrants
|
|
|
|
6,250
|
|
Common stock options and restricted stock units outstanding
|
|
2,018,552
|
|
1,592,744
|
|
Common stock options and restricted stock units available for grant
|
|
754,352
|
|
579,460
|
|
Common stock held by certain employees and unvested
|
|
18,540
|
|
65,572
|
|
Common stock
|
|
23,782,010
|
|
23,130,812
|
|
|
|
|
|
|
|
Total
|
|
26,573,454
|
|
25,374,838
|
|
Basic
net income (loss) per share attributable to common stockholders is computed by
dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is computed by giving
effect to all potential dilutive common shares, including stock options,
warrants and convertible preferred stock, as applicable.
7
Table of Contents
The following table
presents the calculation of historical basic and diluted net income (loss) per
share:
|
|
Three
Months Ended
June 30,
|
|
Six
Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(in
thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
(loss) applicable to common stockholders
|
|
$
|
1,565
|
|
$
|
1,632
|
|
$
|
843
|
|
$
|
(1,305
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstandingbasic
|
|
23,791,989
|
|
23,098,083
|
|
23,695,985
|
|
13,367,699
|
|
Dilutive effect
of the Companys employee compensation plans
|
|
2,742
|
|
1,093,016
|
|
130,846
|
|
|
|
Weighted average
shares used in computing diluted net income (loss) per share
|
|
23,794,731
|
|
24,191,099
|
|
23,826,831
|
|
13,367,699
|
|
Basic net income
(loss) per share
|
|
$
|
0.07
|
|
$
|
0.07
|
|
$
|
0.04
|
|
$
|
(0.10
|
)
|
Diluted net
income (loss) per share
|
|
$
|
0.07
|
|
$
|
0.07
|
|
$
|
0.04
|
|
$
|
(0.10
|
)
|
If
the outstanding vested options or restricted stock units were exercised or
converted into common stock, the result would be anti-dilutive for the six
months ended June 30, 2008. Accordingly, basic and diluted net loss
attributable to common stockholders per share are identical for that period
presented in the consolidated statements of operations.
Goodwill
The Company considers its business to be one reporting unit for
purposes of performing its goodwill impairments analysis. Goodwill is reviewed
for impairment annually, or when events arise that could indicate that and
impairment exists. To determine whether an impairment exists, the Company
estimates the fair value of the reporting unit using an income approach,
generally a discounted cash flow methodology, that includes assumptions for,
among other things, forecasted income, cash flow, growth rates, income tax
rates, expected tax benefits and long-term discount rates, all of which require
significant judgments. The Company also considers comparable market data to
assist in determining the fair value of its reporting unit where appropriate.
There are inherent uncertainties related to these factors and the judgment
applied in the analysis. Nonetheless, the Company believes that the combination
of an income and a market approach provides a reasonable basis to estimate the
fair value of the reporting unit. If the estimated fair value of the reporting
unit is less than its carrying value, an impairment exists and additional
analysis will be undertaken to determine the amount of impairment.
Stock-Based Compensation
ASC
718,
Compensation Stock Compensation
,
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. ASC 718 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). ASC 718 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 ASC
505-50,
Equity-Based Payments to Non-Employees
.
The
Companys income before income taxes for the six months ended June 30,
2009 and 2008 was $3.8 million and $0.8 million lower, respectively, and the
Companys after-tax net income for the same periods was $3.5 million and $0.5
million lower, respectively, as a result of stock-based compensation expense
incurred. The impact of stock-based compensation expense was $0.15 and $0.03 on
both basic and diluted earnings per share for the six months ended June 30,
2009 and 2008, respectively.
8
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of Contents
The
Company utilized the Black-Scholes valuation model for estimating the fair
value of stock options granted using the following weighted average
assumptions:
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Expected volatility
|
|
50
|
%
|
50
|
%
|
Risk-free interest rate
|
|
2.12
|
%
|
2.68
|
%
|
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 ASC 718, 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,
2009 and 2008 was $11.73 and $8.63, respectively.
The following table
summarizes activity under all stock award plans from December 31, 2008
through June 30, 2009:
|
|
|
|
Options Outstanding
|
|
|
|
Shares
|
|
|
|
Weighted
|
|
|
|
Available
|
|
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
|
|
|
|
|
|
|
|
|
|
Granted
|
|
(222,386
|
)
|
222,386
|
|
$
|
17.63
|
|
Canceled
|
|
38,483
|
|
(38,483
|
)
|
$
|
14.44
|
|
Exercised
|
|
|
|
(13,342
|
)
|
$
|
17.41
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2009
|
|
754,352
|
|
2,018,552
|
|
$
|
20.82
|
|
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 issuable upon the exercise of 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:
|
|
June 30,
2009
|
|
June 30,
2008
|
|
Range of exercise price (per option)
|
|
$0.70
- $31.18
|
|
$0.70
- $20.00
|
|
Weighted average remaining contractual life (years)
|
|
9.15
|
|
8.99
|
|
9
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 six months ended June 30, 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 June 30, 2009,
approximately 379,503 shares remain available for purchase under the ESPP.
New Accounting Pronouncements
Effective
January 1, 2009, the Company prospectively adopted ASC 820,
Fair Value Measurements and Disclosures
, with respect to
fair value measurements required for the Companys nonfinancial assets and
nonfinancial liabilities.
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 ASC 805,
Business Combinations
and ASC 810,
Consolidation
. ASC 805 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 the current guidance, any changes
in the valuation allowance related to income from acquisitions currently or in
prior periods now serve to reduce income taxes in the period in which the
reserve is reversed. Additionally, 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 adoption of ASC 805 on January 1, 2009 have
been expensed as incurred. ASC 810 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, ASC 805 was amended for provisions related to the
initial recognition and measurement, subsequent measurement and disclosure of
assets and liabilities arising from contingencies in a business combination.
Under the amended 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. This amendment did not have a material effect
on the Companys financial position or results of operations.
In April 2009, ASC 820 was amended to provide additional guidance
for estimating fair value when the volume and level of activity for the asset
or liability have significantly decreased. This amendment also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. This amendment is effective for periods ending after June 15,
2009. This amendment did not have a
material effect on the Companys financial position or results of operations.
In April 2009, ASC 320,
Investments Debt &
Equity Securities,
was amended to provide guidance for
other-than-temporary impairments of debt securities. The amendment provides
that financial asset impairment indicators should be based on the Companys
intent to sell the security instead of the Companys 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 amendment is effective for periods
ending after June 15, 2009. This
amendment did not have a material effect on the Companys financial position or
results of operations.
The Company adopted ASC 855,
Subsequent Events
on May 1, 2009. The guidance establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This guidance
sets forth the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial
statements. The guidance also requires the disclosure of the date through which
an entity has evaluated subsequent events and the basis for that date - that
is, whether that date represents the date the financial statements were issued
or were available to be issued. In accordance with ASC 855, we have evaluated
subsequent events through the date and time the financial statements were
issued.
2.
Contingent Payment
On March 8, 2007, the Company acquired all of
the outstanding capital stock of PDSHeart, Inc. (PDSHeart or PDS) for
an aggregate purchase price of $51.6 million. In addition to the
$51.6 million consideration, the Company agreed to pay PDSHeart
stockholders $5.0 million of contingent consideration in the event of a
qualifying liquidation event, including a public offering or
10
Table
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acquisition.
The Companys initial public offering was consummated on March 25, 2008
and, accordingly, the purchase price for the PDSHeart acquisition was adjusted
to $56.6 million to reflect this payment.
3.
Mandatorily Redeemable
Convertible Preferred Stock and Stockholders 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.
4.
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. The established reserve has been
fully depleted, and no additional costs are expected to be incurred.
The Company did not incur any expenses in
relation to PDSHeart integration during the six months ended June 30,
2009, and incurred expenses of $0.6 million in the six months ended June 30,
2008. These costs were expensed in accordance with ASC 420,
Exit or Disposal Cost Obligations
. 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 six months ended June 30, 2009,
and incurred expenses of $0.3 million for the six months ended June 30,
2008. The integration was substantially completed as of December 31, 2008.
A
summary of the reserve activity related to the San Diego restructuring
plan as of June 30, 2009 is as follows:
|
|
Initial
Reserve
Recorded
|
|
Payments
through
June 30,
2009
|
|
Additional
reserves
through
June 30,
2009
|
|
Balance
as of
June 30,
2009
|
|
Severance and employee related costs
|
|
$
|
662
|
|
995
|
|
536
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
Income Taxes
The Companys effective tax rate of 8.6% for the six
months ended June 30, 2009 is based on its estimated fiscal 2009 pretax
income. The Company has deferred income tax assets totaling approximately
$28.3 million at June 30, 2009, consisting primarily of
11
Table
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federal
and state net operating loss and credit carryforwards and temporary differences
related to the provision for doubtful accounts. 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.
6.
Subsequent Events
On April 2, 2009 CardioNet entered into a Merger
Agreement to acquire Biotel Inc. for $14.0 million. On July 14, 2009, CardioNet exercised
its contractual right to terminate the Merger Agreement due to Biotels breach
of certain covenants in the agreement. The next day, CardioNet notified Biotel
of its obligation to pay the Company a $1.4 million termination fee in
accordance with the Merger Agreement. On
or about July 16, 2009, Biotel subsequently commenced litigation against
CardioNet in Minnesota District Court in Hennepin County, Fourth Judicial
District, alleging that CardioNet had breached and improperly terminated the
Merger Agreement. Biotel is seeking specific performance and damages. The
Company plans to vigorously defend its position, and does not expect the
outcome of this litigation to have a material impact on the financial
statements.
On July 10, 2009,
Highmark announced a reduction in the reimbursement from its current pricing to
$754 per service, a reduction of approximately 33%. The Company believes that
the reduced rate is not supported by the facts or the accepted methodologies
for establishing reimbursement, and is currently engaging CMS and Highmark in
discussions to develop a pricing methodology that appropriately values MCOT
technology and related services. If no alternative is attained, the new pricing
will become effective on September 1, 2009.
12
Table of
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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and
analysis should be read in conjunction with our annual report on Form 10-K
for the year ended December 31, 2008, and in conjunction with the
accompanying quarterly unaudited condensed consolidated financial statements.
This discussion contains certain forward-looking statements that involve risks
and uncertainties. The Companys actual results and the timing of certain
events could differ materially from those discussed in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth herein and elsewhere in this report and in the Companys other
filings with the Securities and Exchange Commission. See the Forward Looking
Statements section at the beginning of this report.
Company
Background
CardioNet is a leading
provider of ambulatory, continuous, real-time outpatient management solutions
for monitoring relevant and timely clinical information regarding an individuals
health. The Companys efforts are initially focused on the diagnosis and
monitoring of cardiac arrhythmias, or heart rhythm disorders, with a solution
that it markets as Mobile Cardiac Outpatient Telemetry (MCOT). The Company
actively began developing its product platform in April 2000, and since
that time, has devoted substantial resources in advancing its patient
monitoring solutions. The platform successfully integrates a wireless data
transmission network, internally developed software, FDA-cleared algorithms and
medical devices, and a 24-hour monitoring service center.
The Company has been an
approved Independent Diagnostic Testing Facility (IDTF) for Medicare since it
received 510(k) clearance for the first and second generation of our core
MCOT devices in 2002. The Company received FDA 510(k) clearance for the
proprietary algorithm included in its third generation product, or C3, in October 2005.
Subsequently in November 2006, the Company received FDA 510(k) clearance
for its C3 system which it has incorporated as part of its monitoring solution.
The Company continues to pursue innovation of new and existing medical
solutions through investments in research and development. The CardioNet
Monitoring Center commenced operations in Conshohocken, Pennsylvania in 2002,
concurrent with its first FDA approval, and all of the Companys MCOT
arrhythmia monitoring activities are currently conducted at that location.
In March 2007, the
Company acquired all of the outstanding capital stock of PDSHeart. The
acquisition of PDSHeart provided three additional product lines to compliment
MCOT: event, Holter and Pacer monitoring solutions. In addition, the
acquisition supplied the Company with existing sales channels and relationships
in geographic areas that were previously had not been penetrated prior to the
acquisition. In March 2008, the Company completed an initial public
offering of its common stock for proceeds of approximately $46.7 million,
net of underwriter commissions and estimated offering expenses.
Qualcomm Supplier Agreement
The Company established a
relationship with Qualcomm Inc. (Qualcomm) in May 2003. Qualcomm is
the sole provider of wireless cellular data connectivity solutions and data
hosting and queuing services for the Companys monitoring network. The Company
has no fixed or minimum financial commitment as it relates to network usage or
volume activity. However, if the Company fails to maintain an agreed-upon
number of active cardiac monitoring devices on the Qualcomm network or it
utilizes the monitoring and communications services of a provider other than
Qualcomm, Qualcomm has the right to terminate its relationship with the
Company.
Carrier Pricing
In October 2008, the
Centers for Medicare and Medicaid Services (CMS) established reimbursement
rates that cover MCOT services. The reimbursement rates are applicable to the
Category I CPT codes (93228 and 93229) established by the American Medical
Association (AMA) for MCOT became effective on January 1, 2009.
Highmark Medicare Services (Highmark) is responsible for setting the
reimbursement rate on behalf of CMS for code 93229, which is the code for the
technical component of our services. The new billing codes 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 codes 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.
On July 10, 2009, Highmark
announced a reduction in the reimbursement from its current pricing to $754 per
service, a reduction of approximately 33%. The Company believes that the
reduced rate is not supported by the facts or the accepted methodologies for
establishing reimbursement, and is currently engaging CMS and Highmark in
discussions to develop a pricing methodology that appropriately values MCOT
technology and related services. If no alternative is attained, the new pricing
will become effective on September 1, 2009. The Company believes that its
current independent business model may not be economically viable at the
proposed pricing level.
13
Table of Contents
Commercial Contracts
We have successfully secured
contracts with many national and regional commercial payors. We increased the
number of MCOT contracts with commercial payors from 181 at June 30, 2008
to 219 at June 30, 2009. We estimate that the number of covered commercial
lives increased from 137 million at June 30, 2008 to 157 million at June 30,
2009. The current estimated total of 197 million covered lives for Medicare and
commercial lives for which we had reimbursement contracts as of June 30,
2009 represents approximately 76% of the total covered lives in the United
States. The MCOT contracts also cover event, Holter and Pacer service pricing.
In addition, there were approximately 75 contracts with commercial payors that
pertained only to event, Holter and Pacer service pricing, and did not cover
MCOT. The majority of the remaining covered lives are insured by a relatively
small number of large commercial insurance companies that 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
became effective in January 2009 will lead to acceptance of the MCOT
technology and facilitate future contract negotiations with these remaining
non-contracted payors.
Results
of Operations
Three Months Ended June 30,
2009 and 2008
Revenues.
Total revenues for
the three months ended June 30, 2009 increased to $38.3 million from
$29.3 million for the three months ended June 30, 2008, an increase
of $9.0 million, or 30.4%. MCOT revenue increased $9.6 million, offset by a decrease in PDS and
other revenue of $0.6 million.
Gross
Profit.
Gross
profit increased to $26.3 million for the three months ended June 30,
2009, or 68.7% of revenues, from $19.5 million for the three months ended June 30,
2008, or 66.5% of revenues. The increase of $6.8 million, or 34.7%, was due to
increased revenue from MCOT
services, offset by an increase in cost of sales related to payroll expense due
to higher headcount of $1.5 million, increased depreciation expense related to
additional devices being in service in the 2009 period compared to the 2008
period of $0.6 million, and an increase in supplies and other miscellaneous
expenses of $0.1 million.
General
and Administrative Expense.
General and administrative expense increased to
$14.1 million for the three months ended June 30, 2009 from
$10.0 million for the three months ended June 30, 2008. This increase
of $4.1 million, or 41.1%, was primarily due to an increase in the
provision for bad debt of $1.9 million, increase in stock compensation
expense of $1.7 million, increase in professional fees of $0.4 million, and
$0.1 million of miscellaneous expenses. As a percentage of total revenues,
general and administrative expense was 36.9% for the three months ended June 30,
2009 compared to 34.1% for the three months ended June 30, 2008.
Sales and
Marketing Expense.
Sales
and marketing expense was $8.4 million for the three months ended June 30,
2009 compared to $5.4 million for the three months ended June 30,
2008. The increase of $3.0 million, or 55.9%, was due to the growth of the
sales force and sales operations infrastructure. As a percent of total revenues, sales and
marketing expense was 22.1% for the three months ended June 30, 2009
compared to 18.4% for the three months ended June 30, 2008.
Research
and Development Expense.
Research
and development expense was $1.8 million for the three months ended June 30,
2009 compared to $0.9 million for the three months ended June 30, 2008.
The increase of $0.9 million, or 89.9%, was due primarily to an increase in
consulting fees of $0.5 million, increase in payroll expense of $0.2 million
and miscellaneous expenses of $0.2 million. As a percent of total revenues,
research and development expense increased to 4.6% for the three months ended June 30,
2009 compared to 3.2% for the three months ended June 30, 2008.
Integration,
Restructuring and Other Charges.
A final insurance payment related to the fire
that occurred at our Conshohocken, PA facility in August 2008 was received
in the three months ended June 30, 2009, resulting in a benefit of $0.2
million. For the three months ended June 30, 2008, the Company incurred
integration charges relating to the PDSHeart acquisition of $0.4 million, and
incurred restructuring charges relating to the consolidation of our Finance and
Human Resources functions in Pennsylvania of $0.2 million. These activities
were substantially completed as of December 31, 2008, and thus, no charges
related to integration and restructuring were incurred in the three months
ended June 30, 2009.
Other
Income.
Net
interest income was $0.1 million for the three months ended June 30, 2009,
down from $0.3 million for the three months ended June 30, 2008. The
decline of $0.2 million, or 85.0% was due primarily to lower short term
interest rates and a lower average cash balance in the first three months of
2009 compared to the first three months of 2008.
Income
Taxes.
The
Companys effective tax rate was 27.2% for the three months ended June 30,
2009, compared to an effective tax rate of 41.8% for the three months ended June 30,
2008. The effective tax rate is based on our estimated fiscal 2009 pretax
income.
14
Table of Contents
Net
Income.
Net
income for the three months ended June 30, 2009 was flat compared to the
three months ended June 30, 2008 at $1.6 million. As a percent of total
revenues, net income was 4.1% for the three months ended June 30, 2009
compared to 5.6% for the three months ended June 30, 2008.
Six Months Ended June 30, 2009
and 2008
Revenues.
Total revenues for
the six months ended June 30, 2009 increased to $74.0 million from
$54.8 million for the six months ended June 30, 2008, an increase of
$19.2 million, or 35.0%. MCOT
revenue increased $20.9 million, offset by a decrease in PDS and other
revenue of $1.7 million.
Gross
Profit.
Gross
profit increased to $50.2 million for the six months ended June 30,
2009, or 67.8% of revenues, from $35.5 million for the six months ended June 30,
2008, or 64.7% of revenues. The increase of $14.7 million, or 41.5%, was due to
increased revenue from MCOT
services, offset by an increase in cost of sales related to payroll expense due
to higher headcount of $3.3 million and increased depreciation expense related
to additional devices being in service in the 2009 period compared to the 2008
period of $1.1 million.
General
and Administrative Expense.
General and administrative expense increased to
$28.5 million for the six months ended June 30, 2009 from
$19.1 million for the six months ended June 30, 2008. This increase
of $9.4 million, or 49.2%, was primarily due to an increase in the
provision for bad debt of $3.3 million, increase in stock compensation
expense of $2.9 million, increase in payroll expense of $1.5 million, increase
in bonus expense of $1.2 million, increase in professional fees of $0.4 million,
and $0.1 million of miscellaneous expenses. As a percentage of total revenues,
general and administrative expense was 38.5% for the six months ended June 30,
2009 compared to 34.8% for the six months ended June 30, 2008.
Sales and
Marketing Expense.
Sales
and marketing expense was $16.0 million for the six months ended June 30,
2009 compared to $10.5 million for the six months ended June 30,
2008. The increase of $5.5 million, or 51.9%, was due to the growth of the
sales force and sales operations infrastructure. As a percent of total revenues, sales and
marketing expense was 21.6% for the six months ended June 30, 2009
compared to 19.2% for the six months ended June 30, 2008.
Research
and Development Expense.
Research
and development expense was $3.0 million for the six months ended June 30,
2009 compared to $2.1 million for the six months ended June 30, 2008. The
increase of $0.9 million, or 43.9%, was due primarily to an increase in payroll
expense of $0.4 million, increase in consulting fees of $0.3 million and
miscellaneous expenses of $0.2 million. As a percent of total revenues,
research and development expense increased to 4.0% for the six months ended June 30,
2009 from 3.8% for the six months ended June 30, 2008.
Integration,
Restructuring and Other Charges.
Integration, restructuring and other charges
was $2.0 million, or 2.6% of revenues, for the six months ended June 30,
2009, comprised primarily of severance expenses of $2.1 million related to
departure of certain executives in the first quarter of 2009. The severance
costs were offset slightly by an insurance payment received related to the fire
that occurred at our Conshohocken, PA facility in August 2008. For the six
months ended June 30, 2008, integration, restructuring and other charges
totaled $1.9 million, or 3.5% of revenues. The charges for the six months ended
June 30, 2008 included $1.0 million related to the resolution of
intellectual property litigation, integration charges relating to the PDSHeart
acquisition of $0.6 million, and restructuring charges relating to the
consolidation of our Finance and Human Resources functions in Pennsylvania of
$0.3 million.
Other
Income.
Net
interest income was $0.2 million for the six months ended June 30, 2009, a
decrease of $0.2 million, or 58.3% from $0.4 million for the six months ended June 30,
2008. The decrease was primarily due to lower short term interest rates and a
lower average cash balance in the first six months of 2009 compared to the
first six months of 2008.
Income
Taxes.
The
Companys effective tax rate was 8.6% for the six months ended June 30,
2009, compared to an effective tax rate of 42.1% for the six months ended June 30,
2008. The effective tax rate for the six months ended June 30, 2009 is
based on our estimated fiscal 2009 pretax income. The Company has approximately
$27.6 million in federal net operating losses as of June 30, 2009 to
offset future taxable income expiring in various years through 2026.
Net
Income.
Net
income for the six months ended June 30, 2009 increased to $0.8 million
from a net loss of $1.3 million for the six months ended June 30, 2008.
Liquidity
and Capital Resources
As of June 30, 2009,
our principal source of liquidity was cash and cash equivalents totaling
$44.6 million and net accounts receivable of $52.9 million. The
Company incurred net losses from inception through March 31, 2008. Prior
to operating at a net profit, the Company obtained funding through various debt
sources. In March 2008, all material portions of interest-bearing debt
were
15
Table of Contents
retired in conjunction with the Companys initial
public offering (IPO). Proceeds from the IPO were $46.7 million, net of
underwriting commissions and offering expenses. From March 2008 through June 30,
2009 the Company generated sufficient cash to fund its business through
continuing operations.
For the six
months ended June 30, 2009, cash flow from operations decreased to a cash
outflow of $4.7 million, down from a cash inflow of $1.0 for the six months
ended June 30, 2008. The decrease was due primarily to an increase in
accounts receivable that resulted from higher sales of MCOT services, as well
as an extended receivable turnover rate in the six months ended June 30,
2009 compared to the six months ended June 30, 2008. The increase in
accounts receivable was offset by an increase in accounts payable, accrued
liabilities and higher depreciation related to growth in operations, increased
provision for doubtful accounts related to aging receivables, and increased
stock-based compensation related to the adoption of the director compensation
plan, as well as the hiring of several senior level employees that received
stock-based compensation awards upon employment commencement.
The Company used net cash in
investing activities of $11.4 million for the six months ended June 30,
2009, compared to $8.8 million in the six months ended June 30, 2008, an
increase of $2.6 million. The increase was primarily due to investment in
medical devices related to increased patient volume for the six months ended June 30,
2009.
The Company generated net
cash from financing activities of $2.5 million in the six months ended June 30,
2009, compared to $44.3 million in the six months ended June 30, 2008, a
decrease of $41.8 million. The decrease was 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 reimbursement rates
associated with our products and services;
·
our ability to secure
contracts with additional commercial payors providing for the reimbursement of
our services;
·
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;
·
actions taken by the FDA and
other regulatory authorities affecting the MCOT and competitive products;
·
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 June 30,
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.
16
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 April 2,
2009 CardioNet entered into a Merger Agreement to acquire Biotel Inc. for $14.0
million. On July 14, 2009,
CardioNet exercised its contractual right to terminate the Merger Agreement due
to Biotels breach of certain covenants in the agreement. The next day, CardioNet notified Biotel of
its obligation to pay the Company a $1.4 million termination fee in accordance
with the Merger Agreement. On or about July 16,
2009, Biotel subsequently commenced litigation against CardioNet in Minnesota
District Court in Hennepin County, Fourth Judicial District, alleging that
CardioNet had breached and improperly terminated the Merger Agreement. Biotel
is seeking specific performance and damages. The Company plans to vigorously
defend its position, and does not expect the outcome of this litigation to have
a material impact on the financial statements.
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. Material changes from the risk factors
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
are discussed below.
A permanent reduction in the published Medicare
reimbursement rates could negatively impact our business and our operating
results.
Highmark Medicare
Services recently announced the reduction of the Medicare reimbursement rate
for the companys MCOT
services
to $754, a reduction of approximately 33%, which is scheduled to go into effect
September 1, 2009. If the rate becomes effective the Company may not be
economically viable under its current business model.
Reductions in the Medicare reimbursement rates
applicable to the Companys services may lead to pressure from insurance
carriers to reduce our commercial pricing.
In the first six months
of 2009 a limited number of commercial payers have requested price reductions
based on our Medicare reimbursement rates. If the Medicare reimbursement rate
reduction goes into effect in September, we may experience additional pressure
from insurance payers to reduce commercial pricing. A decrease in commercial
pricing would adversely affect our financial results.
17
Table of Contents
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
At the 2009 Annual Meeting of Stockholders of the
Company, held on May 8, 2009, the following matters were considered by the
stockholders and received the following vote:
1.
Managements
nominees, Randy H. Thurman and Kirk E. Gorman, were elected as Class II
directors. Voting (expressed in number
of shares) was as follows: Mr. Thurman: 15,150,875 for, 7,619,003 against or withheld
and no abstentions or broker non-votes and Mr. Gorman: 12,929,961 for,
9,839,917 against or withheld and no abstentions or broker non-votes.
2.
The
shareholders approved a proposal to ratify the selection of Ernst &
Young LLP as the Companys independent registered public accounting firm for
2009. Voting (expressed in number of
shares) was as follows: 21,746,551 for, 1,022,312 against and 1,016 abstentions
or broker non-votes.
3.
The
shareholders did not approve an amendment to the CardioNet, Inc. 2008
Non-Employee Directors Stock Option Plan (the Director Plan) and all
outstanding options granted thereunder to date to extend the post-termination
exercise period for vested options from three months following the directors
termination of service to the remainder of the option term in effect at the
time of the directors termination of service.
Voting (expressed in number of shares) was as follows: 7,805,342 for,
12,542,330 against and 573,983 abstentions or broker non-votes.
Item 5. Other Information
Not applicable.
Item 6. Exhibits.
EXHIBIT INDEX
Exhibit
Number
|
|
|
|
|
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31.1
|
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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.
|
18
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.
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CARDIONET, INC.
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Date:
August 10, 2009
|
By:
|
/s/ Martin P.
Galvan
|
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Martin P.
Galvan, CPA
|
|
|
Chief
Financial Officer
(Principal
Financial Officer)
|
19
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