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
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|
|
for
the quarterly period ended September 30, 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
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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)
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
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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 October 30, 2009, 23,868,596 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
SEPTEMBER 30, 2009
TABLE OF CONTENTS
2
Table of
Contents
FORWARD-LOOKING STATEMENTS
This document 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, our efforts to address
the operational issues and strategic options described in this report, 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
public filings with the Securities and Exchange Commission, including our
latest periodic reports on Form 10-K and 10-Q. 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
)
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(Unaudited)
|
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|
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September 30, 2009
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December 31, 2008
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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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42,873
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$
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58,171
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Accounts receivable, net of allowance for doubtful
accounts of $25,890 and $14,426, at September 30, 2009
and December 31, 2008, respectively
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49,379
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39,334
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Due from related parties
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14
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|
97
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Prepaid expenses and other current assets
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1,359
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|
1,059
|
|
|
|
|
|
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Total current assets
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93,625
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|
98,661
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|
|
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|
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Property and equipment, net
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27,869
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18,766
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Intangible assets, net
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1,154
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1,823
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Goodwill
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45,999
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|
45,999
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Other assets
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371
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|
524
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|
|
|
|
|
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Total assets
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$
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169,018
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$
|
165,773
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Liabilities and stockholders
equity
|
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Current liabilities:
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Accounts payable
|
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$
|
6,358
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$
|
3,838
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|
Accrued liabilities
|
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6,516
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|
10,238
|
|
Current portion of debt
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72
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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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454
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461
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Total current liabilities
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13,377
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14,658
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Deferred rent
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1,563
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|
965
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|
Other noncurrent liabilities
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6
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|
33
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|
|
|
|
|
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Total liabilities
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14,946
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|
15,656
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|
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|
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Stockholders equity:
|
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Common stock, $.001 par value; 200,000,000 shares
authorized; 23,867,765 and 23,477,137 shares issued and outstanding
at September 30, 2009 and December 31,
2008, respectively
|
|
24
|
|
24
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|
Paid-in capital
|
|
231,144
|
|
222,608
|
|
Accumulated deficit
|
|
(77,096
|
)
|
(72,515
|
)
|
|
|
|
|
|
|
Total stockholders equity
|
|
154,072
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|
150,117
|
|
|
|
|
|
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|
Total liabilities and stockholders equity
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$
|
169,018
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$
|
165,773
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|
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
September 30,
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Nine Months Ended
September 30,
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2009
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2008
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2009
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2008
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|
Revenues:
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|
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Net
patient service revenues
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$
|
33,300
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|
$
|
31,073
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$
|
106,954
|
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$
|
85,510
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Other
revenues
|
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40
|
|
150
|
|
370
|
|
516
|
|
|
|
|
|
|
|
|
|
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Total
revenues
|
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33,340
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|
31,223
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|
107,324
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86,026
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|
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|
|
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|
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Cost
of revenues
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11,829
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|
10,014
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35,661
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29,367
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Gross
profit
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21,511
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|
21,209
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|
71,663
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|
56,659
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|
Operating
expenses:
|
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|
|
|
|
|
|
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General
and administrative
|
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15,380
|
|
10,757
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|
43,840
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|
29,839
|
|
Sales
and marketing
|
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9,562
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|
5,216
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|
25,548
|
|
15,743
|
|
Research
and development
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1,325
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|
943
|
|
4,310
|
|
3,015
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Integration,
restructuring and other charges
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1,150
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|
2,859
|
|
3,109
|
|
4,775
|
|
|
|
|
|
|
|
|
|
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Total
expenses
|
|
27,417
|
|
19,775
|
|
76,807
|
|
53,372
|
|
|
|
|
|
|
|
|
|
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(Loss)
income from operations
|
|
(5,906
|
)
|
1,434
|
|
(5,144
|
)
|
3,287
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
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Interest
income
|
|
12
|
|
332
|
|
178
|
|
863
|
|
Interest
expense
|
|
(2
|
)
|
(9
|
)
|
(10
|
)
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
other income
|
|
10
|
|
323
|
|
168
|
|
702
|
|
|
|
|
|
|
|
|
|
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(Loss)
income before income taxes
|
|
(5,896
|
)
|
1,757
|
|
(4,976
|
)
|
3,989
|
|
Income
tax benefit (expense)
|
|
474
|
|
(770
|
)
|
395
|
|
(1,710
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
(5,422
|
)
|
987
|
|
(4,581
|
)
|
2,279
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on and accretion of mandatorily redeemable convertible preferred stock
|
|
|
|
|
|
|
|
(2,597
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income attributable to common stockholders
|
|
$
|
(5,422
|
)
|
$
|
987
|
|
$
|
(4,581
|
)
|
$
|
(318
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
$
|
0.04
|
|
$
|
(0.19
|
)
|
$
|
(0.02
|
)
|
Diluted
|
|
$
|
(0.23
|
)
|
$
|
0.04
|
|
$
|
(0.19
|
)
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
23,813,040
|
|
23,171,000
|
|
23,741,785
|
|
16,644,000
|
|
Diluted
|
|
23,813,040
|
|
24,039,000
|
|
23,741,785
|
|
16,644,000
|
|
See accompanying notes.
5
Table of
Contents
CARDIONET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(
In thousands
)
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
Operating activities
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(4,581
|
)
|
$
|
2,279
|
|
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
|
|
|
|
|
|
Depreciation
|
|
7,240
|
|
5,384
|
|
Amortization of intangibles
|
|
669
|
|
738
|
|
Loss on disposal of property and equipment
|
|
184
|
|
281
|
|
Deferred rent
|
|
598
|
|
(93
|
)
|
Provision for doubtful accounts
|
|
14,086
|
|
8,849
|
|
Stock-based compensation
|
|
5,458
|
|
2,434
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(24,131
|
)
|
(22,078
|
)
|
Due from related parties
|
|
83
|
|
141
|
|
Prepaid expenses and other current assets
|
|
(300
|
)
|
(2,280
|
)
|
Other assets
|
|
153
|
|
(2,522
|
)
|
Accounts payable
|
|
2,520
|
|
73
|
|
Accrued and other liabilities
|
|
(3,756
|
)
|
11,124
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
(1,777
|
)
|
4,330
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
Purchases of property and equipment
|
|
(16,527
|
)
|
(6,874
|
)
|
Investment in subsidiary, net of cash acquired
|
|
|
|
(5,002
|
)
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(16,527
|
)
|
(11,876
|
)
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
3,078
|
|
48,364
|
|
Proceeds from issuance of debt
|
|
|
|
500
|
|
Repayment of debt
|
|
(72
|
)
|
(3,117
|
)
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
3,006
|
|
45,747
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
(15,298
|
)
|
38,201
|
|
Cash and cash equivalents beginning of period
|
|
58,171
|
|
18,091
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
42,873
|
|
$
|
56,292
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
10
|
|
$
|
378
|
|
Cash paid for taxes
|
|
$
|
6,130
|
|
$
|
|
|
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 September 30, 2009 and December 31, 2008,
and the results of operations for the three and nine months ended September 30,
2009 and 2008. The financial data and other information disclosed in these
notes to the financial statements related to the three and nine month periods
are unaudited. The results for the three and nine month periods ended September 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 September 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:
|
|
September 30,
2009
|
|
September 30,
2008
|
|
Series B
warrants
|
|
|
|
6,250
|
|
Common stock options and restricted stock units
outstanding
|
|
2,137,613
|
|
1,740,885
|
|
Common stock options and restricted stock units
available for grant
|
|
631,933
|
|
373,757
|
|
Common stock held by certain employees and
unvested
|
|
13,177
|
|
52,343
|
|
Common stock
|
|
23,867,765
|
|
23,328,028
|
|
|
|
|
|
|
|
Total
|
|
26,650,488
|
|
25,501,263
|
|
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.
The following
table presents the calculation of basic and diluted net income (loss) per
share:
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(in
thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
(loss) income applicable to common stockholders
|
|
$
|
(5,422
|
)
|
$
|
987
|
|
$
|
(4,581
|
)
|
$
|
(318
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstandingbasic
|
|
23,813,040
|
|
23,171,000
|
|
23,741,785
|
|
16,644,000
|
|
Dilutive
effect of the Companys employee compensation plans
|
|
|
|
868,000
|
|
|
|
|
|
Weighted
average shares used in computing diluted net income (loss) per share
|
|
23,813,040
|
|
24,039,000
|
|
23,741,785
|
|
16,644,000
|
|
Basic
net income (loss) per share
|
|
$
|
(0.23
|
)
|
$
|
0.04
|
|
$
|
(0.19
|
)
|
$
|
(0.02
|
)
|
Diluted
net income (loss) per share
|
|
$
|
(0.23
|
)
|
$
|
0.04
|
|
$
|
(0.19
|
)
|
$
|
(0.02
|
)
|
7
Table
of Contents
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 and nine months ended September 30, 2009, and
the nine months ended September 30, 2008. Accordingly, basic and diluted
net loss attributable to common stockholders per share are identical for those
periods presented in the consolidated statements of operations.
Goodwill
The Company considers its business to be one
reporting unit for purposes of performing its goodwill impairment analysis.
Goodwill is reviewed for impairment annually, or when events arise that could
indicate that an 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. 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 and after income taxes
for the nine months ended September 30, 2009 was $5.5 million lower, and
the Companys before and after-tax net income for the nine months ended September 30,
2008 was $2.5 million lower, as a result of stock-based compensation expense
incurred. The impact of stock-based compensation expense was $0.23 and $0.15 on
both basic and diluted earnings per share for the nine months ended September 30,
2009 and 2008, respectively.
The Company utilized the Black-Scholes valuation
model for estimating the fair value of stock options granted using the
following weighted average assumptions:
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Expected volatility
|
|
55
|
%
|
50
|
%
|
Risk-free interest rate
|
|
2.24
|
%
|
2.52
|
%
|
Expected life
|
|
6.25 years
|
|
6.25 years
|
|
The dividend yield of zero is based on the fact that
the Company has never paid dividends and has no present intention to pay
dividends. For stock-based compensation grants made after July 1, 2009,
the Company estimated the expected volatility assumption by calculating the
volatility of its stock price from its IPO date through the current quarter,
which yielded an estimated volatility of approximately 86%. Expected volatility was estimated based on
the volatility of comparable companies for grants made prior to July 1,
2009. This alternative method was used because the Companys stock was not
publicly traded prior to the closing of its initial public offering, and did
not yield a reliable estimate of volatility during the period of its initial
public offering through the end of the second quarter of 2009. The Company
believes that its own stock price is a better representation of stock-based compensation
volatility going forward as the Companys stock has been traded for a long
enough period to develop a meaningful trend. The risk-free interest rate is
derived from the U.S. Treasury 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
8
Table of Contents
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 nine months ended September 30, 2009 and 2008 was $10.81 and
$12.20, respectively.
The
following table summarizes activity under all stock award plans from December 31,
2008 through September 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
|
|
|
|
|
|
|
|
|
|
Granted
|
|
(171,000
|
)
|
171,000
|
|
$
|
9.20
|
|
Canceled
|
|
48,581
|
|
(48,581
|
)
|
$
|
12.71
|
|
Exercised
|
|
|
|
(3,358
|
)
|
$
|
2.56
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2009
|
|
631,933
|
|
2,137,613
|
|
$
|
20.13
|
|
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:
|
|
September 30,
2009
|
|
September 30,
2008
|
|
Range of exercise prices (per option)
|
|
$0.70 - $31.18
|
|
$0.70 - $31.18
|
|
Weighted average remaining contractual life
(years)
|
|
8.95
|
|
9.09
|
|
Employee
Stock Purchase Plan
On
March 17, 2009 and September 17, 2009, 44,189 shares and 77,010
shares, respectively, 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 nine months ended September 30,
2009 were $1.2 million. In January 2009, the number of shares available
for grant was increased by 235,189, per the ESPP plan documents. At September 30,
2009, approximately 302,493 shares remain available for purchase under the
ESPP.
New Accounting Pronouncements
In June 2009, the FASB issued FASB ASC
105, Generally Accepted Accounting Principles, which establishes the FASB
Accounting Standards Codification as the sole source of authoritative generally
accepted accounting principles. Pursuant to the provisions of FASB ASC 105, the
Company has updated references to GAAP in its financial statements issued for
the period ended September 30, 2009. The adoption of FASB ASC 105 did not
impact the Companys financial position or results of operations.
9
Table
of Contents
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 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.
10
Table
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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
2009 Restructuring
On or about July 22, 2009, the Company
undertook an initiative to reduce support costs
company-wide
and initiated plans to move the majority of its
manufacturing activities from San Diego to its facility in Chester,
Pennsylvania. The Company believes that it can achieve a reduction in shipping
and administrative costs by combining its manufacturing facilities into one
location. Prior to the restructuring, devices were
shipped to and from the San Diego location for
production and maintenance before being deployed out of the Companys
distribution facility in Pennsylvania.
Also on or about July 22, 2009,
the Company closed its event monitoring facility in
Florida and consolidated its with the Companys event monitoring facility in
Georgia. The
Company believes that it can realize cost
efficiencies by consolidating its event monitoring centers in the southeastern
United States and by eliminating duplicative administrative costs.
The restructuring plan involves the elimination of approximately 80 positions
and the relocation of 15 employees. The Company expects the restructuring to be
substantially completed by the end of 2009, and expects the total cost of the
restructuring to be approximately $1.5 million, all of which are expected to
result in cash charges. The Company incurred restructuring expenses of $1.2
million for the nine months ended September 30, 2009.
A summary of the reserve activity related to the 2009 restructuring
plan as of September 30, 2009 is as follows:
|
|
Initial
Reserve
Recorded
|
|
Payments
through
September 30,
2009
|
|
Balance
as of
September 30,
2009
|
|
Severance and employee related costs
|
|
$
|
1,014
|
|
$
|
384
|
|
$
|
630
|
|
Other exit activity costs
|
|
136
|
|
136
|
|
|
|
Total
|
|
$
|
1,150
|
|
$
|
520
|
|
$
|
630
|
|
The Company
accounts for expenses associated with exit or disposal activities in accordance
with ASC 420,
Exit or Disposal
Cost Obligations,
and records the expenses in
Integration, restructuring and other charges
in its
statement of operations, and records the related accrual in the
Accrued expenses
line of its balance sheet.
11
Table
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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 nine months ended September 30,
2009, and incurred expenses of $0.3 million for the nine months ended September 30,
2008. The integration was substantially completed as of December 31, 2008.
5.
Income Taxes
The Companys effective tax
rate was a benefit of 7.9% for the nine months ended September 30, 2009.
This was due primarily to a benefit received from the adjustment of the estimated
effective tax rate to the actual tax rate upon the filing of the Companys 2008
tax return. The Company has deferred income tax assets totaling approximately
$31.7 million at September 30, 2009, consisting primarily of federal
and state net operating loss and credit carryforwards and temporary differences
related to the provision for doubtful accounts. 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.
Reimbursement
On July 10,
2009, Highmark announced a reduction in the reimbursement rate for our MCOT
services to $754 per service, a reduction of approximately 33%. This new rate
went into effect on September 1, 2009. The reduction in reimbursement rates is
reflected in the
Revenue
and
Accounts
receivable
lines in the Companys financial statements.
7.
Legal Proceedings
On August 26, 2009,
two putative class actions were filed in the United States District Court for
the Eastern District of Pennsylvania naming CardioNet, Inc., Randy Thurman
and Martin P. Galvan as defendants and alleging violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended. These actions were consolidated on September 9,
2009 under docket number 09-3894. The complaints purport to bring claims on
behalf of a class of persons who purchased the Companys common stock between April 30,
2009 and June 30, 2009 and between April 30, 2009 and July 10,
2009. The complaints allege that the
defendants issued various materially false and misleading statements relating
to the Companys projected performance that had the effect of artificially
inflating the market price of its securities.
The Company believes the claims are without merit and intends to defend
the litigation vigorously. At this time, it is not possible to determine the
likelihood or amount of liability, if any, on the part of the Company.
Consistent with ASC 450-20-25, no accrual has been recorded in the financial
statements.
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 $1.4 million for a termination fee and
expenses 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. CardioNet removed the
action to the United States District Court for the District of Minnesota on the
basis of diversity jurisdiction, and Biotel did not seek to remand the action.
Biotel is seeking specific performance and damages (the amount of which is
currently unspecified). CardioNet has counterclaimed under the terms of the
Merger Agreement for its termination fee and associated expenses; the current
amount of that counterclaim is $1.4 million.
The case is to be ready for trial by July 15, 2010. Discovery is
underway. The Company plans to
vigorously defend its position and prosecute its counterclaim. At this time, it
is not possible to determine the likelihood or amount of liability, if any, on
the part of the Company. Consistent with ASC 450-20-25, no accrual has been
recorded in the financial statements.
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 have initially been focused on the
12
Table of Contents
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.
Reimbursement
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 and 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 previous 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 rate for our MCOT services
to $754 per service, a reduction of approximately 33%. This new rate went into
effect on September 1, 2009. We have also experienced a decline in our
commercial carrier pricing. The decline in reimbursement rates has had a
negative impact on the Companys revenue and operating results, and has
presented significant challenges to the viability of the Companys current business
model. Several strategic initiatives are currently being implemented, including
cost efficiency measures and a continued focus on sales volume growth. The
Company intends to continue to work with Highmark and CMS to achieve an
appropriate national rate in the future, and will continue to evaluate its
strategic options.
We have successfully secured
contracts with many national and regional commercial payors. We increased the
number of MCOT contracts with commercial payors from 194 at September 30,
2008 to 232 at September 30, 2009. We estimate that the number of covered
commercial lives increased from 150 million at September 30, 2008 to 158
million at September 30, 2009. The current estimated total of 197 million
covered lives for Medicare and commercial lives for which we had reimbursement
contracts as of September 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 78
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.
13
Table of Contents
Restructuring Activities
In the third quarter of 2009 the Company initiated
restructuring plans that included the closure of the Companys event monitoring
facility in Florida and consolidating it with its event monitoring facility in
Georgia, the shift of the majority of its manufacturing activities from its San
Diego location to Chester, Pennsylvania and a reduction of support costs
company-wide. The total cost of the restructuring plan is expected to be
approximately $1.5 million, and is expected to be substantially complete by the
end of fiscal 2009. The Company expects to realize an annualized cost savings
of approximately $8.0 million from the execution of the 2009 restructuring
plan.
Results
of Operations
Three Months Ended September 30,
2009 and 2008
Revenues.
Total revenues for
the three months ended September 30, 2009 increased to $33.3 million
from $31.2 million for the three months ended September 30, 2008, an
increase of $2.1 million, or 6.8%. MCOT revenue increased
$3.1 million due to an increase in sales volume, partially offset by a
decrease in MCOT reimbursement rates. The net increase in MCOT revenue was
offset by a decrease in PDSHeart and other revenue of $1.0 million.
Gross
Profit.
Gross
profit increased to $21.5 million for the three months ended September 30,
2009, or 64.5% of revenues, from $21.2 million for the three months ended September 30,
2008, or 67.9% of revenues. The increase of $0.3 million was due to increased
revenue from MCOT services. The increase in revenue was offset by an increase
in cost of sales related to payroll expense due to higher headcount of $1.1
million, an increase in supplies and other miscellaneous expenses of $0.4
million and increased depreciation expense related to additional devices being
in service in the 2009 period compared to the 2008 period of $0.3 million.
Gross profit as a percentage of revenue was negatively affected by the decline
in reimbursement rates.
General
and Administrative Expense.
General and administrative expense increased to
$15.4 million for the three months ended September 30, 2009 from
$10.8 million for the three months ended September 30, 2008. This
increase of $4.6 million, or 42.6%, was primarily due to an increase in
the provision for bad debt of $1.9 million, increase in stock compensation
expense of $0.7 million, increase in payroll costs of $0.7 million, increase in
legal fees of $0.6 million and an increase of $0.7 million of miscellaneous
expenses. As a percentage of total revenues, general and administrative expense
was 46.1% for the three months ended September 30, 2009 compared to 34.5%
for the three months ended September 30, 2008.
Sales and
Marketing Expense.
Sales
and marketing expense was $9.6 million for the three months ended September 30,
2009 compared to $5.2 million for the three months ended September 30,
2008. The increase of $4.4 million, or 84.6%, was due to the growth of the
sales force and sales operations infrastructure. As a percent of total revenues, sales and
marketing expense was 28.7% for the three months ended September 30, 2009
compared to 16.7% for the three months ended September 30, 2008.
Research
and Development Expense.
Research
and development expense was $1.3 million for the three months ended September 30,
2009 compared to $0.9 million for the three months ended September 30,
2008. The increase of $0.4 million, or 44.4%, was due primarily to an increase
in payroll costs of $0.3 million and miscellaneous expenses of $0.1 million. As
a percent of total revenues, research and development expense increased to 4.0%
for the three months ended September 30, 2009 compared to 3.0% for the
three months ended September 30, 2008.
Integration,
Restructuring and Other Charges.
The Company incurred severance costs of $1.0
million and relocation and other exit related costs of $0.1 million for the
three months ended September 30, 2009 in connection with the 2009
restructuring plan. The 2009 restructuring plan included the consolidation and
closure of the Companys event monitoring facility in Florida with its event
monitoring facility in Georgia, the shift of the majority of the Companys
manufacturing activities to its Chester, Pennsylvania facility, and an overall
reduction of support costs company-wide. Integration, restructuring and other
charges were 3.4% of total revenues for the three months ended September 30,
2009.
For the three months ended September 30,
2008, integration, restructuring and other charges relating to the PDSHeart
acquisition were $0.2 million, charges relating to the consolidation of the
Finance and Human Resources functions in Pennsylvania were $0.7 million,
secondary offering costs were $0.9 million and other nonrecurring charges were
$1.1 million.
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Other
Income.
There
was no interest income for the three months ended September 30, 2009, down
from $0.3 million for the three months ended September 30, 2008. The
decline was due primarily to lower short term interest rates and a lower
average cash balance in the three months ended September 30, 2009 compared
to the three months ended September 30, 2008.
Income
Taxes.
The
Company received a tax benefit of $0.5 million for the three months ended September 30,
2009, compared to a provision of $0.8 for the three months ended September 30,
2008. The effective tax rate for the three months ended September 30, 2009
was 8.0%, compared to 43.8% for the three months ended September 30, 2008.
Net
Income.
The
Company incurred a net loss of $5.4 million for the three months ended September 30,
2009 compared to net income in the three months ended September 30, 2008
of $1.0 million.
Nine Months Ended September 30,
2009 and 2008
Revenues.
Total revenues for
the nine months ended September 30, 2009 increased to $107.3 million
from $86.0 million for the nine months ended September 30, 2008, an
increase of $21.3 million, or 24.8%. MCOT revenue increased $24.0 million due to an increase in sales
volume, partially offset by a decrease in MCOT reimbursement rates. The net increase in MCOT revenue was offset by a decrease in PDSHeart and other
revenue of $2.7 million.
Gross
Profit.
Gross
profit increased to $71.7 million for the nine months ended September 30,
2009, or 66.8% of revenues, from $56.7 million for the nine months ended September 30,
2008, or 65.9% of revenues. The increase of $15.0 million, or 26.5%, 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 $4.4 million, increased depreciation expense related to
additional devices being in service in the 2009 period compared to the 2008
period of $1.3 million and an increase in miscellaneous costs of $0.6 million.
General
and Administrative Expense.
General and administrative expense increased to
$43.8 million for the nine months ended September 30, 2009 from
$29.8 million for the nine months ended September 30, 2008. This
increase of $14.0 million, or 47.0%, was primarily due to an increase in
the provision for bad debt of $5.2 million, increase in stock compensation
expense of $3.7 million, increase in payroll expense of $1.5 million, increase
in rent expense of $0.5 million, increase in depreciation and amortization of
$0.5 million, increase in legal fees of $0.4 million, increased professional
fees of $0.4 million and $2.3 million of miscellaneous expenses. As a
percentage of total revenues, general and administrative expense was 40.8% for
the nine months ended September 30, 2009 compared to 34.7% for the nine
months ended September 30, 2008.
Sales and
Marketing Expense.
Sales
and marketing expense was $25.5 million for the nine months ended September 30,
2009 compared to $15.7 million for the nine months ended September 30,
2008. The increase of $9.8 million, or 62.4%, was due to the growth of the
sales force and sales operations infrastructure. As a percent of total revenues, sales and
marketing expense was 23.8% for the nine months ended September 30, 2009
compared to 18.3% for the nine months ended September 30, 2008.
Research
and Development Expense.
Research
and development expense was $4.3 million for the nine months ended September 30,
2009 compared to $3.0 million for the nine months ended September 30,
2008. The increase of $1.3 million, or 43.3%, was due primarily to an increase
in payroll expense of $0.7 million, increase in consulting fees of $0.3 million
and miscellaneous expenses of $0.3 million. As a percent of total revenues,
research and development expense increased to 4.0% for the nine months ended September 30,
2009 from 3.5% for the nine months ended September 30, 2008.
Integration,
Restructuring and Other Charges.
Integration, restructuring and other charges
were $3.1 million, or 2.9% of revenues, for the nine months ended September 30,
2009, comprised primarily of severance expenses related to the departure of
certain executives in the first quarter of 2009 and the 2009 restructuring plan
activities that were initiated in the third quarter of 2009. The 2009
restructuring plan included the consolidation and closure of the Companys
event monitoring facility in Florida with its event monitoring facility in
Georgia, the shift of the majority of the Companys manufacturing activities to
its Chester, Pennsylvania facility, and an overall reduction of support costs
companywide.
For the nine months ended September 30,
2008, integration, restructuring and other charges were $4.8 million.
Integration charges relating to the PDSHeart acquisition were $0.8 million for
the nine months ended September 30, 2008, and restructuring charges
relating to consolidating our Finance and Human Resources functions in
Pennsylvania were $1.0 million. Secondary offering costs were $0.9 million,
costs related to the resolution of intellectual property litigation were $1.0
million and other nonrecurring charges related to the departure of certain
directors were $1.1 million for the nine months ended September 30, 2008.
15
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Other
Income.
Net
interest income was $0.2 million for the nine months ended September 30,
2009, a decrease of $0.5 million, or 71.4% from $0.7 million for the nine
months ended September 30, 2008. The decrease was primarily due to lower
short term interest rates and a lower average cash balance in the first nine
months of 2009 compared to the first nine months of 2008.
Income
Taxes.
The
Companys effective tax rate was 7.9% for the nine months ended September 30,
2009, compared to an effective tax rate of 42.9% for the nine months ended September 30,
2008.
Net
Income.
The
Company incurred a net loss of $4.6 million for the nine months ended September 30,
2009, a decline from a net loss of $0.3 million for the nine months ended September 30,
2008.
Liquidity
and Capital Resources
As of September 30,
2009, our principal source of liquidity was cash and cash equivalents totaling
$42.9 million and net accounts receivable of $50.6 million. The
Company has incurred net losses from inception through March 31, 2008.
Prior to March 2008 the Company obtained funding through various debt
sources. In March 2008, all material portions of interest-bearing debt
were 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.
The Company incurred a net loss of $4.6 million for the nine months ended September 30,
2009.
For the nine
months ended September 30, 2009, cash flow from operations decreased to a
cash outflow of $1.8 million, compared to a cash inflow of $4.3 million for the
nine months ended September 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 for the nine months
ended September 30, 2009 compared to the nine months ended September 30,
2008. The increase in accounts receivable was offset by an increase in accounts
payable, 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 $16.5 million for the nine months ended September 30,
2009, compared to $11.9 million in the nine months ended September 30,
2008, an increase of $4.6 million. The increase was primarily due to investment
in medical devices related to increased patient volume for the nine months
ended September 30, 2009.
The Company generated net
cash from financing activities of $3.0 million in the nine months ended September 30,
2009, compared to $45.7 million in the nine months ended September 30,
2008, a decrease of $42.7 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;
·
our ability to liquidate our receivables;
·
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;
16
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·
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.
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 our
existing stockholders ownership will be diluted. 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 September 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.
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.
Commencing on August 26,
2009, two putative class actions were filed in the United States District Court
for the Eastern District of Pennsylvania naming CardioNet, Inc., Randy
Thurman and Martin P. Galvan as defendants and alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaints purport to bring claims on
behalf of a class of persons who purchased the Companys common stock between April 30,
2009 and June 30, 2009 and between April 30, 2009 and July 10,
2009. The complaints allege that the
defendants issued various materially false and misleading statements relating
to the Companys projected performance that had the effect of artificially
inflating the market price of its securities.
The complaints further allege that the alleged misstatements were
revealed to the public on June 30, 2009 and July 10, 2009 when the
Company made certain announcements regarding potential lower pricing for
commercial and Medicare reimbursement rates.
These actions were consolidated on September 9, 2009 under docket
number 09-3894. On October 26,
2009, two competing motions were filed for appointment of lead plaintiffs and
lead counsel pursuant to the requirements of the Private Securities Litigation
Reform Act of 1995. Lead plaintiffs are
required to file a consolidated
17
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complaint within fourteen days of an Order, if any,
designating lead plaintiffs and lead counsel.
The defendants have fourteen days to respond to the consolidated
complaint and if defendants file a motion to dismiss, lead plaintiffs shall
have fourteen days in which to file an opposition. The Company believes the claims are without merit
and intends to defend the litigation vigorously.
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 $1.4 million for a termination fee and
expenses 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. CardioNet removed the
action to the United States District Court for the District of Minnesota on the
basis of diversity jurisdiction, and Biotel did not seek to remand the action.
Biotel is seeking specific performance and damages (the amount of which is
currently unspecified). CardioNet has counterclaimed under the terms of the
Merger Agreement for its termination fee and associated expenses; the current
amount of that counterclaim is $1.4 million.
The case is to be ready for trial by July 15, 2010. Discovery is
underway. The Company plans to vigorously
defend its position and prosecute its counterclaim.
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.
The reduction in the published Medicare reimbursement
rates could negatively impact our business and our operating results.
Highmark Medicare
Services announced the reduction of the Medicare reimbursement rate for the Companys
MCOT
services to $754, a
reduction of approximately 33%, which went into effect September 1, 2009.
This decrease in the reimbursement rate for our services will have material
adverse effects on our business and operating results. Furthermore, if the
current reimbursement rate remains in effect, the Company may not be
economically viable under its current business model.
The decline in reimbursement rates has had a
negative impact on the Companys revenue and operating results, and has
presented significant challenges to the viability of the Companys current
business model. Several operational initiatives are currently being
implemented, including cost efficiency measures and a continued focus on sales
volume growth. The Company intends to continue to work with Highmark and CMS to
achieve an appropriate national rate in the future, and will continue to
evaluate its strategic options. Failure to effectively execute the cost
efficiency and other operational and strategic initiatives may have materially
adverse consequences on the Companys financial results and viability.
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 nine months
of 2009 a limited number of commercial payers have requested price reductions
based on our Medicare reimbursement rates. Due to the reduction of our Medicare
reimbursement rate that took effect on September 1, 2009, we may
experience additional pressure from insurance payers to reduce commercial
pricing. A decrease in commercial pricing would adversely affect our financial
results.
The Company has significant outstanding accounts
receivables; failure to liquidate these receivables may lead to additional bad
debt expense being recorded and could have a materially adverse effect on our
operating results.
The Company has
experienced a continued increase in its days sales outstanding (DSO) over the
nine months ended September 30, 2009. Several strategic initiatives have
been implemented to collect on outstanding receivable accounts. While the
Company believes that it will realize improvements in its DSO in the
foreseeable future, there is no guarantee that collections rates will improve.
A failure to liquidate its receivables may have a materially adverse impact on
its financial results.
18
Table of Contents
Several lawsuits have been
brought against us and the outcome of these lawsuits is uncertain.
Several lawsuits have been
brought against us that allege, among other things, that we issued various
materially false and misleading statements relating to the Companys projected
performance that had the effect of artificially inflating the market price of
our securities. We intend to vigorously
defend ourselves against these lawsuits; however, no assurance can be given as
to the outcome of these lawsuits. In addition, other lawsuits may be brought
against us. We may be required to defend such lawsuits, thus incurring expenses
which we may not be able to bear, or which we may not be successful in
defending.
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
Restructuring
Activities
As
discussed in Note 4, Integration and Restructuring Activities, to the
Consolidated Financial Statements included in this Quarterly Report on Form 10-Q,
management initiated certain restructuring activities on or around July 22,
2009, including moving the majority of our manufacturing activities from San
Diego to our facility in Chester, Pennsylvania, as well as closing our event
monitoring facility in Florida and consolidating it with our event monitoring
facility in Georgia and undertaking an initiative to reduce support costs
Company-wide. The Company believes that it can realize cost efficiencies by
consolidating its event monitoring centers in the southeastern United States and
by eliminating duplicative administrative costs. Among other things, the plan calls for the
elimination of approximately 80 positions and the relocation of 15 employees.
We
expect the restructuring to be substantially completed by the end of 2009, and expect
the total cost of the restructuring to be approximately $1.5 million, all of
which is expected to result in cash charges. The Company incurred restructuring
expenses of $1.2 million for the nine months ended September 30,
2009. Of these costs, approximately $1.0
million relate to severance and employee related costs.
Phoenix,
AZ Lease Agreement
On
September 30, 2009, we entered into a sixty-five (65) month lease,
commencing December 1, 2009, for approximately 10,800 rentable square feet
in Phoenix, AZ. The space is dedicated
to distribution activities. There is no
rental due under the lease through April 30, 2010; thereafter, monthly
base rents are $9,736.20 from May 1, 2010 to April 20, 2011;
$9,952.56 from May 1, 2011 to April 20, 2012; $10,168.92 from May 1,
2012 to April 20, 2013; $10,385.28 from May 1, 2013 to April 20,
2014; and $10,601.64 from May 1, 2014 to April 20, 2015. A copy of the lease agreement is attached to
this Quarterly Report on Form 10-Q as Exhibit 10.5.
Item 6. Exhibits.
EXHIBIT INDEX
Exhibit
Number
|
|
|
|
|
|
10.5
|
|
Building Lease Agreement dated September 30, 2009 between the
Registrant and EastGroup Properties, L.P.
|
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.
|
19
Table of
Contents
CardioNet, Inc.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
CARDIONET, INC.
|
|
|
|
|
|
|
Date: November 6,
2009
|
By:
|
/s/ Martin P.
Galvan
|
|
|
Martin P.
Galvan, CPA
|
|
|
Chief
Financial Officer
(Principal
Financial Officer)
|
20
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