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 September 30, 2010
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)
|
|
(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
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
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 November 1, 2010, 24,229,546 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, 2010
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, the national rate set
by the Centers for Medicare and Medicaid Services (CMS) for our mobile
cardiovascular telemetry service, effectiveness of our cost savings
initiatives, changes to insurance coverage and reimbursement levels for our
products, 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, 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
)
|
|
(Unaudited)
|
|
|
|
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,631
|
|
$
|
49,152
|
|
Short-term available-for-sale-investments
|
|
32,247
|
|
|
|
Accounts receivable, net of allowance for doubtful
accounts of $12,697 and $22,396, at September 30, 2010 and
December 31, 2009, respectively
|
|
38,066
|
|
40,885
|
|
Prepaid expenses and other current assets
|
|
3,603
|
|
2,818
|
|
|
|
|
|
|
|
Total current assets
|
|
84,547
|
|
92,855
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
22,693
|
|
28,243
|
|
Intangible assets, net
|
|
629
|
|
939
|
|
Goodwill
|
|
45,999
|
|
45,999
|
|
Other assets
|
|
480
|
|
286
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
154,348
|
|
$
|
168,322
|
|
|
|
|
|
|
|
Liabilities and stockholders
equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,436
|
|
$
|
7,160
|
|
Accrued liabilities
|
|
8,416
|
|
9,919
|
|
Deferred revenue
|
|
383
|
|
393
|
|
|
|
|
|
|
|
Total current liabilities
|
|
14,235
|
|
17,472
|
|
|
|
|
|
|
|
Deferred rent
|
|
1,263
|
|
1,497
|
|
|
|
|
|
|
|
Total liabilities
|
|
15,498
|
|
18,969
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Common stock, $.001 par value; 200,000,000 shares
authorized; 24,245,305 and 23,965,405 shares issued and outstanding at
September 30, 2010 and December 31, 2009, respectively
|
|
24
|
|
24
|
|
Paid-in capital
|
|
246,842
|
|
242,320
|
|
Accumulated other comprehensive income
|
|
18
|
|
|
|
Accumulated deficit
|
|
(108,034
|
)
|
(92,991
|
)
|
|
|
|
|
|
|
Total stockholders equity
|
|
138,850
|
|
149,353
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
154,348
|
|
$
|
168,322
|
|
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,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Net patient service revenues
|
|
$
|
27,486
|
|
$
|
33,300
|
|
$
|
91,241
|
|
$
|
106,954
|
|
Other revenues
|
|
|
|
40
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
27,486
|
|
33,340
|
|
91,241
|
|
107,324
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
11,938
|
|
11,829
|
|
35,522
|
|
35,661
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
15,548
|
|
21,511
|
|
55,719
|
|
71,663
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
8,717
|
|
9,738
|
|
26,942
|
|
29,754
|
|
Sales and marketing
|
|
7,305
|
|
9,562
|
|
22,178
|
|
25,548
|
|
Bad debt expense
|
|
4,934
|
|
5,642
|
|
14,058
|
|
14,086
|
|
Research and development
|
|
1,237
|
|
1,325
|
|
3,710
|
|
4,310
|
|
Integration, restructuring and other charges
|
|
859
|
|
1,150
|
|
3,932
|
|
3,109
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
23,052
|
|
27,417
|
|
70,820
|
|
76,807
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(7,504
|
)
|
(5,906
|
)
|
(15,101
|
)
|
(5,144
|
)
|
Other income, net
|
|
34
|
|
10
|
|
58
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(7,470
|
)
|
(5,896
|
)
|
(15,043
|
)
|
(4,976
|
)
|
Income tax benefit
|
|
|
|
474
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(7,470
|
)
|
(5,422
|
)
|
(15,043
|
)
|
(4,581
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.31
|
)
|
$
|
(0.23
|
)
|
$
|
(0.63
|
)
|
$
|
(0.19
|
)
|
Diluted
|
|
$
|
(0.31
|
)
|
$
|
(0.23
|
)
|
$
|
(0.63
|
)
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
24,161,904
|
|
23,813,040
|
|
24,061,194
|
|
23,741,785
|
|
Diluted
|
|
24,161,904
|
|
23,813,040
|
|
24,061,194
|
|
23,741,785
|
|
See accompanying notes.
5
Table of Contents
CARDIONET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(
In thousands
)
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
Operating activities
|
|
|
|
|
|
Net loss
|
|
$
|
(15,043
|
)
|
$
|
(4,581
|
)
|
Adjustments to reconcile net loss to net cash used
in operating activities:
|
|
|
|
|
|
Depreciation
|
|
8,789
|
|
7,240
|
|
Amortization of intangibles
|
|
310
|
|
669
|
|
Amortization of investment premium
|
|
255
|
|
|
|
Loss on disposal of property and equipment
|
|
433
|
|
184
|
|
(Decrease) increase in deferred rent
|
|
(234
|
)
|
598
|
|
Provision for doubtful accounts
|
|
14,058
|
|
14,086
|
|
Stock-based compensation
|
|
3,058
|
|
5,458
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(11,239
|
)
|
(24,048
|
)
|
Prepaid expenses and other current assets
|
|
(785
|
)
|
(300
|
)
|
Other assets
|
|
(194
|
)
|
153
|
|
Accounts payable
|
|
(1,724
|
)
|
2,520
|
|
Accrued and other liabilities
|
|
(1,513
|
)
|
(3,756
|
)
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
(3,829
|
)
|
(1,777
|
)
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
Purchases of property and equipment
|
|
(3,672
|
)
|
(16,527
|
)
|
Purchases of short-term available-for-sale
investments
|
|
(34,684
|
)
|
|
|
Sale or maturity of short-term available-for-sale
investments
|
|
2,200
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(36,156
|
)
|
(16,527
|
)
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
Proceeds from the exercise of employee stock
options and employee stock purchase plan contributions
|
|
1,464
|
|
3,078
|
|
Repayment of debt
|
|
|
|
(72
|
)
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
1,464
|
|
3,006
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(38,521
|
)
|
(15,298
|
)
|
Cash and cash equivalents beginning of period
|
|
49,152
|
|
58,171
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
10,631
|
|
$
|
42,873
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3
|
|
$
|
10
|
|
Cash paid for taxes
|
|
$
|
675
|
|
$
|
6,130
|
|
See accompanying notes.
6
Table of Contents
CARDIONET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(
In thousands, except share and per
share amounts
)
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
CardioNet, Inc.s (the Company or CardioNet) financial position as of
September 30, 2010 and December 31, 2009, the results of operations
for the three and nine months ended September 30, 2010 and 2009, and cash
flows for the nine months ended September 30, 2010 and 2009. The financial data and other information
disclosed in these notes to the financial statements related to the three and
nine months ended are unaudited. The results for the three and nine months
ended September 30, 2010 are not necessarily indicative of the results to
be expected for any future period.
Net Loss
The
Company computes net 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, 2010 and 2009:
|
|
September 30,
2010
|
|
September 30,
2009
|
|
Common stock options and restricted stock units
outstanding
|
|
2,007,414
|
|
2,137,613
|
|
Common stock options and restricted stock units
available for grant
|
|
1,767,896
|
|
631,933
|
|
Common stock held by certain employees and unvested
|
|
|
|
13,177
|
|
Common stock
|
|
24,245,305
|
|
23,867,765
|
|
|
|
|
|
|
|
Total
|
|
28,020,615
|
|
26,650,488
|
|
Basic
net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period. Diluted net 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
loss per share:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(7,470
|
)
|
$
|
(5,422
|
)
|
$
|
(15,043
|
)
|
$
|
(4,581
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing diluted
net loss per share
|
|
24,161,904
|
|
23,813,040
|
|
24,061,194
|
|
23,741,785
|
|
Basic net loss per share
|
|
$
|
(0.31
|
)
|
$
|
(0.23
|
)
|
$
|
(0.63
|
)
|
$
|
(0.19
|
)
|
Diluted net loss per share
|
|
$
|
(0.31
|
)
|
$
|
(0.23
|
)
|
$
|
(0.63
|
)
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Table of Contents
CARDIONET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(
In thousands, except share and per
share amounts
)
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, 2010 and 2009. Accordingly, basic and
diluted net loss attributable to common stockholders per share are identical
for the three and nine months ended September 30, 2010 and 2009 and are
presented in the consolidated statements of operations.
Comprehensive
Loss
Comprehensive loss consists of net loss and all changes in
stockholders equity from non-stockholder sources. The following summarizes the
components of the Companys comprehensive loss:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,470
|
)
|
$
|
(5,422
|
)
|
$
|
(15,043
|
)
|
$
|
(4,581
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
|
|
37
|
|
|
|
18
|
|
|
|
Total comprehensive loss
|
|
(7,433
|
)
|
(5,422
|
)
|
(15,025
|
)
|
(4,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
Cash and cash
equivalents are held in U.S. financial institutions or in custodial accounts
with U.S. financial institutions. Cash equivalents are defined as liquid
investments and money market funds with maturity from date of purchase of 90
days or less that are readily convertible into cash and have insignificant
interest rate risk.
Available-for-Sale Investments
Marketable
securities that do not meet the definition of cash and cash equivalents are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, based on quoted market prices and observable inputs, with
unrealized gains and losses, reported as a separate component of stockholders
equity. We classify securities as current or non-current assets on the
consolidated balance sheet based on maturity dates. The amortized cost of debt
securities is adjusted for amortization of premiums and accretions of discounts
to maturity. Amortization of debt premiums and accretion of debt discounts are
recorded in other income and expense. Realized gains and losses, and declines
in value, that are considered to be other-than-temporary, are recorded in other
income and expense. The cost of securities sold is based on specific
identification.
Accounts Receivable
Receivables are recorded at the time revenue is recognized, net of
contractual allowances. The Company makes estimates each quarter regarding the
collectability of its receivables as of the balance sheet date. The estimates
take into consideration the most recent information available to the Company,
as well as cash collection trends and the aging of receivables. Receivables are
presented on the balance sheet net of allowances for doubtful accounts.
Receivables are written off when the Company believes the likelihood for
collection is remote, the receivables have been fully reserved, and when the
Company believes collection efforts have been fully exhausted and it does not
intend to devote additional resources in attempting to collect. Prior to the
third quarter of 2010, the Company performed an annual accounts receivable
write-off in the fourth quarter. The Company has determined it will evaluate
outstanding receivables and perform write-offs quarterly going forward,
beginning in the third quarter of 2010. The Company wrote off $22,775 of
receivables in the third quarter of 2010. The impact was a reduction of gross
receivables and a reduction in the allowance for doubtful accounts. There was
no impact on the net receivables reported on the balance sheet as of September 30,
2010 or bad debt expense reported on the statement of operations for the three
or nine months ended September 30, 2010 as a result of this write-off.
8
Table of Contents
CARDIONET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(
In thousands, except share and per
share amounts
)
Goodwill
The
Company considers its business to be one reporting unit for the purpose of
performing its goodwill impairment analysis. Goodwill is reviewed for
impairment annually, or when events arise that could indicate that impairment
exists. To determine whether 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 judgment.
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. 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, impairment may
exist and additional analysis will be undertaken to determine the amount of
impairment.
The
Company experienced a decline in its stock price during the nine months ended
September 30, 2010. The Company considers the stock price decline to be an
event that could indicate goodwill impairment has occurred. Goodwill was tested
for impairment as of September 30, 2010. A discounted cash flow analysis
was performed, taking into consideration revenue and profit projections based
on the most recent data available to the Company. The result of the impairment
test yielded an estimated fair market value of the reporting unit that was
greater than the carrying value. Because the estimated fair value was in excess
of the book value, the Company did not proceed to step 2 of the impairment test
as described in ASC 350-20-35,
Intangibles Goodwill and
Other
.
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, 2010 and 2009, was reduced by $3,058 and $5,458,
respectively, as a result of stock-based compensation expense incurred. The
impact of stock-based compensation expense was $(0.13) and $(0.23) on both
basic and diluted earnings per share for the nine months ended
September 30, 2010 and 2009, respectively.
We
estimate the fair value of our share-based awards to employees and directors
using the Black-Scholes option valuation model. The Black-Scholes option
valuation model requires the use of certain subjective assumptions. The most
significant of these assumptions are our estimates of the expected volatility
of the market price of our stock and the expected term of the award. We base
our estimates of expected volatility on a group of similar entities whose stock
prices are publicly available. The expected term represents the period of time
that stock-based awards granted are expected to be outstanding. Other
assumptions used in the Black-Scholes option valuation model include the
risk-free interest rate and expected dividend yield. The risk-free interest
rate for periods pertaining to the contractual life of each option is based on
the U.S. Treasury yield of a similar duration in effect at the time of grant.
We have never paid, and do not expect to pay, dividends in the foreseeable
future.
9
Table of Contents
CARDIONET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(
In thousands, except share and per
share amounts
)
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,
|
|
|
|
2010
|
|
2009
|
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Expected volatility
|
|
65
|
%
|
55
|
%
|
Risk-free interest rate
|
|
2.37
|
%
|
2.24
|
%
|
Expected life
|
|
6.25 years
|
|
6.25 years
|
|
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 nine months ended
September 30, 2010 and 2009 was $4.16 and $10.81, respectively.
The
following table summarizes activity under all stock award plans from
December 31, 2009 through September 30, 2010:
|
|
|
|
Options Outstanding
|
|
|
|
Shares
|
|
|
|
Weighted
|
|
|
|
Available
|
|
Number
|
|
Average
|
|
|
|
for Grant
|
|
of Shares
|
|
Exercise Price
|
|
Balance December 31, 2009
|
|
1,132,135
|
|
1,575,645
|
|
$
|
15.21
|
|
Additional options available for grant
|
|
1,194,094
|
|
|
|
$
|
|
|
Granted
|
|
(10,000
|
)
|
10,000
|
|
$
|
6.43
|
|
Canceled
|
|
134,985
|
|
(134,985
|
)
|
$
|
5.17
|
|
Exercised
|
|
|
|
(14,347
|
)
|
$
|
2.99
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2010
|
|
2,451,214
|
|
1,436,313
|
|
$
|
15.70
|
|
|
|
|
|
|
|
|
|
Granted
|
|
(819,663
|
)
|
819,663
|
|
$
|
7.26
|
|
Canceled
|
|
43,620
|
|
(43,620
|
)
|
$
|
14.18
|
|
Exercised
|
|
|
|
(90,919
|
)
|
$
|
7.09
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2010
|
|
1,675,171
|
|
2,121,437
|
|
$
|
12.83
|
|
|
|
|
|
|
|
|
|
Granted
|
|
(70,000
|
)
|
70,000
|
|
$
|
4.66
|
|
Canceled
|
|
162,725
|
|
(162,725
|
)
|
$
|
17.67
|
|
Exercised
|
|
|
|
(21,298
|
)
|
$
|
7.46
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2010
|
|
1,767,896
|
|
2,007,414
|
|
$
|
11.89
|
|
10
Table of Contents
CARDIONET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(
In thousands, except share and per
share amounts
)
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 as determined by the Board of
Directors. The increase in the shares available for grant under the ESOP plan
is equal to 5% of the total shares outstanding at December 31, 2009.
Additional
information regarding options outstanding is as follows:
|
|
September 30,
2010
|
|
September 30,
2009
|
|
Range of exercise prices (per option)
|
|
$0.70 -$31.18
|
|
$0.70 - $31.18
|
|
Weighted average remaining contractual life
(years)
|
|
7.87
|
|
8.95
|
|
Employee
Stock Purchase Plan
On
March 17, 2010 and September 17, 2010, 83,659 and 77,440 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, 2010 were
$798. In January 2010, the number of shares available for grant was
increased by 239,750, per the ESPP plan documents. At September 30, 2010,
approximately 381,144 shares remain available for purchase under the ESPP.
New Accounting Pronouncements
In
January 2010, the FASB issued authoritative guidance intended to improve
disclosures about fair value measurements. The guidance requires entities to
disclose significant transfers in and out of fair value hierarchy levels and
the reasons for the transfers. Additionally, the guidance clarifies that a
reporting entity should provide fair value measurements for each class of
assets and liabilities and disclose the inputs and valuation techniques used
for fair value measurements using significant other observable inputs (Level 2)
and significant unobservable inputs (Level 3). Level 3 reconciliations should
present separately information about purchases, sales, issuances and
settlements. To date, the Company has not had any assets or liabilities that
transferred in or out of fair value hierarchy levels, and as such, is not
currently subject to this guidance. This guidance is effective for interim and
annual periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances and settlements in the Level 3
reconciliations, which is effective for fiscal years beginning after December 15,
2010. This guidance did not have an impact on the Companys results of
operations or financial position. The Company adopted this guidance effective
December 31, 2009. The Company believes the enhanced Level 3 disclosures
will not have an impact on the Companys results of operations or financial
position.
In
February 2010, the FASB issued authoritative guidance on subsequent
events. The guidance requires an SEC filer to evaluate subsequent events
through the date the financial statements are issued but no longer requires an
SEC filer to disclose the date through which the subsequent event evaluation
occurred. The guidance became effective for the Company upon issuance and had
no impact on the Companys results of operations or financial position.
2. Available-for-Sale
Investments
We
invest our excess funds in securities issued by the United States government,
corporations, banks, municipalities, financial holding companies and in money
market funds comprised of these same types of securities. Our cash and cash
equivalents and available-for-sale investments are placed with high credit
quality financial institutions. Additionally, we diversify our investment
portfolio in order to maintain safety and liquidity. We do not hold
mortgage-backed securities. As of September 30, 2010, all of our
investments will mature within one year. These investments are recorded at fair
value, based on quoted market prices, with unrealized gains and losses reported
as a separate component of stockholders equity.
11
Table of Contents
CARDIONET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(
In thousands, except share and per
share amounts
)
Investments
have been classified as available-for-sale investments. At September 30,
2010, available-for-sale investments are detailed as follows:
|
|
Amortized
|
|
Gross Unrealized
|
|
Gross Unrealized
|
|
Estimated
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
13,297
|
|
$
|
6
|
|
$
|
(4
|
)
|
$
|
13,299
|
|
U.S. Treasury and agency debt securities
|
|
18,932
|
|
16
|
|
|
|
18,948
|
|
|
|
$
|
32,229
|
|
$
|
22
|
|
$
|
(4
|
)
|
$
|
32,247
|
|
Net
unrealized gains on available-for-sale investments are included as a component
of stockholders equity and comprehensive loss until realized from a sale or
other-than-temporary impairment. The Company recorded net unrealized gains for
the nine months ended September 30, 2010 and 2009 of $18 and $0,
respectively. Realized gains and losses from the sale of securities are
determined on a specific identification basis. Purchases and sales of
investments are recorded on their trade dates. Dividend and interest income are
recognized when earned. Interest income for the nine months ended
September 30, 2010 was $310, which was partially offset by $255 related to
amortization of investment premiums.
Maturities
of available-for-sale investments were as follows at September 30, 2010:
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
32,229
|
|
$
|
32,247
|
|
Due after one year through five years
|
|
|
|
|
|
Due after five years through ten years
|
|
|
|
|
|
Due after ten years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,229
|
|
$
|
32,247
|
|
3. Fair
Value Measurements
ASC
820 defines fair value as an exit price that would be received from the sale of
an asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 establishes a three-level hierarchy
for disclosure that is based on the extent and level of judgment used to
estimate the fair value of assets and liabilities.
·
|
Level
1 Valuations based on quoted prices for identical assets or liabilities in
active markets at the measurement date. Since valuations are based on quoted
prices that are readily and regularly available in an active market,
valuation of these products does not entail a significant degree of judgment.
Our Level 1 assets consist of cash and money market funds, as well as U.S.
Treasury and agency debt securities.
|
|
|
·
|
Level
2 Valuations based on quoted prices for similar assets and liabilities in
active markets; quoted prices for identical or similar assets and liabilities
in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data, such as alternative pricing sources
with reasonable levels of price transparency. Our Level 2 assets consist of
fixed income securities such as corporate debt securities including
commercial paper and corporate bonds.
|
|
|
·
|
Level
3 Valuations based on inputs that are unobservable and significant to the
overall fair value measurement. We have not measured the fair value of any of
our assets using Level 3 inputs.
|
12
Table of Contents
CARDIONET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(
In thousands, except share and per
share amounts
)
In
January 2010, the FASB updated the disclosure requirements for fair value
measurements. The updated guidance requires companies to disclose separately
the investments that transfer in and out of Levels 1 and 2 and the reason for
those transfers. Additionally, in the reconciliation for fair value measurements
using significant unobservable inputs (Level 3), companies should present
separately information about purchases, sales, issuances and settlements.
During the nine months ended September 30, 2010, no transfers were made
into or out of the different category levels, nor did the Company categorize
any of its investments as Level 3. We will continue to review our fair value
inputs on a quarterly basis. The updated guidance is effective for the
reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances and settlements in the Level 3
reconciliations, which is effective for fiscal years beginning after
December 15, 2010. The Company will provide the additional disclosures
necessary beginning in the Companys fiscal year 2010 Annual Report on
Form 10-K.
The
fair value of our financial assets subject to the disclosure requirements of
ASC 820 was determined using the following levels of inputs at
September 30, 2010:
Fair Value Measurements at September 30, 2010
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,999
|
|
$
|
|
|
$
|
|
|
$
|
4,999
|
|
Money market funds
|
|
5,133
|
|
|
|
|
|
5,133
|
|
Corporate debt securities
|
|
|
|
13,798
|
|
|
|
13,798
|
|
U.S. Treasury and agency debt securities
|
|
18,948
|
|
|
|
|
|
18,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,080
|
|
$
|
13,798
|
|
$
|
|
|
$
|
42,878
|
|
4. Integration,
Restructuring and Other Charges
2010 Restructuring
During the first quarter of 2010, the Company undertook an initiative
to streamline its sales and service organizations and reduce support costs
company-wide. It also initiated plans to close its event monitoring facility in
Georgia and consolidate it with the Companys monitoring facilities in
Pennsylvania and Minnesota. The Company believes that it can realize cost
efficiencies by undertaking these initiatives.
The restructuring plan involves the elimination of approximately
100 positions. The restructuring activities were substantially complete by
the end of the third quarter of 2010. The Company expects the total cost of the
restructuring to be approximately $4,000, all of which is expected to result in
cash charges. The Company incurred restructuring expenses of $2,988 for the
nine months ended September 30, 2010.
13
Table
of Contents
CARDIONET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(
In thousands, except share and per
share amounts
)
A summary of the reserve activity related to the 2010 restructuring
plan as of September 30, 2010 is as follows:
|
|
Severance and
employee
related costs
|
|
Other exit
activity costs
|
|
Total
|
|
Initial reserve recorded
|
|
$
|
1,400
|
|
$
|
262
|
|
$
|
1,662
|
|
Payments
|
|
(466
|
)
|
(262
|
)
|
(728
|
)
|
|
|
|
|
|
|
|
|
Balance March 31, 2010
|
|
934
|
|
|
|
934
|
|
|
|
|
|
|
|
|
|
Additional reserve recorded
|
|
559
|
|
342
|
|
901
|
|
Payments
|
|
(360
|
)
|
(342
|
)
|
(702
|
)
|
|
|
|
|
|
|
|
|
Balance June 30, 2010
|
|
1,133
|
|
|
|
1,133
|
|
|
|
|
|
|
|
|
|
Additional reserve recorded
|
|
296
|
|
129
|
|
425
|
|
Payments
|
|
(704
|
)
|
(129
|
)
|
(833
|
)
|
|
|
|
|
|
|
|
|
Balance September 30, 2010
|
|
$
|
725
|
|
$
|
|
|
$
|
725
|
|
Integration,
restructuring and other charges for the nine months ended September 30,
2009 was $3,109, which was comprised primarily of severance expenses related to
the departure of certain executive officers 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 Company-wide.
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 liabilities
line of its balance sheet.
Other Charges
The Company incurred other charges of $944 for the nine months ended
September 30, 2010, including legal costs related to the Companys defense
of class-action and Biotel lawsuits. Additional information regarding legal
proceedings can be found in Note 7.
5.
Income
Taxes
The
income tax provision for interim periods is determined using an estimated
annual effective tax rate adjusted for discrete items, if any, which are taken
into account in the quarterly period in which they occur. The Company reviews
and updates its estimated annual effective tax rate each quarter. For the nine
months ended September 30, 2010, the Companys estimated annual effective
tax rate was primarily impacted by a financial loss for the period, the benefit
of which was offset by a valuation allowance. Accordingly, the Company recorded
no tax expense or benefit for the nine months ended September 30, 2010.
The income tax benefit totaled approximately $395 for the nine months ended
September 30, 2009.
As
of December 31, 2009, in accordance with ASC 740, the Company maintained a
full valuation allowance against net deferred tax assets. The Company maintains
a full valuation allowance for the nine months ended September 30, 2010.
The Company implemented the provisions of ASC 740-10 on January 1, 2007
related to accounting for uncertainty in income taxes. There has been no
material change to the amount of unrecognized tax expense or benefit reported
as of September 30, 2010.
14
Table of Contents
CARDIONET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(
In thousands, except share and per
share amounts
)
6.
Reimbursement
A
reduction in the Medicare reimbursement rate for our MCOT services to $754 per
service, a reduction of approximately 33%, went into effect on
September 1, 2009. The reduction in reimbursement rates has a direct
impact in the reduction of revenue for the nine months ended September 30,
2010.
During
the third quarter of 2010, the local entity responsible for Medicare carrier
pricing, Highmark Medicare Services (Highmark), conducted a prepayment review
of the Companys Medicare claims. This review involved an evaluation of medical
records and application of clinical judgment by Highmark about whether a
service is covered, and is reasonable and necessary. As a result of this
review, reimbursement payments to the Company were temporarily suspended in the
third quarter of 2010 and caused an estimated reduction in cash collections of
$7,000 to $9,000. Effective October 25, 2010, Highmark completed the prepayment
review and the Company anticipates cash collections will resume for its
Medicare claims in November 2010. During the period of temporary
reimbursement suspension, revenue and its related accounts receivable were
recognized as services were provided, consistent with the Companys revenue
recognition policy.
7.
Legal Proceedings
On
March 5, 2010, West Palm Beach Police Pension Fund filed a putative class
action complaint in California Superior Court, San Diego County asserting
claims for violations of Sections 11, 12 and 15 of the Securities Act of 1933,
as amended, against CardioNet, nine current and former officers and directors
of CardioNet and six underwriters of CardioNets IPO and/or Secondary Offering
on August 6, 2008 (together with the IPO, the Offerings). The
complaint filed March 5, 2010 also asserted claims for alleged violations
of Sections 25401 and 25501 of the California Corporations Code against
defendants James M. Sweeney and Fred Middleton. The plaintiff seeks to bring
claims on behalf of all those who purchased or otherwise acquired the common
stock of CardioNet pursuant and/or traceable to the Offerings. On
March 10, 2010, plaintiff filed an Amended Complaint that deleted the
claims for violations of the California Corporations Code. The claims are
based on purported misrepresentations and omissions in the Registration
Statements for the Offerings relating to alleged business decisions made by
CardioNet that were supposedly not disclosed to investors and alleged misstatements
concerning CardioNets business. On April 5, 2010, all defendants
removed the case to the Southern District of California, where it is
pending. On April 7, 2010, defendants filed a Motion to Transfer the
case to the Eastern District of Pennsylvania. On April 23, 2010, the
plaintiff moved to remand the case to state court. On May 19, 2010, the
court ordered that defendants response to the complaint will be due 21 days
after the order on the Motion to Remand. On May 28, 2010, defendants filed
their opposition to the Motion to Remand, and plaintiff filed its opposition to
the Motion to Transfer. On June 14, 2010, plaintiff filed its reply in
support of the Motion to Remand, and on June 18, 2010, defendants reply
in support of the Motion to Transfer was filed. On June 21, 2010, the
court found the motions suitable for disposition on the written motions
submitted by the parties without oral argument. The Company believes that
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 with any degree of certainty.
Consistent with the accounting for contingent liabilities, no accrual has been
recorded in the financial statements.
15
Table of Contents
CARDIONET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(
In thousands, except share and per share
amounts
)
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, Randy Thurman, former Chief Executive Officer and Martin P. Galvan,
former Chief Financial Officer 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. 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.
On December 22, 2009, the Court appointed lead plaintiff, but
denied its request for appointment of lead counsel and required lead plaintiff
to file an amended motion for approval of its selection of class counsel. Lead
plaintiff filed its amended motion for appointment of lead counsel on
January 15, 2010, which was granted on February 3, 2010. Lead
plaintiff filed a consolidated class action complaint on February 19, 2010
and the defendants filed a motion to dismiss on March 26, 2010. Lead
plaintiff filed its opposition to the motion to dismiss on April 30, 2010.
On May 13, 2010, defendants moved for leave to file a reply brief, which
motion was granted and the reply brief was filed May 20, 2010. On August 10,
2010, the Court issued an opinion dismissing the consolidated class action
complaint. Plaintiffs have not appealed that decision which became final on
September 9, 2010.
On
April 2, 2009 CardioNet entered into a Merger Agreement to acquire (Biotel)
Inc. for $14,000. On July 14, 2009, CardioNet exercised its contractual right
to terminate the Merger Agreement due to Biotels breach of certain covenants
in the agreement. On or about July 16, 2009, Biotel subsequently commenced
litigation against CardioNet in Minnesota District Count 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 in an amount in excess of $10,000. CardioNet has
counterclaimed under the terms of the Merger Agreement for its termination fee
and associated expenses; the current amount of that counterclaim is $1,400.
Discovery has been concluded and the case has been set for a two-week trial
starting January 11, 2011. Biotel has brought a motion for partial summary
judgment directed to certain CardioNet defenses and the counterclaim; the Court
has held a hearing on that motion and has taken the motion under advisement.
The Company has defended, and continues to defend, its position vigorously. The
2010 Merger Agreement (as defined in Note 8 below) includes a Settlement
Agreement that will resolve the CardioNet-Biotel litigation and result in a
mutual release of all claims arising out of, in connection with, or related to
the April 2, 2009 Merger Agreement, including the claims in the litigation, but
only if the merger contemplated by the 2010 Merger Agreement is closed or if
certain other conditions occur or are satisfied. The mutual release set forth
in the Settlement Agreement does not go into effect unless and until the 2010
Merger Agreement is closed or the other conditions occur or are satisfied. As a
part of the Settlement Agreement, the parties have agreed to move the District
Court to stay the litigation. If the mutual releases in the Settlement
Agreement do not go into effect, CardioNet will continue to defend its position
and will continue to prosecute its counterclaim. At this time, it is not
possible to determine, if the case should go forward to trial, the likelihood
or amount of liability, if any, on the part of the Company with any degree of
certainty. Consistent with the accounting for contingent liabilities, no
accrual has been recorded in the financial statements.
8.
Subsequent Events
On November 2, 2010, CMS published The Medicare Program Final Rule establishing
a national rate for the MCOT technology (CPT Code 93229). CMS valued the CPT
code at 20.14 relative value units. Using the formula and values currently in
place, the Company estimates the national rate to be approximately $800 per
service, effective January 1, 2011. This is an increase of approximately
6% from the current local carrier rate of $754 per service that was previously
established by Highmark. The values incorporated in the current formula will
expire in December 2010. If the United States Congress (Congress) does
not act before December 31, 2010 to continue the values, then all payments
under the physician fee schedule will be reduced by approximately 25%.
Historically, Congress has taken action to prevent the scheduled reduction and
we anticipate Congress will do so again in December 2010. However, if
Congress does not take action to postpone the rate reduction the rate will be
approximately $560.
On November 5, 2010, the Company entered into a Merger Agreement
(the 2010 Merger Agreement) with Biotel Inc., a Minnesota corporation
(referred to herein as Biotel). Upon the closing date of the transaction,
which is expected to be on or around December 20, 2010, the Company will
acquire all of the outstanding capital stock of Biotel for approximately
$11,000, subject to adjustment for the amount of working capital of Biotel as
of the closing date of the transaction. The 2010 Merger Agreement effectively
terminates the Merger Agreement with Biotel that was dated April 2, 2009.
The merger will provide the Company with additional development, manufacturing
and testing capabilities related to its event monitor product line. In
connection with entering into the 2010 Merger Agreement, the Company entered
into a Settlement Agreement with Biotel, pursuant to which, among other things,
the litigation between the parties will be terminated at the time of closing
under the Merger Agreement.
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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, 2009, 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 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 Companys Conshohocken location has been an approved Independent
Diagnostic Testing Facility (IDTF) by Medicare since it received
510(k) clearance for the first and second generation of its core MCOT
devices in 2002. 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. 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 received FDA 510(k) clearance for its
next generation platform in April 2010 and expects the product launch to
occur in early 2011. The Company continues to pursue innovation of new and
existing medical solutions through investments in research and development.
In
March 2007, the Company acquired all of the outstanding capital stock of
PDSHeart. The acquisition of PDSHeart provided three additional product lines
to complement MCOT: event, Holter and Pacemaker monitoring solutions. In
addition, the acquisition supplied the Company with existing sales channels and
relationships in geographic areas that 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.
Reimbursement
The reimbursement rates 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
previous process. Reimbursement prior to the use of the new CPT codes was obtained
through non-specific billing codes which required various narratives that, in
most cases, involved semi-automated or manual processing, as well as additional
review by payors.
After receiving the CPT code in the first quarter of 2009, the Company
received pressure from several commercial payors to renegotiate reimbursement
rate contracts. This pressure led to a substantial decline in our average
commercial reimbursement rates in the first half of 2009. During the second
half of 2009, and throughout the first half of 2010, we have seen commercial
reimbursement rates stabilize. The Company experienced a decline in commercial
reimbursement rates during the third quarter of 2010. During 2010 and 2009, the
Companys commercial reimbursement rates declined approximately 15% and 17%,
respectively. The Company expects to experience fluctuations in its average
commercial reimbursement rates due to payor mix, as well as contract negotiations
for new and existing payors. Overall, we expect the average commercial
reimbursement rates to remain stable or decline over time.
On July 10, 2009,
Highmark announced a reduction in the Medicare 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 decline in reimbursement rate
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. The Company estimates that the rate reduction caused a
reduction in revenue for the four months ended December 31, 2009 and the
nine months ended September 30, 2010, of approximately $6.3 million and
$14.2 million, respectively. Several strategic initiatives are currently being
implemented, including cost reduction initiatives, process improvement and
facility consolidation in an effort to improve the Companys operating
performance given the reduced reimbursement rate.
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On November 2, 2010, CMS published The Medicare Program Final Rule establishing
a national rate for the MCOT technology (CPT Code 93229). CMS valued the CPT
code at 20.14 relative value units. Using the formula and values currently in
place, the Company estimates the national rate to be approximately $800 per
service, effective January 1, 2011. This is an increase of approximately
6% from the current local carrier rate of $754 per service that was previously
established by Highmark. The values incorporated in the current formula will
expire in December 2010. If the United States Congress (Congress) does
not act before December 31, 2010 to continue the values, then all payments
under the physician fee schedule will be reduced by approximately 25%.
Historically, Congress has taken action to prevent the scheduled reduction and
we anticipate Congress will do so again in December 2010. However, if
Congress does not take action to postpone the rate reduction the rate will be
approximately $560. If no action is taken by Congress and the reimbursement
rate for the Companys MCOT technology is reduced to a level lower than
anticipated, the rate would have a negative impact on the Companys results of
operations.
We have successfully secured contracts with many national and regional
commercial payors. As of September 30, 2010, we have 285 MCOT contracts
with commercial payors, compared to 245 at December 31, 2009. The current
estimated total of over 200 million covered lives for Medicare and commercial
lives for which we had reimbursement contracts as of September 30, 2010
represents approximately 79% of the total covered lives in the United States.
The MCOT contracts also cover event, Holter and Pacemaker service pricing. In
addition, as of September 30, 2010 there were approximately 165 contracts
with commercial payors that pertained only to event, Holter and Pacemaker
service pricing, and did not cover MCOT. The majority of the remaining covered
lives are insured by a small number of large commercial insurance companies
that deemed MCOT to be experimental in nature and do not currently reimburse
us for services provided to their beneficiaries.
Accounts Receivable
Receivables are recorded at the time revenue is recognized, net of
contractual allowances and are presented on the balance sheet net of allowance
for doubtful accounts. The Company performs analyses to evaluate the net
realizable value of accounts receivable as of the balance sheet date.
Specifically, the Company considers historical realization data, accounts
receivable aging trends, other operating trends and relevant business
conditions. Because of continuing changes in the health care industry and third
party reimbursement, it is possible that our estimates could change, which
could have a material impact on our operations and cash flows.
The Company realized improvements in its billing procedures and cash
collections activity during 2010 and experienced a corresponding decline in its
days sales outstanding. The Company believes that it can realize additional
improvement in its billing and collection processes, and has engaged a third
party consultant that is a specialist with significant experience in medical
claims reimbursement to assist. The first phase of the project will include a
review of all outstanding receivables. The Company cannot reasonably determine
as of the balance sheet date what impact, if any, this review will have on the
financial statements. This review is expected to be completed in the fourth
quarter of 2010. The second phase of the project, expected to be completed in
the first half of 2011, will include a review and recommendation for changes,
if needed, in the Companys patient intake, billing and reimbursement practices
and processes.
During the third quarter of 2010, Highmark Medical Services conducted a
prepayment review of the Companys Medicare claims. This review involved an
evaluation of medical records and application of clinical judgment by Highmark
about whether a service is covered, and is reasonable and necessary. As a
result of this review, reimbursement payments to the Company were temporarily
suspended in the third quarter of 2010 and caused an estimated reduction in
cash collections of $7.0 million to $9.0 million. Effective October 25,
2010, Highmark completed the prepayment review and the Company anticipates cash
collections will resume for its Medicare claims in November 2010.
The ultimate collection of accounts receivable may not be known for
several months after services have been provided and billed. The Company
records bad debt expense based on the aging of the receivable using historical
Company-specific data. The percentages and amounts used to record bad debt
expense and the allowance for doubtful accounts are supported by various
methods and analyses, including current and historical cash collections, and
bad debt write-offs. The Company will write-off receivables when the likelihood
for collection is remote, the receivables have been fully reserved, and when
the Company believes collection efforts have been fully exhausted and it does
not intend to devote additional resources in attempting to collect. Prior to
the third quarter of 2010, the Company performed an annual accounts receivable
write-off in the fourth quarter. The Company has determined it will evaluate
outstanding receivables and perform write-offs quarterly going forward,
beginning in the third quarter of 2010. The Company wrote off $22.8 million of
receivables in the third quarter of 2010. The impact was a reduction of gross
receivables and a reduction in the allowance for doubtful accounts. There was
no impact on the net receivables reported on the balance sheet as of September 30,
2010 or bad debt expense reported on the statement of operations for the three
or nine months ended September 30, 2010 as a result of this write-off.
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Medical Industry Trends
Based on recent business journal articles, several trends have emerged
in the medical services industry during 2010. Physicians, clinics and hospitals
have experienced a lower level of patient visits, and performed fewer elective
procedures. The downward trend in census is being attributed to weak economic
conditions, as well as changes in insurance coverage. Patients are delaying
doctor visits and deferring elective medical treatments that are not perceived
to be critical to patients immediate health. In addition to other
factors, the Company believes this overall economic trend has impacted its
volume, leading to two consecutive quarters of modest sequential volume
declines.
Restructuring Activities
During the first quarter of 2010, the Company undertook an initiative
to streamline its sales and service organizations and reduce support costs
Company-wide. It also initiated plans to close its event monitoring facility in
Georgia and consolidate it with the Companys monitoring facilities in
Pennsylvania and Minnesota. The Company believes that it can realize cost
efficiencies by undertaking these initiatives. The total cost of the
restructuring plan is expected to be approximately $4.0 million, of which $3.0
million has been incurred to date. The activities were substantially complete
by the end of the third quarter of 2010.
nPhase Supplier Agreement
The Company established a relationship with nPhase, formerly
Qualcomm Inc., in May 2003. nPhase 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 nPhase network or it utilizes the monitoring and communications
services of a provider other than nPhase, nPhase has the right to terminate its
relationship with the Company.
Results of Operations
Three Months Ended
September 30, 2010 and 2009
Revenues.
Total
revenues for the three months ended September 30, 2010 decreased to $27.5
million from $33.3 million for the three months ended September 30, 2009,
a decrease of $5.8 million, or 17.6%. MCOT revenue declined $5.0 million
substantially due to a decrease in MCOT reimbursement rates. Additionally,
there was a decrease in event, Holter and other revenue of $0.8 million for the
three months ended September 30, 2010 compared to the three months ended
September 30, 2009.
Gross Profit.
Gross
profit decreased to $15.5 million for the three months ended September 30,
2010 from $21.5 million for the three months ended September 30, 2009. The
decrease of $6.0 million was due to a decrease in revenue related to lower
MCOT reimbursement rates totaling $4.7 million. The remaining $1.3 million
reduction resulted largely from lower Event and Holter volume, partially offset
by lower cost of sales resulting from our Company-wide cost reduction
initiatives for the three months ended September 30, 2010 compared to the
three months ended September 30, 2009. Gross profit as a percentage of
revenue declined to 56.6% for the three months ended September 30, 2010
compared to 64.5% for the three months ended September 30, 2009.
General and Administrative Expense.
General
and administrative expense was $8.7 million for the three months ended
September 30, 2010 compared to $9.7 million for the three months ended
September 30, 2009. The decrease of $1.0 million, or 10.5%, was due
primarily to our restructuring efforts resulting in a decrease in professional
fees of $0.7 million, payroll costs of $0.5 million, and stock compensation
expense of $0.3 million. The decrease was offset by an increase in consulting
costs of $0.2 million, depreciation expense of $0.2 million and other costs of
$0.1 million. As a percent of total revenues, general and administrative
expense was 31.7% for the three months ended September 30, 2010 compared
to 29.2% for the three months ended September 30, 2009.
Sales and Marketing Expense.
Sales
and marketing expense was $7.3 million for the three months ended
September 30, 2010 compared to $9.6 million for the three months
ended September 30, 2009. The decrease of $2.3 million, or 23.6%, was due
to lower payroll, travel and stock based compensation costs primarily resulting
from Company-wide cost reduction efforts in 2010. As a percent of total
revenues, sales and marketing expense was 26.6% for the three months ended
September 30, 2010 compared to 28.7% for the three months ended
September 30, 2009.
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Bad Debt Expense.
Bad
debt expense was $4.9 million for the three months ended September 30,
2010 compared to $5.6 million for the three months ended September 30,
2009. The decrease of $0.7 million, or 12.5%, was due to lower gross receivable
balances moving into older aging brackets with higher reserve percentages,
which was a result of improved cash collections in 2010. The bad debt expense
we recorded was based upon an evaluation of our historical collection
experience of accounts receivable, by age, for our various payor classes.
Highmarks prepayment review had a minimal impact on the bad debt expense for
the three months ended September 30, 2010.
Research and Development Expense.
Research
and development expense was $1.2 million for the three months ended
September 30, 2010 compared to $1.3 million for the three months ended
September 30, 2009. The decrease of $0.1 million, or 6.6%, was largely due
to lower payroll costs. As a percent of total revenues, research and
development expense was 4.5% for the three months ended September 30, 2010
compared to 4.0% for the three months ended September 30, 2009.
Integration, Restructuring and Other Charges.
The
Company incurred restructuring costs of $0.4 million and other charges of $0.5
million for the three months ended September 30, 2010. The restructuring
costs included $0.3 million of severance and employee related costs and $0.1
million of other charges related to the 2010 restructuring plan. The 2010
restructuring plan included the consolidation of the Companys sales and
service organizations, the closure of the Companys event monitoring facility
in Georgia and consolidation of its monitoring facilities in Pennsylvania and
Minnesota, and an overall reduction of administrative costs Company-wide.
Integration, restructuring and other charges were 3.1% of total revenues for
the three months ended September 30, 2010. The other charges related to
legal costs and other miscellaneous items.
The
Company incurred severance charges related to executive employee terminations
of $1.2 million for the three months ended September 30, 2009.
Income Taxes.
The
Company received no tax benefit for the three months ended September 30,
2010, compared to a tax benefit of $0.5 million for the three months ended
September 30, 2009. The effective tax rate for the three months ended
September 30, 2010 was 0.0%, compared to 8.0% for the three months ended
September 30, 2009. The effective tax rate is 0.0% because the Company is
in a net operating loss position and as a result, has included the net
operating losses in its deferred tax assets balance on the balance sheet as of
September 30, 2010. The Company is uncertain as to when it may realize the
benefit of its deferred tax assets, and maintains a full valuation allowance.
Net Loss.
The
Company incurred a net loss of $7.5 million for the three months ended
September 30, 2010 compared to a net loss of $5.4 million for the three
months ended September 30, 2009.
Nine Months Ended September 30,
2010 and 2009
Revenues.
Total
revenues for the nine months ended September 30, 2010 decreased to $91.2
million from $107.3 million for the nine months ended September 30, 2009,
a decrease of $16.1 million, or 15.0%. MCOT revenue decreased $13.8 million
due to a decrease in MCOT reimbursement rates totaling $24.0 million. The
decrease in reimbursement rates was offset by an increase in volume of 11%, or
$7.9 million. Additionally, there was a decrease in event, Holter and other
revenue of $2.3 million for the nine months ended September 30, 2010
compared to the nine months ended September 30, 2009, due primarily to
volume declines.
Gross Profit.
Gross
profit decreased to $55.7 million for the nine months ended September 30,
2010 from $71.7 million for the nine months ended September 30, 2009. The
decrease of $16.0 million was due to a decrease in revenue offset by $2.9
million of lower cost of sales resulting from our Company-wide cost initiatives
for the nine months ended September 30, 2010 compared to the nine months
ended September 30, 2009. Gross profit as a percentage of revenue declined
to 61.1% for the nine months ended September 30, 2010 compared to 66.8% for
the nine months ended September 30, 2009.
General and Administrative Expense.
General
and administrative expense was $26.9 million for the nine months ended
September 30, 2010 compared to $29.7 million for the nine months ended
September 30, 2009. The decrease of $2.8 million, or 9.5%, was due
primarily to our cost reduction efforts resulting in a decrease in stock
compensation expense of $1.9 million, professional fees of $1.3 million,
payroll costs of $0.8 million, and other costs of $0.3 million. The decrease was
offset by an increase in consulting costs of $0.8 million and depreciation
expense of $0.7 million. As a percent of total revenues, general and
administrative expense was 29.5% for the nine months ended September 30,
2010 compared to 27.7% for the nine months ended September 30, 2009.
Sales and Marketing Expense.
Sales
and marketing expense was $22.2 million for the nine months ended
September 30, 2010 compared to $25.5 million for the nine months
ended September 30, 2009. The decrease of $3.3 million, or 13.2% was due
to lower payroll, travel and stock based compensation costs primarily resulting
from Company-wide cost reduction efforts in 2010. As a percent of total
revenues, sales and marketing expense was 24.3% for the nine months ended
September 30, 2010 compared to 23.8% for the nine months ended
September 30, 2009.
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Bad Debt Expense.
Bad
debt expense was $14.1 million for the nine months ended September 30,
2010 and 2009. The bad debt expense we recorded was based upon an evaluation of
our historical collection experience of accounts receivable, by age, for our
various payor classes. Highmarks prepayment review had a minimal impact on the
bad debt expense for the nine months ended September 30, 2010.
Research and Development Expense.
Research
and development expense was $3.7 million for the nine months ended
September 30, 2010 compared to $4.3 million for the nine months ended
September 30, 2009. The decrease of $0.6 million, or 13.9%, was largely
due to lower consulting costs. As a percent of total revenues, research and
development expense was 4.1% for the nine months ended September 30, 2010
compared to 4.0% for the nine months ended September 30, 2009.
Integration, Restructuring and Other Charges.
The
Company incurred restructuring costs of $3.0 million and other charges of $0.9
million for the nine months ended September 30, 2010. The restructuring
costs included $2.3 million of severance and employee related costs and $0.7
million of other charges related to the 2010 restructuring plan. The 2010
restructuring plan included the consolidation of the Companys sales and
service organizations, the closure of the Companys event monitoring facility
in Georgia and consolidation with its monitoring facilities in Pennsylvania and
Minnesota, and an overall reduction of administrative costs company-wide.
Integration, restructuring and other charges were 4.3% of total revenues for
the nine months ended September 30, 2010. The other charges related to
legal costs and other miscellaneous items.
The
Company incurred severance charges related to executive employee terminations
of $3.1 million for the nine months ended September 30, 2009.
Income Taxes.
The
Company received no tax benefit for the nine months ended September 30,
2010, compared to a tax benefit of $0.4 million for the nine months ended
September 30, 2009. The effective tax rate for the nine months ended
September 30, 2010 was 0.0%, compared to 7.9% for the nine months ended
September 30, 2009. The effective tax rate is 0.0% because the Company is
in a net operating loss position and as a result, has included the net
operating losses in its deferred tax assets balance on the balance sheet as of
September 30, 2010. The Company is uncertain as to when it may realize the
benefit of its deferred tax assets, and maintains a full valuation allowance.
Net Loss.
The
Company incurred a net loss of $15.0 million for the nine months ended
September 30, 2010 compared to a net loss of $4.6 million for the nine
months ended September 30, 2009.
Liquidity and Capital Resources
The
Companys Annual Report on Form 10-K for the year ended December 31,
2009 includes a detailed discussion of our liquidity, contractual obligations
and commitments. The information presented below updates and should be read in
conjunction with the information disclosed in that Form 10-K.
As
of September 30, 2010, our principal source of liquidity was cash and cash
equivalents of $10.6 million, available-for-sale investments of $32.2 million
and net accounts receivable of $38.1 million. The Company has no short or
long-term debt and does not anticipate needing to secure financing from
external sources for cash to operate the business. The Company had working
capital of $70.3 million as of September 30, 2010. We believe that our
existing cash and cash equivalent balances will be sufficient to meet our
anticipated cash requirements for the foreseeable future.
The Company used $3.8 million of cash from
operations for the nine months ended September 30, 2010. Cash was used
primarily to fund the Companys ongoing operations during the nine month period
that resulted in a $15.0 million net loss, and to fund its net working capital
requirements of $1.4 million. The Companys working capital requirements were
driven primarily by the repayment of certain payor overpayments that were
recorded in accounts payable and a reduction in accrued payroll costs and
restructuring as a significant portion of activities initiated by the 2009
restructuring plan were completed during 2010. The net loss and net working
capital requirements were primarily offset by $11.8 million of non-cash items
related to depreciation and stock compensation expense.
During
the third quarter of 2010, Highmark conducted a prepayment review of the
Companys Medicare claims. Under Highmarks procedures for a prepayment review,
the Company must submit documentation for each claim submitted prior to
receiving payment. This is a lengthy, time consuming process. As a result of
this review, reimbursement payments were temporarily suspended in the third
quarter of 2010 and caused an estimated reduction in cash collections of $7.0 million
to $9.0 million. Effective October 25, 2010, Highmark completed the
prepayment review and the Company anticipates cash collections will resume for
its Medicare claims in November 2010.
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The
Company used $3.7 million for the investment in medical devices for use in its
ongoing operations for the nine months ended September 30, 2010. In
addition, the Company used $34.7 million for the purchase of available-for-sale
securities for the nine months ended September 30, 2010. The Company
believes that the available-for-sale investments can be converted to cash in a
short period of time, if needed.
If
the Company determines that it needs to raise additional capital, such capital
may not be available on reasonable terms, or at all. If the Company raises
additional funds by issuing equity securities, its existing stockholders
ownership will be diluted. If the Company raises additional funds by incurring
debt financing, the terms of the debt may involve significant cash payment
obligations as well as covenants and specific financial ratios that may
restrict the ability to operate its business.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.
Our
cash and cash equivalents as of September 30, 2010 were $10.6 million and
consisted primarily of cash and money market funds with maturities of less than
90 days. The Company also has $32.2 million of available-for-sale securities
with maturities of less than one year. The Company believes that these
securities can be converted to cash in a short period of time, if needed. The
primary objective of our investment activities is to preserve our capital for
the purpose of funding operations while, at the same time, maximizing the
income we receive from our investments without significantly increasing risk.
To achieve this objective, our investment policy allows us to maintain a
portfolio of cash equivalents and short term investments in a variety of
securities including money market funds and corporate debt securities. Due to
the short term nature of our investments, we believe we have no material
exposure to interest rate risk.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures designed to ensure
information required to be disclosed in Company reports filed under the
Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded,
processed, summarized, and reported within the time periods specified in the
SECs rules and forms. Disclosure controls and procedures are
designed to provide reasonable assurance that information required to be
disclosed in Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Companys Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
The
Companys management, with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Companys disclosure controls and procedures pursuant to
Rule 13a-15(b) of the Exchange Act as of the end of the period covered
by this report. Based on that evaluation, the Companys Chief
Executive Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures were effective as of September 30, 2010
to ensure that information required to be disclosed in Company reports filed
under the Exchange Act is (i) recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms and
(ii) accumulated and communicated to management, including the Companys principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There
were no changes in the Companys internal control over financial reporting
during the three months ending September 30, 2010, that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
22
Table of Contents
PART II - OTHER INFORMATION.
Item 1. Legal Proceedings.
On
March 5, 2010, West Palm Beach Police Pension Fund filed a putative class
action complaint in California Superior Court, San Diego County asserting
claims for violations of Sections 11, 12 and 15 of the Securities Act of 1933,
as amended, against CardioNet, nine current and former officers and directors
of CardioNet and six underwriters of CardioNets intial public offering (IPO)
consummated March 25, 2008 and/or Secondary Offering on August 6,
2008 (together with the IPO, the Offerings). The complaint filed
March 5, 2010 also asserted claims for alleged violations of Sections
25401 and 25501 of the California Corporations Code against defendants James M.
Sweeney and Fred Middleton. The plaintiff seeks to bring claims on behalf of
all those who purchased or otherwise acquired the common stock of CardioNet
pursuant and/or traceable to the Companys IPO and/or Secondary Offering. On
March 10, 2010, plaintiff filed an Amended Complaint that deleted the
claims for violations of the California Corporations Code. The claims are
based on purported misrepresentations and omissions in the Registration Statements
for the Offerings relating to alleged business decisions made by CardioNet that
were supposedly not disclosed to investors and alleged misstatements concerning
CardioNets business. On April 5, 2010, all defendants removed the
case to the Southern District of California, where it is pending at docket no.
10-cv-00711-L-NLS. On April 7, 2010, defendants filed a Motion to
Transfer the case to the Eastern District of Pennsylvania, which Motion to
Transfer is noticed for hearing on June 28, 2010. On April 23,
2010, the plaintiff moved to remand the case to state court. On May 19,
2010, the court ordered that defendants response to the complaint will be due
21 days after the order on the Motion to Remand. On May 28, 2010,
defendants filed their opposition to the Motion to Remand, and plaintiff filed
its opposition to the Motion to Transfer. On June 14, 2010, plaintiff
filed its reply in support of the Motion to Remand, and on June 18, 2010,
defendants reply in support of the Motion to Transfer was filed. On
June 21, 2010, the court found the motions suitable for disposition on the
written motions submitted by the parties without oral argument. The Company
believes that the claims are without merit and intends to defend the litigation
vigorously.
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, 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.
On December 22, 2009, the Court appointed lead plaintiff, but
denied its request for appointment of lead counsel and require lead plaintiff
to file an amended motion for approval of its selection of class counsel. Lead
plaintiff filed their amended motion for appointment of lead counsel on
January 15, 2010, which was granted on February 3, 2010. Lead
plaintiff filed a consolidated class action complaint on February 19, 2010
and the defendants filed a motion to dismiss on March 26, 2010. Lead
plaintiff filed its opposition to the motion to dismiss on April 30, 2010.
On May 13, 2010, defendants moved for leave to file a reply brief, which
motion was granted and the reply brief was filed May 20, 2010. On August 10,
2010, the Court issued an opinion dismissing the consolidated class action
complaint. Plaintiffs have not appealed that decision which became final on
September 9, 2010.
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. On or about July 16, 2009, Biotel subsequently commenced
litigation against CardioNet in Minnesota District Count 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 in an amount in excess of $10.0 million.
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. Discovery has been concluded and the case has
been set for a two-week trial starting January 11, 2011. Biotel has brought a
motion for partial summary judgment directed to certain CardioNet defenses and
the counterclaim; the Court has held a hearing on that motion and has taken the
motion under advisement. The Company has defended, and continues to defend, its
position vigorously. The 2010 Merger Agreement (as defined in Note 8 above)
includes a Settlement Agreement that will resolve the CardioNet-Biotel
litigation and result in a mutual release of all claims arising out of, in
connection with, or related to the April 2, 2009 Merger Agreement, including
the claims in the litigation, but only if the merger contemplated by the 2010
Merger Agreement is closed or if certain other conditions occur or are
satisfied. The mutual release set forth in the Settlement Agreement does not go
into effect unless and until the 2010 Merger Agreement is closed or the other
conditions occur or are satisfied. As a part of the settlement agreement, the
parties have agreed to move the District Court to stay the litigation. If the
mutual releases in the settlement agreement do not go into effect, CardioNet
will continue to defend its position and will continue to prosecute its
counterclaim. At this time, it is not possible to determine, if the case should
go forward to trial, the likelihood or amount of liability, if any, on the part
of the Company with any degree of certainty. Consistent with the accounting for
contingent liabilities, no accrual has been recorded in the financial
statements.
23
Table of Contents
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 for the year ended December 31, 2009 and in
Part II, Item 1A of our Quarterly Report on Form 10-Q for the
quarters ended March 31, 2010 and June 30, 2010, 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
for the year ended December 31, 2009 and in Part II, Item 1A of
our Quarterly Report on Form 10-Q for the quarters ended March 31,
2010 and June 30, 2010 are discussed below.
The Medicare prepayment medical review could negatively impact our cash
position and ability to continue current business operations.
During
the third quarter of 2010, the local entity responsible for Medicare carrier
pricing, Highmark Medicare Services (Highmark), conducted a prepayment review
of the Companys Medicare claims. This review involved an evaluation of medical
records and application of clinical judgment by Highmark about whether a
service is covered, and is reasonable and necessary. As a result of this
review, reimbursement payments had been temporarily suspended in the third
quarter of 2010 and caused an estimated reduction in cash collections of $7.0
million to $9.0 million. Effective October 25, 2010, Highmark completed
the prepayment review and the Company anticipates cash collections will resume
for its Medicare claims in November 2010. If there are difficulties, or
further delays in obtaining these reimbursements legally owed to the Company,
it may have a materially adverse affect on the Companys cash position and
ability to continue current business operations.
The national reimbursement rate set by CMS for our mobile
cardiovascular telemetry service is subject to continuing change and any
reductions in reimbursement levels would decrease our revenues and adversely
affect our results of operations and financial condition.
Reimbursement
to healthcare providers, including the Company, is subject to continuing change
in policies by CMS. Reimbursement from governmental payors is subject to
statutory and regulatory changes, retroactive rate adjustments and
administrative rulings and other policy changes, all of which could materially
decrease the range of services for which we are reimbursed or the reimbursement
rates we are paid. Reimbursement under the Medicare program for our services is
subject to the physician fee schedule. The fee schedule is typically updated
annually.
The
amounts paid under the physician fee schedule are based on geographically
adjusted relative value units, or RVUs, for each procedure or service, adjusted
by a budget neutrality adjustor, and multiplied by an annually determined
conversion factor. Historically, the formula used to calculate the fee schedule
conversion factor resulted, or would have resulted, in significant decreases in
payment levels. However, in every year from 2004 through 2009, the United
States Congress (Congress) has intervened multiple times to freeze or
increase the conversion factor.
On
November 2, 2010, CMS published The Medicare Program Final Rule establishing
a national rate for the MCOT technology (CPT Code 93229). CMS valued the CPT
code at 20.14 relative value units. Using the formula and values currently in
place, the Company estimates the national rate to be approximately $800 per
service, effective January 1, 2011. This is an increase of approximately
6% from the current local carrier rate of $754 per service that was previously
established by Highmark. The values incorporated in the current formula will
expire in December 2010. If Congress does not act before December 31,
2010 to continue the values, then all payments under the physician fee schedule
will be reduced by approximately 25%. If Congress does not take action to
postpone the rate reduction the rate will be approximately $560. If no action
is taken by Congress and the reimbursement rate for the Companys MCOT
technology is reduced to a level lower than anticipated, the rate would have a
negative impact on the Companys results of operations. Future Congressional
action is uncertain and future pricing methodology changes may result in reductions
or increases to the Medicare physician fee schedule.
24
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. Removed and Reserved
Item 5. Other Information
Not
applicable.
25
Table of Contents
Item 6. Exhibits.
EXHIBIT INDEX
Exhibit
Number
|
|
|
|
|
|
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.
|
26
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.
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|
|
|
|
|
|
Date: November 9, 2010
|
By:
|
/s/
Heather C. Getz
|
|
|
Heather
C. Getz, CPA
|
|
|
Chief Financial Officer
|
|
|
(Principal
Financial Officer and authorized officer of the Registrant)
|
27
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