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| BEAT > SEC Filings for BEAT > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
The following discussion and analysis should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2008, and in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements. This discussion contains certain forward-looking statements that involve risks and uncertainties. The Company's 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 Company's 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 individual's health. The Company's 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 Company has been an approved Independent Diagnostic Testing Facility ("IDTF") for Medicare since it received 510(k) clearance for the first and second generation of our core MCOT™ devices in 2002. The Company received FDA 510(k) clearance for the proprietary algorithm included in its third generation product, or C3, in October 2005. Subsequently in November 2006, the Company received FDA 510(k) clearance for its C3 system which it has incorporated as part of its monitoring solution. The Company continues to pursue innovation of new and existing medical solutions through investments in research and development. The CardioNet Monitoring Center commenced operations in Conshohocken, Pennsylvania in 2002, concurrent with its first FDA approval, and all of the Company's MCOT™ arrhythmia monitoring activities are currently conducted at that location.
In March 2007, the Company acquired all of the outstanding capital stock of PDSHeart. The acquisition of PDSHeart provided three additional product lines to compliment MCOT™: event, Holter and Pacer monitoring solutions. In addition, the acquisition supplied the Company with existing sales channels and relationships in geographic areas that were previously had not been penetrated prior to the acquisition. In March 2008, the Company completed an initial public offering of its common stock for proceeds of approximately $46.7 million, net of underwriter commissions and estimated offering expenses.
Qualcomm Supplier Agreement
The Company established a relationship with Qualcomm Inc. ("Qualcomm") in May 2003. Qualcomm is the sole provider of wireless cellular data connectivity solutions and data hosting and queuing services for the Company's monitoring network. The Company has no fixed or minimum financial commitment as it relates to network usage or volume activity. However, if the Company fails to maintain an agreed-upon number of active cardiac monitoring devices on the Qualcomm network or it utilizes the monitoring and communications services of a provider other than Qualcomm, Qualcomm has the right to terminate its relationship with the Company.
Reimbursement
In October 2008, the Centers for Medicare and Medicaid Services ("CMS") established reimbursement rates that cover MCOT™ services. The reimbursement rates are applicable to the Category I CPT codes (93228 and 93229) established by the American Medical Association ("AMA") for MCOT™ and became effective on January 1, 2009. Highmark Medicare Services ("Highmark") is responsible for setting the reimbursement rate on behalf of CMS for code 93229, which is the code for the technical component of our services. The new billing codes allow for automated claims adjudication, substantially simplifying the reimbursement process for physicians and payors compared to the previous process. Reimbursement prior to the use of the new CPT codes was obtained through non-specific billing codes which require various narratives that, in most cases, involve semi-automated or manual processing, as well as additional review by payors.
On July 10, 2009, Highmark announced a reduction in the reimbursement rate for our MCOT™ services to $754 per service, a reduction of approximately 33%. This new rate went into effect on September 1, 2009. We have also experienced a decline in our commercial carrier pricing. The decline in reimbursement rates has had a negative impact on the Company's revenue and operating results, and has presented significant challenges to the viability of the Company's current business model. Several strategic initiatives are currently being implemented, including cost efficiency measures and a continued focus on sales volume growth. The Company intends to continue to work with Highmark and CMS to achieve an appropriate national rate in the future, and will continue to evaluate its strategic options.
We have successfully secured contracts with many national and regional commercial payors. We increased the number of MCOT™ contracts with commercial payors from 194 at September 30, 2008 to 232 at September 30, 2009. We estimate that the number of covered commercial lives increased from 150 million at September 30, 2008 to 158 million at September 30, 2009. The current estimated total of 197 million covered lives for Medicare and commercial lives for which we had reimbursement contracts as of September 30, 2009 represents approximately 76% of the total covered lives in the United States. The MCOT™ contracts also cover event, Holter and Pacer service pricing. In addition, there were approximately 78 contracts with commercial payors that pertained only to event, Holter and Pacer service pricing, and did not cover MCOT™. The majority of the remaining covered lives are insured by a relatively small number of large commercial insurance companies that deemed MCOT™ to be "experimental and investigational" and do not currently reimburse us for services provided to their beneficiaries.
Restructuring Activities
In the third quarter of 2009 the Company initiated restructuring plans that included the closure of the Company's event monitoring facility in Florida and consolidating it with its event monitoring facility in Georgia, the shift of the majority of its manufacturing activities from its San Diego location to Chester, Pennsylvania and a reduction of support costs company-wide. The total cost of the restructuring plan is expected to be approximately $1.5 million, and is expected to be substantially complete by the end of fiscal 2009. The Company expects to realize an annualized cost savings of approximately $8.0 million from the execution of the 2009 restructuring plan.
Results of Operations
Three Months Ended September 30, 2009 and 2008
Revenues. Total revenues for the three months ended September 30, 2009 increased to $33.3 million from $31.2 million for the three months ended September 30, 2008, an increase of $2.1 million, or 6.8%. MCOT™ revenue increased $3.1 million due to an increase in sales volume, partially offset by a decrease in MCOT™ reimbursement rates. The net increase in MCOT™ revenue was offset by a decrease in PDSHeart and other revenue of $1.0 million.
Gross Profit. Gross profit increased to $21.5 million for the three months ended September 30, 2009, or 64.5% of revenues, from $21.2 million for the three months ended September 30, 2008, or 67.9% of revenues. The increase of $0.3 million was due to increased revenue from MCOT™ services. The increase in revenue was offset by an increase in cost of sales related to payroll expense due to higher headcount of $1.1 million, an increase in supplies and other miscellaneous expenses of $0.4 million and increased depreciation expense related to additional devices being in service in the 2009 period compared to the 2008 period of $0.3 million. Gross profit as a percentage of revenue was negatively affected by the decline in reimbursement rates.
General and Administrative Expense. General and administrative expense increased to $15.4 million for the three months ended September 30, 2009 from $10.8 million for the three months ended September 30, 2008. This increase of $4.6 million, or 42.6%, was primarily due to an increase in the provision for bad debt of $1.9 million, increase in stock compensation expense of $0.7 million, increase in payroll costs of $0.7 million, increase in legal fees of $0.6 million and an increase of $0.7 million of miscellaneous expenses. As a percentage of total revenues, general and administrative expense was 46.1% for the three months ended September 30, 2009 compared to 34.5% for the three months ended September 30, 2008.
Sales and Marketing Expense. Sales and marketing expense was $9.6 million for the three months ended September 30, 2009 compared to $5.2 million for the three months ended September 30, 2008. The increase of $4.4 million, or 84.6%, was due to the growth of the sales force and sales operations infrastructure. As a percent of total revenues, sales and marketing expense was 28.7% for the three months ended September 30, 2009 compared to 16.7% for the three months ended September 30, 2008.
Research and Development Expense. Research and development expense was $1.3 million for the three months ended September 30, 2009 compared to $0.9 million for the three months ended September 30, 2008. The increase of $0.4 million, or 44.4%, was due primarily to an increase in payroll costs of $0.3 million and miscellaneous expenses of $0.1 million. As a percent of total revenues, research and development expense increased to 4.0% for the three months ended September 30, 2009 compared to 3.0% for the three months ended September 30, 2008.
Integration, Restructuring and Other Charges. The Company incurred severance costs of $1.0 million and relocation and other exit related costs of $0.1 million for the three months ended September 30, 2009 in connection with the 2009 restructuring plan. The 2009 restructuring plan included the consolidation and closure of the Company's event monitoring facility in Florida with its event monitoring facility in Georgia, the shift of the majority of the Company's manufacturing activities to its Chester, Pennsylvania facility, and an overall reduction of support costs company-wide. Integration, restructuring and other charges were 3.4% of total revenues for the three months ended September 30, 2009.
For the three months ended September 30, 2008, integration, restructuring and other charges relating to the PDSHeart acquisition were $0.2 million, charges relating to the consolidation of the Finance and Human Resources functions in Pennsylvania were $0.7 million, secondary offering costs were $0.9 million and other nonrecurring charges were $1.1 million.
Other Income. There was no interest income for the three months ended September 30, 2009, down from $0.3 million for the three months ended September 30, 2008. The decline was due primarily to lower short term interest rates and a lower average cash balance in the three months ended September 30, 2009 compared to the three months ended September 30, 2008.
Income Taxes. The Company received a tax benefit of $0.5 million for the three months ended September 30, 2009, compared to a provision of $0.8 for the three months ended September 30, 2008. The effective tax rate for the three months ended September 30, 2009 was 8.0%, compared to 43.8% for the three months ended September 30, 2008.
Net Income. The Company incurred a net loss of $5.4 million for the three months ended September 30, 2009 compared to net income in the three months ended September 30, 2008 of $1.0 million.
Nine Months Ended September 30, 2009 and 2008
Revenues. Total revenues for the nine months ended September 30, 2009 increased to $107.3 million from $86.0 million for the nine months ended September 30, 2008, an increase of $21.3 million, or 24.8%. MCOT™ revenue increased $24.0 million due to an increase in sales volume, partially offset by a decrease in MCOT™ reimbursement rates. The net increase in MCOT™ revenue was offset by a decrease in PDSHeart and other revenue of $2.7 million.
Gross Profit. Gross profit increased to $71.7 million for the nine months ended September 30, 2009, or 66.8% of revenues, from $56.7 million for the nine months ended September 30, 2008, or 65.9% of revenues. The increase of $15.0 million, or 26.5%, was due to increased revenue from MCOT™ services, offset by an increase in cost of sales related to payroll expense due to higher headcount of $4.4 million, increased depreciation expense related to additional devices being in service in the 2009 period compared to the 2008 period of $1.3 million and an increase in miscellaneous costs of $0.6 million.
General and Administrative Expense. General and administrative expense increased to $43.8 million for the nine months ended September 30, 2009 from $29.8 million for the nine months ended September 30, 2008. This increase of $14.0 million, or 47.0%, was primarily due to an increase in the provision for bad debt of $5.2 million, increase in stock compensation expense of $3.7 million, increase in payroll expense of $1.5 million, increase in rent expense of $0.5 million, increase in depreciation and amortization of $0.5 million, increase in legal fees of $0.4 million, increased professional fees of $0.4 million and $2.3 million of miscellaneous expenses. As a percentage of total revenues, general and administrative expense was 40.8% for the nine months ended September 30, 2009 compared to 34.7% for the nine months ended September 30, 2008.
Sales and Marketing Expense. Sales and marketing expense was $25.5 million for the nine months ended September 30, 2009 compared to $15.7 million for the nine months ended September 30, 2008. The increase of $9.8 million, or 62.4%, was due to the growth of the sales force and sales operations infrastructure. As a percent of total revenues, sales and marketing expense was 23.8% for the nine months ended September 30, 2009 compared to 18.3% for the nine months ended September 30, 2008.
Research and Development Expense. Research and development expense was $4.3 million for the nine months ended September 30, 2009 compared to $3.0 million for the nine months ended September 30, 2008. The increase of $1.3 million, or 43.3%, was due primarily to an increase in payroll expense of $0.7 million, increase in consulting fees of $0.3 million and miscellaneous expenses of $0.3 million. As a percent of total revenues, research and development expense increased to 4.0% for the nine months ended September 30, 2009 from 3.5% for the nine months ended September 30, 2008.
Integration, Restructuring and Other Charges. Integration, restructuring and other charges were $3.1 million, or 2.9% of revenues, for the nine months ended September 30, 2009, comprised primarily of severance expenses related to the departure of certain executives in the first quarter of 2009 and the 2009 restructuring plan activities that were initiated in the third quarter of 2009. The 2009 restructuring plan included the consolidation and closure of the Company's event monitoring facility in Florida with its event monitoring facility in Georgia, the shift of the majority of the Company's manufacturing activities to its Chester, Pennsylvania facility, and an overall reduction of support costs companywide.
For the nine months ended September 30, 2008, integration, restructuring and other charges were $4.8 million. Integration charges relating to the PDSHeart acquisition were $0.8 million for the nine months ended September 30, 2008, and restructuring charges relating to consolidating our Finance and Human Resources functions in Pennsylvania were $1.0 million. Secondary offering costs were $0.9 million, costs related to the resolution of intellectual property litigation were $1.0 million and other nonrecurring charges related to the departure of certain directors were $1.1 million for the nine months ended September 30, 2008.
Other Income. Net interest income was $0.2 million for the nine months ended September 30, 2009, a decrease of $0.5 million, or 71.4% from $0.7 million for the nine months ended September 30, 2008. The decrease was primarily due to lower short term interest rates and a lower average cash balance in the first nine months of 2009 compared to the first nine months of 2008.
Income Taxes. The Company's effective tax rate was 7.9% for the nine months ended September 30, 2009, compared to an effective tax rate of 42.9% for the nine months ended September 30, 2008.
Net Income. The Company incurred a net loss of $4.6 million for the nine months ended September 30, 2009, a decline from a net loss of $0.3 million for the nine months ended September 30, 2008.
Liquidity and Capital Resources
As of September 30, 2009, our principal source of liquidity was cash and cash equivalents totaling $42.9 million and net accounts receivable of $50.6 million. The Company has incurred net losses from inception through March 31, 2008. Prior to March 2008 the Company obtained funding through various debt sources. In March 2008, all material portions of interest-bearing debt were retired in conjunction with the Company's initial public offering (IPO). Proceeds from the IPO were $46.7 million, net of underwriting commissions and offering expenses. From March 2008 through June 30, 2009 the Company generated sufficient cash to fund its business through continuing operations. The Company incurred a net loss of $4.6 million for the nine months ended September 30, 2009.
For the nine months ended September 30, 2009, cash flow from operations decreased to a cash outflow of $1.8 million, compared to a cash inflow of $4.3 million for the nine months ended September 30, 2008. The decrease was due primarily to an increase in accounts receivable that resulted from higher sales of MCOT™ services, as well as an extended receivable turnover rate for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. The increase in accounts receivable was offset by an increase in accounts payable, higher depreciation related to growth in operations, increased provision for doubtful accounts related to aging receivables, and increased stock-based compensation related to the adoption of the director compensation plan, as well as the hiring of several senior level employees that received stock-based compensation awards upon employment commencement.
The Company used net cash in investing activities of $16.5 million for the nine months ended September 30, 2009, compared to $11.9 million in the nine months ended September 30, 2008, an increase of $4.6 million. The increase was primarily due to investment in medical devices related to increased patient volume for the nine months ended September 30, 2009.
The Company generated net cash from financing activities of $3.0 million in the nine months ended September 30, 2009, compared to $45.7 million in the nine months ended September 30, 2008, a decrease of $42.7 million. The decrease was primarily due to the Company receiving proceeds from its initial public offering in the first quarter of 2008.
We believe that our existing cash and cash equivalent balances and revenues from our operations will be sufficient to meet our anticipated cash requirements for the foreseeable future.
Our future funding requirements will depend on many factors, including:
† the reimbursement rates associated with our products and services;
† our ability to secure contracts with additional commercial payors providing for the reimbursement of our services;
† our ability to liquidate our receivables;
† the costs associated with developing, manufacturing and building our inventory of our future monitoring solutions;
† the costs of hiring additional personnel and investing in infrastructure to support future growth;
† actions taken by the FDA and other regulatory authorities affecting the MCOT™ and competitive products;
† the emergence of competing technologies and products and other adverse market developments;
† the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights or defending against claims of infringement by others;
† the costs related to business combinations; and
† the costs of investing in additional lines of business outside of arrhythmia monitoring solutions.
If we determine that we need to raise additional capital, such capital may not be available on reasonable terms, or at all. If we raise additional funds by issuing equity securities our existing stockholders' ownership will be diluted. If we raise additional funds by incurring additional debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.
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