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BEAT > SEC Filings for BEAT > Form 10-Q on 30-Apr-2013All Recent SEC Filings

Show all filings for CARDIONET, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CARDIONET, INC.


30-Apr-2013

Quarterly Report


Item 2. Management's 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, 2012, 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, Inc. (the "Company," "CardioNet," "we" or "us"), a Delaware corporation, provides cardiac monitoring services, cardiac monitoring device manufacturing, and centralized cardiac core laboratory services. Since the Company became focused on cardiac monitoring in 1999, the Company has developed a proprietary integrated patient management platform that incorporates a wireless data transmission network, Food and Drug Administration ("FDA") cleared algorithms and medical devices, and 24-hour digital monitoring service centers.

The Company operates under three segments: patient services, product and research services. The patient services segment is focused on the diagnosis and monitoring of cardiac arrhythmias, or heart rhythm disorders. We provide cardiologists and electrophysiologists who prefer to use a single source of arrhythmia monitoring services with a full spectrum of solutions, ranging from our differentiated MCOT™ services to event and Holter monitoring.

The product segment focuses on the manufacturing, engineering and development of noninvasive cardiac monitors for leading healthcare companies worldwide. The Company has been able to build successful OEM relationships by providing technology, reliability, quality products and engineering services. The Company offers contract engineering and manufacturing services, developing and producing devices to the specific requirements set by customers.

The research services segment is engaged in central core laboratory services that provide cardiac monitoring, scientific consulting and data management services for drug and medical treatment trials. The centralized services include electrocardiography (ECG), Holter monitoring, ambulatory blood pressure monitoring (ABPM), echocardiography (ECHO), multigated acquisition scan (MUGA), protocol development, expert reporting and statistical analysis. The Company's research services encompass a full range of services from project coordination, setup and management, to equipment rental and data transfer, processing, and analysis, to 24/7 customer support and site training. The Company's data management systems enable complete customization for sponsors' preferred data specifications and the Company's web service, CardioPortal™, provides real time access to rich data from any web browser, without client-side plug-ins.

In August 2012, the Company completed the acquisition of Cardiocore Lab, Inc. ("Cardiocore"). Cardiocore is a central core laboratory that provides cardiac monitoring services for drug and medical treatment trials. Cardiocore's primary customers are pharmaceutical companies and contract research organizations. The acquisition gives the Company access to industry expertise, an established operating structure and a substantial footprint in the core lab industry. Financial information related to Cardiocore is included in the Company's research services reporting segment.

Revenue Recognition

Patient Services Segment

Patient services revenue includes revenue from MCOT™, event, Holter and pacemaker monitoring services. The Company receives a significant portion of its revenue from third party commercial insurance organizations and governmental entities. It also receives reimbursement directly from patients through co-pay and self-pay arrangements. Billings for services reimbursed by contract third party payors, including Medicare, are recorded as revenue net of contractual allowances. Adjustments to the estimated receipts, based on final settlement with third party payors, are recorded upon settlement. If the Company does not have sufficient historical information regarding collectability from a given payor to support revenue recognition at the time of service, revenue is recognized when cash is received. Unearned amounts are appropriately deferred until service is performed. For the three months ended March 31, 2013 and 2012, revenue from Medicare as a percentage of the Company's total revenue was 34.3% and 35.7%, respectively.

Product Segment

Product revenue includes revenue from product sales and repairs. The Company's product revenue is recognized at the time of sale.


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Research Services Segment

Research services revenue includes revenue for research and core laboratory services. The Company's research services revenue is provided on a fee for services basis, and is recognized as the related services are performed. We also provide consulting services on a time and materials basis and recognize revenue as we perform the services. Our site support revenue, consisting of equipment rentals and sales along with related supplies and logistics management, are recognized at the time of sale or over the rental period. Under a typical contract, customers pay us a portion of our fee for these services upon contract execution as an upfront deposit, some of which is typically nonrefundable upon contract termination. Unearned revenues are deferred, and then recognized as the services are performed.

For arrangements with multiple deliverables, the revenue is allocated to each element (both delivered and undelivered items) based on their relative selling prices or management's best estimate of their selling prices, when vendor-specific or third-party evidence is unavailable.

We record reimbursements received for out-of-pocket expenses incurred, including freight, as revenue in the accompanying consolidated statements of operations. Revenue generally is recognized net of any taxes collected from customers and subsequently remitted to government authorities.

Patient Services Reimbursement

The Company is dependent on reimbursement for its patient services by government and commercial insurance payors. Medicare reimbursement rates for the Company's event, Holter and pacemaker monitoring services have been established nationally by the Centers for Medicare and Medicaid Services ("CMS") for many years, and fluctuate periodically based on the annually published CMS rate table.

The American Medical Association ("AMA") established CPT codes covering MCOT™ services that became effective on January 1, 2009. On January 1, 2011, CMS established a national reimbursement rate that is subject to geographical adjustment. Effective January 1, 2012, the national reimbursement rate for the Company's MCOT™ services was $734 per service for patients monitored in Conshohocken, PA. Beginning in February 2012, the Company moved its monitoring for Medicare patients to San Francisco, CA. The reimbursement rate for Medicare patients serviced in the San Francisco, CA facility, adjusted for local geographic pricing, was $943 per service in 2012 and is $1,000 in 2013. Due to the impending federal budgetary cuts related to sequestration that takes effect April 1, 2013, we expect that our Medicare reimbursement rate for services provided after the effective date will be reduced by 2%.

Commercial reimbursement pricing for our services has declined over the past three years. Commercial pricing is affected by numerous factors, including the current Medicare reimbursement rates, competitive pressures, our ability to successfully negotiate favorable terms in our agreements and the perceived value and effectiveness of our services.

We have successfully secured contracts with most national and regional commercial payors for our cardiac monitoring services. We estimate that over 215 million covered lives are represented through our commercial contracts and Medicare, which is approximately 70% of the total covered lives in the United States. The majority of the remaining lives that are not covered by our commercial contracts and Medicare are insured by a small number of large commercial insurance companies that deem MCOT to be experimental in nature and do not currently reimburse us for services provided to their beneficiaries.

Accounts Receivable

Accounts receivable related to the patient services segment 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 ultimate collection of accounts receivable may not be known for several months after services have been provided and billed. The Company records allowance for doubtful accounts based on the aging of the receivable using historical customer-specific data as well as current and historical cash collections. 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

Accounts receivable related to the product and research services segments are recorded at the time revenue is recognized. The Company estimates allowance for doubtful accounts on a specific account basis, and considers several factors in its analysis including customer specific information and aging of the account.


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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. The Company performs write-offs on a quarterly basis. The Company wrote off $2.2 million of receivables for the three months ended March 31, 2013 and 2012. The impact was reduction of gross receivables and a reduction in the allowance for doubtful accounts. The Company recorded bad debt expense of $2.5 million and $2.9 million for the three months ended March 31, 2013 and 2012, respectively.

Integration, Restructuring and Other Charges

During the three months ended March 31, 2013, the Company incurred $0.5 million in legal costs associated with ongoing legal matters, $0.1 million of professional fees related to corporate restructuring activities and $0.6 million of severance and employee relates costs related to restructuring and integration related actives.

Verizon Supplier Agreement

The Company established a relationship with Verizon, formerly nPhase, in May 2003. Verizon is the sole provider of wireless cellular data connectivity solutions, 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 Verizon network or it utilizes the monitoring and communications services of a provider other than Verizon, the Company may be subject to penalties and Verizon has the right to terminate its relationship with the Company. To date, no penalties have been incurred related to this agreement. The current agreement terminates in 2014.

Results of Operations

Three Months Ended March 31, 2013 and 2012

Revenues. Total revenues for the three months ended March 31, 2013 were $32.4 million compared to $27.0 million for the three months ended March 31, 2012, an increase of $5.4 million, or 19.9%. This increase is primarily attributable to higher research services revenue of $4.5 million related to the acquisition of Cardiocore. In addition, patient services revenue increased by $0.9 million primarily due to a higher volume and average reimbursement rate.

Gross Profit. Gross profit increased to $19.5 million for the three months ended March 31, 2013 from $15.6 million for the three months ended March 31, 2012. The increase of $3.9 million, or 25.2%, is primarily related to gross profit of $1.9 million related to the research services segment related to the acquisition of Cardiocore, higher patient services revenue and a decrease in patient services cost of sales resulting from cost reduction initiatives. Gross profit as a percentage of revenue increased to 60.3% for the three months ended March 31, 2013 compared to 57.7% for the three months ended March 31, 2012.

General and Administrative Expense. General and administrative expense was $9.5 million for the three months ended March 31, 2013 compared to $8.7 million for the three months ended March 31, 2012. The increase of $0.8 million, or 9.9%, was due primarily to the inclusion of $1.3 million of expenses related to the Cardiocore acquisition. This increase was partially offset by $0.5 million of lower employee related costs in the patient services segment associated with cost reduction activities. As a percent of total revenue, general and administrative expense was 29.4% for the three months ended March 31, 2013 compared to 32.1% for the three months ended March 31, 2012.

Sales and Marketing Expense. Sales and marketing expense was $6.8 million for the three months ended March 31, 2013 compared to $6.2 million for the three months ended March 31, 2012. The increase of $0.6 million, or 9.9%, primarily related to the inclusion of expenses related to the Cardiocore acquisition. As a percent of total revenue, sales and marketing expense was 20.9% for the three months ended March 31, 2013 compared to 22.7% for the three months ended March 31, 2012.

Bad Debt Expense. Bad debt expense was $2.5 million for the three months ended March 31, 2013 compared to $2.9 million for the three months ended March 31, 2012. The decline in bad debt expense was primarily related to higher collections in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. As a percentage of total revenue, bad debt expense was 7.6% for the three months ended March 31, 2013 compared to 10.8% for the three months ended March 31, 2012.

Research and Development Expense. Research and development expense was $1.6 million for the three months ended March 31, 2013 compared to $1.2 million for the three months ended March 31, 2012. The increase of $0.4 million, or 36.7%, was due primarily to the inclusion of expenses related to the Cardiocore acquisition. As a percent of total revenue, research and development expense was 5.0% for the three months ended March 31, 2013 compared to 4.4% for the three months ended March 31, 2012.


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Integration, Restructuring and Other Charges. The Company incurred other charges of $1.2 million relating to legal fees associated patent litigation and the civil investigative demand, severance and employee related costs for restructuring, and integration related activities. For the three months ended March 31, 2013, integration, restructuring and other charges were 3.7% of total revenues for the three months ended March 31, 2013.

Net Loss. The Company incurred a net loss of $2.1 million for the three months ended March 31, 2013 compared to a net loss of $3.5 million for the three months ended March 31, 2012.

Liquidity and Capital Resources

The Company's Annual Report on Form 10-K for the year ended December 31, 2012 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 March 31, 2013, our principal source of liquidity was cash and cash equivalents of $18.3 million and net accounts receivable of $20.2 million. In addition, the Company entered into a credit agreement in August 2012 providing the Company with access to borrowings of up to $15.0 million. As of March 31, 2013, the Company did not have any outstanding balance on the credit agreement.

The Company generated $1.7 million of cash from operations for the three months ended March 31, 2013. The Company's ongoing operations during the three month period resulted in a loss of $2.1 million, which included $3.7 million of non-cash items related to depreciation, amortization and stock compensation expense.

The Company used $1.8 million for capital purchases, primarily related to the investment in medical devices in the patient and research services segments for use in its ongoing operations for the three months ended March 31, 2013.

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.

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