Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 
| **x** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

** **

**for thequarterly period ended June 30, 2010**

** **

**OR**

** **
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

** **

**For thetransition 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**

(Registrant’s Telephone Number, including Area Code)

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post suchfiles).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting 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) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o  No x

 

Asof July 30, 2010, 24,128,606 shares of the registrant’s common stock,$0.001 par value per share, were outstanding.

 

 

 

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**CARDIONET, INC.**

**QUARTERLY REPORT ON FORM 10-Q FOR THE PERIODENDED JUNE 30, 2010**

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                  | **Page  No.** |
|-------------------|---------------------------------------------------------------------------------------------|---------------|
| **PART I.**  | **FINANCIAL INFORMATION**                                                                   | ** **    |
| Item 1.           | Financial Statements                                                                        | 4             |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 14            |
| Item 3.           | Quantitative  and Qualitative Disclosures about Market Risk                                 | 18            |
| Item 4.           | Controls and  Procedures                                                                    | 18            |
|              |                                                                                        |          |
| **PART II.** | **OTHER INFORMATION**                                                                       | ** **    |
| Item 1.           | Legal Proceedings                                                                           | 19            |
| Item 1A.          | Risk Factors                                                                                | 20            |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 20            |
| Item 3.           | Defaults Upon  Senior Securities                                                            | 20            |
| Item 4.           | Removed and Reserved                                                                        | 20            |
| Item 5.           | Other Information                                                                           | 20            |
| Item 6.           | Exhibits                                                                                    | 21            |
|              |                                                                                        |          |
| SIGNATURES        | 22                                                                                          |

 

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**FORWARD-LOOKING STATEMENTS**

 

This document includes certain forward-lookingstatements within the meaning of the “Safe Harbor” provisions of the PrivateSecurities Litigation Reform Act of 1995 regarding, among other things, ourgrowth prospects, the prospects for our products and our confidence in theCompany’s future. These statements may be identified by words such as “expect,”“anticipate,” “estimate,” “intend,” “plan,” “believe,” “promises” and otherwords and terms of similar meaning. Such forward-looking statements are basedon current expectations and involve inherent risks and uncertainties, includingimportant factors that could delay, divert, or change any of them, and couldcause actual outcomes and results to differ materially from currentexpectations. These factors include, among other things, the potential for theCenters for Medicare and Medicaid Services’ (CMS) re-evaluation of its proposalfor carrier pricing of mobile cardiovascular telemetry during the public commentsperiod prior to CMS’ final ruling, the success of our efforts to address theoperational issues and strategic options, effectiveness of our cost savingsinitiatives, changes to insurance coverage and reimbursement levels for ourproducts, the success of our attempts to work with CMS to achieve a nationalrate for mobile cardiovascular telemetry, the success of our sales andmarketing initiatives, our ability to attract and retain talented executivemanagement and sales personnel, our ability to identify acquisition candidates,acquire them on attractive terms and integrate their operations into ourbusiness, the commercialization of new products, market factors, internalresearch and development initiatives, partnered research and developmentinitiatives, competitive product development, changes in governmentalregulations and legislation, the continued consolidation of payors, acceptanceof our new products and services and patent protection and litigation. Forfurther 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 undertakeno obligation to publicly update any forward-looking statement, whether as aresult of new information, future events, or otherwise.

 

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**PART I — FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

 

**CARDIONET, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

**(*In thousands, except share and pershare amounts*)**

 
| ** **                                                                                                                                                                                       | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                       | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
| ** **                                                                                                                                                                                       | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| **Assets**                                                                                                                                                                                       |       |                        |       |                            |       |
| Current assets:                                                                                                                                                                                  |       |                        |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                        |       | $                           | 23,950     |                            | $          | 49,152 |   |
| Short-term available-for-sale-investments                                                                                                                                                        |       | 26,232                      |       | —                          |       |
| Accounts receivable, net of allowance for doubtful  accounts of $30,944 and $22,396, at June 30, 2010 and December 31, 2009,  respectively                                                  |       | 34,214                      |       | 40,885                          |       |
| Prepaid expenses and other current assets                                                                                                                                                        |       | 4,178                       |       | 2,818                           |       |
|                                                                                                                                                                                             |       |                        |       |                            |       |
| Total current assets                                                                                                                                                                             |       | 88,574                      |       | 92,855                          |       |
|                                                                                                                                                                                             |       |                        |       |                            |       |
| Property and equipment, net                                                                                                                                                                      |       | 24,833                      |       | 28,243                          |       |
| Intangible assets, net                                                                                                                                                                           |       | 693                         |       | 939                             |       |
| Goodwill                                                                                                                                                                                         |       | 45,999                      |       | 45,999                          |       |
| Other assets                                                                                                                                                                                     |       | 480                         |       | 286                             |       |
|                                                                                                                                                                                             |       |                        |       |                            |       |
| Total assets                                                                                                                                                                                     |       | $                           | 160,579    |                            | $          | 168,322 |   |
|                                                                                                                                                                                             |       |                        |       |                            |       |
| **Liabilities and stockholders’  equity**                                                                                                                                                   |       |                        |       |                            |       |
| Current liabilities:                                                                                                                                                                             |       |                        |       |                            |       |
| Accounts payable                                                                                                                                                                                 |       | $                           | 4,563      |                            | $          | 7,160 |   |
| Accrued liabilities                                                                                                                                                                              |       | 9,455                       |       | 9,919                           |       |
| Deferred revenue                                                                                                                                                                                 |       | 398                         |       | 393                             |       |
|                                                                                                                                                                                             |       |                        |       |                            |       |
| Total current liabilities                                                                                                                                                                        |       | 14,416                      |       | 17,472                          |       |
|                                                                                                                                                                                             |       |                        |       |                            |       |
| Deferred rent                                                                                                                                                                                    |       | 1,354                       |       | 1,497                           |       |
|                                                                                                                                                                                             |       |                        |       |                            |       |
| Total liabilities                                                                                                                                                                                |       | 15,770                      |       | 18,969                          |       |
|                                                                                                                                                                                             |       |                        |       |                            |       |
| Stockholders’ equity:                                                                                                                                                                       |       |                        |       |                            |       |
| Common stock, $.001 par value; 200,000,000 shares  authorized; 24,161,517 and 23,965,405 shares issued and outstanding at  June 30, 2010 and December 31, 2009, respectively |       | 24                          |       | 24                              |       |
| Paid-in capital                                                                                                                                                                                  |       | 245,368                     |       | 242,320                         |       |
| Accumulated other comprehensive loss                                                                                                                                                             |       | (19                         | )          | —                          |       |
| Accumulated deficit                                                                                                                                                                              |       | (100,564                    | )          | (92,991                         | )          |
|                                                                                                                                                                                             |       |                        |       |                            |       |
| Total stockholders’ equity                                                                                                                                                                  |       | 144,809                     |       | 149,353                         |       |
|                                                                                                                                                                                             |       |                        |       |                            |       |
| Total liabilities and stockholders’ equity                                                                                                                                                  |       | $                           | 160,579    |                            | $          | 168,322 |   |

 

See accompanying notes.

 

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**CARDIONET, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

**(*In thousands, except share andper share amounts*)**

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues:                                              |       |                             |       |                           |       |   |   |   |   |
| Net patient service revenues                           |       | $                                | 31,939     |                           | $          | 38,096 |   | $ | 63,755 |   | $ | 73,655 |   |
| Other revenues                                         |       | —                           |       | 168                            |       | — |   | 330 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Total revenues                                         |       | 31,939                           |       | 38,264                         |       | 63,755 |   | 73,985 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Cost of revenues                                       |       | 11,835                           |       | 11,993                         |       | 23,584 |   | 23,831 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Gross profit                                           |       | 20,104                           |       | 26,271                         |       | 40,171 |   | 50,154 |   |
| Operating expenses:                                    |       |                             |       |                           |       |   |   |   |   |
| General and administrative                             |       | 8,548                            |       | 9,507                          |       | 18,225 |   | 20,016 |   |
| Sales and marketing                                    |       | 6,876                            |       | 8,440                          |       | 14,873 |   | 15,987 |   |
| Bad debt expense                                       |       | 4,484                            |       | 4,627                          |       | 9,124 |   | 8,444 |   |
| Research and development                               |       | 1,230                            |       | 1,768                          |       | 2,473 |   | 2,984 |   |
| Integration, restructuring and other charges           |       | 1,128                            |       | (180                           | )          | 3,073 |   | 1,959 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Total expenses                                         |       | 22,266                           |       | 24,162                         |       | 47,768 |   | 49,390 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| (Loss) income from operations                          |       | (2,162                           | )          | 2,109                          |       | (7,597 | ) | 764 |   |
| Other income, net                                      |       | 20                               |       | 40                             |       | 24 |   | 158 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| (Loss) income before income taxes                      |       | (2,142                           | )          | 2,149                          |       | (7,573 | ) | 922 |   |
| Income tax expense                                     |       | —                           |       | (584                           | )          | — |   | (79 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net (loss) income                                      |       | (2,142                           | )          | 1,565                          |       | (7,573 | ) | 843 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net (loss) income per common share:                    |       |                             |       |                           |       |   |   |   |   |
| Basic                                                  |       | $                                | (0.09      | )                              | $          | 0.07 |   | $ | (0.32 | ) | $ | 0.04 |   |
| Diluted                                                |       | $                                | (0.09      | )                              | $          | 0.07 |   | $ | (0.32 | ) | $ | 0.04 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Weighted average number of common shares  outstanding: |       |                             |       |                           |       |   |   |   |   |
| Basic                                                  |       | 24,083,080                       |       | 23,791,989                     |       | 24,010,839 |   | 23,695,985 |   |
| Diluted                                                |       | 24,083,080                       |       | 23,794,731                     |       | 24,010,839 |   | 23,826,831 |   |

 

See accompanying notes.

 

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**CARDIONET, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(*In thousands*)**

 
| ** **                                                                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| **Operating activities**                                                                             |       |                                          |       |   |   |
| Net (loss) income                                                                                    |       | $                                             | (7,573     | ) | $ | 843 |   |
| Adjustments to reconcile net (loss) income to net  cash used in operating activities:                |       |                                          |       |   |   |
| Depreciation                                                                                         |       | 5,830                                         |       | 4,866 |   |
| Amortization of intangibles                                                                          |       | 246                                           |       | 453 |   |
| Amortization of investment premium                                                                   |       | 98                                            |       | — |   |
| Loss on disposal of property and equipment                                                           |       | 306                                           |       | 94 |   |
| Other non-cash adjustments                                                                           |       | (19                                           | )          | — |   |
| (Decrease) increase in deferred rent                                                                 |       | (143                                          | )          | 681 |   |
| Provision for doubtful accounts                                                                      |       | 9,124                                         |       | 8,444 |   |
| Stock-based compensation                                                                             |       | 1,866                                         |       | 3,790 |   |
| Changes in operating assets and liabilities:                                                         |       |                                          |       |   |   |
| Accounts receivable                                                                                  |       | (2,453                                        | )          | (21,943 | ) |
| Prepaid expenses and other current assets                                                            |       | (1,360                                        | )          | 31 |   |
| Other assets                                                                                         |       | (194                                          | )          | 181 |   |
| Accounts payable                                                                                     |       | (2,597                                        | )          | 2,675 |   |
| Accrued and other liabilities                                                                        |       | (459                                          | )          | (4,805 | ) |
|                                                                                                 |       |                                          |       |   |   |
| Net cash provided by (used in) operating  activities                                                 |       | 2,672                                         |       | (4,690 | ) |
|                                                                                                 |       |                                          |       |   |   |
| **Investing activities**                                                                             |       |                                          |       |   |   |
| Purchases of property and equipment                                                                  |       | (2,726                                        | )          | (11,419 | ) |
| Purchases of short-term available-for-sale  investments                                              |       | (26,330                                       | )          | — |   |
|                                                                                                 |       |                                          |       |   |   |
| Net cash used in investing activities                                                                |       | (29,056                                       | )          | (11,419 | ) |
|                                                                                                 |       |                                          |       |   |   |
| **Financing activities**                                                                             |       |                                          |       |   |   |
| Proceeds from the exercise of employee stock  options and employee stock purchase plan contributions |       | 1,182                                         |       | 2,551 |   |
| Repayment of debt                                                                                    |       | —                                        |       | (47 | ) |
|                                                                                                 |       |                                          |       |   |   |
| Net cash provided by financing activities                                                            |       | 1,182                                         |       | 2,504 |   |
|                                                                                                 |       |                                          |       |   |   |
| Net decrease in cash and cash equivalents                                                            |       | (25,202                                       | )          | (13,605 | ) |
| Cash and cash equivalents — beginning of period                                                 |       | 49,152                                        |       | 58,171 |   |
|                                                                                                 |       |                                          |       |   |   |
| Cash and cash equivalents — end of period                                                       |       | $                                             | 23,950     |   | $ | 44,566 |   |
|                                                                                                 |       |                                          |       |   |   |
| **Supplemental disclosure of cash  flow information**                                                |       |                                          |       |   |   |
| Cash paid for interest                                                                               |       | $                                             | 2          |   | $ | 8 |   |
| Cash paid for taxes                                                                                  |       | $                                             | 522        |   | $ | 6,619 |   |

 

See accompanying notes.

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(*In thousands, except share and pershare amounts*)**

 

**1.     Summary ofSignificant Accounting Policies**

 

**Unaudited Interim Financial Data**

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with U.S. generally accepted accounting principles for interimfinancial information and the requirements of Form 10-Q andArticle 10 of Regulation S-X. Accordingly, these consolidated financialstatements do not include all of the information and footnotes necessary for acomplete presentation of financial position, results of operations and cashflows.  In the opinion of management,these consolidated financial statements reflect all adjustments which are ofnormal recurring nature and necessary for a fair presentation of CardioNet, Inc.’s(the “Company” or “CardioNet”) financial position as of June 30, 2010 andDecember 31, 2009, the results of operations for the three and six monthsended June 30, 2010 and 2009, and cash flows for the six months ended June30, 2010 and 2009.  The financial dataand other information disclosed in these notes to the financial statements relatedto the three and six months ended are unaudited. The results for the three andsix months ended June 30, 2010 are not necessarily indicative of theresults to be expected for any future period.

 

**Net (Loss) Income**

 

TheCompany computes net (loss) income per share in accordance with FinancialAccounting Standards Board (FASB) Accounting Standards Codification (ASC) 260, *Earnings Per Share*.  The following summarizes the potentialoutstanding common stock of the Company at June 30, 2010 and 2009:

 
| ** **                                                           | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Common stock options and restricted stock units  outstanding         |       | 2,121,437               |       | 2,018,552               |       |
| Common stock options and restricted stock units  available for grant |       | 1,675,171               |       | 754,352                 |       |
| Common stock held by certain employees and  unvested                 |       | 2,396                   |       | 18,540                  |       |
| Common stock                                                         |       | 24,161,517              |       | 23,782,010              |       |
|                                                                 |       |                    |       |                    |       |
| Total                                                                |       | 27,960,521              |       | 26,573,454              |       |

 

Basicnet (loss) income per share is computed by dividing net (loss) income by theweighted average number of common shares outstanding during the period. Dilutednet (loss) income per share is computed by giving effect to all potentialdilutive common shares, including stock options, warrants and convertiblepreferred stock, as applicable.

 

The following table presents the calculation of basic and diluted net(loss) income per share:

 
| ** **                                                                          | ** ** | **Three Months Ended********June 30,**   | ** ** | **Six Months Ended********June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                          | ** ** | **2010**                                      | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                          | ** ** | **(in  thousands, except per share amounts)** | ** ** |
| *Numerator:*                                                                        |       |                                          |       |                                      |       |   |   |   |   |
| Net (loss) income applicable to common  stockholders                                |       | $                                             | (2,142     | )                                         | $          | 1,565 |   | $ | (7,573 | ) | $ | 843 |   |
| *Denominator:*                                                                      |       |                                          |       |                                      |       |   |   |   |   |
| Weighted average common shares outstanding—basic                               |       | 24,083,080                                    |       | 23,791,989                                |       | 24,010,839 |   | 23,695,985 |   |
| Dilutive effect of the Company’s employee  compensation plans                  |       | —                                        |       | 2,742                                     |       | — |   | 130,846 |   |
| Weighted average shares used in computing diluted  net (loss) income per share |       | 24,083,080                                    |       | 23,794,731                                |       | 24,010,839 |   | 23,826,831 |   |
| Basic net (loss) income per share                                                   |       | $                                             | (0.09      | )                                         | $          | 0.07 |   | $ | (0.32 | ) | $ | 0.04 |   |
| Diluted net (loss) income per share                                                 |       | $                                             | (0.09      | )                                         | $          | 0.07 |   | $ | (0.32 | ) | $ | 0.04 |   |

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(*In thousands, except share and pershare amounts*)**

 

Ifthe outstanding vested options or restricted stock units were exercised orconverted into common stock, the result would be anti-dilutive for the threeand six months ended June 30, 2010 and dilutive for the three and sixmonths ended June 30, 2009. Accordingly, basic and diluted net (loss)income attributable to common stockholders per share are identical for thethree and six months ended June 30, 2010 and are presented in theconsolidated statements of operations.

 

**Comprehensive(Loss) Income**

 

Comprehensive (loss) income consists of net (loss) income and allchanges in stockholders’ equity from non-stockholder sources. The followingsummarizes the components of the Company’s comprehensive (loss) income:

 
| ** **                           | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                 |       |                                        |       |                                      |       |   |   |   |   |
| Net (loss) income                    |       | $                                           | (2,142     | )                                         | $          | 1,565 |   | $ | (7,573 | ) | $ | 843 |   |
| Other comprehensive (loss) income:   |       |                                        |       |                                      |       |   |   |   |   |
| Unrealized (loss) gain on securities |       | (19                                         | )          | —                                    |       | (19 | ) | — |   |
| Total comprehensive (loss) income    |       | (2,161                                      | )          | 1,565                                     |       | (7,592 | ) | 843 |   |
|                                      |            |                                             |            |                                           |            |  |  |  |  |  |  |  |  |

 

**Cash and Cash Equivalents**

 

Cash and cashequivalents are held in U.S. financial institutions or in custodial accountswith U.S. financial institutions. Cash equivalents are defined as all liquidinvestments and money market funds with maturity from date of purchase of 90days or less that are readily convertible into cash and have insignificantinterest rate risk.

 

**Available-for-Sale Investments**

 

All marketablesecurities are classified as available-for-sale. Available-for-sale securitiesare carried at fair value, based on quoted market prices and observable inputs,with unrealized gains and losses, reported as a separate component ofstockholders’ equity. We classify securities as current or non-current assetson the consolidated balance sheet based on maturity dates. The amortized costof debt securities is adjusted for amortization of premiums and accretions ofdiscounts to maturity. Amortization of debt premiums and accretion of debtdiscounts are recorded in other income and expense. Realized gains and losses,and declines in value, that are considered to be other-than-temporary, arerecorded in other income and expense. The cost of securities sold is based onspecific identification.

 

**Goodwill**

 

TheCompany considers its business to be one reporting unit for the purpose ofperforming its goodwill impairment analysis. Goodwill is reviewed forimpairment annually, or when events arise that could indicate that animpairment exists. To determine whether an impairment exists, the Companyestimates 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 taxrates, expected tax benefits and long-term discount rates, all of which requiresignificant judgment. The Company also considers comparable market data toassist in determining the fair value of its reporting unit. There are inherentuncertainties related to these factors and the judgment applied in theanalysis. The Company believes that the combination of an income and a marketapproach provides a reasonable basis to estimate the fair value of thereporting unit. If the estimated fair value of the reporting unit is less thanits carrying value, an impairment may exist and additional analysis will beundertaken to determine the amount of impairment.

 

TheCompany experienced a decline in its stock price during the second quarter of2010. The Company considers the stock price decline to be an event that couldindicate goodwill impairment has occurred. Goodwill was tested for impairmentas of June 30, 2010. A discounted cash flow analysis was performed, takinginto consideration revenue and profit projections based on the most recent dataavailable to the Company. The result of the impairment test yielded anestimated fair market value of the reporting unit that was greater than thecarrying value. Because the estimated fair value was in excess of the bookvalue, the Company did not proceed to step 2 of the impairment test asdescribed in ASC 350-20-35, *Intangibles — Goodwill andOther*.

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(*In thousands, except share and pershare amounts*)**

 

**Stock-Based Compensation**

 

ASC718, *Compensation — Stock Compensation*,addresses the accounting for share-based payment transactions in which anenterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. ASC 718 requires that an entity measurethe cost of equity-based service awards based on the grant-date fair value ofthe award and recognize the cost of such awards over the period during whichthe employee is required to provide service in exchange for the award (the vestingperiod). ASC 718 requires that an entity measure the cost of liability-basedservice awards based on current fair value that is re-measured subsequently ateach reporting date through the settlement date. The Company accounts forequity awards issued to non-employees in accordance with ASC 505-50, *Equity-Based Payments to Non-Employees*.

 

TheCompany’s income before and after income taxes for the six months ended June 30,2010 was reduced by $1,866, as a result of stock-based compensation expenseincurred. The Company’s income before and after income taxes for the six monthsended June 30, 2009 was reduced by $3,790 and $3,465, respectively, as aresult of stock-based compensation expense incurred. The impact of stock-basedcompensation expense was $(0.08) and $(0.16) on both basic and diluted earningsper share for the six months ended June 30, 2010 and 2009, respectively.

 

Weestimate the fair value of our share-based awards to employees and directorsusing the Black-Scholes option valuation model. The Black-Scholes optionvaluation model requires the use of certain subjective assumptions. The mostsignificant of these assumptions are our estimates of the expected volatilityof the market price of our stock and the expected term of the award. We base ourestimates of expected volatility on a group of similar entities whose stockprices are publicly available. The expected term represents the period of timethat stock-based awards granted are expected to be outstanding. As we have ahistory of exercise experience for use in the calculation of expected term, webelieve our historical experience is the best estimate of our future exercisepatterns. Other assumptions used in the Black-Scholes option valuation modelinclude the risk-free interest rate and expected dividend yield. The risk-freeinterest rate for periods pertaining to the contractual life of each option isbased on the U.S. Treasury yield of a similar duration in effect at the time ofgrant. We have never paid, and do not expect to pay, dividends in theforeseeable future.

 

TheCompany utilized the Black-Scholes valuation model for estimating the fairvalue of stock options granted using the following weighted averageassumptions:

 
| ** **              | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|
| ** **              | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Expected dividend yield |       | 0                                             | %          | 0 | % |
| Expected volatility     |       | 65                                            | %          | 50 | % |
| Risk-free interest rate |       | 2.43                                          | %          | 2.12 | % |
| Expected life           |       | 6.25 years                                    |       | 6.25 years |   |

 

Basedon the Company’s historical experience of options that cancel before becomingfully vested, the Company has assumed an annualized forfeiture rate of 15% forall options. Under the true-up provision of ASC 718, the Company will recordadditional expense if the actual forfeiture rate is lower than estimated, andwill record a recovery of prior expense if the actual forfeiture rate is higherthan estimated.

 

Basedon the above assumptions, the per share weighted average fair value of theoptions granted under the stock option plan for the six months endedJune 30, 2010 and 2009 was $4.30 and $11.73, respectively.

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(*In thousands, except share and pershare amounts*)**

 

Thefollowing table summarizes activity under all stock award plans fromDecember 31, 2009 through June 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 |   |

 

Perthe plan documents, the 2008 Non-Employee Director Stock Option (NEDS) andEmployee Stock Option (ESOP) Plans have an automatic increase in the sharesavailable for grant every January the plans are active. The increase inthe shares available for grant under the NEDS plan is equal to the lesser ofthe number of shares issuable upon the exercise of options granted during thepreceding calendar year or such number of shares as determined by the Board ofDirectors. The increase in the shares available for grant under the ESOP planis equal to 5% of the total shares outstanding at December 31, 2009.

 

Additionalinformation regarding options outstanding is as follows:

 
| ** **                                           | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Range of exercise prices (per option)                |       | $0.70 - $31.18          |       | $0.70 - $31.18          |       |
| Weighted average remaining contractual life  (years) |       | 8.06                    |       | 9.15                    |       |

 

*EmployeeStock Purchase Plan*

 

OnMarch 17, 2010, 83,659 shares were purchased in accordance with theEmployee Stock Purchase Plan (ESPP). Net proceeds to the Company from theissuance of shares of common stock under the ESPP for the six months ended June 30,2010 were $533. In January 2010, the number of shares available for grantwas increased by 239,750, per the ESPP plan documents. At June 30, 2010,approximately 458,584 shares remain available for purchase under the ESPP.

 

**New Accounting Pronouncements**

 

InJanuary 2010, the FASB issued authoritative guidance intended to improvedisclosures about fair value measurements. The guidance requires entities todisclose significant transfers in and out of fair value hierarchy levels and thereasons for the transfers. Additionally, the guidance clarifies that areporting entity should provide fair value measurements for each class ofassets and liabilities and disclose the inputs and valuation techniques usedfor fair value measurements using significant other observable inputs (Level 2)and significant unobservable inputs (Level 3). To date, the Company has not hadany assets or liabilities that transferred in or out of fair value hierarchylevels, and as such, is not subject to this guidance. This guidance iseffective for interim and annual periods beginning after December 15,2009. This guidance did not have an impact on the Company’s results ofoperation or financial position. The Company adopted this guidance effectiveJanuary 1, 2010.

 

InFebruary 2010, the FASB issued authoritative guidance on subsequentevents. The guidance requires an SEC filer to evaluate subsequent eventsthrough the date the financial statements are issued but no longer requires anSEC filer to disclose the date through which the subsequent event evaluationoccurred. The guidance became effective for the Company upon issuance and hadno impact on the Company’s results of operations or financial position.

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(*In thousands, except share and pershare amounts*)**

 

**2.             Available-for-SaleInvestments**

 

Weinvest our excess funds in securities issued by the United States government,corporations, banks, municipalities, financial holding companies and in moneymarket funds comprised of these same types of securities. Our cash and cashequivalents and available-for-sale investments are placed with high creditquality financial institutions. Additionally, we diversify our investmentportfolio in order to maintain safety and liquidity. We do not holdmortgage-backed securities. As of June 30, 2010, all of our investments willmature within one year. These investments are recorded at fair value, based onquoted market prices, with unrealized gains and losses reported as a separatecomponent of stockholders’ equity.

 

Investmentshave been classified as available-for-sale investments. At June 30, 2010,available-for-sale investments are detailed as follows (in thousands):

 
| ** **                                | ** ** | **Amortized** | ** ** | **Gross Unrealized** | ** ** | **Gross Unrealized** | ** ** | **Estimated**       | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------------------|------------|---------------------------|------------|---------------------|------------|
| ** **                                | ** ** | **Cost**      | ** ** | **Gains**                 | ** ** | **Losses**                | ** ** | **Fair Value** | ** ** |
| Short-term investments:                   |       |          |       |                      |       |                      |       |                |       |
| Corporate debt securities                 |       | $             | 11,041     |                      | $          | —                    |       | $                   | (27        | ) | $ | 11,014 |   |
| U.S. Treasury and agency  debt securities |       | 15,209        |       | 9                         |       | —                    |       | 15,218              |       |
|                                      |       | $             | 26,250     |                      | $          | 9                         |       | $                   | (27        | ) | $ | 26,232 |   |

 

Netunrealized losses of $19 on available-for-sale investments are included as acomponent of stockholders’ equity and comprehensive (loss) income untilrealized from a sale or other-than-temporary impairment. Realized gains andlosses from the sale of securities are determined on a specific identificationbasis. Purchases and sales of investments are recorded on their trade dates.Dividend and interest income are recognized when earned. Interest income forthe six months ended June 30, 2010 was $119, which was partially offset by$98 related to amortization of investment premiums.

 

Maturitiesof available-for-sale investments were as follows at June 30, 2010 (inthousands):

 
| ** **                             | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|--------------------------------|------------|
|                                   |       |                |       |                           |       |
| Due within one year                    |       | $                   | 26,250     |                           | $          | 26,232 |   |
| Due after one year through five years  |       | —              |       | —                         |       |
| Due after five years through ten years |       | —              |       | —                         |       |
| Due after ten years                    |       | —              |       | —                         |       |
|                                   |       |                |       |                           |       |
|                                   |       | $                   | 26,250     |                           | $          | 26,232 |   |

 

**3.             FairValue Measurements**

 

ASC820 defines fair value as an exit price that would be received from the sale ofan asset or paid to transfer a liability in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. ASC 820 establishes a three-levelhierarchy for disclosure that is based on the extent and level of judgment usedto 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. |

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(*In thousands, except share and pershare amounts*)**

 
| · | 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. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

InJanuary 2010, the FASB updated the disclosure requirements for fair valuemeasurements. The updated guidance requires companies to disclose separatelythe investments that transfer in and out of Levels 1 and 2 and the reason forthose transfers. Additionally, in the reconciliation for fair valuemeasurements using significant unobservable inputs (Level 3), companies shouldpresent separately information about purchases, sales, issuances andsettlements. During the six months ended June 30, 2010, no transfers weremade into or out of the Level 3 categories. We will continue to review our fairvalue inputs on a quarterly basis. The updated guidance is effective for thereporting periods beginning after December 15, 2009, except for thedisclosures about purchases, sales, issuances and settlements in the Level 3reconciliations, which is effective for fiscal years beginning after December 15,2010. The Company will provide the additional disclosures necessary beginningin the Company’s fiscal year 2010 Annual Report on Form 10-K.

 

Thefair value of our financial assets subject to the disclosure requirements ofASC 820 was determined using the following levels of inputs at June 30,2010 (in thousands):

 

**Fair Value Measurements at June 30, 2010**

 
| ** **                               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------|------------|
| Assets:                                  |       |        |       |        |       |        |       |      |       |
| Cash                                     |       | $           | 12,400     |        | $          | —      |       | $         | —     |   | $ | 12,400 |   |
| Money market funds                       |       | 7,048       |       | —      |       | —      |       | 7,048     |       |
| Corporate debt securities                |       | —      |       | 15,516      |       | —      |       | 15,516    |       |
| U.S. Treasury and agency debt securities |       | 15,218      |       | —      |       | —      |       | 15,218    |       |
|                                     |       |        |       |        |       |        |       |      |       |
|                                     |       | $           | 34,666     |        | $          | 15,616      |       | $         | —     |   | $ | 50,182 |   |

 

**4.             Integration,Restructuring and Other Charges**

 

*2010 Restructuring*

 

During the first quarter of 2010, the Company undertook an initiativeto streamline its sales and service organizations and reduce support costscompany-wide. It also initiated plans to close its event monitoring facility inGeorgia and consolidate it with the Company’s monitoring facilities in Pennsylvaniaand Minnesota. The Company believes that it can realize cost efficiencies byundertaking these initiatives.

 

The restructuring plan involves the elimination of approximately100 positions. The Company expects the restructuring to be substantiallycompleted by the end of the third quarter in 2010, and expects the total costof the restructuring to be approximately $3,600, all of which is expected toresult in cash charges. The Company incurred restructuring expenses of $2,563for the six months ended June 30, 2010.

 

Asummary of the reserve activity related to the 2010 restructuring plan as ofJune 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 |   |

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(*In thousands, except share and pershare amounts*)**

 

The Company accounts for expenses associated with exit or disposalactivities in accordance with ASC 420, *Exit or Disposal**Cost Obligations,* and records theexpenses 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 $510 for the six months endedJune 30, 2010, including legal costs related to the Company’s defense ofclass-action and Biotel lawsuits. Additional information regarding legalproceedings can be found in Note 7. Integration, restructuring and othercharges for the six months ended June 30, 2009 was $1,959, which wascomprised primarily of severance expenses of $2,139 related to the departure ofcertain executive officers. The severance costs were offset slightly by aninsurance payment of $200 received related to the fire that occurred at ourConshohocken facility in August 2008.

 

**5.**              **IncomeTaxes**

 

Theincome tax provision for interim periods is determined using an estimatedannual effective tax rate adjusted for discrete items, if any, which are takeninto account in the quarterly period in which they occur. The Company reviewsand updates its estimated annual effective tax rate each quarter. For the six monthsended June 30, 2010, the Company’s estimated annual effective tax rate wasprimarily impacted by a financial loss for the period, the benefit of which wasoffset by a valuation allowance. Accordingly, the Company recorded no taxexpense or benefit for the six months ended June 30, 2010. The income taxexpense totaled approximately $79 for the six months ended June 30, 2009.

 

Asof December 31, 2009, in accordance with ASC 740, the Company maintained afull valuation allowance against net deferred tax assets. The Company maintainsa full valuation allowance for the six months ended June 30, 2010. TheCompany implemented the provisions of ASC 740-10 on January 1, 2007related to accounting for uncertainty in income taxes. There has been nomaterial change to the amount of unrecognized tax expense or benefit reportedas of June 30, 2010.

 

**6.**     **Reimbursement**

 

Areduction in the Medicare reimbursement rate for our MCOTTM services to $754 perservice, a reduction of approximately 33%, went into effect on September 1,2009. The reduction in reimbursement rates is reflected in the *Revenue*and*Accounts receivable*lines in the Company’s financial statements.

 

**7.**     **Legal Proceedings**

 

OnMarch 5, 2010, West Palm Beach Police Pension Fund filed a putative classaction complaint in California Superior Court, San Diego County assertingclaims for violations of Sections 11, 12 and 15 of the Securities Act of 1933,as amended, against CardioNet, nine current and former officers and directorsof CardioNet and six underwriters of CardioNet’s IPO and/or Secondary Offeringon August 6, 2008 (together with the IPO, the “Offerings”). Thecomplaint filed March 5, 2010 also asserted claims for alleged violationsof Sections 25401 and 25501 of the California Corporations Code against defendantsJames M. Sweeney and Fred Middleton. The plaintiff seeks to bring claims onbehalf of all those who purchased or otherwise acquired the common stock ofCardioNet pursuant and/or traceable to the Offerings. On March 10, 2010,plaintiff filed an Amended Complaint that deleted the claims for violations ofthe California Corporations Code.  The claims are based on purportedmisrepresentations and omissions in the Registration Statements for theOfferings relating to alleged business decisions made by CardioNet that weresupposedly not disclosed to investors and alleged misstatements concerningCardioNet’s business.  On April 5, 2010, all defendants removed thecase to the Southern District of California, where it is pending.  OnApril 7, 2010, defendants filed a Motion to Transfer the case to theEastern District of Pennsylvania. On April 23, 2010, the plaintiff movedto remand the case to state court. On May 19, 2010, the court ordered thatdefendants’ response to the complaint will be due 21 days after the order onthe Motion to Remand. On May 28, 2010, defendants filed their oppositionto the Motion to Remand, and plaintiff filed its opposition to the Motion toTransfer. On June 14, 2010, plaintiff filed its reply in support of theMotion to Remand, and on June 18, 2010, defendants’ reply in support ofthe Motion to Transfer was filed. On June 21, 2010, the court found themotions suitable for disposition on the written motions submitted by theparties without oral argument.  The Company believes that the claims arewithout merit and intends to defend the litigation vigorously. At this time, itis not possible to determine the likelihood or amount of liability, if any, onthe part of the Company with any degree of certainty. Consistent with theaccounting for contingent liabilities, no accrual has been recorded in thefinancial statements.

 

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Commencingon August 26, 2009, two putative class actions were filed in the UnitedStates District Court for the Eastern District of Pennsylvania naming CardioNet,Randy Thurman, former Chief Executive Officer and Martin P. Galvan, formerChief Financial Officer as defendants and alleging violations of Sections10(b) and 20(a) of the Securities Exchange Act of 1934, as amended.  The complaints purport to bring claims onbehalf of a class of persons who purchased the Company’s common stock betweenApril 30, 2009 and June 30, 2009 and between April 30, 2009 andJuly 10, 2009.  The complaintsallege that the defendants issued various materially false and misleading statementsrelating to the Company’s projected performance that had the effect ofartificially inflating the market price of its securities.  The complaints further allege that thealleged misstatements were revealed to the public on June 30, 2009 andJuly 10, 2009 when the Company made certain announcements regardingpotential lower pricing for commercial and Medicare reimbursement rates.  These actions were consolidated onSeptember 9, 2009.  OnOctober 26, 2009, two competing motions were filed for appointment of leadplaintiffs and lead counsel pursuant to the requirements of the PrivateSecurities Litigation Reform Act of 1995.  On December 22, 2009, the Court appointed lead plaintiff, butdenied its request for appointment of lead counsel and require lead plaintiffto file an amended motion for approval of its selection of class counsel. Leadplaintiff filed its amended motion for appointment of lead counsel onJanuary 15, 2010, which was granted on February 3, 2010. Leadplaintiff filed a consolidated class action complaint on February 19, 2010and the defendants filed a motion to dismiss on March 26, 2010. Leadplaintiff 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, whichmotion was granted and the reply brief was filed May 20, 2010. The Companybelieves the claims are without merit and intends to defend the litigationvigorously. At this time, it is not possible to determine the likelihood oramount of liability, if any, on the part of the Company with any degree ofcertainty. Consistent with the accounting for contingent liabilities, noaccrual has been recorded in the financial statements.

 

OnApril 2, 2009 CardioNet entered into a Merger Agreement to acquire(“Biotel”) Inc. for $14,000. On July 14, 2009, CardioNet exercisedits contractual right to terminate the Merger Agreement due to Biotel’s breachof certain covenants in the agreement. On or about July 16, 2009, Biotelsubsequently commenced litigation against CardioNet in Minnesota District Countin Hennepin County, Fourth Judicial District, alleging that CardioNet hadbreached and improperly terminated the Merger Agreement. CardioNet removed theaction to the United States District Court for the District of Minnesota on thebasis 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 Agreementfor its termination fee and associated expenses; the current amount of thatcounterclaim is $1,400. Discovery has been concluded and the case has been setfor a two-week trial starting November 8, 2010. Biotel has brought amotion for partial summary judgment directed to certain CardioNet defenses andthe counterclaim; the Court has held a hearing on that motion and has taken themotion under advisement. The Company has defended, and continues to defend, itsposition vigorously and continues to prosecute its counterclaim. At this time,it is not possible to determine the likelihood or amount of liability, if any,on the part of the Company with any degree of certainty. Consistent with theaccounting for contingent liabilities, no accrual has been recorded in the financialstatements.

 

**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

 

The following discussion and analysis should be readin conjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2009, and in conjunction with the accompanying quarterlyunaudited condensed consolidated financial statements. This discussion containscertain forward-looking statements that involve risks and uncertainties. TheCompany’s actual results and the timing of certain events could differmaterially from those discussed in these forward-looking statements as a resultof certain factors, including, but not limited to, those set forth herein andelsewhere in this report and in the Company’s other filings with the Securitiesand Exchange Commission. See the “Forward-Looking Statements” section at thebeginning of this report.

 

**Company Background**

 

CardioNet is a leading provider of ambulatory, continuous, real-timeoutpatient management solutions for monitoring relevant and timely clinicalinformation regarding an individual’s health. The Company’s efforts haveinitially been focused on the diagnosis and monitoring of cardiac arrhythmias,or heart rhythm disorders, with a solution that it markets as Mobile CardiacOutpatient TelemetryTM (MCOTTM). The Company actively began developing itsproduct platform in April 2000, and since that time, has devotedsubstantial resources in advancing its patient monitoring solutions. Theplatform successfully integrates a wireless data transmission network,internally developed software, FDA-cleared algorithms and medical devices, anda 24-hour monitoring service center.

 

The Company’s Conshohocken location has been an approved IndependentDiagnostic Testing Facility (“IDTF”) by Medicare since it received510(k) clearance for the first and second generation of its core MCOTdevices in 2002. The CardioNet Monitoring Center commenced operations inConshohocken, Pennsylvania in 2002, concurrent with its first FDA approval, andall of the Company’s MCOT arrhythmia monitoring activities are currentlyconducted at that location. The Company received FDA 510(k) clearance forthe proprietary algorithm included in its third generation product, or C3, inOctober 2005. Subsequently in November 2006, the Company received FDA510(k) clearance for its C3 system which it has incorporated as part ofits monitoring solution. The Company received FDA 510(k) clearance for itsnext generation platform in April 2010 and expects the product launch 

 

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tooccur in late 2010. The Company continues to pursue innovation of new andexisting medical solutions through investments in research and development.

 

InMarch 2007, the Company acquired all of the outstanding capital stock ofPDSHeart. The acquisition of PDSHeart provided three additional product linesto complement MCOTTM: event, Holter and Pacemaker monitoring solutions. Inaddition, the acquisition supplied the Company with existing sales channels andrelationships in geographic areas that previously had not been penetrated priorto the acquisition. In March 2008, the Company completed an initial publicoffering of its common stock for proceeds of approximately $46.7 million,net of underwriter commissions and estimated offering expenses.

 

**nPhase Supplier Agreement**

 

The Company established a relationship with nPhase, formerlyQualcomm Inc., in May 2003. nPhase is the sole provider of wirelesscellular data connectivity solutions and data hosting and queuing services forthe Company’s monitoring network. The Company has no fixed or minimum financialcommitment as it relates to network usage or volume activity. However, if theCompany fails to maintain an agreed-upon number of active cardiac monitoringdevices on the nPhase network or it utilizes the monitoring and communicationsservices of a provider other than nPhase, nPhase has the right to terminate itsrelationship with the Company.

 

**Reimbursement**

 

The reimbursement rates applicable to the Category I CPT codes (93228and 93229) established by the American Medical Association (“AMA”) for MCOTTMbecame effective on January 1, 2009. Highmark Medicare Services(“Highmark”) is responsible for setting the reimbursement rate on behalf of CMSfor code 93229, which is the code for the technical component of our services.The new billing codes allow for automated claims adjudication, substantiallysimplifying the reimbursement process for physicians and payors compared to theprevious process. Reimbursement prior to the use of the new CPT codes wasobtained through non-specific billing codes which required various narrativesthat, in most cases, involved semi-automated or manual processing, as well asadditional review by payors.

 

After receiving the CPT code in the first quarter of 2009, the Companyreceived pressure from several commercial payors to renegotiate reimbursementrate contracts. This pressure led to a substantial decline in our averagecommercial reimbursement rates in the first half of 2009. During the secondhalf of 2009, and into the first half of 2010, we have seen commercial reimbursementrates stabilize. The Company expects to experience fluctuations in its averagecommercial reimbursement rates due to contract negotiations for new andexisting payors. Overall, we expect the average commercial reimbursement ratesto remain stable or decline over time.

 

On July 10, 2009,Highmark announced a reduction in the Medicare reimbursement rate for our MCOTTMservices to $754 per service, a reduction of approximately 33%. This new ratewent into effect on September 1, 2009. The decline in reimbursement ratehas had a negative impact on the Company’s revenue and operating results, andhas presented significant challenges to the viability of the Company’s currentbusiness model. The Company estimates that the rate reduction caused a reductionin revenue for the four months ended December 31, 2009 and the six monthsended June 30, 2010, of approximately $6.3 million and $9.4 million,respectively. Several strategic initiatives are currently being implemented,including cost efficiency measures. The Company intends to continue to workwith CMS to achieve an appropriate national rate in the future, and willcontinue to evaluate its strategic options.

 

We have successfully secured contracts with many national and regionalcommercial payors. As of June 30, 2010, we have 268 MCOTTM contracts withcommercial payors, compared to 245 at December 31, 2009. The currentestimated total of over 200 million covered lives for Medicare and commerciallives for which we had reimbursement contracts as of June 30, 2010represents approximately 78% of the total covered lives in the United States.The MCOTTM contracts also cover event, Holter and Pacemaker service pricing. Inaddition, as of June 30, 2010 there were approximately 165 contracts withcommercial payors that pertained only to event, Holter and Pacemaker servicepricing, and did not cover MCOTTM. The majority of the remaining covered livesare insured by a small number of large commercial insurance companies thatdeemed MCOTTM to be experimental in nature and do not currently reimburse us forservices provided to their beneficiaries.

 

**Medical Industry Trends**

 

Based on recent business journal articles, several trends have emergedin the medical services industry during the first half of 2010. Physicians,clinics and hospitals have experienced a lower level of patient visits, andperformed fewer elective procedures. The downward trend in census is beingattributed to weak economic conditions, as well as changes in insurancecoverage. Patients are delaying doctor visits and deferring elective medicaltreatments that are not perceived to be critical to patients’ immediate health. In addition to other factors, we believe this overall economic trend hadimpacted our volume, leading to two consecutive quarters of modest sequentialvolume declines.

 

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**Restructuring Activities**

 

During the first quarter of 2010, the Company undertook an initiativeto streamline its sales and service organizations and reduce support costsCompany-wide. It also initiated plans to close its event monitoring facility inGeorgia and consolidate it with the Company’s monitoring facilities inPennsylvania and Minnesota. The Company believes that it can realize costefficiencies by undertaking these initiatives. The total cost of therestructuring plan is expected to be approximately $3.6 million, of which $2.6million has been incurred to date. The plan is expected to be substantiallycomplete by the end of the third quarter of 2010.

 

**Results of Operations**

 

***Three Months Ended June 30,2010 and 2009***

 

*Revenues.*    Totalrevenues for the three months ended June 30, 2010 decreased to $31.9million from $38.3 million for the three months ended June 30, 2009, adecrease of $6.4 million, or 16.5%. MCOTTM revenue declined $9.8 million due toa decrease in MCOTTM reimbursement rates, partially offset by an increase involume of 12% totaling $4.3 million. Additionally, there was a decrease inevent, Holter and other revenue of $0.8 million for the three months ended June 30,2010 compared to the three months ended June 30, 2009.

 

*Gross Profit.*    Grossprofit decreased to $20.1 million for the three months ended June 30, 2010from $26.3 million for the three months ended June 30, 2009. The decreaseof $6.2 million was due to a decrease in revenue related to lower reimbursementrates totaling $9.8 million, offset slightly by the favorable impact of $2.8million from higher sales volume and $0.8 million of lower cost of sales resultingfrom our Company-wide cost reduction initiatives for the three months endedJune 30, 2010 compared to the three months ended June 30, 2009. Grossprofit as a percentage of revenue declined to 62.9% for the three months endedJune 30, 2010 compared to 68.7% for the three months ended June 30,2009.

 

*General and Administrative Expense.*    Generaland administrative expense was $8.5 million for the three months ended June 30,2010 compared to $9.5 million for the three months ended June 30, 2009.The decrease of $1.0 million, or 10.1%, was due to our restructuring effortsresulting in a decrease in stock based compensation expense of $0.9 million,payroll costs of $0.6 million and $0.5 million of professional fees. This waspartially offset by an increase in volume related expenses, as well asrecruiting charges totaling $1.0 million. As a percent of total revenues,general and administrative expense was 26.8% for the three months ended June 30,2010 compared to 24.8% for the three months ended June 30, 2009.

 

*Bad Debt Expense.*    Baddebt expense was $4.5 million for the three months ended June 30, 2010compared to $4.6 million for the three months ended June 30, 2009. Cashcollections were $3.2 million higher for the three months ended June 30,2010 compared to same period in 2009. The bad debt expense we recorded for thethree months ended June 30, 2010 was based upon an evaluation of ourhistorical collection experience of accounts receivable, by age, for ourvarious payor classes. The Company expects to continue to realize an improvedrate of collections as we more effectively manage our billing and collectionfunction, and continue to improve our billing and collection processes.

 

*Sales and Marketing Expense.*    Salesand marketing expense was $6.9 million for the three months ended June 30,2010 compared to $8.4 million for the three months ended June 30,2009. The decrease of $1.5 million, or 18.5%, was due to lower payroll, traveland stock based compensation costs primarily resulting from Company-wide costreduction efforts in 2010. As a percent of total revenues, sales and marketingexpense was 21.5% for the three months ended June 30, 2010 compared to22.1% for the three months ended June 30, 2009.

 

*Research and Development Expense.*    Researchand development expense was $1.2 million for the three months ended June 30,2010 compared to $1.8 million for the three months ended June 30, 2009.The decrease of $0.6 million, or 30.4%, was largely due to the reduction ofconsulting expenses of $0.4 million. As a percent of total revenues, researchand development expense was 3.9% for the three months ended June 30, 2010compared to 4.6% for the three months ended June 30, 2009.

 

*Integration, Restructuring and Other Charges.*    TheCompany incurred restructuring costs of $0.9 million and other charges of $0.2million for the three months ended June 30, 2010. The restructuring costsincluded $0.6 million of severance and employee related costs and $0.3 millionof other charges related to the 2010 restructuring plan. The 2010 restructuringplan included the consolidation of the Company’s sales and serviceorganizations, the closure of the Company’s event monitoring facility inGeorgia and consolidation with its monitoring facilities in Pennsylvania andMinnesota, and an overall reduction of administrative costs Company-wide.Integration, restructuring and other charges were 3.5% of total revenues forthe three months ended June 30, 2010. The other charges related to legalcosts and other miscellaneous items.

 

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TheCompany incurred a benefit of $0.2 million for the three months ended June 30,2009 due to an insurance payment received related to the fire that occurred atour Conshohocken facility in August 2008.

 

*Income Taxes.*    TheCompany received no tax benefit for the three months ended June 30, 2010,compared to a tax expense of $0.6 million for the three months ended June 30,2009. The effective tax rate for the three months ended June 30, 2010 was0.0%, compared to 27.2% for the three months ended June 30, 2009.

 

*Net Income.*    TheCompany incurred a net loss of $2.1 million for the three months ended June 30,2010 compared to net income of $1.6 million for the three months ended June 30,2009.

 

***Six Months Ended June 30, 2010and 2009***

 

*Revenues.*    Totalrevenues for the six months ended June 30, 2010 decreased to $63.8 millionfrom $74.0 million for the six months ended June 30, 2009, a decrease of$10.2 million, or 13.8%. MCOTTM revenue decreased $8.8 million due to a decreasein MCOTTM reimbursement rates totaling $20.2 million, offset by an increase involume of 17%, or $10.0 million. Additionally, there was a decrease in event,Holter and other revenue of $1.4 million for the six months ended June 30,2010 compared to the six months ended June 30, 2009.

 

*Gross Profit.*    Grossprofit decreased to $40.2 million for the six months ended June 30, 2010from $50.2 million for the six months ended June 30, 2009. The decrease of$10.0 million was due to a decrease in revenue related to lower reimbursementrates totaling $20.2 million, offset slightly by the favorable impact of $8.6 millionfrom higher sales volume and $1.6 million of lower cost of sales resulting fromour Company-wide cost initiatives for the six months ended June 30, 2010compared to the six months ended June 30, 2009. Gross profit as apercentage of revenue declined to 63.0% for the six months ended June 30, 2010compared to 67.8% for the six months ended June 30, 2009.

 

*General and Administrative Expense.*    Generaland administrative expense was $18.2 million for the six months ended June 30,2010 compared to $20.0 million for the six months ended June 30, 2009. Thedecrease of $1.8 million, or 8.9%, was due to our cost reduction effortsresulting in a decrease in stock compensation expense of $1.5 million,professional fees of $0.6 million, payroll costs of $0.4 million, and othercosts of $0.4 million. The decrease was offset by an increase in consultingcosts of $0.6 million and depreciation expense of $0.5 million. As a percent oftotal revenues, general and administrative expense was 28.6% for the six monthsended June 30, 2010 compared to 27.1% for the six months ended June 30,2009.

 

*Bad Debt Expense.*    Baddebt expense was $9.1 million for the six months ended June 30, 2010compared to $8.4 million for the six months ended June 30, 2009. The baddebt expense recorded for the six months ended June 30, 2010 was basedupon an evaluation of our historical collection experience of accountsreceivable, by age, for our various payor classes. Cash collections for the sixmonths ended June 30, 2010 were $8.6 million higher than the same periodin 2009. The Company expects to continue to realize improved rate ofcollections as we more effectively manage our billing and collection function,and continue to improve our billing and collection processes.

 

*Sales and Marketing Expense.*    Salesand marketing expense was $14.9 million for the six months ended June 30,2010 compared to $16.0 million for the six months ended June 30,2009. The decrease of $1.1 million, or 7.0% was due to lower payroll, traveland stock based compensation costs primarily resulting from Company-wide costreduction efforts in 2010. As a percent of total revenues, sales and marketingexpense was 23.3% for the six months ended June 30, 2010 compared to 21.6%for the six months ended June 30, 2009.

 

*Research and Development Expense.*    Researchand development expense was $2.5 million for the six months ended June 30,2010 compared to $3.0 million for the six months ended June 30, 2009. Thedecrease of $0.5 million, or 17.1%, was largely due to lower consulting costs.As a percent of total revenues, research and development expense was 3.9% forthe six months ended June 30, 2010 compared to 4.0% for the six monthsended June 30, 2009.

 

*Integration, Restructuring and Other Charges.*    TheCompany incurred restructuring costs of $2.6 million and other charges of $0.5million for the six months ended June 30, 2010. The restructuring costsincluded $2.0 million of severance and employee related costs and $0.6 millionof other charges related to the 2010 restructuring plan. The 2010 restructuringplan included the consolidation of the Company’s sales and serviceorganizations, the closure of the Company’s event monitoring facility inGeorgia and consolidation with its monitoring facilities in Pennsylvania andMinnesota, and an overall reduction of administrative costs company-wide.Integration, restructuring and other charges were 4.8% of total revenues forthe six months ended June 30, 2010. The other charges related to legalcosts and other miscellaneous items.

 

TheCompany incurred severance charges related to executive employee terminationsof $2.0 million for the six months ended June 30, 2009.

 

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*Net Income.*    TheCompany incurred a net loss of $7.6 million for the six months ended June 30,2010 compared to net income of $0.1 million for the six months ended June 30,2009.

 

**Liquidity and Capital Resources**

 

TheCompany’s Annual Report on Form 10-K for the year ended December 31,2009 includes a detailed discussion of our liquidity, contractual obligationsand commitments. The information presented below updates and should be read inconjunction with the information disclosed in that Form 10-K.

 

Asof June 30, 2010, our principal source of liquidity was cash and cashequivalents of $24.0 million, available-for-sale investments of $26.2 millionand net accounts receivable of $34.2 million. The Company has no short orlong-term debt and does not anticipate needing to secure financing fromexternal sources for cash to operate the business. The Company had workingcapital of $74.2 million as of June 30, 2010. We believe that our existingcash and cash equivalent balances will be sufficient to meet our anticipatedcash requirements for the foreseeable future.

 

The Company generated $2.7 million of cash fromoperations for the six months ended June 30, 2010. Cash was generated byfavorable cash collections related to the Company’s accounts receivables. Thenet loss and net working capital requirements were offset by non-cash itemsrelated to deprecation and stock compensation expense. The Company’s ongoingoperations during the six month period resulted in a $7.6 million net loss, andnet working capital cash flow requirements of $2.1 million. The Company’sworking capital requirements were driven primarily by the prepayment of certainlicenses and insurances costs that routinely occur in the first half of thefiscal year, and the repayment of certain payor overpayments that were recordedin accounts payable.

 

TheCompany used $2.7 million for the investment in medical devices for use in itsongoing operations for the six months ended June 30, 2010. In addition,the Company used $26.3 million for the purchase of available-for-salesecurities during the second quarter of 2010. The available-for-saleinvestments are not required for its ongoing operations, and the Companybelieves that the investments can be converted to cash in a short period oftime, if needed.

 

Ifthe Company determines that it needs to raise additional capital, such capitalmay not be available on reasonable terms, or at all. If the Company raisesadditional funds by issuing equity securities, its existing stockholders’ownership will be diluted. If the Company raises additional funds by incurringdebt financing, the terms of the debt may involve significant cash paymentobligations as well as covenants and specific financial ratios that mayrestrict the ability to operate its business.

 

**Item 3. Quantitative and Qualitative Disclosures aboutMarket Risk.**

 

Ourcash and cash equivalents as of June 30, 2010 were $24.0 million andconsisted primarily of cash and money market funds with maturities of less than90 days. The Company also has $26.2 million of available-for-sale securitieswith maturities of less than one year. The Company believes that thesesecurities can be converted to cash in a short period of time, if needed. Theprimary objective of our investment activities is to preserve our capital forthe purpose of funding operations while, at the same time, maximizing theincome we receive from our investments without significantly increasing risk.To achieve this objective, our investment policy allows us to maintain aportfolio of cash equivalents and short term investments in a variety ofsecurities including money market funds and corporate debt securities. Due tothe short term nature of our investments, we believe we have no materialexposure to interest rate risk.

 

**Item 4. Controls and Procedures.**

 

**Evaluation of Disclosure Controls and Procedures**

 

TheCompany maintains disclosure controls and procedures designed to ensureinformation required to be disclosed in Company reports filed under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,processed, summarized, and reported within the time periods specified in theSEC’s rules and forms.  Disclosure controls and procedures aredesigned to provide reasonable assurance that information required to bedisclosed in Company reports filed under the Exchange Act is accumulated andcommunicated to management, including the Company’s Chief Executive Officer andChief Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure.

 

TheCompany’s management, with the participation of the Company’s Chief ExecutiveOfficer and Chief Financial Officer, has evaluated the effectiveness of theCompany’s disclosure controls and procedures pursuant toRule 13a-15(b) of the Exchange Act as of the end of the period coveredby this report.  Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures were effective as of June 30, 2010 toensure that information required to be disclosed in Company reports filed underthe Exchange Act is (i) recorded, processed, summarized and 

 

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reportedwithin the time periods specified in the SEC rules and forms and(ii) accumulated and communicated to management, including the Company’sprincipal executive officer and principal financial officer, as appropriate toallow timely decisions regarding required disclosure.

 

**Changes in Internal Control over Financial Reporting**

 

Therewere no changes in the Company’s internal control over financial reportingduring the three months ending June 30, 2010, that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**PART II - OTHER INFORMATION.**

 

**Item 1.  Legal Proceedings.**

 

OnMarch 5, 2010, West Palm Beach Police Pension Fund filed a putative classaction complaint in California Superior Court, San Diego County assertingclaims for violations of Sections 11, 12 and 15 of the Securities Act of 1933,as amended, against CardioNet, nine current and former officers and directorsof CardioNet and six underwriters of CardioNet’s intial public offering (IPO)consummated March 25, 2008 and/or Secondary Offering on August 6,2008 (together with the IPO, the “Offerings”). The complaint filedMarch 5, 2010 also asserted claims for alleged violations of Sections25401 and 25501 of the California Corporations Code against defendants James M.Sweeney and Fred Middleton. The plaintiff seeks to bring claims on behalf ofall those who purchased or otherwise acquired the common stock of CardioNetpursuant and/or traceable to the Company’s IPO and/or Secondary Offering. OnMarch 10, 2010, plaintiff filed an Amended Complaint that deleted theclaims for violations of the California Corporations Code.  The claims arebased on purported misrepresentations and omissions in the RegistrationStatements for the Offerings relating to alleged business decisions made byCardioNet that were supposedly not disclosed to investors and allegedmisstatements concerning CardioNet’s business.  On April 5, 2010, alldefendants removed the case to the Southern District of California, where it ispending at docket no. 10-cv-00711-L-NLS.  On April 7, 2010,defendants filed a Motion to Transfer the case to the Eastern District ofPennsylvania, which Motion to Transfer is noticed for hearing on June 28,2010.  On April 23, 2010, the plaintiff moved to remand the case tostate court. On May 19, 2010, the court ordered that defendants’ responseto 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 writtenmotions submitted by the parties without oral argument. The Company believesthat the claims are without merit and intends to defend the litigationvigorously.

 

Commencing on August 26, 2009, two putativeclass actions were filed in the United States District Court for the EasternDistrict of Pennsylvania naming CardioNet, Randy Thurman and Martin P. Galvanas defendants and alleging violations of Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934, as amended.  The complaints purport to bring claims onbehalf of a class of persons who purchased the Company’s common stock betweenApril 30, 2009 and June 30, 2009 and between April 30, 2009 andJuly 10, 2009.  The complaintsallege that the defendants issued various materially false and misleadingstatements relating to the Company’s projected performance that had the effectof artificially inflating the market price of its securities.  The complaints further allege that thealleged misstatements were revealed to the public on June 30, 2009 andJuly 10, 2009 when the Company made certain announcements regardingpotential lower pricing for commercial and Medicare reimbursement rates.  These actions were consolidated onSeptember 9, 2009 under docket number 09-3894.  On October 26, 2009, two competingmotions were filed for appointment of lead plaintiffs and lead counsel pursuantto the requirements of the Private Securities Litigation Reform Act of1995.   On December 22, 2009, theCourt appointed lead plaintiff, but denied its request for appointment of leadcounsel and require lead plaintiff to file an amended motion for approval ofits selection of class counsel. Lead plaintiff filed their amended motion forappointment of lead counsel on January 15, 2010, which was granted onFebruary 3, 2010. Lead plaintiff filed a consolidated class actioncomplaint on February 19, 2010 and the defendants filed a motion todismiss on March 26, 2010. Lead plaintiff filed its opposition to themotion to dismiss on April 30, 2010. On May 13, 2010, defendantsmoved for leave to file a reply brief, which motion was granted and the replybrief was filed May 20, 2010. The Company believes the claims are withoutmerit and intends to defend the litigation vigorously.

 

OnApril 2, 2009 CardioNet entered into a Merger Agreement to acquire(“Biotel”) Inc. for $14.0 million. On July 14, 2009, CardioNetexercised its contractual right to terminate the Merger Agreement due toBiotel’s breach of certain covenants in the agreement. On or about July 16,2009, Biotel subsequently commenced litigation against CardioNet in MinnesotaDistrict Count in Hennepin County, Fourth Judicial District, alleging thatCardioNet had breached and improperly terminated the Merger Agreement.CardioNet removed the action to the United States District Court for theDistrict of Minnesota on the basis of diversity jurisdiction, and Biotel didnot seek to remand the action. Biotel is seeking specific performance anddamages in an amount in excess of $10.0 million. CardioNet has counterclaimedunder the terms of the Merger Agreement for its termination fee and associatedexpenses; the current amount of that counterclaim is $1.4 million. Discoveryhas been concluded and the case has been set for a two-week trial startingNovember 8, 2010. Biotel has brought a motion for partial summary judgmentdirected to certain CardioNet defenses and the 

 

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counterclaim;the Court has held a hearing on that motion and has taken the motion underadvisement. The Company has defended, and continues to defend, its positionvigorously and continues to prosecute its counterclaim.

 

**Item 1A.  Risk Factors.**

 

In evaluating an investment in our common stock,investors should consider carefully, among other things, the risk factorspreviously disclosed in Part I, Item 1A of our Annual Report onForm 10-K for the year ended December 31, 2009 and in Part II, Item1A of our Quarterly Report on Form 10-Q for the quarter ended March 31,2010, as well as the information contained in this Quarterly Report and ourother reports and registration statements filed with the SEC.  Material changes from the risk factorspreviously disclosed under “Risk Factors” in Part I, Item 1A of ourAnnual Report on Form 10-K for the year ended December 31, 2009 andin Part II, Item 1A of our Quarterly Report on Form 10-Q for thequarter ended March 31, 2010  arediscussed below.

 

***Economic conditions may materially and adversely affect our investmentportfolio.***

 

Wehave invested our excess cash in money market funds and corporate debtsecurities issued by banks and corporations. The interest paid on these typesof investments and the value of certain securities may decline due to generalmarket conditions, such as the recent volatility in credit markets and thenational and global financial crisis. If there is continued and expandeddisruption in the credit markets, our investment portfolio could be adverselyaffected. There is no assurance that the financial or credit markets willimprove in the near term, or that the national and worldwide economicconditions will not worsen.

 

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds**

 

Notapplicable.

 

**Item 3. Defaults Upon Senior Securities**

 

Notapplicable.

 

**Item 4. Removed and Reserved**

 

**Item 5. Other Information**

 

Notapplicable.

 

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**Item 6.  Exhibits.**

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | ** **                                                                                                                                                                                                                         |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                               |
| 10.1                |       | Employment  Agreement, dated June 15, 2010, between the Registrant and Joseph H.  Capper (Incorporated by reference to Exhibit 99.2 to the Registrant’s  Current Report on Form 8-K dated June 15, 2010). |
| 10.2                |       | Letter  Agreement, dated July 22, 2010, between the Registrant and Randy H.  Thurman.*                                                                                                                                        |
| 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.                                        |

 

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| * |   | Filed  herewith. |
|---|--------|------------------|

 

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**CardioNet, Inc.**

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| ** **                 | ** ** | **CARDIONET, INC.** |
|----------------------------|------------|--------------------------|
|                       |       |                     |   |
|                       |       |                     |   |
| Date:  August 2, 2010 |       | By:                      | /s/  Heather C. Getz |
|                       |       |                     | Heather  C. Getz, CPA |
| * *                   | * *   | * *                 | *Chief Financial Officer* |
| * *                   | * *   | * *                 | (Principal  Financial Officer and authorized officer of the Registrant) |

 

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