Table ofContents

 

 

 

**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** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

** **

**forthe quarterly period ended June 30, 2009**

** **

**OR**

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

 

**For the transition period from                to                 **

 

**Commission File Number 001-33993**

 

**CardioNet, Inc.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Delaware**                                                   | ** ** | **33-0604557**                          |
|----------------------------------------------------------------|------------|-----------------------------------------|
| (State or Other Jurisdiction of Incorporation or Organization) |       | (I.R.S. Employer Identification Number) |

 

**227 Washington StreetConshohocken, Pennsylvania 19428**

(Address of Principal Executive Offices, including Zip Code)

 

**(610) 729-7000**

(Registrant’s Telephone Number, including Area Code)

 

**N/A**

(Former name, former address and former fiscal year if changed sincelast report)

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  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 o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer x                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

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

 

Asof August 3, 2009, 23,782,034 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 PERIOD ENDEDJUNE 30, 2009**

**TABLE OFCONTENTS**

 
| ** **        | ** **                                                                                  | **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 | 13            |
| Item 3.           | Quantitative  and Qualitative Disclosures about Market Risk                                 | 16            |
| Item 4T.          | Controls and  Procedures                                                                    | 17            |
|              |                                                                                        |          |
| **PART II.** | **OTHER INFORMATION**                                                                       | ** **    |
| Item 1.           | Legal Proceedings                                                                           | 17            |
| Item 1A.          | Risk Factors                                                                                | 17            |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 18            |
| Item 3.           | Defaults Upon Senior  Securities                                                            | 18            |
| Item 4.           | Submission of  Matters to a Vote of Security Holders                                        | 18            |
| Item 5.           | Other Information                                                                           | 18            |
| Item 6.           | Exhibits                                                                                    | 18            |
|              |                                                                                        |          |
| SIGNATURES        | 19                                                                                          |

 

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**FORWARD-LOOKING STATEMENTS**

 

This press release includescertain forward-looking statements within the meaning of the “Safe Harbor”provisions of the Private Securities Litigation Reform Act of 1995 regarding,among other things, our growth prospects, the prospects for our products andour confidence in the Company’s future. These statements may be identified bywords such as “expect,” “anticipate,” “estimate,” “intend,” “plan,” “believe,” “promises”and other words and terms of similar meaning. Such forward-looking statementsare based on current expectations and involve inherent risks and uncertainties,including important factors that could delay, divert, or change any of them,and could cause actual outcomes and results to differ materially from currentexpectations. These factors include, among other things, the potential forre-evaluation from Highmark or the CMS on reimbursement rates, the success ofour sales and marketing initiatives, our ability to attract and retain talentedexecutive management and sales personnel, our ability to identify acquisitioncandidates, acquire them on attractive terms and integrate their operationsinto our business, the commercialization of new products, market factors,internal research and development initiatives, partnered research anddevelopment initiatives, competitive product development, changes ingovernmental regulations and legislation, changes to reimbursement levels forour products, the continued consolidation of payors, acceptance of our newproducts and services and patent protection and litigation. For further detailsand a discussion of these and other risks and uncertainties, please see ourmost recent Form 10-K filed with the Securities and Exchange Commission,as well as the information included in this document and as otherwiseenumerated herein or therein. We undertake no obligation to publicly update anyforward-looking statement, whether as a result of new information, futureevents, or otherwise.

 

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**PART I — FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

 

**CARDIONET, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

**(*In thousands except share and per shareamounts*)**

 
| ** **                                                                                                                                                                             | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
| ** **                                                                                                                                                                             | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| **Assets**                                                                                                                                                                             |       |                        |       |                            |       |
| Current assets:                                                                                                                                                                        |       |                        |       |                            |       |
| Cash and cash equivalents                                                                                                                                                              |       | $                           | 44,566     |                            | $          | 58,171 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $21,202 and $14,426, at June 30, 2009 December 31,  2008, respectively                                       |       | 52,786                      |       | 39,334                          |       |
| Due from related parties                                                                                                                                                               |       | 144                         |       | 97                              |       |
| Prepaid expenses and other current assets                                                                                                                                              |       | 1,028                       |       | 1,059                           |       |
|                                                                                                                                                                                   |       |                        |       |                            |       |
| Total current assets                                                                                                                                                                   |       | 98,524                      |       | 98,661                          |       |
|                                                                                                                                                                                   |       |                        |       |                            |       |
| Property and equipment, net                                                                                                                                                            |       | 25,225                      |       | 18,766                          |       |
| Intangible assets, net                                                                                                                                                                 |       | 1,370                       |       | 1,823                           |       |
| Goodwill                                                                                                                                                                               |       | 45,999                      |       | 45,999                          |       |
| Other assets                                                                                                                                                                           |       | 343                         |       | 524                             |       |
|                                                                                                                                                                                   |       |                        |       |                            |       |
| Total assets                                                                                                                                                                           |       | $                           | 171,461    |                            | $          | 165,773 |   |
|                                                                                                                                                                                   |       |                        |       |                            |       |
| **Liabilities and stockholders’  equity**                                                                                                                                         |       |                        |       |                            |       |
| Current liabilities:                                                                                                                                                                   |       |                        |       |                            |       |
| Accounts payable                                                                                                                                                                       |       | $                           | 6,513      |                            | $          | 3,838 |   |
| Accrued liabilities                                                                                                                                                                    |       | 5,421                       |       | 10,238                          |       |
| Current portion of debt                                                                                                                                                                |       | 25                          |       | 72                              |       |
| Current portion of capital leases                                                                                                                                                      |       | 49                          |       | 49                              |       |
| Deferred revenue                                                                                                                                                                       |       | 490                         |       | 461                             |       |
|                                                                                                                                                                                   |       |                        |       |                            |       |
| Total current liabilities                                                                                                                                                              |       | 12,498                      |       | 14,658                          |       |
|                                                                                                                                                                                   |       |                        |       |                            |       |
| Deferred rent                                                                                                                                                                          |       | 1,646                       |       | 965                             |       |
| Other noncurrent liabilities                                                                                                                                                           |       | 16                          |       | 33                              |       |
|                                                                                                                                                                                   |       |                        |       |                            |       |
| Total liabilities                                                                                                                                                                      |       | 14,160                      |       | 15,656                          |       |
|                                                                                                                                                                                   |       |                        |       |                            |       |
| **Stockholders’ equity**                                                                                                                                                          |       |                        |       |                            |       |
| Common stock, $.001 par value; 200,000,000 shares  authorized; 23,782,010 and 23,477,137 shares issued and outstanding at  June 30, 2009 and December 31, 2008, respectively |       | 24                          |       | 24                              |       |
| Paid-in capital                                                                                                                                                                        |       | 228,949                     |       | 222,608                         |       |
| Accumulated deficit                                                                                                                                                                    |       | (71,672                     | )          | (72,515                         | )          |
|                                                                                                                                                                                   |       |                        |       |                            |       |
| Total stockholders’ equity                                                                                                                                                        |       | 157,301                     |       | 150,117                         |       |
|                                                                                                                                                                                   |       |                        |       |                            |       |
| Total liabilities and stockholders’ equity                                                                                                                                        |       | $                           | 171,461    |                            | $          | 165,773 |   |

 

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,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                        | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues:                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Net  patient service revenues                                                     |       | $                                               | 38,096     |                                          | $          | 29,189 |   | $ | 73,655 |   | $ | 54,437 |   |
| Other  revenues                                                                   |       | 168                                             |       | 151                                           |       | 330 |   | 366 |   |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Total  revenues                                                                   |       | 38,264                                          |       | 29,340                                        |       | 73,985 |   | 54,803 |   |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Cost  of revenues                                                                 |       | 11,993                                          |       | 9,834                                         |       | 23,831 |   | 19,353 |   |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Gross  profit                                                                     |       | 26,271                                          |       | 19,506                                        |       | 50,154 |   | 35,450 |   |
| Operating  expenses:                                                              |       |                                            |       |                                          |       |   |   |   |   |
| General  and administrative                                                       |       | 14,134                                          |       | 10,016                                        |       | 28,460 |   | 19,081 |   |
| Sales  and marketing                                                              |       | 8,440                                           |       | 5,412                                         |       | 15,987 |   | 10,527 |   |
| Research  and development                                                         |       | 1,768                                           |       | 931                                           |       | 2,984 |   | 2,073 |   |
| Integration,  restructuring and other charges                                     |       | (180                                            | )          | 610                                           |       | 1,959 |   | 1,916 |   |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Total  expenses                                                                   |       | 24,162                                          |       | 16,969                                        |       | 49,390 |   | 33,597 |   |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Income  from operations                                                           |       | 2,109                                           |       | 2,537                                         |       | 764 |   | 1,853 |   |
| Other  income (expense):                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Interest  income                                                                  |       | 43                                              |       | 353                                           |       | 166 |   | 531 |   |
| Interest  expense                                                                 |       | (3                                              | )          | (86                                           | )          | (8 | ) | (152 | ) |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Total  other income                                                               |       | 40                                              |       | 267                                           |       | 158 |   | 379 |   |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Income  before income taxes                                                       |       | 2,149                                           |       | 2,804                                         |       | 922 |   | 2,232 |   |
| Income  tax expense                                                               |       | (584                                            | )          | (1,172                                        | )          | (79 | ) | (940 | ) |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Net  income                                                                       |       | 1,565                                           |       | 1,632                                         |       | 843 |   | 1,292 |   |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Dividends  on and accretion of mandatorily redeemable convertible preferred stock |       | —                                          |       | —                                        |       | — |   | (2,597 | ) |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Net  income (loss) attributable to common stockholders                            |       | $                                               | 1,565      |                                          | $          | 1,632 |   | $ | 843 |   | $ | (1,305 | ) |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Net  income (loss) per common share:                                              |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                             |       | $                                               | 0.07       |                                          | $          | 0.07 |   | $ | 0.04 |   | $ | (0.10 | ) |
| Diluted                                                                           |       | $                                               | 0.07       |                                          | $          | 0.07 |   | $ | 0.04 |   | $ | (0.10 | ) |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Weighted  average number of common shares outstanding:                            |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                             |       | 23,791,989                                      |       | 23,098,083                                    |       | 23,695,985 |   | 13,367,699 |   |
| Diluted                                                                           |       | 23,794,731                                      |       | 24,191,099                                    |       | 23,826,831 |   | 13,367,699 |   |

 

See accompanying notes.

 

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**CARDIONET, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(*In thousands*)**

 
| ** **                                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| **Operating activities**                                                                     |       |                                          |       |   |   |
| Net income                                                                                   |       | $                                             | 843        |   | $ | 1,292 |   |
| Adjustments to reconcile net income to net cash  (used in) provided by operating activities: |       |                                          |       |   |   |
| Depreciation                                                                                 |       | 4,866                                         |       | 3,346 |   |
| Amortization of intangibles                                                                  |       | 453                                           |       | 492 |   |
| Loss on disposal of property and equipment                                                   |       | 94                                            |       | 116 |   |
| Deferred rent                                                                                |       | 681                                           |       | (61 | ) |
| Provision for doubtful accounts                                                              |       | 8,444                                         |       | 5,089 |   |
| Stock-based compensation                                                                     |       | 3,790                                         |       | 751 |   |
| Changes in operating assets and liabilities:                                                 |       |                                          |       |   |   |
| Accounts receivable                                                                          |       | (21,896                                       | )          | (11,581 | ) |
| Due from related parties                                                                     |       | (47                                           | )          | 45 |   |
| Prepaid expenses and other current assets                                                    |       | 31                                            |       | (1,419 | ) |
| Other assets                                                                                 |       | 181                                           |       | (793 | ) |
| Accounts payable                                                                             |       | 2,675                                         |       | (2,143 | ) |
| Accrued and other liabilities                                                                |       | (4,805                                        | )          | 5,815 |   |
|                                                                                         |       |                                          |       |   |   |
| Net cash (used in) provided by operating  activities                                         |       | (4,690                                        | )          | 949 |   |
|                                                                                         |       |                                          |       |   |   |
| **Investing activities**                                                                     |       |                                          |       |   |   |
| Purchases of property and equipment                                                          |       | (11,419                                       | )          | (3,779 | ) |
| Investment in subsidiary, net of cash acquired                                               |       | —                                        |       | (5,002 | ) |
|                                                                                         |       |                                          |       |   |   |
| Net cash used in investing activities                                                        |       | (11,419                                       | )          | (8,781 | ) |
|                                                                                         |       |                                          |       |   |   |
| **Financing activities**                                                                     |       |                                          |       |   |   |
| Proceeds from issuance of common stock                                                       |       | 2,551                                         |       | 46,728 |   |
| Proceeds from issuance of debt                                                               |       | —                                        |       | 500 |   |
| Repayment of debt                                                                            |       | (47                                           | )          | (2,915 | ) |
|                                                                                         |       |                                          |       |   |   |
| Net cash provided by financing activities                                                    |       | 2,504                                         |       | 44,313 |   |
|                                                                                         |       |                                          |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                        |       | (13,605                                       | )          | 36,481 |   |
| Cash and cash equivalents — beginning of period                                         |       | 58,171                                        |       | 18,091 |   |
|                                                                                         |       |                                          |       |   |   |
| Cash and cash equivalents — end of period                                               |       | $                                             | 44,566     |   | $ | 54,572 |   |
|                                                                                         |       |                                          |       |   |   |
| **Supplemental disclosure of cash  flow information**                                        |       |                                          |       |   |   |
| Cash paid for interest                                                                       |       | $                                             | 8          |   | $ | 368 |   |
| Cash paid for taxes                                                                          |       | $                                             | 6,169      |   | $ | — |   |

 

See accompanying notes.

 

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**CARDIONET, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****             ****Summary of Significant 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 and Article 10of Regulation S-X. Accordingly, these consolidated financial statementsdo not include all of the information and footnotes necessary for a completepresentation of financial position, results of operations and cash flows.  Inthe opinion of management, these consolidated financial statements reflect alladjustments which are of normal recurring nature and necessary for a fairpresentation of the Company’s financial position as of June 30, 2009 and December 31,2008, and the results of operations for the three and six months ended June 30,2009 and 2008. The financial data and other information disclosed in thesenotes to the financial statements related to the three and six month periodsare unaudited. The results for the three and six month periods ended June 30,2009 are not necessarily indicative of the results to be expected for anyfuture period.

 

**Net Income (Loss) Attributable toCommon Shares**

 

TheCompany computes net income (loss) 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, 2009 and 2008. Allshare amounts have been adjusted for the one-for-two reverse stock spliteffected by the Company on March 5, 2008:

 
| ** **                                                          | ** ** | **June 30,  2009** | ** ** | **June 30,  2008** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Series B  warrants                                             |       | —                  |       | 6,250                   |       |
| Common stock options and restricted stock units outstanding         |       | 2,018,552               |       | 1,592,744               |       |
| Common stock options and restricted stock units available for grant |       | 754,352                 |       | 579,460                 |       |
| Common stock held by certain employees and unvested                 |       | 18,540                  |       | 65,572                  |       |
| Common stock                                                        |       | 23,782,010              |       | 23,130,812              |       |
|                                                                |       |                    |       |                    |       |
| Total                                                               |       | 26,573,454              |       | 25,374,838              |       |

 

Basicnet income (loss) per share attributable to common stockholders is computed bydividing net loss by the weighted average number of common shares outstandingduring the period. Diluted net income (loss) per share is computed by givingeffect to all potential dilutive common shares, including stock options,warrants and convertible preferred stock, as applicable.

 

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The following tablepresents the calculation of historical basic and diluted net income (loss) pershare:

 
| ** **                                                                     | ** ** | **Three  Months Ended********June 30,**  | ** ** | **Six  Months Ended********June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                      | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                     | ** ** | **(in  thousands, except per share amounts)** | ** ** |
| *Numerator:*                                                                   |       |                                          |       |                                       |       |   |   |   |   |
| Net income  (loss) applicable to common stockholders                           |       | $                                             | 1,565      |                                       | $          | 1,632 |   | $ | 843 |   | $ | (1,305 | ) |
| *Denominator:*                                                                 |       |                                          |       |                                       |       |   |   |   |   |
| Weighted average  common shares outstanding—basic                         |       | 23,791,989                                    |       | 23,098,083                                 |       | 23,695,985 |   | 13,367,699 |   |
| Dilutive effect  of the Company’s employee compensation plans             |       | 2,742                                         |       | 1,093,016                                  |       | 130,846 |   | — |   |
| Weighted average  shares used in computing diluted net income (loss) per share |       | 23,794,731                                    |       | 24,191,099                                 |       | 23,826,831 |   | 13,367,699 |   |
| Basic net income  (loss) per share                                             |       | $                                             | 0.07       |                                       | $          | 0.07 |   | $ | 0.04 |   | $ | (0.10 | ) |
| Diluted net  income (loss) per share                                           |       | $                                             | 0.07       |                                       | $          | 0.07 |   | $ | 0.04 |   | $ | (0.10 | ) |

 

Ifthe outstanding vested options or restricted stock units were exercised orconverted into common stock, the result would be anti-dilutive for the sixmonths ended June 30, 2008. Accordingly, basic and diluted net lossattributable to common stockholders per share are identical for that periodpresented in the consolidated statements of operations.

 

**Goodwill**

 

The Company considers its business to be one reporting unit forpurposes of performing its goodwill impairments analysis. Goodwill is reviewedfor impairment annually, or when events arise that could indicate that andimpairment 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 judgments. The Company also considers comparable market data toassist in determining the fair value of its reporting unit where appropriate.There are inherent uncertainties related to these factors and the judgmentapplied in the analysis. Nonetheless, the Company believes that the combinationof an income and a market approach provides a reasonable basis to estimate thefair value of the reporting unit. If the estimated fair value of the reportingunit is less than its carrying value, an impairment exists and additionalanalysis will be undertaken to determine the amount of impairment.

 

**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 (thevesting period). ASC 718 requires that an entity measure the cost ofliability-based service awards based on current fair value that is re-measuredsubsequently at each reporting date through the settlement date. The Companyaccounts for equity awards issued to non-employees in accordance with ASC505-50, *Equity-Based Payments to Non-Employees*.

 

TheCompany’s income before income taxes for the six months ended June 30,2009 and 2008 was $3.8 million and $0.8 million lower, respectively, and theCompany’s after-tax net income for the same periods was $3.5 million and $0.5million lower, respectively, as a result of stock-based compensation expenseincurred. The impact of stock-based compensation expense was $0.15 and $0.03 onboth basic and diluted earnings per share for the six months ended June 30,2009 and 2008, respectively.

 

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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,** | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|
| ** **              | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| Expected dividend yield |       | 0                                             | %          | 0 | % |
| Expected volatility     |       | 50                                            | %          | 50 | % |
| Risk-free interest rate |       | 2.12                                          | %          | 2.68 | % |
| Expected life           |       | 6.25  years                                   |       | 6.25  years |   |

 

Thedividend yield of zero is based on the fact that the Company has never paidcash dividends and has no present intention to pay cash dividends. Since theCompany’s stock was not publicly traded prior to the closing of its initialpublic offering, the expected volatility was calculated for each date of grantbased on an alternative method. The Company identified similar public entitiesfor which share price information was available and considered the historicalvolatility of these entities’ share price in estimated expected volatility. Therisk-free interest rate is derived from the U.S. Federal Reserve rate in effectat the time of grant. The expected life calculation is based on the observedand expected time to the exercise of options by the Company’s employees basedon historical exercise patterns for similar options. Based on the Company’shistorical experience of options that cancel before becoming fully vested, theCompany has assumed an annualized forfeiture rate of 15% for all options. Underthe true-up provision of ASC 718, the Company will record additional expense ifthe actual forfeiture rate is lower than estimated, and will record a recoveryof prior expense if the actual forfeiture rate is higher than estimated.

 

Basedon the above assumptions, the per share weighted average fair value of theoptions granted under the stock option plan for the six months ended June 30,2009 and 2008 was $11.73 and $8.63, respectively.

 

The following tablesummarizes activity under all stock award plans from December 31, 2008through June 30, 2009:

 
| ** **                             | ** ** | ** **         | ** ** | **Options Outstanding** | ** ** |
|----------------------------------------|------------|--------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **Shares**         | ** ** | ** **                   | ** ** | **Weighted** | ** ** |
| ** **                             | ** ** | **Available**      | ** ** | **Number**                   | ** ** | **Average** | ** ** |
| ** **                             | ** ** | **for Grant** | ** ** | **of Shares**           | ** ** | **Exercise Price** | ** ** |
| Balance — December 31, 2008  |       | 340,935            |       | 1,635,205                    |       | $ | 13.67 |   |
| Additional options available for grant |       | 1,024,921          |       | —                       |       | $ | — |   |
| Granted                                |       | (850,890           | )          | 850,890                      |       | $ | 24.84 |   |
| Canceled                               |       | 423,289            |       | (423,289                     | )          | $ | 9.63 |   |
| Exercised                              |       | —             |       | (214,815                     | )          | $ | 8.25 |   |
|                                   |       |               |       |                         |       |   |   |
| Balance — March 31, 2009     |       | 938,255            |       | 1,847,991                    |       | $ | 20.98 |   |
|                                   |       |               |       |                         |       |   |   |
| Granted                                |       | (222,386           | )          | 222,386                      |       | $ | 17.63 |   |
| Canceled                               |       | 38,483             |       | (38,483                      | )          | $ | 14.44 |   |
| Exercised                              |       | —             |       | (13,342                      | )          | $ | 17.41 |   |
|                                   |       |               |       |                         |       |   |   |
| Balance — June 30, 2009      |       | 754,352            |       | 2,018,552                    |       | $ | 20.82 |   |

 

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 determined by the Board ofDirectors. The increase in the shares available for grant under the ESOP planis equal to 4% of the total shares outstanding at December 31, 2008.

 

Additional informationregarding options outstanding is as follows:

 
| ** **                                          | ** ** | **June 30,  2009** | ** ** | **June 30,  2008** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Range of exercise price (per option)                |       | $0.70  - $31.18         |       | $0.70  - $20.00         |       |
| Weighted average remaining contractual life (years) |       | 9.15                    |       | 8.99                    |       |

 

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*Employee Stock Purchase Plan*

 

On March 17, 2009,44,189 shares were purchased in accordance with the Employee Stock PurchasePlan (ESPP). Net proceeds to the Company from the issuance of shares of commonstock under the ESPP for the six months ended June 30, 2009 were $0.7million. In January 2009, the number of shares available for grant wasincreased by 235,189, per the ESPP plan documents. At June 30, 2009,approximately 379,503 shares remain available for purchase under the ESPP.

 

**New Accounting Pronouncements**

 

EffectiveJanuary 1, 2009, the Company prospectively adopted ASC 820, *Fair Value Measurements and Disclosures*, with respect tofair value measurements required for the Company’s nonfinancial assets andnonfinancial liabilities. The adoption did not have a material effect onthe Company’s financial position or results of operations.

 

EffectiveJanuary 1, 2009, the Company prospectively adopted ASC 805, *Business Combinations* and ASC 810, *Consolidation*. ASC 805 establishes theprinciples and requirements for how an acquirer (i) recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed and any noncontrolling interest in the acquiree; (ii) recognizesand measures the goodwill acquired in the business combination or a gain from abargain purchase; and (iii) determines what information to disclose toenable users of the financial statements to evaluate the nature and financialeffects of the business combination. Previously any changes in valuationallowances as a result of income from acquisitions for certain deferred taxassets would serve to reduce goodwill. Under the current guidance, any changesin the valuation allowance related to income from acquisitions currently or inprior periods now serve to reduce income taxes in the period in which thereserve is reversed. Additionally, transaction related expenses that werepreviously capitalized are now expensed as incurred. As of December 31,2008, the Company had no deferred transaction related expenses for businesscombination transactions in negotiation. All transaction related costs thathave been incurred since the adoption of ASC 805 on January 1, 2009 havebeen expensed as incurred. ASC 810 establishes accounting and reportingstandards that require (i) noncontrolling interests to be reported as acomponent of equity; (ii) changes in a parent’s ownership interest whilethe parent retains its controlling interest to be accounted for as equitytransactions; and (iii) any retained noncontrolling equity investment uponthe deconsolidation of a subsidiary to be initially measured at fair value. Theadoption did not have an effect on the Company’s financial position or resultsof operations.

 

In April 2009, ASC 805 was amended for provisions related to theinitial recognition and measurement, subsequent measurement and disclosure ofassets and liabilities arising from contingencies in a business combination.Under the amended guidance, assets acquired and liabilities assumed in abusiness combination that arise from contingencies should be recognized at fairvalue on the acquisition date if fair value can be determined during themeasurement period. If fair value cannot be determined, companies shouldtypically account for the acquired contingencies using existing guidance.  This amendment did not have a material effecton the Company’s financial position or results of operations.

 

In April 2009, ASC 820 was amended to provide additional guidancefor estimating fair value when the volume and level of activity for the assetor liability have significantly decreased. This amendment also includesguidance on identifying circumstances that indicate a transaction is notorderly. This amendment is effective for periods ending after June 15,2009.  This amendment did not have amaterial effect on the Company’s financial position or results of operations.

 

In April 2009, ASC 320, *Investments — Debt &Equity Securities,* was amended to provide guidance forother-than-temporary impairments of debt securities. The amendment providesthat financial asset impairment indicators should be based on the Company’sintent to sell the security instead of the Company’s ability to hold thesecurity, and to improve the presentation and disclosure of other-than-temporaryimpairments on debt and equity securities in the financial statements.  This amendment is effective for periodsending after June 15, 2009.  Thisamendment did not have a material effect on the Company’s financial position orresults of operations.

 

The Company adopted ASC 855, *Subsequent Events*on May 1, 2009. The guidance establishes general standards of accountingfor and disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued. This guidancesets forth the circumstances under which an entity should recognize events ortransactions occurring after the balance sheet date in its financialstatements. The guidance also requires the disclosure of the date through whichan entity has evaluated subsequent events and the basis for that date - thatis, whether that date represents the date the financial statements were issuedor were available to be issued. In accordance with ASC 855, we have evaluatedsubsequent events through the date and time the financial statements wereissued.

 

**2.****                                     ****Contingent Payment**

 

On March 8, 2007, the Company acquired all ofthe outstanding capital stock of PDSHeart, Inc. (“PDSHeart” or “PDS”) foran aggregate purchase price of $51.6 million. In addition to the$51.6 million consideration, the Company agreed to pay PDSHeartstockholders $5.0 million of contingent consideration in the event of aqualifying liquidation event, including a public offering or 

 

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acquisition.The Company’s initial public offering was consummated on March 25, 2008and, accordingly, the purchase price for the PDSHeart acquisition was adjustedto $56.6 million to reflect this payment.

 

**3.****             ****Mandatorily RedeemableConvertible Preferred Stock and Stockholders’ Equity (Deficit)**

 

In March 2007, the Company sold 110,000 sharesof its mandatorily redeemable convertible preferred stock, or MRCPS, whichgenerated net proceeds to the Company of $102.1 million ($110 million lessoffering costs of $7.9 million). The Company also issued 3,383 shares of MRCPSupon conversion of an outstanding bridge loan and 1,456 shares as considerationto a major shareholder of PDSHeart as consideration in the PDSHeartacquisition. Accrued dividends were $6.1 million at March 25,2008.  The MRCPS original purchase priceplus accrued dividends were converted to common shares on March 25, 2008in connection with the Company’s initial public offering.

 

From 1999 to 2004, the Company issued convertiblepreferred stock which generated net proceeds to the Company of $53.5 million.All Series A, B, C and D preferred stock converted to common stock on March 25,2008 in connection with the Company’s initial public offering.

 

In connection with a borrowing arrangement providedby a bank, the Company issued a warrant in August 2000 to purchase 12,500shares of Series B preferred stock at a price of $1.47 per share. Thewarrant may be exercised at any time on or before August 9, 2010.  In connection with the closing of the Company’sinitial public offering on March 25, 2008, this warrant became exercisablefor 6,250 shares of the Company’s common stock at a price of $2.94 per share.In March 2009, these warrants were fully exercised through a cashlesstransaction.

 

In2005 and 2006, the Company issued warrants to purchase 964,189 shares of itspreferred stock at a price of $3.50 per share to the participants in certainbridge financing transactions and to a stockholder in connection with enteringinto the Amended and Restated Subordinated Promissory Note with a stockholder.As a result of the MRCPS financing, the warrants became exercisable for sharesof the Company’s Series D-1 preferred stock. These warrants wereautomatically net exercised for common stock on March 25, 2008 inconnection with the Company’s initial public offering.

 

**4.****             ****Integration and Restructuring Activities**

 

*PDSHeart Integration*

 

Inconnection with the acquisition of PDSHeart the Company initiated exit plansfor acquired activities that are redundant to the Company’s existingoperations. The plan includes the closure of a facility and the elimination of35 positions in the areas of sales, finance, service and management. Inconnection with the plan, the Company established reserves of $0.5 millionincluded in the purchase price allocation. The established reserve has beenfully depleted, and no additional costs are expected to be incurred.The Company did not incur any expenses inrelation to PDSHeart integration during the six months ended June 30,2009, and incurred expenses of $0.6 million in the six months ended June 30,2008. These costs were expensed in accordance with ASC 420, *Exit or Disposal Cost Obligations*. The integrationwas substantially completed as of December 31, 2008.

 

*San Diego Restructuring*

 

Duringthe first quarter of 2008, the Company initiated plans to consolidate itsFinance and Human Resource functions in Pennsylvania. This plan involved theelimination of seven positions in San Diego. The Company did notincur any restructuring expenses for the six months ended June 30, 2009,and incurred expenses of $0.3 million for the six months ended June 30,2008. The integration was substantially completed as of December 31, 2008.

 

Asummary of the reserve activity related to the San Diego restructuringplan as of June 30, 2009 is as follows:

 
| ** **                           | ** ** | **Initial  Reserve  Recorded** | ** ** | **Payments  through  June 30,  2009** | ** ** | **Additional  reserves  through  June 30,  2009** | ** ** | **Balance  as of  June 30,  2009** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|--------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------|------------|
| Severance and employee related costs |       | $                              | 662        |                                       | 995        |                                                   | 536        |                                    | 203        |   |
|                                      |            |                                |            |                                            |            |                                                        |            |                                         |            |  |

 

**5.****             ****Income Taxes**

 

The Company’s effective tax rate of 8.6% for the sixmonths ended June 30, 2009 is based on its estimated fiscal 2009 pretaxincome. The Company has deferred income tax assets totaling approximately$28.3 million at June 30, 2009, consisting primarily of 

 

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federaland state net operating loss and credit carryforwards and temporary differencesrelated to the provision for doubtful accounts. The federal and state netoperating loss carryforwards, if unused, will begin to expire in 2010. Thefederal and state credit carryforwards, if unused, will expire in 2026. Due touncertainty regarding the ultimate realization of these net operating loss andcredit carryforwards and other deferred income tax assets, the Company hasestablished a valuation allowance for most of these assets and will recognizethe benefits only as reassessment indicates the benefits are realizable.

 

**6.****             ****Subsequent Events**

 

On April 2, 2009 CardioNet entered into a MergerAgreement to acquire Biotel Inc. for $14.0 million.  On July 14, 2009, CardioNet exercisedits contractual right to terminate the Merger Agreement due to Biotel’s breachof certain covenants in the agreement. The next day, CardioNet notified Biotelof its obligation to pay the Company a $1.4 million termination fee inaccordance with the Merger Agreement.  Onor about July 16, 2009, Biotel subsequently commenced litigation againstCardioNet in Minnesota District Court in Hennepin County, Fourth JudicialDistrict, alleging that CardioNet had breached and improperly terminated theMerger Agreement. Biotel is seeking specific performance and damages. TheCompany plans to vigorously defend its position, and does not expect theoutcome of this litigation to have a material impact on the financialstatements.

 

On July 10, 2009,Highmark announced a reduction in the reimbursement from its current pricing to$754 per service, a reduction of approximately 33%. The Company believes thatthe reduced rate is not supported by the facts or the accepted methodologiesfor establishing reimbursement, and is currently engaging CMS and Highmark indiscussions to develop a pricing methodology that appropriately values MCOTTMtechnology and related services. If no alternative is attained, the new pricingwill become effective on September 1, 2009.

 

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

 

The following discussion andanalysis should be read in conjunction with our annual report on Form 10-Kfor the year ended December 31, 2008, and in conjunction with theaccompanying quarterly unaudited condensed consolidated financial statements.This discussion contains certain forward-looking statements that involve risksand uncertainties. The Company’s actual results and the timing of certainevents could differ materially from those discussed in these forward-lookingstatements as a result of certain factors, including, but not limited to, thoseset forth herein and elsewhere in this report and in the Company’s otherfilings with the Securities and Exchange Commission. See the “Forward LookingStatements” section at the beginning of this report.

 

**CompanyBackground**

 

CardioNet is a leadingprovider of ambulatory, continuous, real-time outpatient management solutionsfor monitoring relevant and timely clinical information regarding an individual’shealth. The Company’s efforts are initially focused on the diagnosis andmonitoring of cardiac arrhythmias, or heart rhythm disorders, with a solutionthat it markets as Mobile Cardiac Outpatient TelemetryTM (MCOTTM). The Companyactively began developing its product platform in April 2000, and sincethat time, has devoted substantial resources in advancing its patientmonitoring solutions. The platform successfully integrates a wireless datatransmission network, internally developed software, FDA-cleared algorithms andmedical devices, and a 24-hour monitoring service center.

 

The Company has been anapproved Independent Diagnostic Testing Facility (“IDTF”) for Medicare since itreceived 510(k) clearance for the first and second generation of our coreMCOTTM devices in 2002. The Company received FDA 510(k) clearance for theproprietary algorithm included in its third generation product, or C3, in October 2005.Subsequently in November 2006, the Company received FDA 510(k) clearancefor its C3 system which it has incorporated as part of its monitoring solution.The Company continues to pursue innovation of new and existing medicalsolutions through investments in research and development. The CardioNetMonitoring Center commenced operations in Conshohocken, Pennsylvania in 2002,concurrent with its first FDA approval, and all of the Company’s MCOTTMarrhythmia monitoring activities are currently conducted at that location.

 

In March 2007, theCompany acquired all of the outstanding capital stock of PDSHeart. Theacquisition of PDSHeart provided three additional product lines to complimentMCOTTM: event, Holter and Pacer monitoring solutions. In addition, theacquisition supplied the Company with existing sales channels and relationshipsin geographic areas that were previously had not been penetrated prior to theacquisition. 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.

 

**Qualcomm Supplier Agreement**

 

The Company established arelationship with Qualcomm Inc. (“Qualcomm”) in May 2003. Qualcomm isthe sole provider of wireless cellular data connectivity solutions and datahosting and queuing services for the Company’s monitoring network. The Companyhas no fixed or minimum financial commitment as it relates to network usage orvolume activity. However, if the Company fails to maintain an agreed-uponnumber of active cardiac monitoring devices on the Qualcomm network or itutilizes the monitoring and communications services of a provider other thanQualcomm, Qualcomm has the right to terminate its relationship with theCompany.

 

**Carrier Pricing**

 

In October 2008, theCenters for Medicare and Medicaid Services (“CMS”) established reimbursementrates that cover MCOTTM services. The reimbursement rates are applicable to theCategory I CPT codes (93228 and 93229) established by the American MedicalAssociation (“AMA”) for MCOTTM became effective on January 1, 2009.Highmark Medicare Services (“Highmark”) is responsible for setting thereimbursement rate on behalf of CMS for code 93229, which is the code for thetechnical component of our services. The new billing codes allow for automatedclaims adjudication, substantially simplifying the reimbursement process forphysicians and payors compared to the current process. Reimbursement prior tothe use of the new CPT codes was obtained through non-specific billing codeswhich require various narratives that, in most cases, involve semi-automated ormanual processing, as well as additional review by payors.

 

On July 10, 2009, Highmarkannounced a reduction in the reimbursement from its current pricing to $754 perservice, a reduction of approximately 33%. The Company believes that thereduced rate is not supported by the facts or the accepted methodologies forestablishing reimbursement, and is currently engaging CMS and Highmark indiscussions to develop a pricing methodology that appropriately values MCOTTMtechnology and related services. If no alternative is attained, the new pricingwill become effective on September 1, 2009. The Company believes that itscurrent independent business model may not be economically viable at theproposed pricing level.

 

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**Commercial Contracts**

 

We have successfully securedcontracts with many national and regional commercial payors. We increased thenumber of MCOTTM contracts with commercial payors from 181 at June 30, 2008to 219 at June 30, 2009. We estimate that the number of covered commerciallives increased from 137 million at June 30, 2008 to 157 million at June 30,2009. The current estimated total of 197 million covered lives for Medicare andcommercial lives for which we had reimbursement contracts as of June 30,2009 represents approximately 76% of the total covered lives in the UnitedStates. The MCOTTM contracts also cover event, Holter and Pacer service pricing.In addition, there were approximately 75 contracts with commercial payors thatpertained only to event, Holter and Pacer service pricing, and did not coverMCOTTM. The majority of the remaining covered lives are insured by a relativelysmall number of large commercial insurance companies that deemed MCOTTM to be “experimentaland investigational” and do not currently reimburse us for services provided totheir beneficiaries. We believe the CPT codes and reimbursement rates thatbecame effective in January 2009 will lead to acceptance of the MCOTTMtechnology and facilitate future contract negotiations with these remainingnon-contracted payors.

 

**Resultsof Operations**

 

***Three Months Ended June 30,2009 and 2008***

 

*Revenues.*    Total revenues forthe three months ended June 30, 2009 increased to $38.3 million from$29.3 million for the three months ended June 30, 2008, an increaseof $9.0 million, or 30.4%. MCOTTM revenue increased $9.6 million, offset by a decrease in PDS andother revenue of $0.6 million.

 

*GrossProfit.*    Grossprofit increased to $26.3 million for the three months ended June 30,2009, or 68.7% of revenues, from $19.5 million for the three months ended June 30,2008, or 66.5% of revenues. The increase of $6.8 million, or 34.7%, was due toincreased revenue from MCOTTMservices, offset by an increase in cost of sales related to payroll expense dueto higher headcount of $1.5 million, increased depreciation expense related toadditional devices being in service in the 2009 period compared to the 2008period of $0.6 million, and an increase in supplies and other miscellaneousexpenses of $0.1 million.

 

*Generaland Administrative Expense.*    General and administrative expense increased to$14.1 million for the three months ended June 30, 2009 from$10.0 million for the three months ended June 30, 2008. This increaseof $4.1 million, or 41.1%, was primarily due to an increase in theprovision for bad debt of $1.9 million, increase in stock compensationexpense of $1.7 million, increase in professional fees of $0.4 million, and$0.1 million of miscellaneous expenses. As a percentage of total revenues,general and administrative expense was 36.9% for the three months ended June 30,2009 compared to 34.1% for the three months ended June 30, 2008.

 

*Sales andMarketing Expense.*    Salesand marketing expense was $8.4 million for the three months ended June 30,2009 compared to $5.4 million for the three months ended June 30,2008. The increase of $3.0 million, or 55.9%, was due to the growth of thesales force and sales operations infrastructure.  As a percent of total revenues, sales andmarketing expense was 22.1% for the three months ended June 30, 2009compared to 18.4% for the three months ended June 30, 2008.

 

*Researchand Development Expense.*    Researchand development expense was $1.8 million for the three months ended June 30,2009 compared to $0.9 million for the three months ended June 30, 2008.The increase of $0.9 million, or 89.9%, was due primarily to an increase inconsulting fees of $0.5 million, increase in payroll expense of $0.2 millionand miscellaneous expenses of $0.2 million. As a percent of total revenues,research and development expense increased to 4.6% for the three months ended June 30,2009 compared to 3.2% for the three months ended June 30, 2008.

 

*Integration,Restructuring and Other Charges.*    A final insurance payment related to the firethat occurred at our Conshohocken, PA facility in August 2008 was receivedin the three months ended June 30, 2009, resulting in a benefit of $0.2million. For the three months ended June 30, 2008, the Company incurredintegration charges relating to the PDSHeart acquisition of $0.4 million, andincurred restructuring charges relating to the consolidation of our Finance andHuman Resources functions in Pennsylvania of $0.2 million. These activitieswere substantially completed as of December 31, 2008, and thus, no chargesrelated to integration and restructuring were incurred in the three monthsended June 30, 2009.

 

*OtherIncome.*    Netinterest income was $0.1 million for the three months ended June 30, 2009,down from $0.3 million for the three months ended June 30, 2008. Thedecline of $0.2 million, or 85.0% was due primarily to lower short terminterest rates and a lower average cash balance in the first three months of2009 compared to the first three months of 2008.

 

*IncomeTaxes.*    TheCompany’s effective tax rate was 27.2% for the three months ended June 30,2009, compared to an effective tax rate of 41.8% for the three months ended June 30,2008. The effective tax rate is based on our estimated fiscal 2009 pretaxincome.

 

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*NetIncome.*    Netincome for the three months ended June 30, 2009 was flat compared to thethree months ended June 30, 2008 at $1.6 million. As a percent of totalrevenues, net income was 4.1% for the three months ended June 30, 2009compared to 5.6% for the three months ended June 30, 2008.

 

***Six Months Ended June 30, 2009and 2008***

 

*Revenues.*    Total revenues forthe six months ended June 30, 2009 increased to $74.0 million from$54.8 million for the six months ended June 30, 2008, an increase of$19.2 million, or 35.0%. MCOTTMrevenue increased $20.9 million, offset by a decrease in PDS and otherrevenue of $1.7 million.

 

*GrossProfit.*    Grossprofit increased to $50.2 million for the six months ended June 30,2009, or 67.8% of revenues, from $35.5 million for the six months ended June 30,2008, or 64.7% of revenues. The increase of $14.7 million, or 41.5%, was due toincreased revenue from MCOTTMservices, offset by an increase in cost of sales related to payroll expense dueto higher headcount of $3.3 million and increased depreciation expense relatedto additional devices being in service in the 2009 period compared to the 2008period of $1.1 million.

 

*Generaland Administrative Expense.*    General and administrative expense increased to$28.5 million for the six months ended June 30, 2009 from$19.1 million for the six months ended June 30, 2008. This increaseof $9.4 million, or 49.2%, was primarily due to an increase in theprovision for bad debt of $3.3 million, increase in stock compensationexpense of $2.9 million, increase in payroll expense of $1.5 million, increasein bonus expense of $1.2 million, increase in professional fees of $0.4 million,and $0.1 million of miscellaneous expenses. As a percentage of total revenues,general and administrative expense was 38.5% for the six months ended June 30,2009 compared to 34.8% for the six months ended June 30, 2008.

 

*Sales andMarketing Expense.*    Salesand marketing expense was $16.0 million for the six months ended June 30,2009 compared to $10.5 million for the six months ended June 30,2008. The increase of $5.5 million, or 51.9%, was due to the growth of thesales force and sales operations infrastructure.  As a percent of total revenues, sales andmarketing expense was 21.6% for the six months ended June 30, 2009compared to 19.2% for the six months ended June 30, 2008.

 

*Researchand Development Expense.*    Researchand development expense was $3.0 million for the six months ended June 30,2009 compared to $2.1 million for the six months ended June 30, 2008. Theincrease of $0.9 million, or 43.9%, was due primarily to an increase in payrollexpense of $0.4 million, increase in consulting fees of $0.3 million andmiscellaneous expenses of $0.2 million. As a percent of total revenues,research and development expense increased to 4.0% for the six months ended June 30,2009 from 3.8% for the six months ended June 30, 2008.

 

*Integration,Restructuring and Other Charges.*    Integration, restructuring and other chargeswas $2.0 million, or 2.6% of revenues, for the six months ended June 30,2009, comprised primarily of severance expenses of $2.1 million related todeparture of certain executives in the first quarter of 2009. The severancecosts were offset slightly by an insurance payment received related to the firethat occurred at our Conshohocken, PA facility in August 2008. For the sixmonths ended June 30, 2008, integration, restructuring and other chargestotaled $1.9 million, or 3.5% of revenues. The charges for the six months endedJune 30, 2008 included $1.0 million related to the resolution ofintellectual property litigation, integration charges relating to the PDSHeartacquisition of $0.6 million, and restructuring charges relating to theconsolidation of our Finance and Human Resources functions in Pennsylvania of$0.3 million.

 

*OtherIncome.*    Netinterest income was $0.2 million for the six months ended June 30, 2009, adecrease of $0.2 million, or 58.3% from $0.4 million for the six months ended June 30,2008. The decrease was primarily due to lower short term interest rates and alower average cash balance in the first six months of 2009 compared to thefirst six months of 2008.

 

*IncomeTaxes.*    TheCompany’s effective tax rate was 8.6% for the six months ended June 30,2009, compared to an effective tax rate of 42.1% for the six months ended June 30,2008. The effective tax rate for the six months ended June 30, 2009 isbased on our estimated fiscal 2009 pretax income. The Company has approximately$27.6 million in federal net operating losses as of June 30, 2009 tooffset future taxable income expiring in various years through 2026.

 

*NetIncome.*    Netincome for the six months ended June 30, 2009 increased to $0.8 millionfrom a net loss of $1.3 million for the six months ended June 30, 2008.

 

**Liquidityand Capital Resources**

 

As of June 30, 2009,our principal source of liquidity was cash and cash equivalents totaling$44.6 million and net accounts receivable of $52.9 million. TheCompany incurred net losses from inception through March 31, 2008. Priorto operating at a net profit, the Company obtained funding through various debtsources. In March 2008, all material portions of interest-bearing debtwere 

 

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retired in conjunction with the Company’s initialpublic offering (IPO). Proceeds from the IPO were $46.7 million, net ofunderwriting commissions and offering expenses. From March 2008 through June 30,2009 the Company generated sufficient cash to fund its business throughcontinuing operations.

 

For the sixmonths ended June 30, 2009, cash flow from operations decreased to a cashoutflow of $4.7 million, down from a cash inflow of $1.0 for the six monthsended June 30, 2008. The decrease was due primarily to an increase inaccounts receivable that resulted from higher sales of MCOTTM services, as wellas an extended receivable turnover rate in the six months ended June 30,2009 compared to the six months ended June 30, 2008. The increase inaccounts receivable was offset by an increase in accounts payable, accruedliabilities and higher depreciation related to growth in operations, increasedprovision for doubtful accounts related to aging receivables, and increasedstock-based compensation related to the adoption of the director compensationplan, as well as the hiring of several senior level employees that receivedstock-based compensation awards upon employment commencement.

 

The Company used net cash ininvesting activities of $11.4 million for the six months ended June 30,2009, compared to $8.8 million in the six months ended June 30, 2008, anincrease of $2.6 million. The increase was primarily due to investment inmedical devices related to increased patient volume for the six months ended June 30,2009.

 

The Company generated netcash from financing activities of $2.5 million in the six months ended June 30,2009, compared to $44.3 million in the six months ended June 30, 2008, adecrease of $41.8 million. The decrease was primarily due to the Companyreceiving proceeds from its initial public offering in the first quarter of2008.

 

We believe that our existingcash and cash equivalent balances and revenues from our operations will besufficient to meet our anticipated cash requirements for the foreseeablefuture.

 

Our future fundingrequirements will depend on many factors, including:

 

·                  the reimbursement ratesassociated with our products and services;

 

·                  our ability to securecontracts with additional commercial payors providing for the reimbursement ofour services;

 

·                  the costs associated withdeveloping, manufacturing and building our inventory of our future monitoringsolutions;

 

·                  the costs of hiringadditional personnel and investing in infrastructure to support future growth;

 

·                  actions taken by the FDA andother regulatory authorities affecting the MCOTTM and competitive products;

 

·                  the emergence of competingtechnologies and products and other adverse market developments;

 

·                  the costs of preparing,filing, prosecuting, maintaining and enforcing patent claims and otherintellectual property rights or defending against claims of infringement byothers;

 

·                  the costs related tobusiness combinations; and

 

·                  the costs of investing inadditional lines of business outside of arrhythmia monitoring solutions.

 

To the extent that we raiseadditional capital by issuing equity securities, our stockholders’ ownershipwill be diluted. In addition, if we determine that we need to raise additionalcapital, such capital may not be available on reasonable terms, or at all. Ifwe raise additional funds by issuing equity securities, substantial dilution toexisting stockholders would likely result. If we raise additional funds byincurring additional debt financing, the terms of the debt may involvesignificant cash payment obligations as well as covenants and specificfinancial ratios that may restrict our ability to operate our business.

 

**Item 3. Quantitative andQualitative Disclosures about Market Risk.**

 

Our cash and cash equivalents as of June 30,2009 consisted primarily of cash and money market funds with maturities of lessthan 90 days.  The primary objective ofour investment activities is to preserve our capital for the purpose of fundingoperations while, at the same time, maximizing the income we receive from ourinvestments without significantly increasing risk. To achieve this objective, ourinvestment policy allows us to maintain a portfolio of cash equivalents andshort term investments in a variety of securities including money market fundsand corporate debt securities. Due to the short term nature of our investments,we believe we have no material exposure to interest rate risk.

 

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**Item 4T. Controls and Procedures.**

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our periodic reports filed with the SEC is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and that such information is accumulated and communicatedto our management, including our chief executive officer and chief financialofficer, as appropriate, to allow for timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and no evaluation of controls and procedures canprovide absolute assurance that all control issues and instances of fraud, ifany, within a company have been detected. Management is required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.

 

As required by Rule 13a-15(b) ofthe Securities Exchange Act of 1934, as amended, or Exchange Act, prior to thefiling of this report we carried out an evaluation, under the supervision andwith the participation of our management, including our chief executive officerand chief financial officer, of the effectiveness of the design and operationof our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Exchange Act) as of the end of the period covered by thisreport. Based on their evaluation, our chief executive officer and chieffinancial officer concluded that our disclosure controls and procedures wereeffective as of the end of the period covered by this report.

 

In addition, management,including our chief executive officer and chief financial officer, did notidentify any change in our internal control over financial reporting thatoccurred during our latest fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**PART II - OTHER INFORMATION.**

 

**Item 1.  LegalProceedings.**

 

On April 2,2009 CardioNet entered into a Merger Agreement to acquire Biotel Inc. for $14.0million.  On July 14, 2009,CardioNet exercised its contractual right to terminate the Merger Agreement dueto Biotel’s breach of certain covenants in the agreement.  The next day, CardioNet notified Biotel ofits obligation to pay the Company a $1.4 million termination fee in accordancewith the Merger Agreement.  On or about July 16,2009, Biotel subsequently commenced litigation against CardioNet in MinnesotaDistrict Court in Hennepin County, Fourth Judicial District, alleging thatCardioNet had breached and improperly terminated the Merger Agreement. Biotelis seeking specific performance and damages. The Company plans to vigorouslydefend its position, and does not expect the outcome of this litigation to havea material impact on the financial statements.

 

**Item 1A.  Risk Factors.**

 

In evaluating aninvestment in our common stock, investors should consider carefully, amongother things, the risk factors previously disclosed in Part I, Item 1A ofour Annual Report on Form 10-K filed with the SEC for the year ended December 31,2008, as well as the information contained in this Quarterly Report and 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 our AnnualReport on Form 10-K with the SEC for the year ended December 31, 2008are discussed below.

 

***A permanent reduction in the published Medicarereimbursement rates could negatively impact our business and our operatingresults.***

 

Highmark MedicareServices recently announced the reduction of the Medicare reimbursement ratefor the company’s MCOTTM servicesto $754, a reduction of approximately 33%, which is scheduled to go into effectSeptember 1, 2009. If the rate becomes effective the Company may not beeconomically viable under its current business model.

 

***Reductions in the Medicare reimbursement ratesapplicable to the Company’s services may lead to pressure from insurancecarriers to reduce our commercial pricing.***

 

In the first six monthsof 2009 a limited number of commercial payers have requested price reductionsbased on our Medicare reimbursement rates. If the Medicare reimbursement ratereduction goes into effect in September, we may experience additional pressurefrom insurance payers to reduce commercial pricing. A decrease in commercialpricing would adversely affect our financial results.

 

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

 

Not applicable.

 

**Item 3. Defaults Upon Senior Securities**

 

Not applicable.

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders**

 

At the 2009 Annual Meeting of Stockholders of theCompany, held on May 8, 2009, the following matters were considered by thestockholders and received the following vote:

 

1.               Management’snominees, Randy H. Thurman and Kirk E. Gorman, were elected as Class IIdirectors.  Voting (expressed in numberof shares) was as follows:  Mr. Thurman:  15,150,875 for, 7,619,003 against or withheldand no abstentions or broker non-votes and Mr. Gorman: 12,929,961 for,9,839,917 against or withheld and no abstentions or broker non-votes.

 

2.               Theshareholders approved a proposal to ratify the selection of Ernst &Young LLP as the Company’s independent registered public accounting firm for2009.  Voting (expressed in number ofshares) was as follows: 21,746,551 for, 1,022,312 against and 1,016 abstentionsor broker non-votes.

 

3.               Theshareholders did not approve an amendment to the CardioNet, Inc. 2008Non-Employee Directors’ Stock Option Plan (the “Director Plan”) and alloutstanding options granted thereunder to date to extend the post-terminationexercise period for vested options from three months following the director’stermination of service to the remainder of the option term in effect at thetime of the director’s termination of service. Voting (expressed in number of shares) was as follows: 7,805,342 for,12,542,330 against and 573,983 abstentions or broker non-votes.

 

**Item 5. Other Information**

 

Not applicable.

 

**Item 6.  Exhibits.**

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | ** **                                                                                                                                                                                 |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                       |
| 31.1                |       | Certification of Chief Executive Officer pursuant to  Rules 13a-14(a) and 15d-14(a) promulgated under the Securities  and Exchange Act of 1934, as amended.                 |
| 31.2                |       | Certification of Chief Financial Officer pursuant to  Rules 13a-14(a) and 15d-14(a) promulgated under the Securities  and Exchange Act of 1934, as amended.                 |
| 32.1                |       | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |

 

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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 10, 2009 | By:                      | /s/ Martin P.  Galvan |
|                        |                     | Martin P.  Galvan, CPA |
| * *                    | * *                 | *Chief  Financial Officer*(Principal  Financial Officer) |

 

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