Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

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

** **

**Forthe quarterly period ended March 31, 2010**

** **

**OR**

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

** **

**Forthe transition period from                to                **

 

**Commission File Number 001-33993**

 

**CardioNet, Inc.**

(Exact Name of Registrant as Specified in its Charter)

 

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

 

**227 Washington Street**

**Conshohocken, Pennsylvania 19428**

(Address of Principal Executive Offices, including Zip Code)

 

**(610) 729-7000**

(Registrant’s Telephone Number, including Area Code)

 

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

 

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 x         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

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

 

Asof April 23, 2010, 24,124,308 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 ENDEDMARCH 31, 2010**

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                  | **Page  No.** |
|-------------------|---------------------------------------------------------------------------------------------|---------------|
| **PART I.**  | **FINANCIAL INFORMATION**                                                                   | ** **    |
| Item 1.           | Financial Statements                                                                        | 4             |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12            |
| Item 3.           | Quantitative  and Qualitative Disclosures about Market Risk                                 | 14            |
| Item 4.           | Controls and  Procedures                                                                    | 14            |
|              |                                                                                        |          |
| **PART II.** | **OTHER INFORMATION**                                                                       | ** **    |
| Item 1.           | Legal Proceedings                                                                           | 15            |
| Item 1A.          | Risk Factors                                                                                | 16            |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 16            |
| Item 3.           | Defaults  Upon Senior Securities                                                            | 17            |
| Item 4.           | Removed and Reserved                                                                        | 17            |
| Item 5.           | Other Information                                                                           | 17            |
| Item 6.           | Exhibits                                                                                    | 18            |
|              |                                                                                        |          |
| SIGNATURES        | 19                                                                                          |

 

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**FORWARD-LOOKING STATEMENTS**

 

This document 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-lookingstatements are based on current expectations and involve inherent risks anduncertainties, including important factors that could delay, divert, or changeany of them, and could cause actual outcomes and results to differ materiallyfrom current expectations. These factors include, among other things, ourefforts to address the operational issues and strategic options, effectivenessof our cost reduction initiatives, the success of our sales and marketinginitiatives, our ability to attract and retain talented executive managementand sales personnel, our ability to identify acquisition candidates, acquirethem on attractive terms and integrate their operations into our business, thecommercialization of new products, market factors, internal research anddevelopment initiatives, partnered research and development initiatives,competitive product development, changes in governmental regulations andlegislation, changes to reimbursement levels for our products, the continuedconsolidation of payors, acceptance of our new products and services and patentprotection and litigation. For further details and a discussion of these andother risks and uncertainties, please see our public filings with theSecurities and Exchange Commission, including our latest periodic reports on Form 10-Kand 10-Q. We undertake no obligation to publicly update any forward-lookingstatement, whether as a result of new information, future events, or otherwise.

 

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**PART I— FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

 

**CARDIONET, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

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

 
| ** **                                                                                                                                                                                                        | ** ** | **(Unaudited)**              | ** ** | ** **                      | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
| ** **                                                                                                                                                                                                        | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| **Assets**                                                                                                                                                                                                        |       |                         |       |                            |       |
| Current assets:                                                                                                                                                                                                   |       |                         |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                                         |       | $                            | 45,255     |                            | $          | 49,152 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $26,745 and $22,396, at March 31, 2010 and  December 31, 2009, respectively                                              |       | 39,313                       |       | 40,885                          |       |
| Prepaid expenses and other current assets                                                                                                                                                                         |       | 3,544                        |       | 2,818                           |       |
|                                                                                                                                                                                                              |       |                         |       |                            |       |
| Total current assets                                                                                                                                                                                              |       | 88,112                       |       | 92,855                          |       |
|                                                                                                                                                                                                              |       |                         |       |                            |       |
| Property and equipment, net                                                                                                                                                                                       |       | 26,705                       |       | 28,243                          |       |
| Intangible assets, net                                                                                                                                                                                            |       | 758                          |       | 939                             |       |
| Goodwill                                                                                                                                                                                                          |       | 45,999                       |       | 45,999                          |       |
| Other assets                                                                                                                                                                                                      |       | 480                          |       | 286                             |       |
|                                                                                                                                                                                                              |       |                         |       |                            |       |
| Total assets                                                                                                                                                                                                      |       | $                            | 162,054    |                            | $          | 168,322 |   |
|                                                                                                                                                                                                              |       |                         |       |                            |       |
| **Liabilities and stockholders’  equity**                                                                                                                                                                    |       |                         |       |                            |       |
| Current liabilities:                                                                                                                                                                                              |       |                         |       |                            |       |
| Accounts payable                                                                                                                                                                                                  |       | $                            | 5,488      |                            | $          | 7,160 |   |
| Accrued liabilities                                                                                                                                                                                               |       | 9,280                        |       | 9,919                           |       |
| Deferred revenue                                                                                                                                                                                                  |       | 476                          |       | 393                             |       |
|                                                                                                                                                                                                              |       |                         |       |                            |       |
| Total current liabilities                                                                                                                                                                                         |       | 15,244                       |       | 17,472                          |       |
|                                                                                                                                                                                                              |       |                         |       |                            |       |
| Deferred rent and other noncurrent liabilities                                                                                                                                                                    |       | 1,437                        |       | 1,497                           |       |
|                                                                                                                                                                                                              |       |                         |       |                            |       |
| Total liabilities                                                                                                                                                                                                 |       | 16,681                       |       | 18,969                          |       |
|                                                                                                                                                                                                              |       |                         |       |                            |       |
| Stockholders’ equity:                                                                                                                                                                                        |       |                         |       |                            |       |
| Common stock, $.001 par value; 200,000,000 shares  authorized; 24,067,005 and 23,965,405 shares issued and outstanding  at March 31, 2010 and December 31,  2009, respectively |       | 24                           |       | 24                              |       |
| Paid-in capital                                                                                                                                                                                                   |       | 243,771                      |       | 242,320                         |       |
| Accumulated deficit                                                                                                                                                                                               |       | (98,422                      | )          | (92,991                         | )          |
|                                                                                                                                                                                                              |       |                         |       |                            |       |
| Total stockholders’ equity                                                                                                                                                                                   |       | 145,373                      |       | 149,353                         |       |
|                                                                                                                                                                                                              |       |                         |       |                            |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                   |       | $                            | 162,054    |                            | $          | 168,322 |   |

 

See accompanying notes.

 

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**CARDIONET, INC.CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

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

 
| ** **                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                             | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| Revenues:                                              |       |                                             |       |   |   |
| Net patient service revenues                           |       | $                                                | 31,816     |   | $ | 35,559 |   |
| Other revenues                                         |       | —                                           |       | 161 |   |
|                                                   |       |                                             |       |   |   |
| Total revenues                                         |       | 31,816                                           |       | 35,720 |   |
|                                                   |       |                                             |       |   |   |
| Cost of revenues                                       |       | 11,749                                           |       | 11,838 |   |
|                                                   |       |                                             |       |   |   |
| Gross profit                                           |       | 20,067                                           |       | 23,882 |   |
| Operating expenses:                                    |       |                                             |       |   |   |
| General and administrative                             |       | 9,677                                            |       | 10,508 |   |
| Sales and marketing                                    |       | 7,997                                            |       | 7,547 |   |
| Bad debt expense                                       |       | 4,640                                            |       | 3,817 |   |
| Research and development                               |       | 1,243                                            |       | 1,216 |   |
| Integration, restructuring and other charges           |       | 1,945                                            |       | 2,139 |   |
|                                                   |       |                                             |       |   |   |
| Total expenses                                         |       | 25,502                                           |       | 25,227 |   |
|                                                   |       |                                             |       |   |   |
| Loss from operations                                   |       | (5,435                                           | )          | (1,345 | ) |
| Other income, net                                      |       | 4                                                |       | 118 |   |
|                                                   |       |                                             |       |   |   |
| Loss before income taxes                               |       | (5,431                                           | )          | (1,227 | ) |
| Income tax benefit                                     |       | —                                           |       | 505 |   |
|                                                   |       |                                             |       |   |   |
| Net loss                                               |       | (5,431                                           | )          | (722 | ) |
|                                                   |       |                                             |       |   |   |
| Net loss per common share:                             |       |                                             |       |   |   |
| Basic                                                  |       | $                                                | (0.23      | ) | $ | (0.03 | ) |
| Diluted                                                |       | $                                                | (0.23      | ) | $ | (0.03 | ) |
|                                                   |       |                                             |       |   |   |
| Weighted average number of common shares  outstanding: |       |                                             |       |   |   |
| Basic                                                  |       | 23,893,140                                       |       | 23,600,149 |   |
| Diluted                                                |       | 23,893,140                                       |       | 23,600,149 |   |

 

See accompanying notes.

 

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**CARDIONET, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

**(*In thousands*)**

 
| ** **                                                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| **Operating activities**                                                                             |       |                                             |       |   |   |
| Net loss                                                                                             |       | $                                                | (5,431     | ) | $ | (722 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                         |       |                                             |       |   |   |
| Depreciation                                                                                         |       | 2,898                                            |       | 2,271 |   |
| Amortization of intangibles                                                                          |       | 181                                              |       | 238 |   |
| Loss on disposal of property and equipment                                                           |       | 118                                              |       | 11 |   |
| (Decrease) increase in deferred rent                                                                 |       | (60                                              | )          | 8 |   |
| Provision for doubtful accounts                                                                      |       | 4,640                                            |       | 2,453 |   |
| Stock-based compensation                                                                             |       | 918                                              |       | 1,660 |   |
| Changes in operating assets and liabilities:                                                         |       |                                             |       |   |   |
| Accounts receivable                                                                                  |       | (3,068                                           | )          | (10,917 | ) |
| Prepaid expenses and other current assets                                                            |       | (726                                             | )          | (794 | ) |
| Other assets                                                                                         |       | (194                                             | )          | (42 | ) |
| Accounts payable                                                                                     |       | (1,672                                           | )          | 481 |   |
| Accrued and other liabilities                                                                        |       | (556                                             | )          | 724 |   |
|                                                                                                 |       |                                             |       |   |   |
| Net cash used in operating activities                                                                |       | (2,952                                           | )          | (4,629 | ) |
|                                                                                                 |       |                                             |       |   |   |
| **Investing activities**                                                                             |       |                                             |       |   |   |
| Purchases of property and equipment                                                                  |       | (1,478                                           | )          | (5,594 | ) |
|                                                                                                 |       |                                             |       |   |   |
| Net cash used in investing activities                                                                |       | (1,478                                           | )          | (5,594 | ) |
|                                                                                                 |       |                                             |       |   |   |
| **Financing activities**                                                                             |       |                                             |       |   |   |
| Proceeds from the exercise of employee stock  options and employee stock purchase plan contributions |       | 533                                              |       | 2,487 |   |
| Repayment of debt                                                                                    |       | —                                           |       | (23 | ) |
|                                                                                                 |       |                                             |       |   |   |
| Net cash provided by financing activities                                                            |       | 533                                              |       | 2,464 |   |
|                                                                                                 |       |                                             |       |   |   |
| Net decrease in cash and cash equivalents                                                            |       | (3,897                                           | )          | (7,759 | ) |
| Cash and cash equivalents — beginning of period                                                 |       | 49,152                                           |       | 58,171 |   |
|                                                                                                 |       |                                             |       |   |   |
| Cash and cash equivalents — end of period                                                       |       | $                                                | 45,255     |   | $ | 50,412 |   |
|                                                                                                 |       |                                             |       |   |   |
| **Supplemental disclosure of cash  flow information**                                                |       |                                             |       |   |   |
| Cash paid for interest                                                                               |       | $                                                | 1          |   | $ | 4 |   |
| Cash paid for taxes                                                                                  |       | $                                                | 130        |   | $ | 1,268 |   |

 

See accompanying notes.

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

 

**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. In the opinion of management, these consolidated financial statementsreflect all adjustments which are of normal recurring nature and necessary fora fair presentation of the Company’s financial position as of March 31,2010 and December 31, 2009, and the results of operations for the threemonths ended March 31, 2010 and 2009. The financial data and otherinformation disclosed in these notes to the financial statements related to thethree months ended March 31, 2010 and 2009 are unaudited. The results forthe three months ended March 31, 2010 are not necessarily indicative ofthe results to be expected for any future period.

 

**Net Loss**

 

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 March 31, 2010 and 2009:

 
| ** **                                                           | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Common stock options and restricted stock units  outstanding         |       | 1,436,313                |       | 1,847,991                |       |
| Common stock options and restricted stock units  available for grant |       | 2,451,214                |       | 938,225                  |       |
| Common stock held by certain employees and  unvested                 |       | 5,989                    |       | 31,093                   |       |
| Common stock                                                         |       | 24,067,005               |       | 23,752,292               |       |
|                                                                 |       |                     |       |                     |       |
| Total                                                                |       | 27,960,521               |       | 26,569,631               |       |

 

Basicnet loss per share is computed by dividing net loss by the weighted averagenumber of common shares outstanding during the period. Diluted net loss pershare is computed by giving effect to all potential dilutive common shares,including stock options, warrants and convertible preferred stock, asapplicable.

 

The followingtable presents the calculation of basic and diluted net loss per share:

 
| ** **                                                                        | ** ** | **Three  Months Ended********March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
|                                                                              |       |                                          |       |   |   |
| *Numerator:*                                                                      |       |                                          |       |   |   |
| Net  loss applicable to common stockholders                                       |       | $                                             | (5,431     | ) | $ | (722 | ) |
| *Denominator:*                                                                    |       |                                          |       |   |   |
| Weighted  average common shares outstanding—basic                       |       | 23,893,140                                    |       | 23,600,149 |   |
| Dilutive  effect of the Company’s employee compensation plans                |       | —                                        |       | — |   |
| Weighted  average shares used in computing diluted net income loss per share |       | 23,893,140                                    |       | 23,600,149 |   |
| Basic  net loss per share                                                         |       | $                                             | (0.23      | ) | $ | (0.03 | ) |
| Diluted  net loss per share                                                       |       | $                                             | (0.23      | ) | $ | (0.03 | ) |

 

If theoutstanding vested options or restricted stock units were exercised orconverted into common stock, the result would be anti-dilutive for the threemonths ended March 31, 2010 and 2009. Accordingly, basic and diluted netloss attributable to common stockholders per share are identical for thoseperiods presented in the consolidated statements of operations.

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

 

**Goodwill**

 

The Company considers its business to be onereporting unit for the purpose of performing its goodwill impairment analysis.Goodwill is reviewed for impairment annually, or when events arise that couldindicate that an impairment exists. To determine whether an impairment exists,the Company estimates the fair value of the reporting unit using an incomeapproach, generally a discounted cash flow methodology, that includesassumptions for, among other things, forecasted income, cash flow, growth rates,income tax rates, expected tax benefits and long-term discount rates, all ofwhich require significant judgments. The Company also considers comparablemarket data to assist in determining the fair value of its reporting unit.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 may exist 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 and after income taxes for the three months ended March 31,2010 was reduced by $918, and the Company’s before and after-tax net income forthe three months ended March 31, 2009 was reduced by $1,660, as a resultof stock-based compensation expense incurred. The impact of stock-basedcompensation expense was $(0.04) and $(0.07) on both basic and diluted earningsper share for the three months ended March 31, 2010 and 2009,respectively.

 

Weestimate the fair value of our share-based award to employees and directorsusing the Black-Scholes option valuation model. The Black-Scholes optionvaluation model requires the use of certain subjective assumptions. The mostsignificant of these assumptions are our estimates of the expected volatilityof the mark price of our stock and the expected term of the award. Because our initialpublic offering (IPO) was in March 2008, sufficient historical informationprior to the third quarter of 2009 was not available to base assumptions ofvolatility on our own stock. As such, prior to the third quarter of 2009, webased our estimates of expected volatility of a group of similar entities whosestock prices are publicly available. Beginning in the third quarter of 2009, webegan using the historical price of our own stock to estimate expectedvolatility. The expected term represents the period of time that stock-basedawards granted are expected to be outstanding. As we have a history of exerciseexperience for use in the calculation of expected term, we believe ourhistorical experience is the best estimate of our future exercise patterns.Other assumptions used in the Black-Scholes option valuation model include therisk-free interest rate and expected dividend yield. The risk-free interestrate for periods pertaining to the contractual life of each option is based onthe U.S. Treasury strip yield of a similar duration in effect at the time ofgrant. We have never paid, and do not expect to pay, dividends in theforeseeable future.

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

 

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

 
| ** **              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| Expected dividend yield |       | 0                                                | %          | 0 | % |
| Expected volatility     |       | 81                                               | %          | 50 | % |
| Risk-free interest rate |       | 2.67                                             | %          | 2.0 | % |
| Expected life           |       | 6.25 years                                       |       | 6.25 years |   |

 

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

 

Basedon the above assumptions, the per share weighted average fair value of theoptions granted under the stock option plan for the three months ended March 31,2010 and 2009 was $4.76 and $12.46, respectively.

 

The following tablesummarizes activity under all stock award plans from December 31, 2009through March 31, 2010:

 
| ** **                             | ** ** | ** **         | ** ** | **Options Outstanding** | ** ** |
|----------------------------------------|------------|--------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **Shares**         | ** ** | ** **                   | ** ** | **Weighted** | ** ** |
| ** **                             | ** ** | **Available**      | ** ** | **Number**                   | ** ** | **Average** | ** ** |
| ** **                             | ** ** | **for Grant** | ** ** | **of Shares**           | ** ** | **Exercise Price** | ** ** |
| Balance — December 31, 2009  |       | 1,132,135          |       | 1,575,645                    |       | $ | 15.21 |   |
| Additional options available for grant |       | 1,194,094          |       | —                       |       | $ | — |   |
| Granted                                |       | (10,000            | )          | 10,000                       |       | $ | 6.43 |   |
| Canceled                               |       | 134,985            |       | (134,985                     | )          | $ | 5.17 |   |
| Exercised                              |       | —             |       | (14,347                      | )          | $ | 2.99 |   |
|                                   |       |               |       |                         |       |   |   |
| Balance — March 31, 2010     |       | 2,451,214          |       | 1,436,313                    |       | $ | 15.70 |   |

 

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 5% of the total shares outstanding at December 31, 2009.

 

Additional informationregarding options outstanding is as follows:

 
| ** **                                           | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Range  of exercise prices (per option)               |       | $0.70 - $31.18           |       | $1.50 - $31.18           |       |
| Weighted  average remaining contractual life (years) |       | 8.25                     |       | 9.30                     |       |

 

*EmployeeStock Purchase Plan*

 

OnMarch 17, 2010, 83,659 shares were purchased in accordance with theEmployee Stock Purchase Plan (ESPP). Net proceeds to the Company from theissuance of shares of common stock under the ESPP for the three months ended March 31,2010 were $533. In January 2010, the number of shares available for grantwas increased by 239,750, per the ESPP plan documents. At March 31, 2010,approximately 458,584 shares remain available for purchase under the ESPP.

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

 

**New Accounting Pronouncements**

 

In January 2010, the FASB issued authoritativeguidance intended to improve disclosures about fair value measurements. Theguidance requires entities to disclose significant transfers in and out of fairvalue hierarchy levels and the reasons for the transfers. Additionally, theguidance clarifies that a reporting entity should provide fair valuemeasurements for each class of assets and liabilities and disclose the inputsand valuation techniques used for fair value measurements using significantother observable inputs (Level 2) and significant unobservable inputs (Level3). Currently, the Company does not have any assets or liabilities that aresubject to this guidance. As such, this guidance did not have an impact on theCompany’s results of operation or financial position. This guidance iseffective for interim and annual periods beginning after December 15,2009.

 

In February 2010, the FASB issued authoritativeguidance on subsequent events. The guidance requires an SEC filer to evaluatesubsequent events through the date the financial statements are issued but nolonger requires an SEC filer to disclose the date through which the subsequentevent evaluation occurred. The guidance became effective for the Company uponissuance and had no impact on the Company’s results of operations or financialposition.

 

**2.**              **Integration andRestructuring Activities**

 

*2010 Restructuring*

 

During the first quarter of 2010, the Company undertook an initiative to streamline itssales and service organizations and reduce support costs company-wide. It alsoinitiated plans to close its event monitoring facility in Georgia andconsolidate it with the Company’s monitoring facilities in Pennsylvania andMinnesota. The Company believes that it can realize cost efficiencies byundertaking these initiatives.

 

The restructuring plan involves the elimination of approximately100 positions. The Company expects the restructuring to be substantiallycompleted by the end of thethird quarter in 2010, and expects the total cost of the restructuring tobe approximately $3,500, all of which is expected to result in cash charges.The Company incurred restructuring expenses of $1,662 for the three monthsended March 31, 2010.

 

A summary of the reserve activity related to the 2010 restructuringplan as of March 31, 2010 is as follows:

 
| ** **                           | ** ** | **Initial  Reserve  Recorded** | ** ** | **Payments  through  March 31,  2010** | ** ** | **Balance  as of  March 31,  2010** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|
| Severance and employee related costs |       | $                              | 1,400      |                                        | $          | 466                                      |       | $ | 934 |   |
| Other exit activity costs            |       | 262                            |       | 262                                         |       | —                                   |       |
| Total                                |       | $                              | 1,662      |                                        | $          | 728                                      |       | $ | 934 |   |

 

The Company accounts forexpenses associated with exit or disposal activities in accordance with ASC420, *Exit or Disposal**CostObligations,* and records the expenses in *Integration,restructuring and other charges* in its statement of operations, andrecords the related accrual in the *Accrued liabilities*line of its balance sheet.

 

*Legal and Other Costs*

 

The Company incurred legaland other costs of $283 for the three months ended March 31, 2010. Thelegal costs are related to the Company’s defense of class-action lawsuits.Additional information regarding legal proceedings can be found in Note 5. Forthe three months ended March 31, 2009, the Company incurred $2,139 ofexpenses related to the departure of certain executive officers.

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

 

**3.**              **Income Taxes**

 

The income tax provisionfor interim periods is determined using an estimated annual effective tax rateadjusted for discrete items, if any, which are taken into account in thequarterly period in which they occur. The Company reviews and updates its estimatedannual effective tax rate each quarter. For the three months ended March 31,2010, the Company’s estimated annual effective tax rate was primarily impactedby a financial loss for the period, the benefit of which was offset by avaluation allowance. Accordingly, the Company recorded no tax expense orbenefit for the three months ended March 31, 2010. The income tax benefittotaled approximately $505 for the three months ended March 31, 2009.

 

As of December 31,2009, in accordance with ASC-740, the Company maintained a full valuationallowance against net deferred tax assets. The Company maintains a fullvaluation allowance for the quarter ended March 31, 2010. The Companyimplemented the provisions of ASC 740-10 on January 1, 2007 related toaccounting for uncertainty in income taxes. There has been no material changeto the amount of unrecognized tax expense or benefit reported as of March 31,2010.

 

**4.**     **Reimbursement**

 

On July 10, 2009,Highmark announced a reduction in the reimbursement rate for our MCOTTM servicesto $754 per service, a reduction of approximately 33%. This new rate went intoeffect on September 1, 2009. The reduction in reimbursement rates isreflected in the *Revenue*and*Accountsreceivable* lines in the Company’s financial statements.

 

**5.**     **Legal Proceedings**

 

OnMarch 5, 2010, West Palm Beach Police Pension Fund filed a putative classaction complaint in California Superior Court, San Diego County assertingclaims for violations of Sections 11, 12 and 15 of the Securities Act of 1933,as amended, against CardioNet, nine current and former officers and directorsof CardioNet and six underwriters of CardioNet’s IPO and/or Secondary Offeringon August 6, 2008 (together with the IPO, the “Offerings”). Thecomplaint filed March 5, 2010 also asserted claims for alleged violationsof Sections 25401 and 25501 of the California Corporations Code againstdefendants James M. Sweeney and Fred Middleton. The plaintiff seeks to bringclaims on behalf of all those who purchased or otherwise acquired the commonstock of CardioNet pursuant and/or traceable to the Offerings. On March 10,2010, plaintiff filed an Amended Complaint that deleted the claims forviolations of the California Corporations Code.  The claims are based onpurported misrepresentations and omissions in the Registration Statements forthe Offerings relating to alleged business decisions made by CardioNet thatwere supposedly not disclosed to investors and alleged misstatements concerningCardioNet’s business.  On April 5, 2010, all defendants removed thecase to the Southern District of California, where it is pending.  On April 7,2010, defendants filed a Motion to Transfer the case to the Eastern District ofPennsylvania, which Motion to Transfer is noticed for hearing on June 28,2010.  The Company believes that the claims are without merit and intendsto defend the litigation vigorously. At this time, it is not possible todetermine the likelihood or amount of liability, if any, on the part of theCompany with any degree of certainty. Consistent with the accounting forcontingent liabilities, no accrual has been recorded in the financialstatements.

 

Commencingon August 26, 2009, two putative class actions were filed in the UnitedStates District Court for the Eastern District of Pennsylvania namingCardioNet, Randy Thurman, Chief Executive Officer and Martin P. Galvan, formerChief Financial Officer as defendants and alleging violations of Sections 10(b) and20(a) of the Securities Exchange Act of 1934, as amended.  The complaints purport to bring claims onbehalf of a class of persons who purchased the Company’s common stock between April 30,2009 and June 30, 2009 and between April 30, 2009 and July 10,2009.  The complaints allege that thedefendants issued various materially false and misleading statements relatingto the Company’s projected performance that had the effect of artificiallyinflating the market price of its securities. The complaints further allege that the alleged misstatements wererevealed to the public on June 30, 2009 and July 10, 2009 when theCompany made certain announcements regarding potential lower pricing forcommercial and Medicare reimbursement rates. These actions were consolidated on September 9, 2009.  On October 26, 2009, two competingmotions were filed for appointment of lead plaintiffs and lead counsel pursuantto the requirements of the Private Securities Litigation Reform Act of1995.   On December 22, 2009, theCourt appointed lead plaintiff, but denied its request for appointment of leadcounsel and require lead plaintiff to file an amended motion for approval ofits selection of class counsel. Lead plaintiff filed its amended motion forappointment of lead counsel on January 15, 2010, which was granted on February 3,2010. Lead plaintiff filed a consolidated class action complaint on February 19,2010 and the defendants filed a motion to dismiss on March 26, 2010. Leadplaintiff filed its opposition to the motion to dismiss on April 30, 2010.The Company believes the claims are without merit and intends to defend thelitigation vigorously. At this time, it is not possible to determine thelikelihood or amount of liability, if any, on the part of the Company with anydegree of certainty. Consistent with the accounting for contingent liabilities,no accrual has been recorded in the financial statements.

 

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OnApril 2, 2009 CardioNet entered into a Merger Agreement to acquire(“Biotel”) Inc. for $14,000. On July 14, 2009, CardioNet exercised itscontractual right to terminate the Merger Agreement due to Biotel’s breach ofcertain covenants in the agreement. The next day, CardioNet notified Biotel ofits obligation to pay the Company $1,400 for a termination fee and expenses inaccordance with the Merger Agreement. On or about July 16, 2009, Biotelsubsequently commenced litigation against CardioNet in Minnesota District Courtin Hennepin County, Fourth Judicial District, alleging that CardioNet hadbreached and improperly terminated the Merger Agreement. CardioNet removed theaction to the United States District Court for the District of Minnesota on thebasis of diversity jurisdiction, and Biotel did not seek to remand the action.Biotel is seeking specific performance and damages in an amount in excess of$10,000. CardioNet has counterclaimed under the terms of the Merger Agreementfor its termination fee and associated expenses; the current amount of thatcounterclaim is $1,400. The case is to be ready for trial by July 15,2010. Discovery is underway. The Company plans to vigorously defend itsposition and prosecute its counterclaim. At this time, it is not possible todetermine the likelihood or amount of liability, if any, on the part of theCompany with any degree of certainty. Consistent with the accounting for contingentliabilities, no accrual has been recorded in the financial statements.

 

**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, 2009, 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.

 

**Company Background**

 

CardioNet is a leadingprovider of ambulatory, continuous, real-time outpatient management solutionsfor monitoring relevant and timely clinical information regarding anindividual’s health. The Company’s efforts have initially been focused on thediagnosis and monitoring of cardiac arrhythmias, or heart rhythm disorders,with a solution that it markets as Mobile Cardiac Outpatient TelemetryTM(MCOTTM). The Company actively began developing its product platform in April 2000,and since that 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’s Conshohocken location has been an approved IndependentDiagnostic Testing Facility (“IDTF”) by Medicare since it received 510(k) clearancefor the first and second generation of its core MCOT devices in 2002. TheCardioNet Monitoring Center commenced operations in Conshohocken, Pennsylvaniain 2002, concurrent with its first FDA approval, and all of the Company’s MCOTarrhythmia monitoring activities are currently conducted at that location. TheCompany received FDA 510(k) clearance for the proprietary algorithmincluded 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 medical solutionsthrough investments in research and development. The Company received FDA 510(k) clearancefor its next generation platform in April 2010 and expects the productlaunch to occur in late 2010.

 

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 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.

 

**nPhase Supplier Agreement**

 

The Company established arelationship with nPhase, formerly Qualcomm Inc., in May 2003. nPhaseis the 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 nPhase network or itutilizes the monitoring and communications services of a provider other thannPhase, nPhase has the right to terminate its relationship with the Company.

 

**Reimbursement**

 

In October 2008, theCenters for Medicare and Medicaid Services (“CMS”) established reimbursementrates covering MCOTTM services. The reimbursement rates 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 previous 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.

 

After receiving the CPT codein the first quarter of 2009, the Company received pressure from severalcommercial payors to renegotiate reimbursement rate contracts. This pressureled to a substantial decline in our average commercial reimbursement rates inthe first half of 2009. During the second half of 2009, and into the firstquarter of 2010, we have seen commercial reimbursements stabilize.

 

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On July 10, 2009,Highmark announced a reduction in the reimbursement rate for our MCOTTM servicesto $754 per service, a reduction of approximately 33%. This new rate went intoeffect on September 1, 2009. The decline in reimbursement rate has had anegative impact on the Company’s revenue and operating results, and haspresented significant challenges to the viability of the Company’s currentbusiness model. Several strategic initiatives are currently being implemented,including cost efficiency measures. The Company intends to continue to workwith CMS to achieve an appropriate national rate in the future, and willcontinue to evaluate its strategic options.

 

We have successfully securedcontracts with many national and regional commercial payors. We increased thenumber of MCOTTM contracts with commercial payors to 259 at March 31, 2010,compared to 203 at March 31, 2009. The current estimated total of 200million covered lives for Medicare and commercial lives for which we hadreimbursement contracts as of March 31, 2010 represents approximately 78%of the total covered lives in the United States. The MCOTTM contracts also coverevent, Holter and Pacer service pricing. In addition, as of March 31, 2010there were approximately 90 contracts with commercial payors that pertainedonly to event, Holter and Pacer service pricing, and did not cover MCOTTM. Themajority of the remaining covered lives are insured by a relatively smallnumber of large commercial insurance companies that deemed MCOTTM to be“experimental and investigational” and do not currently reimburse us forservices provided to their beneficiaries.

 

**Restructuring Activities**

 

During the first quarter of 2010, the Company undertook an initiative to streamline itssales and service organizations and reduce support costs Company-wide. It alsoinitiated plans to close its event monitoring facility in Georgia andconsolidate it with the Company’s monitoring facilities in Pennsylvania andMinnesota. The Company believes that it can realize cost efficiencies byundertaking these initiatives. The total cost of the restructuring plan is expectedto be approximately $3.5 million, of which $1.7 million was incurred to dateand is expected to be substantially complete by the end of the third quarter of2010.

 

**Results of Operations**

 

***Three Months Ended March 31, 2010 and 2009***

 

*Revenues.*    Total revenuesfor the three months ended March 31, 2010 decreased to $31.8 millionfrom $35.7 million for the three months ended March 31, 2009, adecrease of $3.9 million, or 10.9%. MCOTTM revenue was lower by$3.3 million due to a decrease in MCOTTM reimbursement rates, offset by anincrease in volume of 23%. Additionally, there was a decrease in event, Holterand other revenue of $0.6 million for the three months ended March 31,2010 compared to the three months ended March 31, 2009.

 

*Gross Profit.*    Gross profitdecreased to $20.1 million for the three months ended March 31, 2010from $23.9 million for the three months ended March 31, 2009. Thedecrease of $3.8 million was due to a decrease in revenue, offset slightly by adecrease in cost of sales of $0.1 million for the three months ended March 31,2010 compared to the three months ended March 31, 2009. Gross profit as apercentage of revenue declined to 63.1% for the three months ended March 31,2010 compared to 66.9% for the three months ended March 31, 2009.

 

*General and Administrative Expense.*    General andadministrative expense remained constant at $14.3 million for the three monthsended March 31, 2010 and 2009. An increase in bad debt and legal expensewas offset by a reduction in stock compensation and bonus expense. As apercentage of total revenues, general and administrative expense was 45.0% forthe three months ended March 31, 2010 compared to 40.1% for the threemonths ended March 31, 2009.

 

*Sales and Marketing Expense.*    Sales andmarketing expense was $8.0 million for the three months ended March 31,2010 compared to $7.5 million for the three months ended March 31,2009. The increase of $0.5 million, or 6.7%, was largely due to increasedmarketing efforts.  As a percent of totalrevenues, sales and marketing expense was 25.1% for the three months ended March 31,2010 compared to 21.1% for the three months ended March 31, 2009.

 

*Research and Development Expense.*    Research anddevelopment expense remained constant at $1.2 million for the three monthsended March 31, 2010 and 2009. As a percent of total revenues, researchand development expense was 3.9% for the three months ended March 31, 2010compared to 3.4% for the three months ended March 31, 2009.

 

*Integration, Restructuring and OtherCharges.*    TheCompany incurred restructuring costs of $1.7 million and other charges of $0.3million for the three months ended March 31, 2010. The restructuring costsincluded $1.4 million of severance and employee related costs and $0.3 millionof other charges related to the 2010 restructuring plan. The 2010 restructuringplan included the consolidation of the Company’s sales and serviceorganizations, the closure of the Company’s event monitoring facility inGeorgia and consolidation with its monitoring facilities in Pennsylvania andMinnesota, and an overall reduction of administrative costs company-wide.Integration, restructuring and other charges were 6.1% of total revenues forthe three months ended March 31, 2010. The other charges related to legalcosts and other miscellaneous items.

 

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The Company incurred severance charges related toexecutive employee terminations of $2.1 million for the three months ended March 31,2009.

 

*Other Income.*    There was nointerest income for the three months ended March 31, 2010, down from $0.1million for the three months ended March 31, 2009. The decline was dueprimarily to lower short term interest rates and a lower average cash balancein the three months ended March 31, 2010 compared to the three monthsended March 31, 2009.

 

*Income Taxes.*    The Companyrecorded no tax benefit for the three months ended March 31, 2010,compared to a tax benefit of $0.5 for the three months ended March 31,2009. The effective tax rate for the three months ended March 31, 2010 was0.0%, compared to 41.1% for the three months ended March 31, 2009.

 

*Net Income.*    The Companyincurred a net loss of $5.4 million for the three months ended March 31,2010 compared to a net loss of $0.7 million for the three months ended March 31,2009.

 

**Liquidity and Capital Resources**

 

The Company’s AnnualReport on Form 10-K for the year ended December 31, 2009 includes adetailed discussion of our liquidity, contractual obligations and commitments.The information presented below updates and should be read in conjunction withthe information disclosed in that Form 10-K.

 

As of March 31,2010, our principal source of liquidity was cash and cash equivalents of $45.3million and net accounts receivable of $39.3 million. The Company has no shortor long-term debt and does not anticipate needing to secure financing fromexternal sources for cash to operate the business. The Company had workingcapital of $72.9 million as of March 31, 2010. We believe that ourexisting cash and cash equivalent balances will be sufficient to meet ouranticipated cash requirements for the foreseeable future.

 

TheCompany used $3.0 million of its cash in its operations for the three monthsended March 31, 2010. Cash was used primarily to fund the Company’songoing operations during the three month period that resulted in a $5.4million net loss, and to fund its net working capital requirements of $1.6million. The Company’s working capital requirements were driven primarily bythe prepayment of certain licenses and insurances costs that routinely occur inthe first quarter of the fiscal year and the repayment of certain payoroverpayments that were recorded in accounts payable. These working capitalrequirements were offset by favorable cash collections related to the Company’saccounts receivables. The net loss and net working capital requirements wereoffset by non-cash items related to deprecation and stock compensationexpense.  The Company used $1.5 million for the investment inmedical devices for use in its ongoing operations for the three months ended March 31,2010.

 

If the Company determinesthat it needs to raise additional capital, such capital may not be available onreasonable terms, or at all. If the Company raises additional funds by issuingequity securities, its existing stockholders’ ownership will be diluted. If theCompany raises additional funds by incurring additional debt financing, theterms of the debt may involve significant cash payment obligations as well ascovenants and specific financial ratios that may restrict the ability tooperate its business.

 

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

 

Our cash and cash equivalents as of March 31,2010 were $45.3 million and consisted primarily of cash and money market fundswith maturities of less than 90 days. The primary objective of our investment activities is to preserve ourcapital for the purpose of funding operations while, at the same time,maximizing the income we receive from our investments without significantlyincreasing risk. To achieve this objective, our investment policy allows us tomaintain a portfolio of cash equivalents and short term investments in avariety of securities including money market funds and corporate debtsecurities. Due to the short term nature of our investments, we believe we haveno material exposure to interest rate risk.

 

**Item 4. Controls and Procedures.**

 

**Evaluationof Disclosure Controls and Procedures**

 

The Company maintainsdisclosure controls and procedures designed to ensure information required tobe disclosed in Company reports filed under the Securities Exchange Act of1934, as amended (the Exchange Act), is recorded, processed, summarized, andreported within the time periods specified in the SEC’s rules andforms.  Disclosure controls and procedures are designed to providereasonable assurance that information required to be disclosed in Companyreports filed under the Exchange Act is accumulated and communicated tomanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

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The Company’s management,with the participation of the Company’s Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of the Company’s disclosurecontrols and procedures pursuant to Rule 13a-15(b) of the ExchangeAct as of the end of the period covered by this report.  Based onthat evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer have concluded that the Company’s disclosure controls and procedureswere effective as of March 31, 2010 to ensure that information required tobe disclosed in Company reports filed under the Exchange Act is (i) recorded,processed, summarized and reported within the time periods specified in the SECrules and forms and (ii) accumulated and communicated to management,including the Company’s principal executive officer and principal financialofficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

**Changesin Internal Control over Financial Reporting**

 

There were no changes inthe Company’s internal control over financial reporting during the three monthsending March 31, 2010, that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

**PART II - OTHER INFORMATION.**

 

**Item 1.  LegalProceedings.**

 

OnMarch 5, 2010, West Palm Beach Police Pension Fund filed a putative classaction complaint in California Superior Court, San Diego County assertingclaims for violations of Sections 11, 12 and 15 of the Securities Act of 1933,as amended, against CardioNet, nine current and former officers and directorsof CardioNet and six underwriters of CardioNet’s intial public offering (IPO)consummated March 25, 2008 and/or Secondary Offering on August 6,2008 (together with the IPO, the “Offerings”). The complaint filed March 5,2010 also asserted claims for alleged violations of Sections 25401 and 25501 ofthe California Corporations Code against defendants James M. Sweeney and FredMiddleton. The plaintiff seeks to bring claims on behalf of all those whopurchased or otherwise acquired the common stock of CardioNet pursuant and/ortraceable to the Company’s IPO and/or Secondary Offering. On March 10,2010, plaintiff filed an Amended Complaint that deleted the claims forviolations of the California Corporations Code.  The claims are based onpurported misrepresentations and omissions in the Registration Statements forthe Offerings relating to alleged business decisions made by CardioNet thatwere supposedly not disclosed to investors and alleged misstatements concerningCardioNet’s business.  On April 5, 2010, all defendants removed thecase to the Southern District of California, where it is pending at docket no.10-cv-00711-L-NLS.  On April 7, 2010, defendants filed a Motion toTransfer the case to the Eastern District of Pennsylvania, which Motion toTransfer is noticed for hearing on June 28, 2010.  On April 12,2010, all parties filed a Joint Stipulation agreeing that plaintiff shall fileand serve its Motion to Remand on or before May 4, 2010; opposition paperson Defendants’ Motion to Transfer and Plaintiff’s Motion to Remand shall befiled and served on May 28, 2010; reply briefs on Defendants’ Motion toTransfer and Plaintiff’s Motion to Remand shall be filed and served on June 14,2010; and Plaintiff shall notice its Motion to Remand for hearing on the June 28,2010 for the same date and time as Defendants’ Motion to Transfer is currentlynoticed.  The Joint Stipulation further provides that defendants are notcurrently required to respond to the Amended Complaint and sets forth a schedulefor defendants’ response depending on whether Plaintiff’s Motion to Remand isgranted.  On April 15, 2010, the Court granted in part and denied inpart the dates proposed in the Joint Stipulation.  It approved all datesother than the proposed extension of time to respond to the complaint, which itdenied for failure to show good cause.  The denial was without prejudiceif the action is remanded or transferred.  On April 30, 2010, Defendantsfiled an unopposed motion to extend time for their responses to the AmendedComplaint that set forth a good cause basis for their proposed extension.  The Company believes that the claims arewithout merit and intends to defend the litigation vigorously.

 

Commencing on August 26,2009, two putative class actions were filed in the United States District Courtfor the Eastern District of Pennsylvania naming CardioNet, Randy Thurman andMartin P. Galvan as defendants and alleging violations of Sections 10(b) and20(a) of the Securities Exchange Act of 1934, as amended.  The complaints purport to bring claims onbehalf of a class of persons who purchased the Company’s common stock between April 30,2009 and June 30, 2009 and between April 30, 2009 and July 10,2009.  The complaints allege that thedefendants issued various materially false and misleading statements relatingto the Company’s projected performance that had the effect of artificiallyinflating the market price of its securities. The complaints further allege that the alleged misstatements wererevealed to the public on June 30, 2009 and July 10, 2009 when theCompany made certain announcements regarding potential lower pricing forcommercial and Medicare reimbursement rates. These actions were consolidated on September 9, 2009 under docketnumber 09-3894.  On October 26,2009, two competing motions were filed for appointment of lead plaintiffs andlead counsel pursuant to the requirements of the Private Securities LitigationReform Act of 1995.   On December 22,2009, the Court appointed lead plaintiff, but denied its request forappointment of lead counsel and require lead plaintiff to file an amendedmotion for approval of its selection of class counsel. Lead plaintiff filedtheir amended motion for appointment of lead counsel on January 15, 2010,which was granted on February 3, 2010. Lead plaintiff filed a consolidatedclass action complaint on February 19, 2010 and the defendants filed amotion to dismiss on March 26, 2010. Lead plaintiff filed its oppositionto the motion to dismiss on April 30, 2010. The Company believes theclaims are without merit and intends to defend the litigation vigorously.

 

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On April 2,2009 CardioNet entered into a Merger Agreement to acquire (“Biotel”) Inc.for $14.0 million. On July 14, 2009, CardioNet exercised itscontractual right to terminate the Merger Agreement due to Biotel’s breach ofcertain covenants in the agreement. The next day, CardioNet notified Biotel ofits obligation to pay the Company $1.4 million for a termination fee andexpenses in accordance with 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.CardioNet removed the action to the United States District Court for theDistrict of Minnesota on the basis of diversity jurisdiction, and Biotel didnot seek to remand the action. Biotel is seeking specific performance anddamages in an amount in excess of $10.0 million. CardioNet hascounterclaimed under the terms of the Merger Agreement for its termination feeand associated expenses; the current amount of that counterclaim is$1.4 million. The case is to be ready for trial by July 15, 2010.Discovery is underway. The Company plans to vigorously defend its position andprosecute its counterclaim.

 

**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 for the year ended December 31, 2009,as well as the information contained in this Quarterly Report and our otherreports 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 for the year ended December 31, 2009 arediscussed below.

 

***Legislation andpolicy changes reforming the United States healthcare system may have amaterial adverse effect on our operating results and financial condition.***

 

On March 23, 2010, the Patient Protection andAffordable Care Act was signed into law and on March 30, 2010, the HealthCare and Education Reconciliation Act of 2010 was signed into law. Together,the two measures make the most sweeping and fundamental changes to the UnitedStates health care system since the creation of Medicare and Medicaid. TheHealth Care Reform laws include a large number of health-related provisions totake effect over the next four years, including expanding Medicaid eligibility,requiring most individuals to have health insurance, establishing newregulations on health plans, establishing health insurance exchanges, requiringmanufacturers to report payments or other transfers of value made to physiciansand teaching hospitals, and modifying certain payment systems to encourage morecost-effective care and a reduction of inefficiencies and waste, includingthrough new tools to address fraud and abuse.

 

In addition, various healthcare reform proposalshave also emerged at the state level. We cannot predict the effect that newlyenacted laws or any future legislation or regulation will have on us. However,the implementation of new legislation and regulation may lower reimbursementsfor our products, reduce medical procedure volumes and adversely affect ourbusiness, possibly materially. The enacted excise tax may materially andadversely affect our operating expenses and results of operations.

 

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

 

The initial public offering of our common stock was effected through aRegistration Statement on Form S-1 (File No. 333-145547) that wasdeclared effective by the Securities and Exchange Commission on March 18,2008, which registered an aggregate of 5,175,000 shares of our common stock,including 675,000 shares that the underwriters had the option to purchase tocover over-allotments. On March 25, 2008, 3,000,000 shares of common stockwere sold on our behalf and 1,500,000 shares of common stock were sold onbehalf of a selling stockholder at an initial public offering price of $18.00per share, for an aggregate gross offering price of $54.0 million to us,and $27.0 million to the selling stockholders. On April 8, 2008,1,014,286 shares of common stock were sold on behalf of the selling stockholderupon a partial exercise of the underwriters’ over-allotment option, at aninitial public offering price of $18.00 per share, for an aggregate grossoffering price of $1.8 million to the selling stockholder. Following thesale of the shares in connection with the over-allotment closing of our initialpublic offering, the offering terminated.

 

We paid to the underwriters underwriting discounts and commissionstotaling approximately $3.8 million in connection with the offering. Inaddition, we incurred additional costs of approximately $3.2 million inconnection with the offering, which when added to the underwriting discountsand commissions paid by us, amounts to total fees and costs of approximately$7.0 million. Thus, the net offering proceeds to us, after deducting underwritingdiscounts and commissions and offering costs, were approximately$46.7 million. No offering costs were paid directly or indirectly to anyof our directors or officers (or their associates) or persons owning tenpercent or more of any class of our equity securities or to any otheraffiliates.

 

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Asof March 31, 2010, we had invested $26.2 million of net proceeds fromthe offering in money market funds. We have used the net proceeds from theoffering to fund our operations for the three months ended March 31, 2010,the purchase of capital equipment during fiscal year 2009 and the three monthsended March 31, 2010, repay our outstanding long-term debt balance andrelated fees of $2.7 million and to pay $5.0 million owed to formerstockholders of PDSHeart holding certificates of subordinated contingentpayment interest to fully extinguish our obligations under such certificates.We intend to use the remaining proceeds for our working capital needs, researchand development, to invest in infrastructure, pursue new markets and productapplications and to pursue strategic opportunities. We cannot specify withcertainty all of the particular uses for the net proceeds from our initialpublic offering. Accordingly, our management will have broad discretion in theapplication of the net proceeds.

 

**Item 3. Defaults Upon Senior Securities**

 

Not applicable.

 

**Item 4. Removed and Reserved**

 

**Item5. Other Information**

 

Not applicable.

 

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**Item 6.  Exhibits.**

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | ** **                                                                                                                                                                                 |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                       |
| 10.1                |       | First Amendment to Lease dated February 24, 2010 between the  Registrant and OCC, LLC.                                                                                                |
| 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: May 4,  2010 |       | By:                      | /s/ Heather C.  Getz |
|                    |       |                     | Heather C. Getz,  CPA |
| * *                | * *   | * *                 | *Chief  Financial Officer*(Principal  Financial Officer and authorized officer of the Registrant) |

 

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