Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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| **(Mark  One)**                                         | ** **                                                                                              |
|---------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                              | ** **                                                                                              |
| **x**                                                   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                              | ** **                                                                                              |
| **for  the quarterly period ended March 31, 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 required tobe 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 90days.    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) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o  Noo

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions 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 April 22, 2009, 23,754,365 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, 2009**

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                  | ** ** | **Page  No.** |
|-------------------|---------------------------------------------------------------------------------------------|------------|---------------|
| **PART I.**  | **FINANCIAL INFORMATION**                                                                   | ** ** | ** **    |
| Item 1.           | Financial Statements                                                                        |       | 3             |
| Item  2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 11            |
| Item  3.          | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 15            |
| Item  4T.         | Controls and  Procedures                                                                    |       | 16            |
|              |                                                                                        |       |          |
| **PART II.** | **OTHER INFORMATION**                                                                       | ** ** | ** **    |
| Item 1.           | Legal Proceedings                                                                           |       | 16            |
| Item 1A.          | Risk Factors                                                                                |       | 16            |
| Item  2.          | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 16            |
| Item  3.          | Defaults Upon  Senior Securities                                                            |       | 16            |
| Item  4.          | Submission of  Matters to a Vote of Security Holders                                        |       | 16            |
| Item 5.           | Other Information                                                                           |       | 16            |
| Item 6.           | Exhibits                                                                                    |       | 17            |
|              |                                                                                        |       |          |
| SIGNATURES        |                                                                                        | 17         |

 

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**PART I — FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

 

**CARDIONET, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

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

 
| ** **                                                                                                                                                                              | ** ** | ** **                      | ** ** | **(Unaudited)**              | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **December 31, 2008** | ** ** | **March 31, 2009** | ** ** |
| ** **                                                                                                                                                                              | ** ** | ** **                      | ** ** | ** **                   | ** ** |
| **Assets**                                                                                                                                                                              |       |                            |       |                         |       |
| Current assets:                                                                                                                                                                         |       |                            |       |                         |       |
| Cash and cash equivalents                                                                                                                                                               |       | $                               | 58,171     |                         | $          | 50,412 |   |
| Accounts receivable, net of allowance for doubtful accounts of  $14,426, and $16,879 at December 31, 2008 and March 31, 2009,  respectively                                   |       | 39,334                          |       | 47,751                       |       |
| Due from related parties                                                                                                                                                                |       | 97                              |       | 144                          |       |
| Prepaid expenses and other current assets                                                                                                                                               |       | 1,059                           |       | 1,853                        |       |
|                                                                                                                                                                                    |       |                            |       |                         |       |
| Total current assets                                                                                                                                                                    |       | 98,661                          |       | 100,160                      |       |
|                                                                                                                                                                                    |       |                            |       |                         |       |
| Property and equipment, net                                                                                                                                                             |       | 18,766                          |       | 22,078                       |       |
| Intangible assets, net                                                                                                                                                                  |       | 1,823                           |       | 1,585                        |       |
| Goodwill                                                                                                                                                                                |       | 45,999                          |       | 45,999                       |       |
| Other assets                                                                                                                                                                            |       | 524                             |       | 566                          |       |
|                                                                                                                                                                                    |       |                            |       |                         |       |
| Total assets                                                                                                                                                                            |       | $                               | 165,773    |                         | $          | 170,388 |   |
|                                                                                                                                                                                    |       |                            |       |                         |       |
| **Liabilities and shareholders’ equity**                                                                                                                                           |       |                            |       |                         |       |
| Current liabilities:                                                                                                                                                                    |       |                            |       |                         |       |
| Accounts payable                                                                                                                                                                        |       | $                               | 3,838      |                         | $          | 4,319 |   |
| Accrued liabilities                                                                                                                                                                     |       | 10,238                          |       | 10,845                       |       |
| Current portion of debt                                                                                                                                                                 |       | 72                              |       | 49                           |       |
| Current portion of capital leases                                                                                                                                                       |       | 49                              |       | 49                           |       |
| Deferred revenue                                                                                                                                                                        |       | 461                             |       | 586                          |       |
|                                                                                                                                                                                    |       |                            |       |                         |       |
| Total current liabilities                                                                                                                                                               |       | 14,658                          |       | 15,848                       |       |
|                                                                                                                                                                                    |       |                            |       |                         |       |
| Deferred rent                                                                                                                                                                           |       | 965                             |       | 973                          |       |
| Other noncurrent liabilities                                                                                                                                                            |       | 33                              |       | 25                           |       |
|                                                                                                                                                                                    |       |                            |       |                         |       |
| Total liabilities                                                                                                                                                                       |       | 15,656                          |       | 16,846                       |       |
|                                                                                                                                                                                    |       |                            |       |                         |       |
| Common stock, $.001 par value; 200,000,000 shares authorized;  23,477,137 and 23,752,292 shares issued and outstanding at December 31,  2008 and March 31, 2009, respectively |       | 24                              |       | 24                           |       |
| Paid-in capital                                                                                                                                                                         |       | 222,608                         |       | 226,755                      |       |
| Accumulated deficit                                                                                                                                                                     |       | (72,515                         | )          | (73,237                      | )          |
|                                                                                                                                                                                    |       |                            |       |                         |       |
| Total shareholders’ equity                                                                                                                                                         |       | 150,117                         |       | 153,542                      |       |
|                                                                                                                                                                                    |       |                            |       |                         |       |
| Total liabilities and shareholders’ equity                                                                                                                                         |       | $                               | 165,773    |                         | $          | 170,388 |   |

 

See accompanying notes.

 

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

**(Unaudited)**

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

 
| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| ** **                                                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Revenues:                                                                         |       |                                             |       |   |   |
| Net patient service revenues                                                      |       | $                                                | 25,248     |   | $ | 35,559 |   |
| Other revenues                                                                    |       | 215                                              |       | 161 |   |
|                                                                              |       |                                             |       |   |   |
| Total revenues                                                                    |       | 25,463                                           |       | 35,720 |   |
|                                                                              |       |                                             |       |   |   |
| Cost of revenues                                                                  |       | 9,519                                            |       | 11,838 |   |
|                                                                              |       |                                             |       |   |   |
| Gross profit                                                                      |       | 15,944                                           |       | 23,882 |   |
| Operating expenses:                                                               |       |                                             |       |   |   |
| Research and development                                                          |       | 1,141                                            |       | 1,216 |   |
| General and administrative                                                        |       | 9,066                                            |       | 14,325 |   |
| Sales and marketing                                                               |       | 5,115                                            |       | 7,547 |   |
| Integration, restructuring and other charges                                      |       | 1,306                                            |       | 2,139 |   |
|                                                                              |       |                                             |       |   |   |
| Total expenses                                                                    |       | 16,628                                           |       | 25,227 |   |
|                                                                              |       |                                             |       |   |   |
| Loss from operations                                                              |       | (684                                             | )          | (1,345 | ) |
| Other income (expense):                                                           |       |                                             |       |   |   |
| Interest income                                                                   |       | 178                                              |       | 122 |   |
| Interest expense                                                                  |       | (66                                              | )          | (4 | ) |
|                                                                              |       |                                             |       |   |   |
| Total other income                                                                |       | 112                                              |       | 118 |   |
|                                                                              |       |                                             |       |   |   |
| Loss before income taxes                                                          |       | (572                                             | )          | (1,227 | ) |
| Income tax benefit (provision)                                                    |       | 232                                              |       | 505 |   |
|                                                                              |       |                                             |       |   |   |
| Net loss                                                                          |       | (340                                             | )          | (722 | ) |
|                                                                              |       |                                             |       |   |   |
| Dividends on and accretion of mandatorily redeemable convertible  preferred stock |       | (2,597                                           | )          | — |   |
|                                                                              |       |                                             |       |   |   |
| Net loss attributable to common stockholders                                      |       | $                                                | (2,937     | ) | $ | (722 | ) |
|                                                                              |       |                                             |       |   |   |
| Net loss per common share:                                                        |       |                                             |       |   |   |
| Basic                                                                             |       | $                                                | (0.63      | ) | $ | (0.03 | ) |
| Diluted                                                                           |       | $                                                | (0.63      | ) | $ | (0.03 | ) |
|                                                                              |       |                                             |       |   |   |
| Weighted average number of common shares outstanding:                             |       |                                             |       |   |   |
| Basic                                                                             |       | 4,694,561                                        |       | 23,600,149 |   |
| Diluted                                                                           |       | 4,694,561                                        |       | 23,600,149 |   |

 

See accompanying notes.

 

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

**(Unaudited)**

**(*In thousands*)**

 
| ** **                                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| **Operating activities**                                                                  |       |                                             |       |   |   |
| Net loss                                                                                  |       | $                                                | (340       | ) | $ | (722 | ) |
| Adjustments to reconcile net (loss) income to net cash provided by  operating activities: |       |                                             |       |   |   |
| Depreciation                                                                              |       | 1,647                                            |       | 2,271 |   |
| Amortization of intangibles                                                               |       | 246                                              |       | 238 |   |
| Loss on disposal of property and equipment                                                |       | 46                                               |       | 11 |   |
| (Decrease) increase in deferred rent                                                      |       | (29                                              | )          | 8 |   |
| Provision for doubtful accounts                                                           |       | 2,344                                            |       | 2,453 |   |
| Stock-based compensation                                                                  |       | 360                                              |       | 1,660 |   |
| Changes in operating assets and liabilities:                                              |       |                                             |       |   |   |
| Accounts receivable                                                                       |       | (5,269                                           | )          | (10,870 | ) |
| Due from related parties                                                                  |       | 13                                               |       | (47 | ) |
| Prepaid expenses and other current assets                                                 |       | (912                                             | )          | (794 | ) |
| Other assets                                                                              |       | 613                                              |       | (42 | ) |
| Accounts payable                                                                          |       | (1,042                                           | )          | 481 |   |
| Accrued liabilities                                                                       |       | 3,135                                            |       | 607 |   |
| Other liabilities                                                                         |       | —                                           |       | 117 |   |
|                                                                                      |       |                                             |       |   |   |
| Net cash provided by operating activities                                                 |       | 812                                              |       | (4,629 | ) |
|                                                                                      |       |                                             |       |   |   |
| **Investing activities**                                                                  |       |                                             |       |   |   |
| Purchases of property and equipment                                                       |       | (1,738                                           | )          | (5,594 | ) |
| Investment in subsidiary, net of cash acquired                                            |       | (2,608                                           | )          | — |   |
|                                                                                      |       |                                             |       |   |   |
| Net cash used in investing activities                                                     |       | (4,346                                           | )          | (5,594 | ) |
|                                                                                      |       |                                             |       |   |   |
| **Financing activities**                                                                  |       |                                             |       |   |   |
| Proceeds from issuance of common stock                                                    |       | 47,294                                           |       | 2,487 |   |
| Proceeds from issuance of debt                                                            |       | 500                                              |       | — |   |
| Repayment of debt                                                                         |       | (380                                             | )          | (23 | ) |
| Repurchase of stock/subject to repurchase                                                 |       | 2                                                |       | — |   |
|                                                                                      |       |                                             |       |   |   |
| Net cash provided by financing activities                                                 |       | 47,416                                           |       | 2,464 |   |
|                                                                                      |       |                                             |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                      |       | 43,882                                           |       | (7,759 | ) |
| Cash and cash equivalents — beginning of period                                      |       | 18,091                                           |       | 58,171 |   |
|                                                                                      |       |                                             |       |   |   |
| Cash and cash equivalents — end of period                                            |       | $                                                | 61,973     |   | $ | 50,412 |   |
|                                                                                      |       |                                             |       |   |   |
| **Supplemental disclosure of cash flow information**                                      |       |                                             |       |   |   |
| Cash paid for interest                                                                    |       | $                                                | 64         |   | $ | 4 |   |
| Cash paid for taxes                                                                       |       | $                                                | —     |   | $ | 1,268 |   |

 

See accompanying notes.

 

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**CARDIONET, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**1.****    ****Summary of SignificantAccounting Policies**

 

**Unaudited Interim Financial Data**

 

The accompanying unaudited consolidated financialstatements have been prepared in accordance with U.S. generally acceptedaccounting principles for interim financial information and the requirements ofForm 10-Q and Article 10 of Regulation S-X. Accordingly, theseconsolidated financial statements do not include all of the information andfootnotes necessary for a complete presentation of financial position, resultsof operations and cash flows.  In the opinion of management, theseconsolidated financial statements reflect all adjustments which are of normalrecurring nature and necessary for a fair presentation of the Company’sfinancial position as of December 31, 2008 and March 31, 2009, andthe results of operations for the three months ended March 31, 2008 and 2009.The financial data and other information disclosed in these notes to thefinancial statements related to the three month period is unaudited. Theresults for the three month period ended March 31, 2009 is not necessarilyindicative of the results to be expected for any future period.

 

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

 

The Company computes net income (loss) per share inaccordance with Statement of Financial Accounting Standards (SFAS) No. 128,*Earnings Per Share*. Under SFAS No. 128,basic net loss per share is computed by dividing net loss per shareattributable to common stockholders by the weighted average number of commonshares outstanding for the period and excludes the effects of any potentiallydilutive securities. Diluted earnings per share, if presented, would includethe dilution that would occur upon the exercise or conversion of allpotentially dilutive securities into common stock using the “treasury stock”and/or “if converted” methods, as applicable.

 

The following summarizes the potential outstandingcommon stock of the Company at March 31, 2008 and 2009. All share amountshave been adjusted for the one-for-two reverse stock split effected by theCompany on March 5, 2008:

 
| ** **                                                          | ** ** | **March 31,  2008** | ** ** | **March 31,  2009** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Series B warrants                                              |       | 6,250                    |       | —                   |       |
| Common stock options and restricted stock units outstanding         |       | 1,704,804                |       | 1,847,991                |       |
| Common stock options and restricted stock units available for grant |       | 533,063                  |       | 938,255                  |       |
| Common stock held by certain employees and unvested                 |       | 79,866                   |       | 31,093                   |       |
| Common stock                                                        |       | 22,985,279               |       | 23,752,292               |       |
|                                                                |       |                     |       |                     |       |
| Total                                                               |       | 25,309,262               |       | 26,569,631               |       |

 

If the outstanding vested options or restrictedstock units were exercised or converted into common stock, the result would beanti-dilutive for the three months ended March 31, 2008 and 2009.Accordingly, basic and diluted net loss attributable to common stockholders pershare are identical for those periods presented in the consolidated statementsof operations.

 

**Stock-Based Compensation**

 

SFAS No. 123(R), *Share-Based Payment*, addresses the accounting forshare-based payment transactions in which an enterprise receives employeeservices in exchange for (a) equity instruments of the enterprise or (b) liabilitiesthat are based on the fair value of the enterprise’s equity instruments or thatmay be settled by the issuance of such equity instruments. SFAS No. 123(R) requiresthat an entity measure the cost of equity-based service awards based on thegrant-date fair value of the award and recognize the cost of such awards overthe period during which the employee is required to provide service in exchangefor the award (the vesting period). SFAS No. 123(R) requires that anentity measure the cost of liability-based service awards based on current fairvalue that is re-measured subsequently at each reporting date through thesettlement date. The Company accounts for equity awards issued to non-employeesin accordance with EITF 96-18, *Accountingfor Equity Investments that are Issued to Other Than Employees for Acquiring,or in Conjunction with, Selling Goods or Services*.

 

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The Company’s income before income taxes for thethree months ended March 31, 2008 and 2009 was $0.4 million and $1.7million lower, respectively, and the Company’s after-tax net income for thethree months ended March 31, 2008 and 2009 was $0.2 million and $1.0million lower, respectively, as a result of stock-based compensation expenseincurred. The impact of stock-based compensation expense was $(0.04) on thebasic and diluted earnings per share for the three months ended March 31,2008 and 2009, respectively.

 

The Company utilized the Black-Scholes valuationmodel for estimating the fair value of the stock options granted after theadoption of SFAS No. 123R with the following weighted averageassumptions:

 
| ** **              | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| Expected dividend yield |       | 0                                                | %          | 0 | % |
| Expected volatility     |       | 50                                               | %          | 50 | % |
| Risk-free interest rate |       | 2.7                                              | %          | 2.0 | % |
| Expected life           |       | 6.25  years                                      |       | 6.25  years |   |

 

The dividend yield of zero is based on the fact thatthe Company has never paid cash dividends and has no present intention to paycash dividends. Since the Company’s stock was not publicly traded prior to theclosing of its initial public offering, the expected volatility was calculatedfor each date of grant based on an alternative method. The Company identifiedsimilar public entities for which share price information was available andconsidered the historical volatility of these entities’ share price inestimated expected volatility. The risk-free interest rate is derived from theU.S. Federal Reserve rate in effect at the time of grant. The expected lifecalculation is based on the observed and expected time to the exercise ofoptions by the Company’s employees based on historical exercise patterns forsimilar options. Based on the Company’s historical experience of options thatcancel before becoming fully vested, the Company has assumed an annualizedforfeiture rate of 15% for all options. Under the true-up provision ofSFAS No. 123R, the Company will record additional expense if theactual forfeiture rate is lower than estimated, and will record a recovery ofprior expense if the actual forfeiture rate is higher than estimated.

 

Based on the above assumptions, the per shareweighted average fair value of the options granted under the stock option planfor the three months ended March 31, 2008 and 2009 was $12.19 and $12.46,respectively.

 

Thefollowing table summarizes activity under all stock award plans from December 31,2008 through March 31, 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 |   |

 

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 subject to Options granted during the preceding calendaryear or such number of shares determined by the Board of Directors. Theincrease in the shares available for grant under the ESOP plan is equal to 4%of the total shares outstanding at December 31, 2008.

 

Additionalinformation regarding options outstanding is as follows:

 
| ** **                                          | ** ** | **March 31,  2008** | ** ** | **March 31,  2009** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Range of exercise price (per option)                |       | $0.70  - $18.30          |       | $1.50  - $31.18          |       |
| Weighted average remaining contractual life (years) |       | 9.22                     |       | 9.30                     |       |

 

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*EmployeeStock Purchase Plan*

 

OnMarch 17, 2009, 44,189 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 31,2009 were $0.7 million. In January 2009, the number of shares availablefor grant was increased by 235,189, per the ESPP plan documents. At March 31,2009, approximately 379,503 shares remain available for purchase under theESPP.

 

**New Accounting Pronouncements**

 

Effective January 1, 2009, the Companyprospectively adopted Statement of Financial Accounting Standards No. 157(“SFAS No. 157”), *Fair Value Measurements*,with respect to fair value measurements required for the Company’s nonfinancialassets and nonfinancial liabilities. The adoption of SFAS 157 with respect tothe Company’s nonfinancial assets and nonfinancial liabilities was delayeduntil January 1, 2009 by FSP No. 157-2, Effective Date of FASBStatement No. 157. The adoption did not have a material effect onthe Company’s financial position or results of operations.

 

Effective January 1, 2009, the Companyprospectively adopted Statement of Financial Accounting Standards No. 141(R) (“SFASNo. 141(R)”), *Business Combinations*and Statement of Financial Accounting Standards No. 160 (“SFAS No. 160”),*Noncontrolling Interests in ConsolidatedFinancial Statements, an Amendment of ARB No. 151*. SFAS No. 141(R) establishesthe principles 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 tax assetswould serve to reduce goodwill. Under SFAS 141(R), any changes in the valuationallowance related to income from acquisitions currently or in prior periods nowserves to reduce income taxes in the period in which the reserve is reversed.Additionally, under SFAS 141(R), 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 adoptions of SFAS No. 141(R) on January 1,2009 have been expensed as incurred. SFAS No. 160 establishes accountingand reporting standards that require (i) noncontrolling interests to bereported as a component of equity; (ii) changes in a parent’s ownershipinterest while the parent retains its controlling interest to be accounted foras equity transactions; and (iii) any retained noncontrolling equityinvestment upon the deconsolidation of a subsidiary to be initially measured atfair value. The adoption did not have an effect on the Company’s financialposition or results of operations.

 

In April 2009, the Financial AccountingStandards Board (“FASB”) issued FSP SFAS 141(R)-1, “Accounting for Assets Acquiredand Liabilities Assumed in a Business Combination That Arise fromContingencies,” to amend the provisions related to the initial recognition andmeasurement, subsequent measurement and disclosure of assets and liabilitiesarising from contingencies in a business combination under SFAS 141(R). Underthe new guidance, assets acquired and liabilities assumed in a businesscombination that arise from contingencies should be recognized at fair value onthe acquisition date if fair value can be determined during the measurementperiod. If fair value cannot be determined, companies should typically accountfor the acquired contingencies using existing guidance.  The Company adopted FAS 141(R) and FSPSFAS 141(R)-1 on January 1, 2009. The adoption did not have a material effect on the Company’s financialposition or results of operations.

 

In April 2009, the FASB issued FSP SFAS157-4, “Determining Fair Value When the Volume and Level of Activity for theAsset or Liability Have Significantly Decreased and Identifying TransactionsThat Are Not Orderly,” which provides additional guidance for estimating fairvalue in accordance with FASB Statement No. 157, “Fair Value Measurements,”when the volume and level of activity for the asset or liability have significantlydecreased. This FSP also includes guidance on identifying circumstances thatindicate a transaction is not orderly. This pronouncement is effective forperiods ending after June 15, 2009. The Company’s management does not expect this pronouncement to have amaterial effect on the Company’s financial position or results of operations.

 

In April 2009, the FASB issued FSP SFAS115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-TemporaryImpairments,” to amend the other-than-temporary impairment guidance in debtsecurities to be based on intent to sell instead of 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 pronouncement is effective for periodsending after June 15, 2009.  TheCompany’s management does not expect this pronouncement to have a materialeffect on the Company’s financial position or results of operations.

 

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**3.****    ****Contingent Payment**

 

On March 8, 2007, theCompany acquired all of the outstanding capital stock of PDSHeart for anaggregate purchase price of $51.6 million. In addition to the$51.6 million consideration, the Company agreed to pay PDSHeartshareholders $5.0 million of contingent consideration in the event of aqualifying liquidation event, including a public offering or acquisition. TheCompany’s initial public offering was consummated on March 25, 2008 and,accordingly, the purchase price for the PDSHeart acquisition has been adjustedto $56.6 million to reflect this payment.

 

**4.****    ****Mandatorily Redeemable Convertible Preferred Stock and Shareholders’Equity (Deficit)**

 

In March 2007, theCompany sold 110,000 shares of its mandatorily redeemable convertible preferredstock, or MRCPS, which generated net proceeds to the Company of $102.1 million($110 million less offering costs of $7.9 million). The Company also issued3,383 shares of MRCPS upon conversion of an outstanding bridge loan and 1,456shares as consideration to a major shareholder of PDSHeart as consideration inthe PDSHeart acquisition. 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, theCompany issued convertible preferred stock which generated net proceeds to theCompany of $53.5 million. All Series A, B, C and D preferred stockconverted to common stock on March 25, 2008 in connection with the Company’sinitial public offering.

 

In connection with aborrowing arrangement provided by a bank, the Company issued a warrant in August 2000to purchase 12,500 shares of Series B preferred stock at a price of $1.47per share. The warrant may be exercised at any time on or before August 9,2010.  In connection with the closing ofthe Company’s initial public offering on March 25, 2008, this warrantbecame exercisable for 6,250 shares of the Company’s common stock at a price of$2.94 per share. In March 2009, these warrants were fully exercisedthrough a cashless transaction.

 

In 2005 and 2006, the Company issued warrants topurchase 964,189 shares of its preferred stock at a price of $3.50 per share tothe participants in certain bridge financing transactions and to a stockholderin connection with entering into the Amended and Restated SubordinatedPromissory Note with a stockholder. As a result of the MRCPS financing, thewarrants became exercisable for shares of the Company’s Series D-1preferred stock. These warrants were automatically net exercised for commonstock on March 25, 2008 in connection with the Company’s initial publicoffering.

 

**5.****             ****Integration andRestructuring Activities**

 

*PDSHeart Integration*

 

In connection with the acquisition of PDSHeart, theCompany initiated exit plans for acquired activities that are redundant to theCompany’s existing operations. The plan includes the closure of a facility andthe elimination of 35 positions in the areas of sales, finance, serviceand management. In connection with the plan, the Company established reservesof $0.5 million included in the purchase price allocation. As of March 31,2009, all of the positions had been eliminated and the Company vacated thefacility. The reserve is included in accrued liabilities in the accompanyingconsolidated balance sheet.

 

A summary of the reserve activity related to thePDSHeart acquisition integration plan as of March 31, 2009 is as follows:

 
| ** **                           | ** ** | **Initial Reserves  Recorded in  Purchase Accounting** | ** ** | **Payments/Adjustments  through  March 31, 2009** | ** ** | **Balance as of  March 31, 2009** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| Severance and employee related costs |       | $                                                                     | 366        |                                                   | $          | 366                                              |       | $ | — |   |
| Rent abandonment                     |       | $                                                                     | 144        |                                                   | $          | 108                                              |       | $ | 36 |   |
| Total:                               |       | $                                                                     | 510        |                                                   | $          | 474                                              |       | $ | 36 |   |

 

The Company did not incurany expenses in relation to PDSHeart integration during the three months ended March 31,2009. The integration was substantially completed as of December 31,2008.

 

*San Diego Restructuring*

 

During the first quarter of 2008, the Company initiated plans toconsolidate its Finance and Human Resource functions in Pennsylvania. This planinvolved the elimination of seven positions in San Diego. The Companydid not incur any restructuring expenses for the three months ended March 31,2008 or 2009. The integration was substantially completed as of December 31,2008.

 

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A summary of the reserve activity related to the San Diegorestructuring plan as of March 31, 2009 is as follows:

 
| ** **                           | ** ** | **Initial Reserve  Recorded** | ** ** | **Payments  through  March 31,  2009** | ** ** | **Additional  reserves  through  March 31,  2009** | ** ** | **Balance as of  March 31,  2009** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------|------------|
| Severance and employee related costs |       | $                             | 662        |                                        | 1,048      |                                                    | 501        |                                    | 115        |   |
|                                      |            |                               |            |                                             |            |                                                         |            |                                         |            |  |

 

**6.****             ****Income Taxes**

 

The Company’s effective taxrate of 41.1% for the three months ended March 31, 2009 is based on itsestimated fiscal 2009 pretax income. The Company has deferred income tax assetstotaling approximately $29.5 million at March 31, 2009, consistingprimarily of federal and state net operating loss and credit carryforwards. Thefederal and state net operating loss carryforwards, if unused, will begin to expirein 2010. The federal and state credit carryforwards, if unused, will expire in2026. Due to uncertainty regarding the ultimate realization of these netoperating loss and credit carryforwards and other deferred income tax assets,the Company has established a valuation allowance for most of these assets andwill recognize the benefits only as reassessment indicates the benefits arerealizable.

 

**7.****    ****SubsequentEvents**

 

**Merger Agreement with Biotel Inc.**

 

On April 2, 2009, the Company entered into amerger agreement (the “Agreement”) with Biotel Inc. (“Biotel”). Under theAgreement, a wholly owned subsidiary of the Company will be merged with andinto Biotel, with Biotel continuing after the merger as the survivingcorporation and a wholly owned subsidiary of the Company. At the effective timeof the merger, each issued and outstanding share of Biotel’s common stock willbe converted into the right to receive consideration of $4.82 in cash, withoutinterest. The total transaction value is approximately $14 million. Inaddition, each holder of an option to purchase shares of Biotel common stockwill be entitled to receive a per share cash payment equal to the amount bywhich the merger consideration exceeds the exercise price of such option, lessany applicable withholding taxes. The completion of the merger is subject tothe approval of the merger agreement by Biotel’s shareholders and customarycovenants and closing conditions.  TheCompany may be entitled to a $1.0 million break-up fee and reimbursementof deal related costs of up to $0.4 million if the merger is not completed.The transaction is not subject to any financing condition.

 

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Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

**Overview**

 

We are a leading provider of ambulatory, continuous, real-timeoutpatient management solutions for monitoring relevant and timely clinicalinformation regarding an individual’s health. We actively began developing ourproduct platform in April 2000. From 2000 through 2002, we devotedsubstantially all of our resources to developing an integrated patientmonitoring platform that incorporates a wireless data transmission network,internally developed software, FDA-cleared algorithms and medical devices, anda 24-hour monitoring service center.

 

In February 2002, we received FDA 510(k) clearance for thefirst and second generation of our core MCOTTM (Mobile Cardiac OutpatientTelemetryTM) devices. We opened the CardioNet Monitoring Center in Conshohocken,Pennsylvania in July 2002 and currently provide all of our MCOT arrhythmiamonitoring at that location. In May 2003, we established our relationshipwith QUALCOMM Inc. (“QUALCOMM”). QUALCOMM provides us its wirelesscellular data connectivity solution and data hosting and queuing services.Pursuant to our agreement with QUALCOMM, we have no fixed or minimum financialcommitment. However, in the event that we fail to maintain an agreed-uponnumber of active cardiac monitoring devices on the QUALCOMM network or in theevent that we begin to utilize the services of a provider of monitoring andcommunications services other than QUALCOMM, QUALCOMM has the right toterminate this agreement.

 

In November 2006, we received FDA 510(k) clearance for ourthird generation product, or C3, which we have incorporated as part of ourmonitoring solution. We had previously received FDA 510(k) clearance forthe proprietary algorithm included in our C3 system in October 2005.

 

In September 2002, we were approved as an Independent DiagnosticTesting Facility (“IDTF”) for Medicare. The local Medicare carrier in Pennsylvaniasets the terms for reimbursement for MCOT services for approximately40 million covered lives. We have also worked to secure contracts withcommercial payors. We increased the number of contracts with commercial payorsfrom six at year-end 2003 to 41 at year-end 2004, 97 at year-end 2005, 144 atyear-end 2006, 169 at year-end 2007, 195 at year-end 2008, and 203 at March 31,2009. Over this period of time, we estimate that the number of coveredcommercial lives increased from six million at year-end 2003 to 32 millionat year-end 2004, 70 million at year-end 2005, 102 million atyear-end 2006, 120 million at year-end 2007, 151 million at year-end2008, and 155 million at March 31, 2009. The current estimated total of195 million Medicare and commercial lives for which we had reimbursementcontracts as of March 31, 2009 represents approximately 78% of the totalcovered lives in the United States. The majority of the remaining covered livesare insured by a relatively small number of large commercial insurancecompanies that, beginning in 2003, deemed MCOT to be “experimental andinvestigational” and do not currently reimburse us for services provided totheir beneficiaries. We believe the CPT codes and reimbursement rates that wesecured in October 2008 will facilitate future contract negotiations withthese remaining non-contracted payors as the codes will simplify andstandardize the billing and reimbursement process.

 

On March 8, 2007, we acquired all of the outstanding capital stockof PDSHeart for an aggregate purchase price of $51.6 million. In additionto the $51.6 million of consideration, the Company agreed to pay PDSHeartshareholders $5.0 million of contingent consideration in the event of aqualifying liquidation event, including a public offering or acquisition. TheCompany’s initial public offering was consummated on March 25, 2008 and,accordingly, the purchase price for the PDSHeart acquisition has been adjustedto $56.6 million to reflect this payment. Through this acquisition,CardioNet provides event, Holter and pacemaker monitoring services to patientsin 49 states, with a concentration of sales in the Southeast. The acquisitionhas broadened our geographic coverage and expanded our service offerings toinclude the complete range of cardiac monitoring services. For our event,Holter and pacemaker monitoring services, we have established Medicarereimbursement and we have 108 direct contracts with commercial payors as of March 31,2009 representing an estimated 135 million covered lives.

 

In March 2007, we raised $110 million in mandatorilyredeemable convertible preferred stock (MRCPS) to, in part, fund theacquisition of PDSHeart. On February 25, 2008, the Board of Directors ofthe Company, subject to stockholder approval, approved a reverse stock split ofthe Company’s common stock at a ratio of one share for every two sharespreviously held. On March 5, 2008, the stockholders of the Companyapproved the reverse stock split and the reverse stock split became effective.On March 25, 2008, the Company completed its initial public offeringgenerating net proceeds of approximately $46.7 million after deductingunderwriter commissions and estimated offering expenses. The MRCPS original purchase price plusaccrued dividends were converted to common shares on March 25, 2008 inconnection with the Company’s initial public offering.

 

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On August 6, 2008, an underwritten secondary public offering ofshares of common stock held by certain of the Company’s existing stockholderswas completed. The Company did not issue any shares and received no proceeds inconnection with such offering. The Company incurred approximately$0.9 million in offering expenses on behalf of the selling stockholders.These expenses were incurred in accordance with the Company’s obligations undera registration rights agreement with the selling stockholders.

 

In October 2008, the Centers for Medicare and Medicaid Services (“CMS”)established reimbursement rates that cover MCOT. The reimbursement rates areapplicable to the Category I CPT codes established by the American MedicalAssociation (“AMA”) for Mobile Cardiovascular Telemetry. The codes and ratesare contained in The Medicare Program Final Rule for the calendar year2009 and become effective on January 1, 2009. We believe that the newbilling codes will allow for automated claims adjudication, substantiallysimplifying the reimbursement process for physicians and payors compared to thecurrent process. Reimbursement prior to the use of the new CPT code wasobtained through non-specific billing codes which require various narrativesthat, in most cases, involve semi-automated or manual processing, as well asadditional review by payors.

 

**Statements of Operations Overview**

 

***Revenues***

 

Our principal source of revenues is patient revenue from cardiacmonitoring services. The amount of revenue generated is based on the number ofpatients enrolled through physician prescriptions and the rates reimbursed tous by commercial payors, physicians, patients and Medicare. Reimbursement ratesare set by the CMS on a case rate basis for the Medicare program and throughnegotiations with commercial payors who typically pay a daily monitoring rate.From 2002 through March 2009, our average case rate for monitoringMedicare patients has remained relatively stable. We expect pricing to declineover time in a manner consistent with the introduction and penetration of apremium priced service due to competition, introduction of new technologies andthe potential addition of larger commercial payors. Since our MCOT services arerelatively new and the reimbursement status is evolving, our revenues are subjectto fluctuations due to increases or decreases in rates and decisions by payorsregarding reimbursement.

 

For the event, Holter and pacemaker monitoring market we expect theprice to remain constant or decline as the new generation technology gains wideracceptance in the market. The established 2007 Medicare rates compared to 2006for our event monitoring services declined by 3% to 8%, depending on the typeof service, and our Holter monitoring services declined 8%. The Medicare reimbursementrates for event and Holter services in 2008 were flat compared to 2007, anddeclined 8% in 2009 compared to 2008. We expect 2010 rates to remain consistentor decline compared with 2009.

 

We believe MCOT revenues will increase as a percentage of revenuesgoing forward as we emphasize this service, continue our geographic expansionand achieve greater market penetration in existing markets. We expect that theevent, Holter and pacemaker monitoring services revenues will remain constantor decline in absolute terms as the old technology is replaced and therefore,decrease as a percentage of revenues going forward. Other revenue consistsmainly of web hosting services, which we believe will remain constant ordecline in absolute terms and therefore, decrease as a percentage of revenuesgoing forward. Our revenues are seasonal, as the volume of prescriptions tendsto slow down in the summer months due to the more limited use of our monitoringsolutions as physicians and patients vacation.

 

***Gross Profit***

 

Gross profit consists of revenues less the cost of revenues. Cost ofrevenues includes:

 

·                  salaries, benefits andstock-based compensation for personnel providing various services and customersupport to physicians and patients including patient enrollment and education,monitoring services, distribution services (scheduling, packaging and deliveryof the monitors and sensors to the patients), device repair and maintenance,and quality assurance;

 

·                  cost of patient-relatedservices provided by third-party subcontractors including device transportationto and from the patient, cellular airtime charges related to transmission ofECGs to the CardioNet Monitoring Center and cost for in-home customer hook-upswhen necessary;

 

·                  consumable supplies sent topatients along with the durable components of MCOT devices;

 

·                  depreciation on ourmonitors; and

 

·                  service cost related tospecial project revenues.

 

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For the three months ended March 31, 2009, our gross profit marginwas 66.9%. In general, we expect gross profit margins on MCOT services toremain flat or increase. For our event and Holter monitoring services, weexpect gross profit margins to remain flat or decline.

 

***Sales and Marketing***

 

Sales and marketing expense consists primarily of salaries, benefitsand stock-based compensation related to account executives, marketing personneland contracting personnel, account executive commissions, travel and otherreimbursable expenses, and marketing programs such as trade shows and marketingcampaigns.

 

Following the completion of our randomized clinical trial and thePDSHeart acquisition, we made a significant investment in sales and marketingby increasing the number of account executives in new geographies. We had asales force of 103 account executives as of March 31, 2009. We currentlyhave account executives covering 49 states. We also plan to increase ourmarketing activities and to invest in and expand our sales organization. As aresult, we expect that sales and marketing expenses will increase in absoluteterms and as a percentage of revenues in 2009. Thereafter, we expect sales andmarketing to increase in absolute terms and decrease as a percentage ofrevenues.

 

***Research and Development***

 

Research and development expense consists primarily of salaries,benefits and stock-based compensation of personnel and the cost ofsubcontractors who work on the development of the hardware and software for ournext generation monitors, enhance the hardware and software of our existingmonitors and provide quality control and testing. Expenses related to clinicaltrials are also included in research and development expenses. We expect thatresearch and development expenses will increase in absolute terms but remainflat as a percentage of revenue going forward as we continue to focus on newproduct development

 

***General and Administrative***

 

General and administrative expense consists primarily of salaries,benefits and stock based compensation related to general and administrativepersonnel, professional fees primarily related to legal and audit fees,facilities expenses and the related overhead, and bad debt expense. We expectthat general and administrative expenses will increase in absolute terms due tothe significant planned investment in infrastructure to support our growth andthe additional expenses related to becoming a publicly traded company,including the increased cost of compliance and increased audit fees resultingfrom the Sarbanes-Oxley Act. As a percentage of revenues, we expect general andadministrative expenses to decline as we grow.

 

***Integration, Restructuring and Other Charges***

 

During 2008, the Company undertook several initiatives to increase theefficiency of its operations. These initiatives included the integration andrestructuring of PDSHeart, and the restructuring of the Finance and HumanResource functions located in our San Diego location. In addition, theCompany settled an intellectual property dispute with a competitor in the firstquarter of 2008. In the first quarter 2009, the Company incurred expensesrelated to the termination of certain executives.

 

**Critical Accounting Policies andEstimates**

 

In our Annual Report on Form 10-Kfor the year ended December 31, 2008, we identified the critical accountingpolicies which affect our more significant estimates and assumptions used inpreparing our consolidated financial statements. We have not changed thesepolicies from those previously disclosed in our Annual Report.

 

**Results of Operations**

 

***Quarters Ended March 31, 2008 and 2009***

 

*Revenues.*    Total revenues forthe quarter ended March 31, 2009 increased to $35.7 million from$25.5 million for the quarter ended March 31, 2008, an increase of$10.2 million, or 40.3%. MCOT revenue increased $11.3 million, offsetby a decrease in PDS revenue of $1.1 million.

 

*Gross Profit.*    Gross profitincreased to $23.9 million for the quarter ended March 31, 2009, or66.9% of revenues, from $15.9 million for the quarter ended March 31,2008, or 62.6% of revenues. The increase of $8.0 million, or 49.8%, was due tothe increased revenue from MCOT as well as operational efficiencies achievedand cost reductions negotiated with vendors during 2009.

 

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*Sales and Marketing Expense.*    Sales and marketingexpense was $7.5 million for the quarter ended March 31, 2009compared to $5.1 million for the quarter ended March 31, 2008. Theincrease of $2.4 million was due to the continued building of the salesforce and sales operations infrastructure. As a percent of total revenues, sales and marketing expense was 21.1%for the quarter ended March 31, 2009 compared to 20.1% for the quarter endedMarch 31, 2008, an increase of 1.0%.

 

*Research and Development Expense.*    Research anddevelopment expense remained relatively flat in March 31, 2009 compared toMarch 31, 2008, increasing to $1.2 million from $1.1 million. Asa percent of total revenues, research and development expense declined to 3.4%for the quarter ended March 31, 2009 compared to 4.5% for the quarterended March 31, 2008, a decline of 1.1% primarily due to the higherrevenue.

 

*General and AdministrativeExpense.*    Generaland administrative expense increased to $14.3 million for the quarterended March 31, 2009 from $9.1 million for the quarter ended March 31,2008. This increase of $5.2 million, or 58.0%, was primarily due to anincrease in the provision for bad debt of $1.5 million, increase in stockcompensation expense of $1.3 million, increase in the bonus expense of $1.1million, and $0.9 million of additional expense from the expansion ofinfrastructure related to Company growth.

 

*Integration, Restructuring andOther Nonrecurring Charges.*     Severance charges related to executiveemployee terminations were $2.1 million for the quarter ended March 31,2009. For the quarter ended March 31, 2008, the Company initiated exitplans for certain acquired activities of PDSHeart that were redundant to theCompany’s existing operations, and initiated restructuring plans to consolidateits Finance and Human Resources functions in Conshohocken, Pennsylvania. Forthe quarter ended March 31, 2008, the Company incurred $0.3 millionrelated to PDSHeart integration activities and $0.1 million related to theconsolidation of its Finance and Human Resources functions. Additionally, inthe quarter ended March 31, 2008, the Company incurred expenses of $0.9million for a legal settlement with one of our competitors.

 

*Total Interest Income/Expense,Net.*    Netinterest income was $0.1 million for the quarter ended March 31, 2008 and2009.

 

*Income Taxes.*    The Company’seffective tax rate was 41.1% for the quarter ended March 31, 2009,compared to an effective tax rate of 40.6% for the quarter ended March 31,2008. The effective tax rate is based on our estimated fiscal 2009 pretaxincome. The Company has approximately $38.3 million in federal net operatinglosses as of March 31, 2009 to offset future taxable income expiring invarious years through 2026.

 

*Net Income (Loss).*    Net loss was $0.7million for the quarter ended March 31, 2009 compared to a net loss of$0.3 million for the quarter ended March 31, 2008. As a percent oftotal revenues, net loss was 2.0% for the quarter ended March 31, 2009compared to 1.3% for the quarter ended March 31, 2008.

 

**Liquidity and Capital Resources**

 

From our inception in 1999 through March 31,2009, we did not generate sufficient cash flows to fund our operations and thegrowth of our business. As a result, prior to the completion of our initialpublic offering, our operations were financed primarily through the privateplacement of equity securities and both long-term and short-term debtfinancings.  We completed a financinginvolving shares of our mandatorily redeemable convertible preferred stock in March 2007,in which we received net proceeds of approximately $102.1 million, andcompleted our initial public offering in March 2008, in which we receivednet proceeds, after underwriting discounts and offering expenses, ofapproximately $46.7 million. Through March 31, 2009, we funded ourbusiness primarily through the following:

 

·                  initial public offering that provided netproceeds of approximately $46.7 million, after deducting underwritingcommissions and offering expenses;

 

·                  issuance of mandatorily redeemableconvertible preferred stock that provided gross proceeds of $110 million,of which $45.9 million was used to acquire PDSHeart;

 

·                  issuance of preferred stock that providedgross proceeds of $53.7 million; and

 

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·                  bank debt from Silicon Valley Bank consistingof a term loan of $3.0 million, which was repaid on April 1, 2008,and a working capital line secured by accounts receivable of $1.9 million,which was repaid from the proceeds of the mandatorily redeemable convertiblepreferred stock.

 

As of March 31, 2009, our principal source ofliquidity was cash and cash equivalents totaling $50.4 million and netaccounts receivable of $47.9 million.

 

Our cash flow from operations decreased by $5.4million to a cash outflow of $4.6 million in the first three months of 2009 froma cash inflow of $0.8 million in the first three months of 2008. The decreaseis due primarily to increases in accounts receivable.

 

We used net cash in investing activities of $5.6million in the first three months of 2009, compared to $4.3 million in thefirst three months of 2008, an increase of $1.3 million. The increase isprimarily due to investment in medical devices related to the Company’s growthin operations in the three months ended March 31, 2009.

 

We generated net cash from financing activities of$2.5 million in the first three months of 2009, compared to $47.4 million inthe first three months of 2008, a decrease of $44.9 million. The decrease isprimarily due to the Company receiving proceeds from its initial publicoffering in the first quarter of 2008.

 

We believe that our existing cash and cashequivalent balances and revenues from our operations will be sufficient to meetour anticipated cash requirements for the foreseeable future.

 

Our future funding requirements will depend on manyfactors, including:

 

·                  the costs associated with developing,manufacturing and building our inventory of our future monitoring solutions;

 

·                  the costs of hiring additional personnel andinvesting in infrastructure to support future growth;

 

·                  the reimbursement rates associated with ourproducts and services;

 

·                  actions taken by the FDA and other regulatoryauthorities affecting the MCOT and competitive products;

 

·                  our ability to secure contracts withadditional commercial payors providing for the reimbursement of our services;

 

·                  the emergence of competing technologies andproducts and other adverse market developments;

 

·                  the costs of preparing, filing, prosecuting,maintaining and enforcing patent claims and other intellectual property rightsor defending against claims of infringement by others;

 

·                  the costs related to business combinations;and

 

·                  the costs of investing in additional lines ofbusiness outside of arrhythmia monitoring solutions.

 

To the extent that we raise additional capital byissuing equity securities, our stockholders’ ownership will be diluted. Inaddition, if we determine that we need to raise additional capital, suchcapital may not be available on reasonable terms, or at all. If we raiseadditional funds by issuing equity securities, substantial dilution to existingstockholders would likely result. If we raise additional funds by incurringadditional debt financing, the terms of the debt may involve significant cashpayment obligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business.

 

**Item 3.Quantitative and Qualitative Disclosures about Market Risk.**

 

Ourcash and cash equivalents as of March 31, 2009 consisted primarily of cashand money market funds with maturities of less than 90 days.  The primary objective of our investmentactivities is to preserve our capital for the purpose of funding operationswhile, at the same time, maximizing the income we receive from our investmentswithout 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 disclosure controls and procedures thatare designed to ensure that information required to be disclosed in ourperiodic reports filed with the SEC is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and formsand that such information is accumulated and communicated to our management,including our chief executive officer and chief financial officer, asappropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and no evaluation of controls and procedures can provideabsolute assurance that all control issues and instances of fraud, if any,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) of theSecurities 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 executiveofficer and chief financial officer, did not identify any change in ourinternal control over financial reporting that occurred during our latestfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II - OTHER INFORMATION.**

 

**Item 1.  Legal Proceedings.**

 

OnNovember 26, 2007, we filed a lawsuit against LifeWatch Corp. andcertain of its employees in the United States District Court for the NorthernDistrict of Illinois, Eastern Division. In the action, we allege several causesof action including trade secret misappropriation, breach of contract, fraud,and unfair competition arising from actions of LifeWatch and its employees tounlawfully obtain, use, inspect and test two of our MCOT kits. On January 4,2008, LifeWatch responded by filing counterclaims in the action against us. Inits counterclaims, LifeWatch alleged that we misappropriated trade secrets ofLifeWatch through inspection of a LifeWatch device, and that we have mademisleading advertising and marketing statements relating to LifeWatch. In May 2008,the parties entered into a settlement agreement pursuant to which the partiesamicably agreed to resolve the lawsuit with dismissal by both sides of allclaims pending in the lawsuit.

 

**Item 1A.  Risk Factors.**

 

In evaluating an investment in our common stock,investors should consider carefully, among other things, the risk factorspreviously disclosed in Part I, Item 1A of our Annual Report on Form 10-Kfiled with the SEC for the year ended December 31, 2008, as well as theinformation contained in this Quarterly Report and our other reports andregistration statements filed with the SEC. There have been no material changes in the risk factors as previouslydisclosed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-Kwith the SEC for the year ended December 31, 2008.

 

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

 

Notapplicable.

 

**Item 3. Defaults Upon Senior Securities**

 

Notapplicable.

 

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

 

Notapplicable.

 

**Item 5. Other Information**

 

Notapplicable.

 

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Table ofContents

 

**Item 6.  Exhibits.**

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | ** **                                                                                                                                                                                                                                           |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                 |
| 10.1                |       | Release and Waiver of  Claims, dated January 25, 2009, by Arie Cohen (Filed as  Exhibit 99.2 to the Company’s Current Report on Form 8-K dated  January 28, 2009, and incorporated by reference herein.)                    |
| 10.2                |       | Letter  Agreement, dated January 28, 2009, between Randy Thurman and the Company  (Filed as Exhibit 99.4 to the Company’s Current Report on Form 8-K  dated January 28, 2009, and incorporated by reference herein.)        |
| 10.3                |       | Compensation  Program for Non-Employee Directors (Filed as Exhibit 99.5 to the  Company’s Current Report on Form 8-K dated January 28, 2009, and  incorporated by reference herein.)                                             |
| 10.4                |       | Employment  Agreement, dated February 24, 2009, between Randy Thurman and the  Company (Filed as Exhibit 99.2 to the Company’s Current Report on  Form 8-K dated February 27, 2009, and incorporated by reference  herein.) |
| 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.                                                          |

 

**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 15, 2009 | By:                      | /s/ Martin P. Galvan |
|                    |                     | Martin P. Galvan, CPA |
| * *                | * *                 | *Chief  Financial Officer*(Principal  Financial Officer) |

 

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