Heartbeam Inc Annual Report 2012

Plain-text annual report

Use these links to rapidly review the documentTABLE OF CONTENTSTable of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KCommission file number: 0-10961CardioNet, Inc.(Exact name of registrant as specified in its charter)DELAWARE(State or other jurisdiction ofincorporation or organization) 94-2573850(I.R.S. EmployerIdentification No.)227 Washington StreetConshohocken, Pennsylvania(Address of principal executiveoffices) 19428(Zip Code)(610) 729-7000(Registrant's telephone number, including area code)Not Applicable(Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on WhichRegisteredCommon Stock, $0.001 par value NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the ExchangeAct. Yes o No  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2012ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from N/A to N/A1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes  No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.(Check one): Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  The aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $34,525,117 based on the closing saleprice at which the common stock was last sold on June 29, 2012, the last business day of the registrant's most recently completed second fiscal quarter. As of February 13, 2013, 25,215,366 shares of the registrant's common stock were outstanding.DOCUMENTS INCORPORATED BY REFERENCE Certain information contained in the registrant's definitive Proxy Statement for the 2013 annual meeting of stockholders is incorporated byreference into Part III of this Form 10-K. Large accelerated filer o Accelerated filer o Non-accelerated filer o(Do not check if asmaller reporting company) Smaller reporting company Table of ContentsCardioNet, Inc.Annual Report on Form 10-KFor The Fiscal Year Ended December 31, 2012 TABLE OF CONTENTS 2 PagePART I Item 1. Business 3Item 1A. Risk Factors 13Item 1B. Unresolved Staff Comments 27Item 2. Properties 27Item 3. Legal Proceedings 28Item 4. Mine Safety Disclosures 29PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities 29Item 6. Selected Financial Data 31Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 32Item 7A. Quantitative and Qualitative Disclosures About Market Risk 42Item 8. Financial Statements and Supplementary Data 43Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 77Item 9A. Controls and Procedures 77Item 9B. Other Information 80PART III Item 10. Directors, Executive Officers and Corporate Governance 80Item 11. Executive Compensation 80Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters 80Item 13. Certain Relationships and Related Transactions, and Director Independence 80Item 14. Principal Accountant Fees and Services 81PART IV Item 15. Exhibits and Financial Statement Schedules 81Exhibit Index 82Signatures 85Table of ContentsCAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This document includes certain forward-looking statements within the meaning of the "Safe Harbor" provisions of the Private Securities LitigationReform Act of 1995 regarding, among other things, our growth prospects, the prospects for our products and our confidence in the Company's future.These statements may be identified by words such as "expect," "anticipate," "estimate," "intend," "plan," "believe," "promises" and other words andterms of similar meaning. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, includingimportant factors that could delay, divert, or change any of these expectations, and could cause actual outcomes and results to differ materially fromcurrent expectations. These factors include, among other things, the effect of the Cardiocore acquisition on our business operations and financial resultsand our ability to successfully integrate its operations into our business, the national rate set by the Centers for Medicare and Medicaid Services("CMS") for our mobile cardiovascular telemetry service, effects of changes in health care legislation, effectiveness of our cost savings initiatives,relationships with our government and commercial payors, changes to insurance coverage and reimbursement levels for our products, the success of oursales and marketing initiatives, our ability to attract and retain talented executive management and sales personnel, our ability to identify acquisitioncandidates, acquire them on attractive terms and integrate their operations into our business, the commercialization of new products, market factors,internal research and development initiatives, partnered research and development initiatives, competitive product development, changes in governmentalregulations and legislation, the continued consolidation of payors, acceptance of our new products and services, patent protection, adverse regulatoryaction, and litigation success. For further details and a discussion of these and other risks and uncertainties, please see our public filings with theSecurities and Exchange Commission, including our latest periodic reports on Form 10-K and 10-Q We undertake no obligation to publicly update anyforward-looking statement, whether as a result of new information, future events, or otherwise.PART I Item 1. Business CardioNet, Inc. (the "Company," "CardioNet," "we" or "us"), a Delaware corporation, provides cardiac monitoring services, cardiac monitoringdevice manufacturing, and centralized cardiac core laboratory services. Since the Company became focused on cardiac monitoring in 1999, theCompany has developed a proprietary integrated patient management platform that incorporates a wireless data transmission network, Food and DrugAdministration ("FDA") cleared algorithms and medical devices, and 24-hour digital monitoring service centers. The Company operates under three segments: patient services, product and research services. Prior to 2012, the Company operated under twosegments: patient services and product. The patient services business segment's principal focus is on the diagnosis and monitoring of cardiacarrhythmias or heart rhythm disorders, through its Mobile Cardiac Outpatient Telemetry™ ("MCOT™"), event and Holter services. The productbusiness segment focuses on the development, manufacturing, testing and marketing of medical devices to healthcare companies, clinics and hospitals.The Company's research services focuses on providing cardiac safety monitoring services for drug and medical devices trials in a research environment. On December 21, 2010, the Company completed the acquisition of Biotel Inc. ("Biotel"), and its wholly owned subsidiaries, Braemar, Inc.("Braemar") and Agility Centralized Research Services, Inc. ("Agility"). Braemar develops, manufactures, and markets cardiac monitoring devices tohealthcare companies, clinics and hospitals. Agility is a central core laboratory that provides cardiac monitoring service to medical device companieswho are seeking FDA approval of their products. This acquisition provided access to an established customer base and diversified the Company'srevenue by adding3Table of Contentsmanufacturing and core laboratory services to its portfolio. Braemar is included in the Company's product segment, whereas Agility has beenrepositioned during the current year into the Company's research services segment. In February 2012, the Company completed the acquisition of ECG Scanning & Medical Services, Inc. ("ECG Scanning"). Similar to theCompany's core patient services business, ECG Scanning is engaged in providing cardiac monitoring services to general practitioners, internal medicinespecialists, cardiologists and hospital cardiac care departments. The acquisition gives the Company access to established customer relationships andprovided cost synergies. The financial operations of ECG Scanning are included in the Company's patient services segment. In August 2012, the Company completed the acquisition of Cardiocore Lab, Inc. ("Cardiocore"). Cardiocore is a central core laboratory thatprovides cardiac monitoring services for drug and medical treatment trials. Cardiocore's primary customers are pharmaceutical companies and contractresearch organizations. The acquisition gives the Company access to industry expertise, an established operating structure and a substantial footprint inthe core lab industry. Financial information related to Cardiocore is included in the Company's research services reporting segment. Our goals are to expand our position as the leading provider of outpatient monitoring services, expand our presence in the research services marketand leverage our monitoring platform in new markets. The key elements of the business strategy by which we intend to achieve these goals include:•Provide Comprehensive Cardiac Monitoring Solutions. We intend to continue to educate cardiologists and electrophysiologists on thebenefits of using MCOT™ to meet their arrhythmia monitoring needs, stressing the increased diagnostic yield and their ability to use theclinically significant data to make timely interventions and guide more effective treatments. While doing this we plan to continue to offera comprehensive portfolio of outpatient cardiac monitoring that includes, MCOT, event, Holter and Pacer in order to meet all the cardiacmonitoring needs of our doctors and patients. •Expand our presence in the Research Services market and become a preferred global provider of cardiac laboratory services. InDecember 2010, we entered the core lab services business through our acquisition of Agility. We later were able to expand our presencein Research Services with our acquisition of Cardiocore in August 2012. We are focusing efforts on increasing our presence in this fieldas it provides us with the ability to diversify our product and service offerings while leveraging our expertise with cardiac monitoring. •Leverage Our Monitoring Platform to New Market Opportunities. We believe that MCOT™ is a platform that can be leveraged forapplications in multiple markets. While our initial focus has been on arrhythmia diagnosis and monitoring, we intend to expand into newmarket areas that require outpatient or ambulatory monitoring and management. We believe that our technology could also be used tocreate "instant telemetry beds" in hospitals, particularly in rural hospitals, step-down units or skilled nursing facilities to help cope withacute nursing shortages by reducing the number of nurses needed to oversee ECG monitoring and reduce capital equipment costs.Patient Services Segment The patient services segment is focused on the diagnosis and monitoring of cardiac arrhythmias, or heart rhythm disorders. We providecardiologists and electrophysiologists who prefer to use a single source of arrhythmia monitoring services with a full spectrum of solutions, rangingfrom our differentiated MCOT™ services to event and Holter monitoring. CardioNet's MCOT™ service incorporates a lightweight patient-worn sensor attached to electrodes that capture two-channel ECG data, measuringelectrical activity of the heart, on a compact wireless handheld monitor. The monitor analyzes incoming heartbeat-by-heartbeat information from thesensor4Table of Contentson a real-time basis by applying proprietary algorithms designed to detect arrhythmias. When the monitor detects an arrhythmic event, it automaticallytransmits the ECG to the CardioNet Monitoring Center in San Francisco, CA and Conshohocken, PA, even in the absence of symptoms noticed by thepatient. At the CardioNet Monitoring Center, which operates 24 hours a day and 7 days per week, experienced certified cardiac monitoring specialistsanalyze the sent data, respond to urgent events and report results in the manner prescribed by the physician. The MCOT™ device employs two-waywireless communications, enabling continuous transmission of patient data to the CardioNet Monitoring Center and permitting physicians to remotelyadjust monitoring parameters and request previous ECG data from the memory stored in the monitor. The MCOT™ device has the capability of storing21 days of continuous ECG data, in contrast to a maximum of 10 minutes for a typical event monitor, and a maximum of 24 hours for a typical Holtermonitor. Since our commercial introduction of MCOT™ in February 2002, physicians have enrolled over 580,000 patients in our MCOT™ services.Through December 31, 2012, we marketed our solution throughout the United States and have secured direct contracts with 400 commercial payors,which we estimate that, when combined with our Medicare participation, represents more than 200 million covered lives. We receive reimbursement forthe monitoring services provided to patients from Medicare and other third-party commercial payors. Our event monitoring services provide physicians with the flexibility to prescribe wireless event monitors, digital loop event monitors, memoryloop event monitors and non-loop event monitors. Event data is transmitted, either through automatic transmission of event data with wireless eventmonitors or through telephonic transmission of stored event data with our traditional event monitors, to one of two event monitoring centers inMinnesota or Pennsylvania, where our trained cardiac technicians analyze the data, generate a report of the findings and return the results back to thephysician. Our two event monitoring centers are distinct from the CardioNet Monitoring Center. We provided event monitoring services toapproximately 70,000 patients in 2012. A Holter monitor stores an image of the electrical impulses of every heartbeat or irregularity in either digital format on an internal compactflashcard or in analog format on a standard cassette tape located inside the monitor. Approximately 95% of our Holter devices use digital flashcardtechnology. At the conclusion of the monitoring period, the patient returns to the physician office to have the monitor disconnected. The stored data ismailed or sent electronically through a secure web transfer to our Holter lab where our trained cardiac technicians analyze the data, generate a report ofthe findings and return the results back to the physician. Our Holter lab is distinct from the CardioNet Monitoring Center. We provided Holtermonitoring services to approximately 90,000 patients in 2012.Product Segment The product segment focuses on the manufacturing, engineering and development of noninvasive cardiac monitors for leading healthcarecompanies worldwide. The Company has been able to build successful OEM relationships by providing technology, reliability, quality products andengineering services. The Company offers contract engineering and manufacturing services, developing and producing devices to the specificrequirements set by customers. The Company currently manufactures various devices including cardiac event monitors, digital Holter monitors, and fusion MCT. Manufacturingof devices is performed in our Eagan, MN facility. We believe that our manufacturing facilities will be sufficient to meet our manufacturing needs forthe foreseeable future. Our facilities located in San Diego, CA, and Eagan, MN are responsible for product specifications and development under FDAguidelines. We believe our manufacturing operations are in compliance with regulations mandated by the FDA. We are subject to unannounced inspections bythe FDA and we successfully completed a routine audit by the FDA in December 2011 with no significant findings noted or warnings issued. OurEagan,5Table of ContentsMN and San Diego, CA facilities are ISO 13485:2003 certified and registered with the FDA. ISO 13485 is a quality system standard used by medicalcompanies providing design, development, manufacturing, installation and servicing. Manufacturing of our monitors, sensors and bases is provided by a limited number of electronics manufacturing service providers. However, webelieve that there are other capable suppliers available should we choose to supplement our current service providers' capabilities and capacity. Ourproduction group provides system test and product release activities. There are a number of critical components and sub-assemblies in the monitors, sensors and bases that compose part of our MCOT™ service. Thevendors for these materials are qualified through stringent evaluation and testing of their performance. We implement a strict no change policy with ourcontract manufacturer to ensure that no components are changed without our approval.Research Services Segment The research services segment is engaged in central core laboratory services that provide cardiac monitoring, scientific consulting and datamanagement services for drug and medical treatment trials. The centralized services include electrocardiography (ECG), Holter monitoring, ambulatoryblood pressure monitoring (ABPM), echocardiography (ECHO), multigated acquisition scan (MUGA), protocol development, expert reporting andstatistical analysis. The Company's research services encompass a full range of services from project coordination, setup and management, to equipmentrental and data transfer, processing, and analysis, to 24/7 customer support and site training. The Company's data management systems enable completecustomization for sponsors' preferred data specifications and the Company's web service, CardioPortal™, provides real time access to rich data fromany web browser, without client-side plug-ins. The Company entered the research services field through the acquisition of Agility in December 2010, and later expanded our presence with theacquisition of Cardiocore in August 2012. Through these acquisitions the Company gained global experience in central core laboratory services, whichincludes experience in Phase I-IV and Thorough QT Trials. The Company's primary customers are pharmaceutical companies and contract researchorganizations. Additionally, the Company obtained core lab locations in or near Bannockburn, IL, Washington, DC, San Francisco, CA, and London,UK, which support sponsors and sites in Eastern and Western Europe, Russia and Asia-Pacific, North and South America, Africa and the Middle East.Research and Development For the years ended December 31, 2012, 2011, and 2010, we spent $4.7 million, $5.7 million, and $4.9 million, respectively, on research anddevelopment expenses. We intend to continue to develop proof of superiority of our MCOT™ technology through clinical data. The three primarysources of clinical data that we have used to date to illustrate the clinical value of MCOT™ include: (1) a randomized 300-patient clinical study; (2) ourcumulative actual monitoring experience from our databases; and (3) other published studies. We completed a 17-center, 300-patient randomized clinical trial in March 2007 that was CardioNet sponsored. We believe this study represents thelargest randomized study comparing two noninvasive arrhythmia monitoring methods. The study was designed to evaluate patients who were suspectedto have an arrhythmic cause underlying their symptoms, but who were a diagnostic challenge given that they had already had a non-diagnostic 24-hourHolter monitoring session or four hours of telemetry within 45 days prior to enrollment. Patients were randomized to either MCOT™ or to a loop eventmonitor for up to 30 days. Of the 300 patients who were randomized, 266 patients who completed a minimum of 25 days of monitoring were analyzed(134 patients using MCOT™ and 132 patients using loop event monitors).6Table of Contents The study specifically compared the success of MCOT™ against loop event monitors in detecting patients afflicted with atrial fibrillation becauseof the prevalence of asymptomatic episodes that occur in cases of atrial fibrillation and the difficulty of diagnosis. Diagnosis and treatment of atrialfibrillation is important because it can lead to many other medical problems, including stroke. The study concluded that MCOT™ provided asignificantly higher diagnostic yield, approximately three times as likely to detect an arrhythmic event, compared to traditional loop event monitoring,including such monitoring designed to automatically detect certain arrhythmias. MCOT™ has been cited and referenced in a total of 39 publications and abstracts, including the aforementioned 300-patient randomized clinicaltrial. During 2012, MCOT™ was cited in the Journal of Neurological Sciences, publication: "Outpatient Cardiac Telemetry Detects a High Rate ofAtrial Fibrillation Among Patients with Cryptogenic Cerebral Ischemia," Miller, Daniel J., et al, Henry Ford Hospital, Detroit, MI, as well as cited inthree abstracts presented at the International Stroke meeting, as follows:•"Paroxysmal Atrial Fibrillation Detected by Prolonged Ambulatory Cardiac Monitoring in Patients with Cryptogenic Stroke: A case-Control Study," Rabinstein, Alejandro A, Friedman, Paul A., et al, Mayo Clinic Rochester, MN •"Timing of Mobile Cardiac Outpatient Telemetry May Increase Diagnostic Yield of Atrial Fibrillation in Select Patients withCryptogenic Strokes," Kandel, Amit, et al, State Univ of New York at Buffalo, Jacobs Neurological Institute, Buffalo, NY •"Randomized Trial of Outpatient Cardiac monitoring after Cryptogenic Stroke," Kamel, Hooman, et al, Univ of California, SanFrancisco, CASales and Marketing We market our arrhythmia monitoring solutions and medical devices primarily to cardiologists and electrophysiologists, who are the physicianspecialists who most commonly diagnose and manage patients with arrhythmias. We market our research services to pharmaceutical companies, medicaldevice companies, and contract research and academic research organizations. We attend trade shows and medical conferences to promote our variousproducts and services and to meet medical professionals with an interest in performing research and reporting their results in peer-reviewed medicaljournals and at major medical conferences. The trade shows and conferences we attend are related to organizations such as the Heart Rhythm Society,American College of Cardiology (ACC), numerous regional ACC chapter events, Society of Thoracic Surgeons, European Society of Cardiology,American Heart Association, American Telemedicine Association and the annual Boston Atrial Fibrillation Conference. We also sponsor peer-to-peereducational opportunities and participate in targeted public relations opportunities. In addition, Cardiocore is a founding member and the first cardiaccore lab to join the Cardiac Safety Research Consortium (CSRC). Through the CSRC we are able to network with representatives of majorpharmaceutical companies, as well as discuss key cardiac safety issues during the drug development process.Patient Services Reimbursement In the patient services segment, services are billed to government and commercial payors using specific codes describing those services. Thosecodes are part of the Commercial Procedural Terminology "CPT" coding system which was established by the American Medical Association("AMA") to describe services provided by physicians and other suppliers. Physicians select the code that best describes the medical services beingprescribed. In addition to receiving reimbursement from Medicare at rates that are set nationally and adjusted for certain regional indices, the Companyenters into contracts with commercial payors to receive reimbursement at specified rates for our technical services. Such contracts typically provide foran initial term of between one and three years and provide7Table of Contentsfor automatic renewal. Either party can typically terminate these contracts by providing between 60 to 120 days prior notice to the other party at any timefollowing the end of the initial term of the agreement. The contracts provide for an agreed upon reimbursement rate, which in some instances is tied tothe rate of reimbursement we receive from Medicare. Pursuant to these contracts, we generally agree to indemnify our commercial payors for damagesarising in connection with the performance of our obligations thereunder. In addition to receiving reimbursement from government and commercial payors, the Company has direct arrangements with physicians whopurchase our event, Holter and pacemaker monitoring services and then submit claims for these services directly to commercial and government payors.In some cases, patients may pay out-of-pocket on a fee for service basis.Competition Although we believe that we have a leading market share in the mobile cardiac arrhythmia monitoring industry, the market in which we operate isfragmented and characterized by a large number of smaller regional service providers. We believe that the principal competitive factors that impact thesuccess of our cardiac monitoring solutions include some or all of the following:•quality of the algorithm used to detect symptoms; •quality of clinical data; •ease of use and reliability of cardiac monitoring solutions for patients and physicians; •technology performance, innovation, flexibility and range of application; •timeliness and clinical relevance of new product introductions; •quality and availability of customer support services; •size, experience, knowledge and training of sales and marketing staff; •brand recognition and reputation; •relationships with referring physicians, hospitals, managed care organizations and other third party payors; •reporting capabilities; and •perceived value. We believe that we compete favorably based on the factors described above. However, our industry is evolving rapidly and is becomingincreasingly competitive and the basis on which we compete may change over time. In addition, if companies with substantially greater resources thanours enter our market, we will face increased competition.Intellectual Property To protect our proprietary rights, we rely on a combination of trademark, copyright, patent, trade secret and other intellectual property laws,employment, confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements and protectivecontractual provisions with our partners and other third parties. Patents. As of December 31, 2012, we had 25 issued U.S. patents and 32 issued foreign patents relating to functionality of individualcomponents of our MCOT™ device, operation of the total monitoring system, communication methodologies, control of data in the system, algorithmsfor ECG detection and analysis, and monitoring methods. We are in the process of applying for additional patents relating to various aspects of ourtechnology, including our proprietary ECG detection8Table of Contentsalgorithm. As of December 31, 2012, we had 35 U.S., foreign and international patent applications on file relating to various aspects of our technology. Trademarks and Copyrights. As of December 31, 2012, we had 6 trademark registrations in the United States for a variety of word marks andslogans. Our trademarks are an integral part of our business and include, among others, the registered trademark CardioNet®, and the unregisteredtrademarks Mobile Cardiac Outpatient Telemetry™, MCOT™, and CardioPortal™. We also have a significant amount of copyright-protected materials,including among other things, software textual material. In addition, we also seek to maintain certain intellectual property and proprietary know-how as trade secrets, and generally require our partners toexecute non-disclosure agreements prior to any substantive discussions or disclosures of our technology or business plans. Our business andcompetitive positions are dependent in part upon our ability to protect our proprietary technology and our ability to avoid infringing the patents orproprietary rights of others.Government Regulation The health care industry is highly regulated, with no guarantee that the regulatory environment in which we operate will not change significantlyand adversely in the future. We believe that health care legislation, rules, regulations and interpretations will change, and we expect to modify ouragreements and operations in response to these changes. U.S. Food and Drug Administration. The monitors and sensors that comprise part of the MCOT™ service are regulated by the FDA as amedical device under the Federal Food, Drug, and Cosmetic Act. The basic regulatory requirements that manufacturers of medical devices distributed inthe U.S. must comply with are Premarket Notification 510(k), unless exempt, or Premarket Approval ("PMA"); establishment registration, medicaldevice listing, quality system regulation, labeling requirements and medical device reporting. The algorithms we use in the MCOT™ service maintain FDA 510(k) clearance as a Class II device. On October 28, 2003, the FDA issued a draftguidance document entitled: "Class II Special Controls Guidance Document: Arrhythmia Detector and Alarm." In addition to conforming to the generalrequirements of the Federal Food, Drug, and Cosmetic Act, including the Premarket Notification requirements described above, all of our 510(k)submissions address the specific issues covered in this special controls guidance document. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include certain sanctions, suchas fines, injunctions and civil penalties, recall or seizure of our MCOT™ devices and intellectual property, operating restrictions, partial suspension ortotal shutdown of production; withdrawal of 510(k) clearance of new components or algorithms, withdrawal of 510(k) clearance already granted to oneor more of our existing components or algorithms, and criminal prosecution. Health Care Fraud and Abuse. In the United States, there are state and federal anti-kickback laws that generally prohibit the payment or receiptof kickbacks, bribes or other remuneration in exchange for the referral of patients or other health care-related business. In addition, federal law (e.g., the"Stark" law) and some state laws prohibit the existence of certain financial relationships between referring physicians and healthcare providers andsuppliers unless those relationships meet the requirements of specific exceptions to the law. Anti-kickback laws constrain our sales, marketing andpromotional activities by limiting the kinds of financial arrangements we may have with physicians, medical centers, and others in a position topurchase, recommend or refer patients for our cardiac monitoring services or other products or services we may develop and commercialize. Due to the9Table of Contentsbreadth of some of these laws, it is possible that some of our current or future practices might be challenged under one or more of these laws. Furthermore, federal and state false claims laws prohibit anyone from presenting, or causing to be presented, claims for payment to third partypayors that are false or fraudulent. Violations may result in substantial civil penalties, including treble damages, and criminal penalties, includingimprisonment, fines and exclusion from participation in federal health care programs. The federal False Claims Act also contains "whistleblower" or"qui tam" provisions that allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded thegovernment. Various states have enacted laws modeled after the federal False Claims Act, including "qui tam" provisions, and some of these laws applyto claims filed with commercial insurers. Any violations of anti-kickback and false claims laws could have a material adverse effect on our business,financial condition and results of operations. The Patient Protection and Affordable Care Act. On March 23, 2010, the Patient Protection and Affordable Care Act was signed into law and onMarch 30, 2010, the Health Care and Education Reconciliation Act of 2010 was signed into law. Together, the two measures make the most sweepingand fundamental changes to the United States health care system since the creation of Medicare and Medicaid. The Health Care Reform laws include alarge number of health-related provisions to take effect over the next four years, including expanding Medicaid eligibility, requiring most individuals tohave health insurance, establishing new regulations on health plans, establishing health insurance exchanges, requiring manufacturers to reportpayments or other transfers of value made to physicians and teaching hospitals, modifying certain payment systems to encourage more cost-effectivecare and a reduction of inefficiencies and waste, and by including new tools to address fraud and abuse. Section 6002 of the Affordable Care Actrequires manufacturers of medical devices and other products reimbursed by Medicare to report annually to the government certain payments tophysicians and teaching hospitals. Health Insurance Portability and Accountability Act of 1996 (HIPAA). The Health Insurance Portability and Accountability Act was enacted bythe United States Congress in 1996. Numerous state and federal laws govern the collection, dissemination, use and confidentiality of patient and otherhealth information, including the administrative simplification provisions of HIPAA. Historically, state law has governed confidentiality issues andHIPAA preserves these laws to the extent they are more protective of a patient's privacy or provide the patient with more access to his or her healthinformation. As a result of the implementation of the HIPAA regulations, many states are considering revisions to their existing laws and regulationsthat may or may not be more stringent or burdensome than the federal HIPAA provisions. HIPAA applies directly to covered entities, which includehealth plans, health care clearinghouses and many health care providers. These HIPAA rules are concerned primarily with the privacy of informationwhen it is used and/or disclosed; confidentiality, integrity and availability of electronic health information; and the content and format of certainidentified electronic health care transactions. The laws governing health care information impose civil and criminal penalties for their violation and canrequire substantial expenditures of financial and other resources for information technology system modifications and for implementation of operationalcompliance. Medicare. Medicare is a federal program administered by the CMS through Medicare administrative contractors. The Medicare programprovides qualified persons with health care benefits that cover the major costs of medical care within prescribed limits, subject to certain deductibles andco-payments. The Medicare program has established guidelines for local and national coverage determinations and reimbursement of certain equipment,supplies and services. The methodology for determining coverage status and the amount of Medicare reimbursement varies based upon, among otherfactors, the setting in which a Medicare beneficiary received health care items and services.10Table of Contents The Medicare program is subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings,interpretations of policy, Medicare administrative contractor determinations, and government funding restrictions. All of these restrictions maymaterially increase or decrease the rate of program payments to health care facilities and other health care suppliers and practitioners, including thosepaid for our cardiac monitoring services. Any changes in federal legislation, regulations and policy affecting Medicare coverage and reimbursementrelative to our cardiac monitoring services could have an adverse effect on our performance. Our facilities in Pennsylvania, San Francisco and Minnesota are enrolled as Independent Diagnostic Testing Facilities ("IDTFs"), which is definedby CMS as an entity independent of a hospital or physician's office in which diagnostic tests are performed by licensed or certified non-physicianpersonnel under appropriate physician supervision. Medicare has set certain performance standards that every IDTF must meet in order to obtain ormaintain its billing privileges. Specifically, an IDTF is required to: (i) operate its business in compliance with all applicable federal and state licensureand regulatory requirements for the health and safety of patients; (ii) provide complete and accurate information on its enrollment application, and reportcertain changes, within 30 calendar days, to the designated fee-for-service contractor on the Medicare enrollment application; (iii) maintain a physicalfacility on an appropriate site, that is not an office box or a commercial mail box that contains space for equipment appropriate for the servicesdesignated on the enrollment application, and both business and current medical records storage within the office setting of the IDTF; (iv) have allapplicable diagnostic testing equipment, with the physical site maintaining a catalog of portable diagnostic testing equipment, including the equipment'sserial number; (v) maintain a primary business phone under the name of the designated business, which is located at the designated site of the business,or within the home office of the mobile IDTF units; (vi) have a comprehensive liability insurance policy of at least $0.3 million per location, coveringboth the place of business and all customers and employees of the IDTF, and carried by a non-relative owned company; (vii) agree not to directly solicitpatients and to accept only those patients referred for diagnostic testing by an attending physician, who is furnishing a consultation or treating abeneficiary for a specific medical problem and who uses the results in the management of the beneficiary's specific medical problem; (viii) answerbeneficiaries' questions and respond to their complaints; (ix) openly post the Medicare standards for review by patients and the public; (x) disclose tothe government any person having ownership, financial, or control interest or any other legal interest in the supplier at the time of enrollment or within30 days of a change; (xi) have its testing equipment calibrated and maintained per equipment instructions and in compliance with applicablemanufacturers suggested maintenance and calibration standards; (xii) have technical staff on duty with the appropriate credentials to perform tests andproduce the applicable federal or state licenses or certifications of the individuals performing these services; (xiii) have proper medical record storageand be able to retrieve medical records upon request from CMS or its fee-for-service contractor within two business days; and (xiv) permit CMS,including its agents, or its designated fee-for-service contractors, to conduct unannounced, on-site inspections to confirm the IDTFs compliance withthese standards. Environmental Regulation. We use materials and products regulated under environmental laws, primarily in manufacturing and the sterilizationprocesses. While it is difficult to quantify, we believe the ongoing cost of compliance with environmental protection laws and regulations will not have amaterial impact on our business, financial position or results of operations. Medical Device Tax. Effective January 1, 2013, as a result of the passage of the Affordable Care Act, manufacturers of certain medical devicesare subject to an excise tax on the sale of the devices. Several devices that are manufactured by our products segment will be subject to these taxes. Thetax is 2.3% of the sale price of the applicable medical device. The manufacturer is responsible for remitting these taxes to the Federal Government.11Table of ContentsProduct Liability and Insurance The design, manufacture and marketing of medical devices and services of the types we produce entail an inherent risk of product liability claims.In addition, we provide information to health care providers and payors upon which determinations affecting medical care are made, and claims may bemade against us resulting from adverse medical consequences to patients resulting from the information we provide. To protect ourselves from productliability claims, we maintain professional liability and general liability insurance on a "claims made" basis. Insurance coverage under such policies iscontingent upon a policy being in effect when a claim is made, regardless of when the events which caused the claim occurred. While, as of the date ofthis Report, a product liability claim has never been made against us and we believe our insurance policies are adequate in amount and coverage for ourcurrent operations, there can be no assurance that the coverage maintained by us is sufficient to cover all future claims. In addition, there can be noassurance that we will be able to obtain such insurance on commercially reasonable terms in the future.Employees As of December 31, 2012, we employed 728 full-time employees. None of our employees are represented by a collective bargaining agreement.We consider our relationship with our employees to be good.Corporate Governance and Internet Address The Company emphasizes the importance of professional business conduct and ethics through its corporate governance initiatives. The Company'sBoard of Directors has adopted a code of business conduct and ethics that applies to all employees, directors and officers, including the Company'sprincipal executive officer and principal financial officer. Our corporate governance information and materials, including our Code of Business Conductand Ethics, are posted on the corporate governance section of our website at www.cardionet.com. Our Board regularly reviews corporate governancedevelopments and modifies these materials and practices as warranted. To the extent we make amendments to or grant waivers from our Code ofBusiness Conduct and Ethics in the future, we intend to disclose the amendments and waivers on the corporate governance section of our website. Theinformation contained on our website, or on other websites linked to our website, is not part of this document. Reference in this Report to our website isan inactive text reference only.Available Information We file electronically with the U.S. Securities and Exchange Commission our annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of1934. We make available on our website at http://www.cardionet.com, free of charge, copies of these reports as soon as reasonably practicable after weelectronically file such material with, or furnish it to the SEC. Further copies of these reports are located at the SEC's Public Reference Room at 100 FStreet, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding our filings, athttp://www.sec.gov.12Table of ContentsItem 1A. Risk Factors General Risks Related to Our Business and IndustryWe have a history of net losses and future profitability is uncertain. We have incurred net losses from our inception. For the years ended December 31, 2012 and 2011, we realized net losses of $12.2 million and$61.4 million, respectively. As of December 31, 2012, we had total accumulated deficit of approximately $186.5 million. Although we have initiatedplans to reduce our operating losses and achieve profitability, we may continue to incur losses if we are not able to execute our plans. If we do achieveprofitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.We have outstanding lawsuits, the outcome of which is uncertain. We are subject to material legal proceedings as described in Item 3, "Legal Proceedings." In addition to our existing lawsuits, other lawsuits maybe brought against us. We may be required to defend such lawsuits, thus incurring expenses which we may not be able to bear, or which we may not besuccessful in defending.Our acquisition of other companies or technologies in the future could prove difficult to integrate and may disrupt our business and harm ouroperating results and prospects. Acquisitions, such as those we have completed or others in which we may engage in the future, involve risks associated with our assumption ofthe liabilities of an acquired company, which may be liabilities that we were or are unaware of at the time of the acquisition, potential write-offs ofacquired assets and potential loss of the acquired company's key employees or customers. We may encounter difficulties in successfully integrating our operations, technologies, services and personnel with that of the acquired company,and our financial and management resources may be diverted from our existing operations. Offices in multiple states create a strain on our ability toeffectively manage our operations and key personnel. If we elect to consolidate our facilities, we may lose key personnel unwilling to relocate to theconsolidated facility, may have difficulty hiring appropriate personnel at the consolidated facility and may have difficulty providing continuity of servicethrough the consolidation. Physician and patient satisfaction or performance problems with an acquired business, technology, service or device could also have a materialadverse effect on our reputation. Additionally, potential disputes with the seller of an acquired business or its employees, suppliers or customers andamortization expenses related to intangible assets could adversely affect our business, operating results and financial condition. If we fail to properlyevaluate and execute acquisitions, our business may be disrupted and our operating results and prospects may be harmed.Tax requirements and audits could impact our results of operations. We are subject to the tax laws of various jurisdictions. Our results of operations could be materially affected with a change in tax law or in theinterpretation of tax law. This also includes the risk of changes in tax rates and the risk of failure to comply with procedures required by the taxingauthorities. Failure to manage our tax strategies could lead to an additional tax charge. Any material disagreement with taxing authorities could result incash expenditures and adversely affect our results of operations and financial position.13Table of ContentsOur annual operating results and stock price may be volatile or may decline regardless of our operating performance. The market price for our common stock has been and is likely to continue to be volatile, and may fluctuate significantly in response to a number offactors, most of which we cannot control, including:•changes in reimbursement rates or policies by payors; •adoption of our services by physicians; •changes in Medicare rules or regulations; •the development of increased competition for arrhythmia monitoring solutions; •price and volume fluctuations in the overall stock market; •changes in operating performance and stock market valuations of other early stage companies generally; •changes in the competitive landscape of the market for our services, including technological innovations by our competitors and newentrants to the market; •the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; •changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure ofthose analysts to initiate or maintain coverage of our common stock; •ratings downgrades by any securities analysts who follow our common stock; •the public's response to press releases or other public announcements by us or third parties, including our filings with the SEC,regulatory matters relating to governmental entities including Medicare, the FDA, and the Department of Justice, and announcementsrelating to payor reimbursement decisions, product development, litigation and intellectual property impacting us or our business; •market conditions or trends in our industry or the economy as a whole; •the development and sustainability of an active trading market for our common stock; •future sales of our common stock by our officers, directors and significant stockholders; •other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to these events; and •changes in accounting principles. In addition, the stock markets, and in particular the NASDAQ Global Market, have experienced considerable price and volume fluctuations thathave affected and continue to affect the market prices of equity securities of many health care companies. Stock prices of many health care companieshave fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have institutedsecurities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs, andour resources and the attention of management could be diverted from our business.14Table of ContentsIf we need to raise additional funding in the future, we may be unable to raise such capital when needed, or at all, and the terms of such capitalmay be adverse to our stockholders. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements for the foreseeable future.However, our future funding requirements will depend on many factors, including:•the results of our operations; •the reimbursement rates associated with our products and services; •our ability to secure contracts with additional commercial payors providing for the reimbursement of our services; •the costs associated with manufacturing and building our inventory of our current and future generation monitors; •the costs of hiring additional personnel and investing in infrastructure to support future growth; •the costs of undertaking future strategic initiatives, such as acquisitions or joint ventures; •the emergence of competing technologies and products and other adverse market developments; •the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights or defendingagainst claims of infringement by others; and •actions taken by the FDA, CMS and other regulatory authorities affecting MCOT™ and competitive products.If we decide to raise additional capital in the future, such capital may not be available on reasonable terms, or at all. If we raise additional funds byissuing equity securities, substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring debt financing, theterms of the debt may involve significant cash payment obligations as well as covenants and financial ratios that may restrict our ability to operate ourbusiness.Future sales of our common stock may depress our stock price. Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in themarket that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of December 31, 2012,we had 25,189,340 outstanding shares of vested common stock. In addition, we have outstanding 3,669,103 options and restricted stock units (RSUs)to purchase shares of our common stock that will become exercisable over the next four years. If exercised, these options and RSUs would result inadditional shares becoming available for sale upon expiration of the lock-up agreements.Anti-takeover provisions in our charter documents and Delaware law might deter acquisition bids for us that our stockholders might considerfavorable. Our amended and restated certificate of incorporation and bylaws contain provisions that may make the acquisition of our Company more difficultwithout the approval of our Board of Directors. These provisions:•establish a classified board of directors so that not all members of our board are elected at one time; •authorize the issuance of undesignated preferred stock, the terms of which may be established and shares of which may be issuedwithout stockholder approval, and which may include rights superior to the rights of the holders of common stock;15Table of Contents•prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; •provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and •establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon bystockholders at stockholder meetings. In addition, because we are incorporated in Delaware, we are subject to Section 203 of the Delaware General Corporation Law which, subject tocertain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change of control of ourCompany, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for ourstockholders to elect directors of their choosing and cause us to take other corporate actions such stockholders desire.If securities or industry analysts publish inaccurate or unfavorable research about our business, our stock price and trading volume coulddecline. The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us orour business. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business,our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for ourstock could decrease, which could cause our stock price and trading volume to decline.We do not expect to pay any cash dividends for the foreseeable future. The continued expansion of our business may require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividendson shares of our common stock for the foreseeable future. Any determination to pay dividends in the future would be at the discretion of our Board ofDirectors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and otherfactors our Board of Directors deems relevant. Accordingly, realization of a gain of investment from our stock will depend on the appreciation of theprice of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.General economic conditions, which are largely out of our control, may adversely affect our financial condition and results of operations. Our operations may be affected by changes in general economic conditions. Recessionary economic cycles, higher interest rates, inflation, higherlevels of unemployment, changes in the laws or industry regulations or other economic factors may adversely affect the demand for our products.Additionally, these economic factors and changes in laws and regulations may adversely affect our financial condition and results of operations.16Table of ContentsRisks related to Cardiac Monitoring business and industryOur patient services business is dependent upon physicians prescribing our services; if we fail to obtain those prescriptions, our revenue couldfail to grow and could decrease. The success of our patient services segment is dependent upon physicians prescribing our services. Our success in obtaining prescriptions will bedirectly influenced by a number of factors, including:•the ability of the physicians with whom we work to obtain sufficient reimbursement and be paid in a timely manner for the professionalservices they provide in connection with the use of our arrhythmia monitoring solutions; •continuing to establish ourselves as a comprehensive arrhythmia monitoring services provider; •our ability to educate physicians regarding the benefits of MCOT™ over alternative diagnostic monitoring solutions; and •the clinical efficacy of MCOT™. If we are unable to educate physicians regarding the benefits of MCOT™ and obtain sufficient prescriptions for our services, revenue from theprovision of our arrhythmia monitoring solutions could potentially decrease.We and the physicians with whom we work are dependent upon reimbursement for the fees associated with our services; the absence orinadequacy of reimbursement would cause our revenue to fail to grow, or could cause our revenue to decrease. We receive reimbursement for our services from commercial payors and from Medicare administrative contractors with jurisdiction in the statewhere the services are performed. Medicare administrative contractors change from time to time, which may result in changes in coverage for ourservices, increased administrative burden and reimbursement delays. In addition, our prescribing physicians receive reimbursement for professional interpretation of the information provided by our products andservices from commercial payors or Medicare. The efficacy, safety, performance and cost-effectiveness of our products and services, on a standalonebasis and relative to competing services, will determine the availability and level of reimbursement we and our prescribing physicians receive. Ourability to successfully contract with payors is critical to our business because physicians and their patients will select arrhythmia monitoring solutionsother than ours in the event that payors refuse to adequately reimburse our technical fees and physicians' professional fees.The national reimbursement rate set by CMS for our mobile cardiovascular telemetry service is subject to continuing change and any reductionsin reimbursement levels would decrease our revenues and adversely affect our results of operations and financial condition. Reimbursement to healthcare providers, including the Company, is subject to continuing change in policies by CMS. Reimbursement fromgovernmental payors is subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and other policy changes, all ofwhich could materially decrease the range of services or the rate for which we are reimbursed. Reimbursement under the Medicare program for ourservices is subject to the physician fee schedule that is typically updated annually. The amounts paid under the physician fee schedule are based on geographically adjusted relative value units, or RVUs, for each procedure orservice, adjusted by a budget neutrality adjustor, and multiplied by an annually determined conversion factor. Historically, the formula used to calculatethe fee schedule conversion factor resulted in significant decreases in payment levels. However, in every year from 2004 through 2012, Congress hasintervened multiple times to freeze or increase the conversion factor.17Table of Contents Using the relative value formula and values currently in place, the Company's national rate is approximately $734 per service, effective January 1,2012. This is a decrease of less than 1% from the Company's national carrier rate of $739 per service that was established by CMS in 2011. Beginningin February 2012, the Company moved its monitoring for Medicare patients to San Francisco, CA. The reimbursement rate for Medicare patientsserviced in the San Francisco, CA facility, adjusted for local geographic pricing, was $943 per service in 2012, and is $1,000 in 2013. Congress passed legislation that froze the Medicare reimbursement rates for 2013. If Congress does not intervene again to freeze or increase ratesfor 2014, Medicare reimbursement rates would be reduced significantly, having a materially adverse effect on our business and results of operations.Reductions in the Medicare reimbursement rates applicable to our services may lead to pressure from insurance carriers to reduce ourcommercial pricing. We have experienced declines in our Medicare reimbursement rates for MCOT™ over the past several years. As a result, we received substantialpressure from commercial payors to reduce our contractual reimbursement rates. Average commercial reimbursement rates have declined significantlyfrom 2009 to 2012. We expect to experience some fluctuations in its average commercial reimbursement rates due to payor mix, as well as contractnegotiations for new and existing payors. Over time we expect commercial payors may transition from commercial pricing to the CMS national rate. Adecrease in commercial pricing would adversely affect our financial results.We may experience difficulty in obtaining reimbursement for our services from commercial payors that consider our technology to beexperimental and investigational, which would adversely affect our revenue and operating results. Many commercial payors refuse to enter into contracts to reimburse the fees associated with medical devices or services that such payors determineto be "experimental and investigational." Commercial payors typically label medical devices or services as "experimental and investigational" until suchdevices or services have demonstrated product superiority evidenced by a randomized clinical trial. We completed a clinical trial in March 2007 thatshowed that MCOT™ provided higher diagnostic yield than traditional loop event monitoring. Prior to our clinical trial, MCOT™ was labeled"experimental and investigational" by several commercial payors. Since the trial was published in March 2007 we have obtained contracts with severalof these commercial payors that previously labeled MCOT™ as "experimental and investigational." We have not obtained contracts with certainremaining commercial payors, however, and these payors have informed us that they do not believe the data from this trial justifies the removal of theexperimental designation. As a result, these commercial payors may refuse to reimburse the technical and professional fees associated with MCOT™. If commercial payors or Medicare decide not to reimburse our services or the related services provided by physicians, or the rates of suchreimbursement change, or if we fail to properly administer claims, our revenue could fail to grow and could decrease.Reimbursement by Medicare is highly regulated and subject to change; our failure to comply with applicable regulations, could decrease ourrevenue and may subject us to penalties or have an adverse impact on our business. The Medicare program is administered by CMS, which imposes extensive and detailed requirements on medical services providers, including, butnot limited to, rules that govern how we structure our relationships with physicians, how and when we submit reimbursement claims, how we operateour monitoring facilities and how and where we provide our arrhythmia monitoring solutions. Our failure to comply with applicable Medicare rulescould result in discontinuing our reimbursement under the Medicare payment program, our being required to return funds already paid to us, civilmonetary penalties, criminal penalties and/or exclusion from the Medicare program.18Table of ContentsWe have significant outstanding accounts receivables; failure to liquidate these receivables may lead to additional bad debt expense being recordedand could have a materially adverse effect on our operating results. We continue to execute on several strategic initiatives to collect on outstanding receivable accounts. While we have realized improvements incollection rates and our days sales outstanding (DSO), and believe we will continue to see improvements in the foreseeable future, there is no guaranteethat collection rates will remain at current levels or improve. A failure to liquidate receivables may have a materially adverse impact on our financialresults.A reduction in sales of our services or a loss of one or more of our key commercial payors would adversely affect our business and operatingresults. A small number of commercial payors represent a significant percentage of our revenue. In the year ended December 31, 2012, our top 10commercial payors by revenue accounted for approximately 73% of our total revenue. Our agreements with these commercial payors typically alloweither party to the contract to terminate the contract by providing between 60 and 120 days prior written notice to the other party at any time followingthe end of the initial term of the contract. Our commercial payors may elect to terminate or not to renew their contracts with us for any reason and, insome instances can unilaterally change the reimbursement rates they pay. In the event any of our key commercial payors terminate their agreements withus, elect not to renew or enter into new agreements with us upon expiration of their current agreements, or do not renew or establish new agreements onterms as favorable as are currently contracted, our business, operating results and prospects would be adversely affected.We have a concentration of risk related to the accounts receivable from one customer. Failure to fully collect outstanding balances from thiscustomer, or a combination of other customers, may adversely affect our results of operations. As of December 31, 2012, we have balances owed to us from one customer representing approximately 16% of our total gross accountsreceivable. We maintain an allowance for doubtful accounts based on the aging of outstanding receivables, as well as for any specific instances webecome aware of that may preclude us from reasonably assuring collection on outstanding balances. Determining the allowance for doubtful accounts isjudgmental in nature and often involves the use of significant estimates. A determination that requires a change in our estimates could have a materiallyadverse effect on our financial condition and operating results.Consolidation of commercial payors could result in payors eliminating coverage of MCOT™ services or reduced reimbursement rates forMCOT™. When payors combine their operations, the combined company may elect to reimburse MCOT™ services at the lowest rate paid by any of theparticipants in the consolidation. If one of the payors participating in the consolidation does not reimburse for MCOT™ at all, the combined companymay elect not to reimburse for MCOT™. Our reimbursement rates tend to be lower for larger payors. As a result, as payors consolidate, our averagereimbursement rate may decline.If we do not have enough MCOT™ monitors or sensors or experience delays in manufacturing, we may be unable to fill prescriptions in a timelymanner, physicians may elect not to prescribe MCOT™, and our revenue and growth prospects could be harmed. When a physician prescribes MCOT™ to a patient, our customer service department begins the patient hook-up process, which includes procuringa monitor, sensors and base from our distribution department and sending them to the patient. While our goal is to provide each patient with a monitor,sensors and base in a timely manner, we have experienced, and may in the future experience delays19Table of Contentsdue to the availability of monitors, primarily when converting to a new generation of monitor or in connection with the increase in prescriptionsfollowing potential acquisitions of other companies. We may also experience shortages of monitors, sensors or bases due to manufacturing difficulties. Multiple suppliers provide the components usedin our MCOT™ devices, but our Minnesota facility is registered and approved by the FDA, as the ultimate manufacturer of MCOT™ devices. Ourmanufacturing operations could be disrupted by fire, earthquake or other natural disaster, a labor-related disruption, failure in supply or other logisticalchannels, electrical outages or other reasons. If there were a disruption to our facility in Minnesota, we would be unable to manufacture MCOT™devices until we have restored and re-qualified our manufacturing capability or developed alternative manufacturing facilities. Our success in obtaining future prescriptions from physicians is dependent upon our ability to promptly deliver monitors, sensors and bases to ourpatients, and a failure in this regard would have an adverse effect on our revenue and growth prospects.Interruptions or delays in telecommunications systems or in the data services provided to us by Verizon or the loss of our wireless or data servicescould impair the delivery of MCOT™ services. The success of MCOT™ is dependent upon our ability to store, retrieve, process and manage data and to maintain and upgrade our data processingand communication capabilities. The MCOT™ monitors rely on a third party wireless carrier to transmit data over its data network during times that themonitor is removed from its base. All data sent by our monitors via this wireless data network or via landline is routed directly to Verizon data centersand subsequently routed to our monitoring center. We are dependent upon this third party wireless carrier to provide data transmission and data hostingservices to us through our agreement with Verizon. We do not have an agreement with the third party wireless carrier, and although we have anagreement with Verizon that has a termination date in September 2014, Verizon may terminate its agreement with us if certain conditions occur. Wehave no control over the status of the agreement between Verizon and the wireless carrier. If we fail to maintain our relationship with Verizon, or if welose wireless carrier services, we would be forced to seek alternative providers of data transmission and data hosting services, which might not beavailable on commercially reasonable terms or at all. As we expand our commercial activities, an increased burden will be placed upon our data processing systems and the equipment upon which theyrely. Interruptions of our data networks, or the data networks of Verizon, for any extended length of time, loss of stored data or other computerproblems could have a material adverse effect on our business and operating results. Frequent or persistent interruptions in our arrhythmia monitoringservices could cause permanent harm to our reputation and could cause current or potential users of MCOT™ or prescribing physicians to believe thatour systems are unreliable, leading them to switch to our competitors. Such interruptions could result in liability, claims and litigation against us fordamages or injuries resulting from the disruption in service. Our systems are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks,computer viruses, break-ins, sabotage, and acts of vandalism. Despite any precautions that we may take, the occurrence of a natural disaster or otherunanticipated problems could result in lengthy interruptions in these services. We do not carry business interruption insurance to protect against lossesthat may result from interruptions in service as a result of system failures. Moreover, the communications and information technology industries aresubject to rapid and significant changes, and our ability to operate and compete is dependent on our ability to update and enhance the communicationtechnologies used in our systems and services.20Table of ContentsIf our competitors are able to develop or market monitoring solutions that are more effective, or gain greater acceptance in the marketplace thanour solutions, our commercial opportunities will be reduced or eliminated. The market for arrhythmia monitoring solutions is evolving rapidly and becoming increasingly competitive. Our industry is highly fragmented andcharacterized by a small number of large providers and a large number of smaller regional service providers. These third parties compete with us inmarketing to payors and prescribing physicians, recruiting and retaining qualified personnel, acquiring technology and developing solutionscomplementary to our programs. In addition, as companies with substantially greater resources than ours enter our market, we will face increasedcompetition. If our competitors are better able to develop and patent arrhythmia monitoring solutions than us, or develop more effective or lessexpensive arrhythmia monitoring solutions that render our solutions obsolete or non-competitive, or deploy larger or more effective marketing and salesresources than ours, our business will be harmed and our commercial opportunities will be reduced or eliminated.We operate in an intensely competitive industry, and our failure to respond quickly to technological developments and incorporate new featuresinto our products could harm our ability to compete. We operate in an intensely competitive industry that experiences rapid technological developments, changes in industry standards, changes inpatient requirements, and frequent new product introductions and improvements. If we are unable to respond quickly and successfully to thesedevelopments, we may lose our competitive position, and our products or technologies may become uncompetitive or obsolete. To competesuccessfully, we must maintain a successful research and development effort, develop new products and production processes, and improve ourexisting products and processes at the same pace or ahead of our competitors. Our research and development efforts are aimed at solving increasinglycomplex problems, as well as creating new technologies, and we do not expect that all of our projects will be successful. If our research anddevelopment efforts are unsuccessful, our future results of operations could be materially harmed.Enforcement of federal and state laws regarding privacy and security of patient information may adversely affect our business, financial conditionor operations. The use and disclosure of certain health care information by health care providers and their business associates have come under increasing publicscrutiny. Recent federal standards under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, establish rules concerning howindividually-identifiable health information may be used, disclosed and protected. Historically, state law has governed confidentiality issues, andHIPAA preserves these laws to the extent they are more protective of a patient's privacy or provide the patient with more access to his or her healthinformation. As a result of the implementation of the HIPAA regulations, many states are considering revisions to their existing laws and regulationsthat may or may not be more stringent or burdensome than the federal HIPAA provisions. We must operate our business in a manner that complies withall applicable laws, both federal and state, and that does not jeopardize the ability of our customers to comply with all applicable laws. We believe thatour operations are consistent with these legal standards. Nevertheless, these laws and regulations present risks for health care providers and theirbusiness associates that provide services to patients in multiple states. Because these laws and regulations are recent, and few have been interpreted bygovernment regulators or courts, our interpretations of these laws and regulations may be incorrect. If a challenge to our activities is successful, it couldhave an adverse effect on our operations, may require us to forego relationships with customers in certain states and may restrict the territory available tous to expand our business. In addition, even if our interpretations of HIPAA and other federal and state laws and regulations are correct, we could beheld liable for unauthorized uses or disclosures of patient information as a result of inadequate systems and controls to protect this information or as aresult of the theft of information by unauthorized computer programmers who penetrate our network security. Enforcement of these21Table of Contentslaws against us could have a material adverse effect on our business, financial condition and results of operations.We may be subject, directly or indirectly, to federal and state health care fraud and abuse laws and regulations and if we are unable to fullycomply with such laws, the Company could face substantial penalties. Our operations may be directly or indirectly affected by various broad state and federal health care fraud and abuse laws, including the FederalHealthcare Programs' Anti-Kickback Statute and the Stark law. For some of our services, we directly bill physicians, who in turn bill payors. Althoughwe believe such payments are proper and in compliance with laws and regulations, we may be subject to claims asserting that we have violated theselaws and regulations. If our past or present operations are found to be in violation of these laws, we or our officers may be subject to civil or criminalpenalties, including large monetary penalties, damages, fines, imprisonment and exclusion from Medicare and Medicaid program participation. Ifenforcement action were to occur, our business and results of operations could be adversely affected.The operation of our call centers and monitoring facilities is subject to rules and regulations governing IDTFs and state licensure requirements;failure to comply with these rules could prevent us from receiving reimbursement from Medicare and some commercial payors. We have call centers and monitoring facilities in Pennsylvania, Minnesota and San Francisco that analyze the data obtained from arrhythmiamonitors and report the results to physicians. In order for us to receive reimbursement from Medicare and some commercial payors, we must have a callcenter certified as an IDTF. Certification as an IDTF requires that we follow strict regulations governing how the center operates, such as requirementsregarding the experience and certifications of the technicians who review data transmitted from our monitors. These rules and regulations vary fromlocation to location and are subject to change. If they change, we may have to change the operating procedures at our monitoring facilities and callcenters, which could increase our costs significantly. If we fail to obtain and maintain IDTF certification, our services may no longer be reimbursed byMedicare and some commercial payors, which could have a material adverse impact on our business.We may be subject to federal and state false claims laws which impose substantial penalties. Many of the physicians and patients who use our services file claims for reimbursement with government programs such as Medicare andMedicaid. As a result, we may be subject to the federal False Claims Act if we knowingly "cause" the filing of false claims. Violations may result insubstantial civil penalties, including treble damages. The federal False Claims Act also contains "whistleblower" or "qui tam" provisions that allowprivate individuals to bring actions on behalf of the government alleging that the defendant has defrauded the government. In recent years, the number ofsuits brought in the medical industry by private individuals has increased dramatically. Various states have enacted laws modeled after the federal FalseClaims Act, including "qui tam" provisions, and some of these laws apply to claims filed with commercial insurers. We are unable to predict whetherwe could be subject to actions under the federal False Claims Act, or the impact of such actions. However, the costs of defending claims under the FalseClaims Act, as well as sanctions imposed under the False Claims Act, could adversely affect our results of operations.Changes in the health care industry or tort reform could reduce the number of arrhythmia monitoring solutions ordered by physicians, whichcould result in a decline in the demand for our solutions, pricing pressure and decreased revenue. Changes in the health care industry directed at controlling health care costs or perceived over-utilization of arrhythmia monitoring solutions couldreduce the volume of solutions ordered by physicians. If more health care cost controls are broadly instituted throughout the health care industry,22Table of Contentsthe volume of cardiac monitoring solutions could decrease, resulting in pricing pressure and declining demand for our services, which could harm ouroperating results. In addition, it has been suggested that some physicians order arrhythmia monitoring solutions, even when the services may havelimited clinical utility, primarily to establish a record for defense in the event of a claim of medical malpractice against the physician. Legal changesincreasing the difficulty of initiating medical malpractice cases, known as tort reform, could reduce the amount of our services prescribed as physiciansrespond to reduced risks of litigation, which could harm our operating results.Legislation and policy changes reforming the United States healthcare system may have a material adverse effect on our operating results andfinancial condition. On March 23, 2010, both the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 weresigned into law. Together, the two measures make the most sweeping and fundamental changes to the United States health care system since the creationof Medicare and Medicaid. The Health Care Reform laws include a large number of health-related provisions to take effect over the next few years,including expanding Medicaid eligibility, requiring most individuals to have health insurance, establishing new regulations on health plans, establishinghealth insurance exchanges, requiring manufacturers to report payments or other transfers of value made to physicians and teaching hospitals, andmodifying certain payment systems to encourage more cost-effective care. In addition, various healthcare reform proposals have also emerged at the state level. We cannot predict the effect that newly enacted laws or anyfuture legislation or regulation will have on us. However, the implementation of new legislation and regulation may lower reimbursements for ourproducts, reduce medical procedure volumes and adversely affect our business.Risks related to the Products Business and IndustryIf we or our suppliers fail to achieve or maintain regulatory approval of manufacturing facilities, our growth could be limited and our businesscould be harmed. We currently assemble the monitors, sensors and bases for MCOT™, and manufacture event and Holter monitors in our Eagan, MN facility.Monitors used for pacemaker services are purchased from third parties. In order to maintain compliance with FDA and other regulatory requirements,our manufacturing facilities must be periodically re-evaluated and qualified under a quality system to ensure they meet production and quality standards.Suppliers of components and products used to manufacture MCOT™, event and Holter devices, and the manufacturers of the monitors used inpacemaker services must also comply with FDA regulatory requirements, which often require significant resources and subject us and our suppliers topotential regulatory inspections and stoppages. If we or our suppliers do not maintain regulatory approval for our manufacturing operations, ourbusiness could be adversely affected.Our dependence on a limited number of suppliers may prevent us from delivering our devices on a timely basis. We currently rely on a limited number of suppliers of components for MCOT™, event and Holter devices. If these suppliers became unable toprovide components in the volumes needed or at an acceptable price, we would have to identify and qualify acceptable replacements from alternativesources of supply. The process of qualifying suppliers is lengthy. Delays or interruptions in the supply of our requirements could limit or stop ourability to provide sufficient quantities of devices on a timely basis, meet demand for our services, which could have a material adverse effect on ourbusiness, financial condition and results of operations.23Table of ContentsWe are subject to new legislation imposing additional taxes on our services and could be subject to penalties and charges if these taxes are notappropriately collected and remitted to the Federal Government. Effective January 1, 2013, as a result of the passage of the Affordable Care Act, manufacturers of certain medical devices are subject to an excisetax on the sale of the devices. Several devices that are manufactured by our products segment will be subject to these taxes. The tax is 2.3% of the saleprice of the applicable medical device. The manufacturer is responsible for remitting these taxes to the Federal Government. If taxes are not collectedfrom customers in an amount equal to the taxes owed, or the taxes are not remitted in a timely matter, we may be subject to penalties and fees that couldadversely affect our business.We could be subject to medical liability or product liability claims, which may not be covered by insurance and which would adversely affect ourbusiness and results of operations. The design, manufacture and marketing of services of the types we provide entail an inherent risk of product liability claims. Any such claimsagainst us may require us to incur significant defense costs, irrespective of whether such claims have merit. In addition, we provide information tohealth care providers and payors upon which determinations affecting medical care are made, and claims may be made against us resulting from adversemedical consequences to patients resulting from the information we provide. In addition, we may become subject to liability in the event that themonitors and sensors we use fail to correctly record or transfer patient information or if we provide incorrect information to patients or health careproviders using our services. We have also agreed to indemnify Verizon for any claims resulting from the provision of our services. If we incur one ormore significant claims against us, if we are required to indemnify Verizon as a result of the provision of our services, or if we are required to undertakeremedial actions in response to any such claims, such claims or actions would adversely affect our business and results of operations. Our liability insurance is subject to deductibles and coverage limitations. In addition, our current insurance may not continue to be available to uson acceptable terms, if at all, and, if available, the coverage may not be adequate to protect us against any future claims. If we are unable to obtaininsurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against any claims against us, we will be exposed tosignificant liabilities, which may adversely affect our business and results of operations.If we do not obtain and maintain adequate protection for our intellectual property, the value of our technology and devices may be adverselyaffected. Our business and competitive positions are dependent in part upon our ability to protect our proprietary technology. To protect our proprietaryrights, we rely on a combination of trademark, copyright, patent, trade secret and other intellectual property laws, employment, confidentiality andinvention assignment agreements with our employees and contractors, and confidentiality agreements and protective contractual provisions with otherthird parties. We attempt to protect our intellectual property position by filing trademark applications and U.S., foreign and international patentapplications related to our proprietary technology, inventions and improvements that are important to the development of our business. We do not believe that any single patent, trademark or other intellectual property right of ours, or combination of our intellectual property rights, islikely to prevent others from competing with us using a similar business model. There are many issued patents and patent applications held by others inour industry and the electronics field. Our competitors may independently develop technologies that are substantially similar or superior to ourtechnologies, or design around our patents or other intellectual property to avoid infringement. In addition, we may not apply for a patent relating toproducts or processes that are patentable, we may fail to receive any patent for which we apply or have applied,24Table of Contentsand any patent owned by us or issued to us could be circumvented, challenged, invalidated, or held to be unenforceable, or rights granted thereundermay not adequately protect our technology or provide a competitive advantage to us. If a third-party challenges the validity of any patents or proprietaryrights of ours, we may become involved in intellectual property disputes and litigation that would be costly and time-consuming. Although third parties may infringe on our patents and other intellectual property rights, we may not be aware of any such infringement, or we maybe aware of potential infringement but elect not to seek to prevent such infringement or pursue any claim of infringement, and the third party maycontinue its potentially infringing activities. Any decision whether or not to take further action in response to potential infringement of our patent orother intellectual property rights may be based on a variety of factors, such as the potential costs and benefits of taking such action, and business andlegal issues and circumstances. Litigation of claims of infringement of a patent or other intellectual property rights may be costly and time-consuming,may divert the attention of key Company personnel, and may not be successful or result in any significant recovery of compensation for anyinfringement or enjoining of any infringing activity. Litigation or licensing discussions may also involve or lead to counterclaims that could be broughtby a potential infringer to challenge the validity or enforceability of our patents and other intellectual property. To protect our trade secrets and other proprietary information, we generally require our employees, consultants, contractors and outsidecollaborators to enter into written nondisclosure agreements. These agreements, however, may not provide adequate protection to prevent anyunauthorized use, misappropriation or disclosure of our trade secrets, know-how or other proprietary information. These agreements may be breached,and we may not become aware of, or have adequate remedies in the event of, any such breach. Also, others may independently develop the same orsubstantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.Our ability to market our products may be impaired by the intellectual property rights of third parties. Our success is dependent in part upon our ability to avoid infringing the patents or proprietary rights of others. Our industry and the electronicsfield are characterized by a large number of patents, patent filings and frequent litigation based on allegations of patent infringement. Competitors mayhave filed applications for, or have been issued, patents, and may obtain additional patents and proprietary rights related to devices, services orprocesses that we compete with. We may not be aware of all of the patents or patent applications potentially adverse to our interests that may have beenfiled or issued to others. U.S. patent applications may be kept confidential while pending in the Patent and Trademark Office. If other companies have or obtain patentsrelating to our products or services, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. We may not beable to obtain any such licenses on acceptable terms, or at all. Any failure to obtain such licenses could impair or foreclose our ability to make, use,market or sell our products and services. Based on the litigious nature of our industry and the electronics field and the fact that we may pose a competitive threat to some companies whoown or control various patents, it is possible that one or more third parties may assert a patent infringement claim seeking damages and to enjoin themanufacture, use, sale and marketing of our products and services. If a third-party asserts that we have infringed on its patent or proprietary rights, wemay become involved in intellectual property disputes and litigation that would be costly and time-consuming and could impair or foreclose our abilityto make, use, market or sell our products and services. Lawsuits may have already been filed against us without our knowledge. Additionally, we mayreceive notices from other third parties suggesting or asserting that we are infringing their patents and inviting us to license such patents. We do notbelieve25Table of Contentsthat we are infringing on any other party's patents or that a license to any such patents is necessary. Should litigation over such patents arise, we intendto vigorously defend against any allegation of infringement. If we are found to infringe on the patent or intellectual property rights of others, we may be required to pay damages, stop the infringing activity orobtain licenses or rights to the patents or other intellectual property in order to use, manufacture, market or sell our products and services. Any requiredlicense may not be available to us on acceptable terms or at all. If we succeed in obtaining such licenses, payments under such licenses would reduceany earnings from our products. In addition, licenses may be non-exclusive and, accordingly, our competitors may have access to the same technologyas that which may be licensed to us. If we fail to obtain a required license or are unable to alter the design of our product candidates to make a licenseunnecessary, we may be unable to manufacture, use, market or sell our products and services, which could significantly affect our ability to achieve,sustain or grow our commercial business.If we fail to obtain and maintain necessary FDA clearances, our business will be adversely affected. The monitors, sensors and bases that we manufacture and use as part of our MCOT™ product are classified as medical devices and are subject toextensive regulation by the FDA. Further, we maintain establishment registration with the FDA as a distributor of medical devices. FDA regulationsgovern manufacturing, labeling, promotion, distribution, importing, exporting, shipping and sale of these devices. Our MCOT™ devices, including ourC3 and C5 monitors, and our arrhythmia detection algorithms have "510(k) clearance" status from the FDA. Modifications to our MCOT™ devices orour algorithms that could significantly affect safety or effectiveness, or that could constitute a significant change in intended use, would require a newclearance from the FDA. If in the future we make changes to our MCOT™ devices or our algorithms, the FDA could determine that such modificationsrequire new FDA clearance, and we may not be able to obtain such FDA clearances timely, or at all. We are subject to continuing regulation by the FDA, including quality regulations applicable to the manufacture of our MCOT™, event and Holterdevices and various reporting regulations, as well as regulations that govern the promotion and advertising of medical devices. The FDA could find thatwe have failed to comply with one of these requirements, which could result in a wide variety of enforcement actions, ranging from a warning letter toone or more severe sanctions. These sanctions could include fines, injunctions and civil penalties; recall or seizure of MCOT™ devices; operatingrestrictions, partial suspension or total shutdown of production; refusal to grant 510(k) clearance of new components or algorithms; withdrawing 510(k)clearance already granted to one or more of our existing components or algorithms; and criminal prosecution. Any of these enforcement actions could becostly and significantly harm our business, financial condition and results of operations.We may be subject to federal reporting requirements involving payments we make to physicians and teaching hospitals. Section 6002 of the Affordable Care Act requires certain medical devices manufacturers that produce devices covered by the Medicare and stateMedicaid programs to report annually to the government certain payments to physicians and teaching hospitals. If we fail to appropriately track andreport such payments to the government, we could be subject to civil fines and penalties, which could adversely affect the results of our operations.26Table of ContentsRisks related to the Clinical Research Services Business and IndustryIf our clients discontinue using our services or cancel projects, revenue may be adversely affected and we may not receive future business fromthese clients. Clients may cease using our services or may prematurely cancel projects. The cancellation or delay of a large contract or multiple contracts couldhave an adverse material effect on our revenue and profitability. The loss of clients or individual contracts could have an adverse effect if we are unableto attract new clients or unable to replace projects. Historically, clients have cancelled or discontinued projects and may in the future cancel theircontracts for various reasons including:•unexpected or undesired clinical results of the product; •a decision that a particular study is no longer necessary or needed; •insufficient patient enrollment or poor project performance; •production problems resulting in shortages of the drugs.We are reliant on the outsourcing of research and development by pharmaceutical and biotechnology companies. We are reliant on the ability and willingness of pharmaceutical and biotechnology companies to continue to spend on research and development andto outsource the types of research services that we provide. As such, we are impacted and subject to risks, uncertainties and trends that affect companiesin these industries. Any downturn in these industries or reduction in spending or outsourcing could adversely affect our business.Our backlog may not convert to net revenue. Backlog consists of potential net revenue yet to be earned from projects awarded by clients. If a project is prematurely cancelled or delayed, futureoperating results will be adversely impacted.Item 1B. Unresolved Staff Comments None.Item 2. Properties We lease facilities in the following locations:•55,000 square feet of space for our headquarters and service center in Conshohocken, PA, under an agreement that expires in December2013 •12,000 square feet of space dedicated to research and development, various IT functions, and engineering activities in San Diego, CA,under an agreement that expires in November 2014 •10,000 square feet of space for our distribution operation in Chester, PA, under an agreement that expires in October 2014 •11,000 square feet of space for our distribution operation in Phoenix, AZ, under an agreement that expires in April 2015 •24,000 square feet of space for our event and Holter monitoring, as well as product production in Eagan, MN, under an agreement thatexpires in January 2017 •2,000 square feet of space for Edina, MN, under an agreement that expires in 201527Table of Contents•7,000 square feet of space for our MCOT™ monitoring facility in San Francisco, CA, under an agreement that expires in March 2019 •13,000 square feet of space for research services in Rockville, MD under an agreement that expires in November 2018 •4,000 square feet of space for research services in San Francisco, CA under an agreement that expires in October 2015 We believe that our existing facilities are adequate to meet our current needs, and that suitable additional alternative spaces will be available in thefuture on commercially reasonable terms.Item 3. Legal Proceedings On June 12, 2012 CardioNet, Inc. (the "Company") settled the patent infringement action brought on September 25, 2009 by LifeWatchServices, Inc., and Card Guard Scientific Survival, Ltd. ("Lifewatch"), the licensee and owner, respectively, of U.S. Patent Nos. 7,542,878 B2 ("the'878 Patent") and 5,730,143 ("the '143 Patent"), collectively ("Licensed Patents") against the Company's wholly owned subsidiary, Braemar Inc.("Braemar") and one of its customers, eCardio Diagnostics, LLC ("eCardio"), in Federal District Court for the Northern District of Illinois, File No. 09-CV-6001. In this matter, Lifewatch alleged that Braemar and eCardio had infringed the Licensed Patents. Pursuant to the terms of the settlementagreement, the Company paid a Lifewatch a lump sum of $0.3 million for a fully paid- up license, release, and covenant not to sue under the LicensedPatents for Braemar products. The covenant not to sue extends to Braemar's customers, including eCardio. On August 25, 2011, the Company received a Civil Investigative Demand ("CID") issued by the U.S. Department of Justice, Western District ofWashington. The CID states that it was issued in the course of an investigation under the federal false claims act and seeks documents for the periodJanuary 1, 2007 through the date of the CID. The CID indicates that the investigation concerns allegations that the Company may have usedinappropriate diagnosis codes when submitting claims for payment to Medicare for its real-time, outpatient cardiac monitoring services. The Company iscooperating with the government's request and is in the process of providing information in response to the CID. The Company is unable to predictwhat action, if any, might be taken in the future by the Department of Justice or other governmental authorities as a result of this investigation or whatimpact, if any, the outcome of this matter might have on the Company's business, financial position or results of operations. On December 12, 2011 the Company announced that it had reached a preliminary agreement to settle the West Palm Beach Police Pension Fundputative class action litigation filed in California Superior Court, San Diego County, which asserted claims against the Company for violations ofSections 11, 12 and 15 of the Securities Act of 1933. On June 22, 2012, the court approved the settlement of $7.3 million, of which, the Companypreviously paid $1.3 million on March 31, 2012, and the remainder was covered by insurance. On May 8, 2012, CardioNet filed suit against The ScottCare Corporation and Ambucor Health Solutions, Inc. in the United States District Courtfor the Eastern District of Pennsylvania (Civil Action No. 2:12-CV-2516-PBT) for patent infringement related to the use, offering for use, sale, andoffering for sale of the ScottCare TeleSentry Mobile Cardiac Telemetry device and monitoring services. On May 8, 2012, CardioNet also filed suitagainst Mednet Healthcare Technologies, Inc., MedTel 24, Inc., RhythmWatch LLC, and AMI Cardiac Monitoring, Inc., in the United States DistrictCourt for the Eastern District of Pennsylvania (Civil Action No. 2:12-CV-2517-JS) for patent infringement related to the use, offering for use, sale, andoffering for sale of the Heartrak External Cardiac Ambulatory Telemetry device and monitoring services. The suits each allege that the defendants areinfringing the28Table of Contentsfollowing CardioNet patents: U.S. Patent Nos. 7,212,850, 7,907,996, 6,569,095, 7,587,237 and 7,941,207. CardioNet is seeking an injunction againsteach defendant, as well as monetary damages. Defendants Mednet HealthCare Technologies, Inc. and the ScottCare Corporation have assertedcounterclaims alleging the patents in suit are invalid and not infringed. Consistent with the accounting for contingent liabilities, no accrual has beenrecorded in the financial statements. The Company is vigorously pursuing its claims and defending against the counterclaims.Item 4. Mine Safety Disclosures Not Applicable.Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information for Common Stock Our common stock has been traded on the NASDAQ Global Market under the symbol "BEAT" since March 19, 2008. The following table setsforth the range of high and low sale prices of our common stock for the periods indicated.20122011 As of February 13, 2013, there were 25,215,366 shares of our common stock outstanding. Also as of that date, we had approximately 61 holdersof record, including multiple beneficial holders at depositories, banks and brokers included as a single holder in the single "street" name of eachrespective depository, bank or broker.Share Repurchases We did not repurchase any of our equity securities during 2012 or 2011.Dividends We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings tosupport our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for theforeseeable future. Any future determination related to dividend policy will be made at the discretion of our Board of Directors.29Quarter Ended High Low December 31, 2012 $2.57 $2.01 September 30, 2012 2.60 1.86 June 30, 2012 3.11 2.02 March 31, 2012 3.37 2.49 Quarter Ended High Low December 31, 2011 $3.16 $2.20 September 30, 2011 5.28 2.84 June 30, 2011 5.66 4.42 March 31, 2011 4.96 4.25 Table of ContentsStock Performance Graph The graph below compares the total stockholder return of an investment of $100 on March 19, 2008 (the first day of trading of our common stockon the NASDAQ Stock Exchange) through December 31, 2012 for (i) our common stock (ii) The NASDAQ Health Care Index and (iii) The Russell2000 Index. Each of the three measures of cumulative total return assumes reinvestment of dividends, if any. The stock price performance show on thegraph below is based on historical data and is not indicative of future stock price performance.Comparison of Cumulative Total ReturnAmong CardioNet, Inc., The NASDAQ Health Care Indexand The Russell 2000 Index The foregoing graph and chart shall not be deemed incorporated by reference by any general statement incorporating by reference this AnnualReport on Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, exceptto the extent we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those acts.30Company/Index BasePeriod3/19/2008 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 CardioNet, Inc. $100.00 $139.27 $33.56 $26.44 $13.39 $12.88 NASDAQHealth CareIndex $100.00 $93.19 $108.59 $119.81 $125.22 $159.32 Russell 2000Index $100.00 $76.17 $96.87 $122.89 $117.75 $137.01 Table of ContentsItem 6. Selected Financial Data The selected financial data set forth below are derived from our consolidated financial statements. The statement of operations for the years endedDecember 31, 2012, 2011 and 2010, and the balance sheet data at December 31, 2012 and 2011 are derived from our audited consolidated financialstatements included elsewhere in this report. The statement of operations data for the years ended December 31, 2009 and 2008 and the balance sheetdata at December 2010, 2009 and 2008 are derived from our audited consolidated financial statements which are not included herein. The following selected financial data should be read in conjunction with the Consolidated Financial Statements and related notes thereto in Item 8and "Management's Discussion and Analysis of Financial Condition and Results of Operation" in Item 7 of this report. Year ended December 31, 2012 2011 2010 2009 2008 in thousands, except per share data Statement ofOperationsData: Revenues: Patient services $93,640 $106,853 $119,924 $140,233 $119,764 Researchservices 8,333 1,079 — — — Product 9,521 11,090 — 388 690 Total revenues 111,494 119,022 119,924 140,621 120,454 Cost of revenues: Patient services 36,793 42,258 47,492 48,688 39,913 Researchservices 3,726 571 — — — Product 5,074 6,247 — — — Total cost ofrevenues 45,593 49,076 47,492 48,688 39,913 Gross profit 65,901 69,946 72,432 91,933 80,541 Operatingexpenses: General andadministrative 32,644 35,011 34,657 39,153 27,607 Sales andmarketing 25,604 27,821 29,338 34,656 21,111 Bad debtexpense 11,912 12,080 18,578 19,982 13,253 Research anddevelopment 4,664 5,698 4,897 5,810 3,999 Integration,restructuringand othercharges 4,236 4,659 4,654 12,981 4,880 GoodwillImpairment — 45,999 — — — Total operatingexpenses 79,060 131,268 92,124 112,582 70,850 (Loss) incomefrom operations (13,159) (61,322) (19,692) (20,649) 9,691 Other income(expense): Interest income 351 144 97 190 1,167 Interest expense (299) — (3) (12) (170) 31Total otherincome 52 144 94 178 997 (Loss) incomebeforeprovision fromincome taxes $(13,107)$(61,178)$(19,598)$(20,471)$10,688 Benefit(provision) forincome taxes 905 (244) (262) (5) (1,483) Net (loss) income $(12,202)$(61,422)$(19,860)$(20,476)$9,205 Dividends on andaccretion ofmandatorilyredeemableconvertiblepreferred stock — — — — (2,597)Net (loss) incomeapplicable tocommon shares $(12,202)$(61,422)$(19,860)$(20,476)$6,608 Net (loss) incomeper commonshare: Basic $(0.49)$(2.51)$(0.82)$(0.86)$0.36 Diluted $(0.49)$(2.51)$(0.82)$(0.86)$0.29 Weighted averagenumber ofsharesoutstanding: Basic 24,933,656 24,425,318 24,109,085 23,771,368 18,348,594 Diluted 24,933,656 24,425,318 24,109,085 23,771,368 22,658,813 Table of ContentsItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operation You should read the following discussion and analysis of our financial condition and results of our operations in conjunction with ourconsolidated financial statements and the related notes to those statements included elsewhere in this report. This discussion contains forward-lookingstatements reflecting our current expectations that involve risks and uncertainties. Our actual results and the timing of events may differ materiallyfrom those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled "Risk Factors,"and elsewhere in this prospectus. We are on a calendar year end, and except where otherwise indicated below, "2012" refers to the year endedDecember 31, 2012, "2011" refers to the year ended December 31, 2011 and "2010" refers to the year ended December 31, 2010.OverviewCompany Background CardioNet provides cardiac monitoring services, cardiac monitoring device manufacturing, and centralized cardiac core laboratory services. TheCompany operates under three segments: patient services, product, and research services. Prior to 2012, the company operated under two segments:patient services and product. The patient services business segment's principal focus is on the diagnosis and monitoring of cardiac arrhythmias or heartrhythm disorders, through its core Mobile Cardiac Outpatient Telemetry™ ("MCOT™"), event and Holter services in a healthcare setting. The productbusiness segment focuses on the development, manufacturing, testing and marketing of medical devices to medical companies, clinics and hospitals. TheCompany's research services focuses on providing cardiac safety monitoring services for drug and medical treatment trials in a research environment. In February 2012, the Company completed the acquisition of ECG Scanning & Medical Services, Inc. ("ECG Scanning"). ECG Scanning isengaged in providing cardiac monitoring services to general practitioners, internal medicine specialists, cardiologists and hospital cardiac caredepartments. The acquisition gives the Company access to established customer relationships. In August 2012, the Company completed the acquisition of Cardiocore Lab, Inc. ("Cardiocore"). Cardiocore is engaged in central core laboratoryservices that provide cardiac monitoring for drug and medical treatment trials. Cardiocore's primary customers are pharmaceutical companies andcontract research organizations. The acquisition gives the Company access to industry expertise, an established operating structure and a substantialfootprint in the core lab industry.Verizon Supplier Agreement The Company established a relationship with Verizon in May 2003. Verizon is the sole provider of wireless cellular data connectivity solutions,data hosting and queuing services for the Company's monitoring network. The Company has no fixed or minimum financial commitment as it relates tonetwork usage or volume activity. However, if the Company utilizes the monitoring and32 As of December 31, 2012 2011 2010 2009 2008 in thousands Balance Sheet Data: Cash and cash equivalents $18,298 $18,531 $18,705 $49,152 $58,171 Short-term available-for-sale investments — 27,953 26,779 — — Working capital 24,932 57,177 60,634 75,383 84,003 Total assets 90,010 94,975 156,692 168,322 165,773 Total debt — — — — 72 Total shareholders' equity 69,998 77,997 134,928 149,353 150,117 Table of Contentscommunications services of a provider other than Verizon, the Company may be subject to penalties and Verizon has the right to terminate itsrelationship with the Company. To date, no penalties have been incurred related to this agreement.Reimbursement—Patient Services Segment The Company is dependent on reimbursement for its patient services by government and commercial insurance payors. Medicare reimbursementrates for the Company's event, Holter and pacemaker monitoring services have been established nationally by the Centers for Medicare and MedicaidServices ("CMS") for many years, and fluctuate periodically based on the annually published CMS rate table. The American Medical Association ("AMA") established CPT codes covering MCOT™ services which became effective on January 1, 2009. Atthat time, Highmark Medicare Services ("HMS") was responsible for setting the Medicare reimbursement rate on behalf of CMS for MCOT™services. Reimbursement prior to the use of the MCOT™ specific CPT codes was obtained through non-specific billing codes. Effective September 1,2009, HMS reduced the Medicare reimbursement rate for MCOT™ services to $754 per service, a reduction of approximately 33%. CMS publishesthe reimbursement rates for CPT codes for the following year in November. The reimbursement rates for 2011 and 2012 were $739 and $734,respectively. Beginning in February 2012, the Company moved its monitoring for Medicare patients to San Francisco, CA. The reimbursement rate forMedicare patients serviced in the San Francisco, CA facility, adjusted for local geographic pricing, was $943 per service in 2012 and is $1,000 in 2013. In addition to government reimbursement through Medicare, the Company has entered into contracts with commercial insurance carriers for itsMCOT™, event, Holter and pacemaker monitoring services. As of December 31, 2012, we have 400 contracts with commercial payors that cover all ofour monitoring services compared to 356 at December 31, 2011. We have reimbursement contracts representing approximately 65% of the currentestimated total of over 200 million covered lives for Medicare and commercial insurance carriers in the United States. In addition, we haveapproximately 52 contracts with commercial payors that pertained only to event, Holter and pacemaker services. The majority of the remaining coveredlives are insured by a relatively small number of large commercial insurance companies that have deemed MCOT™ to be experimental in nature and donot currently reimburse for services. Commercial reimbursement pricing for our services has declined over the past three years. Commercial pricing is affected by numerous factors,including the current Medicare reimbursement rates, competitive pressures, our ability to successfully negotiate favorable terms in our agreements andthe perceived value and effectiveness of our services.Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared inaccordance with generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptionsthat affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures. We base our estimates and judgments onhistorical experience and on various other factors that we believe to be reasonable under the circumstances; however, actual results may differ fromthese estimates. We review our estimates and judgments on an ongoing basis. We believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financialresults. Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements.33Table of ContentsRevenue RecognitionPatient Services Segment Patient services revenue includes revenue from MCOT™, event, Holter and pacemaker monitoring services. The Company receives a significantportion of its revenue from third party commercial insurance organizations and governmental entities. It also receives reimbursement directly frompatients through co-pay and self-pay arrangements. Billings for services reimbursed by contract third party payors, including Medicare, are recorded asrevenue net of contractual allowances. Adjustments to the estimated receipts, based on final settlement with the third party payors, are recorded uponsettlement. If the Company does not have sufficient historical information regarding collectability from a given payor to support revenue recognition atthe time of service, revenue is recognized when cash is received. Unearned amounts are appropriately deferred until service is performed. For the yearsended December 31, 2012, 2011 and 2010, revenue from Medicare as a percentage of the Company's total revenue was 37%, 33% and 35%,respectively.Product Segment Product revenue includes revenue from product sales and repairs. The Company's product revenue is recognized at the time of sale.Research Services Segment Research services revenue includes revenue for research and core laboratory services. The Company's research services revenues are provided on afee for services basis, and revenue is recognized as the related services are performed. We also provide consulting services on a time and materials basisand recognize revenues as we perform the services. Our site support revenue, consisting of equipment rentals and sales along with related supplies andlogistics management, are recognized at the time of sale or over the rental period. Under a typical contract, customers pay us a portion of our fee forthese services upon contract execution as an upfront deposit, some of which is typically nonrefundable upon contract termination. Unearned revenuesare deferred, and then recognized as the services are performed. For arrangements with multiple deliverables, the revenue is allocated to each element (both delivered and undelivered items) based on their relativeselling prices or management's best estimate of their selling prices, when vendor-specific or third-party evidence is unavailable. We record reimbursements received for out-of-pocket expenses, including freight, incurred as revenue in the accompanying consolidatedstatements of operations. Revenue generally is recognized net of any taxes collected from customers and subsequently remitted to governmentauthorities.Accounts Receivable Accounts receivable related to the patient services segment are recorded at the time revenue is recognized, net of contractual allowances, and arepresented on the balance sheet net of allowance for doubtful accounts. The ultimate collection of accounts receivable may not be known for severalmonths after services have been provided and billed. The Company records an allowance for doubtful accounts based on the aging of the receivableusing historical Company-specific data. The percentages and amounts used to record bad debt expense and the allowance for doubtful accounts aresupported by various methods and analyses, including current and historical cash collections, and the aging of specific receivables. Because ofcontinuing changes in the health care industry and third party reimbursement, it is possible that our estimates could change, which could have a materialimpact on our operations and cash flows.34Table of Contents Accounts receivable related to the product and research services segments are recorded at the time revenue is recognized, or when products orservices become billable. The Company estimates the allowance for doubtful accounts on a specific account basis, and considers several factors in itsanalysis including customer specific information and aging of the account. The Company will write-off receivables when the likelihood for collection is remote, the receivables have been fully reserved, and when theCompany believes collection efforts have been fully exhausted and it does not intend to devote additional resources in attempting to collect. TheCompany performs write-offs on a quarterly basis. The Company wrote off $14.2 million and $14.0 million of receivables for the years endedDecember 31, 2012 and 2011, respectively. The impact was a reduction of gross receivables and a reduction in the allowance for doubtful accounts. TheCompany recorded bad debt expense of $11.9 million and $12.1 million for the years ended December 31, 2012 and 2011, respectively.Stock Based Compensation ASC 718, Compensation—Stock Compensation, addresses the accounting for share-based payment transactions in which an enterprise receivesemployee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equityinstruments or that may be settled by the issuance of such equity instruments. ASC 718 requires that an entity measure the cost of equity-based serviceawards based on the grant-date fair value of the award and recognize the cost of such awards over the period during which the employee is required toprovide service in exchange for the award (the vesting period). ASC 718 requires that an entity measure the cost of liability-based service awards basedon current fair value that is re-measured subsequently at each reporting date through the settlement date. The Company accounts for equity awardsissued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. We estimate the fair value of our share-based awards to employees and directors using the Black-Scholes option valuation model. The Black-Scholes option valuation model requires the use of certain subjective assumptions. The most significant of these assumptions are the estimates of theexpected volatility of the market price of the Company's stock and the expected term of the award. We base our estimates of expected volatility on thehistorical volatility of our stock price. The expected term represents the period of time that stock-based awards granted are expected to be outstanding.Other assumptions used in the Black-Scholes option valuation model include the risk-free interest rate and expected dividend yield. The risk-free interestrate for periods pertaining to the contractual life of each option is based on the U.S. Treasury yield of a similar duration in effect at the time of grant. Wehave never paid, and do not expect to pay, dividends in the foreseeable future. The fair value of our stock-based awards was estimated at the date ofgrant using the following assumptions: ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ fromestimates. Forfeitures are estimated based on our historical experience and distinct groups of employees that have similar historical forfeiture behaviorare considered for expense recognition.35 Year EndedDecember 31, 2012 2011 2010 Expected volatility 63.4% 62.0% 65.0%Expected term (in years) 6.31 6.25 6.25 Weighted-average risk-free interest rate 1.15% 2.48% 2.29%Expected dividends 0.0% 0.0% 0.0%Weighted-average grant date fair value per share $1.58 $2.82 $3.95 Table of ContentsGoodwill and Acquired Intangible Assets Goodwill is the excess of the purchase price of an acquired business over the amounts assigned to assets acquired and liabilities assumed in abusiness combination. In accordance with ASC 350, Intangibles—Goodwill and Other, goodwill is reviewed for impairment annually, or when eventsarise that could indicate that impairment exists. The provisions of ASC 350 require that the Company perform a two-step impairment test. In the firststep, the Company compares the fair value of its reporting units to the carrying value of the reporting units. If the carrying value of the net assetsassigned to the reporting units exceeds the fair value of the reporting units, then the second step of the impairment test is performed in order todetermine the implied fair value of the reporting units' goodwill. If the carrying value of the reporting units' goodwill exceeds its implied fair value, animpairment loss equal to the difference is recorded. For the purpose of performing its goodwill impairment analysis, the Company considers its business to be comprised of three reporting units,patient services, products and research services. The Company calculates the fair value of the reporting units utilizing the income and marketapproaches. The income approach is based on a discounted cash flow methodology that includes assumptions for, among other things, forecastedincome, cash flow, growth rates, income tax rates, expected tax benefits and long-term discount rates, all of which require significant judgment. Themarket approach utilizes the Company's market data. There are inherent uncertainties related to these factors and the judgment applied in the analysis.The Company believes that the combination of an income and a market approach provides a reasonable basis to estimate the fair value of its reportingunits. The Company performed a goodwill impairment analysis for the year ended December 31, 2012. This analysis did not indicate goodwillimpairment in any of the reporting units. For the year ended December 31, 2011, the Company recognized an impairment charge of $46.0 million relatedto the patient services reporting unit. This charge had no effect on the Company's operations, cash balances or cash flows.Statements of Operations OverviewRevenue The vast majority of our revenue is derived from cardiac monitoring services, sales of product and research services. The amount of patient servicerevenue generated is based on the number of patients enrolled through physician prescriptions and the rates reimbursed to us by commercial payors,patients and Medicare. Consistent with the economic life cycle of a premium service that is introduced and achieves successful market penetration, weexpect MCOT™ pricing to decline over time due to competition and the introduction of new technologies. Event, Holter and pacemaker monitoringservices utilize widely accepted technologies, and we expect the price to remain relatively constant or slightly decline in the long-term. Other sources of revenue include revenue generated from the sale of cardiac monitoring products to third-party distributors and service providersin our products segment. Product revenue is driven by the number of the units purchased by our customers, and the relative per unit pricing for variousproducts. The average price per unit and volume for our product segment has been relatively consistent over the past several years. We expect revenueto remain constant or decrease slightly. Additionally, revenue is generated in the research services segment through various study and consulting services, which includes activities suchas project management, cardiac monitoring services, data management, equipment rental and customer support. Research services revenue is driven byour ability to enter into service contracts at various phases of the pharmaceutical drug development lifecycle. We expect volume to increase as thepharmaceutical industry moves increasingly towards central core lab services to conduct cardiac safety studies for drug development. Negotiated pricingfor36Table of Contentsservices contracts is subject to market pressures, but has remained relatively consistent over the last few years. We expect revenue from the researchservices segment to increase.Gross Profit Gross profit consists of revenue less the cost of revenue. Cost of revenue for the patient services segment includes:•salaries and benefits for personnel providing various services and customer support to physicians and patients including patienteducation, monitoring services, distribution services (scheduling, packaging and delivery of the devices to the patients), device repair andmaintenance, and quality assurance; •cost of patient-related services provided by third-party subcontractors including device transportation to and from the patient and cellularairtime charges related to transmission of ECGs to the CardioNet Monitoring Center; •consumable supplies sent to patients along with the durable components of MCOT™ devices; and •depreciation on our medical devices. Cost of revenue for the product segment includes the cost of materials and labor related to the manufacture of our products and product repairservices. Cost of revenue for the research services segment includes:•depreciation on our medical devices; •cost of materials and transportation related to the sale of products and supplies; •cost of internal and third party medical specialists and technicians; and •salaries and benefits of personnel providing various services to customers including consulting, customer support, project managementand certain information technology support. We expect multiple factors to influence our gross profit margins in the foreseeable future. If reimbursement rates decline in our patient servicessegment, it would have an adverse effect on our gross profit margin. Payor mix is unpredictable and dependent on the insurance coverage of patientsthat are prescribed our services. We expect to continue to achieve efficiencies in cost of revenues through process improvements, as well as from areduction in the cost of our devices. These factors will have a favorable impact on our gross profit margins. While these factors could be offsetting, it isdifficult to predict how they will influence our gross profit margins. If we experience volume or selling price declines in our product segment, or service contract pricing or volume declines in our research servicessegment, it would have an adverse effect on our gross profit margin. We expect the cost of selling products and repairs to remain relatively consistent.We expect to achieve some efficiencies in the research services cost of sales through process improvement, and expect a favorable impact on grossmargins due to leveraging of the relatively fixed cost infrastructure.General and Administrative General and administrative expense consists primarily of salaries and benefits related to general and administrative personnel, stock-basedcompensation, management bonus, professional fees primarily related to legal and audit fees, amortization related to intangible assets, facilities expensesand the related overhead.37Table of ContentsSales and Marketing Sales and marketing expense consists primarily of salaries, benefits, and commissions related to sales, marketing and contracting personnel. Alsoincluded are marketing programs such as trade shows and advertising campaigns.Research and Development Research and development expense consists primarily of salaries and benefits of personnel as well as subcontractors who work on new productdevelopment and sustaining engineering of our existing products.Integration, Restructuring and Other Charges Integration, restructuring and other charges are related to strategic acquisitions, cost reduction programs, reorganizations and facility closures, aswell as other costs that are not considered part of our ongoing business operations.Results of OperationsYears Ended December 31, 2012 and 2011 Revenue. Total revenue for the year ended December 31, 2012 was $111.5 million compared to $119.0 million for the year ended December 31,2011, a decrease of $7.5 million, or 6.3%. The decrease was primarily related to lower patient services revenue of $13.2 million, driven by a decrease inthe average reimbursement rate resulting from a shift in services provided, and $1.6 million in the product segment due to lower volume. The decreasewas partially offset by the inclusion of $6.3 million in the research services segment due to the acquisition of Cardiocore. Gross Profit. Gross profit decreased to $65.9 million for the year ended December 31, 2012 from $69.9 million for the year ended December 31,2011. The decrease of $4.0 million was due primarily to a decline in average selling price in the patient services segment and lower volume in theproduct segment. Also impacting the margin was startup costs for the San Francisco monitoring facility. These decreases were offset by lowerdepreciation expense of $2.8 million, and additional gross profit due to the inclusion of Cardiocore of $3.2 million. Gross profit as a percentage ofrevenue increased to 59.1% for the year ended December 31, 2012 compared to 58.8% for the year ended December 31, 2011. General and Administrative Expense. General and administrative expense was $32.6 million for the year ended December 31, 2012 compared to$35.0 million for the year ended December 31, 2011. The decrease of $2.4 million, or 6.8%, was due primarily due to lower payroll and other employeerelated expenses of $5.1 million and other expenses of $0.6 million as a result of cost reduction initiatives in the patient services and product segments,partially offset by the inclusion of general and administrative expenses of $3.3 million related to the acquisitions of ECG Scanning and Cardiocore. As apercentage of total revenues, general and administrative expense was 29.3% for the year ended December 31, 2012 compared to 29.4% for the yearended December 31, 2011. Sales and Marketing Expense. Sales and marketing expense was $25.6 million for the year ended December 31, 2012 compared to $27.8 millionfor the year ended December 31, 2011. The decrease of $2.2 million, or 8.0%, was primarily due to lower payroll and employee related expenses of$3.5 million, offset by the inclusion of an additional $1.3 million of sales and marketing expense in the patient services and research services segmentsas a result of the ECG Scanning and Cardiocore acquisitions. As a percentage of total revenues, sales and marketing expense was 23.0% for the yearended December 31, 2012 compared to 23.4% for the year ended December 31, 2011.38Table of Contents Bad Debt Expense. Bad debt expense was $11.9 million for the year ended December 31, 2012 compared to $12.1 million for the year endedDecember 31, 2011. The decrease of $0.2 million, or 1.4%, was primarily a result of improved cash collections due to process improvements during2012 and lower patient services revenue. The bad debt expense recorded was based on an evaluation of historical collection experience and a review ofoutstanding accounts receivable, by age, by payor class. As a percentage of total revenues, bad debt expense was 10.7% and 10.1% for the years endedDecember 31, 2012 and 2011, respectively. Research and Development Expense. Research and development expense was $4.7 million for the year ended December 31, 2012 compared to$5.7 million for the year ended December 31, 2011. The decrease of $1.0 million, or 18.1%, was primarily due to a decrease in production materials andoutside consulting services that were incurred in the prior year in connection with the development of our new MCOT™ device. As a percent of totalrevenue, research and development expense was 4.2% for the year ended December 31, 2012 compared to 4.8% for the year ended December 31, 2011. Integration, Restructuring and Other Charges. The Company incurred integration, restructuring and other charges of $4.2 million for the yearended December 31, 2012. Restructuring and integration costs of $1.5 million were related to severances and other costs largely associated with theacquisition of ECG Scanning and current year restructuring activities. Other charges incurred were for legal fees of $1.8 million related to the settlementof the class action lawsuit, $0.8 million for professional services related to strategic initiatives, and other miscellaneous charges of $0.1 million.Integration, restructuring and other charges were 3.8% of total revenues for the year ended December 31, 2012. The Company incurred integration, restructuring and other charges of $4.7 million for the year ended December 31, 2011. Restructuring andintegration costs of $1.0 million were related to severances and other costs largely associated with the acquisition of Biotel. Other charges incurred werefor legal fees of $1.4 million related to the settlement of the class action lawsuit, $1.1 million for professional services related to strategic initiatives,$1.0 million related to other litigation and miscellaneous charges of $0.2 million. Integration, restructuring and other charges were 3.9% of totalrevenues for the year ended December 31, 2011. Other Income. Net interest income was $0.1 million for both the years ended December 31, 2012 and 2011. The Company had additional interestincome, which were primarily offset by amortization of bond premiums during 2012. Income Taxes. The Company's effective tax rate was 6.9% for the year ended December 31, 2012 and was (0.40)% for the year endedDecember 31, 2011. The tax expense resulted from certain state taxes that are based on gross receipts rather than income, as well as the effect of certaindeferred tax liabilities related to certain business acquisitions that occurred during 2012. Net Loss. The Company incurred a net loss of $12.2 million for the year ended December 31, 2012 compared to a net loss of $61.4 million forthe year ended December 31, 2011.Years Ended December 31, 2011 and 2010 Revenue. Total revenue for the year ended December 31, 2011 decreased to $119.0 million from $119.9 million for the year ended December 31,2010, a decrease of $0.9 million, or 0.8%. Patient services revenue decreased $13.1 million due to slightly lower MCOT™ volume and contractedreimbursement rates partially offset by increased event and Holter volumes. Substantially offsetting the patient services revenue decline was theinclusion of revenue resulting from our Biotel acquisition of $12.2 million. Gross Profit. Gross profit decreased to $69.9 million for the year ended December 31, 2011 from $72.4 million for the year ended December 31,2010. The decrease of $2.5 million was due to the39Table of Contentsdecreased revenues as well as higher cost of sales resulting from the acquisition of Biotel partially offset by cost reductions implemented during 2011.Gross profit as a percentage of revenue declined to 58.8% for the year ended December 31, 2011 compared to 60.4% for the year ended December 31,2010 due to the addition of the lower margin Biotel business. Goodwill Impairment. The Company incurred a charge of $46.0 million to reduce the carrying value of goodwill associated with the patientservices unit. The impairment was driven by a suppressed market price which the Company believes is a result of current market conditions as well asmarket reaction to the ongoing Department of Justice inquiry. This charge had no effect on the Company's operations, cash balances or cash flows. General and Administrative Expense. General and administrative expense was $35.0 million for the year ended December 31, 2011 compared to$34.7 million for the year ended December 31, 2010. The increase of $0.3 million, or 1.0%, was due primarily to the inclusion of Biotel expenses of$3.0 million partially offset by decreases in outside services of $1.5 million, and $1.2 million of other expenses. As a percent of total revenues, generaland administrative expense was 29.4% for the year ended December 31, 2011 compared to 28.9% for the year ended December 31, 2010. Sales and Marketing Expense. Sales and marketing expense was $27.8 million for the year ended December 31, 2011 compared to $29.3 millionfor the year ended December 31, 2010. The decrease of $1.5 million, or 5.2%, was primarily related to a $1.2 million decrease in outside services relatedto training and the contract sales organization and $0.3 million of other expenses. As a percentage of total revenues, sales and marketing expense was23.4% for the year ended December 31, 2011 compared to 24.5% for the year ended December 31, 2010. Bad Debt Expense. Bad debt expense was $12.1 million for the year ended December 31, 2011 compared to $18.6 million for the year endedDecember 31, 2010. The decrease of $6.5 million, or 35.0%, was primarily a result of improved cash collections due to process improvements during2011 and lower patient services revenue. The bad debt expense recorded was based on an evaluation of historical collection experience and a review ofoutstanding accounts receivable, by age, by payor class. As a percentage of total revenues, bad debt expense was 10.1% for the year endedDecember 31, 2011 compared to 15.5% for the year ended December 31, 2010. Research and Development Expense. Research and development expense was $5.7 million for the year ended December 31, 2011 compared to$4.9 million for the year ended December 31, 2010. The increase of $0.8 million, or 16.4%, was largely due to costs incurred in the development of ournext generation MCOT™ device, C5, which was launched in December 2011 as well as the inclusion of expenses related to the acquisition of Biotel.As a percent of total revenue, research and development expense was 4.8% for the year ended December 31, 2011 compared to 4.1% for the year endedDecember 31, 2010. Integration, Restructuring and Other Charges. The Company incurred integration, restructuring and other charges of $4.7 million for the yearended December 31, 2011. Restructuring and integration costs of $1.0 million were related to severances and other costs largely associated with theacquisition of Biotel. Other charges incurred were for legal fees of $1.4 million related to the settlement of the class action lawsuit, $1.1 million forprofessional services related to strategic initiatives, $1.0 million related to other ongoing litigation and miscellaneous charges of $0.2 million.Integration, restructuring and other charges were 3.9% of total revenues for the year ended December 31, 2011. Integration, restructuring and other charges were $4.7 million for the year ended December 31, 2010. The restructuring costs related to the 2010restructuring plan were $2.1 million of severance and employee related costs as well as $1.4 million of other charges. The 2010 restructuring planincluded the consolidation of the Company's sales and service organizations, the closure of the Company's event40Table of Contentsmonitoring facility in Georgia and consolidation with its monitoring facilities in Pennsylvania and Minnesota, and an overall reduction of administrativecosts company-wide. Additionally, the Company incurred other charges of $1.2 million for the year ended December 31, 2010, including legal costsrelated to the Company's defense of the class-action and Biotel lawsuits. Integration, restructuring and other charges were 3.9% of total revenues for theyear ended December 31, 2010. Other Income. Net interest income was $0.1 million for the years ended December 31, 2011 and 2010. The Company had additional interestincome and realized gains on available-for-sale investments, all of which were primarily offset by amortization of bond premiums during 2011. Income Taxes. The Company's effective tax rate was (0.40)% for the year ended December 31, 2011 and was (1.34)% for the year endedDecember 31, 2010. The tax expense resulted from certain state taxes that are based on gross receipts rather than income. Additionally, the Companyrecognized tax expense related to the reconciliation of its prior year provision to tax return filed during 2011 and 2010. Net Loss. The Company incurred a net loss of $61.4 million for the year ended December 31, 2011 compared to a net loss of $19.9 million forthe year ended December 31, 2010.Liquidity and Capital Resources As of December 31, 2012, our principal source of liquidity was cash of $18.3 million and net accounts receivable of $20.3 million. In addition, theCompany entered into a credit agreement in August 2012 providing the Company with access to borrowings of up to $15.0 million. As ofDecember 31, 2012, the Company did not have an outstanding balance on the credit agreement. The Company had working capital of $24.9 million asof December 31, 2012. We believe that our existing cash and cash equivalents balances will be sufficient to meet our anticipated cash requirements forthe foreseeable future. The Company generated $5.7 million of cash from operations for the year ended December 31, 2012, primarily through revenue and improvedcash collection efforts. Cash was used primarily to fund the Company's net working capital requirements of $6.1 million. Additionally, the Companyhad $13.1 million of non-cash items related to depreciation, amortization and stock compensation expense during 2012. The Company used $6.4 million in cash for investments for the year ended December 31, 2012. This was primarily driven by the use of$6.0 million for the investment in medical devices and other capital expenditures for use in its ongoing operations, $22.4 million net of cash of$1.1 million for the purchase of Cardiocore, and $5.8 million for the purchase of ECG Scanning for the year ended December 31, 2012. In addition, theCompany received $39.6 million from the maturity and sale of certain of its short term investments, offset by $11.9 million used in the purchase ofavailable-for-sale securities. As of December 31, 2012 the Company converted all available-for-sale securities to cash. If the Company determines that it needs to raise additional capital, such capital may not be available on reasonable terms, or at all. If the Companyraises additional funds by issuing equity securities, its existing stockholders' ownership will be diluted. If the Company raises additional funds byincurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios thatmay restrict its ability to operate the business.41Table of ContentsContractual Obligations and Commitments The following table describes our long-term contractual obligations and commitments as of December 31, 2012: As of December 31, 2012, the Company is bound under facility leases and several office equipment leases that are included in the table above.From time to time, we may enter into contracts or purchase orders with third parties under which we may be required to make payments. Our paymentobligations under certain agreements will depend on, among other things, the progress of our development programs. Therefore, we are unable at thistime to estimate with certainty the potential future costs we will incur under these agreements or purchase orders.Recent Accounting Pronouncements In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The ASUis effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoptionpermitted. The new guidance allows an entity the option to first assess qualitative factors to determine whether existence of events or circumstances leadto a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment leadsto the determination that the fair value of the reporting unit is not less than the carrying value, then performing a two-step impairment test is no longernecessary. The new guidance did not have a material impact on our results of operations, cash flows, or financial position. In July 2012, the FASB issued ASU 2012-02, Intangibles—Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment. TheASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The new guidance allows anentity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than notthat the indefinite-lived intangible asset is impaired. If the qualitative assessment leads to the determination that is more likely than not that the indefinite-lived intangible asset is impaired, then the entity is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitativeimpairment test by comparing the fair value with the carrying amount. The Company does not expect the amendment to have a material impact on itsresults of operations, cash flows, or financial position.Off-Balance Sheet Arrangements As of December 31, 2012 and 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entitiesreferred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes.Item 7A. Quantitative and Qualitative Disclosures About Market Risk Our cash and cash equivalents as of December 31, 2012 were $18.3 million. As we do not invest in any short-term or long-term securities, webelieve we have no material exposure to interest rate risk.42 (in thousands)Payments due by period Contractual obligations Total 2013 2014 2015 2016 2017 Beyond Operating lease obligations 9,300 3,384 1,803 1,350 1,012 857 894 Table of ContentsItem 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The Board of Directors and ShareholdersCardioNet, Inc. We have audited the accompanying consolidated balance sheets of CardioNet, Inc. as of December 31, 2012 and 2011, and the related consolidatedstatements of operations and comprehensive income (loss), cash flows, and shareholders' equity for each of the three years in the period endedDecember 31, 2012. Our audits also included the financial statement schedule listed at Item 15(a). These financial statements and schedule are theresponsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on ouraudits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position ofCardioNet, Inc. at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the periodended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statementschedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forththerein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CardioNet, Inc.'sinternal control over financial reporting as of December 31, 2012, based on criteria established in "Internal Control—Integrated Framework" issued bythe Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2013 expressed an unqualified opinionthereon.Philadelphia, PennsylvaniaFebruary 22, 201343 /s/ Ernst & Young LLPTable of ContentsCARDIONET, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts.) See accompanying notes.44 December 31, 2012 2011 Assets Current assets: Cash and cash equivalents $18,298 $18,531 Short-term available-for-sale investments — 27,953 Accounts receivable—patient services, net of allowance for doubtful accounts of $7,532and $9,889 at December 31, 2012 and 2011, respectively 13,792 21,028 Other accounts receivable, net of allowance for doubtful accounts of $85 and $0 atDecember 31, 2012 and 2011, respectively 6,515 1,564 Inventory 2,894 2,009 Prepaid expenses and other current assets 1,923 1,511 Total current assets 43,422 72,596 Property and equipment, net 19,851 15,041 Intangible assets, net 9,664 2,545 Goodwill 16,446 3,363 Other assets 627 1,430 Total assets $90,010 $94,975 Liabilities and shareholders' equity Current liabilities: Accounts payable $6,349 $4,094 Accrued expenses 9,946 10,453 Deferred revenue 2,195 872 Total current liabilities 18,490 15,419 Deferred tax liability 866 705 Deferred rent 656 854 Total liabilities 20,012 16,978 Shareholders' equity Common stock—$.001 par value as of December 31, 2012 and 2011; 200,000,000shares authorized as of December 31, 2012 and 2011; 25,189,340 and 24,534,601shares issued and outstanding at December 31, 2012 and 2011, respectively 25 25 Paid-in capital 256,448 252,261 Accumulated other comprehensive loss — (16)Accumulated deficit (186,475) (174,273) Total shareholders' equity 69,998 77,997 Total liabilities and shareholders' equity $90,010 $94,975 Table of ContentsCARDIONET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands, except share and per share amounts.) See accompanying notes.45 Year Ended December 31, 2012 2011 2010 Revenues: Patient services $93,640 $106,853 $119,924 Research services 8,333 1,079 — Product 9,521 11,090 — Total revenues 111,494 119,022 119,924 Cost of revenue: Patient services 36,793 42,258 47,492 Research services 3,726 571 — Product 5,074 6,247 — Total cost of revenues: 45,593 49,076 47,492 Gross profit 65,901 69,946 72,432 Operating expenses: General and administrative 32,644 35,011 34,657 Sales and marketing 25,604 27,821 29,338 Bad debt expense 11,912 12,080 18,578 Research and development 4,664 5,698 4,897 Integration, restructuring and other charges 4,236 4,659 4,654 Goodwill impairment — 45,999 — Total operating expenses 79,060 131,268 92,124 Loss from operations (13,159) (61,322) (19,692)Other income (expense): Interest income 351 144 97 Interest expense (299) — (3) Total other income 52 144 94 Loss before income taxes (13,107) (61,178) (19,598)Benefit (provision) for income taxes 905 (244) (262) Net loss $(12,202)$(61,422)$(19,860) Net loss per common share: Basic and diluted $(0.49)$(2.51)$(0.82) Weighted average number of common shares outstanding: Basic and diluted 24,933,656 24,425,318 24,109,085 Other comprehensive loss: Unrealized gains/(losses) on securities: Unrealized holding gains/(losses) arising during the period 16 (24) 8 Comprehensive loss $(12,186)$(61,446)$(19,852) Table of ContentsCARDIONET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except share and per share amounts.) See accompanying notes.46 Year Ended December 31, 2012 2011 2010 Operating activities Net loss $(12,202)$(61,422)$(19,860)Adjustments to reconcile net loss to net cash provided by operating activities: Provision for doubtful accounts 11,912 12,080 18,578 Depreciation 8,037 10,913 11,696 Loss on the disposal of property & equipment — — 807 Decrease in deferred rent (198) (303) (340)Deferred income tax (benefit) expense (1,033) 13 — Stock-based compensation 3,747 4,006 3,945 Amortization of intangibles 1,341 1,219 375 Amortization of investment premium 268 561 421 Goodwill impairment — 45,999 — Changes in operating assets and liabilities: Accounts receivable (3,635) (6,653) (3,062)Inventory (885) (548) — Prepaid expenses and other current assets (176) 1,575 — Other assets 867 2,086 (2,043)Accounts payable 552 (3,033) (1,182)Accrued and other liabilities (2,852) (1,463) 1,027 Net cash provided by operating activities 5,743 5,030 10,362 Investing activities Acquisition of businesses, net of cash acquired (28,155) — (9,852)Purchases of property and equipment (5,962) (3,954) (5,247)Purchases of short-term available-for-sale investments (11,935) (49,657) (36,942)Sale or maturity of short-term available-for-sale investments 39,636 47,898 9,750 Net cash used in investing activities (6,416) (5,713) (42,291)Financing activities Proceeds from issuance of common stock — — 10 Proceeds from the exercise of employee stock options and employee stockpurchase plan contributions 440 509 1,472 Net cash provided by financing activities 440 509 1,482 Net decrease in cash and cash equivalents (233) (174) (30,447)Cash and cash equivalents—beginning of period 18,531 18,705 49,152 Cash and cash equivalents—end of period $18,298 $18,531 $18,705 Supplemental disclosure of cash flow information Cash paid for interest $295 $— $3 Cash paid for taxes $135 $171 $692 Table of ContentsCARDIONET, INC. CONSOLIDATED STATEMENTS OFSHAREHOLDERS' EQUITY (In thousands, except share amounts.) Shareholders' Equity Common Stock AccumulatedOtherComprehensiveIncome Paid-inCapital AccumulatedDeficit TotalShareholders'Equity Shares Amount BalanceDecember 31,2009 23,965,405 $24 $242,320 $— $(92,991)$149,353 Issuance/vestingof commonstock 22,083 — 1,422 — — 1,422 Exercise of stockoptions andpurchase ofshares related tothe employeestock purchaseplan 263,682 — 1,472 — — 1,472 Stock basedcompensation — — 2,533 — — 2,533 Net loss — — — — (19,860) (19,860)Changes inunrealized gainon available-for-sale investments — — — 8 — 8 BalanceDecember 31,2010 24,251,170 24 247,747 8 (112,851) 134,928 Issuance/vestingof commonstock 112,824 1 1,593 — — 1,594 Exercise of stockoptions andpurchase ofshares related tothe employeestock purchaseplan 170,607 — 515 — — 515 Stock basedcompensation — — 2,406 — — 2,406 Net loss — — — — (61,422) (61,422)Changes inunrealized gainon available-for-sale investments — — — (24) — (24) Balance See accompanying notes.47December 31,2011 24,534,601 25 252,261 (16) (174,273) 77,997 Issuance/vestingof commonstock 459,861 — 1,603 — — 1,603 Exercise of stockoptions andpurchase ofshares related tothe employeestock purchaseplan 194,878 — 440 — — 440 Stock basedcompensation — — 2,144 — — 2,144 Net loss — — — — (12,202) (12,202)Changes inunrealized gainon available-for-sale investments — — — 16 — 16 BalanceDecember 31,2012 25,189,340 $25 $256,448 $— $(186,475)$69,998 Table of ContentsCARDIONET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2012, 2011 and 2010 (In thousands, except share and per share amounts.) 1. Organization and Description of Business CardioNet, Inc. (the "Company") provides cardiac monitoring services, cardiac monitoring device manufacturing, and centralized cardiac corelaboratory services. Since the Company became focused on cardiac monitoring in 1999, the Company has developed a proprietary integrated patientmanagement platform that incorporates a wireless data transmission network, Food and Drug Administration (FDA) cleared algorithms and medicaldevices, and 24-hour digital monitoring service centers. The Company operates under three segments: patient services, product, and research services. Prior to 2012, the company operated under twosegments: patient services and product. The patient services business segment's principal focus is on the diagnosis and monitoring of cardiacarrhythmias or heart rhythm disorders, through its core Mobile Cardiac Outpatient Telemetry™ ("MCOT™"), event and Holter services in a healthcaresetting. The product business segment focuses on the development, manufacturing, testing and marketing of medical devices to medical companies,clinics and hospitals. The Company's research services segment focuses on providing cardiac safety monitoring services for drug and medical treatmenttrials in a research environment. In February 2012, the Company completed the acquisition of ECG Scanning & Medical Services, Inc. ("ECG Scanning"). ECG Scanning isengaged in providing cardiac monitoring services to general practitioners, internal medicine specialists, cardiologists and hospital cardiac caredepartments. The acquisition gives the Company access to established customer relationships and the ability to diversify its product and serviceofferings. In August 2012, the Company completed the acquisition of Cardiocore Lab, Inc. ("Cardiocore"). Cardiocore is engaged in central core laboratoryservices that provide cardiac monitoring for drug and medical treatment trials. Cardiocore's primary customers are pharmaceutical companies andcontract research organizations. The acquisition gives the Company access to industry expertise, an established operating structure and a substantialfootprint in the core lab industry.2. Summary of Significant Accounting PoliciesPrinciples of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significantintercompany transactions and balances have been eliminated in consolidation.Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that managementmake estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.48Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)2. Summary of Significant Accounting Policies (Continued)Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash and cash equivalents, available-for-sale investments, accounts receivable, other currentassets, accounts payable, deferred revenue and other current liabilities. The carrying value of these financial instruments approximates their fair valuebecause of their short-term nature. The fair value of financial instruments is defined as the amount at which the instrument could be exchanged in acurrent transaction between willing parties.Cash and Cash Equivalents Cash and cash equivalents are held in U.S. financial institutions or in custodial accounts with U.S. financial institutions. Cash equivalents aredefined as liquid investments and money market funds with maturity from date of purchase of 90 days or less that are readily convertible into cash andhave insignificant interest rate risk.Available-for-Sale Investments Marketable securities that do not meet the definition of cash and cash equivalents are classified as available-for-sale. Available-for-sale securitiesare carried at fair value, based on quoted market prices and observable inputs, with unrealized gains and losses reported in comprehensive income(loss). We classify securities as current or non-current assets on the consolidated balance sheet based on maturity dates. The amortized cost of debtsecurities is adjusted for amortization of premiums and accretions of discounts to maturity. Amortization of debt premiums and accretion of debtdiscounts are recorded in other income and expense. Realized gains and losses, and declines in value, that are considered to be other-than-temporary, arerecorded in other income and expense. The cost of securities sold is based on specific identification.Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable related to the patient services segment are recorded at the time revenue is recognized, net of contractual allowances, and arepresented on the balance sheet net of allowance for doubtful accounts. The ultimate collection of accounts receivable may not be known for severalmonths after services have been provided and billed. The Company records bad debt expense based on the aging of the receivable using historicalCompany-specific data. The percentages and amounts used to record bad debt expense and the allowance for doubtful accounts are supported byvarious methods and analyses, including current and historical cash collections, and the aging of specific receivables. Because of continuing changes inthe health care industry and third party reimbursement, it is possible that the Company's estimates of collectability could change, which could have amaterial impact on the Company's operations and cash flows. Accounts receivable related to the product and research services segments are recorded at the time revenue is recognized, or when the services orproducts are billable, net of discounts. The Company estimates allowance for doubtful accounts on a specific account basis, and considers severalfactors in its analysis including customer specific information and aging of the account.49Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)2. Summary of Significant Accounting Policies (Continued) The Company writes off receivables when the likelihood for collection is remote, the receivables have been fully reserved, and when the Companybelieves collection efforts have been fully exhausted and it does not intend to devote additional resources in attempting to collect. The Companyperforms write-offs on a quarterly basis. In the patient services segment, the Company wrote off $14,184 and $13,970 of receivables for the yearsended December 31, 2012 and 2011, respectively. The impact was a reduction of gross receivables and a reduction in the allowance for doubtfulaccounts. Additionally, the Company recorded bad debt expense of $11,912, $12,080, and $18,578 for the years ended December 31, 2012, 2011 and2010, respectively. Based on collection experience, unfavorable adjustments of $6,343 and $2,074 were made to accounts receivable in 2012 and 2011,respectively, related to prior years accounts receivable. There were no write-offs in the product and research services segments.Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-termavailable-for-sale investments and accounts receivable. The Company maintains its cash and cash equivalents with high quality financial institutions tomitigate this risk. The Company has established guidelines to limit exposure to credit risk by placing investments with high quality financial institutions,diversifying the Company's investment portfolio and placing investments with maturities that maintain safety and liquidity. The Company performsongoing credit evaluations of its customers and generally does not require collateral. The Company records an allowance for doubtful accounts inaccordance with the procedures described above. Past-due amounts are written off against the allowance for doubtful accounts when collections arebelieved to be unlikely and all collection efforts have ceased. At December 31, 2012, 2011 and 2010, one customer accounted for 20%, 19% and 18%, respectively, of the Company's net accounts receivable.Inventory Inventory is valued at the lower of cost (using first-in, first-out cost method) or market (net realizable value or replacement cost). Companymanagement periodically reviews inventory for specific future usage, and estimates of impairment of individual inventory items are recorded to reduceinventory to the lower of cost or market.Property and Equipment Property and equipment is recorded at cost. Depreciation is recorded over the estimated useful life of each class of depreciable assets, and iscomputed using the straight-line method. Leasehold improvements are amortized over the shorter of the estimated asset life or term of the lease. Repairsand maintenance costs are charged to expense as incurred.50Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)2. Summary of Significant Accounting Policies (Continued)Impairment of Long-Lived Assets The Company periodically evaluates the recoverability of the carrying value of its long-lived assets based on the criteria established in AccountingStandards Codification (ASC) 360, Property, Plant & Equipment. The Company considers historical performance and anticipated future results in itsevaluation of potential impairment. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of these assets inrelation to the operating performance of the business and the undiscounted cash flows expected to result from the use of these assets. Impairment lossesare recognized when the sum of the expected future cash flows is less than the assets' carrying value.Goodwill and Acquired Intangible Assets Goodwill is the excess of purchase price of an acquired business over the amounts assigned to assets acquired and liabilities assumed in a businesscombination. In accordance with ASC 350, Intangibles—Goodwill and Other, goodwill is reviewed for impairment annually, or when events arise thatcould indicate that impairment exists. The provisions of ASC 350 require that the Company perform a two-step impairment test. In the first step, theCompany compares the fair value of its reporting units to the carrying value of the reporting units. If the carrying value of the net assets assigned to thereporting units exceeds the fair value of the reporting units, then the second step of the impairment test is performed in order to determine the impliedfair value of the reporting units' goodwill. If the carrying value of the reporting units' goodwill exceeds its implied fair value, an impairment loss equal tothe difference is recorded. For the purpose of performing its goodwill impairment analysis in 2012, the Company considers its business to be comprised of three reportingunits, patient services, products and research services. The Company calculates the fair value of the reporting units utilizing the income and marketapproaches. The income approach is based on a discounted cash flow methodology that includes assumptions for, among other things, forecastedincome, cash flow, growth rates, income tax rates, expected tax benefits and long-term discount rates, all of which require significant judgment. Themarket approach utilizes the Company's market data. There are inherent uncertainties related to these factors and the judgment applied in the analysis.The Company believes that the combination of an income and a market approach provides a reasonable basis to estimate the fair value of its reportingunits.Revenue Recognition The Company recognizes approximately 80% of its revenue from patient monitoring services in its patient services segment, derived from itsMCOT™, event, Holter and pacemaker services. The Company receives a significant portion of its revenue from third party commercial payors andgovernmental entities. It also receives reimbursement directly from patients through co-pay, deductibles and self-pay arrangements. Revenue from the Medicare program is based on reimbursement rates set by CMS. Revenue from contracted commercial payors is recorded at thenegotiated contractual rate. Revenue from non-contracted commercial payors is recorded at net realizable value based on historical payment51Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)2. Summary of Significant Accounting Policies (Continued)patterns. Adjustments to the estimated net realizable value, based on final settlement with the third party payors, are recorded upon settlement. If theCompany does not have consistent historical information regarding collectability from a given payor, revenue is recognized when cash is received.Unearned amounts are appropriately deferred until service is performed. For the years ended December 31, 2012, 2011 and 2010, revenue fromMedicare as a percentage of the patient services segment's revenue was 37%, 33% and 35%, respectively. Revenue received from the sale of products, product repair and supplies is recognized when shipped, or as service is completed. Unearnedamounts are appropriately deferred until service is performed. Research services revenue includes revenue for research and core laboratory services. The Company's research services revenues are provided on afee for services basis, and revenue is recognized as the related services are performed. We also provide consulting services on a time and materials basisand recognize revenues as we perform the services. Our site support revenue, consisting of equipment rentals and sales along with related supplies andlogistics management, are recognized at the time of sale or over the rental period. Under a typical contract, customers pay us a portion of our fee forthese services upon contract execution as an upfront deposit, some of which is typically nonrefundable upon contract termination. Unearned revenuesare deferred, and then recognized as the services are performed. For arrangements with multiple deliverables, the revenue is allocated to each element (both delivered and undelivered items) based on their relativeselling prices or management's best estimate of their selling prices, when vendor-specific or third-party evidence is unavailable. We record reimbursements received for out-of-pocket expenses, including freight, incurred as revenue in the accompanying consolidatedstatements of operations. Revenue generally is recognized net of any taxes collected from customers and subsequently remitted to governmentauthorities.Advertising Costs Advertising costs are charged to expense as incurred. For the years ended December 31, 2012, 2011 and 2010, the Company incurred advertisingcosts of $174, $218 and $823, respectively.Research and Development Costs Research and development costs are charged to expense as incurred.Net Loss The Company computes net loss per share in accordance with ASC 260, Earnings Per Share. Basic net loss per share is computed by dividing netloss per share available to common shareholders by the weighted average number of common shares outstanding for the period, and excludes the effectsof any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise orconversion of all potentially dilutive securities into common stock using the treasury stock or if converted methods, as applicable.52Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)2. Summary of Significant Accounting Policies (Continued) The following summarizes the potential outstanding common stock of the Company as of the end of each period: Basic net loss per share is computed by dividing net loss by the weighted average number of fully vested common shares outstanding during theperiod. Diluted net loss per share is computed by giving effect to all potential dilutive common shares, including stock options, and RSUs. The following table presents the calculation of historical basic and diluted net loss per share:Stock-Based Compensation ASC 718, Compensation—Stock Compensation, addresses the accounting for share-based payment transactions in which an enterprise receivesemployee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equityinstruments or that may be settled by the issuance of such equity instruments. ASC 718 requires that an entity measures the cost of equity-based serviceawards based on the grant-date fair value of the award and recognizes the cost of such awards over the period during which the employee is required toprovide service in exchange for the award (the vesting period). ASC 718 requires that an entity measures the cost of liability-based service awardsbased on current fair value that is re-measured subsequently at53 December 31,2012 December 31,2011 December 31,2010 Employee stock purchase plan estimated share optionsoutstanding 50,903 51,544 40,208 Common stock options and restricted stock units("RSUs") outstanding 3,669,103 2,468,991 2,102,376 Common stock options available for grant 1,853,786 2,369,802 1,649,723 Common stock 25,189,340 24,534,601 24,251,170 Total 30,763,132 29,424,938 28,043,477 Year Ended December 31, 2012 2011 2010 (in thousands, except per share amounts) Numerator: Net loss $(12,202)$(61,422)$(19,860)Denominator: Weighted average common shares outstanding—Basic 24,933,656 24,425,318 24,109,085 Weighted average shares used in computing dilutednet loss per share 24,933,656 24,425,318 24,109,085 Basic and diluted net loss per share $(0.49)$(2.51)$(0.82) Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)2. Summary of Significant Accounting Policies (Continued)each reporting date through the settlement date. The Company accounts for equity awards issued to non-employees in accordance with ASC 505-50,Equity-Based Payments to Non-Employees.Income Taxes The Company accounts for income taxes under the liability method, as described in ASC 740, Income Taxes. Deferred income taxes arerecognized for the tax consequences of temporary differences between the tax and financial statement reporting bases of assets and liabilities. Avaluation allowance for net deferred tax assets is provided unless realizability is judged by the Company to be more likely than not.Segment Information ASC 280, Segment Reporting, establishes standards for reporting information regarding operating segments in annual financial statements.Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by thechief operating decision-maker, or decision-making group in making decisions on how to allocate resources and assess performance. Effective in the third quarter 2012, with the acquisition of Cardiocore, the Company changed its reportable segments from two segments: Patientservices and Product, to three segments: Patient services, Product and Research services. The Patient services business segment's principal focus is onthe diagnosis and monitoring of cardiac arrhythmias or heart rhythm disorders, through its core Mobile Cardiac Outpatient Telemetry (MCOT), eventand Holter services in a healthcare setting. The Product business segment focuses on the development, manufacturing, testing and marketing of medicaldevices to medical companies, clinics and hospitals. The Research services segment includes the Company's operations that focus on providing cardiacsafety monitoring services in a research environment, which includes certain equipment rental and product sales. In addition, the Company realigned theProduct segment to exclude central core laboratory research operations previously reported in this segment and repositioned these operations into theResearch services segment. Disclosures for the twelve months ended December 31, 2012 and 2011 have been adjusted to reflect the change inreportable segments.Recent Accounting Pronouncements In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The ASUis effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoptionpermitted. The new guidance allows an entity the option to first assess qualitative factors to determine whether existence of events or circumstances leadto a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment leadsto the determination that the fair value of the reporting unit is not more likely than not less than the carrying value, then performing a two-stepimpairment test is no longer necessary. The amendments did not have a material impact on the Company's results of operations, cash flows, or financialposition.54Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)2. Summary of Significant Accounting Policies (Continued) In July 2012, the FASB issued ASU 2012-02, Intangibles—Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment. TheASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The new guidance allows anentity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than notthat the indefinite-lived intangible asset is impaired. If the qualitative assessment leads to the determination that is more likely than not that the indefinite-lived intangible asset is impaired, then the entity is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitativeimpairment test by comparing the fair value with the carrying amount. The Company does not expect the amendment to have a material impact on itsresults of operations, cash flows, or financial position.3. Business Combinations On February 10, 2012, the Company entered into and closed on a definitive Stock Purchase Agreement (the "Stock Purchase Agreement") withECG Scanning and Medical Services, Inc., an Ohio corporation ("ECG Scanning"). Upon the closing of the transaction, the Company acquired all ofthe issued and outstanding capital stock, and ECG Scanning became a wholly-owned subsidiary of the Company. ECG Scanning is a provider ofcardiac monitoring services in the United States. The Company paid an aggregate cash purchase price of $5,800 at closing and up to an additional $600in cash, with an estimated fair value of $570, upon the achievement of certain performance targets approximately one year from the date of purchase. AtDecember 31, 2012 the estimated fair value of the earn out is $0. The reduction of the liability was recognized in the Statement of Operations andComprehensive Income(Loss) in the Integration, restructuring, and other line. The acquisition has been included within the consolidated results ofoperations and financial condition from the date of the acquisition. The acquisition gave the Company access to established customer relationships, andentry into additional regions and geographic locations.55Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)3. Business Combinations (Continued) The purchase price allocation of the ECG Scanning acquisition purchase consideration of $6,370 was completed in the second quarter of 2012. Thefollowing table summarizes the purchase price allocation: On August 29, 2012, the Company entered into a definitive merger agreement with Cardicore Lab, Inc. ("Cardiocore"), a Delaware corporation.Upon the closing of the transaction, Cardiocore became a wholly-owned subsidiary of the Company. The Company paid an aggregate purchase price of$23,500 in cash at closing. The acquisition has been included within the consolidated results of operations and financial condition from the date of theacquisition. Cardiocore is engaged in central core laboratory services that provide cardiac monitoring for drug and medical treatment trials. Cardiocore'sprimary customers are pharmaceutical companies and contract research organizations. The acquisition gives the Company access to industry expertise,an established operating structure and a substantial footprint in the core laboratory industry.56Fair value of assets acquired: Cash and cash equivalents $32 Accounts receivable 1,686 Prepaid expenses and other current assets 141 Property and equipment 2,655 Goodwill 1,577 Intangible assets 1,540 Other assets 64 Total assets acquired 7,695 Liabilities assumed: Accounts payable 508 Accrued expenses 283 Other liabilities 534 Total liabilities assumed 1,325 Net assets acquired $6,370 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)3. Business Combinations (Continued) The purchase price allocation of the Cardiocore acquisition purchase consideration of $23,500 was completed in the fourth quarter of 2012. Thefollowing table summarizes the purchase price allocation: The unaudited pro forma information below presents combined results of operations as if the acquisition had occurred at the beginning of theperiods presented instead of August 29, 2012. The pro forma information is based on historical results adjusted for the effect of purchase accountingand is not necessarily indicative of the results of operations of the combined entity had the acquisition occurred at the beginning of the periodspresented, nor is it necessarily indicative of future results.4. Available-for-Sale Investments As of December 31, 2012, the Company did not hold any investment securities. At December 31, 2011, the Company invested its excess funds insecurities issued by the United States government, corporations, banks, municipalities, financial holding companies and in money market fundscomprised of these same types of securities. Cash and cash equivalents and available-for-sale investments were57Fair value of assets acquired: Cash and cash equivalents $1,113 Accounts receivable 4,290 Prepaid expenses and other current assets 386 Property and equipment 4,230 Goodwill 11,506 Intangible assets 6,920 Total assets acquired 28,445 Liabilities assumed: Accounts payable 1,195 Accrued expenses 1,215 Deferred tax liabilities 935 Deferred revenue 1,600 Total liabilities assumed 4,945 Net assets acquired $23,500 December 31, 2012 2011 Revenue $124,698 $134,102 Net Income (Loss) $(10,936)$(62,712) Net Income per common share: Basic and Diluted $(0.47)$(2.56) Weighted average number of shares: Basic 24,933,656 24,425,318 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)4. Available-for-Sale Investments (Continued)placed with high credit quality financial institutions. Additionally, the Company diversified its investment portfolio in order to maintain safety andliquidity. The investments at December 31, 2011 were recorded at fair value, based on quoted market prices, with unrealized gains and losses reported as aseparate component of stockholders' equity. These investments were classified as available-for-sale investments. At December 31, 2011, available-for-sale investments are detailed as follows: Net unrealized gains and losses on available-for-sale investments are included as a component of shareholders' equity and comprehensive loss untilrealized from a sale or other-than-temporary impairment. Realized gains and losses from the sale of securities are determined on a specific identificationbasis. Purchases and sales of investments are recorded on their trade dates. The Company recorded realized gains for the years ended December 31,2012, 2011 and 2010 of $16, $1 and $2, respectively. Dividend and interest income are recognized when earned. Interest income from available-for-saleinvestments for the years ended December 31, 2012, 2011 and 2010 was $351, $144, and $97, respectively, which were partially offset by amortizationof investment premiums.5. Fair Value Measurements ASC 820 defines fair value as an exit price that would be received from the sale of an asset or paid to transfer a liability in the principal or mostadvantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 establishes athree-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.•Level 1—Valuations based on quoted prices for identical assets or liabilities in active markets at the measurement date. Since valuationsare based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail asignificant degree of judgment. Our Level 1 assets consist of cash and money market funds, as well as U.S. Treasury and agency debtsecurities. •Level 2—Valuations based on quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similarassets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data,such as alternative pricing sources with reasonable levels of price transparency. Our Level 2 assets consist of fixed income securitiessuch as corporate debt securities including commercial paper and corporate bonds.58 AmortizedCost Gross UnrealizedGains Gross UnrealizedLosses EstimatedFair Value Short-term investments: Corporate debt securities $20,012 $1 $(18)$19,995 U.S. Treasury and agency debt securities 7,957 1 — 7,958 Total $27,969 $2 $(18)$27,953 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)5. Fair Value Measurements (Continued)•Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. We have not measuredthe fair value of any of our assets using Level 3 inputs. The fair value of the Company's financial assets subject to the disclosure requirements of ASC 820 at December 31, 2012 was $18,298 in cash,categorized as a Level 1 financial asset. The fair value of the Company's financial assets subject to the disclosure requirements of ASC 820 was determined using the following levels ofinputs at December 31, 2011:Fair Value Measurements at December 31, 2011 6. Inventory Inventory consists of the following: Inventories, which include purchased parts, materials, direct labor and applied manufacturing overhead, are stated at the lower of cost or netrealizable value, with cost determined by use of the first-in, first-out method.59 Level 1 Level 2 Level 3 Total Assets: Cash $10,622 $— $— $10,622 Money market funds 7,909 — — 7,909 Corporate debt securities — 19,995 — 19,995 U.S. Treasury and agency debt securities 7,958 — — 7,958 Total $26,489 $19,995 $— $46,484 December 31, 2012 2011 Raw materials and supplies $2,782 $1,727 Finished goods 112 282 Total inventories $2,894 $2,009 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)7. Property and Equipment Property and equipment consists of the following: Depreciation expense associated with property and equipment was $8,037, $10,913 and $11,696, for the years ended December 31, 2012, 2011and 2010, respectively.8. Goodwill and Intangible Assets Goodwill was recognized at the time of the Cardiocore, ECG, Biotel and PDSHeart acquisitions. The carrying amount of goodwill as ofDecember 31, 2012 and 2011 was $16,446 and $3,363, respectively. The changes in the carrying amounts of goodwill by segment were as follows:60 December 31, EstimatedUseful Life(Years) 2012 2011 Cardiac monitoring devices, device parts and components 3 - 5 $52,943 $44,796 Computers and purchased software 3 - 5 12,088 10,635 Equipment, tools and molds 3 6,591 5,975 Furniture and fixtures 3 3,476 3,078 Leasehold improvements Life of lease 5,828 4,911 Total property and equipment, at cost 80,926 69,395 Less accumulated depreciation (61,075) (54,354) Total property and equipment, net $19,851 $15,041 Reporting Segment PatientServices ResearchServices Product Total Balance at December 31, 2011 $— $— $3,363 $3,363 Goodwill acquired during the year 1,577 11,506 — 13,083 Balance at December 31, 2012 $1,577 $11,506 $3,363 $16,446 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)8. Goodwill and Intangible Assets (Continued) The gross carrying amounts and accumulated amortization of the Company's intangible assets as of December 31, 2012 and 2011 are as follows: The estimated amortization expense for the next five years is summarized as follows at December 31, 2012: Amortization expense for the years ending December 31, 2012, 2011 and 2010 was $1,341, $1,219 and $375, respectively. At December 31, 2012, the Company performed its required annual impairment test of goodwill. Based on this impairment test, the Companydetermined that none of the reporting unit's goodwill was impaired.61 December 31, EstimatedUseful Life(Years) 2012 2011 Customer relationships 6 - 10 $3,651 $2,551 Proprietary technology 5 4,000 800 Signed backlog 1 - 4 2,800 700 Unsigned backlog 4 600 — Covenants not to compete 5 360 — Total intangible assets, gross 11,411 4,051 Customer relationships accumulated amortization (1,894) (1,346)Proprietary technology accumulated amortization (676) (160)Signed backlog accumulated amortization (875) (700)Unsigned backlog accumulated amortization (50) — Covenants not to compete accumulated amortization (52) — Total accumulated amortization (3,547) (2,206) Indefinite-lived trade name 1,800 700 Total intangible assets, net $9,664 $2,545 2013 2,340 2014 2,294 2015 1,937 2016 842 2017 138 Total 7,551 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)8. Goodwill and Intangible Assets (Continued) At December 31, 2011, the Company performed its required annual impairment test of goodwill. Based on this impairment test, the Companydetermined that its Product reporting unit's goodwill was not impaired. However, as a result of the impairment test, the Company determined thatimpairment may exist in the patient services reporting unit. Therefore, the Company performed Step 2 of the goodwill impairment analysis on its patientservices reporting unit. The Step 2 analysis was performed by allocating the fair value of the patient services reporting unit to the identifiable assets, including unrecordedintangible assets and liabilities. This allocation is performed as if the reporting unit had been acquired in a business combination, and assumes thepurchase price was equivalent to the fair value determined in Step 1 of the goodwill impairment test. The residual fair value of the reporting unit afterallocation is the implied fair value of goodwill. This value is then compared to the carrying value of the reporting unit's goodwill. If the implied fairvalue of goodwill is less than the carrying value, impairment exists and a charge is recorded in the amount of the difference. As a result of theCompany's analysis, an impairment charge of $45,999 was recorded for the year ended December 31, 2011 related to the patient services reporting unit.9. Accrued Expenses Accrued expenses consisted of the following:10. Integration, Restructuring and Other Charges2012 Integration, Restructuring and Other Charges For the year ended December 31, 2012, the Company incurred expenses related to restructuring, integration and other activities. A summary ofthese expenses is as follows:62 December 31, 2012 2011 Accrued purchases $197 $461 Accrued compensation 6,382 6,583 Accrued professional fees 544 1,667 Accrued 2012 restructuring costs 914 — Other 1,909 1,742 Total $9,946 $10,453 Legal fees $1,780 Severance and employee related costs 1,490 Professional fees 778 Other charges 188 Total $4,236 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)10. Integration, Restructuring and Other Charges (Continued) The Company accounts for expenses associated with exit or disposal activities in accordance with ASC 420, Exit or Disposal Cost Obligations,and records the expenses in "Integration, restructuring and other charges" in its statement of operations, and records the related accrual in the "Accruedexpenses" line of its balance sheet. In 2012, integration, restructuring and other charges included legal fees of $1,780 related to ongoing litigation and transaction due diligence, $778related to professional services associated with transaction due diligence, $1,490 related to severance and other employee related costs and $188 relatedto other restructuring charges.2011 Integration, Restructuring and Other Charges For the year ended December 31, 2011, the Company incurred expenses related to restructuring, integration and other activities. A summary ofthese expenses is as follows: In 2011, integration, restructuring and other charges included legal fees of $2,835 related to ongoing litigation, $639 related to professionalservices associated with transaction due diligence and $162 related to severance and other employee related costs. Restructuring and integration costs of $1,023 were related to severances and other employee related costs associated with the acquisition of Biotel.The restructuring activities related to Biotel were substantially complete as of December 31, 2011.2010 Integration, Restructuring and Other Charges For the year ended December 31, 2010, the Company incurred expenses related to restructuring, integration and other activities. A summary ofthese expenses is as follows: During the first quarter of 2010, the Company undertook an initiative to streamline its sales and service organizations and reduce support costscompany-wide. It also initiated plans to close its event monitoring facility in Georgia and consolidate it with the Company's monitoring facilities inPennsylvania and Minnesota. The Company realized cost efficiencies by undertaking these initiatives.63Legal fees $2,835 Biotel integration 1,023 Professional fees 639 Other charges 162 Total $4,659 2010 restructuring $3,523 Other charges 1,131 Total $4,654 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)10. Integration, Restructuring and Other Charges (Continued) The restructuring plan involved the elimination of approximately 100 positions. The restructuring activities were substantially complete as ofDecember 31, 2010. No additional charges were incurred after December 31, 2010 related to this restructuring plan, and all remaining accruals related tothe plan were paid in 2011. The Company incurred other charges of $1,131 for the year ended December 31, 2010, including legal costs related to the Company's defense ofclass-action and Biotel lawsuits.11. Shareholders' EquityCommon Stock As of December 31, 2012 and 2011, the Company was authorized to issue 200,000,000 shares of common stock. As of December 31, 2012 and2011, the Company had 25,189,340 and 24,534,601 shares outstanding, respectively.Preferred Stock The Company maintains an unregistered blank check preferred stock class. As of December 31, 2012 and 2011, there are no shares authorized andoutstanding.Stock Based Compensation2008 Equity Incentive Plan The Company's 2008 Equity Incentive Plan (the 2008 Option Plan) became effective on March 18, 2008. The Plan permits the Company's Boardof Directors to grant incentive stock options to employees of the Company and non-qualified stock options, restricted stock, performance stock andother stock-based incentive awards to officers, directors, employees and consultants of the Company. On that date, the Company began granting optionsto purchase shares of common stock to employees, executives, directors and consultants. Under the terms of the 2008 Option Plan, all available sharesin the 2003 Option Plan's share reserve automatically roll into the 2008 Option Plan. Any cancellations or forfeitures of granted options under the 2003Option Plan also automatically roll into the 2008 Option Plan. Beginning on January 1, 2009, and each year thereafter, the number of options availableto be granted under the plan will increase by the lesser of 4% of the total number of common shares outstanding or 1,500,000 shares. The restrictions on restricted stock units (RSU's) issued under the plan lapse as follows: one third on the date of grant, one third on the firstanniversary of the date of grant, and one third on the second anniversary of the date of grant. The restrictions on certain other restricted stock unitsissued under the plan lapse in full on the third anniversary of the date of grant. Options granted to certain officers of the Company in combination withrestricted stock units, described above, under the Plan vest in three equal installments beginning on the third anniversary from the date of grant. Options granted under the 2008 Option Plan have exercise prices not less than the fair market value at the date of grant and have an expiration dateof no greater than ten years from the date of64Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)11. Shareholders' Equity (Continued)grant. There is no vesting schedule provided in the 2008 Option Plan, and vesting is determined by the Board of Directors on the date of grant.However, the Company's practice is to follow a four year vesting schedule such that 25% of the granted options vest on the anniversary date of grant,and the remaining options granted vest ratably over 36 months thereafter. No options have been granted with vesting schedules that differ fromCompany practice.2008 Non-employee Directors' Stock Option Plan The Company's 2008 Non-employee Directors' Stock Option Plan (the Directors' Plan) became effective March 18, 2008. Beginning on that date,all directors elected for the first time to the Board of Directors receive a fixed number of options. On the date of the annual meeting, and when directorsare elected to a committee or a chair position of a committee, they will also receive a grant equal to a fixed number of options per the Directors' Plan.Options granted under the Directors' Plan have exercise prices not less than the fair market value at the date of grant, and have an expiration date of nogreater than ten years from the date of grant. Initial and committee chair grants vest 33% on the first anniversary date of grant, and the balance vestsratably over 24 months. Annual grants vest ratably over 12 months from the date of grant.2003 Equity Incentive Plan As of March 18, 2008 the Company no longer granted options to purchase shares of common stock to employees, executives, directors andconsultants under the Company's 2003 Equity Incentive Plan (the 2003 Option Plan). Options granted under the 2003 Option Plan have exercise pricesnot less than the fair market value at date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory options. The options generally expire ten years from the date of grant and generally vest 25% twelve months from the date of grant, and ratablyover the next 36 months thereafter. The 2003 Option Plan allows for employees to early exercise options on the first anniversary date of employment, regardless of the vested statusof granted options. If an employee terminates prior to fully vesting in options that have been early exercised, the Company repurchases the commonstock associated with unvested options at the original exercise price.65Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)11. Shareholders' Equity (Continued) Option and RSU activity under all equity incentive plans is summarized as follows for the years ended December 31, 2012, 2011 and 2010: A summary of total outstanding stock options as of December 31, 2012 is as follows:66 Options/RSU's Outstanding SharesAvailablefor Grant Numberof Shares WeightedAverageExercise Price Balance—December 31, 2009 1,132,135 1,575,645 $15.21 Additional shares authorized for grant 1,194,094 — — Granted (1,034,663) 1,034,663 $6.70 Cancelled/forfeited 358,157 (358,157)$14.44 Exercised/vesting — (149,775)$8.21 Balance—December 31, 2010 1,649,723 2,102,376 $12.18 Additional shares authorized for grant 1,207,210 — — Granted (724,333) 724,333 $4.67 Cancelled/forfeited 237,202 (237,202)$15.10 Exercised/vesting — (120,516)$7.78 Balance—December 31, 2011 2,369,802 2,468,991 $9.43 Additional shares authorized for grant 1,216,611 — — Granted (2,128,939) 2,128,939 $2.73 Cancelled/forfeited 396,312 (396,312)$9.98 Exercised/vesting — (532,515)$7.85 Balance—December 31, 2012 1,853,786 3,669,103 $5.83 Options Outstanding Options Exercisable Range of Exercise Price NumberOutstanding Weighted-AverageRemainingContractualLife (inyears) Weighted-AverageExercisePrice NumberExercisable Weighted-AverageRemainingContractualLife (inyears) Weighted-AverageExercisePrice $0.70 - $7.50 2,445,563 8.37 $4.10 790,012 7.54 $5.14 $7.51 - $15.00 86,641 5.93 $9.58 76,407 5.74 $9.69 $15.01 - $22.50 285,597 6.20 $18.57 285,597 6.20 $18.57 $22.51 - $31.18 83,300 5.64 $29.94 83,300 5.64 $29.94 $0.70 - $31.18 2,901,101 8.00 $6.43 1,235,316 6.99 $10.20 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)11. Shareholders' Equity (Continued) In addition, a summary of total outstanding RSU's as of December 31, 2012 is as follows: The table below summarizes certain additional information with respect to our options: As of December 31, 2012, 2011 and 2010, the Company has reserved shares of common stock for issuance as follows: The Company's loss before income taxes for the years ended December 31, 2012, 2011 and 2010 was $3,747, $4,006 and $3,945 lower,respectively, as a result of stock- based compensation expense incurred. For the year ended December 31, 2012, the impact of stock-basedcompensation expense was $(0.15) on the basic and diluted earnings per share. The impact of stock-based compensation expense was $(0.16) on thebasic and diluted earnings per share for both of the years ended December 31, 2011 and 2010. Stock-based compensation expense was recorded ingeneral and administrative expenses for the years ended 2012 and 2011. Total cash received from the exercise of stock options for the year ended December 31, 2012, 2011 and 2010 was $4, $11 and $665, respectively.The tax benefit was fully reserved for through a tax valuation allowance.67Range of Grant Price RSU'sOutstanding $2.16 - $6.75 749,944 $6.76 - $7.75 3,000 $7.76 - $8.80 15,058 $2.16 - $8.80 768,002 (In thousands) 2012 2011 2010 Aggregate intrinsic value of options outstanding at year-end $46 $17 $141 Aggregate intrinsic value of options exercisable at year-end 13 17 87 Aggregate intrinsic value of options exercised during the year 2 7 151 December 31, 2012 2011 2010 Exercise of options available and grants of awards underequity plans 5,522,889 4,838,793 3,752,099 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)11. Shareholders' Equity (Continued) The Company estimates the fair value of its share-based awards to employees and directors using the Black-Scholes option valuation model. TheBlack-Scholes option valuation model requires the use of certain subjective assumptions. The most significant of these assumptions are the estimates ofthe expected volatility of the market price of the Company's stock and the expected term of the award. We base our estimates of expected volatility onthe historical volatility of our stock price. The expected term represents the period of time that stock-based awards granted are expected to beoutstanding. Other assumptions used in the Black-Scholes option valuation model include the risk-free interest rate and expected dividend yield. Therisk-free interest rate for periods pertaining to the contractual life of each option is based on the U.S. Treasury yield of a similar duration in effect at thetime of grant. The Company has never paid, and does not expect to pay, dividends in the foreseeable future. The fair value of the Company's stock-based awards was estimated at the date of grant using the following weighted average assumptions: Based on the Company's historical experience of options that cancel before becoming fully vested, the Company has assumed an annualizedforfeiture rate of 15% for all options. Under the true-up provision of ASC 718, the Company will record additional expense if the actual forfeiture rateis lower than estimated, and will record a recovery of prior expense if the actual forfeiture rate is higher than estimated. Total compensation cost of options granted but not yet vested at December 31, 2012, 2011 and 2010 were approximately $3,433, $3,615 and$5,047, respectively. At December 31, 2012, 2011 and 2010, the weighted average remaining periods over which the above amounts are expected to berecognized were 2.34 years, 2.62 years, and 3.09 years, respectively. At December 31, 2012, 1,853,786 shares remained available for future grant underthe Plan.68 Year Ended December 31, 2012 2011 2010 Expected volatility 63.4% 62.0% 65.0%Expected term (in years) 6.31 6.25 6.25 Weighted-average risk-free interest rate 1.15% 2.48% 2.29%Expected dividends 0.0% 0.0% 0.0%Weighted-average grant date fair value per share $1.58 $2.82 $3.95 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)11. Shareholders' Equity (Continued) A summary of the status of the Company's unvested stock options as of the respective balance sheet dates, and changes during years, is presentedbelow:Option Acceleration On December 1, 2009, the Company accelerated the vesting of certain employees' unvested options that were deeply out-of-the-money. Theacceleration was done because the Company believed that there was no longer a compensation incentive tied to Company performance, given theexercise price of the options that were accelerated. Consistent with ASC 718, the Company will continue to expense the accelerated options over theremaining service period. The Company does not have a static policy threshold to use for determining whether an option is deeply out-of-the-money.Rather, the Company believes that the determination should be made in light of current market conditions, probability of stock price recovery within theremaining service period, and historical volatility of the Company's stock price. For the purposes of this option acceleration, the Company determinedthat options that were out-of-the-money by 30% or more were deeply out-of-the-money. As a result of the option acceleration, approximately 309,000previously unvested shares became fully vested on December 1, 2009. The Company incurred an expense associated with the options that wereaccelerated in the amount of $578, $984 and $1,269 for the years ended December 31, 2012, 2011 and 2010, respectively, which have been recorded inthe General and administrative line of the consolidated statement of operations and comprehensive income(loss). The weighted average exercise price ofthe accelerated options is $19.87, and the average remaining service period is less than one year.Employee Stock Purchase Plan In July 2008, the Company made available an employee stock purchase plan in which substantially all of the Company's full-time employeesbecame eligible to participate effective March 18, 2008. Under the plan, employees may contribute through payroll deductions up to 15% of theircompensation toward the purchase of the Company's common stock, or $21, whichever is lower. The price per share is equal to the lower of 85% of thefair market price on the first day of the offering period, or 85% of the fair market price on the day of purchase. Proceeds received from the issuance ofshares are credited to stockholders' equity in the period that the shares are issued. Under the terms of the plan, a total of 238,000 shares of commonstock have been reserved for issuance to employees. On March 17, 2012 and September 17, 2012, 99,345 shares and 93,281 shares, respectively, werepurchased69 Number ofShares Weighted-AverageGrant-DateFair Value(per share) Unvested shares at December 31, 2011 1,541,470 $5.03 Granted 2,128,939 $2.01 Vested (837,395)$5.14 Cancelled/forfeited (396,312)$5.64 Unvested shares at December 31, 2012 2,436,702 $2.62 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)11. Shareholders' Equity (Continued)in accordance with the Employee Stock Purchase Plan (ESPP). Net proceeds to the Company from the issuance of shares of common stock under theESPP for the year ended December 31, 2012 were $436. In January 2012, the number of shares available for grant was increased by 241,442, per theESPP plan documents. At December 31, 2012, approximately 508,487 shares remain available for purchase under the ESPP. For the years endedDecember 31, 2012, 2011 and 2010, the Company incurred ESPP expenses of $182, $201, and $202, respectively.12. Income Taxes The Company has deferred income tax assets totaling $52,385 at December 31, 2012, consisting primarily of federal and state net operating lossand credit carryforwards. Due to uncertainty regarding the ultimate realization of these net operating loss and credit carryforwards and other deferredincome tax assets, we have established a full valuation allowance on our deferred tax assets and will recognize the benefits only as reassessmentindicates the benefits are realizable. The determination of the required valuation allowance against net deferred tax assets was made without taking intoaccount the deferred tax liabilities created from the book and tax differences on indefinite-lived assets. The Company's income tax benefit for 2012 of $905 primarily relates to the tax effects of the acquisitions of ECG Scanning and Cardiocore, offsetby state taxes based on gross receipts or modified gross receipts calculations properly included as income taxes. The Company performed an analysis to determine the extent to which it can use its net operating loss carryforwards in future periods, subject tocertain limitations imposed by the Internal Revenue Code. The Company concluded that because of the Company's limited history of reporting a netprofit, it cannot predict that the benefits of the net operating loss carryfowards will be realized in future periods, and therefore the Company continues toprovide a full valuation allowance for deferred tax assets. The Company will perform a similar analysis during 2013 to reassess the estimated futurerealizability of net operating loss carryforwards.70Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)12. Income Taxes (Continued) Deferred taxes result from temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes andthe amounts used for income tax purposes. The significant components of the Company's deferred tax assets and liabilities are as follows: Reconciliations between expected income taxes computed at the federal rate of 35% for each of the years ended December 31, 2012, 2011 and2010, and the provision (benefit) for income taxes is as follows: At December 31, 2012, the Company had federal net operating loss carryforwards of approximately $95,806, to offset future federal taxableincome expiring in various years through 2030. At December 31, 2012, the Company had state net operating loss carryforwards of $60,065, whichexpire in various years starting in 2013.71 December 31, 2012 2011 Deferred tax assets: Net operating loss carryforwards $37,384 $32,574 Research & development and AMT credit carryforwards 4,530 4,578 Stock option grants 5,329 4,389 Allowance for doubtful accounts 2,932 3,896 Other, net 2,210 2,172 Total deferred tax assets 52,385 47,609 Less valuation allowance (49,145) (47,142) Net deferred tax assets $3,240 $467 Deferred tax liabilities: Property, plant and equipment (815) (197)Identified intangible assets (2,404) (166)Indefinite lived intangible assets (678) (269)Prepaid insurance (21) (73) Total deferred tax liabilities (3,918)$(705) Net deferred tax liability (678)$(238) Years ended December 31, 2012 2011 2010 Income tax benefit at statutory rate $(4,587)$(21,412)$(6,855)State income tax benefit, net of federal benefit (211) 191 73 Stock-based compensation 397 493 478 Goodwill impairment — 16,100 — Other 200 (173) 326 Increase in valuation allowance 3,296 5,045 6,240 Income tax (benefit) provision $(905)$244 $262 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)12. Income Taxes (Continued) The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which thosetemporary differences are deductible. The timing and manner in which the Company can utilize its net operating loss carryforward and future income taxdeductions in any year may be limited by provisions of the Internal Revenue Code regarding the change in ownership of corporations. Such limitationmay have an impact on the ultimate realization of the Company's carryforwards and future tax deductions. Section 382 of the Internal Revenue Code("Section 382") imposes limitations on a corporation's ability to utilize net operating losses if it experiences an "ownership change." In general terms, anownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than50 percentage points over a three-year period. Any unused annual limitation may be carried over to later years, and the amount of the limitation mayunder certain circumstances be increased by the built-in gains in assets held by the Company at the time of the change that are recognized in the five-yearperiod after the change. Currently, the Company's loss carryforwards are limited under Section 382. The components of the Company's income tax (benefit) provision are summarized as follows: The U.S. Internal Revenue Service concluded its examination of the Company's U.S. federal tax returns for all years through 2010. Because of netoperating losses, the Company's U.S. federal tax returns for those years will remain subject to examination until the losses are utilized. The Company does not have a tax reserve recorded for tax contingencies. As of December 31, 2012 and 2011, the Company has not identified anyuncertain tax positions and therefore, it has no tax reserve recorded as of December 31, 2012 and 2011.72 Year EndedDecember 31, 2012 2011 Current: Federal $— $— State 128 231 Total current provision for income taxes 128 231 Deferred: Federal (996) — State (37) 13 Total deferred (benefit) provision for income taxes (1,033) 13 Total (benefit) provision for income taxes $(905)$244 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)13. Commitments and ContingenciesOperating Leases The Company leases its principal administrative and service facilities as well as office equipment under non-cancelable operating leases expiring atvarious dates through 2019. The terms of the leases are renewable at the end of the lease term. Payments made under operating leases are charged tooperations on a straight-line basis over the period of the lease. Differences between straight-line expense and cash payments are recognized in thedeferred rent line of the balance sheet. Rent expense was $2,946, $2,713 and $2,993 for the years ended December 31, 2012, 2011 and 2010,respectively. Future minimum lease payments under non-cancelable operating leases are summarized as follows at December 31, 2012:Other The Company has an agreement with Verizon whereby the Company has no fixed or minimum financial commitment. However, in the event theCompany fails to maintain an agreed upon number of active cardiac monitoring devices on the Verizon network, Verizon has the right to terminate thisagreement.14. Credit Agreement On August 29, 2012, the Company entered into a Credit and Security Agreement ("Credit Agreement") with MidCap Financial, LLC to providerevolving loan borrowings with a loan commitment of $15,000, and an option by the Company to increase to a maximum loan commitment of $30,000.Interest on borrowings under the Credit Agreement is based on the London Interbank Offered Rate ("LIBOR") plus an applicable margin of 4.75%. Anunused line fee of 0.50% per annum is payable on any unused line balance, determined as the total loan commitment of $15,000 minus the average dailybalance of the sum of the revolving loan borrowings outstanding during the preceding month. Furthermore, if the Company terminates the agreement atany point prior to the loan expiration date, the Company will incur a loan termination fee of 1.00% of the loan commitment due immediately precedingthe termination. The Credit Agreement is secured by the Company's personal property, inventory and other assets and expires in August 2016. As ofDecember 31, 2012, the Company did not have any outstanding balance on the credit agreement.732013 $3,384 2014 1,803 2015 1,350 2016 1,012 2017 857 Thereafter 894 $9,300 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)15. Employee Benefit Plan The Company sponsors a 401(k) Retirement Savings Plan (the Plan) for all eligible employees who meet certain requirements. Participants maycontribute, on a pre-tax basis, up to the maximum allowable amount pursuant to Section 401(k) of the Internal Revenue Code. The Company is notrequired to contribute to the Plan. In May 2009, the Company adopted an amendment to the Plan that allowed for an employer matching contribution of100% of employee contributions, up to 3% of the employees' salary. For the years ended December 31, 2012, 2011 and 2010, the Company contributed$0, $1,296 and $1,134, respectively. Employer contributions vest immediately.16. Segment Information The Company operates under three segments: patient services, product, and research services. Prior to 2012, the company operated under twosegments: patient services and product. The patient services business segment's principal focus is on the diagnosis and monitoring of cardiacarrhythmias or heart rhythm disorders, through its core Mobile Cardiac Outpatient Telemetry™ ("MCOT™"), event and Holter services in a healthcaresetting. The product business segment focuses on the development, manufacturing, testing and marketing of medical devices to medical companies,clinics and hospitals. The Company's research services focuses on providing cardiac safety monitoring services for drug and medical treatment trials in aresearch environment. Overhead expenses that can be identified with a segment have been included as deductions in determining pre-tax segment income. Any remainingexpenses are included in Corporate and Other. Also included in Corporate and Other are net financing expenses and other, which consist principally ofinterest expense and debt and other financing expenses less interest income, and significant unusual and infrequently occurring items not allocated to asegment for purposes of reporting to the chief operating decision maker. Total assets are those assets that are utilized within a specific segment. 74 PatientServices ResearchServices Product Corporateand Other Consolidated 2012 Revenues $93,640 $8,333 $9,521 $— $111,494 (Loss) income before income taxes (5,752) 962 1,483 (9,800) (13,107)Depreciation and amortization 7,953 860 565 — 9,378 Capital expenditures 4,199 1,079 684 — 5,962 Total assets $43,838 $33,293 $12,879 — $90,010 PatientServices ResearchServices Product Corporateand Other Consolidated 2011 Revenues $106,853 $1,079 $11,090 $— $119,022 (Loss) income before income taxes (48,637) 106 (1,064) (11,583) (61,178)Depreciation and amortization 10,762 61 1,309 — 12,132 Capital expenditures 3,616 174 164 — 3,954 Total assets $82,451 $1,018 $11,506 — 94,975 Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)17. Legal Proceedings On June 12, 2012, CardioNet, Inc. (the "Company") settled the patent infringement action brought on September 25, 2009 by LifeWatchServices, Inc., and Card Guard Scientific Survival, Ltd. ("Lifewatch"), the licensee and owner, respectively, of U.S. Patent Nos. 7,542,878 B2 ("the'878 Patent") and 5,730,143 ("the '143 Patent"), collectively ("Licensed Patents") against the Company's wholly owned subsidiary, Braemar Inc.("Braemar") and one of its customers, eCardio Diagnostics, LLC ("eCardio"), in Federal District Court for the Northern District of Illinois, File No. 09-CV-6001. In this matter, Lifewatch alleged that Braemar and eCardio had infringed the Licensed Patents. Pursuant to the terms of the settlementagreement, the Company paid Lifewatch a lump sum of $250 for a fully paid-up license, release, and covenant not to sue under the Licensed Patents forBraemar products. The covenant not to sue extends to Braemar's customers, including eCardio. On December 12, 2011 the Company announced that it had reached a preliminary agreement to settle the West Palm Beach Police Pension Fundputative class action litigation filed in California Superior Court, San Diego County, which asserted claims against the Company for violations ofSections 11, 12 and 15 of the Securities Act of 1933. On June 22, 2012, the court approved the settlement of $7,250, of which, the Company paid$1,250 on March 31, 2012, and the remainder was covered by insurance. On May 8, 2012, CardioNet filed suit against The ScottCare Corporation and Ambucor Health Solutions, Inc. in the United States District Courtfor the Eastern District of Pennsylvania (Civil Action No. 2:12-CV-2516-PBT) for patent infringement related to the use, offering for use, sale, andoffering for sale of the ScottCare TeleSentry Mobile Cardiac Telemetry device and monitoring services. On May 8, 2012, CardioNet also filed suitagainst Mednet Healthcare Technologies, Inc., MedTel 24, Inc., RhythmWatch LLC, and AMI Cardiac Monitoring, Inc., in the United States DistrictCourt for the Eastern District of Pennsylvania (Civil Action No. 2:12-CV-2517-JS) for patent infringement related to the use, offering for use, sale, andoffering for sale of the Heartrak External Cardiac Ambulatory Telemetry device and monitoring services. The suits each allege that the defendants areinfringing the following CardioNet patents: U.S. Patent Nos. 7,212,850, 7,907,996, 6,569,095, 7,587,237 and 7,941,207. CardioNet is seeking aninjunction against each defendant, as well as monetary damages. Defendants Mednet HealthCare Technologies, Inc. and the ScottCare Corporation haveasserted counterclaims alleging the patents in suit are invalid and not infringed. Consistent with the accounting for contingent liabilities, no accrual hasbeen recorded in the financial statements. The Company is vigorously pursuing its claims and defending against the counterclaims.18. Civil Investigative Demand On August 25, 2011, the Company received a Civil Investigative Demand ("CID") issued by the U.S. Department of Justice, Western District ofWashington. The CID states that it was issued in the course of an investigation under the federal false claims act and seeks documents for the periodJanuary 1, 2007 through the date of the CID. The CID indicates that the investigation concerns allegations that the Company may have usedinappropriate diagnosis codes when submitting claims for payment to Medicare for its real-time, outpatient cardiac monitoring services. The Company iscooperating with the government's request and is in the process of providing information in response to75Table of ContentsCARDIONET, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Years Ended December 31, 2012, 2011 and 2010(In thousands, except share and per share amounts.)18. Civil Investigative Demand (Continued)the CID. The Company is unable to predict what action, if any, might be taken in the future by the Department of Justice or other governmentalauthorities as a result of this investigation or what impact, if any, the outcome of this matter might have on the Company's business, financial position orresults of operations. The Company cannot reasonably estimate the range of loss, if any, that may result from this matter. Consistent with the accountingfor contingent liabilities, no accrual has been recorded in the financial statements.19. Quarterly Financial Data (Unaudited) The following tables summarize the unaudited quarterly financial data for the last two fiscal years.76 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (in thousands, except per share amount) 2012 Total revenues $27,045 $27,450 $27,040 $29,959 Gross profit 15,610 16,726 16,398 17,167 Integration, restructuring and other charges 270 733 741 2,492 Loss from operations (3,581) (1,668) (3,126) (4,784)Net loss (3,534) (1,198) (3,121) (4,349)Basic and diluted net loss per share $(0.14)$(0.05)$(0.12)$(0.17)2011 Total revenues $33,999 $31,637 $26,602 $26,784 Gross profit 20,347 18,619 14,350 16,630 Integration, restructuring and other charges 124 1,014 1,619 1,902 Loss from operations (1,589) (3,038) (7,137) (49,558)Net loss (1,552) (3,006) (7,103) (49,761)Basic and diluted net loss per share $(0.06)$(0.12)$(0.29)$(2.03)Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Prior to the filing of this Report on Form 10-K, an evaluation was performed under the supervision of and with the participation of the Company'smanagement, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosurecontrols and procedures. Based on the evaluation, the CEO and CFO have concluded that, as of December 31, 2012, the Company's disclosure controlsand procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the ExchangeAct, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicatedto the Company's management, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that the design of any systemof controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions, regardless of how remote.Changes in Internal Control over Financial Reporting There was no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) or 240.15d-15(f) under theExchange Act) during our fourth fiscal quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that:(i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assetsof the Company; (ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withU.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordancewith authorizations of management and directors of the Company; and (iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company'sassets that could have a material effect on the financial statements. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate. The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2012. Inmaking this assessment, management used the criteria77Table of Contentsset forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control—Integrated Framework. Basedon management's assessment and those criteria, management has concluded that the Company's internal control over financial reporting was effective asof December 31, 2012. The effectiveness of the Company's internal control over financial reporting did not include the internal controls of ECG Scanning and Cardiocore,which were included in the Company's consolidated financial statements for the year ended December 31, 2012, due to the timing of the acquisitions. The effectiveness of our internal control over financial reporting as of December 31, 2012 has been audited by Ernst & Young LLP, anindependent registered public accounting firm, as stated in their report included in this Annual Report on form 10-K.78Table of ContentsReport of Independent Registered Public Accounting Firm The Board of Directors and ShareholdersCardioNet, Inc. We have audited CardioNet, Inc.'s internal control over financial reporting as of December 31, 2012, based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO criteria").CardioNet, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over FinancialReporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that amaterial weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performingsuch other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have amaterial effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate. The effectiveness of the Company's internal control over financial reporting did not include the internal controls of ECG Scanning and MedicalServices, Inc. or Cardiocore Lab, Inc., which were included in the Company's consolidated financial statements for the year ended December 31, 2012,due to the timing of the acquisitions. ECG Scanning and Medical Services, Inc. and Cardiocore Lab, Inc. accounted for 9% and 30% of assets,respectively, and 5% and 6% of revenue, respectively, for the year ended December 31, 2012. In our opinion, CardioNet, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedbalance sheets of CardioNet, Inc. as of December 31, 2012 and 2011 and the related consolidated statements of operations and comprehensive income(loss), cash flows and shareholders' equity for each of the three years in the period ended December 31, 2012 of CardioNet, Inc. and our report datedFebruary 22, 2013 expressed an unqualified opinion thereon.Philadelphia, PennsylvaniaFebruary 22, 201379 /s/ Ernst & Young LLPTable of ContentsItem 9B. Other Information On January 25, 2013, the Compensation Committee of the Board of Directors of the Company approved a salary increase for Heather C. Getz,Senior Vice President and Chief Financial Officer from $298,100 to $322,000.Part III Item 10. Directors, Executive Officers and Corporate Governance Information with respect to this Item is incorporated by reference from our definitive proxy statement in connection with the 2013 Annual Meetingof Stockholders, or the Proxy Statement, unless the Proxy Statement is not filed by April 30, 2013, in which case we will amend this Form 10-K toprovide the omitted information in accordance with the requirements of Instruction G to Form 10-K.Item 11. Executive Compensation Information with respect to this Item is incorporated by reference from the Proxy Statement unless the Proxy Statement is not filed by April 30,2013, in which case we will amend this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information with respect to this Item is incorporated by reference from the Proxy Statement unless the Proxy Statement is not filed by April 30,2013, in which case we will amend this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.Equity Compensation Plan Information The following table presents the equity compensation plan information as of December 31, 2012:Item 13. Certain Relationships and Related Transactions, and Director Independence Information with respect to this Item is incorporated by reference from the Proxy Statement unless the Proxy Statement is not filed by April 30,2013, in which case we will amend this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.80 Equity Compensation Plan Information Number ofsecurities to beissued uponexercise ofoutstandingoptions, warrants,and rights Weighted-averageexercise price ofoutstandingoptions, warrantsand rights Number of securitiesremaining availablefor future issuanceunder equitycompensationplans (excludingsecurities reflectedin column (a)) (a) (b) (c) Equity compensation plans approved by security holders: Employee and non-employee director stock option plans 3,669,103 $5.83 1,853,786 Employee stock purchase plan 50,903 $2.01 457,584 Total 3,720,006 $5.78 2,311,370 Table of ContentsItem 14. Principal Account Fees and Services Information with respect to this Item is incorporated by reference from the Proxy Statement unless the Proxy Statement is not filed by April 30,2013, in which case we will amend this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.Part IV Item 15. Exhibits and Financial Statement Schedules (a)The following financial statements, schedules and exhibits are filed as part of this report: 1.Financial Statements—The Financial Statements required by this item are listed on the Index to Financial Statements in Part II, Item 8 ofthis report. 2.Financial Statement Schedules •Schedule II—Valuation and Qualifying Accounts and Reserves; and •Other financial statement schedules are not included because they are not required or the information is otherwise shown in thefinancial statements or notes thereto. 3.Exhibits—The exhibits listed on the accompanying Exhibit Index are filed as part of, or are incorporated by reference into, this report. (b)See Item 15(a)(3) above. (c)See Item 15(a)(2) above.SCHEDULE II 81 BeginningBalance AdditionsCharged ToExpense DeductionsFromReserve EndingBalance Allowance for Doubtful Accounts Year ended December 31, 2012 $9,889 $11,912 $(14,184)$7,617 Year ended December 31, 2011 $11,779 $12,080 $(13,970)$9,889 Year ended December 31, 2010 $22,396 $18,578 $(29,195)$11,779 Table of ContentsEXHIBIT INDEX 82ExhibitNumber Description 2.1 Merger Agreement, dated as of November 5, 2010, among Biotel Inc., Garden Merger Sub, Inc. and theRegistrant. (Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K filed November 12,2010). 2.2 Stock Purchase Agreement, dated as of February 10, 2012, by and among the Registrant, ECGScanning and Medical Services, Inc. and the Stockholder Representatives (as defined therein).(Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed February 10, 2012). 2.3 Agreement and Plan of Merger, dated as of August 5, 2012, by and among the Registrant, cardioCORELab, Inc., Cardinal Merger Sub, Inc. and the Stockholder Representative (as defined therein).(Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed August 6, 2012). 3.1 Amended and Restated Certificate of Incorporation (Incorporated by reference to the Registrant'sregistration statement on Form S-1 and amendments thereto (File No. 333-145547)). 3.2 Amended and Restated Bylaws (Incorporated by reference to the Registrant's registration statement onForm S-1 and amendments thereto (File No. 333-145547)). 4.1 Form of Common Stock Certificate (Incorporated by reference to the Registrant's registration statementon Form S-1 and amendments thereto (File No. 333-145547)). 10.1 Form of Indemnity Agreement (Incorporated by reference to the Registrant's registration statement onForm S-1 and amendments thereto (File No. 333-145547)). 10.8(1)2008 Equity Incentive Plan and Form of Stock Option Agreement thereunder (Incorporated by referenceto the Registrant's registration statement on Form S-1 and amendments thereto (File No. 333-145547)). 10.9(1)2008 Non-Employee Directors' Stock Option Plan and Form of Stock Option Agreement thereunder(Incorporated by reference to the Registrant's registration statement on Form S-1 and amendmentsthereto (File No. 333-145547)). 10.10(1)2008 Employee Stock Purchase Plan and Form of Offering Document thereunder (Incorporated byreference to the Registrant's registration statement on Form S-1 and amendments thereto (File No. 333-145547)). 10.12 Office Lease dated February 6, 2004 between the Registrant and Executive One Associates, as amended(Incorporated by reference to the Registrant's registration statement on Form S-1 and amendmentsthereto (File No. 333-145547)). 10.13 Building Lease Agreement dated September 30, 2009, between the Registrant and EastGroupProperties, L.P. (Incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-Q filedNovember 6, 2009). 10.14†Amendment No. 8 dated February 1, 2010 to the Communication Voice and Data Services ProviderAgreement dated May 12, 2003 between the Company and Verizon (as successor to QualcommIncorporated and nPhase, LLC), as amended (Incorporated by reference to the Registrant's Form 8-K,dated November 30, 2011. Table of Contents83ExhibitNumber Description 10.15†Purchase Agreement dated September 14, 2001 between the Registrant and Varian, Inc. (a wholly-owned subsidiary of Jabil Circuit, Inc.) (Incorporated by reference to the Registrant's registrationstatement on Form S-1 and amendments thereto (File No. 333-145547)). 10.16†Consignment Inventory Agreement dated September 13, 2004 between the Registrant and Varian, Inc.(a wholly- owned subsidiary of Jabil Circuit, Inc.) (Incorporated by reference to the Registrant'sregistration statement on Form S-1 and amendments thereto (File No. 333-145547)). 10.18(1)CardioNet, Inc. Long Term Incentive Plan (Incorporated by reference to Exhibit 10.2 to the Registrant'sForm 8-K filed October 28, 2008). 10.19(1)Compensation Program for Non-Employee Directors. (Incorporated by reference to Exhibit 99.5 to theRegistrant's Form 8-K filed January 28, 2009). 10.20(1)Employment Agreement, dated as of October 19, 2009, by and among the Registrant and AnnaMcNamara. (Incorporated by reference to Exhibit 10.35 to the Registrant's Form 10-K filedFebruary 23, 2010). 10.21(1)Employment Agreement, dated as of June 15, 2010, between Joseph H. Capper and the Registrant.(Incorporated by reference to Exhibit 99.2 to the Registrant's Form 8-K filed June 18, 2010). 10.22(1)Employment Agreement, dated as of January 28, 2010, by and among the Registrant and Heather Getz.(Incorporated by reference to Exhibit 10.36 to the Registrant's Form 10-K filed February 23, 2010). 10.23(1)Employment Agreement, dated as of December 7, 2010, between the Registrant and Daniel Wisniewski(Incorporated by reference to Exhibit 10.38 to the Registrant's Form 10-K, filed February 25, 2010). 10.24(1)Employment Agreement dated as of February 7, 2011, between the Registrant and Peter Ferola(Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q dated May 6, 2011). 10.25(1)Employment Agreement dated as of June 11, 2012, between the Registrant and Michael Geldart(Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q filed August 9, 2012). 10.26 Employment Agreement dated as of July 30, 2010, between the Registrant and Fred Anthony BroadwayIII.* 23.1 Consent of Independent Registered Public Accounting Firm.* 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated underthe 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 underthe Securities and Exchange Act of 1934, as amended.* 32 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.* 101.INS XBRL Instance Document.** 101.DEF XBRL Taxonomy Definition Linkbase Document.** Table of Contents84ExhibitNumber Description 101.SCH XBRL Taxonomy Extension Schema Document.** 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.** 101.LAB Taxonomy Label Linkbase Document.** 101.PRE XBRL Taxonomy Presentation Linkbase Document.***Filed herewith. †Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filedseparately with the Securities and Exchange Commission. (1)Indicates a management plan or compensatory plan or arrangement. **Furnished herewith. Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reportingobligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraudprovisions of the federal securities laws as long as we have made a good faith attempt to comply with the submissionrequirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply withthe submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemednot filed and otherwise are not subject to liability.Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to besigned on its behalf by the undersigned, thereunto duly authorized. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.85Date: February 22, 2013 CardioNet, Inc. By: /s/ JOSEPH H. CAPPERJoseph H. CapperPresident and Chief Executive OfficerSignature Title Date /s/ JOSEPH H. CAPPERJoseph H. Capper President and Chief Executive Officer(Principal Executive Officer) February 22, 2013/s/ HEATHER C. GETZHeather C. Getz, CPA Chief Financial Officer (Principal Financialand Accounting Officer) February 22, 2013/s/ KIRK E. GORMANKirk E. Gorman Chairman and Director February 22, 2013/s/ RONALD A. AHRENSRonald A. Ahrens Director February 22, 2013/s/ ANTHONY J. CONTIAnthony J. Conti Director February 22, 2013/s/ ERIC N. PRYSTOWSKYEric N. Prystowsky, M.D. Director February 22, 2013/s/ REBECCA RIMELRebecca Rimel Director February 22, 2013/s/ ROBERT J. RUBINRobert J. Rubin, M.D. Director February 22, 2013Exhibit 10.26 CARDIONET, INC. EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into effective as of July 30, 2010 (the “Effective Date”) by andamong CARDIONET, INC. (the “Company”) and FRED A. BROADWAY III (the “Executive”). The Company and Executive are hereinaftercollectively referred to as the “Parties”, and individually referred to as a “Party”. This Agreement supersedes all prior and contemporaneous oral or writtenemployment agreements or arrangements between Executive and the Company. RECITALS A. The Company desires assurance of the association and services of Executive in order to retain Executive’s experience, skills, abilities, backgroundand knowledge, and is willing to continue to engage Executive’s services on the terms and conditions set forth in this Agreement. B. Executive desires to continue to be in the employ of the Company, and is willing to accept such continued employment on the terms and conditionsset forth in this Agreement. AGREEMENT In consideration of the foregoing Recitals and the mutual promises and covenants herein contained, and for other good and valuable consideration, theParties, intending to be legally bound, agree as follows: 1. EMPLOYMENT. 1.1 Title. Effective as of the Effective Date, Executive’s position shall be the Company’s Vice President, Marketing, subject to theterms and conditions set forth in this Agreement. 1.2 Term. The term of this Agreement shall begin on the Effective Date and shall continue until it is terminated pursuant toSection 4 herein (the “Term”). 1.3 Duties. Executive shall do and perform all services, acts or things necessary or advisable to manage and conduct the businessof the Company and that are normally associated with the position of Vice President, Marketing. Executive shall report to the Chief Executive Officer of theCompany. 1.4 Policies and Practices. The employment relationship between the Parties shall be governed by this Agreement and by the policiesand practices established by the Company and the Company’s Board of Directors, or any committee thereof to which the Company’s Board of Directors hasdelegated responsibility for compensation matters, (the “Board”). In the event that the terms of this Agreement differ from or are in conflict with theCompany’s policies or practices or the Company’s Employee Handbook, this Agreement shall control. 1 1.5 Location. Unless the Parties otherwise agree in writing, during the Term Executive shall perform the services Executive isrequired to perform pursuant to this Agreement at the Company’s offices in Conshohocken, Pennsylvania; provided, however, that the Company may fromtime to time require Executive to travel temporarily to other locations in connection with the Company’s business. 2. LOYAL AND CONSCIENTIOUS PERFORMANCE; NONCOMPETITION. 2.1 Loyalty. During Executive’s employment by the Company, Executive shall devote Executive’s full business energies, interest,abilities and productive time to the proper and efficient performance of Executive’s duties under this Agreement. 2.2 Covenant not to Compete. During the Term, and during any period thereafter in which Executive is receiving severancebenefits from the Company, Executive shall not engage in competition with the Company and/or any of its Affiliates (as defined below), either directly orindirectly, in any manner or capacity, as adviser, principal, agent, affiliate, promoter, partner, officer, director, employee, stockholder, owner, co-owner,consultant, or member of any association or otherwise, in any phase of the business of developing, manufacturing and marketing of products or services thatare in the same field of use or which otherwise compete with the products or services of the Company, except with the prior written consent of the Board. Forpurposes of this Agreement, “Affiliate,” means, with respect to any specific entity, any other entity that, directly or indirectly, through one or moreintermediaries, controls, is controlled by or is under common control with such specified entity. 2.3 Agreement not to Participate in Company’s Competitors. During the Term, Executive agrees not to acquire, assume orparticipate in, directly or indirectly, any position, investment or interest known by Executive to be adverse or antagonistic to the Company, its business, orprospects, financial or otherwise, or in any company, person, or entity that is, directly or indirectly, in competition with the business of the Company or anyof its Affiliates. Ownership by Executive, in professionally managed funds over which Executive does not have control or discretion in investment decisions,or as a passive investment, of less than two percent (2%) of the outstanding shares of capital stock of any corporation with one or more classes of its capitalstock listed on a national securities exchange or publicly traded on a national securities exchange or in the over-the-counter market shall not constitute a breachof this Section 2.3. 3. COMPENSATION OF EXECUTIVE. 3.1 Base Salary. The Company shall pay Executive a base salary at the annualized rate of Two Hundred Nineteen ThousandThree Hundred Dollars ($219,300) (the “Base Salary”), less payroll deductions and all required withholdings, payable in regular periodic payments inaccordance with the Company’s normal payroll practices. The Base Salary shall be prorated for any partial year of employment on the basis of a threehundred sixty-five (365) day fiscal year. 2 3.2 Discretionary Bonus. In addition to Executive’s Base Salary, Executive shall be eligible to receive an annual discretionarybonus under the Company’s Management Incentive Program. The bonus amount Executive may receive, if any, shall be discretionary and based upon thetarget bonus amount determined by the Board and the other criteria set forth in the Management Incentive Program as determined by and evaluated by theBoard in its sole and absolute discretion. Any bonus earned by Executive shall be paid in accordance with the Company’s Management Incentive Program. 3.3 Expense Reimbursements. The Company shall reimburse Executive for all reasonable business expenses Executive incurs inconducting his duties hereunder, pursuant to the Company’s usual expense reimbursement policies, but in no event later than thirty (30) days after the end ofthe calendar month following the month in which such expenses were incurred by Executive; provided that Executive supplies the appropriate substantiationfor such expenses no later than the end of the calendar month following the month in which such expenses were incurred by Executive. 3.4 Changes to Compensation. Executive’s compensation shall be reviewed periodically and may be changed from time to time inthe Company’s sole discretion. 3.5 Employment Taxes. All of Executive’s compensation shall be subject to customary withholding taxes and any otheremployment taxes as are commonly required to be collected or withheld by the Company. 3.6 Benefits. Executive shall, in accordance with Company policy and the terms of the applicable plan documents, be eligible toparticipate in benefits under any benefit plan or arrangement that may be in effect from time to time and made available to the Company’s senior managementemployees. Executive shall also be eligible for paid vacation and paid Company holidays in accordance with Company policy. 3.7 Indemnification. The Company shall, to the maximum extent permitted by law, indemnify and hold Executive harmless againstany costs and expenses, including reasonable attorneys’ fees, judgments, fines, settlements and other amounts incurred in connection with any proceedingarising out of, by reason of or relating to Executive’s employment by the Company. The Company shall also advance to Executive any costs and expensesincurred in defending any such proceeding to the maximum extent permitted by law. The Company shall also provide Executive with coverage as a namedinsured under a directors and officers liability insurance policy maintained for the Company’s directors and officers. The Company shall continue tomaintain directors and officers liability insurance for the benefit of Executive during the Term and for at least three (3) years following the termination ofExecutive’s employment with the Company. This obligation to provide insurance and indemnify Executive shall survive expiration or termination of thisAgreement with respect to proceedings or threatened proceedings based on acts or omissions of Executive occurring during Executive’s employment with theCompany or with any of its Affiliates. Such obligations shall be binding upon the Company’s successors and assigns and shall inure to the benefit ofExecutive’s heirs and personal representatives. 3 4. TERMINATION. 4.1 Termination by the Company. Executive’s employment with the Company is at will and may be terminated by the Companyat any time and for any reason, or for no reason, including, but not limited to, under the following conditions. Upon any termination by the Company,Executive agrees to resign all positions, including as an officer and, if applicable, as a director or member of the Board, related to the Company and itsparents, subsidiaries and Affiliates. 4.1.1 Termination by the Company for Cause. The Company may terminate Executive’s employment under thisAgreement for “Cause” (as defined below) by delivery of written notice to Executive. Any notice of termination given pursuant to this Section 4.1.1 shall effecttermination as of the date of the notice, or as of such other date as specified in the notice. 4.1.2 Termination by the Company without Cause. The Company may terminate Executive’s employment under thisAgreement without Cause at any time and for any reason, or for no reason. Such termination shall be effective on the date Executive is so informed, or asotherwise specified by the Company. 4.2 Termination by Executive. Executive’s employment with the Company is at will and may be terminated by Executive at anytime and for any reason, or for no reason, including, but not limited to, under the following conditions. Upon any termination by Executive, Executive agreesto resign all positions, including as an officer and, if applicable, as a director or member of the Board, related to the Company and its parents, subsidiariesand Affiliates. 4.2.1 Termination by Executive for Good Reason. Executive may terminate his employment under this Agreement for“Good Reason” (as defined below) in accordance with the procedures specified in Section 4.6.2 below. 4.2.2 Without Good Reason. Executive may terminate Executive’s employment hereunder for other than Good Reason uponthirty (30) days’ written notice to the Company. 4.3 Termination for Death or Complete Disability. Executive’s employment with the Company shall automatically terminateeffective upon the date of Executive’s death. In addition, subject to the requirements of applicable law, the Company may terminate Executive’s employmentdue to Executive’s Complete Disability (as defined below). 4.4 Termination by Mutual Agreement of the Parties. Executive’s employment with the Company may be terminated at anytime upon a mutual agreement in writing of the Parties. Any such termination of employment shall have the consequences specified in such agreement. 4 4.5 Compensation Upon Termination. 4.5.1 Death or Complete Disability. If, during the Term, Executive’s employment shall be terminated by the Company onaccount of Executive’s Complete Disability as provided in Section 4.3 or due to Executive’s death, the Company shall pay to Executive, or to Executive’s heirs,as applicable, Executive’s Base Salary and accrued and unused vacation benefits earned through the date of termination at the rate in effect at the time oftermination, less standard deductions and withholdings. The Company shall thereafter have no further obligations to Executive and/or to Executive’s heirsunder this Agreement, except as otherwise provided by law. 4.5.2 With Cause or Without Good Reason. If, during the Term, Executive’s employment is terminated by the Companyfor Cause, or Executive terminates Executive’s employment hereunder without Good Reason, the Company shall pay Executive’s Base Salary and accrued andunused vacation benefits earned through the date of termination at the rate in effect at the time of termination, less standard deductions and withholdings. TheCompany shall thereafter have no further obligations to Executive under this Agreement, except as otherwise provided by law. 4.5.3 Without Cause or For Good Reason. If, during the Term, the Company terminates Executive’s employment withoutCause or Executive resigns Executive’s employment for Good Reason, the Company shall pay Executive’s Base Salary and accrued and unused vacationearned through the date of termination, at the rate in effect at the time of termination, less standard deductions and withholdings. In addition, subject toExecutive (a) furnishing to the Company an executed waiver and release of claims in the form attached hereto as Exhibit A (or in such other form as may bespecified by the Company in order to comply with then-existing legal requirements to effect a valid release of claims) (the “Release”); and (b) allowing theRelease to become effective in accordance with its terms, then Executive shall be entitled to the following: (i) payment of (a) an amount equal to one times (1.0x) Executive’s annual Base Salary in effect at the time of termination(but determined prior to any reduction in Base Salary that would give rise to Executive’s right to voluntarily resign for “Good Reason” pursuant toSection 4.6.2), less required deductions and withholdings, and (b) an amount equal to one times (1.0x) Executive’s on-target annual performance incentivebonus in effect at the time of termination, less required deductions and withholdings, such amounts described in (a) and (b) hereof to be paid in installmentsover twelve (12) months following the date of Executive’s termination in accordance with the Company’s payroll practices commencing within sixty (60) daysof the date of Executive’s termination; (ii) if the date of Executive’s termination is within the thirty (30) days immediately preceding or the twelve (12) monthsimmediately following a Corporate Transaction (as defined below), the vesting of all equity awards granted to Executive prior to the date of termination shallaccelerate such that all such awards shall be deemed fully vested and immediately exercisable; and 5 (iii) continued participation in the medical, dental and vision plans in which Executive (and where applicable, Executive’sspouse and dependents) was enrolled as of the date of Executive’s termination until the earlier of: (a) the date that is twelve (12) months after the date ofExecutive’s termination, or (b) the date upon which Executive becomes eligible to enroll in any similar plan offered or provided by an employer other than theCompany, at the same premium rates and cost sharing as may be charged from time to time for employees generally, as if Executive had continued inemployment during such period. Executive agrees to immediately notify the Company in writing in the event Executive becomes eligible to so enroll. 4.6 Definitions. For purposes of this Agreement, the following terms shall have the following meanings: 4.6.1 Complete Disability. “Complete Disability” shall mean the inability of Executive to perform Executive’s dutiesunder this Agreement, even with reasonable accommodation, because Executive has become permanently disabled within the meaning of any policy ofdisability income insurance covering employees of the Company then in force. In the event the Company has no policy of disability income insurancecovering employees of the Company in force when Executive becomes disabled, the term “Complete Disability” shall mean the inability of Executive toperform Executive’s duties under this Agreement, whether with or without reasonable accommodation, by reason of any incapacity, physical or mental, whichthe Company, based upon medical advice or an opinion provided by a licensed physician acceptable to the Company, determines to have incapacitatedExecutive from satisfactorily performing all of Executive’s usual services for the Company, with or without reasonable accommodation, for a period of at leastone hundred twenty (120) days during any twelve (12) month period (whether or not consecutive). Based upon such medical advice or opinion, thedetermination of the Company shall be final and binding and the date such determination is made shall be the date of such Complete Disability for purposesof this Agreement. 4.6.2 Good Reason. “Good Reason” for Executive to terminate Executive’s employment hereunder shall mean theoccurrence of any of the following events without Executive’s consent: (i) a change in Executive’s title that is accompanied by a material reduction in Executive’s duties, authority, orresponsibilities relative to Executive’s duties, authority, or responsibilities in effect immediately prior to such reduction; (ii) the relocation of Executive’s principal business location to a point that requires a one-way increase of Executive’scommuting distance of more than fifty (50) miles; or (iii) a material reduction by the Company of Executive’s Base Salary as initially set forth herein or as the same may beincreased from time to time; (iv) failure of the Company to obtain the agreement from any successor to assume and agree to perform the Company’sobligations under this Agreement; provided, however, that such termination by Executive shall only be deemed for Good Reason pursuant to the foregoing definition if: (A) Executive gives theCompany written notice of the intent to terminate for Good Reason within thirty (30) days following the first occurrence of the condition(s) that Executivebelieves constitutes Good Reason, which notice shall describe such condition(s); (B) the Company fails to remedy such condition(s) within thirty (30) daysfollowing receipt of the written notice (the “Cure Period”); and (C) Executive terminates his employment within thirty (30) days following the end of the CurePeriod. 6 4.6.3 Cause. “Cause” for the Company to terminate Executive’s employment hereunder shall mean the occurrence of any ofthe following events, as determined by the Company, in its sole discretion: (i) Executive’s willful and repeated failure to satisfactorily perform Executive’s job duties; (ii) Executive’s willful commission of an act that materially injures the business of the Company; (iii) Executive’s willful refusal or failure to follow lawful and reasonable directions of the Board or the appropriate individualto whom Executive reports; (iv) Executive’s conviction of, or plea of nolo contendere to, any felony involving moral turpitude; (v) Executive’s engaging or in any manner participating in any activity which is directly competitive with or injurious to theCompany or any of its Affiliates or which violates any material provisions of Sections 2 and/or 5 hereof or the PIIA (as defined in Section 5); (vi) Executive’s commission of any fraud against the Company, its Affiliates, employees, agents or customers or use orintentional appropriation for Executive’s personal use or benefit of any funds or properties of the Company not authorized by the Board to be so used orappropriated; or (vii) Executive’s material breach of or willful failure to comply with Company policies, including but not limited to equalemployment opportunity or harassment policies, insider trading policies, code of ethics or conflict of interest policies, non-disclosure and confidentialitypolicies, travel and expense policies, workplace violence policies, Sarbanes-Oxley compliance policies, policies governing preparation and approval offinancial statements, and/or policies governing the making of financial commitments on behalf of the Company. 4.6.4 Corporate Transaction. A “Corporate Transaction” is an Acquisition or Asset Transfer of the Company. An“Acquisition” shall mean (A) any consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporatereorganization, in which the capital stock of the Company immediately prior to such consolidation, merger or reorganization, represents less than 50% of thevoting power of the surviving entity (or, if the surviving entity is a wholly owned subsidiary, its parent) immediately after such consolidation, merger orreorganization; or (B) any transaction or series of related transactions to which the Company is a party in which in excess of fifty (50%) of the Company’svoting power is transferred; provided that an Acquisition shall not include (x) any consolidation or merger effected exclusively to change the domicile of theCompany, or (y) any transaction or series of transactions principally for bona fide equity financing purposes in which cash is received by the Company orany successor or indebtedness of the Company is cancelled or converted or a combination thereof. “Asset Transfer” shall mean a sale, lease, license or otherdisposition or all or substantially all of the assets of the Company. 7 4.7 Survival of Certain Sections. Sections 2.2, 3.7, 4, 5, 6, 7, 8, 9, 12, 13, 16 and 18 of this Agreement shall survive thetermination of this Agreement. 4.8 Parachute Payment. If any payment or benefit the Executive would receive pursuant to this Agreement (“Payment”) would(i) constitute a “Parachute Payment” within the meaning of Section 280G of the Internal Revenue Code (the “Code”), and (ii) but for this sentence, besubject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then such Payment shall be reduced to the Reduced Amount. The“Reduced Amount” shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or(y) the largest portion of the Payment, which such amount, after taking into account all applicable federal, state and local employment taxes, income taxes,and the Excise Tax (all computed at the highest applicable marginal rate), results in the Executive’s receipt, on an after-tax basis, of the greatest amount of thePayment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting“Parachute Payments” is necessary so that the Payment equals the Base Amount, the Payments shall be reduced on a nondiscretionary basis in such a way asto minimize the reduction in the economic value deliverable to Executive. Where more than one payment has the same value for this purpose and they arepayable at different times they shall be reduced on a pro rata basis. 4.9 Application of Section 409A of the Internal Revenue Code. Notwithstanding anything to the contrary set forth herein, anypayments and benefits provided under this Agreement (the “Severance Benefits”) that constitute “deferred compensation” within the meaning of Section 409Aof the Code and the regulations and other guidance thereunder and any state law of similar effect (collectively “Section 409A”) shall not commence inconnection with Executive’s termination of employment unless and until Executive has also incurred a “separation from service” (as such term is defined inTreasury Regulation Section 1.409A-1(h) (“Separation From Service”), unless the Company reasonably determines that such amounts may be provided toExecutive without causing Executive to incur the additional twenty percent (20%) tax under Section 409A. It is intended that each payment under this Agreement shall constitute a separate “payment” and each installment of the Severance Benefits payments providedfor in this Agreement shall be treated as a separate “payment” for purposes of Treasury Regulation Section 1.409A-2(b)(2)(i). For the avoidance of doubt, it isintended that payments of the Severance Benefits set forth in this Agreement satisfy, to the greatest extent possible, the exemptions from the application ofSection 409A provided under Treasury Regulation Sections 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9). However, if the Company (or, ifapplicable, the successor entity thereto) determines that the Severance Benefits constitute “deferred compensation” under Section 409A and Executive is, on thetermination of service, a “specified employee” of the Company or any successor entity thereto, as such term is defined in Section 409A(a)(2)(B)(i) of the Code,then, solely to the extent necessary to avoid the incurrence of the adverse personal tax consequences under Section 409A, the timing of the Severance Benefitpayments shall be delayed until the earlier to occur of: (i) the date that is six months and one day after Executive’s Separation From Service, or (ii) the date ofExecutive’s death (such applicable date, the “Specified Employee Initial Payment Date”), the Company (or the successor entity thereto, as applicable) shall(A) pay to Executive a lump sum amount equal to the sum of the Severance Benefit payments that 8 Executive would otherwise have received through the Specified Employee Initial Payment Date if the commencement of the payment of the Severance Benefitshad not been so delayed pursuant to this Section and (B) commence paying the balance of the Severance Benefits in accordance with the applicable paymentschedules set forth in this Agreement. Notwithstanding anything to the contrary set forth herein, Executive shall receive the Severance Benefits described above, if and only if Executive dulyexecutes and returns to the Company within the applicable time period set forth therein, a separation agreement containing the Company’s standard form ofrelease of claims in favor of the Company (attached to this Agreement as Exhibit A) and other standard provisions, including without limitation, those relatingto non-disparagement and confidentiality (the “Separation Agreement”), and permits the release of claims contained therein to become effective in accordancewith its terms. Notwithstanding any other payment schedule set forth in this Agreement, none of the Severance Benefits shall be paid or otherwise deliveredprior to the effective date of the Separation Agreement. Except to the extent that payments may be delayed until the Specified Employee Initial Payment Datepursuant to the preceding paragraph, on the first regular payroll pay day following the effective date of the Separation Agreement, the Company shall payExecutive the Severance Benefits Executive would otherwise have received under the Agreement on or prior to such date but for the delay in payment related tothe effectiveness of the Separation Agreement, with the balance of the Severance Benefits being paid as originally scheduled. All amounts payable under theAgreement shall be subject to standard payroll taxes and deductions. All reimbursements provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A, including, whereapplicable, the requirement that (a) any reimbursement shall be for expenses incurred during Executive’s lifetime (or during a shorter period of time specified inthis Agreement), (b) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in anyother calendar year, (c) the reimbursement of an eligible expense shall be made on or before the last day of the calendar year following the year in which theexpense is incurred and (d) the right to reimbursement is not subject to liquidation or exchange for another benefit. 5. CONFIDENTIAL AND PROPRIETARY INFORMATION. 5.1 As a condition of employment Executive agrees to execute and abide by the Company’s Proprietary Information and InventionsAgreement (“PIIA”). 5.2 Executive recognizes that Executive’s employment with the Company will involve contact with information of substantial value tothe Company, which is not generally known in the trade, and which gives the Company an advantage over its competitors who do not know or use it,including but not limited to, techniques, designs, drawings, processes, inventions know how, strategies, marketing, and/or advertising plans orarrangements, developments, equipment, prototypes, sales, supplier, service provider, vendor, distributor and customer information, and business andfinancial information relating to the business, products, services, practices and techniques of the Company, (hereinafter referred to as “Confidential andProprietary Information”). Executive shall at all times regard and preserve as confidential such Confidential and Proprietary Information obtained byExecutive from whatever source and shall not, either during Executive’s employment with the Company or thereafter, publish or disclose any part of suchConfidential and Proprietary Information in any manner at any time, or use the same except on behalf of the Company, without the prior written consent of theCompany. 9 6. ASSIGNMENT AND BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of Executive and Executive’s heirs, executors, personal representatives,assigns, administrators and legal representatives. Because of the unique and personal nature of Executive’s duties under this Agreement, neither thisAgreement nor any rights or obligations under this Agreement shall be assignable by Executive. This Agreement shall be binding upon and inure to the benefitof the Company and its successors, assigns and legal representatives. Any such successor of the Company shall be deemed substituted for the Companyunder the terms of this Agreement for all purposes. For this purpose, “successor” means any person, firm, corporation or other business entity which at anytie, whether by purchase, merger or otherwise, directly or indirectly acquires all or substantially all of the assets or business of the Company. 7. NOTICES. All notices or demands of any kind required or permitted to be given by the Company or Executive under this Agreement shall be given inwriting and shall be personally delivered (and receipted for) or faxed during normal business hours or mailed by certified mail, return receipt requested,postage prepaid, addressed as follows: If to the Company: CardioNet, Inc.227 Washington St. #300Conshohocken, PA 19428Fax (610) 828-8048Attention: Chief Executive Officer If to Executive: Fred A. Broadway III Any such written notice shall be deemed given on the earlier of the date on which such notice is personally delivered or three (3) days after its deposit in theUnited States mail as specified above. Either Party may change its address for notices by giving notice to the other Party in the manner specified in thissection. 8. CHOICE OF LAW. This Agreement is made in the Commonwealth of Pennsylvania. This Agreement shall be construed and interpreted in accordance with theinternal laws of the Commonwealth of Pennsylvania. Any disputes or proceedings regarding this Agreement shall be conducted in Conshohocken,Pennsylvania, or, by written agreement of the Parties, at a mutually convenient location in the greater Philadelphia, Pennsylvania area. 10 9. INTEGRATION. This Agreement, including Exhibit A and the PIIA, contains the complete, final and exclusive agreement of the Parties relating to the termsand conditions of Executive’s employment and the termination of Executive’s employment, and supersedes all prior and contemporaneous oral and writtenemployment agreements or arrangements between the Parties. 10. AMENDMENT. This Agreement cannot be amended or modified except by a written agreement signed by Executive and the Company. 11. WAIVER. No term, covenant or condition of this Agreement or any breach thereof shall be deemed waived, except with the written consent of the Partyagainst whom the wavier is claimed, and any waiver or any such term, covenant, condition or breach shall not be deemed to be a waiver of any preceding orsucceeding breach of the same or any other term, covenant, condition or breach. 12. SEVERABILITY. The finding by a court of competent jurisdiction of the unenforceability, invalidity or illegality of any provision of this Agreement shall notrender any other provision of this Agreement unenforceable, invalid or illegal. Such court shall have the authority to modify or replace the invalid orunenforceable term or provision with a valid and enforceable term or provision, which most accurately represents the Parties’ intention with respect to theinvalid or unenforceable term, or provision. 13. INTERPRETATION; CONSTRUCTION. The headings set forth in this Agreement are for convenience of reference only and shall not be used in interpreting this Agreement. ThisAgreement has been drafted by legal counsel representing the Company, but Executive has been encouraged to consult with, and has consulted with,Executive’s own independent counsel and tax advisors with respect to the terms of this Agreement. The Parties acknowledge that each Party and its counselhas reviewed and revised, or had an opportunity to review and revise, this Agreement, and any rule of construction to the effect that any ambiguities are to beresolved against the drafting Party shall not be employed in the interpretation of this Agreement. 14. REPRESENTATIONS AND WARRANTIES. Executive represents and warrants that Executive is not restricted or prohibited, contractually or otherwise, from entering into andperforming each of the terms and covenants contained in this Agreement, and that Executive’s execution and performance of this Agreement shall not violate orbreach any other agreements between Executive and any other person or entity. 11 15. COUNTERPARTS. This Agreement may be executed in two counterparts, each of which shall be deemed an original, all of which together shall contribute oneand the same instrument. 16. ARBITRATION. To ensure the rapid and economical resolution of disputes that may arise in connection with Executive’s employment with the Company,Executive and the Company agree that any and all disputes, claims, or causes of action, in law or equity, arising from or relating to Executive’s employment,or the termination of that employment, will be resolved, to the fullest extent permitted by law, by final, binding and confidential arbitration pursuant to theFederal Arbitration Act in Conshohocken, Pennsylvania conducted by the Judicial Arbitration and Mediation Services/Endispute, Inc. (“JAMS”), or itssuccessors, under the then current rules of JAMS for employment disputes; provided that the arbitrator shall: (a) have the authority to compel adequatediscovery for the resolution of the dispute and to award such relief as would otherwise be permitted by law; and (b) issue a written arbitration decisionincluding the arbitrator’s essential findings and conclusions and a statement of the award. Accordingly, Executive and the Company hereby waive any right toa jury trial. Both Executive and the Company shall be entitled to all rights and remedies that either Executive or the Company would be entitled to pursue in acourt of law. The Company shall pay any JAMS filing fee and shall pay the arbitrator’s fee. The arbitrator shall have the discretion to award attorneys fees tothe party the arbitrator determines is the prevailing party in the arbitration. Nothing in this Agreement is intended to prevent either Executive or the Companyfrom obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. Notwithstanding the foregoing, Executiveand the Company each have the right to resolve any issue or dispute involving confidential, proprietary or trade secret information, or intellectual propertyrights, by Court action instead of arbitration. 17. TRADE SECRETS OF OTHERS. It is the understanding of both the Company and Executive that Executive shall not divulge to the Company and/or its subsidiaries anyconfidential information or trade secrets belonging to others, including Executive’s former employers, nor shall the Company and/or its Affiliates seek to elicitfrom Executive any such information. Consistent with the foregoing, Executive shall not provide to the Company and/or its Affiliates, and the Companyand/or its Affiliates shall not request, any documents or copies of documents containing such information. 18. ADVERTISING WAIVER. Executive agrees to permit the Company, and persons or other organizations authorized by the Company, to use, publish and distributeadvertising or sales promotional literature concerning the products and/or services of the Company, or the machinery and equipment used in the provisionthereof, in which Executive’s name and/or pictures of Executive taken in the course of Executive’s provision of services to the Company appear. Executivehereby waives and releases any claim or right Executive may otherwise have arising out of such use, publication or distribution. 12 IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written. CARDIONET, INC. By:/s/ Joseph H. Capper Name:Joseph H. Capper Title:President and CEO Dated:July 30, 2010 EXECUTIVE: /s/ Fred A. Broadway IIIFRED A. BROADWAY III Dated:July 30, 2010 13 EXHIBIT A RELEASE AND WAIVER OF CLAIMS TO BE SIGNED FOLLOWING TERMINATION WITHOUT CAUSEOR RESIGNATION FOR GOOD REASON In consideration of the payments and other benefits set forth in the Employment Agreement of , 2010, to which this form isattached, I, Fred A. Broadway III, hereby furnish CARDIONET, INC. (the “Company”), with the following release and waiver (“Release and Waiver”). In exchange for the consideration provided to me by the Employment Agreement that I am not otherwise entitled to receive, I hereby generally andcompletely release the Company and its directors, officers, employees, shareholders, partners, agents, attorneys, predecessors, successors, parent andsubsidiary entities, insurers, Affiliates, and assigns from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are inany way related to events, acts, conduct, or omissions occurring prior to my signing this Release and Waiver. This general release includes, but is not limitedto: (1) all claims arising out of or in any way related to my employment with the Company or the termination of that employment; (2) all claims related to mycompensation or benefits from the Company, including salary, bonuses, commissions, vacation pay, expense reimbursements, severance pay, fringe benefits,stock, stock options, or any other ownership interests in the Company; (3) all claims for breach of contract, wrongful termination, and breach of the impliedcovenant of good faith and fair dealing; () all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation of publicpolicy; and (5) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys’ fees, or other claimsarising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of 1990, the federal Age Discrimination inEmployment Act of 1967 (as amended) (“ADEA”), and the the Pennsylvania Human Rights Act (as amended) (“PHRA”). Notwithstanding the foregoing, Ishall be entitled to enforce the terms of any employee benefit plan of the Company in which I am, on the date of this Release and Waiver, due a benefit, and tobe indemnified by the Company as to any liability, cost or expense for which I would have been indemnified during employment, in accordance with thebylaws of the Company, for actions taken on behalf of the Company within the scope of my employment with the Company. I also acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: “A general release does notextend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by himor her must have materially affected his or her settlement with the debtor.” I hereby expressly waive and relinquish all rights and benefits under thatsection and any law of any jurisdiction of similar effect with respect to any claims I may have against the Company. I acknowledge that, among other rights, I am waiving and releasing any rights I may have under ADEA, that this Release and Waiver is knowingand voluntary, and that the consideration given for this Release and Waiver is in addition to anything of value to which I was already entitled as an executive of the Company. If I am forty (40) years of age or older upon execution of this Release and Waiver, I further acknowledge that I havebeen advised, as required by the Older Workers Benefit Protection Act, that: (a) the release and waiver granted herein does not relate to claims under the ADEAwhich may arise after this Release and Waiver is executed; (b) I should consult with an attorney prior to executing this Release and Waiver; and (c) I havetwenty-one (21) days from the date of termination of my employment with the Company in which to consider this Release and Waiver (although I may choosevoluntarily to execute this Release and Waiver earlier); (d) I have seven (7) days following the execution of this Release and Waiver to revoke my consent to thisRelease and Waiver; and (e) this Release and Waiver shall not be effective until the seven (7) day revocation period has expired without my having previouslyrevoked this Release and Waiver. I acknowledge my continuing obligations under my Proprietary Information and Inventions Agreement. Pursuant to the Proprietary Information andInventions Agreement I understand that among other things, I must not use or disclose any confidential or proprietary information of the Company and I mustimmediately return all Company property and documents (including all embodiments of proprietary information) and all copies thereof in my possession orcontrol. I understand and agree that my right to the severance pay I am receiving in exchange for my agreement to the terms of this Release and Waiver iscontingent upon my continued compliance with my Proprietary Information and Inventions Agreement. I agree, covenant and promise that I will not in any way communicate the terms of this Release and Waiver to any person other than my immediatefamily, my attorney and my financial consultant or when necessary to enforce this Release and Waiver or to advise a third party of my obligations under thisRelease and Waiver. I agree not to disparage the name, business reputation or business practices of the Company, or any of its subsidiaries or Affiliates, ortheir respective officers, employees and directors. This Release and Waiver constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regardto the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein. This Release and Waivermay only be modified by a writing signed by both me and a duly authorized officer of the Company. Date:By: QuickLinks -- Click here to rapidly navigate through this documentExhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-149800) pertaining to the 2003 Equity IncentivePlan, 2008 Equity Incentive Plan, 2008 Employee Stock Purchase Plan, and 2008 Non-Employee Directors' Stock Option Plan of CardioNet, Inc. ofour reports dated February 22, 2013, with respect to the consolidated financial statements and schedule of CardioNet, Inc. and the effectiveness ofinternal control over financial reporting of CardioNet, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2012.Philadelphia, PennsylvaniaFebruary 22, 2013 /s/ Ernst & Young LLPQuickLinksExhibit 23.1Consent of Independent Registered Public Accounting FirmQuickLinks -- Click here to rapidly navigate through this documentExhibit 31.1 CERTIFICATION PURSUANT TORULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, Joseph H. Capper, certify that:1.I have reviewed this annual report on Form 10-K of CardioNet, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting.Date: February 22, 2013/s/ JOSEPH H. CAPPERJoseph H. CapperPresident and Chief Executive Officer (Principal Executive Officer)QuickLinksExhibit 31.1CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934QuickLinks -- Click here to rapidly navigate through this documentExhibit 31.2 CERTIFICATIONS PURSUANT TORULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, Heather C. Getz, certify that:1.I have reviewed this annual report on Form 10-K of CardioNet, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting.Date: February 22, 2013/s/ HEATHER C. GETZHeather C. Getz, CPAChief Financial Officer (Principle Financial and Accounting Officer)QuickLinksExhibit 31.2CERTIFICATIONS PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934QuickLinks -- Click here to rapidly navigate through this documentExhibit 32 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of CardioNet, Inc. (the "Company") on Form 10-K for the year ended December 31, 2012, as filed with theSecurities and Exchange Commission on the date hereof (the "Report"), each of Joseph H. Capper, the President and Chief Executive Officer of theCompany, and Heather C. Getz, the Chief Financial Officer of the Company, hereby certifies, pursuant to and for purposes of 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany./s/ JOSEPH H. CAPPERJoseph H. CapperPresident and Chief Executive Officer /s/ HEATHER C. GETZHeather C. Getz, CPAChief Financial OfficerFebruary 22, 2013 February 22, 2013QuickLinksExhibit 32CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEYACT OF 2002

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