Item 1. Business
Overview
BioTelemetry, Inc. provides monitoring services and digital population health management in a healthcare setting, medical device
manufacturing and centralized core laboratory services for clinical research. Since we became focused on cardiac monitoring in 1999, we have developed a proprietary integrated patient management
platform that incorporates a wireless data transmission network, Food and Drug Administration ("FDA") cleared algorithms and medical devices and 24-hour monitoring service centers.
BioTelemetry
operates under three reportable segments: (1) Healthcare, (2) Research and (3) Technology. The Healthcare segment, which generated 79% of our revenue in
2016, is focused on the diagnosis and monitoring of cardiac arrhythmias or heart rhythm disorders. We offer cardiologists and electrophysiologists a full spectrum of solutions which provides them with
a single source of cardiac monitoring services. These services range from the differentiated mobile cardiac telemetry service ("MCT"), which we market as Mobile Cardiac Outpatient
Telemetry
TM
("MCOT
TM
") or External Cardiac Ambulatory Telemetry ("ECAT"), to wireless and trans telephonic event, traditional Holter, extended-wear Holter, Pacemaker and
International Normalized Ratio ("INR") monitoring. The Research segment, which generated 16% of our revenue in 2016, is engaged in central core laboratory services providing cardiac monitoring,
imaging services, scientific consulting and data management services for drug and medical device trials. The Technology segment, which generated 5% of our revenue in 2016, focuses on the development,
manufacturing, testing and marketing of medical devices to medical companies, clinics and hospitals.
Business Strategy
Our goals are to solidify our position as the leading provider of outpatient cardiac monitoring services, expand our presence in the research
market and leverage our monitoring platform in new markets. The key elements of the business strategy by which we intend to achieve these goals include:
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Increase Demand for Our Comprehensive Cardiac Monitoring
Solutions.
We believe that we can increase demand for our comprehensive portfolio of outpatient cardiac monitoring solutions by educating
cardiologists, electrophysiologists and neurologists on the benefits of using mobile cardiac telemetry to meet their arrhythmia monitoring needs, stressing the increased diagnostic yield and their
ability to use the clinically significant data to make timely interventions and guide more effective treatments.
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Expand Our Presence in the Research
Market.
In December 2010, we entered the core lab services business through our acquisition of Agility Centralized Research. We later were able
to expand our presence in clinical research with our acquisition of Cardiocore Lab, LLC ("CardioCore") in August 2012 and our purchase of the assets of RadCore Lab LLC ("RadCore") in
June 2014. In 2016, we further expanded our core lab capabilities with the acquisition of VirtualScopics Inc. ("VirtualScopics"), a leading provider of clinical trial imaging solutions. We
continue to focus our efforts on increasing our presence in the research market, and on becoming a preferred global provider as it provides us with the ability to diversify our service offerings.
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Leverage Our Core Competencies to New Market
Opportunities.
We believe our core competencies can be leveraged for applications in multiple markets. While our initial focus has been on
arrhythmia diagnosis and monitoring, we intend to expand into new market areas that require outpatient or ambulatory monitoring and management. In line with this goal, we acquired Telcare, the first
company to receive FDA clearance for a cellular-enabled Blood Glucose
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Healthcare
The Healthcare segment, operating as CardioNet, LLC ("CardioNet") and Heartcare Corporation of America, Inc. ("Heartcare"), is
focused on the diagnosis and monitoring of cardiac arrhythmias, or heart rhythm disorders. We provide cardiologists and electrophysiologists who prefer to use a single source of cardiac monitoring
services with a full spectrum of solutions, ranging from our differentiated MCT services to event and Holter monitoring. We also provide Pacemaker and INR monitoring.
Our
MCOT and ECAT services incorporate a lightweight patient-worn sensor attached to electrodes that capture two-channel electrocardiogram ("ECG") data, measuring electrical
activity of the heart, on a compact wireless handheld monitor. The monitor analyzes incoming heartbeat-by-heartbeat information from the sensor on a real-time basis by applying proprietary algorithms
designed to detect arrhythmias. The monitor can detect an arrhythmic event even in the absence of symptoms noticed by the patient. When the monitor detects an arrhythmic event, it automatically
transmits the ECG to our Monitoring Centers. At the Monitoring Centers, which operate 24/7, experienced certified cardiac monitoring specialists analyze the sent data, respond to urgent events and
report results in the manner prescribed by the physician. The MCOT and ECAT devices employ two-way wireless communications, enabling continuous transmission of patient data to the
Monitoring Centers and permitting physicians to remotely adjust monitoring parameters and request previous ECG data from the memory stored in the monitor. The MCOT and ECAT devices have
the capability of storing 30 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 Holter monitor. In
2016, we obtained FDA approval of our next generation MCOT
TM
device, the MCOT
TM
Patch. The MCOT
TM
Patch is a four-lead, two-channel system which provides the
same best in class technology as the current MCOT
TM
, in a more convenient form factor. The MCOT
TM
Patch is expected to be commercially available in 2017.
Our
event monitoring services provide physicians with the flexibility to prescribe wireless event monitors, digital loop event monitors, memory loop event monitors and non-loop event
monitors. Event data is transmitted, either through automatic transmission of event data with wireless event monitors or through telephonic transmission of stored event data with our traditional event
monitors, to one of our event monitoring centers in, where our trained cardiac technicians analyze the data.
Traditional
Holter and extended-wear Holter monitors store an image of the electrical impulses of every heartbeat or irregularity in digital format on a compact flashcard. The flashcard
is mailed or the data is sent electronically through a secure web transfer to one of our Holter labs, where our trained cardiac technicians analyze the data. Our next generation Holter monitor, the
CardioKey launched in 2015 is a small, lightweight cardiac monitor which continuously stores up to 14 days of cardiac images.
We
market our services throughout the United States and receive reimbursement for the monitoring provided to patients from Medicare and other third-party commercial payors.
Research
The Research segment, operating as Cardiocore and VirtualScopics, is engaged in central core laboratory services that provide cardiac
monitoring, imaging services, scientific consulting and data management services for drug, medical treatment and device trials. The centralized services include ECG, Holter monitoring, ambulatory
blood pressure monitoring ("ABPM"), echocardiography ("ECHO"), multigated acquisition scan ("MUGA"), a full range of imaging services, protocol
development, expert reporting and statistical analysis. Our imaging services offerings were bolstered by the 2016 acquisition of VirtualScopics and provides services in the cardiovascular, oncology,
musculoskeletal and neurologic therapeutic areas. We also provide a full range of support services that
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include
project coordination, setup and management, equipment rental, data transfer, processing, analysis and 24/7 customer support and site training. Our data management systems enable
complete customization for sponsors' preferred data specifications and our web service, CardioPortal, provides access to rich data from any web browser, without client-side plug-ins.
We
entered the research field through the acquisition of Agility Centralized Research in December 2010, and later expanded our presence with the acquisition of Cardiocore in August 2012
and RadCore in June 2014. We further expanded our research offerings with the 2016 acquisition of VirtualScopics, a leading provider of clinical trial imaging solutions. Through these acquisitions, we
gained global experience in central core laboratory services, which includes experience in Phase I-IV and Thorough QT Trials. Our primary customers are pharmaceutical companies and contract
research organizations. We operate locations in Maryland, California, New York, London, UK, and Tokyo, Japan, which support sponsors and sites in Eastern and Western Europe, Russia and Asia-Pacific,
North and South America, Africa and the Middle East.
Technology
The Technology segment, operating as Braemar Manufacturing, LLC ("Braemar"), Universal Medical, Inc. ("UMI"), BioTelemetry Belgium
BVBA. ("BioTelemetry Belgium") and BioTelemetry Technology ApS ("BioTelemetry Denmark"), focuses on the manufacturing, engineering and development of non-invasive cardiac monitors for leading
healthcare companies worldwide. We have been able to build successful customer relationships by providing reliable, quality products and engineering services. We offer contract manufacturing services,
developing and producing devices to the specific requirements set by customers. Braemar and UMI currently manufacture the cardiac monitoring devices utilized by our Healthcare segment.
Braemar
and UMI manufacture various devices including, but not limited to, cardiac event monitors, digital Holter monitors and MCT monitors. Our facilities located in San Diego, CA,
Eagan, MN and Ewing, NJ are responsible for research and product development under FDA guidelines. We operate BioTelemetry Belgium in Zaventem, Belgium, which imports and distributes our devices to
the international markets. Manufacturing of devices is performed in our Eagan, MN and Ewing, NJ
facilities. We also operate BioTelemetry Denmark, which includes the assets acquired in 2016 of the ePatch division of DELTA Danish Electronics, Light and Acoustics ("DELTA"). BioTelemetry Denmark
manufactures and sells devices to customers in the international market. We believe that our manufacturing facilities will be sufficient to meet our manufacturing needs for the foreseeable future.
In
addition, in December 2016, we acquired Telcare, the first company to receive FDA clearance for a cellular-enabled BGM system. This wireless BGM system transmits real-time results to
a cloud-based analytical engine, which synthesizes the data, monitors trends and provides caregivers with critical information about the patients' health status and the potential need to intervene.
Telcare's BGM devices are manufactured in our Concord, MA facility.
We
believe our manufacturing operations are in compliance with regulations mandated by the applicable governing bodies. We are subject to unannounced inspections by the FDA and we
successfully completed routine audits by the FDA in December 2016 in Ewing, NJ, in February 2016 in Concord, MA and in February 2013 in Eagan, MN with no significant findings noted or warnings issued.
Our Eagan, MN, San Diego, CA, Ewing, NJ and Concord, MA facilities are ISO 13485 certified and registered with the FDA. ISO 13485 is a quality system standard used by medical companies
providing design, development, manufacturing, installation and servicing, and is the basis for acquiring European Conformity Marking ("CE Marking") for medical device product distribution in the
European Union. Many of our devices also carry a CE Marking.
There
are a number of critical components and sub-assemblies in the devices. The vendors for these materials are qualified through stringent evaluation and testing of their performance.
We
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implement
a strict no-change policy with our contract manufacturers to ensure that no components are changed without our approval.
Research and Development
For the years ended December 31, 2016, 2015 and 2014, we spent $8.4 million, $7.1 million and $7.4 million,
respectively, on research and development expenses focused on developing new products and enhancements to our existing products. We intend to continue to develop proof of superiority of our
MCOT technology through clinical data. The three primary sources
of clinical data that we have used to date to illustrate the clinical value of MCOT include: (i) a randomized 300-patient clinical study; (ii) our cumulative actual
monitoring experience from our databases; and (iii) numerous other published studies.
We
sponsored and completed a 17-center, 300-patient randomized clinical trial in March 2007. We believe this study, at that time, represented the largest randomized study comparing two
non-invasive arrhythmia monitoring methods. The study was designed to evaluate patients who were suspected to have an arrhythmic cause underlying their symptoms, but who were a diagnostic challenge
given that they had already had a non-diagnostic 24-hour Holter monitoring session or four hours of telemetry monitoring within 45 days prior to enrollment. Patients were randomized to either
MCOT or to a loop event monitor 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).
The
study specifically compared the success of MCOT against loop event monitors in detecting patients with clinically significant arrhythmias and demonstrated the
superiority of MCOT for confirming the diagnosis of these types of arrhythmias. The study also demonstrated the advantage of using MCOT compared to the loop event monitor in
the detection of asymptomatic atrial fibrillation or flutter. Diagnosis and treatment of atrial fibrillation is important because it can lead to many other medical problems, including stroke. The
study concluded that MCOT provided a significantly higher diagnostic yield, in detecting an arrhythmic event in patients with symptoms of cardiac arrhythmia, compared to traditional loop
event monitoring, including such monitoring designed to automatically detect certain arrhythmias.
In
addition to the aforementioned 300-patient randomized clinical trial, MCOT has been cited and referenced in a total of 40 publications and abstracts.
Sales and Marketing
We market our cardiac monitoring solutions through a direct sales force primarily to cardiologists, electrophysiologists and neurologists who
are the physician specialists who most commonly diagnose and manage patients with arrhythmias. We sponsor peer-to-peer educational events and participate in targeted public relations opportunities.
CardioNet is a leading member of the Remote Cardiac Service Provider Group. We market our research services to pharmaceutical companies, medical device companies, contract research organizations and
academic research organizations. Cardiocore is a founding member and the first cardiac core lab to join the Cardiac Safety Research Consortium ("CSRC"). Through the CSRC, we are able to network with
representatives of major pharmaceutical companies, as well as discuss key cardiac safety issues during the drug development process. Through the 2016 acquisition of VirtualScopics, we have broadened
our research service offerings, allowing us to more favorably compete for research studies requiring a wider
range of research services. We market our manufactured products to physicians, hospitals and other cardiac monitoring providers.
We
attend trade shows and medical conferences to promote our various product and service offerings. The trade shows and conferences we attend are related to organizations such as: the
Heart Rhythm Society, American College of Cardiology, Society of Thoracic Surgeons, European Society of
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Cardiology,
American Heart Association and the American Telemedicine Association. We also attend the Medica, DIA and Partnerships in Clinical Trials tradeshows as well as the annual Boston Atrial
Fibrillation Conference.
Healthcare Reimbursement
In the Healthcare segment, services are billed to government and commercial payors using specific codes describing the services. Those codes 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 being prescribed. Approximately 33% of our total revenue is subject to reimbursement from the Medicare program, a federal government
health insurance program administered by the Centers for Medicare and Medicaid Services ("CMS"), at rates that are set nationally and adjusted for certain regional indices.
In
addition to receiving reimbursement from Medicare, we enter into contracts with commercial payors to receive reimbursement at specified rates for our technical services. Such
contracts typically provide for an initial term of between one and three years and provide for automatic renewal thereafter. Either party can typically terminate these contracts by providing between
60 and 120 days prior notice to the other party at any time following the end of the initial term of the agreement. The contracts provide for an agreed upon reimbursement rate, which in some
instances is tied to the rate of reimbursement we receive from Medicare. Pursuant to these contracts, we generally agree to indemnify our commercial payors for damages arising in connection with the
performance of our obligations under these agreements.
In
addition to receiving reimbursement from government and commercial payors, we have direct arrangements with physicians who may purchase our monitoring services and then submit claims
for these services directly to commercial and government payors. In some cases, patients pay for their service out-of-pocket.
Competition
Although we believe that we have a leading market share in the mobile cardiac monitoring industry, the market in which our Healthcare segment
operates is fragmented and characterized by a large number of smaller regional service providers. Additionally, several larger healthcare companies offer certain cardiac monitoring solutions,
primarily Holter monitors. We believe that the principal competitive factors that impact the success of our cardiac monitoring solutions include some or all of the
following:
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quality of our algorithms used to detect symptoms;
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quality of clinical data;
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ease of use and reliability of cardiac monitoring solutions for patients and physicians;
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technology performance, innovation, flexibility and range of application;
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timeliness and clinical relevance of new product introductions;
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quality and availability of customer support services;
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size, experience, knowledge and training of sales and marketing staff;
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brand recognition and reputation;
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relationships with referring physicians, hospitals, managed care organizations and other third-party payors;
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reporting capabilities;
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spectrum of solutions, ranging from our differentiated MCT services to event and Holter monitoring, making us a single source for cardiac
monitoring services; and
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perceived value.
We
believe that we compete favorably based on the factors described above. However, our industry is evolving rapidly and is becoming increasingly competitive and the basis on which we
compete may change over time. In addition, if companies with substantially greater resources than ours enter our market, we will face increased competition.
Our
Research segment competes directly with other core labs as well as contract research organizations that offer core lab services. We believe that we compete favorably based on our
comprehensive cardiac and imaging service offerings, the scale of our operation and our ability to support the entire life cycle of new drug development.
Our
Technology segment competes directly with other original equipment manufacturers. We believe that we compete favorably based on our suite of quality products and innovative
solutions, our superior customer service and our extensive industry experience.
Intellectual Property
We rely on a combination of intellectual property laws, non-disclosure agreements and other measures to protect our proprietary rights. We
attempt to protect our intellectual property rights by filing patent applications for new features and products we develop. In addition, we also seek to maintain certain intellectual property and
proprietary know-how as trade secrets, and generally require our partners to execute non-disclosure agreements prior to any substantive discussions or disclosures of our technology or business plans.
Our business and competitive positions are dependent in part upon our ability to protect our proprietary technology and our ability to avoid infringing the patents or proprietary rights of others.
Patents.
As of December 31, 2016, we had 49 issued United States patents, of which four are United States design patents. We also
have 111
issued foreign patents, bringing our total number of issued patents worldwide to 160. In furtherance of our overall global intellectual property strategy, we have approximately 56 patent applications
currently on file worldwide. We filed these patent applications in the United States, Europe, Canada, China, Korea, Japan and Australia. Our issued United States patents expire between 2017 and 2032.
While we have several patents expiring between 2017 and 2020, including patents that relate, in part, to our key products, we do not believe such expirations will have a material impact on our ability
to compete in the short-term since our technology is typically covered by several patents, creating a system of protected technology.
Trademarks and Copyrights.
As of December 31, 2016, we had 21 trademark registrations in the United States, eight pending
trademark
applications in the United States and one trademark registration in Europe for a variety of word marks and slogans. Our trademarks are an integral part of our business and include, among others, the
registered trademark CardioNet®, and the unregistered trademarks Mobile Cardiac Outpatient Telemetry, MCOT and CardioPortal. We also have a
significant amount of copyright-protected materials.
Government Regulation
The health care industry is highly regulated, with no guarantee that the regulatory environment in which we operate will not change
significantly and adversely in the future. We believe that health care legislation, rules, regulations and interpretations will change, and we expect to modify our agreements and operations in
response to these changes.
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U.S. Food and Drug Administration.
The medical devices that we use to provide patient monitoring services are regulated by the FDA
under the Federal
Food, Drug, and Cosmetic Act. The basic regulatory requirements that manufacturers of medical devices distributed in the United Sates must comply with are Premarket Notification 510(k), unless exempt,
or Premarket Approval, establishment registration, medical device listing, quality system regulation, labeling requirements and medical device reporting.
The
algorithms we use in the MCT service maintain FDA 510(k) clearance as a Class II device ("510(k) Clearance"). On October 28, 2003, the FDA issued a guidance document
entitled: "Class II Special Controls Guidance Document: Arrhythmia Detector and Alarm." In addition to conforming to the general requirements of the Federal Food, Drug, and Cosmetic Act,
including the Premarket Notification requirements described above, all of our cardiac related 510(k) submissions address the specific issues covered in this special controls guidance document. The
algorithms we use in the BGM service also maintain FDA 510(k) Clearance as a Class II device.
Failure
to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include certain sanctions, such as fines, injunctions and civil
penalties; recall or seizure of our devices and intellectual property; operating restrictions; partial suspension or total shutdown of production; withdrawal of 510(k) Clearance of new components or
algorithms; withdrawal of 510(k) Clearance already granted to one or more of our existing components or algorithms; and criminal prosecution.
CE Marking.
Medical devices distributed within the European Economic Area require a CE Marking. ISO 13485 is a quality system
standard used by
medical companies providing design, development, manufacturing, installation and servicing, and is the basis for acquiring CE Marking for medical device product distribution in the European Union.
Failure to maintain appropriate CE Marking could have an adverse effect on our ability to sell our devices within the European Union.
Health Care Fraud and Abuse.
In the United States, there are state and federal anti-kickback laws that generally prohibit the payment
or receipt of
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 health care providers and suppliers unless those relationships meet the requirements of specific exceptions
to the law. Anti-kickback laws constrain our sales, marketing and promotional activities by limiting the kinds of financial arrangements we may have with physicians, medical centers and others in a
position to purchase, recommend or refer patients for our cardiac monitoring services or other products or services we may develop and commercialize. Due to the breadth 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-party payors that are false or fraudulent.
Violations may result in substantial civil penalties, including treble damages, and criminal penalties, including imprisonment, 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
the government. Various states have enacted laws modeled after the Federal False Claims Act, including "qui tam" provisions, and some of these laws apply to 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.
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The Patient Protection and Affordable Care Act.
On March 23, 2010, the Patient Protection and Affordable Care Act was signed into
law and on
March 30, 2010, the Health Care and Education Reconciliation Act of 2010 was signed into law. Together, the two measures, collectively known as the Affordable Care Act, make the most sweeping
and fundamental changes to the United States health care system since the creation of Medicare and Medicaid. The Affordable Care Act includes numerous health-related provisions with various effective
dates, including expanded Medicaid eligibility, a requirement that most individuals have health insurance or pay a penalty, new requirements for health plans and insurance policy standards, the
establishment of health insurance exchanges, changes to Medicare payment systems to encourage more cost-effective care and new and expanded tools to address fraud and abuse. Section 6002 of the
Affordable Care Act requires manufacturers of medical devices and other products reimbursed by Medicare to report annually to the government certain payments to physicians and teaching hospitals.
As
a result of the passage of the Affordable Care Act, manufacturers of certain medical devices are subject to an excise tax, applicable to sales of taxable medical devices beginning
January 1, 2013. Several devices that are manufactured by our Technology segment are subject to these taxes. The tax equals 2.3% of the sale price of the applicable medical device. As a
manufacturer, we are responsible for
remitting these taxes to the federal government. However, on December 18, 2015, the Consolidated Appropriations Act of 2016, among other things, included a moratorium on the medical devices tax
commencing on January 1, 2016 and ending on December 31, 2017.
Health Insurance Portability and Accountability Act of 1996.
The Health Insurance Portability and Accountability Act ("HIPAA") was
enacted by the
United States Congress in 1996. Numerous state and federal laws govern the collection, dissemination, use and confidentiality of patient and other health information, including the administrative
simplification and privacy provisions of HIPAA. Historically, state law has governed confidentiality issues, and HIPAA preserves these laws to the extent they are more protective of a patient's
privacy or provide the patient with greater access to his or her health information. As a result of the implementation of the HIPAA regulations, many states are considering revisions to their existing
laws and regulations that may or may not be more stringent or burdensome than the federal HIPAA provisions. HIPAA applies directly to covered entities, which include health plans, health care
clearinghouses and many health care providers. The HIPAA statute and its implementation rules are concerned primarily with the privacy of protected health information when it is used and/or disclosed;
the confidentiality, integrity and availability of electronic health information; and the content and format of certain identified electronic health care transactions. The laws governing health care
information privacy and security impose civil and criminal penalties for their violation and can require substantial expenditures of financial and other resources for information technology system
modifications and for ongoing operational compliance.
Medicare.
Medicare is a federal program administered by CMS and its Medicare administrative contractors. The Medicare program provides
qualified
persons with health care benefits that cover the major costs of medical care within prescribed limits, subject to certain deductibles and co-payments. The Medicare program has established guidelines
for local and national coverage determinations and reimbursement of certain equipment, supplies and services, which are subject to change. The methodology for determining coverage status and the basis
and amount of Medicare reimbursement varies based upon, among other factors, the setting in which a Medicare beneficiary receives health care items and services.
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 policies may materially increase or decrease the rate of program payments to health care facilities and other
health care suppliers and practitioners, including those paid for our cardiac monitoring services. Any changes in federal
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legislation,
regulations or other policies affecting Medicare coverage or reimbursement relative to our cardiac monitoring services could have an adverse effect on our performance.
Our
facilities in Malvern, PA, San Francisco, CA, Ewing, NJ and Eagan, MN are enrolled in Medicare as Independent Diagnostic Testing Facilities ("IDTFs"), which is defined by CMS as an
entity independent of a hospital or physician's office in which diagnostic tests are performed by licensed or certified non-physician personnel under appropriate physician supervision. Medicare has
set very detailed performance standards that every IDTF must meet in order to obtain or maintain its billing privileges, including requirements to, among other things, operate in compliance with all
applicable federal and state licensure and regulatory requirements for the health and safety of patients; maintain a physical facility on an appropriate site meeting specific criteria; have a
comprehensive liability insurance policy of at least $0.3 million per location; disclose certain ownership information; have its testing equipment calibrated and maintained in accordance with
specific standards; have technical staff on duty with the appropriate credentials to perform tests; and permit on-site inspections. These requirements are subject to change. We believe that our
facilities are in compliance with the IDTF standards.
Environmental Regulation.
We use materials and products regulated under environmental laws, primarily in the manufacturing and
sterilization
processes. While it is difficult to quantify, we believe the ongoing cost of compliance with environmental protection laws and regulations will not have a material impact on our business, financial
position or results of operations.
Supply Chain Diligence and Transparency
Section 1502 of the Dodd Frank Wall Street Reform and Consumer Protection Act was adopted to further the humanitarian goal of ending the
violent conflict and human rights abuses in the Democratic Republic of the Congo and adjoining countries ("DRC"). This conflict has been partially financed by the exploitation and trade of tantalum,
tin, tungsten and gold (so called "conflict minerals") that originate from mines or smelters in the region. SEC rules adopted in August 2012 under Section 1502 require reporting companies to
disclose annually on Form SD whether any such minerals that are necessary to the functionality or production of products they manufactured, or for which they contracted the manufacture, during
the prior calendar year did, in fact, originate in the DRC and, if so, if the related revenue was used to support the conflict and/or abuses.
Some
of the products manufactured by Braemar, UMI, BioTelemetry Denmark and Telcare may contain tantalum, tin, tungsten and/or gold. Consequently, in compliance with United States
Securities and Exchange Commission ("SEC") rules, we have adopted a policy on conflict minerals, which can be found on our website, and have implemented a supply chain due diligence and risk
mitigation process with reference to the Organization for Economic Cooperation and Development ("OECD") guidance approved by the SEC to assess and report annually whether our products are "conflict
free."
We
support efforts to end the violence and human rights abuses in the mining of certain minerals in the DRC. We expect our suppliers to comply with the OECD guidance and industry
standards and to ensure that their supply chain conforms to our policy and the OECD guidance. We will mitigate identified risks by working directly with our suppliers; however, we may need to alter
our sources of supply or modify our product design if circumstances require. We may incur certain costs in order to comply with these disclosure requirements, including for due diligence to determine
the source of the subject minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. In addition, these
rules could adversely affect the sourcing, supply and pricing of materials used in our products throughout the supply chain beyond our control, whether or not the subject minerals are "conflict free."
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Product 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 be made against us resulting from adverse
medical consequences to patients resulting from the information we provide. To protect ourselves from product liability claims, we maintain professional liability and general liability insurance on a
"claims made" basis. Insurance coverage under such policies is contingent 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 of this Report, a material product liability claim has never been made against us and we believe our insurance policies are adequate in amount and coverage for our current operations,
there can be no assurance that the coverage maintained by us is sufficient to cover all future claims. In addition, there can be no assurance that we will be able to obtain such insurance on
commercially reasonable terms in the future.
Employees
As of December 31, 2016, we employed 1,087 employees. None of our employees are represented by a collective bargaining agreement. We
consider our relationship with our employees to be good.
Available Information
We file electronically with the SEC 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 of 1934 ("Exchange Act"). We make these reports available on
our website at
http://www.gobio.com
, free of charge. Copies of these reports are made available as soon as reasonably practicable after we
electronically 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 F Street, 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, at
http://www.sec.gov
.
Item 1A. Risk Factors
We have a history of net losses and future profitability is uncertain.
We previously incurred net losses for each annual period from our inception through December 31, 2014. For the year ended
December 31, 2014, we realized a net loss of $9.8 million. For the years ended December 31, 2016 and 2015, we achieved net income of $53.4 million and $7.4 million,
respectively. We may not be able to sustain or increase profitability on a quarterly or annual basis. As of December 31, 2016, we had a total accumulated deficit of approximately
$142.7 million.
Reimbursement by Medicare is highly regulated and subject to change and our failure to comply with applicable
regulations could decrease our revenue, subject us to penalties or adversely affect our results of operations.
The Medicare program is administered by CMS, which imposes extensive and detailed requirements on medical product and services providers,
including, but not limited to, rules that govern how we structure our relationships with physicians, how and when we submit reimbursement claims, how we operate our monitoring facilities and how and
where we provide our arrhythmia monitoring solutions. Our failure to comply with applicable Medicare rules could result in the discontinuation of
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our
reimbursement under the Medicare payment program, a requirement to return funds already paid to us, civil monetary penalties, criminal penalties and/or exclusion from the Medicare program.
Changes in the reimbursement rate that commercial payors and Medicare will pay for our products and services
could adversely affect our revenue.
We receive reimbursement for our products and services from commercial payors and from Medicare administrative contractors with jurisdiction in
the state where the services are performed. In addition, our prescribing physicians receive reimbursement for professional interpretation of the information provided by our products and services from
commercial payors or Medicare. Average commercial reimbursement rates have declined over a three and five year period. When commercial payors combine their operations, the combined company may elect
to reimburse for our products and services at the lowest rate paid by any of the participants in the consolidation. If one of the payors participating in the consolidation does not reimburse for one
of our products or services, the combined company may elect not to reimburse for such product or service. Additionally, commercial payors can typically terminate these contracts by providing between
60 and 120 days prior notice at any time following the end of the initial term of the agreement. In addition, CMS may reduce the reimbursement rate for our services, as it has in the past.
Furthermore, CMS has adopted a complex new system for reimbursing Medicare physician services as required by the Medicare Access and CHIP Reauthorization Act of 2015. Under the new program, which
began January 1, 2017, physicians will either report under the Merit-based Incentive Payment System or an Advanced Alternative Payment Model, and their 2017 performance will impact 2018 rates.
We cannot predict the impact of this new framework on reimbursement for our services. A decrease in Medicare or commercial reimbursement rates or termination of commercial payor contracts would
adversely affect our financial results.
The operation of our 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 monitoring facilities in Malvern, PA, Eagan, MN, Ewing, NJ and San Francisco, CA that analyze the data obtained from cardiac monitors
and report the results to physicians. In order for us to receive reimbursement from Medicare and some commercial payors, our monitoring centers must be certified as IDTFs. Certification as an IDTF
requires that we follow strict regulations governing how the center operates, such as requirements regarding the experience and certifications of the technicians who review data transmitted from our
monitors. These rules and regulations vary from location to location and are subject to change. If they change, we may have to change the operating procedures at our monitoring facilities, which could
increase our costs significantly. If we fail to obtain and maintain IDTF certification, our services may no longer be reimbursed by Medicare and some commercial payors, which could have a material
adverse impact on our business.
Our failure to maintain accreditation could impact our DMEPOS operations.
Accreditation is required by most of our managed care payors and became a mandatory requirement for all Medicare durable medical equipment,
prosthetics, orthotics and supplies ("DMEPOS") providers effective October 1, 2009. In 2016, we acquired Telcare, a diabetes care management company. In 2017, Telcare completed a nationwide
accreditation renewal process conducted by the Healthcare Quality Association on Accreditation, which renewed our accreditation for another three years. The Company will undergo the next survey
cycle in 2020. If we lose accreditation, our failure to maintain accreditation could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital
resources and liquidity.
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Failure to appropriately track and report certain payments to physicians and teaching hospitals may violate
certain federal reporting laws and subject us to fines and penalties.
Section 6002 of the Affordable Care Act requires certain medical device manufacturers that produce devices covered by the Medicare and
state Medicaid programs to report annually to the government certain payments to physicians and teaching hospitals. If we fail to appropriately track and report such payments to the government, we
could be subject to civil fines and penalties, which could adversely affect the results of our operations.
Audits or denials of our claims by government agencies and private payors could reduce our revenue and have
an adverse effect on our results of operations.
As part of our business operations, we submit claims on behalf of patients directly to, and receive payments from, Medicare, Medicaid and other
third-party payors. We are subject to extensive government regulation, including requirements for submitting reimbursement claims under appropriate codes and maintaining certain documentation to
support our claims. Medicare contractors and Medicaid agencies periodically conduct pre-and post-payment reviews and other audits of claims and are under increasing pressure to more closely scrutinize
health care claims and supporting documentation. We have been and are currently subject to pre-and post-payment reviews as well as audits of claims under CMS' Recovery Audit Program and may experience
such reviews and audits of claims in the future. Such reviews and similar audits of our claims could result in material delays in payment, as well as material recoupments or denials, which would
reduce our net sales and profitability, or result in our exclusion from participation in the Medicare or Medicaid programs. We are also subject to similar review and audits from private payors, which
may also result in material delays in payment and material recoupments and denials. In addition, state agencies may conduct investigations or submit requests for information relating to claims data
submitted to private payors.
We have a concentrated number of payors and losing one of them would reduce our sales and adversely affect
our business and operating results.
Medicare, our largest payor, represents a significant percentage of our revenue. For the year ended December 31, 2016, Medicare accounted
for 33% of our total revenue. No other payor accounted for more than 10% of total revenue. Our agreements with commercial payors typically allow either 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 following the 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, in some instances, can unilaterally change the reimbursement rates they pay. A commercial payor who terminates or does not renew their contract
with us may, or may not, alter their coverage of our
services. In the event any of our key commercial payors terminate their agreements with us, 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 on terms as favorable as are currently contracted, our business, operating results and prospects would be adversely affected.
Violation of federal and state laws regarding privacy and security of patient information may adversely
affect our business, financial condition or operations.
The use and disclosure of certain health care information by health care providers and their business associates have come under increased
public scrutiny. Federal standards under HIPAA establish rules concerning how individually-identifiable health information may be used, disclosed and protected. Historically, state law had governed
confidentiality issues, and HIPAA 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 health information.
Additionally, the 2009 Health Information Technology for Economic and Clinical Health Act and associated changes to HIPAA impose additional requirements relating to the
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privacy,
security and transmission of individually identifiable health information. We must operate our business in a manner that complies with all applicable laws, both federal and state, and that
does not jeopardize the ability of our customers to comply with all applicable laws. We believe that our operations are consistent with these legal standards. Nevertheless, these laws and regulations
present risks for health care providers and their business associates that provide services to patients in multiple states. As we continue to see how government regulators and courts interpret and
enforce HIPAA's requirements, we may need to adjust our interpretations of these laws and regulations over time. If a challenge to our activities is successful, it could have an adverse effect on our
operations, may require us to forego relationships with customers in certain states and may restrict the territory available to us to expand our business. In addition, even if our interpretations of
HIPAA and other federal and state laws and regulations are correct, we could be held liable for unauthorized uses or disclosures of patient information as a result of inadequate systems and controls
to protect this information or as a result of the theft of information by unauthorized computer programmers who penetrate our network security.
Violation
of these laws against us could have a material adverse effect on our business, financial condition and results of operations. For example, in 2011, we experienced the theft of
two unencrypted laptop computers and, as a result, were required to provide notices under the HIPAA Breach Notification Rule. Although we have been in compliance with our obligations stemming from
these incidents, there has yet to be an outcome to the ongoing investigation into the thefts by the United States Department of Health and Human Services' Office for Civil Rights. We are unable to
predict what action, if any, might be taken in the future by the Office for Civil Rights or other governmental
authorities as a result of this investigation or what impact, if any, the outcome of this matter might have on our results of operations.
The FDA may recommend a different approach to measuring the cardiac impact and safety of drugs as part of the
approval process. Such changes could make the systems and processes of our research segment obsolete and adversely affect revenue and profitability.
As part of its approval process, the FDA has provided guidance reinforcing the need for cardiac safety testing of all compounds entering the
blood stream. The requirements vary based on the type and history of compound. This testing is accomplished by different methods, including cardiac imaging such as MUGA and ECG analysis including
measuring the QT/QTc interval for prolongation. We function as a core lab and have developed proprietary systems and processes to receive cardiac imaging studies and ECGs for analysis. It is possible
that, in the future, the FDA may recommend a different approach for evaluating the cardiac impact and safety of compounds which may diminish the need for a core lab. This would considerably reduce the
value of our existing systems and processes and would substantially decrease our revenue and profitability in our Research segment.
In
December, 2015, the FDA published a report which called into question the need for certain QT studies. In a series of public meetings throughout 2016 discussing the report, FDA
speakers indicated that certain studies were no longer mandatory and indicated that future regulations will include some combination of traditional study types along with early phase Exposure Response
modeling. A new FDA White Paper is expected in 2017 which will clarify guidance around the performance of QT studies. We cannot assess the impact of this expected guidance at this time, but it may
substantially decrease our revenue and profitability in our Research segment.
We are subject to numerous FDA regulations and decisions and it may be costly to comply with these
regulations and decisions and to develop compliant products and processes.
The devices that we manufacture are classified as medical devices and are subject to extensive regulation by the FDA. Further, we maintain
establishment registration with the FDA as a distributor of medical devices. FDA regulations govern manufacturing, labeling, promotion, distribution, importing, exporting, shipping and sale of these
devices. Our devices and our arrhythmia detection algorithms
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have
510(k) Clearance status from the FDA. Modifications to our devices or our algorithms that could significantly affect safety or effectiveness, or that could constitute a significant change in
intended use, would require a new clearance from the FDA. If in the future we make changes to our devices or our algorithms, the FDA could determine that such modifications require 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 devices and various reporting regulations, as well as regulations
that govern the promotion and advertising of medical devices. The FDA could find that we have failed to comply with one of these requirements, which could result in a wide variety of enforcement
actions, ranging from a warning letter to one or more severe sanctions. These sanctions could include fines, injunctions and civil penalties; recall or seizure of devices; operating restrictions,
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 be costly and significantly harm our business, financial condition and results of operations.
Our operations and our interactions with our physicians and patients are subject to regulation aimed at
preventing health care fraud and abuse and, if we are unable to fully comply with such laws, we 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 Federal
Healthcare Programs' Anti-Kickback Statute and the Federal False Claims Act. For some of our services, we directly bill physicians or other health care entities, that, in turn, bill payors. Although
we believe such payments and practices are proper and in compliance with laws and regulations, we may be subject to claims asserting that we have violated these laws 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 criminal penalties, including large monetary penalties, damages, fines, imprisonment and
exclusion from Medicare and Medicaid program participation. Furthermore, if we knowingly file, or "cause" the filing of, false claims for reimbursement with government programs such as Medicare and
Medicaid, we may be subject to substantial civil penalties, including treble damages. 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 the government. In recent years, the number of suits brought in the medical industry by private individuals has
increased dramatically. Various states have enacted laws modeled after the Federal False Claims Act, including "qui tam" provisions, and some of these laws apply to claims filed with commercial
insurers. Even if we are not found to have violated any of these federal or state anti-fraud or false claims acts, the costs of defending these claims could adversely affect our results of operations.
The medical device industry is the subject of numerous governmental investigations into marketing and other
business practices. These investigations could result in the commencement of civil and/or criminal proceedings, substantial fines, penalties, and/or administrative remedies, divert the attention of
our management, and have an adverse effect on our financial condition and results of operations.
As mentioned above, we are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities.
These authorities have been increasing their scrutiny of our industry. We occasionally receive subpoenas or other requests for information from state and federal governmental agencies, including,
among others, the United States Department of Justice and the Office of Inspector General of Health and Human Services. These investigations typically relate primarily to financial arrangements with
health care providers, regulatory compliance and product promotional practices.
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We
cooperate with these investigations and respond to such requests. However, when an investigation begins, we cannot predict when it will be resolved, the outcome of the investigation
or its impact on us. An adverse outcome in one or more of these investigations could include the commencement of civil and/or criminal proceedings, substantial fines, penalties and/or administrative
remedies, including exclusion from government reimbursement programs and entry into Corporate Integrity Agreements with governmental agencies. In addition, resolution of any of these matters could
involve the imposition of additional and costly compliance obligations. Finally, if these investigations continue over a long period of time, they could divert the attention of management from the
day-to-day operations of our business and impose significant administrative burdens, including cost, on us. These potential consequences, as well as any adverse outcome from these investigations or
other investigations initiated by the government at any time, could have a material adverse effect on our financial condition and results of operations.
If we do not obtain and maintain adequate protection for our intellectual property, it may adversely affect
the value of our technology and devices and future revenue and operating income.
Our business and competitive positions are in part dependent upon our ability to protect our proprietary technology. 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 protective contractual provisions with other third parties. We attempt to
protect our intellectual property position by filing trademark applications and United States and international patent applications 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, is likely to prevent others from
competing with us using a similar business model. There are many issued patents and patent applications held by others in our industry and the electronics field. Our competitors may independently
develop technologies that are substantially similar or superior to our technologies, or design around our patents or other intellectual property to avoid infringement. In addition, we may not apply
for a patent relating to products or processes that are patentable, we may fail to receive any patent for which we apply or have applied, and any patent owned by us or issued to us could be
circumvented, challenged, invalidated, or held to be unenforceable or rights granted thereunder may not adequately protect our technology or provide a competitive advantage to us. If a third-party
challenges the validity of any patents or proprietary rights of ours, we may become involved in intellectual property disputes and litigation that would be costly and time-consuming. All of our
patents will eventually expire. Some of our patents, including patents protecting significant elements of our technology, will expire between 2017 and 2020, at which point we can no longer enforce
these against third parties to prevent them from making, using, selling, offering to sell or importing our current clinical device. While we have several patents expiring between 2017 and 2020,
including patents that relate, in part, to our key products, our technology is typically covered by several patents, creating a system of protected technology. The expiration of our patents could
expose us to more competition and have an adverse impact on our business.
Although
third parties may infringe on our patents and other intellectual property rights, we may not be aware of any such infringement, or we may be aware of potential infringement but
elect not to seek to prevent such infringement or pursue any claim of infringement, and the third-party may continue its potentially infringing activities. Any decision whether or not to take further
action in response to potential infringement of our patent or other intellectual property rights may be based on a variety of factors, such as the potential costs and benefits of taking such action,
and business and legal 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 management personnel and
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may
not be successful or result in any significant recovery of compensation for any infringement or enjoining of any infringing activity. Litigation or licensing discussions may also involve or lead
to counterclaims that could be brought by 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 outside collaborators to enter into written
non-disclosure agreements. These agreements, however, may not provide adequate protection to prevent any unauthorized 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 or substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.
Our ability to innovate or 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. The cardiac monitoring
industry is characterized by a large number of patents and patent filing. Competitors may have filed applications for, or have been issued, patents and may obtain additional patents and proprietary
rights related to devices, services or processes that we use to compete. We may not be aware of all of the patents or patent applications potentially adverse to our interests that may have been filed
or issued to others.
United
States patent applications may be kept confidential while pending in the Patent and Trademark Office. If other companies have or obtain patents relating 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 be able 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 fact that we may pose a competitive threat to some companies who own or control various patents, it is possible that one or more third parties may assert a patent
infringement claim seeking damages and to enjoin the manufacture, use, sale and marketing of our products and services. If a third-party asserts that we have infringed on its patent or proprietary
rights, we may become involved in intellectual property disputes and litigation that would be costly and time-consuming and could impair or foreclose our ability to make, use, market or sell our
products and services. Lawsuits may have already been filed against us without our knowledge. Additionally, we may receive notices from other third parties suggesting or asserting that we are
infringing their patents and inviting us to license such patents. We do not believe that 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 intend to vigorously defend against any allegation of infringement.
If
we are found to infringe on the patents or intellectual property rights of others, we may be required to pay damages, stop the infringing activity or obtain licenses or rights to the
patents or other intellectual property in order to use, manufacture, market or sell our products and services. Any required license may not be available to us on acceptable terms, or at all. If we
succeed in obtaining such licenses, payments under such licenses would reduce any earnings from our products. In addition, licenses may be non-exclusive and, accordingly, our competitors may have
access to the same technology as 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 license unnecessary, 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.
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If we are unable to successfully integrate acquired companies and technology, we may not realize the benefits
anticipated and our future growth may be adversely affected.
We have grown through acquisitions of companies and technology, including our acquisitions of the assets of the ePatch Division of DELTA in
April 2016, VirtualScopics in May 2016 and Telcare in December 2016. Acquisitions involve risks associated with our assumption of the 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 of acquired assets and potential loss of the acquired company's key employees or customers. Physician, patient and
customer satisfaction or performance problems with an acquired business, technology, service or device could also have a material adverse effect on our reputation. Additionally, potential disputes
with the seller of an acquired business or its employees, suppliers or customers could adversely affect our business, operating results and financial condition. If we fail to properly evaluate and
execute acquisitions, our business may be disrupted and our operating results and prospects may be harmed.
Furthermore,
integrating acquired companies or new technologies into our business may prove more difficult than we anticipate. 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 to effectively manage our operations and key personnel. If we elect to consolidate our facilities, we may lose key personnel unwilling to relocate to the
consolidated facility, may have difficulty hiring appropriate personnel at the consolidated facility and may have difficulty providing continuity of service through the consolidation.
The success of our business is partially dependent on our ability to raise capital, and failure to raise the
necessary capital may adversely affect our results of operations, financial condition and stock price.
We believe that our existing cash and cash equivalents, together with our revolving credit facility with Healthcare Financial
Solutions, LLC ("HFS"), the successor in interest to The General Electric Capital Corporation, will be sufficient to meet our anticipated cash requirements for the foreseeable future. However,
our future funding requirements will depend on many factors, including:
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the results of our operations;
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the reimbursement rates associated with our products and services;
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our ability to secure contracts with additional commercial payors providing for the reimbursement of our services;
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the costs associated with manufacturing and building our inventory of our current and future generation monitors;
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the costs of hiring additional personnel and investing in infrastructure to support future growth;
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the costs of undertaking future strategic initiatives, such as acquisitions or joint ventures;
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the emergence of competing technologies and products and other adverse market developments;
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the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights or defending
against claims of infringement by others; and
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actions taken by the FDA, CMS and other regulatory authorities affecting cardiac monitoring devices 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 by issuing equity securities,
dilution to existing stockholders would result. If we raise additional funds by incurring debt financing, the terms of the
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debt
may involve significant cash payment obligations as well as covenants and financial ratios that may restrict our ability to operate our business.
We have outstanding debt, and may incur other debt in the future, which could adversely affect our financial
condition, liquidity and results of operations.
As of December 31, 2016, we had outstanding debt under our credit facility with HFS of $25.8 million. We may borrow additional
amounts in the future and use the proceeds from any future borrowing for general corporate purposes, future acquisitions or expansion of our business.
Our
incurrence of this debt, and any increases in our levels of debt, may adversely affect our operating results and financial condition by, among other
things:
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requiring a portion of our cash flow from operations to make payments on this debt; or
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limiting our flexibility in planning for, or reacting to, changes in our business and the industry.
Our
current credit facility imposes restrictions on us, including restrictions on our ability to create liens on our assets, incur additional indebtedness, make acquisitions or dispose
of assets, and also requires us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. If we breach any of the
covenants and do not obtain a waiver from our lender, then, subject to applicable cure periods, our outstanding indebtedness could be declared immediately due and payable.
Our business depends on our ability to attract and retain talented employees.
Our business is based on successfully attracting and retaining talented employees. The market for highly-skilled workers and leaders in our
industry is extremely competitive. If we are less successful in our recruiting efforts, or if we are unable to retain key employees, our ability to develop and deliver successful products and services
may be adversely affected.
Our cardiac monitoring and INR testing businesses are dependent upon physicians prescribing our services and
failure to obtain those prescriptions may adversely affect our revenue.
The success of our cardiac monitoring and INR testing businesses are dependent upon physicians prescribing our services. Our success in
obtaining prescriptions will be directly influenced by a number of factors, including:
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the ability of the physicians with whom we work to obtain sufficient reimbursement and be paid in a timely manner for the professional services
they provide in connection with the use of our cardiac monitoring solutions;
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our ability to continue to establish ourselves as a comprehensive cardiac monitoring services provider;
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our ability to educate physicians regarding the benefits of our services over alternative diagnostic monitoring solutions; and
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the clinical efficacy of our devices.
If
we are unable to educate physicians regarding the benefits of our products and obtain sufficient prescriptions for our services, revenue from the provision of our cardiac monitoring
solutions could potentially decrease.
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We may experience difficulty in obtaining reimbursement for our services from commercial payors that consider
our technology to be experimental 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
determine to be "experimental and investigational." Commercial payors typically label medical devices or services as "experimental and investigational" until such devices or services have demonstrated
product superiority evidenced by a randomized clinical trial. We completed a clinical trial in March 2007 that showed that MCOT provided higher diagnostic yield than traditional loop
event monitoring. Prior to our clinical trial, MCOT was labeled "experimental and investigational" by numerous commercial payors. Since the trial was published in March 2007, we have
obtained contracts with most of these commercial payors that previously labeled MCOT as "experimental and investigational." We have not obtained contracts with certain remaining
commercial payors however, and these payors have informed us that they do not believe the data from this trial justifies the removal of the experimental designation. As a result, these commercial
payors may refuse to reimburse the technical and professional fees associated with MCOT.
If
commercial payors decide not to reimburse our products or services or the related services provided by physicians, or the rates of such reimbursement change, or if we fail to properly
administer claims, our revenue could be adversely affected.
We have a concentration of risk related to the accounts receivable from Medicare and failure to fully collect
outstanding balances from this customer, or a combination of other customers, may adversely affect our results of operations.
As of December 31, 2016, we have balances owed to us from one customer, Medicare, representing approximately 11% of our total gross
accounts receivable. We maintain an allowance for doubtful accounts based on the collections history and aging of outstanding receivables, as well as for any specific instances we become aware of that
may preclude us from reasonably assuring collection on outstanding balances. Determining the allowance for doubtful accounts is judgmental in nature and often involves the use of significant
estimates. A determination that requires a change in our estimates could have a materially adverse effect on our financial condition and operating results.
If we do not have enough equipment or experience delays in manufacturing, we may be unable to fill
prescriptions for cardiac and diabetic monitoring in a timely manner, physicians may elect not to prescribe our services, and our revenue and growth prospects may be adversely affected.
When a physician prescribes cardiac monitoring to a patient, our customer service department begins the patient set-up process. While our goal
is to provide each patient with the appropriate device in a timely manner, we have experienced, and may in the future experience, delays due to the availability of devices, primarily when converting
to a new generation of device or in connection with the increase in prescriptions following potential acquisitions of other companies.
We
may also experience shortages of devices due to manufacturing difficulties. Multiple suppliers provide the components used in our devices, but our Minnesota, New Jersey and
Massachusetts facilities are registered and approved by the FDA as the manufacturer of record of our devices. Our manufacturing operations could be disrupted by fire, earthquake or other natural
disaster, a labor-related disruption, failure in supply or other logistical channels, electrical outages or other reasons. If there were a disruption to our facilities in Minnesota, New Jersey or
Massachusetts, we would be unable to manufacture devices until we have restored and re-qualified our manufacturing capability or developed alternative manufacturing facilities.
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Our
success in obtaining future cardiac monitor prescriptions from physicians is dependent upon our ability to promptly deliver devices to our patients, and a failure in this regard
would have an adverse effect on our revenue and growth prospects.
Interruptions or delays in telecommunications systems could impair the delivery of our MCT and wireless event
services.
The success of our MCT and wireless event services is dependent upon our ability to transmit and process data. Our MCT and wireless event
devices rely on third-party wireless carriers to transmit data over their data networks. We are dependent upon these third-party wireless carriers to provide data transmission services to us through
our various agreements. If we fail to maintain these relationships, or if we lose wireless carrier services, we would be forced to seek alternative providers of data transmission services, which might
not be available 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 they rely. Interruptions of our data networks, or
the data networks of our wireless carriers for any extended length of time, loss of stored data or other computer problems could have a material adverse effect on our business and operating results.
Frequent or persistent interruptions in our cardiac monitoring services could cause permanent harm to our reputation and could cause current or potential users of our remote monitoring services or
prescribing physicians to believe that our systems are unreliable, leading them to switch to our competitors. Such interruptions could result in liability claims and litigation against us for damages
or injuries resulting from the disruption in service.
New products and technological advances by our competitors may negatively affect our market share, commercial
opportunities and results of operations.
The market for cardiac monitoring solutions is evolving rapidly and becoming increasingly competitive. Our industry is highly fragmented and
characterized by a small number of large providers and a large number of smaller regional service providers. These third parties compete with us in marketing to payors and prescribing physicians,
recruiting and retaining qualified personnel, acquiring technology and developing solutions complementary to our programs. In addition, as companies with substantially greater resources than ours
enter our market, we will face increased competition. If our competitors are better able to develop and patent cardiac monitoring solutions than us, or develop more effective or less expensive cardiac
monitoring solutions that render our solutions obsolete or non-competitive, or deploy larger or more effective marketing and sales resources 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 features into 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 in
patient requirements and frequent new product introductions and improvements. If we are unable to respond quickly and successfully to these developments, we may lose our competitive position, and our
products or technologies may become uncompetitive or obsolete. To compete successfully, we must maintain a successful research and development effort, develop new products and production processes and
improve our existing products and processes at the same pace or ahead of our competitors. Our research and development efforts are aimed at solving increasingly complex problems, as well as creating
new technologies, and we do not expect that all of our projects will be successful. If our research and development efforts are unsuccessful, our future results of operations could be materially
affected.
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We are increasingly dependent on sophisticated information technology systems to operate our business and if
we fail to properly maintain the integrity of our data or if our products do not operate as intended or we experience a cyber-attack or other breach of these systems, our business could be materially
affected.
We are increasingly dependent on sophisticated information technology for our products and infrastructure. We rely on information technology
systems to process, transmit and store electronic information in our day-to-day operations. The size and complexity of our information technology systems makes them vulnerable to increasingly
sophisticated cyber-attacks, malicious intrusion, breakdown, destruction, loss of data privacy or other significant disruption. Our information systems require an ongoing commitment of significant
resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory
standards, the increasing need to protect patient and customer information and changing customer patterns. As a result of technology initiatives, recently enacted regulations, changes in our system
platforms and integration of new business acquisitions, we have been consolidating and integrating the number of systems we operate and have upgraded and expanded our information systems capabilities.
In
addition, third parties may attempt to hack into our products or systems and may obtain data relating to patients with our products or our proprietary information. If we fail to
maintain or protect our information systems and data integrity effectively, we could lose existing customers, have difficulty attracting new customers, have problems in determining product cost
estimates and establishing appropriate pricing, have difficulty preventing, detecting and controlling fraud, have disputes with customers, physicians and other health care professionals, have
regulatory sanctions or penalties imposed, have increases in operating expenses, incur expenses or lose revenue as a result of a data privacy breach or suffer other adverse consequences. There can be
no assurance that our process of consolidating the number of systems we operate, upgrading and expanding our information systems capabilities, protecting and enhancing our systems and developing new
systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future. Any significant breakdown,
intrusion, interruption, corruption or destruction of these systems, as well as any data breaches, could have a material adverse effect on our business.
Changes in the health care industry or tort reform could reduce the number of cardiac monitoring solutions
ordered by physicians, which could 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 cardiac monitoring solutions
could reduce the volume of services ordered by physicians. If more health care cost controls are broadly instituted throughout the health care industry, the volume of cardiac monitoring solutions
could decrease, resulting in pricing pressure and declining demand for our services, which could harm our operating results. In addition, it has been suggested that some physicians order cardiac
monitoring solutions, even when the services may have limited clinical utility, primarily to establish a record for defense in the event of a claim of medical malpractice against the physician. Legal
changes increasing the difficulty of initiating medical malpractice cases, known as tort reform, could reduce the number of our services prescribed as physicians respond to reduced risks of
litigation, which could harm our operating results.
Legislation and policy changes reforming the United States health care system may have a material adverse
effect on our operating results and financial condition.
On March 23, 2010, the Affordable Care Act was signed into law. The Affordable Care Act makes the most sweeping and fundamental changes
to the United States health care system since the creation of Medicare and Medicaid. The Affordable Care Act includes a large number of health-related
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provisions
expanding Medicaid eligibility, requiring most individuals to have health insurance, establishing new regulations on health plans, establishing health insurance exchanges, requiring
manufacturers to report payments or other transfers of value made to physicians and teaching hospitals and modifying certain payment systems to encourage more cost-effective care.
Further,
on June 28, 2012, the United States Supreme Court upheld the vast majority of this landmark health reform law. Several provisions of the Affordable Care Act specifically
affect the medical equipment industry. In addition to changes in Medicare DMEPOS reimbursement and an expansion of the DMEPOS competitive bidding program, the Affordable Care Act provides that for
sales on or after January 1, 2013, manufacturers, producers and importers of taxable medical devices must pay an annual excise tax of 2.3% of the price for which the devices are sold.
Subsequent legislation (Pub. L. 114-113)
includes a two-year moratorium on the medical device excise tax; it does not apply to sales during 2016 and 2017.
The
Affordable Care Act also establishes enhanced Medicare and Medicaid program integrity provisions, including expanded documentation requirements for Medicare DMEPOS orders, more
stringent procedures for screening Medicare and Medicaid DMEPOS suppliers, and new disclosure requirements regarding manufacturer payments to physicians and teaching hospitals, along with broader
expansion of federal fraud and abuse authorities. The Affordable Care Act, in whole, or in part, may be repealed.
In
addition, various health care reform proposals have also emerged at the state level. We cannot predict the full effect that these laws or any future legislation or regulation will
have on us. However, the implementation of new legislation and regulation may lower reimbursements for our products, reduce medical prescriptions for our services and adversely affect our business.
If we or our suppliers fail to achieve or maintain regulatory approval of manufacturing facilities, our
growth could be limited and our business could be adversely affected.
We currently assemble and manufacture our devices in our Eagan, MN, Ewing, NJ and Concord, MA facilities. We purchase INR monitoring devices
from third parties. In order to maintain compliance with FDA and other regulatory requirements, our manufacturing facilities must be periodically reevaluated and qualified under a quality system to
ensure they meet production and quality standards. Suppliers of components and products used to manufacture MCT, BGM, event, Holter and Pacemaker devices and the manufacturers of the monitors used in
INR services must also comply with FDA regulatory requirements, which often require significant resources and subject us and our suppliers to potential regulatory inspections and stoppages. If we or
our suppliers do not maintain regulatory approval for our manufacturing operations, our business could be adversely affected.
If we fail to meet Medicare accreditation and surety bond requirements or DMEPOS supplier standards, it could
negatively affect our business operations.
Medicare DMEPOS suppliers (other than certain exempted professionals) must be accredited by an approved accreditation organization as meeting
DMEPOS quality standards adopted by CMS. Medicare suppliers also are required to meet surety bond requirements. In addition, Medicare DMEPOS suppliers must comply with Medicare supplier standards in
order to obtain and retain billing privileges, including meeting all applicable federal and state licensure and regulatory requirements. In addition, many of our managed care contracts for the
provision of diabetes services require that we qualify as an accredited DMEPOS supplier. CMS periodically expands or otherwise
clarifies the Medicare DMEPOS supplier standards. We believe we are in compliance with these requirements. If we fail to maintain our Medicare accreditation status and/or do not comply with Medicare
surety bond or supplier standard requirements in the future, or if these requirements are changed or expanded, it could adversely affect our profits and results of operations.
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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 the devices that we manufacture. If these suppliers became unable to
provide components in the volumes needed or at an acceptable price, we would have to identify and qualify acceptable replacements from alternative sources of supply. The process of qualifying
suppliers is lengthy. Delays or interruptions in the supply of our required components could limit or stop our ability to provide sufficient quantities of devices on a timely basis and meet demand for
our services, which could have a material adverse effect on our business, financial condition and results of operations.
We could be subject to medical liability or product liability claims, which may not be covered by insurance
and which would adversely affect our business 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 claims
against us may require us to incur significant defense costs, irrespective of whether such claims have merit. In addition, we provide information to health care providers and payors upon which
determinations affecting medical care are made, and claims may be made against us resulting from adverse medical consequences to patients resulting from the information we provide. In addition, we may
become subject to liability in the event that the devices we use fail to correctly record or transfer patient information or if we provide incorrect information to patients or health care providers
using our services.
Our
liability insurance is subject to deductibles and coverage limitations. In addition, our current insurance may not continue to be available to us on 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 obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or
otherwise protect against any claims against us, we will be exposed to significant liabilities, which may adversely affect our business and results of operations.
Regulations related to conflict minerals may adversely impact our business.
The Dodd Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the
supply of certain minerals, known as conflict minerals, originating from the DRC. Due to the materials used in certain of the products manufactured by our subsidiaries, Braemar, UMI and Telcare, we
must comply with annual disclosure and reporting rules adopted by the SEC by assessing whether the subject minerals contained in Braemar and UMI's products originated in the DRC. Our supply chain is
complex since we do not source our minerals directly from the original mine or smelter. Consequently, we incur costs in complying with these disclosure requirements, including for due diligence to
determine the source of the subject minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. The rules
may adversely affect the sourcing, supply and pricing of materials used in our products throughout the supply chain beyond our control, whether or not the subject minerals are "conflict free." Also,
we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all
subject minerals used in our products through our diligence process.
We are reliant on the outsourcing of clinical research by pharmaceutical, clinical research and biotechnology
companies.
We are reliant on the ability and willingness of pharmaceutical, clinical research and biotechnology companies to continue to spend on clinical
research to outsource the types of research services that we
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provide.
As such, we are impacted and subject to risks, uncertainties and trends that affect companies in these industries. Any downturn in these industries or reduction in spending or outsourcing
could adversely affect our business.
Future sales of our common stock may depress our stock price.
Future issuance in connection with acquisitions and 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 the market 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, 2016, we had 28,261,503 outstanding shares of vested common stock. In addition, we have 3,568,434 options and 592,349 restricted stock units ("RSUs") outstanding to purchase shares
of our common stock that will become exercisable over the next four years. Additionally, as of December 31, 2016, we had 132,992 performance stock units ("PSUs"), which remain unvested.
Further, we have 100,000 performance stock options which have become exercisable. If exercised, vested or earned, additional shares would become available for sale.
Anti-takeover provisions in our charter documents and Delaware law might deter acquisition bids for us that
our stockholders might consider favorable.
Our amended and restated certificate of incorporation and bylaws contain provisions that may make the acquisition of our Company more difficult
without the approval of our Board of Directors. These provisions:
-
-
establish a classified Board of Directors so that not all members of the 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 issued without
stockholder approval, and which may include rights superior to the rights of the holders of common stock;
-
-
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 of Directors or for proposing matters that can be acted upon
by stockholders 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 to certain 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 our Company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult
for our stockholders to elect directors of their choosing and cause us to take other corporate actions such stockholders desire.
We may not be able to realize our net operating loss carryforwards.
We have deferred tax assets that include net operating loss carryforwards that can be used to offset taxable income in future periods and reduce
income taxes payable in those future periods. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences are deductible. The timing and manner in which we can utilize our net operating loss carryforward and future income tax deductions in any year may be limited
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by
provisions of the Internal Revenue Code ("IRC") regarding the change in ownership of corporations. Such limitation may have an impact on the ultimate realization of our carryforwards and future tax
deductions. Section 382 of the IRC ("Section 382") imposes limitations on a corporation's ability to utilize net operating losses if it experiences an "ownership change." In general
terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year
period. Any unused annual limitation may be carried over to later years, and the amount of the limitation may under certain
circumstances be increased by the built-in gains in assets held by us at the time of the change that are recognized in the five-year period after the change. Currently, a portion of our loss
carryforwards are limited under Section 382.