Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of BioTelemetry, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BioTelemetry, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), cash flows and equity for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated
February 21, 2019
expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
|
|
|
/s/ ERNST & YOUNG LLP
|
|
|
|
We have served as the Company’s auditors since 2004.
|
|
|
Philadelphia, Pennsylvania
|
|
February 21, 2019
|
|
BIOTELEMETRY, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands, except shares and par value)
|
2018
|
|
2017
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
80,889
|
|
|
$
|
36,022
|
|
Healthcare accounts receivable, net of allowance for doubtful accounts of $25,345 and $15,556 at December 31, 2018 and 2017, respectively
|
37,754
|
|
|
25,190
|
|
Other accounts receivable, net of allowance for doubtful accounts of $268 and $1,425 at December 31, 2018 and 2017, respectively
|
14,874
|
|
|
13,296
|
|
Inventory
|
7,323
|
|
|
5,332
|
|
Prepaid expenses and other current assets
|
5,820
|
|
|
10,268
|
|
Total current assets
|
146,660
|
|
|
90,108
|
|
Property and equipment, net
|
48,377
|
|
|
49,194
|
|
Intangible assets, net
|
129,653
|
|
|
141,707
|
|
Goodwill
|
238,814
|
|
|
223,105
|
|
Deferred tax asset
|
19,975
|
|
|
17,681
|
|
Other assets
|
3,322
|
|
|
2,767
|
|
Total assets
|
$
|
586,801
|
|
|
$
|
524,562
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
18,157
|
|
|
14,529
|
|
Accrued liabilities
|
21,609
|
|
|
26,055
|
|
Current portion of capital lease obligations
|
1,652
|
|
|
4,023
|
|
Current portion of long-term debt
|
5,125
|
|
|
2,050
|
|
Contract liabilities
|
3,080
|
|
|
4,298
|
|
Total current liabilities
|
49,623
|
|
|
50,955
|
|
Long-term portion of capital lease obligations
|
117
|
|
|
1,486
|
|
Long-term debt
|
193,424
|
|
|
197,306
|
|
Other long-term liabilities
|
33,152
|
|
|
25,112
|
|
Total liabilities
|
276,316
|
|
|
274,859
|
|
Stockholders’ equity:
|
|
|
|
Common stock—$.001 par value as of December 31, 2018 and 2017; 200,000,000 shares authorized as of December 31, 2018 and 2017; 33,406,364 and 32,460,668 shares issued and outstanding at December 31, 2018 and 2017, respectively
|
33
|
|
|
32
|
|
Paid-in capital
|
426,054
|
|
|
409,517
|
|
Accumulated other comprehensive income/(loss)
|
256
|
|
|
(114
|
)
|
Accumulated deficit
|
(115,858
|
)
|
|
(158,678
|
)
|
Total BioTelemetry, Inc.’s stockholders’ equity
|
310,485
|
|
|
250,757
|
|
Noncontrolling interests
|
—
|
|
|
(1,054
|
)
|
Total equity
|
310,485
|
|
|
249,703
|
|
Total liabilities and equity
|
$
|
586,801
|
|
|
$
|
524,562
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands, except per share amounts)
|
2018
|
|
2017
|
|
2016
|
Revenue
|
$
|
399,472
|
|
|
$
|
286,776
|
|
|
$
|
208,332
|
|
Cost of revenue
|
148,986
|
|
|
114,406
|
|
|
78,882
|
|
Gross profit
|
250,486
|
|
|
172,370
|
|
|
129,450
|
|
Operating expenses:
|
|
|
|
|
|
General and administrative
|
109,736
|
|
|
82,983
|
|
|
55,877
|
|
Sales and marketing
|
42,849
|
|
|
35,322
|
|
|
28,636
|
|
Bad debt expense
|
22,222
|
|
|
13,291
|
|
|
9,931
|
|
Research and development
|
11,206
|
|
|
11,101
|
|
|
8,355
|
|
Other charges
|
14,659
|
|
|
31,436
|
|
|
8,639
|
|
Total operating expenses
|
200,672
|
|
|
174,133
|
|
|
111,438
|
|
Income/(loss) from operations
|
49,814
|
|
|
(1,763
|
)
|
|
18,012
|
|
Other expense:
|
|
|
|
|
|
Interest expense
|
(9,429
|
)
|
|
(4,897
|
)
|
|
(1,830
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
(543
|
)
|
|
—
|
|
Loss on equity method investments
|
(246
|
)
|
|
(384
|
)
|
|
(287
|
)
|
Other non-operating income/(expense), net
|
1,365
|
|
|
(2,809
|
)
|
|
(125
|
)
|
Total other expense, net
|
(8,310
|
)
|
|
(8,633
|
)
|
|
(2,242
|
)
|
Income/(loss) before income taxes
|
41,504
|
|
|
(10,396
|
)
|
|
15,770
|
|
(Provision for)/benefit from income taxes
|
370
|
|
|
(6,747
|
)
|
|
37,667
|
|
Net income/(loss)
|
41,874
|
|
|
(17,143
|
)
|
|
53,437
|
|
Net loss attributable to noncontrolling interests
|
(946
|
)
|
|
(1,187
|
)
|
|
—
|
|
Net income/(loss) attributable to BioTelemetry, Inc.
|
$
|
42,820
|
|
|
$
|
(15,956
|
)
|
|
$
|
53,437
|
|
|
|
|
|
|
|
Net income/(loss) per common share attributable to BioTelemetry, Inc.:
|
|
|
|
|
|
Basic
|
$
|
1.31
|
|
|
$
|
(0.53
|
)
|
|
$
|
1.91
|
|
Diluted
|
$
|
1.20
|
|
|
$
|
(0.53
|
)
|
|
$
|
1.75
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
Basic
|
32,709
|
|
|
30,386
|
|
|
27,920
|
|
Dilutive stock options and restricted stock units
|
3,074
|
|
|
—
|
|
|
2,569
|
|
Diluted
|
35,783
|
|
|
30,386
|
|
|
30,489
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Net income/(loss) attributable to BioTelemetry, Inc.
|
$
|
42,820
|
|
|
$
|
(15,956
|
)
|
|
$
|
53,437
|
|
Other comprehensive income/(loss):
|
|
|
|
|
|
Foreign currency translation gain/(loss)
|
370
|
|
|
(80
|
)
|
|
(22
|
)
|
Comprehensive income/(loss) attributable to BioTelemetry, Inc.
|
$
|
43,190
|
|
|
$
|
(16,036
|
)
|
|
$
|
53,415
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
OPERATING ACTIVITIES
|
|
|
|
|
|
Net income/(loss)
|
$
|
41,874
|
|
|
$
|
(17,143
|
)
|
|
$
|
53,437
|
|
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
|
|
|
|
|
|
Bad debt expense
|
22,222
|
|
|
13,291
|
|
|
9,931
|
|
Depreciation
|
22,963
|
|
|
18,337
|
|
|
10,547
|
|
Amortization of intangibles
|
17,205
|
|
|
10,224
|
|
|
3,722
|
|
Impairment charge
|
—
|
|
|
12,045
|
|
|
—
|
|
Stock-based compensation
|
9,261
|
|
|
7,680
|
|
|
6,502
|
|
Write off of derivative premium
|
—
|
|
|
1,322
|
|
|
—
|
|
Accretion of debt discount
|
1,243
|
|
|
678
|
|
|
217
|
|
Loss on extinguishment of debt
|
—
|
|
|
543
|
|
|
—
|
|
Gain on legal settlement
|
—
|
|
|
(1,333
|
)
|
|
—
|
|
Tax (benefit)/expense
|
(2,294
|
)
|
|
6,050
|
|
|
(38,141
|
)
|
Other non-cash items
|
(446
|
)
|
|
(2,644
|
)
|
|
457
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Healthcare and other accounts receivable
|
(35,742
|
)
|
|
(15,455
|
)
|
|
(8,707
|
)
|
Inventory
|
(1,991
|
)
|
|
665
|
|
|
(753
|
)
|
Prepaid expenses and other assets
|
3,517
|
|
|
(694
|
)
|
|
(1,050
|
)
|
Accounts payable
|
3,760
|
|
|
(8,320
|
)
|
|
3,145
|
|
Accrued and other liabilities
|
(8,826
|
)
|
|
(1,464
|
)
|
|
(456
|
)
|
Net cash provided by operating activities
|
72,746
|
|
|
23,782
|
|
|
38,851
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
(3,750
|
)
|
|
(161,479
|
)
|
|
(24,970
|
)
|
Purchases of property and equipment and investment in internally developed software
|
(24,637
|
)
|
|
(13,697
|
)
|
|
(10,899
|
)
|
Purchase of derivative instrument
|
—
|
|
|
(1,322
|
)
|
|
—
|
|
Investment in equity method investee
|
(464
|
)
|
|
(690
|
)
|
|
(312
|
)
|
Net cash used in investing activities
|
(28,851
|
)
|
|
(177,188
|
)
|
|
(36,181
|
)
|
FINANCING ACTIVITIES
|
|
|
|
|
|
Proceeds related to the exercising of stock options and employee stock purchase plan
|
12,186
|
|
|
6,071
|
|
|
2,519
|
|
Tax payments related to the vesting of shares
|
(2,910
|
)
|
|
(1,933
|
)
|
|
(2,333
|
)
|
Issuance of long-term debt
|
—
|
|
|
205,000
|
|
|
—
|
|
Borrowings under revolving loans
|
—
|
|
|
—
|
|
|
14,500
|
|
Repayments on revolving loans
|
—
|
|
|
(3,000
|
)
|
|
(11,500
|
)
|
Payment of debt issuance costs
|
—
|
|
|
(6,213
|
)
|
|
—
|
|
Principal payments on long-term debt
|
(2,050
|
)
|
|
(25,840
|
)
|
|
(1,438
|
)
|
Principal payments on capital lease obligations
|
(3,740
|
)
|
|
(2,863
|
)
|
|
(321
|
)
|
Acquisition of noncontrolling interests
|
(2,885
|
)
|
|
(4,765
|
)
|
|
—
|
|
Net cash provided by financing activities
|
601
|
|
|
166,457
|
|
|
1,427
|
|
Effect of exchange rate changes on cash
|
371
|
|
|
(81
|
)
|
|
(31
|
)
|
Net increase in cash and cash equivalents
|
44,867
|
|
|
12,970
|
|
|
4,066
|
|
Cash and cash equivalents—beginning of period
|
36,022
|
|
|
23,052
|
|
|
18,986
|
|
Cash and cash equivalents—end of period
|
$
|
80,889
|
|
|
$
|
36,022
|
|
|
$
|
23,052
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
Non-cash purchases of property and equipment
|
$
|
505
|
|
|
$
|
498
|
|
|
$
|
—
|
|
Non-cash fair value of common stock returned in legal settlement
|
—
|
|
|
2,753
|
|
|
—
|
|
Non-cash fair value of equity issued for acquisition of business
|
—
|
|
|
117,440
|
|
|
2,885
|
|
Non-cash fair value of non-trade receivables exchanged for investment in equity method investee
|
395
|
|
|
—
|
|
|
—
|
|
Cash paid for interest
|
7,836
|
|
|
3,888
|
|
|
1,273
|
|
Cash paid for taxes
|
$
|
763
|
|
|
$
|
1,648
|
|
|
$
|
359
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioTelemetry, Inc. Equity
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
|
|
|
|
|
|
Common Stock
|
|
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
Noncontrolling Interests
|
|
Total
Equity
|
(in thousands, except shares)
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance December 31, 2015
|
27,277,939
|
|
|
$
|
27
|
|
|
$
|
272,070
|
|
|
$
|
(12
|
)
|
|
$
|
(196,159
|
)
|
|
$
|
—
|
|
|
$
|
75,926
|
|
Share issuances related to stock compensation plans
|
917,912
|
|
|
1
|
|
|
2,518
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,519
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
6,502
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,502
|
|
Shares withheld to cover taxes on vesting of share based awards
|
(178,867
|
)
|
|
—
|
|
|
(2,333
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,333
|
)
|
Issuance of stock related to 2014 business combination
|
244,519
|
|
|
—
|
|
|
2,885
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,885
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
53,437
|
|
|
—
|
|
|
53,437
|
|
Balance December 31, 2016
|
28,261,503
|
|
|
28
|
|
|
281,642
|
|
|
(34
|
)
|
|
(142,722
|
)
|
|
—
|
|
|
138,914
|
|
Share issuances related to stock compensation plans
|
722,441
|
|
|
—
|
|
|
6,071
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,071
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
7,680
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,680
|
|
Shares withheld to cover taxes on vesting of share based awards
|
(79,589
|
)
|
|
—
|
|
|
(1,933
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,933
|
)
|
Issuance of stock related to business combinations
|
3,615,840
|
|
|
4
|
|
|
116,788
|
|
|
—
|
|
|
—
|
|
|
11,224
|
|
|
128,016
|
|
Acquisition of noncontrolling interest
|
19,806
|
|
|
—
|
|
|
2,022
|
|
|
—
|
|
|
—
|
|
|
(11,091
|
)
|
|
(9,069
|
)
|
Common stock returned in legal settlement
|
(79,333
|
)
|
|
—
|
|
|
(2,753
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,753
|
)
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(80
|
)
|
|
—
|
|
|
—
|
|
|
(80
|
)
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,956
|
)
|
|
(1,187
|
)
|
|
(17,143
|
)
|
Balance December 31, 2017
|
32,460,668
|
|
|
32
|
|
|
409,517
|
|
|
(114
|
)
|
|
(158,678
|
)
|
|
(1,054
|
)
|
|
249,703
|
|
Share issuances related to stock compensation plans
|
972,415
|
|
|
1
|
|
|
12,185
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,186
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
9,261
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,261
|
|
Shares withheld to cover taxes on vesting of share based awards
|
(85,505
|
)
|
|
—
|
|
|
(2,909
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,909
|
)
|
Acquisition of noncontrolling interest
|
58,786
|
|
|
—
|
|
|
(2,000
|
)
|
|
—
|
|
|
—
|
|
|
2,000
|
|
|
—
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
370
|
|
|
—
|
|
|
—
|
|
|
370
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42,820
|
|
|
(946
|
)
|
|
41,874
|
|
Balance December 31, 2018
|
33,406,364
|
|
|
$
|
33
|
|
|
$
|
426,054
|
|
|
$
|
256
|
|
|
$
|
(115,858
|
)
|
|
$
|
—
|
|
|
$
|
310,485
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
BioTelemetry, Inc. (“
BioTelemetry
,” “
Company
,” “
we
,” “
our
” or “
us
”), a Delaware corporation, is the leading remote medical technology company focused on delivery of health information to improve quality of life and reduce cost of care. We provide remote cardiac monitoring, remote blood glucose monitoring, centralized core lab services for clinical trials and original equipment manufacturing that serves both healthcare and clinical research customers.
We operate under
two
reportable segments: Healthcare and Research. During the first quarter of 2018, we aggregated the Technology operating segment into the Corporate and Other category. The Healthcare segment is focused on the diagnosis and monitoring of cardiac arrhythmias or heart rhythm disorders. We offer cardiologists, electrophysiologists, neurologists and primary care physicians a full spectrum of solutions, which provides them with a single source of cardiac monitoring services. These services range from the differentiated MCT service, to event, traditional Holter, extended-wear Holter, Pacemaker and INR monitoring. The Research segment is engaged in central core laboratory services providing cardiac monitoring, imaging services, scientific consulting and data management services for drug and medical device trials. Included in the Corporate and Other category is the manufacturing, testing and marketing of cardiac and blood glucose monitoring devices to medical companies, clinics and hospitals and corporate overhead and other items not allocated to any of our reportable segments.
We have grown both organically and through recent acquisitions; for further details related to our acquisitions, please see
“Note 4. Acquisitions”
below.
Our common stock is traded on the NASDAQ Global Select Market under our symbol “BEAT.”
2. Summary of Significant Accounting Policies
a) Principles of Consolidation & Reclassifications
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“
U.S. GAAP
”) and include the accounts of BioTelemetry and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Certain reclassifications have been made to prior period statements to conform to the current period presentation. These consist of:
|
|
•
|
combining the non-cash operating items of equity method investment loss, the change in fair value of acquisition-related contingent consideration and lease income/(expense) into other non-cash items, a component of our net cash provided by operating activities on our consolidated statements of cash flows; and
|
|
|
•
|
reclassifying trade payable invoices received but not yet processed in our purchasing system from accrued liabilities to accounts payable in the consolidated balance sheets.
|
The reclassifications had no impact on previously reported consolidated net income/(loss), cash flows from operating, financing and investing activities, or accumulated deficit.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
b) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.
c) Fair Value of Financial Instruments
Fair value is defined as the exit price, the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as defined below. Observable inputs are inputs a market participant would use in valuing an asset or liability based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our own assumptions about the factors a market participant would use in valuing an asset or liability developed using the best information available in the circumstances. The classification of an asset’s or liability’s level within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
|
|
Level 1 -
|
Quoted prices in active markets for an identical asset or liability.
|
|
|
Level 2 -
|
Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
|
|
|
Level 3 -
|
Inputs that are unobservable for the asset or liability, based on our own assumptions about the assumptions a market participant would use in pricing the asset or liability.
|
Our financial instruments consist primarily of cash and cash equivalents, Healthcare accounts receivable, other accounts receivable, accounts payable, contingent consideration, short-term debt and long-term debt. With the exception of contingent consideration and long-term debt, the carrying value of these financial instruments approximates their fair value because of their short-term nature (classified as Level 1).
Our long-term debt (classified as Level 2) is measured using market prices for similar instruments, inputs such as the borrowing rates currently available, benchmark yields, actual trade data, broker/dealer quotes and other similar data obtained from quoted market prices or independent pricing vendors.
The fair value of contingent consideration (classified as Level 3) is measured on a recurring basis using unobservable inputs such as projected payment dates, probabilities of meeting specified milestones and other such variables resulting in payment amounts which are discounted back to present value using a probability-weighted discounted cash flow model. Adjustments to contingent consideration are recorded in other charges in the consolidated statements of operations.
In addition to the recurring fair value measurements, the fair value of certain assets acquired and liabilities assumed in connection with a business combination are recorded at fair value, primarily using a discounted cash flow model (classified as Level 3). This valuation technique requires us to make certain assumptions, including, but not limited to, future operating performance and cash flows, royalty rate and other such variables which are discounted to present value using a discount rate that reflects the risk factors associated with future cash flow, the characteristics of the assets acquired and liabilities assumed and the experience of the acquired business. Non-financial assets such as goodwill, intangible assets, and property
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and equipment are subsequently measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. We assess the impairment of goodwill and intangible assets annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable.
d) Cash and Cash Equivalents
Cash and cash equivalents are held in financial institutions or in custodial accounts with financial institutions. Cash equivalents are defined as liquid investments and money market funds with maturity from date of purchase of 90 days or less that are readily convertible into cash and have minimal interest rate risk. We do not have restricted cash.
e) Accounts Receivable and Allowance for Doubtful Accounts
Healthcare accounts receivable is recorded at the time Healthcare segment revenue is recognized and is presented on the consolidated balance sheet net of an allowance for doubtful accounts. For our contracted payors, we determine revenue based on negotiated prices for the services provided. Based on our history, we have experience collecting substantially all of the negotiated contracted rates and are therefore not providing an implicit price concession. As a result, an allowance for doubtful accounts is recorded based on historical collection trends to account for the risk of patient default. Because of continuing changes in the health care industry and third-party reimbursement, it is possible that our estimates of collectability could change, which could have a material impact on our operations and cash flows.
Other accounts receivable is related to the Research segment and Corporate and Other category and are recorded at the time revenue is recognized, when products are shipped or services are performed. We estimate an allowance for doubtful accounts on a specific account basis, and consider several factors in our analysis including customer specific information.
We write off receivables when the likelihood for collection is remote and when we believe collection efforts have been fully exhausted and we do not intend to devote additional resources in attempting to collect. We perform write-offs on a monthly basis. In the Healthcare segment, we wrote-off
$11.2 million
and
$8.8 million
of receivables for the years ended
December 31, 2018
and
2017
, respectively. The impact was a reduction of gross receivables and a reduction in the allowance for doubtful accounts. There were
no
material write-offs in the Research segment. We recorded bad debt expense of
$1.1 million
and
$0.8 million
related to a customer bankruptcy in the Corporate and Other category during the years ended
December 31, 2018
and
2017
, respectively, and wrote off these amounts in 2018. We recorded consolidated bad debt expense of
$22.2 million
,
$13.3 million
and
$9.9 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
f) Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, Healthcare accounts receivable and other accounts receivable. We maintain our cash and cash equivalents with high quality financial institutions to mitigate this risk. We perform ongoing credit evaluations of our customers and generally do not require collateral. We record an allowance for doubtful accounts in accordance with the procedures described above. Past-due amounts are written-off against the allowance for doubtful accounts when collections are believed to be unlikely and all collection efforts have ceased.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At
December 31, 2018
,
2017
and
2016
,
one
payor, Medicare, accounted for
15%
,
21%
and
11%
, respectively, of our gross accounts receivable.
g) Inventory
Inventory is valued at the lower of cost (using first-in, first-out cost method) or market (net realizable value or replacement cost). Management reviews inventory for specific future usage, and estimates of impairment of individual inventory items are recorded to reduce inventory to the lower of cost or market.
h) Property and Equipment
Property and equipment is recorded at cost, except for assets acquired in business combinations, which are recorded at fair value as of the acquisition date. Depreciation is recorded over the estimated useful life of each class of depreciable assets, and is computed using the straight-line method. Leasehold improvements and assets acquired under a capital lease are amortized over the shorter of the estimated asset life or term of the lease and included in depreciation expense. Repairs and maintenance costs are charged to expense as incurred. Costs of additions and improvements are capitalized.
i) Impairment of Long-Lived Assets
The carrying value of long-lived assets, other than goodwill and indefinite-lived intangible assets, is evaluated when events or changes in circumstances indicate the carrying value may not be recoverable or the useful life has changed. We consider historical performance and anticipated future results in our evaluation of potential impairment. Accordingly, when indicators of impairment are present, we evaluate the carrying value of these assets in relation to the operating performance of the business and the undiscounted cash flows expected to result from the use of these assets. If the carrying amount of a long-lived asset exceeds its expected undiscounted cash flows, an impairment charge is recognized to the extent the carrying amount exceeds its fair value.
j) Derivative Instrument
During the second quarter of 2017, we purchased a foreign currency option with a notional value of
$194.2 million
to mitigate the foreign exchange risk related to the Swiss Franc-denominated purchase price of LifeWatch AG (“
LifeWatch
”). This derivative instrument was not designated as a hedge for accounting purposes. We did not exercise this option and the contract expired during the third quarter of 2017, resulting in a charge of
$1.3 million
, which was recorded as a component of other non-operating income/(expense), net in the consolidated statements of operations. We did not enter into any derivative transactions during 2018.
k) Equity Method Investments
We account for investments using the equity method of accounting if the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if our ownership interest in the voting stock of the investee ranges between 20% and 50%, although other factors, such as representation on the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment is recorded at cost in the consolidated balance sheets under other assets and is periodically adjusted for capital contributions, dividends received and our share of the investee’s earnings or losses together with other-than-temporary impairments which are recorded through loss on equity method investment in the consolidated statements of operations.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
l) Noncontrolling Interests
The consolidated financial statements reflect the application of Accounting Standards Codification (“
ASC
”) 810 -
Consolidations
, which establishes accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within stockholder’s equity, but separate from the parent’s equity; (ii) the amount of consolidated net income/(loss) attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statements of operations; and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently.
We acquired approximately
97%
of LifeWatch on July 12, 2017. On that date, we acquired control of LifeWatch and began consolidating its financial statements. As of December 31, 2017, we owned
100%
of LifeWatch.
Also on July 12, 2017, LifeWatch owned
55%
of LifeWatch Turkey Holding AG (“
LifeWatch Turkey
,” domiciled in Switzerland), with a partner company located in Ankara, Turkey, to provide digital health solutions to the Turkish market. Concurrent with our acquisition of LifeWatch, we acquired control of LifeWatch Turkey and began consolidating their financial statements.
During 2018, after a formal restructuring of shareholdings approved by the board of directors of LifeWatch Turkey, we became the sole shareholder of LifeWatch Turkey. No cash or other consideration was exchanged to effect this transaction. As a result, we no longer reflect a noncontrolling interest in our consolidated balance sheet; however, we continue to reflect the net loss attributable to the noncontrolling interest in our consolidated statement of operations for the period of time where we did not own the entire entity.
m) Goodwill and Acquired Intangible Assets
Goodwill is the excess of the purchase price of an acquired business over the amounts assigned to assets acquired and liabilities assumed in a business combination. In accordance with ASC 350
- Intangibles — Goodwill and Other
(“
ASC 350
”), goodwill is reviewed for impairment annually, or when events arise that could indicate that an impairment exists. In order to test goodwill for impairment, ASC 350 allows reporting entities to take either a qualitative or quantitative approach to testing. Under the qualitative approach, an entity may assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. Such qualitative factors can include, among others, industry and market conditions, present and anticipated sales and cost factors, overall financial performance and relevant entity-specific events. If we conclude based on our qualitative assessment that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative analysis in accordance with ASC 350. Under the quantitative approach, an entity compares the fair value of its reporting units to their carrying value. If the reporting unit’s carrying value exceeds its fair value, an impairment loss equal to the difference is recognized. The loss recognized shall not exceed the total amount of goodwill allocated to the reporting unit, and the income tax effects from any deductible goodwill on the carrying value of the reporting unit when measuring the goodwill impairment loss, if any, are considered.
For the purpose of performing our goodwill impairment analysis, we consider our business to be composed of
three
reporting units: Healthcare, Research and Technology. When performing a quantitative analysis, we calculate the fair value of the reporting units utilizing the income and market approaches. The
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
income approach is based on a discounted cash flow methodology that includes assumptions for, among other things, forecasted income, cash flow, growth rates, income tax rates, expected tax benefits and long-term discount rates, all of which require significant judgment. The market approach utilizes our market data as well as market data from publicly-traded companies that are similar to us. There are inherent uncertainties related to these factors and the judgment applied in the analysis. We believe that the income and market approaches provide a reasonable basis to estimate the fair value of our reporting units.
Acquired intangible assets are recorded at fair value on the acquisition date. The estimated fair values and useful lives of intangible assets are determined by assessing many factors including estimates of future operating performance and cash flows of the acquired business, the characteristics of the intangible assets and the experience of the acquired business. Independent appraisal firms may assist with the valuation of acquired assets. The impairment test for indefinite-lived intangible assets other than goodwill consists of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset. We used a qualitative approach to determine impairment for our indefinite-lived as well as for our finite-lived intangible assets. As a result of our qualitative test for impairment for the year ended December 31, 2017, we noted entity-specific events which resulted in the write-off of the remainder of our indefinite-lived intangible assets other than goodwill, and a portion of our finite-lived intangible assets. See
“Note 8. Goodwill and Intangible Assets”
for further details regarding the impairment charges. We amortize our finite-lived intangible assets over each asset’s estimated useful life using the straight-line method.
n) Revenue Recognition
We adopted ASC 606 -
Revenue from Contracts with Customers
(“
ASC 606
”) on January 1, 2018, which requires revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration that a company expects to receive in exchange for those goods or services.
We utilized the modified retrospective method for adoption, allowing us to not retrospectively adjust prior periods. We applied the modified retrospective method only to contracts that were not complete at January 1, 2018 and accounted for the aggregate effect of any contract modifications upon adoption. No cumulative adjustment to retained earnings was recorded.
Healthcare
Healthcare segment revenue includes revenue from MCT, event, traditional Holter, extended-wear Holter, Pacemaker and International Normalized Ratio (“
INR
”) monitoring services. A significant portion of our revenue is paid for by third-party commercial insurance organizations and governmental entities. We also receive reimbursement directly from patients through co-pays, deductibles and self-pay arrangements.
For contracted payors, including Medicare, we determine revenue based on negotiated prices for the services provided. Based on our history, we have experience collecting substantially all of the negotiated contracted rates and are therefore not providing an implicit price concession. As a result, any adjustments to the revenue recognized are due to patient default and are recorded as bad debt expense.
For non-contracted payors, we are providing an implicit price concession because we do not have a contract with the underlying payor. As a result, we estimate our expected revenue based on historical cash collections. Subsequent adjustments to the revenue recognized are recorded as an adjustment to Healthcare revenue and not as bad debt expense.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Research
Research segment revenue includes revenue for core laboratory services. Our Research segment revenue is provided on a fee-for-service basis, and revenue is recognized as the related services are performed. Our research customer contracts have legally enforceable terms that are predominately thirty days due to termination for convenience clauses, which are held by the customer with no significant penalty. Given the short-term nature of these contracts and the structure of our billing practices, our billing practices approximate our performance if measured by an output method, where each output is an individual occurrence of each performance obligation. Accordingly, we utilize the invoice practical expedient as defined in ASC 606, resulting in recognition of revenue in the amount that we have the right to invoice. We record reimbursements received for out-of-pocket expenses, including freight, as revenue in the accompanying consolidated statements of operations.
Other
Other revenue includes revenue received from the sale of non-invasive cardiac monitors to healthcare companies, wireless blood glucose meters and test strips to wholesale distributors of diabetes supplies and diabetic patients as well as product repairs and is recognized when products are shipped.
Revenue is recognized net of any taxes collected from customers and subsequently remitted to government authorities.
See
“Note 3. Revenue Recognition”
for more information.
o) Stock-Based Compensation
ASC 718 -
Compensation—Stock Compensation
(“
ASC 718
”), addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for: (i) equity instruments of the enterprise or (ii) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. ASC 718 requires that an entity measure the cost of equity-based service awards issued to employees, such as stock options and restricted stock units (“
RSUs
”), based on the grant-date fair value of the award and recognize the cost of such awards over the requisite service period (generally, the vesting period of the award). ASC 718 requires that an entity measure the cost of liability-based service awards based on current fair value that is remeasured subsequently at each reporting date through the settlement date. The compensation expense associated with performance stock units (“
PSUs
”) is recognized ratably over the period between when the performance conditions are deemed probable of achievement and when the awards are vested. Performance stock options (“
PSOs
”) are valued and stock-based compensation expense is recorded once the performance conditions of the outstanding PSOs have achieved probability. Prior to July 1, 2018, we accounted for equity awards issued to non-employees in accordance with ASC 505-50,
Equity-Based Payments to Non-Employees;
see “
t) Recent Accounting Pronouncements”
below for further details related to our adoption of Accounting Standards Update (“
ASU
”) 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,
during the quarter ended September 30, 2018 and our current accounting for equity awards issued to non-employees.
We have historically recorded stock-based compensation expense based on the number of stock options or stock units we expect to vest using our historical forfeiture experience and we periodically update those forfeiture rates to apply to new grants. While we early adopted ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting,
during the year ended December 31, 2016, we have elected
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
to continue to estimate forfeitures under the true-up provision of ASC 718. We record additional expense if the actual forfeiture rate is lower than estimated and record a recovery of prior expense if the actual forfeiture rate is higher than estimated.
We estimate the fair value of our stock options using the Black‑Scholes option valuation model. The Black‑Scholes option valuation model requires the use of certain subjective assumptions. The most significant of these assumptions are the estimates of the expected volatility of the market price of our stock and the expected term of the award. We base our estimates of expected volatility on the historical average of our stock price. The expected term represents the period of time that share‑based awards granted are expected to be outstanding. Other assumptions used in the Black‑Scholes option valuation model include the risk‑free interest rate and expected dividend yield. The risk‑free interest rate for periods pertaining to the expected term of each option is based on the U.S. Treasury yield of a similar duration in effect at the time of grant. We have never paid, and do not expect to pay, dividends in the foreseeable future.
We estimate the fair value of our PSUs using a Monte Carlo simulation. This model uses assumptions, including the risk free interest rate, expected volatility of our stock price and those of the performance group, dividends of the performance group members and expected life of the awards. As noted above, we continue to estimate forfeitures under the true-up provision of ASC 718. If it is deemed probable that the PSU performance targets will be met, compensation expense is recorded for these awards ratably over the requisite service period. The PSUs are forfeited to the extent the performance criteria are not met within the service period.
p) Research and Development Costs
Research and development costs are charged to expense as incurred.
q) Income Taxes
We account for income taxes under the liability method, as described in ASC 740 -
Income Taxes
(“
ASC 740
”). Deferred income taxes are recognized for the tax consequences of temporary differences between the tax and financial statement reporting bases of assets and liabilities. When we determine that we will not be able to realize our deferred tax assets, we adjust the carrying value of the deferred tax assets through the valuation allowance.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (i) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
On December 22, 2017, the Tax Cuts and Jobs Act (the “
TCJA
”) was enacted in the U.S. The TCJA represents sweeping changes in U.S. tax law. Under ASC 740, the effects of changes in tax rates and tax laws on deferred tax balances are recognized in the period in which the new legislation is enacted. The total effect of tax law changes on deferred tax balances is recorded as a component of income tax expense.
In response to the TCJA, the Staff of the U.S. Securities and Exchange Commission (“
SEC
”) issued Staff Accounting Bulletin No. 118 (“
SAB 118
”) to provide guidance to registrants in applying ASC 740 in connection with the TCJA. SAB 118 provides that in the period of enactment, the income tax effects of
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the TCJA may be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a “
measurement period
.” The measurement period begins in the reporting period of the TCJA’s enactment and ends when a registrant has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC 740. SAB 118 also describes supplemental disclosures that should accompany the provisional amounts. We applied the guidance in SAB 118 to account for the financial accounting impacts of the TCJA and have provided the applicable supplemental disclosures in
“Note 17. Income Taxes.”
As of December 31, 2017, we recorded the provisional impact from the TCJA in accordance with SAB 118. We finalized our adjustments related to the impact of the TCJA during the year ended December 31, 2018.
r) Net Income/(Loss) Per Share
We compute net income/(loss) per share in accordance with ASC 260 -
Earnings Per Share
. Basic net income/(loss) per share is computed by dividing net income/(loss) by the weighted average number of common shares outstanding during the period. Diluted net income/(loss) per share is computed by giving effect to all potential dilutive common stock equivalents, including stock options, RSUs, PSOs and PSUs, using the treasury stock method. Potentially dilutive common stock equivalents are not included in the weighted-average shares outstanding for determining net loss per share for the year ended
December 31, 2017
, as the result would be anti-dilutive.
Certain stock options, which are priced higher than the market price of our shares as of
December 31, 2018
,
2017
and
2016
would be anti-dilutive and therefore have been excluded from the weighted average shares used in computing diluted net income per share. These options could become dilutive in future periods. Similarly, certain recently granted RSUs are also excluded using the treasury stock method as their impact would be anti-dilutive. The dilutive effect of weighted average shares outstanding excludes approximately
0.5 million
and
0.4 million
shares for the years ended
December 31, 2018
and
December 31, 2016
, respectively, as their effect would have been anti-dilutive on our net income per share.
s) Segment Information
ASC 280 -
Segment Reporting
, establishes standards for reporting information regarding operating segments in annual financial statements. Operating segments are identified as components of an enterprise which are engaged in business activities to generate revenue and incur expenses, for which separate discrete financial information is available and regularly reviewed by the chief operating decision maker, or decision-making group, for evaluation on how to allocate resources and assess performance.
We report our business under
two
segments: Healthcare and Research. The Healthcare segment is focused on remote cardiac monitoring to identify arrhythmias or heart rhythm disorders. We offer cardiologists, electrophysiologists, neurologists and primary care physicians a full spectrum of solutions, which provides them with a single source of remote cardiac monitoring services. The Research segment is engaged in centralized core laboratory services providing cardiac monitoring, imaging services, scientific consulting and data management services for drug and medical device trials. During the first quarter of 2018, as part of the LifeWatch integration, our forward-looking integration and rebranding plans, as well as re-evaluating the significance and materiality of our segments, we aggregated the Technology operating segment into the Corporate and Other category. Included in the Corporate and Other category is the manufacturing, testing and marketing of cardiac and blood glucose monitoring devices to medical
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
companies, clinics and hospitals and corporate overhead and other items not allocated to any of our reportable segments.
t) Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In June 2018, the Financial Accounting Standards Board (“
FASB
”) issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
.
This update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. The amendments in ASU 2018-07 are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. We early-adopted this standard on July 1, 2018, effective January 1, 2018, and this standard did not have a material impact on our financial position, results of operations or disclosures.
In March 2018, the FASB issued ASU 2018-05,
Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
, to add various SEC paragraphs pursuant to the issuance of SAB 118 to ASC 740. SAB 118 was issued by the SEC in December 2017 to provide immediate guidance for accounting implications of U.S. tax reform under the TCJA. We have evaluated the potential impacts of SAB 118 and have applied this guidance to our consolidated financial statements and related disclosures as of January 1, 2018.
In May 2017, the FASB released ASU 2017-09,
Scope of Modification Accounting
, which clarifies the changes to terms or conditions of a share-based payment award that requires application of modification accounting under Topic 718. A change to an award should be accounted for as a modification unless the fair value of the modified award is the same as the original award, the vesting conditions do not change and the classification as an equity or liability instrument does not change. This update is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. We adopted this standard effective January 1, 2018, and this standard did not have a material impact on our financial position, results of operations or disclosures.
In January 2017, the FASB released ASU 2017-01,
Business Combinations: Clarifying the Definition of a Business
, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this ASU should be applied prospectively and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. No disclosures are required at transition. We adopted this standard effective January 1, 2018, and this standard did not have a material impact on our financial position, results of operations or disclosures.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which has been updated through several revisions and clarifications since its original issuance (collectively, the “
Revenue Updates
”). The Revenue Updates require revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration that a company expects
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
to receive in exchange for those goods or services. The Revenue Updates also require new, expanded disclosures regarding revenue recognition. We adopted the Revenue Updates effective January 1, 2018. See
“Note 3. Revenue Recognition.”
Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-15,
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,
to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The updated guidance also requires an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of this guidance on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
. This standard, along with several subsequent updates (which collectively will be known as Accounting Standards Codification 842 -
Leases
(“
ASC 842
”), is an update and amendment to ASC 840,
Leases
(“
ASC 840
”), and requires lessees to recognize most leases on their balance sheet, makes selected changes to lessor accounting and requires disclosure of additional key information about leases. The standard is effective for annual and interim reporting periods beginning after December 15, 2018. A modified retrospective transition approach is required, with certain practical expedients available.
The following are other key disclosures, as well as determinations made and actions taken by us, related to the adoption of ASC 842:
|
|
•
|
Elected the optional modified retrospective transition method as of January 1, 2019; therefore prior period amounts will not be restated;
|
|
|
•
|
Established and implemented key implementation controls to ensure we meet the new reporting and disclosure requirements;
|
|
|
•
|
Elected the following transition practical expedients:
|
|
|
•
|
to not reassess lease identification, lease classification and initial indirect costs related to those leases entered into prior to the adoption of ASC 842;
|
|
|
•
|
to not separate lease and non-lease components when the requisite criteria is met to be treated as such;
|
|
|
•
|
Made policy elections as of January 1, 2019:
|
|
|
•
|
to not apply the recognition and measurement requirements to leases with an initial term of one year or less;
|
|
|
•
|
to apply the portfolio approach for the development of the discount rate related to leases with similar characteristics;
|
|
|
•
|
to keep leases with an immaterial right-of-use asset at inception, off the balance sheet and recognize this expense on a straight-line basis in our consolidated statements of operations;
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
•
|
Determined the completeness of our lease populations (both lessee and lessor) as of January 1, 2019;
|
|
|
•
|
Expect that the adoption of ASC 842 will materially change our balance sheet by increasing the lease right-of-use assets and lease liabilities to be presented on the balance sheet due primarily to our real estate operating leases;
|
|
|
•
|
Do not expect ASC 842 to:
|
|
|
•
|
materially impact our liquidity or ability to enter or exit leases. ASC 842 does not change the cash payment stream related to our leases but will affect the presentation on our consolidated statement of cash flows with added disclosure of the non-cash impact for the change in assets and liabilities related to right-of-use assets and obligations;
|
|
|
•
|
have a material impact on our debt covenants;
|
|
|
•
|
Continue to evaluate new agreements executed after December 31, 2018, including identifying all contracts that are, or contain, leases and to accumulate all the necessary information required to properly account for those leases under ASC 842.
|
We expect to complete our assessment of the full financial impact of ASC 842 during the first quarter of 2019, and will include all required presentation and disclosures under ASC 842 in our Form 10-Q for the three months ending March 31, 2019.
3. Revenue Recognition
We adopted ASC 606 on January 1, 2018, which requires revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration that a company expects to receive in exchange for those goods or services.
We utilized the modified retrospective method for adoption, allowing us to not retrospectively adjust prior periods. We applied the modified retrospective method only to contracts that were not complete at January 1, 2018 and accounted for the aggregate effect of any contract modifications upon adoption. No cumulative adjustment to retained earnings was recorded.
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by payor type and major service line. We determined that disaggregating revenue into these categories achieves the disclosure objective of illustrating the differences in the nature, amount, timing and uncertainty of our revenue streams. Disaggregated revenue by payor type and major service line for the
year ended
December 31, 2018
was as follows:
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
(in thousands)
|
Healthcare
|
|
Research
|
|
Other
|
|
Total Consolidated
|
Payor/Service Line
|
|
|
|
|
|
|
|
Remote cardiac monitoring services - Medicare
|
$
|
137,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
137,600
|
|
Remote cardiac monitoring services - commercial payors
|
201,212
|
|
|
—
|
|
|
—
|
|
|
201,212
|
|
Clinical trial support and related services
|
—
|
|
|
50,561
|
|
|
—
|
|
|
50,561
|
|
Technology devices, consumable and related services
|
—
|
|
|
—
|
|
|
10,099
|
|
|
10,099
|
|
Total
|
$
|
338,812
|
|
|
$
|
50,561
|
|
|
$
|
10,099
|
|
|
$
|
399,472
|
|
Remote Cardiac Monitoring Services Revenue (Healthcare segment)
Healthcare segment revenue is generated by remote cardiac monitoring to identify cardiac arrhythmias or heart rhythm disorders. We offer cardiologists, electrophysiologists, neurologists and primary care physicians a full spectrum of solutions which provides them with a single source of cardiac monitoring services.
Performance obligations are determined based on the nature of the services provided. With our remote cardiac monitoring services, the patient receives the benefits of the service over time, resulting in revenue recognition over time based on the output method. We believe that this method provides an accurate depiction of the transfer of value over the term of the performance obligation because the level of effort in providing these services is consistent during the service period.
A summary of the payment arrangements with payors is as follows:
|
|
•
|
Contracted payors (including Medicare)
: We determine the transaction price based on negotiated prices for services provided, on a case rate basis, as provided for under the relevant Current Procedural Terminology (“
CPT
”) codes.
|
|
|
•
|
Non-contracted payors:
Non-contracted commercial and government insurance carriers often reimburse out of network rates provided for under the relevant CPT codes on a case rate basis. Our transaction price includes implicit price concessions based on our historical collection experience for our non-contracted patients
|
We are utilizing the portfolio approach practical expedient in ASC 606 for our patient contracts in the Healthcare segment. We account for the contracts within each portfolio as a collective group, rather than individual contracts. Based on our history with these portfolios and the similar nature and characteristics of the patients within each portfolio, we have concluded that the financial statement effects are not materially different than if accounting for revenue on a contract-by-contract basis.
For the contracted portfolio, we have historical experience of collecting substantially all of the negotiated contractual rates and determined at contract inception that these customers have the intention and ability to pay the promised consideration. As such, we are not providing an implicit price concession but, rather, have chosen to accept the risk of default, and adjustments to the transaction price are recorded as bad debt expense.
For our non-contracted portfolio, we are providing an implicit price concession because we do not have a contract with the underlying payor, the result of which requires us to estimate our transaction price
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
based on historical cash collections utilizing the expected value method. Subsequent adjustments to the transaction price are recorded as an adjustment to Healthcare segment revenue and not as bad debt expense.
We have not made any significant changes to judgments in applying ASC 606 during the
year ended
December 31, 2018
.
Clinical Trial Support and Related Services Revenue (Research segment)
Research segment revenue is generated by providing centralized core laboratory services, including cardiac monitoring, imaging services, scientific consulting and data management services for drug and medical device trials. These amounts are due from pharmaceutical companies and contract research organizations. We bill our customers on a fee for service basis. Under a typical contract, some customers pay us a portion of our fee for these services upon contract execution as an upfront refundable deposit. Upfront deposits are deferred and then recognized as the services are performed. If a contract is canceled prior to service being provided, the upfront deposit is refunded.
Performance obligations are determined based on the nature of the services provided by us. Our core laboratory services are provided over time as the customer receives benefits resulting in revenue recognition over the term of the contract. Our research customer contracts have legally enforceable terms that are predominately thirty days due to termination for convenience clauses, which are held by the customer with no significant penalty. Given the short-term nature of these contracts and the structure of our billing practices, our billing practices approximate our performance if measured by an output method, where each output is an individual occurrence of each performance obligation. Accordingly, we utilize the invoice practical expedient as defined in ASC 606, resulting in recognition of revenue in the amount that we have the right to invoice.
We have not made any significant changes to judgments in applying ASC 606 during the
year ended
December 31, 2018
.
Other Revenue (Other category)
Our Other category revenue is primarily derived from the sale of non-invasive cardiac monitors to healthcare companies, wireless blood glucose meters and test strips to wholesale distributors of diabetes supplies and diabetic patients as well as product repairs. Performance obligations are the sale of devices, related goods and repairs provided by us. These contracts transfer control to a customer at a point in time based on the transfer of title for the underlying good or service. We provide standard warranty provisions.
We determine the transaction price based on fixed consideration in our contractual agreements with our customers and allocate the transaction price to each performance obligation based on the relative stand-alone selling price. We determine the relative stand-alone selling price utilizing our observable prices for the sale of the underlying goods.
We have not made any significant changes to judgments in applying ASC 606 during the
year ended
December 31, 2018
.
Contract Assets and Contract Liabilities
ASC 606 requires an entity to present a revenue contract as a contract asset when the entity performs its obligations under the contract by transferring goods or services to a customer before the customer pays consideration or before payment is due. ASC 606 also requires an entity to present a revenue contract as
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g. receivable), before the entity transfers a good or service to the customer.
We currently do not have any material contract assets. We recognize contract liabilities in the form of deferred revenue in the Research segment in instances where a customer pays an upfront deposit upon contract execution for future services to be performed by us.
As of
December 31, 2018
, we had contract liabilities of
$3.1 million
primarily related to the Research segment where customers paid upfront deposits upon contract execution for future services to be performed by us. If the contract is canceled, these upfront deposits are refundable if service was not yet provided. For the
year ended
December 31, 2018
, the amount recognized as revenue from the deferred revenue balance as of December 31, 2017 was
$3.1 million
. No significant changes or impairment losses occurred to contract balances during the
year ended
December 31, 2018
.
Practical Expedient Elections
We have elected the following practical expedients in applying ASC 606 across all reportable segments unless otherwise noted below.
Unsatisfied Performance Obligations:
Because all of our performance obligations relate to contracts with a duration of less than one year, we have elected to apply the optional exemption provided in ASC 606 and, therefore, are not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
Contract Costs:
All incremental customer contract acquisition costs are expensed as they are incurred as the amortization period of the asset that we otherwise would have recognized is one year or less in duration.
Significant Financing Component:
We do not adjust the promised amount of consideration for the effects of a significant financing component as we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Sales Tax Exclusion from the Transaction Price:
We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from the customer.
Shipping and Handling Activities:
For our technology devices, consumable and related service revenue, we account for shipping and handling activities we perform after a customer obtains control of the good as activities to fulfill the promise to transfer the good.
4. Acquisitions
ActiveCare
On October 2, 2018, we acquired, through our subsidiary Telcare Medical Supply, LLC, certain assets of ActiveCare, Inc. (“
ActiveCare
”) for
$3.8 million
in cash. The purchase price also includes a
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
potential earn-out payment of
$2.0 million
, which is contingent on the achievement of certain revenue targets. The acquired net assets primarily consisted of customer relationships. The earn-out was assigned
no
value as of the acquisition date as it is currently not probable of achievement. The accounting for this transaction, including the valuation of certain intangible assets, remains open as of
December 31, 2018
. We have preliminarily accounted for this acquisition as a business combination. Our preliminary estimates are subject to subsequent adjustment as additional information is obtained and we expect to finalize all accounting for this transaction when the valuation is complete. The transaction costs related to this acquisition and revenues and income of ActiveCare prior to our acquisition were all immaterial.
LifeWatch AG
On July 12, 2017, we acquired, through our wholly owned subsidiary Cardiac Monitoring Holding Company, LLC, approximately
97.0%
of the outstanding shares of LifeWatch AG for aggregate consideration of
3,615,840
shares of BioTelemetry common stock with a fair value of
$116.8 million
and cash in the amount of
$165.8 million
. On that date, we acquired control of LifeWatch and began consolidating its financial statements.
Through December 31, 2017, we purchased
343,525
additional shares of LifeWatch for cash consideration of
$4.8 million
and the issuance of
19,806
shares with a fair value of
$0.6 million
. We acquired the remaining untendered LifeWatch shares pursuant to a squeeze-out procedure in accordance with Swiss law and takeover regulations related to the offering occurring in early January 2018, with the settlement of
$2.9 million
cash, which was recorded as a component of accrued liabilities in our consolidated balance sheets, and
58,786
shares with a fair market value of
$2.0 million
, which was recorded as a component of paid-in capital in our consolidated balance sheets, both as of December 31, 2017. As of December 31, 2017, we owned
100%
of LifeWatch.
Also on July 12, 2017, in connection with the closing of the acquisition of LifeWatch, and refinancing of our existing debt, we entered into the SunTrust Credit Agreement pursuant to which we obtained loans as follows; (i) a term loan (funded on July 12, 2017) in an aggregate principal amount equal to
$205.0 million
, the proceeds of which were used to (a) pay our existing GE Credit Agreement of
$24.9 million
and acquired LifeWatch debt of
$3.0 million
, (b) pay a portion of the cash consideration for the acquisition of LifeWatch, and (c) pay related transaction fees and expenses of the acquisition of LifeWatch; and (ii) a
$50.0 million
revolving credit facility for ongoing working capital purposes, which remains undrawn. The term loan will be repaid in quarterly installments beginning January 1, 2018, with the remaining principal balance repaid on or before July 12, 2022. For more information regarding the financing of this acquisition, please refer to
“Note 11. Credit Agreement.”
The acquisition of LifeWatch strengthens our position as the leader in wireless medicine, creating the foremost connected health platform, significantly enhancing our ability to improve quality of life and reduce cost of care. We accounted for the transaction as a business combination, and as such, all assets acquired and liabilities assumed were recorded at their estimated fair values. The excess of the fair value of the purchase price over the fair value of the net assets acquired has been recognized as goodwill, which represents the expected future benefits arising from the assembled workforce and other synergies attributable to cost savings opportunities. We recognized
$198.8 million
of goodwill as a result of the acquisition, all of which has been assigned to the Healthcare segment.
None
of this goodwill will be deductible for tax purposes.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We finalized our estimates related to the LifeWatch acquisition by July 12, 2018. The measurement period adjustments recorded in 2018 were due primarily to a
$5.7 million
adjustment to increase accrued liabilities related to the ZTech legal matter (see
“Note 19. Legal Proceedings”
for details) and an
$8.9 million
increase to other long-term liabilities.
|
|
|
|
|
|
|
(in thousands, except lives)
|
Amount
|
|
Weighted
Average Life
(Years)
|
Fair value of assets acquired:
|
|
|
|
Cash and cash equivalents
|
$
|
4,303
|
|
|
|
Healthcare accounts receivable
|
10,089
|
|
|
|
Inventory
|
1,136
|
|
|
|
Prepaid expenses and other current assets
|
3,798
|
|
|
|
Property and equipment
|
27,507
|
|
|
|
Other assets
|
713
|
|
|
|
Identifiable intangible assets:
|
|
|
|
Customer relationships
|
126,800
|
|
|
10
|
Technology
|
3,217
|
|
|
3
|
Total identifiable intangible assets
|
130,017
|
|
|
|
Total assets acquired
|
177,563
|
|
|
|
Fair value of liabilities assumed:
|
|
|
|
Accounts payable
|
10,292
|
|
|
|
Accrued liabilities
|
15,579
|
|
|
|
Current portion of capital lease obligations
|
4,664
|
|
|
|
Current portion of long-term debt
|
3,027
|
|
|
|
Long-term capital lease obligations
|
3,420
|
|
|
|
Deferred tax liabilities
|
14,465
|
|
|
|
Other long-term liabilities
|
32,364
|
|
|
|
Total liabilities assumed
|
83,811
|
|
|
|
|
|
|
|
Total identifiable net assets
|
93,752
|
|
|
|
Fair value of noncontrolling interest
|
(9,961
|
)
|
|
|
Goodwill
|
198,783
|
|
|
|
Net assets acquired
|
$
|
282,574
|
|
|
|
We have integrated the operations of LifeWatch into our Healthcare segment. As a result of this integration, it is impracticable to disclose the amount of revenue and income/(loss) attributable to LifeWatch.
We incurred
$31.0 million
of acquisition related costs related to LifeWatch for the year ended December 31, 2017. These costs were included in other charges in our consolidated statements of operations.
The following unaudited pro forma financial information has been prepared using historical financial results of BioTelemetry and LifeWatch as if the acquisition had occurred as of January 1, 2016. Certain
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
adjustments related to the elimination of transaction costs, as well as the addition of depreciation and amortization related to fair value adjustments on the tangible and identifiable intangible assets acquired, have been reflected for the purposes of the unaudited pro forma financial information presented below. We believe the assumptions used in preparing the unaudited pro forma financial information are reasonable, but not necessarily indicative of actual results should the acquisition have occurred on January 1, 2016.
Pro forma financial information for the periods presented is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(pro forma, unaudited, in thousands, except share and per share amounts)
|
2017
|
|
2016
|
Revenue
|
$
|
349,900
|
|
|
$
|
322,200
|
|
Net income/(loss)
|
(1,800
|
)
|
|
23,400
|
|
Net income/(loss) per common share:
|
|
|
|
Basic
|
$
|
(0.05
|
)
|
|
$
|
0.74
|
|
Diluted
|
$
|
(0.05
|
)
|
|
$
|
0.69
|
|
Weighted average number of common shares outstanding:
|
|
|
|
Basic
|
34,022
|
|
|
31,556
|
|
Diluted
|
34,022
|
|
|
34,125
|
|
Telcare, Inc.
On December 1, 2016, we, through our wholly owned subsidiary BioTelemetry Care Management, LLC, entered into the Share and Asset Purchase Agreement with Telcare (the “
Telcare Agreement
”) pursuant to which we acquired the stock of Telcare Medical Supply, Inc. (“
Telcare
”) and certain assets of Telcare Inc. The total consideration paid at closing amounted to
$7.0 million
in cash, with the potential for a performance-based earn out up to
$5.0 million
upon reaching certain revenue milestones. The fair value of the total consideration transferred in the acquisition, including the fair value of the contingent consideration, was
$9.7 million
at the acquisition date.
The acquisition of Telcare provides us the opportunity to apply our expertise in remote monitoring to the diabetes market and increases our presence in the digital population health management market. We accounted for the transaction as a business combination, and as such, all assets acquired and liabilities assumed were recorded at their estimated fair values. The excess of the fair value of the purchase price over the fair value of the net assets acquired has been recognized as goodwill, which represents the expected future benefits arising from the assembled workforce and other synergies attributable to cost savings opportunities. We recognized
$2.2 million
of goodwill as a result of the acquisition, all of which has been assigned to the Corporate and Other category. We expect
$0.3 million
of this goodwill will be deductible for tax purposes.
The amounts below represent our final fair value estimates, which were completed in the fourth quarter ended December 31, 2017. The total consideration and related allocation for Telcare is summarized as follows:
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
(in thousands, except lives)
|
Amount
|
|
Weighted
Average Life
(Years)
|
Fair value of assets acquired:
|
|
|
|
Other accounts receivable
|
$
|
235
|
|
|
|
Inventory
|
1,417
|
|
|
|
Prepaid expenses and other current assets
|
1,261
|
|
|
|
Property and equipment
|
55
|
|
|
|
Other assets
|
933
|
|
|
|
Deferred tax assets
|
1,463
|
|
|
|
Identifiable intangible assets:
|
|
|
|
Customer relationships
|
400
|
|
|
5
|
Technology
|
2,000
|
|
|
5
|
Tradename
|
400
|
|
|
Indefinite
|
Total identifiable intangible assets
|
2,800
|
|
|
|
Total assets acquired
|
8,164
|
|
|
|
Fair value of liabilities assumed:
|
|
|
|
Accounts payable
|
459
|
|
|
|
Accrued liabilities
|
206
|
|
|
|
Total liabilities assumed
|
665
|
|
|
|
Total identifiable net assets
|
7,499
|
|
|
|
Goodwill
|
2,201
|
|
|
|
Net assets acquired
|
$
|
9,700
|
|
|
|
The acquisition has been included within the consolidated results of operations and financial condition from the date of the acquisition.
The following unaudited pro forma financial information has been prepared using historical financial results of BioTelemetry and Telcare as if the acquisition had occurred as of January 1, 2015. Certain adjustments related to the elimination of transaction costs, as well as the addition of depreciation and amortization related to fair value adjustments on the tangible and identifiable intangible assets acquired, have been reflected for the purposes of the unaudited pro forma financial information presented below. We believe the assumptions used in preparing the unaudited pro forma financial information are reasonable, but not necessarily indicative of actual results should the acquisition have occurred on January 1, 2015.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro forma financial information is summarized as follows:
|
|
|
|
|
|
(pro forma, unaudited, in thousands, except per share amounts)
|
Year Ended December 31,
2016
|
Revenue
|
$
|
212,538
|
|
Net income
|
50,693
|
|
Net income per common share:
|
|
Basic
|
$
|
1.82
|
|
Diluted
|
$
|
1.66
|
|
The Telcare Agreement includes the potential for a performance-based earn out up to
$5.0 million
upon reaching certain milestones. The fair value of the contingent consideration associated with the Telcare acquisition was
$2.7 million
as of the acquisition date and was included as a component of other long-term liabilities. For further details regarding contingent consideration, refer to “
Note 6. Fair Value Measurements”
below.
VirtualScopics, Inc
.
On March 25, 2016, we, through our wholly owned subsidiary BioTelemetry Research Acquisition Corporation, entered into a definitive Agreement and Plan of Merger (“
VirtualScopics Merger Agreement
”) with VirtualScopics, Inc. (“
VirtualScopics
”), a leading provider of clinical trial imaging solutions. Under the terms of the VirtualScopics Merger Agreement, we purchased: (i) any and all outstanding shares of VirtualScopics’
$0.001
par value common stock for
$4.05
per share; (ii) any and all outstanding shares of VirtualScopics’
$0.001
par value Series A and Series B Convertible Preferred Stock for
$336.30
per share; and (iii) any and all outstanding shares of VirtualScopics’
$0.001
par value Series C-1 Convertible Preferred Stock for
$920.00
per share. The all cash acquisition of VirtualScopics was completed on May 11, 2016. The total consideration paid at closing amounted to
$15.0 million
, net of cash acquired of
$0.8 million
.
The acquisition of VirtualScopics expands our existing clinical research offerings and gives us further access to established customer relationships. We accounted for the transaction as a business combination, and as such, all assets acquired and liabilities assumed were recorded at their estimated fair values. The excess of the consideration paid over the fair value of the net assets acquired has been recognized as goodwill, which represents the expected future benefits arising from the assembled workforce and other synergies attributable to cost savings opportunities. We recognized
$4.3 million
of goodwill as a result of the acquisition, all of which has been assigned to the Research segment.
None
of this goodwill will be deductible for tax purposes.
The amounts below represent our final fair value estimates, which were completed in the second quarter of 2017. Measurement period adjustments were recorded in the fourth quarter of 2016 related to the recognition of a
$0.3 million
deferred tax liability, and in the second quarter of 2017 primarily to recognize
$0.3 million
of deferred tax assets resulting from state net operating losses.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The total consideration and related allocation for VirtualScopics is summarized as follows:
|
|
|
|
|
|
|
(in thousands, except lives)
|
Amount
|
|
Weighted
Average Life
(Years)
|
Fair value of assets acquired:
|
|
|
|
Cash and cash equivalents
|
$
|
849
|
|
|
|
Other accounts receivable
|
3,679
|
|
|
|
Inventory
|
111
|
|
|
|
Prepaid expenses and other current assets
|
396
|
|
|
|
Property and equipment
|
500
|
|
|
|
Deferred taxes
|
20
|
|
|
|
Identifiable intangible assets:
|
|
|
|
Customer relationships
|
5,200
|
|
|
12
|
Technology
|
2,000
|
|
|
10
|
Backlog
|
3,100
|
|
|
4
|
Total identifiable intangible assets
|
10,300
|
|
|
|
Total assets acquired
|
15,855
|
|
|
|
Fair value of liabilities assumed:
|
|
|
|
Accounts payable
|
325
|
|
|
|
Accrued liabilities
|
2,945
|
|
|
|
Current portion of capital lease obligations
|
59
|
|
|
|
Current portion of long-term debt
|
91
|
|
|
|
Deferred revenue
|
700
|
|
|
|
Long-term capital lease obligations
|
162
|
|
|
|
Long-term debt
|
97
|
|
|
|
Total liabilities assumed
|
4,379
|
|
|
|
Total identifiable net assets
|
11,476
|
|
|
|
Goodwill
|
4,343
|
|
|
|
Net assets acquired
|
$
|
15,819
|
|
|
|
The acquisition has been included within the consolidated results of operations and financial condition from the date of the acquisition. For the period from May 11, 2016 to December 31, 2016, VirtualScopics contributed revenue of approximately
$12.3 million
and net income of approximately
$1.4 million
to our consolidated results of operations.
The following unaudited pro forma financial information has been prepared using historical financial results of BioTelemetry and VirtualScopics as if the acquisition had occurred as of January 1, 2015. Certain adjustments related to the elimination of transaction costs and acquisition-related indebtedness, as well as the addition of depreciation and amortization related to fair value adjustments on the tangible and identifiable intangible assets acquired, have been reflected for the purposes of the unaudited pro forma financial information presented below. No adjustments for synergies or certain other expected benefits of the acquisition have been included. We believe the assumptions used in preparing the unaudited pro forma
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
financial information are reasonable, but not necessarily indicative of actual results should the acquisition have occurred on January 1, 2015.
Pro forma financial information is summarized as follows:
|
|
|
|
|
(pro forma, unaudited, in thousands, except per share amounts)
|
Year Ended December 31,
2016
|
Revenue
|
$
|
214,271
|
|
Net income
|
55,413
|
|
Net income per common share:
|
|
Basic
|
$
|
1.98
|
|
Diluted
|
$
|
1.82
|
|
ePatch Division of DELTA Danish Electronics, Light, and Acoustics
On April 1, 2016, we, through our wholly owned subsidiary BioTelemetry Technology ApS, entered into an Asset Purchase Agreement (“
APA
”) with DELTA Danish Electronics, Light & Acoustics (“
DELTA
”), pursuant to which we acquired substantially all of the assets of the ePatch division of DELTA, inclusive of all products and indications currently under development. The total consideration paid at closing amounted to
$3.0 million
in cash and
244,519
shares of our common stock valued at
$2.9 million
. In addition, there is the potential for a performance-based earn out up to
$3.0 million
upon reaching certain regulatory and revenue milestones, as defined in the APA. The fair value of the total consideration transferred in the ePatch acquisition, including the fair value of the contingent consideration, was
$6.5 million
at the acquisition date.
The ePatch acquisition is expected to generate future cost savings for us and will provide control over proprietary components for our next generation mobile cardiac telemetry device. We accounted for the transaction as a business combination, and as such, all assets acquired and liabilities assumed were recorded at their estimated fair values. The excess of the fair value of the purchase price over the fair value of the net assets acquired has been recognized as goodwill, which represents the expected future benefits arising from the assembled workforce and other synergies attributable to cost savings opportunities. We recognized
$3.2 million
of goodwill as a result of the acquisition, all of which has been assigned to the Corporate and Other category, and we expect all of this goodwill to be deductible for tax purposes.
The amounts below represent our final fair value estimates, which we completed in the first quarter of 2017. During the fourth quarter of 2016, we reduced the allocation to the technology intangible asset by
$0.2 million
as a result of additional information obtained during the measurement period.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The total consideration and related allocation for the ePatch acquisition is summarized as follows:
|
|
|
|
|
|
|
(in thousands, except lives)
|
Amount
|
|
Weighted
Average Life
(Years)
|
Fair value of assets acquired:
|
|
|
|
Inventory
|
$
|
100
|
|
|
|
Property and equipment
|
175
|
|
|
|
Identifiable intangible assets:
|
|
|
|
Customer relationships
|
400
|
|
|
10
|
Technology
|
2,800
|
|
|
10
|
Trade names
|
100
|
|
|
Indefinite
|
Total identifiable intangible assets
|
3,300
|
|
|
|
Total assets acquired
|
3,575
|
|
|
|
Fair value of liabilities assumed:
|
|
|
|
Accrued liabilities
|
266
|
|
|
|
Total liabilities assumed
|
266
|
|
|
|
Total identifiable net assets
|
3,309
|
|
|
|
Goodwill
|
3,181
|
|
|
|
Net assets acquired
|
$
|
6,490
|
|
|
|
While the ePatch acquisition provides control over proprietary components of our next generation cardiac monitoring device, the acquisition did not have a material effect on our consolidated results of operations.
The APA includes the potential for a performance-based earn out up to
$3.0 million
upon reaching certain regulatory and revenue milestones. The fair value of the contingent consideration associated with the ePatch acquisition was
$0.6 million
as of the acquisition date and was included as a component of other long-term liabilities. For further details regarding contingent consideration, refer to
“Note 6. Fair Value Measurements”
below.
5. Inventory
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
2018
|
|
2017
|
Raw materials and supplies
|
$
|
3,667
|
|
|
$
|
3,128
|
|
Finished goods
|
3,656
|
|
|
2,204
|
|
Total inventory
|
$
|
7,323
|
|
|
$
|
5,332
|
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Inventory, which includes purchased parts, materials, direct labor and applied manufacturing overhead, is stated at the lower of cost or market (net realizable value or replacement cost), with cost determined by use of the first-in, first-out method.
6. Fair Value Measurements
We have determined that our long-term debt, classified as Level 2, has a fair value consistent with its carry value, exclusive of debt discount and deferred charges, of
$198.5 million
and
$199.4 million
as of
December 31, 2018
and
2017
, respectively.
Contingent consideration represents our contingent milestone payment obligations related to our acquisitions and is measured at fair value, based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions we believe would be made by a market participant. We assess these estimates on an ongoing basis as additional data impacting the assumptions is obtained. The balances of the fair value of contingent consideration, if any, are recognized within other long-term liabilities on our consolidated balance sheets. Adjustments to contingent consideration are recorded in other charges in the consolidated statements of operations.
The following table provides a reconciliation of the beginning and ending balances of contingent payments associated with acquisitions during the years ended
December 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
Beginning balance
|
$
|
700
|
|
|
$
|
3,305
|
|
Changes in fair value of contingent consideration
|
(700
|
)
|
|
(2,605
|
)
|
Ending balance
|
$
|
—
|
|
|
$
|
700
|
|
During the year ended
December 31, 2018
and
2017
, the fair values of the contingent consideration decreased
$0.7 million
and
$2.6 million
, respectively, as it was no longer probable that certain of the contingencies related to both the Telcare or ePatch acquisitions would be met. There was
no
value assigned to the contingent consideration related to the ActiveCare acquisition as the achievement of the contingency was not probable as of
December 31, 2018
.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(Years)
|
|
December 31,
|
(in thousands, except years)
|
|
2018
|
|
2017
|
Cardiac monitoring devices, device parts and components
|
3 - 5
|
|
$
|
76,088
|
|
|
$
|
76,039
|
|
Computers and purchased software
|
3 - 5
|
|
16,800
|
|
|
22,357
|
|
Equipment, tools and molds
|
3 - 5
|
|
6,441
|
|
|
7,857
|
|
Furniture, fixtures and other
|
5 - 7
|
|
3,805
|
|
|
2,104
|
|
Leasehold improvements
|
*
|
|
5,877
|
|
|
5,434
|
|
Capital leases
|
*
|
|
6,568
|
|
|
7,305
|
|
Total property and equipment, at cost
|
|
|
115,579
|
|
|
121,096
|
|
Less accumulated depreciation
|
|
|
(67,202
|
)
|
|
(71,902
|
)
|
Total property and equipment, net
|
|
|
$
|
48,377
|
|
|
$
|
49,194
|
|
* shorter of useful life or term of lease
|
|
|
|
|
|
Depreciation expense associated with property and equipment, inclusive of amortization of assets recorded under capital leases, was
$23.0 million
,
$18.3 million
and
$10.5 million
, for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
During the year ended December 31, 2017, considering the LifeWatch integration and forward-looking integration plans, we determined that certain software were no longer going to be used and was therefore impaired, resulting in
$1.1 million
of impairment charges included within the Corporate and Other category as a component of the other charges line in our consolidated statements of operations. There were
no
fixed asset impairments for the years ended
December 31, 2018
and
December 31, 2016
.
8. Goodwill and Intangible Assets
Goodwill was recognized at the time of our acquisitions. The following table presents the carrying amount of goodwill allocated to our reportable segments, as well as the changes to goodwill during the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting Segment
|
|
Corporate and Other
|
|
|
(in thousands)
|
Healthcare
|
|
Research
|
|
|
Total
|
Balance at December 31, 2016
|
$
|
14,724
|
|
|
$
|
16,643
|
|
|
$
|
9,701
|
|
|
$
|
41,068
|
|
Initial goodwill acquired
|
186,456
|
|
|
—
|
|
|
—
|
|
|
186,456
|
|
Measurement period adjustments
|
(2,907
|
)
|
|
(350
|
)
|
|
(1,162
|
)
|
|
(4,419
|
)
|
Balance at December 31, 2017
|
198,273
|
|
|
16,293
|
|
|
8,539
|
|
|
223,105
|
|
Initial goodwill acquired
|
—
|
|
|
—
|
|
|
475
|
|
|
475
|
|
Measurement period adjustments
|
15,234
|
|
|
—
|
|
|
—
|
|
|
15,234
|
|
Balance at December 31, 2018
|
$
|
213,507
|
|
|
$
|
16,293
|
|
|
$
|
9,014
|
|
|
$
|
238,814
|
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The goodwill acquired in the Healthcare segment is due to the LifeWatch acquisition; Research segment relates to the VirtualScopics acquisition; the Corporate and Other category primarily represents our Telcare and ePatch acquisitions. Refer to
“Note 4. Acquisitions”
above for details related to the measurement period adjustments.
At
December 31, 2018
,
2017
and
2016
, we performed our required annual impairment test of goodwill. Based on these impairment tests, we determined that there was
no
goodwill impairment. The carrying amount of our goodwill as of
December 31, 2018
and
2017
was
$238.8 million
and
$223.1 million
, respectively.
The gross carrying amounts and accumulated amortization of our intangible assets as of
December 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Life (Years)
|
|
December 31,
|
(in thousands, except years)
|
|
2018
|
|
2017
|
Gross Carrying Value
|
|
|
|
|
|
Customer relationships
|
10.3
|
|
$
|
146,200
|
|
|
$
|
143,174
|
|
Technology including internally developed software
|
5.6
|
|
18,078
|
|
|
15,953
|
|
Backlog
|
3.7
|
|
6,860
|
|
|
6,860
|
|
Covenants not to compete
|
5.5
|
|
1,040
|
|
|
1,040
|
|
Total intangible assets, gross
|
|
|
172,178
|
|
|
167,027
|
|
Accumulated Amortization
|
|
|
|
|
|
Customer relationships
|
|
|
(24,870
|
)
|
|
(10,868
|
)
|
Technology including internally developed software
|
|
|
(10,879
|
)
|
|
(8,573
|
)
|
Backlog
|
|
|
(5,827
|
)
|
|
(5,052
|
)
|
Covenants not to compete
|
|
|
(949
|
)
|
|
(827
|
)
|
Total accumulated amortization
|
|
|
(42,525
|
)
|
|
(25,320
|
)
|
Total intangible assets, net
|
|
|
$
|
129,653
|
|
|
$
|
141,707
|
|
During our intangible asset impairment testing for the year ended December 31, 2017, considering the LifeWatch integration and forward-looking integration plans, we determined that certain trade names and internally developed software costs were no longer going to be used and were therefore impaired, resulting in
$11.0 million
of intangible asset impairment charges included within the Corporate and Other category as a component of the other charges line in our consolidated statements of operations. There were
no
other intangible asset impairments for the year ended December 31, 2017, and
no
intangible asset impairments for the years ended December 31, 2018 and 2016.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The estimated amortization expense for finite-lived intangible assets for the next five years and thereafter is summarized as follows at
December 31, 2018
:
|
|
|
|
|
|
(in thousands)
|
|
2019
|
$
|
16,678
|
|
2020
|
16,159
|
|
2021
|
15,562
|
|
2022
|
14,819
|
|
2023
|
14,518
|
|
Thereafter
|
51,917
|
|
Total estimated amortization
|
$
|
129,653
|
|
Amortization expense for the years ended
December 31, 2018
,
2017
and
2016
was
$17.2 million
,
$10.2 million
and
$3.7 million
, respectively. The 2017 amortization expense excludes impairment charges of
$3.0 million
related to indefinite-lived trade names and
$8.0 million
related to developed technology and customer relationships. See
“Note 13. Other Charges”
below.
9. Equity Method Investments
On October 31, 2018, we acquired an ownership interest in ADEA Medical AB (“
ADEA
”), a limited liability company incorporated and registered under the laws of Sweden, for approximately
$0.9 million
. This investment is accounted for under the equity method. ADEA serves as a distributor of remote cardiac monitoring devices and a service provider, primarily in northern Europe. ADEA had previously purchased product and had trade receivables and a note receivable with BioTelemetry and therefore is considered a related party. Additionally, our Executive Vice President & Chief Financial Officer sits on ADEA’s board of directors. Except for our investment in ADEA, there were no material related-party transactions during the year.
We hold an ownership interest in Wellbridge Health, Inc. (“
Wellbridge
”). The investment is accounted for under the equity method. Our Chief Executive Officer sits on Wellbridge’s board of directors, and therefore, Wellbridge is considered a related party. Except for our periodic investment in Wellbridge through capital contributions, there were no related-party transactions.
As of
December 31, 2018
, our investment in ADEA and Wellbridge represented
23.8%
and
32.2%
, respectively, of their outstanding stock. A summary of our investments is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
Beginning balance
|
$
|
1,431
|
|
|
$
|
1,125
|
|
Capital contributions
|
859
|
|
|
690
|
|
Loss from equity method investments
|
(246
|
)
|
|
(384
|
)
|
Ending balance
|
$
|
2,044
|
|
|
$
|
1,431
|
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Accrued Liabilities
Accrued liabilities consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
2018
|
|
2017
|
Compensation
|
$
|
13,443
|
|
|
$
|
13,694
|
|
Professional fees
|
4,260
|
|
|
3,816
|
|
Operating costs
|
1,095
|
|
|
1,170
|
|
Non-income taxes
|
906
|
|
|
588
|
|
Interest
|
702
|
|
|
306
|
|
Facility costs
|
106
|
|
|
802
|
|
Severance
|
55
|
|
|
1,605
|
|
Squeeze-out of untendered LifeWatch shares
|
—
|
|
|
2,885
|
|
Other
|
1,042
|
|
|
1,189
|
|
Total
|
$
|
21,609
|
|
|
$
|
26,055
|
|
11. Credit Agreement
2017 SunTrust Credit Agreement
Concurrent with the acquisition of LifeWatch discussed in
“Note 4. Acquisitions”
above, we entered into a credit agreement with SunTrust Bank, as a lender and an agent for the lenders (the “
Lenders
”) (together, the “
SunTrust Credit Agreement
”). Pursuant to the credit agreement, the Lenders agreed to make loans to us as follows; (i) a term loan in an aggregate principal amount equal to
$205.0 million
; and (ii) a
$50.0 million
revolving credit facility for ongoing working capital purposes. The proceeds of the loans were used to pay our existing GE Credit Agreement of
$24.9 million
and acquired LifeWatch debt of
$3.0 million
, pay a portion of the consideration for the acquisition of LifeWatch and pay related transaction fees and expenses of the acquisition of LifeWatch.
The loans bear interest at an annual rate, at our election, of (i) with respect to LIBOR rate loans,
LIBOR
plus the applicable margin and (ii) with respect to base rate loans, the Base Rate (the “
prime
rate” as published in the Wall Street Journal plus the applicable margin). The applicable margin for both LIBOR and Base Rate loans is determined by reference to our Consolidated Total Net Leverage Ratio, as defined in the credit agreement. As of
December 31, 2018
, the applicable margin is
1.75%
for LIBOR loans and
0.75%
for base rate loans.
The outstanding principal of the loan will be paid as follows:
|
|
•
|
Beginning January 1, 2018, the principal amount of the term loan will be repaid, on a quarterly basis, in installments of approximately
$0.5 million
, plus accrued interest;
|
|
|
•
|
Beginning January 1, 2019, the principal amount of the term loan will be repaid, on a quarterly basis, in installments of approximately
$1.3 million
, plus accrued interest;
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
•
|
Beginning January 1, 2020, the principal amount of the term loan will be repaid, on a quarterly basis, in installments of approximately
$3.8 million
, plus accrued interest;
|
|
|
•
|
Beginning January 1, 2021, the principal amount of the term loan will be repaid, on a quarterly basis, in installments of approximately
$5.1 million
, plus accrued interest;
|
|
|
•
|
The remaining principal balance will be repaid on or before July 12, 2022 (or such earlier date upon an acceleration of the loans by Lenders upon an event of default or by our termination).
|
The loans are secured by substantially all of our assets and by a pledge of our capital stock as well as a pledge of
65%
of the capital stock of its first tier material foreign subsidiaries, including
65%
of the capital stock we own of LifeWatch.
The carrying amount of the term loan was
$198.5 million
as of
December 31, 2018
, which is the principal amount outstanding, net of
$4.4 million
of unamortized deferred financing costs to be amortized over the remaining term of the credit facility. The revolving credit facility is subject to an unused commitment fee, which is determined by reference to the our Consolidated Total Net Leverage Ratio, as defined in the credit agreement. Our unused commitment fee as of
December 31, 2018
was
0.25%
and the revolving credit facility remains undrawn as of that date.
2014 GE Credit Agreement
On December 30, 2014, we entered into a Credit Agreement with Healthcare Financial Solutions, LLC, (“
HFS
”), previously The General Electric Capital Corporation (“
GE Capital
”), as agent for the lenders, and as a lender and swingline lender (the “
GE Credit Agreement
”). Pursuant to the GE Credit Agreement, the Lenders agreed to make loans to us as follows: (i) Term Loans in an amount of
$25.0 million
as of the closing date with an uncommitted ability to increase such Term Loans up to an amount not to exceed
$10.0 million
and (ii) Revolving Loans up to
$15.0 million
.
Covenants
The SunTrust Credit Agreement contains affirmative and financial covenants regarding the operations of our business and certain negative covenants that, among other things, limit our ability to incur additional indebtedness, grant certain liens, make certain investments, merge or consolidate, make certain restricted payments and engage in certain asset dispositions, including a sale of all, or substantially all, of our property. As of
December 31, 2018
, we were in compliance with our covenants.
Debt Extinguishment
In connection with the SunTrust Credit Agreement in 2017, we paid the
$24.9 million
outstanding indebtedness under the Credit Agreement between BioTelemetry and HFS, previously GE Capital, as agent for the lenders, and as a lender, and we terminated the General Electric Credit Agreement. We wrote‑off the unamortized deferred financing fees related to the existing debt of
$0.5 million
, which is included in loss on extinguishment of debt in our consolidated statements of operations for the year ended December 31, 2017.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Leases
We lease our principal administrative and service facilities as well as office equipment, certain monitoring devices and information technology equipment under arrangements classified as leases under ASC 840 -
Leases
. We have non-cancelable operating leases expiring at various dates through
2028
. Certain leases are renewable at the end of the lease term. We have also entered into and acquired capital leases with various expiration dates through
2022
, which were used primarily to finance office equipment, certain monitoring devices and other information technology equipment. Payments made under operating leases are charged to operations on a straight-line basis over the period of the lease. Differences between straight-line expense and cash payments are recorded as deferred rent. Rent expense was
$6.3 million
,
$5.8 million
and
$4.2 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
See “
Note 2. Summary of Significant Accounting Policies; t) Recent Accounting Pronouncements; Accounting Pronouncements Not Yet Adopted”
for further discussion regarding the transition from ASC 840 to ASC 842 effective January 1, 2019.
Future undiscounted minimum lease payments under non-cancelable operating and capital leases are summarized as follows at
December 31, 2018
:
|
|
|
|
|
|
|
|
|
(in thousands)
|
Operating
Leases
|
|
Capital
Leases
|
2019
|
$
|
5,047
|
|
|
$
|
1,652
|
|
2020
|
4,551
|
|
|
117
|
|
2021
|
3,277
|
|
|
—
|
|
2022
|
2,492
|
|
|
—
|
|
2023
|
2,284
|
|
|
—
|
|
Thereafter
|
5,807
|
|
|
—
|
|
Total minimum lease payments
|
$
|
23,458
|
|
|
$
|
1,769
|
|
13. Other Charges
We account for expenses associated with exit or disposal activities in accordance with ASC 420 -
Exit or Disposal Cost Obligations,
and record the expenses in other charges in our consolidated statements of operations. The related accruals are recorded in the accrued liabilities line of our consolidated balance sheets.
We account for expenses associated with our acquisitions and certain litigation as other charges as incurred. These expenses were primarily a result of activities surrounding our acquisitions and legal fees related to patent litigation in which we are the plaintiff. Other charges are costs that are not considered necessary to the ongoing business operations. A summary of these expenses is as follows:
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Asset impairment charges
|
$
|
—
|
|
|
$
|
12,045
|
|
|
$
|
—
|
|
Legal fees
|
4,792
|
|
|
8,689
|
|
|
7,177
|
|
Severance and employee related costs
|
4,484
|
|
|
4,747
|
|
|
645
|
|
Professional fees
|
2,691
|
|
|
5,614
|
|
|
719
|
|
Write-off of note receivable
|
1,793
|
|
|
—
|
|
|
—
|
|
Change in fair value of contingent consideration
|
(700
|
)
|
|
(2,605
|
)
|
|
—
|
|
Other costs
|
1,599
|
|
|
2,946
|
|
|
98
|
|
Total
|
$
|
14,659
|
|
|
$
|
31,436
|
|
|
$
|
8,639
|
|
14. Equity
Common Stock
As of
December 31, 2018
and
2017
, we were authorized to issue
200,000,000
shares of common stock. As of
December 31, 2018
and
2017
, we had
33,406,364
and
32,460,668
shares issued and outstanding, respectively. During the three months ended March 31, 2018, in accordance with the squeeze-out procedures under Swiss Law, we issued
58,786
shares to the remaining stockholders of LifeWatch. See
“Note 4. Acquisitions”
for further details related to the LifeWatch acquisition.
Preferred Stock
As of
December 31, 2018
, we were authorized to issue
10,000,000
shares of preferred stock. As of
December 31, 2018
, we maintained an unregistered blank check preferred stock class, and
no
shares were authorized. As of
December 31, 2018
and
2017
, there were
no
shares of preferred stock issued or outstanding.
Noncontrolling Interest
During 2018, after a formal restructuring of shareholdings approved by the board of directors of LifeWatch Turkey, we became the sole shareholder of LifeWatch Turkey. No cash or other consideration was exchanged to effect this transaction. As a result, we no longer reflect a noncontrolling interest in our consolidated balance sheet; however, we continue to reflect the net loss attributable to the noncontrolling interest on our consolidated statement of operations for the period of time where we did not own the entire entity.
15. Stock-Based Compensation
We have
three
stock plans: our 2017 Omnibus Incentive Plan (“
OIP
”), our 2008 Equity Incentive Plan (the “
2008 Plan
”) and our 2003 Equity Incentive Plan (the “
2003 Plan
”) (collectively, the “
Plans
”). The OIP is the only remaining stock plan actively granting new stock options or units. The purpose of these stock plans was, and the OIP is, to grant incentive stock options to employees and non-qualified stock options, RSUs, PSOs, PSUs and other stock-based incentive awards to officers, directors, employees and consultants. The Plans are administered by our Board of Directors (the “
Board
”) or its delegates. The
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
number, type, exercise price, and vesting terms of awards are determined by the Board or its delegates in accordance with the terms of the Plans. The stock options granted expire on a date specified by the Board but generally not more than
ten years
from the grant date. Stock option grants to employees generally vest over
four years
while RSUs generally vest after
three years
.
2017 Omnibus Incentive Plan
In May 2017, our stockholders approved the OIP, which replaced the 2008 Plan, with
3,000,000
shares reserved for issuance. Stock options, RSUs, PSUs and PSOs are granted under the OIP. There were
2,274,086
shares available for grant under the OIP as of
December 31, 2018
.
2008 Equity Incentive Plan
Our 2008 Plan became effective on March 18, 2008 and replaced our 2003 Plan. Under the terms of the 2008 Plan, all available shares in the 2003 Plan share reserve automatically rolled into the 2008 Plan. Any cancellations or forfeitures of granted stock options under the 2003 Plan also automatically rolled into the 2008 Plan. There are
no
shares available to grant under the 2008 Plan subsequent to the approval of the OIP.
Stock option and PSO activity is summarized for the years ended
December 31, 2018
,
2017
and
2016
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average Remaining Contractual Term
(Years)
|
|
Aggregate Intrinsic Value
(in thousands)
|
Outstanding as of December 31, 2015
|
3,420,519
|
|
|
$
|
6.69
|
|
|
|
|
|
Granted
|
519,770
|
|
|
13.44
|
|
|
|
|
|
Forfeited
|
(49,709
|
)
|
|
9.97
|
|
|
|
|
|
Exercised
|
(322,146
|
)
|
|
4.56
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
3,568,434
|
|
|
$
|
7.82
|
|
|
|
|
|
Granted
|
543,881
|
|
|
31.12
|
|
|
|
|
|
Forfeited
|
(154,510
|
)
|
|
16.22
|
|
|
|
|
|
Exercised
|
(383,366
|
)
|
|
9.91
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
3,574,439
|
|
|
$
|
10.78
|
|
|
|
|
|
Granted
|
387,306
|
|
|
43.82
|
|
|
|
|
|
Forfeited
|
(114,769
|
)
|
|
30.64
|
|
|
|
|
|
Exercised
|
(1,185,694
|
)
|
|
8.08
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
2,661,282
|
|
|
$
|
15.94
|
|
|
6.0
|
|
$
|
117,609
|
|
Exercisable as of December 31, 2018
|
1,844,079
|
|
|
$
|
7.90
|
|
|
4.8
|
|
$
|
95,564
|
|
Expected to vest as of December 31, 2018
|
741,795
|
|
|
$
|
34.08
|
|
|
8.7
|
|
$
|
20,010
|
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Stock Options
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average Remaining Contractual Term
(Years)
|
|
Aggregate Intrinsic Value
(in thousands)
|
Outstanding as of December 31, 2015
|
200,000
|
|
|
$
|
19.89
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
200,000
|
|
|
$
|
19.89
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(50,000
|
)
|
|
18.33
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
150,000
|
|
|
$
|
20.41
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(15,000
|
)
|
|
18.33
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
135,000
|
|
|
$
|
20.64
|
|
|
8.0
|
|
$
|
5,276
|
|
Exercisable as of December 31, 2018
|
135,000
|
|
|
$
|
20.64
|
|
|
8.0
|
|
$
|
5,276
|
|
The PSOs met their performance criteria, vested, and were priced as follows:
|
|
|
|
|
|
|
|
|
Performance Achievement Date
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
October 4, 2016
|
|
100,000
|
|
|
$
|
18.33
|
|
January 13, 2017
|
|
100,000
|
|
|
$
|
21.45
|
|
A summary of total outstanding stock options and PSOs as of
December 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options & PSOs Outstanding
|
|
Options & PSOs Exercisable
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Weighted
Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Weighted
Average
Exercise Price
|
$2.22 - $10.00
|
1,435,668
|
|
|
4.4
|
|
$
|
5.12
|
|
|
1,370,006
|
|
|
4.3
|
|
$
|
4.91
|
|
$10.01 - $20.00
|
430,944
|
|
|
6.4
|
|
13.03
|
|
|
359,694
|
|
|
6.2
|
|
12.17
|
|
$20.01 - $35.00
|
647,670
|
|
|
8.3
|
|
28.02
|
|
|
216,379
|
|
|
7.2
|
|
23.21
|
|
$35.01 - $50.00
|
175,500
|
|
|
8.8
|
|
37.81
|
|
|
33,000
|
|
|
8.6
|
|
37.15
|
|
$50.01 - $73.62
|
106,500
|
|
|
9.9
|
|
70.00
|
|
|
—
|
|
|
0.0
|
|
—
|
|
$2.22 - $73.62
|
2,796,282
|
|
|
6.1
|
|
$
|
16.17
|
|
|
1,979,079
|
|
|
5.0
|
|
$
|
8.77
|
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below summarizes certain additional information with respect to our options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands, except per share amounts)
|
|
2018
|
|
2017
|
|
2016
|
Aggregate intrinsic value of options exercised during the year
|
$
|
49,188
|
|
|
$
|
7,562
|
|
|
$
|
3,546
|
|
Cash received from the exercise of stock options
|
9,855
|
|
|
4,714
|
|
|
1,470
|
|
Weighted average grant date fair value per option
|
$
|
25.96
|
|
|
$
|
18.05
|
|
|
$
|
9.47
|
|
The total compensation cost of options granted but not yet vested at
December 31, 2018
was
$14.5 million
, which is expected to be recognized over a weighted average period of approximately
three
years.
The fair value of stock options was estimated at the date of grant using the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Expected volatility
|
55.2
|
%
|
|
59.2
|
%
|
|
64.4
|
%
|
Expected term (in years)
|
7.4
|
|
|
7.3
|
|
|
8.0
|
|
Risk-free interest rate
|
2.78
|
%
|
|
2.08
|
%
|
|
1.61
|
%
|
Expected dividends
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
RSU and PSU activity is summarized for the years ended
December 31, 2018
,
2017
and
2016
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Performance Stock Units
|
|
Number
of Shares
|
|
Weighted Average
Grant Date Fair
Value
|
|
Number
of Shares
|
|
Weighted Average
Grant Date Fair
Value
|
Units outstanding as of December 31, 2015
|
690,936
|
|
|
$
|
6.85
|
|
|
265,990
|
|
|
$
|
8.68
|
|
Granted
|
225,198
|
|
|
11.06
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(11,905
|
)
|
|
9.50
|
|
|
—
|
|
|
—
|
|
Vested
|
(311,880
|
)
|
|
4.08
|
|
|
(132,998
|
)
|
|
8.68
|
|
Units outstanding as of December 31, 2016
|
592,349
|
|
|
$
|
9.86
|
|
|
132,992
|
|
|
$
|
8.68
|
|
Granted
|
117,614
|
|
|
25.98
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(48,974
|
)
|
|
13.57
|
|
|
(132,992
|
)
|
|
8.68
|
|
Vested
|
(193,860
|
)
|
|
9.31
|
|
|
—
|
|
|
—
|
|
Units outstanding as of December 31, 2017
|
467,129
|
|
|
$
|
13.76
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
128,860
|
|
|
35.14
|
|
|
88,345
|
|
|
37.79
|
|
Forfeited
|
(12,466
|
)
|
|
22.88
|
|
|
(1,236
|
)
|
|
37.79
|
|
Vested
|
(224,840
|
)
|
|
12.02
|
|
|
—
|
|
|
—
|
|
Units outstanding as of December 31, 2018
|
358,683
|
|
|
$
|
22.22
|
|
|
87,109
|
|
|
$
|
37.79
|
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 2018, we granted awards to certain participants in the form of PSUs. These PSUs will vest at the end of a three-year performance period only if specific financial performance metrics are met, and the vested shares will then be modified based on relative total shareholder return. The
88,345
PSUs were granted at “target” levels; however, for share pool purposes, we have reserved an additional
87,109
shares if the combined financial performance and market conditions achieve maximum levels. The probability of achieving any of the performance criteria was first attained during the fourth quarter of 2018, however, the market conditions are not yet final. Compensation expense related to these PSUs was recognized in accordance with ASC 718 for both employees and non-employees, as amended by the early adoption of ASU 2018-07 (see
“Note 2. Summary of Significant Accounting Policies; t) Recent Accounting Pronouncements; Accounting Pronouncements Recently Adopted”
for further detail regarding ASU 2018-07).
In addition, a summary of total outstanding RSUs as of
December 31, 2018
is as follows:
|
|
|
|
|
Range of Grant Date Fair Value
|
|
RSUs
Outstanding
|
$9.57 - $12.00
|
|
134,278
|
|
$12.01 - $31.50
|
|
112,281
|
|
$31.51 - $73.62
|
|
112,124
|
|
$9.57- $73.62
|
|
358,683
|
|
Additional information about our RSUs and PSUs is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Aggregate market value of RSUs vested during the year
|
$
|
7,940
|
|
|
$
|
4,768
|
|
|
$
|
3,826
|
|
Aggregate market value of PSUs vested during the year
|
—
|
|
|
—
|
|
|
2,093
|
|
The total compensation cost of RSUs and PSUs granted but not yet vested at
December 31, 2018
was
$6.9 million
, which is expected to be recognized over a weighted average period of approximately
two
years. Additionally, there were
576,546
RSUs vested but not released at
December 31, 2018
.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Employee Stock Purchase Plan
In July 2008, we made available an Employee Stock Purchase Plan (“
2008 ESPP
”) in which substantially all of our full-time employees became eligible to participate effective March 18, 2008. Under the 2008 ESPP, employees may contribute through payroll deductions up to
$21,500
in a calendar year towards the purchase of our common stock. The purchase price per share is equal to the lower of
85%
of the fair market price on the first day of the offering period, or
85%
of the fair market price on the day of purchase. Proceeds received from the issuance of shares are credited to stockholders’ equity in the period that the shares are issued. In May 2017, the stockholders approved the BioTelemetry, Inc. 2017 Employee Stock Purchase Plan (“
2017 ESPP
”), with
500,000
shares reserved for issuance under the 2017 ESPP, which replaced the 2008 ESPP. The contribution limits, price discount and the offering periods remain the same under the 2017 ESPP. In
2018
, an aggregate of
121,655
shares were purchased in accordance with the 2017 ESPP. Net proceeds from the issuance of shares of common stock under the 2017 ESPP for the year ended
December 31, 2018
were
$2.3 million
. At
December 31, 2018
,
331,096
shares remain available for purchase under the 2017 ESPP.
Our aggregate stock-based compensation expense is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Stock options
|
$
|
4,550
|
|
|
$
|
3,183
|
|
|
$
|
2,030
|
|
Performance stock options
|
—
|
|
|
1,534
|
|
|
1,297
|
|
Restricted stock units
|
3,052
|
|
|
2,273
|
|
|
2,211
|
|
Performance stock units
|
589
|
|
|
—
|
|
|
444
|
|
Employee stock purchase plan
|
1,070
|
|
|
690
|
|
|
520
|
|
Total stock-based compensation expense
|
$
|
9,261
|
|
|
$
|
7,680
|
|
|
$
|
6,502
|
|
For the years ended
December 31, 2018
,
2017
and 2016, we recognized
$11.6 million
,
$1.5 million
and
$1.7 million
of tax benefit from stock options exercised during the period as a component of our (provision for)/benefit from income taxes.
16. Employee Benefit Plan
We sponsor a 401(k) Retirement Savings Plan (the “
401k Plan
”) for all eligible employees who meet certain requirements. Participants may contribute, on a pre-tax basis, up to the maximum allowable amount pursuant to Section 401(k) of the Internal Revenue Code (“
IRC
”). The plan also includes a Roth feature, allowing after-tax contributions, up to the maximum allowable amount pursuant to Section 401(k) of the IRC. In January 2014, we adopted an amendment to the 401k Plan that allowed for an employer matching contribution of
100%
of the first
3%
of the employees’ salary, and
50%
of the next
2%
of the employees’ salary. For the years ended
December 31, 2018
,
2017
and
2016
, we contributed
$3.5 million
,
$2.6 million
and
$2.1 million
, respectively. Employer contributions vest immediately.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Income Taxes
The components of our (provision for)/benefit from income taxes are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
(273
|
)
|
|
$
|
(321
|
)
|
State
|
(27
|
)
|
|
(424
|
)
|
|
(153
|
)
|
Foreign
|
(1,897
|
)
|
|
—
|
|
|
—
|
|
Total provision for income taxes
|
(1,924
|
)
|
|
(697
|
)
|
|
(474
|
)
|
Deferred:
|
|
|
|
|
|
Federal
|
875
|
|
|
(4,353
|
)
|
|
32,484
|
|
State
|
690
|
|
|
151
|
|
|
5,657
|
|
Foreign
|
729
|
|
|
(1,848
|
)
|
|
—
|
|
Total deferred (provision for)/benefit from income taxes
|
2,294
|
|
|
(6,050
|
)
|
|
38,141
|
|
Total (provision for)/benefit from income taxes
|
$
|
370
|
|
|
$
|
(6,747
|
)
|
|
$
|
37,667
|
|
Reconciliations between expected income taxes computed at the federal statutory rate for each of the years ended
December 31, 2018
,
2017
and
2016
, and the (provision for)/benefit from income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Income tax (provision)/benefit at statutory rate
|
$
|
(8,716
|
)
|
|
$
|
3,638
|
|
|
$
|
(5,520
|
)
|
Permanent difference
|
9,127
|
|
|
392
|
|
|
—
|
|
(Increase)/decrease in valuation allowance
|
714
|
|
|
(976
|
)
|
|
51,630
|
|
State income tax, net of federal benefit
|
606
|
|
|
(177
|
)
|
|
(259
|
)
|
Deferred tax asset adjustments
|
208
|
|
|
(485
|
)
|
|
(4,336
|
)
|
Unrecognized tax benefit
|
(1,547
|
)
|
|
—
|
|
|
(3,559
|
)
|
Foreign rate differential
|
(36
|
)
|
|
(1,107
|
)
|
|
—
|
|
Tax Reform impact
|
—
|
|
|
(8,048
|
)
|
|
—
|
|
Other
|
14
|
|
|
16
|
|
|
(289
|
)
|
(Provision for)/benefit from income taxes
|
$
|
370
|
|
|
$
|
(6,747
|
)
|
|
$
|
37,667
|
|
For the years ended
December 31, 2018
,
2017
and 2016, we recognized
$11.6 million
,
$1.5 million
and
$1.7 million
of tax benefit from stock options exercised during the period as a component of our (provision for)/benefit from income taxes.
At
December 31, 2018
, we had federal net operating loss carryforwards of approximately
$149.1 million
to offset future federal taxable income expiring in various years starting in
2023
through
2037
with the exception of the current year net operating loss carryforward of
$1.0 million
which is not subject to expiration. At
December 31, 2018
, we had state net operating loss carryforwards of
$80.2 million
, which expire in various years starting in
2019
through
2038
. We also had
$129.4 million
of foreign net operating
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
loss carryforwards, and we have recorded a valuation allowance against a portion of the foreign net operating losses, which expire in various years starting in
2019
through
2024
.
The timing and manner in which we can utilize our net operating loss carryforwards and future income tax deductions in any year may be limited. 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.” Section 383 imposes similar limitations on other tax attributes such as research and development credits. Currently, a portion of our loss carryforwards is limited under Section 382 and therefore, is not included in the total net operating losses disclosed above.
The U.S. Internal Revenue Service concluded its examination of our U.S. federal tax returns for all years through 2011. Because of net operating losses, our U.S. federal tax returns for those years will remain subject to examination until the statute of limitations passes for the tax returns which utilized those losses. Additionally, state tax return statutes generally remain open due to operating losses.
Deferred taxes result from temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. As of
December 31, 2018
, our gross deferred income tax assets of
$56.0 million
were primarily the result of federal and state net operating losses and credit carryforwards, stock-based compensation, non-deductible accruals, including an interest expense limitation, and allowance for doubtful accounts. A valuation allowance of
$3.0 million
and
$6.0 million
was recorded against our deferred income tax asset balance as of
December 31, 2018
and
2017
, respectively.
As of each reporting date, our management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred income tax assets.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The significant components of our deferred taxes are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
33,803
|
|
|
$
|
38,245
|
|
Allowance for doubtful accounts
|
6,526
|
|
|
5,324
|
|
Non-deductible accruals
|
4,980
|
|
|
4,471
|
|
Stock based compensation expense
|
3,337
|
|
|
4,300
|
|
Transaction costs
|
2,186
|
|
|
2,361
|
|
Research and development and AMT credit carryforwards
|
1,092
|
|
|
1,198
|
|
Deferred revenue and deferred rent
|
1,019
|
|
|
937
|
|
Capital loss carryforwards
|
2,114
|
|
|
—
|
|
Property and equipment
|
—
|
|
|
690
|
|
Other, net
|
917
|
|
|
158
|
|
Total deferred tax assets
|
55,974
|
|
|
57,684
|
|
Less valuation allowance
|
(3,021
|
)
|
|
(6,032
|
)
|
Net deferred tax assets
|
52,953
|
|
|
51,652
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
(29,663
|
)
|
|
(33,854
|
)
|
Property and equipment
|
(3,173
|
)
|
|
—
|
|
Prepaid insurance
|
(142
|
)
|
|
(117
|
)
|
Total deferred tax liabilities
|
(32,978
|
)
|
|
(33,971
|
)
|
Net deferred tax asset
|
$
|
19,975
|
|
|
$
|
17,681
|
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the TCJA. The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“
AMT
”) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.
In 2018, we completed our analysis of the provisional items of the TCJA under SAB 118, resulting in immaterial adjustments, primarily related to cumulative temporary differences.
The following summarizes the changes in our unrecognized tax benefit:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
Unrecognized tax benefit at the beginning of the year
|
$
|
39,710
|
|
|
$
|
3,899
|
|
Additions to unrecognized tax benefit related to current year
|
—
|
|
|
35,811
|
|
Additions to unrecognized tax benefit related to prior years
|
13,122
|
|
|
—
|
|
Unrecognized tax benefit at the end of the year
|
$
|
52,832
|
|
|
$
|
39,710
|
|
The balance of unrecognized tax benefits, if recognized, would affect the effective tax rate. As of
December 31, 2018
and 2017, we have recorded a net reserve of
$31.3 million
and
$22.0 million
, respectively, for unrecognized tax benefits as a component of other long-term liabilities within our consolidated balance sheets. The unrecognized tax benefit, or a portion of an unrecognized tax benefit, is presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward.
We recognize interest and penalties related to unrecognized tax benefits on the (provision for)/benefit from income taxes line in the accompanying consolidated statements of operations. As of
December 31, 2018
, our accrued interest associated with our liability for unrecognized tax benefits was
$1.6 million
. As of December 31, 2017, we had not recorded any interest associated with our liability for uncertain tax positions. In addition, we have not recorded any penalties on our uncertain tax positions for each of the years ended December 31, 2018 and 2017.
It is reasonably possible that a portion of these unrecognized tax benefits could be resolved within the next twelve months that may result in a decrease in our effective tax rate.
18. Segment Information
We operate under
two
reportable segments: Healthcare and Research. The Healthcare segment is focused on the diagnosis and monitoring of cardiac arrhythmias or heart rhythm disorders. We offer cardiologists, electrophysiologists, neurologists and primary care physicians a full spectrum of solutions, which provides them with a single source of cardiac monitoring services. These services range from the differentiated MCT service, to event, traditional Holter, extended-wear Holter, Pacemaker and INR monitoring. The Research segment is engaged in central core laboratory services providing cardiac monitoring, imaging services, scientific consulting and data management services for drug and medical device trials. During the first quarter of 2018, as part of the LifeWatch integration, our forward-looking integration and rebranding plans, as well as re-evaluating the significance and materiality of our segments, we aggregated the Technology operating segment into the Corporate and Other category. Included in the Corporate and Other category is the revenue received from the sale of non-invasive cardiac monitors to healthcare companies, wireless blood glucose meters and test strips to wholesale distributors of diabetes
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
supplies and diabetic patients as well as product repairs, corporate overhead and other items not allocated to any of our reportable segments.
Expenses that can be specifically identified with a segment have been included as deductions in determining pre-tax segment income. Any remaining expenses including integration, restructuring and other charges, as well as the elimination of costs associated with intercompany revenue are included in the Corporate and Other category. Also included in the Corporate and Other category is our net interest expense, other financing expenses, and income taxes. We do not allocate assets to the individual segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
Reporting Segment
|
|
Corporate
and Other
|
|
Consolidated
|
(in thousands)
|
Healthcare
|
|
Research
|
|
|
Revenue
|
$
|
338,812
|
|
|
$
|
50,561
|
|
|
$
|
10,099
|
|
|
$
|
399,472
|
|
Gross profit
|
220,883
|
|
|
21,603
|
|
|
8,000
|
|
|
250,486
|
|
Income/(loss) before income taxes
|
98,135
|
|
|
6,228
|
|
|
(62,859
|
)
|
|
41,504
|
|
Depreciation and amortization
|
33,119
|
|
|
3,723
|
|
|
3,326
|
|
|
40,168
|
|
Capital expenditures
|
20,258
|
|
|
3,272
|
|
|
1,107
|
|
|
24,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
Reporting Segment
|
|
Corporate
and Other
|
|
Consolidated
|
(reclassified, in thousands)
|
Healthcare
|
|
Research
|
|
|
Revenue
|
$
|
234,385
|
|
|
$
|
38,790
|
|
|
$
|
13,601
|
|
|
$
|
286,776
|
|
Gross profit
|
153,029
|
|
|
15,909
|
|
|
3,432
|
|
|
172,370
|
|
Income/(loss) before income taxes
|
52,054
|
|
|
1,214
|
|
|
(63,664
|
)
|
|
(10,396
|
)
|
Depreciation and amortization
|
29,255
|
|
|
4,148
|
|
|
(4,842
|
)
|
|
28,561
|
|
Capital expenditures
|
12,542
|
|
|
1,274
|
|
|
(119
|
)
|
|
13,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Reporting Segment
|
|
Corporate
and Other
|
|
Consolidated
|
(reclassified, in thousands)
|
Healthcare
|
|
Research
|
|
|
Revenue
|
$
|
165,664
|
|
|
$
|
32,565
|
|
|
$
|
10,103
|
|
|
$
|
208,332
|
|
Gross profit
|
112,105
|
|
|
14,170
|
|
|
3,175
|
|
|
129,450
|
|
Income/(loss) before income taxes
|
53,025
|
|
|
2,229
|
|
|
(39,484
|
)
|
|
15,770
|
|
Depreciation and amortization
|
10,216
|
|
|
3,837
|
|
|
216
|
|
|
14,269
|
|
Capital expenditures
|
8,885
|
|
|
1,941
|
|
|
73
|
|
|
10,899
|
|
19. Legal Proceedings
The final outcome of any current or future litigation or governmental or internal investigations cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. We record accruals for such
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be estimated.
Mednet Settlement
In the third quarter of 2017, a settlement was reached with the selling stockholder of Mednet Healthcare Technologies, Inc., Heartcare Corporation of America, Inc., Universal Medical, Inc., and Universal Medical Laboratory, Inc. (collectively, “
Mednet
”), whereby
79,333
shares of BioTelemetry common stock with a fair value of
$2.8 million
were returned to us. These shares were part of the consideration paid in the acquisition of Mednet and had been subject to certain terms and conditions set forth in the Stock Purchase Agreement (the “
Mednet Agreement
”). In accordance with the terms of the Mednet Agreement, we sought indemnification for alleged breaches of certain representations and warranties. Accordingly, in 2016 we recorded a
$1.4 million
indemnification asset. However, as a result of the settlement’s fair value exceeding the indemnification asset recorded, a gain of
$1.3 million
was recorded as a component of other non-operating expense, net in the consolidated statements of operations for the year ended December 31, 2017.
United States Department of Health and Human Services’ Office for Civil Rights Settlement
In 2011, we experienced the theft of
two
unencrypted laptop computers and, as a result, were required to provide notices under the Health Insurance Portability and Accountability Act Breach Notification Rule to the United States Department of Health and Human Services’ Office for Civil Rights (“
OCR
”). During the first quarter of 2017, the OCR concluded its investigation into the matter and reached a settlement agreement with us. Per the agreement, we paid the OCR
$2.5 million
and agreed to submit a two-year corrective action plan. We did not admit any liability or wrongdoing. As a result of the settlement, we recorded a non-operating charge of
$2.5 million
to other non-operating expense, net in the consolidated statements of operations for the year ended December 31, 2017.
ZTech, Inc., Biorita LLC, and the Cleveland Clinic Foundation Arbitration
In January 2017, ZTech, Inc., Biorita LLC, and the Cleveland Clinic Foundation (collectively, the “
Claimants
”) filed an arbitration demand against LifeWatch with the American Arbitration Association. Claimants alleged that LifeWatch violated the 2015 Stock Purchase Agreement for the purchase of FlexLife Health, Inc., a remote INR monitoring business. The demand alleged LifeWatch did not make commercially reasonable efforts to achieve certain conditions precedent and did not have a reasonable basis for terminating the business line. Claimants sought liquidated damages and attorneys’ fees. On May 9, 2018, the arbitration panel issued an award including accrued interest against LifeWatch in the amount of
$6.0 million
. The award liability, plus the accrued interest through July 12, 2017, was recorded as a measurement period adjustment related to our LifeWatch acquisition due to new facts learned that existed as of the acquisition date (see
“Note 4. Acquisitions”
). The interest accrued since the acquisition date of LifeWatch was recorded as a component of other non-operating expense within our consolidated statements of operations. The total amount of the award and accrued interest was paid in May 2018.
ScottCare Litigation
In May 2012, CardioNet, Inc. and Braemar Manufacturing, LLC filed suit against The ScottCare Corporation and Ambucor Health Solutions, Inc. (collectively, “
ScottCare
”) in the U.S. District Court for the Eastern District of Pennsylvania for patent infringement. We are seeking an injunction against each defendant, as well as monetary damages. ScottCare has asserted counterclaims alleging the patents in the
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
suit are invalid and not infringed. Summary judgment motions are pending with the district court. We are vigorously pursuing our claims and defending against the counterclaims. The probable outcome of this matter cannot be determined, nor can we estimate a range of potential loss. Therefore, in accordance with authoritative guidance on the evaluation of loss contingencies, we have not recorded an accrual related to this matter.
InfoBionic Litigation
CardioNet, LLC and Braemar Manufacturing, LLC filed a patent infringement lawsuit against InfoBionic, Inc. (“
InfoBionic
”) in May 2015 in the U.S. District Court for the District of Massachusetts and filed the most recent amended complaint in March 2017. We also initiated an arbitration proceeding against InfoBionic with the American Arbitration Association in July 2017 asserting claims of misappropriation of trade secrets, unfair competition and unjust enrichment as a result of our discovery that InfoBionic is in unauthorized possession of our confidential and proprietary materials, including source code. We are seeking monetary and injunctive relief. A final hearing is scheduled for May 2019.
20. Quarterly Financial Data (Unaudited)
The following tables summarize the unaudited quarterly financial data for the last two fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
2018
|
|
|
|
|
|
|
|
Total revenue
|
$
|
94,496
|
|
|
$
|
101,360
|
|
|
$
|
100,013
|
|
|
$
|
103,603
|
|
Gross profit
|
58,048
|
|
|
65,755
|
|
|
62,737
|
|
|
63,946
|
|
Net income
|
5,036
|
|
|
10,444
|
|
|
16,001
|
|
|
10,393
|
|
Net income attributable to BioTelemetry, Inc.
|
5,982
|
|
|
10,444
|
|
|
16,001
|
|
|
10,393
|
|
Basic net income per share attributable to BioTelemetry, Inc.
|
$
|
0.18
|
|
|
$
|
0.32
|
|
|
$
|
0.48
|
|
|
$
|
0.31
|
|
Diluted net income per share attributable to BioTelemetry, Inc.
|
$
|
0.17
|
|
|
$
|
0.29
|
|
|
$
|
0.45
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
Total revenue
|
$
|
55,881
|
|
|
$
|
58,129
|
|
|
$
|
81,023
|
|
|
$
|
91,743
|
|
Gross profit
|
32,909
|
|
|
35,967
|
|
|
49,069
|
|
|
54,425
|
|
Net income/(loss)
|
196
|
|
|
1,726
|
|
|
(2,564
|
)
|
|
(16,501
|
)
|
Net income/(loss) attributable to BioTelemetry, Inc.
|
196
|
|
|
1,726
|
|
|
(2,285
|
)
|
|
(15,593
|
)
|
Basic net income/(loss) per share attributable to BioTelemetry, Inc.
|
$
|
0.01
|
|
|
$
|
0.06
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.48
|
)
|
Diluted net income/(loss) per share attributable to BioTelemetry, Inc.
|
$
|
0.01
|
|
|
$
|
0.05
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.48
|
)
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. Subsequent Event
On
January 25, 2019
, we entered into an Agreement and Plan of Merger (the “
Geneva Agreement
”) with Geneva Healthcare, Inc. (“
Geneva
”), a Delaware corporation and early stage company that provides remote monitoring for implantable cardiac devices utilizing a proprietary cloud-based platform, whereby Geneva will become a wholly owned subsidiary of BioTelemetry.
Pursuant to the terms of the Geneva Agreement, the holders of Geneva’s common and preferred stock and options exercisable for Geneva’s common stock outstanding (combined, the “
Securityholders
”) at closing will receive cash in the aggregate of
$45.0 million
, subject to certain closing and post-closing adjustments related to, among other things, Geneva’s net working capital, cash and certain transaction expenses as of the closing date. In addition, pursuant to the terms of Geneva Agreement, on the third anniversary of the closing date, the Securityholders are eligible to receive a revenue-based earn-out of at least
$20.0 million
, payable either in cash or a combination of cash and stock, with no maximum earn-out amount. The consideration for this transaction is expected to be funded with (1) cash on hand, (2) borrowings under BioTelemetry’s current revolving credit facility, (3) through the issuance of BioTelemetry Common Stock, or (4) some combination thereof.
The closing of the transactions contemplated by the Geneva Agreement is expected to be completed later in the first quarter of 2019. We plan to assign Geneva to our Healthcare segment.