Item 1. Financial Statements
BIOTELEMETRY, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share and par value data)
|
(Unaudited)
September 30,
2019
|
|
December 31,
2018
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
61,573
|
|
|
$
|
80,889
|
|
|
Healthcare accounts receivable, net of allowance for doubtful accounts of $26,504 and $25,345, at September 30, 2019 and December 31, 2018, respectively
|
56,832
|
|
|
37,754
|
|
|
Other accounts receivable, net of allowance for doubtful accounts of $92 and $268, at September 30, 2019 and December 31, 2018, respectively
|
15,637
|
|
|
14,874
|
|
|
Inventory
|
6,389
|
|
|
7,323
|
|
|
Prepaid expenses and other current assets
|
9,712
|
|
|
5,820
|
|
|
Total current assets
|
150,143
|
|
|
146,660
|
|
|
Property and equipment, net of accumulated depreciation of $74,241 and $67,202, at September 30, 2019 and December 31, 2018, respectively
|
55,608
|
|
|
48,377
|
|
|
Intangible assets, net
|
133,593
|
|
|
129,653
|
|
|
Goodwill
|
304,101
|
|
|
238,814
|
|
|
Deferred tax assets
|
12,828
|
|
|
19,975
|
|
|
Other assets
|
19,891
|
|
|
3,322
|
|
|
Total assets
|
$
|
676,164
|
|
|
$
|
586,801
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
19,287
|
|
|
$
|
18,157
|
|
|
Accrued liabilities
|
28,487
|
|
|
24,689
|
|
|
Current portion of finance lease obligations
|
490
|
|
|
1,652
|
|
|
Current portion of long-term debt
|
12,813
|
|
|
5,125
|
|
|
Total current liabilities
|
61,077
|
|
|
49,623
|
|
|
Long-term portion of finance lease obligations
|
348
|
|
|
117
|
|
|
Long-term debt
|
182,825
|
|
|
193,424
|
|
|
Other long-term liabilities
|
71,007
|
|
|
33,152
|
|
|
Total liabilities
|
315,257
|
|
|
276,316
|
|
|
Stockholders’ equity:
|
|
|
|
|
Common stock—$0.001 par value as of September 30, 2019 and December 31, 2018; 200,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 33,991,107 and 33,406,364 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
|
34
|
|
|
33
|
|
|
Paid-in capital
|
449,087
|
|
|
426,054
|
|
|
Accumulated other comprehensive (loss)/income
|
(624
|
)
|
|
256
|
|
|
Accumulated deficit
|
(87,590
|
)
|
|
(115,858
|
)
|
|
Total equity
|
360,907
|
|
|
310,485
|
|
|
Total liabilities and equity
|
$
|
676,164
|
|
|
$
|
586,801
|
|
See accompanying Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
(in thousands, except per share data)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenue
|
$
|
111,291
|
|
|
$
|
100,013
|
|
|
$
|
327,073
|
|
|
$
|
295,869
|
|
|
Cost of revenue
|
41,952
|
|
|
37,276
|
|
|
122,716
|
|
|
109,329
|
|
|
Gross profit
|
69,339
|
|
|
62,737
|
|
|
204,357
|
|
|
186,540
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
29,651
|
|
|
26,325
|
|
|
87,845
|
|
|
81,785
|
|
|
Sales and marketing
|
12,572
|
|
|
10,120
|
|
|
37,807
|
|
|
32,535
|
|
|
Bad debt expense
|
5,858
|
|
|
5,157
|
|
|
16,385
|
|
|
16,911
|
|
|
Research and development
|
3,661
|
|
|
2,429
|
|
|
10,526
|
|
|
8,451
|
|
|
Other charges
|
2,598
|
|
|
1,330
|
|
|
7,902
|
|
|
11,623
|
|
|
Total operating expenses
|
54,340
|
|
|
45,361
|
|
|
160,465
|
|
|
151,305
|
|
|
Income from operations
|
14,999
|
|
|
17,376
|
|
|
43,892
|
|
|
35,235
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest expense
|
(2,338
|
)
|
|
(2,408
|
)
|
|
(7,358
|
)
|
|
(6,982
|
)
|
|
Loss on equity method investments
|
(65
|
)
|
|
(54
|
)
|
|
(251
|
)
|
|
(238
|
)
|
|
Other non-operating (expense)/income, net
|
(845
|
)
|
|
(194
|
)
|
|
(1,813
|
)
|
|
543
|
|
|
Total other expense, net
|
(3,248
|
)
|
|
(2,656
|
)
|
|
(9,422
|
)
|
|
(6,677
|
)
|
|
Income before income taxes
|
11,751
|
|
|
14,720
|
|
|
34,470
|
|
|
28,558
|
|
|
(Provision for)/benefit from income taxes
|
(3,468
|
)
|
|
1,281
|
|
|
(6,202
|
)
|
|
2,923
|
|
|
Net income
|
8,283
|
|
|
16,001
|
|
|
28,268
|
|
|
31,481
|
|
|
Net loss attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
(946
|
)
|
|
Net income attributable to BioTelemetry, Inc.
|
$
|
8,283
|
|
|
$
|
16,001
|
|
|
$
|
28,268
|
|
|
$
|
32,427
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share attributable to BioTelemetry, Inc.:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.24
|
|
|
$
|
0.48
|
|
|
$
|
0.83
|
|
|
$
|
1.00
|
|
|
Diluted
|
$
|
0.23
|
|
|
$
|
0.45
|
|
|
$
|
0.78
|
|
|
$
|
0.91
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
33,908
|
|
|
33,003
|
|
|
33,885
|
|
|
32,488
|
|
|
Dilutive common stock equivalents
|
2,360
|
|
|
2,915
|
|
|
2,560
|
|
|
3,078
|
|
|
Diluted
|
36,268
|
|
|
35,918
|
|
|
36,445
|
|
|
35,566
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net income attributable to BioTelemetry, Inc.
|
$
|
8,283
|
|
|
$
|
16,001
|
|
|
$
|
28,268
|
|
|
$
|
32,427
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign currency translation loss
|
(167
|
)
|
|
(27
|
)
|
|
(880
|
)
|
|
(194
|
)
|
|
Comprehensive income attributable to BioTelemetry, Inc.
|
$
|
8,116
|
|
|
$
|
15,974
|
|
|
$
|
27,388
|
|
|
$
|
32,233
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
(in thousands)
|
2019
|
|
2018
|
|
OPERATING ACTIVITIES
|
|
|
|
|
Net income
|
$
|
28,268
|
|
|
$
|
31,481
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Bad debt expense
|
16,385
|
|
|
16,911
|
|
|
Depreciation and amortization
|
30,508
|
|
|
30,231
|
|
|
Stock-based compensation
|
9,662
|
|
|
6,278
|
|
|
Accretion of debt discount
|
932
|
|
|
932
|
|
|
Deferred income taxes
|
5,021
|
|
|
(4,149
|
)
|
|
Change in fair value of acquisition-related contingent consideration
|
(1,720
|
)
|
|
(700
|
)
|
|
Other non-cash items
|
(105
|
)
|
|
279
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Healthcare and other accounts receivable
|
(34,637
|
)
|
|
(28,826
|
)
|
|
Inventory
|
934
|
|
|
(3,454
|
)
|
|
Prepaid expenses and other assets
|
(3,493
|
)
|
|
1,932
|
|
|
Accounts payable
|
640
|
|
|
1,105
|
|
|
Accrued and other liabilities
|
207
|
|
|
(7,733
|
)
|
|
Net cash provided by operating activities
|
52,602
|
|
|
44,287
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
(44,766
|
)
|
|
—
|
|
|
Purchases of property and equipment and investment in internally developed software
|
(23,686
|
)
|
|
(17,498
|
)
|
|
Net cash used in investing activities
|
(68,452
|
)
|
|
(17,498
|
)
|
|
FINANCING ACTIVITIES
|
|
|
|
|
Proceeds related to the exercising of stock options and employee stock purchase plan
|
7,045
|
|
|
10,818
|
|
|
Payments of tax withholdings related to vesting of share-based awards
|
(4,955
|
)
|
|
(2,890
|
)
|
|
Principal payments on long-term debt
|
(3,844
|
)
|
|
(1,538
|
)
|
|
Principal payments on finance lease obligations
|
(1,735
|
)
|
|
(3,005
|
)
|
|
Acquisition of noncontrolling interests
|
—
|
|
|
(2,885
|
)
|
|
Net cash (used in)/provided by financing activities
|
(3,489
|
)
|
|
500
|
|
|
Effect of exchange rate changes on cash
|
23
|
|
|
(193
|
)
|
|
Net (decrease)/increase in cash and cash equivalents
|
(19,316
|
)
|
|
27,096
|
|
|
Cash and cash equivalents - beginning of period
|
80,889
|
|
|
36,022
|
|
|
Cash and cash equivalents - end of period
|
$
|
61,573
|
|
|
$
|
63,118
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
Non-cash purchases of property and equipment
|
$
|
1,721
|
|
|
$
|
1,056
|
|
|
Non-cash fair value of equity issued for acquisition of business
|
2,142
|
|
|
—
|
|
|
Non-cash fair value of equity issued for acquisition of noncontrolling interests
|
—
|
|
|
3,972
|
|
|
Cash paid for interest
|
6,301
|
|
|
5,830
|
|
|
Cash paid for taxes
|
$
|
617
|
|
|
$
|
1,120
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioTelemetry, Inc. Equity
|
|
|
Common Stock
|
|
Paid-in Capital
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated Deficit
|
|
Total Equity
|
|
(in thousands, except shares)
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance at June 30, 2019
|
33,888,920
|
|
|
$
|
34
|
|
|
$
|
443,135
|
|
|
$
|
(457
|
)
|
|
$
|
(95,873
|
)
|
|
$
|
346,839
|
|
|
Share issuances related to stock compensation plans
|
102,187
|
|
|
—
|
|
|
2,316
|
|
|
—
|
|
|
—
|
|
|
2,316
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
3,636
|
|
|
—
|
|
|
—
|
|
|
3,636
|
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(167
|
)
|
|
—
|
|
|
(167
|
)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,283
|
|
|
8,283
|
|
|
Balance at September 30, 2019
|
33,991,107
|
|
|
$
|
34
|
|
|
$
|
449,087
|
|
|
$
|
(624
|
)
|
|
$
|
(87,590
|
)
|
|
$
|
360,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioTelemetry, Inc. Equity
|
|
|
Common Stock
|
|
Paid-in Capital
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated Deficit
|
|
Total Equity
|
|
(in thousands, except shares)
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance at June 30, 2018
|
32,715,190
|
|
|
$
|
33
|
|
|
$
|
415,701
|
|
|
$
|
(281
|
)
|
|
$
|
(142,252
|
)
|
|
$
|
273,201
|
|
|
Share issuances related to stock compensation plans
|
496,868
|
|
|
—
|
|
|
4,985
|
|
|
—
|
|
|
—
|
|
|
4,985
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
1,355
|
|
|
—
|
|
|
—
|
|
|
1,355
|
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(27
|
)
|
|
—
|
|
|
(27
|
)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,001
|
|
|
16,001
|
|
|
Balance at September 30, 2018
|
33,212,058
|
|
|
$
|
33
|
|
|
$
|
422,041
|
|
|
$
|
(308
|
)
|
|
$
|
(126,251
|
)
|
|
$
|
295,515
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioTelemetry, Inc. Equity
|
|
|
Common Stock
|
|
Paid-in Capital
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
Accumulated Deficit
|
|
Total Equity
|
|
(in thousands, except shares)
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance at December 31, 2018
|
33,406,364
|
|
|
$
|
33
|
|
|
$
|
426,054
|
|
|
$
|
256
|
|
|
$
|
(115,858
|
)
|
|
$
|
310,485
|
|
|
Share issuances related to stock compensation plans
|
599,161
|
|
|
1
|
|
|
7,044
|
|
|
—
|
|
|
—
|
|
|
7,045
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
9,662
|
|
|
—
|
|
|
—
|
|
|
9,662
|
|
|
Shares withheld to cover taxes on vesting of share-based awards
|
(64,418
|
)
|
|
—
|
|
|
(4,955
|
)
|
|
—
|
|
|
—
|
|
|
(4,955
|
)
|
|
Issuance of stock related to business combination
|
50,000
|
|
|
—
|
|
|
2,142
|
|
|
—
|
|
|
—
|
|
|
2,142
|
|
|
Deferred purchase price consideration - equity portion
|
—
|
|
|
—
|
|
|
9,140
|
|
|
—
|
|
|
—
|
|
|
9,140
|
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(880
|
)
|
|
—
|
|
|
(880
|
)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
28,268
|
|
|
28,268
|
|
|
Balance at September 30, 2019
|
33,991,107
|
|
|
$
|
34
|
|
|
$
|
449,087
|
|
|
$
|
(624
|
)
|
|
$
|
(87,590
|
)
|
|
$
|
360,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioTelemetry, Inc. Equity
|
|
|
|
|
|
|
Common Stock
|
|
Paid-in Capital
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated Deficit
|
|
Noncontrolling Interest
|
|
Total Equity
|
|
(in thousands, except shares)
|
Shares
|
|
Amount
|
|
|
|
|
|
|
Balance at December 31, 2017
|
31,906,195
|
|
|
$
|
32
|
|
|
$
|
409,517
|
|
|
$
|
(114
|
)
|
|
$
|
(158,678
|
)
|
|
$
|
(1,054
|
)
|
|
$
|
249,703
|
|
|
Share issuances related to stock compensation plans
|
1,332,254
|
|
|
1
|
|
|
11,136
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,137
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
6,278
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,278
|
|
|
Shares withheld to cover taxes on vesting of share-based awards
|
(85,177
|
)
|
|
—
|
|
|
(2,890
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,890
|
)
|
|
Acquisition of noncontrolling interest
|
58,786
|
|
|
—
|
|
|
(2,000
|
)
|
|
—
|
|
|
—
|
|
|
2,000
|
|
|
—
|
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(194
|
)
|
|
—
|
|
|
—
|
|
|
(194
|
)
|
|
Net income/(loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,427
|
|
|
(946
|
)
|
|
31,481
|
|
|
Balance at September 30, 2018
|
33,212,058
|
|
|
$
|
33
|
|
|
$
|
422,041
|
|
|
$
|
(308
|
)
|
|
$
|
(126,251
|
)
|
|
$
|
—
|
|
|
$
|
295,515
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
a) Principles of Consolidation & Reclassifications
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X and include the accounts of BioTelemetry, Inc. and its controlled subsidiaries (“BioTelemetry,” the “Company,” “we,” “our” or “us”). In the opinion of management, all adjustments (which are of a normal and recurring nature) considered necessary to present fairly the financial position, the results of operations, and statements of comprehensive income, cash flows, and equity for the interim periods ended September 30, 2019 and 2018 have been included. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for any interim period are not indicative of the results of the full year. Certain information and footnote disclosures normally included in consolidated financial statements presented in accordance with U.S. GAAP, but which are not required for interim reporting purposes, have been omitted. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Certain reclassifications have been made to prior period statements to conform to the current period presentation. These consist of combining our non-cash depreciation and amortization expenses into one line on our consolidated statements of cash flows and separating the non-cash operating item of change in fair value of acquistion-related contingent consideration from other non-cash items on our consolidated statements of cash flows. These reclassifications had no impact on previously reported working capital, consolidated results of operations, cash flows or accumulated deficit.
b) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires that we 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.
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
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, acquisition-related contingent consideration, short-term debt and long-term debt. With the exception of acquisition-related 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 acquisition-related contingent consideration (classified as Level 3) is measured on a recurring basis using a Monte Carlo simulation. This model uses assumptions, including estimated projected revenues, estimated stock price volatility in future periods, estimated discount rates and discounts for the lack of marketability of common stock. 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 future operating performance, cash flows and revenue growth rates, royalty rates 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 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) 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 is 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, 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.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
e) Acquisition-Related Contingent Consideration
Acquisition-related contingent consideration is our obligation, arising from a business combination, to transfer additional assets and/or equity interests to the seller if certain future events occur or conditions are met. The fair value of the contingency is estimated as of the acquisition date using certain unobservable inputs (and therefore classified as Level 3 in the fair value hierarchy) and is recorded as a liability. We re-measure the estimated fair value of acquisition-related contingent consideration classified as a liability at each reporting date. Adjustments subsequent to the acquisition measurement period are recorded in other charges in the consolidated statements of operations. Changes to the inputs used in the measurement of acquisition-related contingent consideration include, but are not limited to: changes in the assumptions regarding probabilities of successful achievement of future events or conditions; estimated revenue projections; discounts for lack of marketability of our common stock; estimated stock price volatility; and the discount rate used to estimate the fair value of the liability. Acquisition-related contingent consideration may change significantly as our inputs and assumptions noted above evolve and additional data is obtained. The inputs and assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in different fair value estimates that may have a material impact on our results from operations and financial position.
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.
At September 30, 2019 and December 31, 2018, one payor, Medicare, accounted for 21% and 15%, respectively, of our gross accounts receivable.
g) Noncontrolling Interest
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 stockholders’ 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 in 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.
h) Leases
We lease our administrative and service facilities, as well as certain office equipment, monitoring devices and information technology equipment under arrangements classified as leases under ASC 842 - Leases (“ASC 842”). We adopted ASC 842 using the optional modified retrospective transition method as of January 1, 2019, therefore prior period amounts are not restated.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
We recognize right-of-use (“ROU”) assets at the inception of the arrangement as the present value of the lease payments plus our initial direct costs (if any), less any lease incentives. The corresponding liability is computed as the present value of the lease payments at inception. Assets are classified as either operating or finance ROU assets according to the classification criteria in ASC 842. Upon the adoption of ASC 842, we elected the transition practical expedients to not reassess lease identification, lease classification and initial indirect costs related to those leases entered into prior to adoption of ASC 842 and to not separate lease and non-lease components where we are the lessor when the requisite criteria is met to be treated as such. The present value of the lease payments is computed using the rate implicit in the lease (if known) or our incremental borrowing rate.
Operating lease costs are charged to operations on a straight-line basis over the lease term. Interest charged on the finance lease liabilities is charged to interest expense, while the amortization of the finance lease ROU assets is also charged to operations on a straight-line basis.
Under our policy, we do not record an ROU asset or corresponding liability for arrangements where the initial lease term is one year or less, or when the ROU asset at inception is deemed immaterial. Those leases are expensed on a straight-line basis over the term of the lease.
Effective January 1, 2019, for our operating leases, we record the ROU assets as a component of other assets, the current lease liability as a component of accrued liabilities, and the long-term lease liability as a component of other long-term liabilities on our consolidated balance sheet. For our finance leases, we record the ROU asset and the accumulated amortization for the finance ROU asset as a component of property and equipment, net, with the current and long-term portions of the finance lease obligations as separate lines within our consolidated balance sheet. We amortize the finance ROU assets over the shorter of the remaining lease term or the estimated life of the asset.
i) 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). 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 “m) Recent Accounting Pronouncements; Accounting Pronouncements Recently Adopted” 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 three months ended June 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 RSUs we expect to vest using our historical forfeiture experience and we periodically update
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 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.
j) 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 consolidated 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 asset through the valuation allowance.
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.
We record unrecognized tax benefits 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.
k) 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 per share is computed by giving effect to all potential dilutive common stock equivalents, including stock options, RSUs, PSOs and PSUs, using
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
the treasury stock method and shares expected to be issued in connection with acquisition-related contingent consideration arrangements when dilutive.
Certain stock options, which are priced higher than the average market price of our shares for the periods ended September 30, 2019 and September 30, 2018 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 and PSUs 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 1.0 million and 0.4 million shares for the three and nine month periods ended September 30, 2019, respectively, and excludes approximately 0.1 million and 0.5 million shares for the three and nine month periods ended September 30, 2018, respectively, as their effect would have been anti-dilutive on our net income per share.
l) Segment Information
ASC 280 - Segment Reporting, establishes standards for reporting information regarding operating segments in annual financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions 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 cardiac arrhythmias or heart rhythm disorders and to monitor the functionality of implantable cardiac devices. 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. 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. 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.
m) Recent Accounting Pronouncements
Accounting Pronouncements Recently 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. Historically, our implementation costs incurred in hosting service contracts have not been material. We early adopted this standard effective April 1, 2019 on a prospective basis. Upon adoption, our cloud computing implementation costs are deferred and recorded as a component of technology within intangible assets in our consolidated balance sheet and amortized to selling, general and administrative costs over the life of the service arrangement on our statement of operations. This update did not have a material impact on our financial position, results of operations or disclosures.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
In August 2018, the U.S. Securities and Exchange Commission (“SEC”) adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. Additionally, the amendments expanded the disclosure requirements on the consolidated statements of equity for interim consolidated financial statements. Under the amendments, a summary of changes in each caption of stockholders’ equity presented in the consolidated balance sheets must be provided in a note or separate statement. The consolidated statements of equity should present a reconciliation of the beginning balance to the ending balance of each period for which the consolidated statement of comprehensive income is required to be filed. This final rule was effective in the fourth quarter of 2018. The SEC provided relief on the effective date until the first quarter of 2019, and we adopted this rule in the first quarter of 2019.
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 (“ASU 2018-07”). 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 - Revenue from Contracts with Customers (“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 was permitted. We 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 February 2016, the FASB issued ASU 2016-02, Leases. This standard, along with several subsequent updates, requires lessees to recognize most leases on their balance sheet, make selected changes to lessor accounting and disclose additional key information about leases. We adopted these updates on January 1, 2019, using the optional modified retrospective transition method and utilizing practical expedients available. The adoption of the new standard resulted in the recording, as of January 1, 2019, of additional ROU assets of $22.7 million as a component of other assets, current ROU liabilities of $6.2 million as a component of accrued liabilities and long-term ROU liabilities of $16.5 million, all of which relate to our operating leases. The adoption of the new standard did not materially impact our consolidated results of operations and had no impact on our cash flows.
Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This update eliminates certain disclosures related to transfers and valuation processes, clarifies the requirement for measurement uncertainty disclosures, and requires additional disclosures for Level 3 fair value measurements, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are in the process of evaluating the impact of this update on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. This update, along with subsequent amendments, introduces the current expected credit loss model, which will require
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, upon initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. This update will be 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 update on our consolidated financial statements and related disclosures.
2. 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 three and nine months ended September 30, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
Reporting Segment
|
|
|
|
Total Consolidated
|
|
(in thousands)
|
Healthcare
|
|
Research
|
|
Other
|
|
|
Payor/Service Line
|
|
|
|
|
|
|
|
|
Remote cardiac monitoring services - Medicare
|
$
|
39,537
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,537
|
|
|
Remote cardiac monitoring services - commercial payors
|
54,336
|
|
|
—
|
|
|
—
|
|
|
54,336
|
|
|
Clinical trial support and related services
|
—
|
|
|
14,236
|
|
|
—
|
|
|
14,236
|
|
|
Technology devices, consumables and related services
|
—
|
|
|
—
|
|
|
3,182
|
|
|
3,182
|
|
|
Total
|
$
|
93,873
|
|
|
$
|
14,236
|
|
|
$
|
3,182
|
|
|
$
|
111,291
|
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
Reporting Segment
|
|
|
|
Total Consolidated
|
|
(in thousands)
|
Healthcare
|
|
Research
|
|
Other
|
|
|
Payor/Service Line
|
|
|
|
|
|
|
|
|
Remote cardiac monitoring services - Medicare
|
$
|
34,638
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,638
|
|
|
Remote cardiac monitoring services - commercial payors
|
49,558
|
|
|
—
|
|
|
—
|
|
|
49,558
|
|
|
Clinical trial support and related services
|
—
|
|
|
13,464
|
|
|
—
|
|
|
13,464
|
|
|
Technology devices, consumables and related services
|
—
|
|
|
—
|
|
|
2,353
|
|
|
2,353
|
|
|
Total
|
$
|
84,196
|
|
|
$
|
13,464
|
|
|
$
|
2,353
|
|
|
$
|
100,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
Reporting Segment
|
|
|
|
Total Consolidated
|
|
(in thousands)
|
Healthcare
|
|
Research
|
|
Other
|
|
|
Payor/Service Line
|
|
|
|
|
|
|
|
|
Remote cardiac monitoring services - Medicare
|
$
|
114,573
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
114,573
|
|
|
Remote cardiac monitoring services - commercial payors
|
162,313
|
|
|
—
|
|
|
—
|
|
|
162,313
|
|
|
Clinical trial support and related services
|
—
|
|
|
41,079
|
|
|
—
|
|
|
41,079
|
|
|
Technology devices, consumables and related services
|
—
|
|
|
—
|
|
|
9,108
|
|
|
9,108
|
|
|
Total
|
$
|
276,886
|
|
|
$
|
41,079
|
|
|
$
|
9,108
|
|
|
$
|
327,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Reporting Segment
|
|
|
|
Total Consolidated
|
|
(in thousands)
|
Healthcare
|
|
Research
|
|
Other
|
|
|
Payor/Service Line
|
|
|
|
|
|
|
|
|
Remote cardiac monitoring services - Medicare
|
$
|
101,452
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101,452
|
|
|
Remote cardiac monitoring services - commercial payors
|
150,018
|
|
|
—
|
|
|
—
|
|
|
150,018
|
|
|
Clinical trial support and related services
|
—
|
|
|
37,254
|
|
|
—
|
|
|
37,254
|
|
|
Technology devices, consumables and related services
|
—
|
|
|
—
|
|
|
7,145
|
|
|
7,145
|
|
|
Total
|
$
|
251,470
|
|
|
$
|
37,254
|
|
|
$
|
7,145
|
|
|
$
|
295,869
|
|
Remote Cardiac Monitoring Services Revenue (Healthcare segment)
Healthcare segment revenue is generated by remote cardiac monitoring to identify cardiac arrhythmias or heart rhythm disorders and to monitor the functionality of implantable cardiac devices. 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.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 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 to the Healthcare segment during the three and nine months ended September 30, 2019.
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 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
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 to the Research segment during the three and nine months ended September 30, 2019.
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 primarily 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 to the Other category during the three and nine months ended September 30, 2019.
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 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.
As of September 30, 2019 and December 31, 2018, we had contract assets of $9.8 million and $2.1 million, respectively, due to cardiac monitoring services. Our contract assets are included as a component of Healthcare accounts receivable on our consolidated balance sheets.
As of September 30, 2019 and December 31, 2018, we had contract liabilities of $1.7 million and $3.1 million, respectively, 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. Our contract liabilities are now included as a component of accrued liabilities on our consolidated balance sheets.
For the three months ended September 30, 2019, the amount recognized as revenue from the contract liabilities balance at June 30, 2019 was $0.6 million, while for the nine months ended September 30, 2019, the amount recognized as revenue from the contract liabilities balance as of December 31, 2018 was $1.9 million. Similarly, for the three months ended September 30, 2018, the amount recognized as revenue from the contract liabilities balance at June 30, 2018 was $1.0 million, while for the nine months ended September 30, 2018, the amount recognized as revenue from the contract liabilities balance as of
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
December 31, 2017 was $2.6 million. No significant changes or impairment losses occurred to contract balances during the nine months ended September 30, 2019.
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 Other category 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.
3. Acquisitions
ADEA Medical AB
During the second quarter of 2019, we acquired all of the remaining outstanding equity of ADEA Medical AB, now known as BioTel Europe AB (“ADEA” or “BioTel Europe”), a limited company incorporated and registered under the laws of Sweden. BioTel Europe provides cardiac monitoring in northern Europe.
Pursuant to the acquisition agreement, we agreed to issue the owners of ADEA 50,000 shares of our common stock, with a fair value of approximately $2.1 million, as well as to pay approximately $0.2 million in cash. The shares are restricted, with the restrictions related to 10,000 shares expiring in the fourth quarter of 2019, and the restrictions on the remaining 40,000 shares expiring in the second quarter of 2022, and the shares are also available to satisfy indemnification obligations.
Prior to the second quarter of 2019, we accounted for our 23.8% stake in ADEA as an equity method investment. We accounted for the acquisition of the remaining equity of ADEA as a step acquisition, which required us to re-measure our previous ownership interest to fair value prior to application of purchase
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
accounting, and we recognized the immaterial difference between the fair value and the carrying value of the equity method investment at that time. The total purchase price of ADEA was $3.3 million, primarily consisting of the equity and cash consideration paid in the second quarter of 2019, plus the amounts paid for our initial investment in ADEA in 2018. We then allocated this purchase price to the assets acquired and liabilities assumed. The acquired net assets consisted primarily of customer relationships and non-compete agreements. 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 have recognized $2.6 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.
We finalized our fair value estimates related to the BioTel Europe acquisition during the three months ended September 30, 2019. There were no changes to the total purchase price, and the measurement period adjustment related to deferred income taxes during the three months ended September 30, 2019 was not material.
We do not consider this acquisition to be significant to our results of operations. The transaction costs related to this acquisition and revenues and results of operations of BioTel Europe prior to our acquisition were all immaterial.
Geneva Healthcare, Inc.
On March 1, 2019, we acquired Geneva Healthcare, Inc., now known as Geneva Healthcare, LLC (“Geneva”), for cash consideration in the amount of $45.9 million. In addition, pursuant to the terms of the Agreement and Plan of Merger, dated January 25, 2019, by and among Geneva, BioTelemetry, Inc., Tyersall Merger Sub, Inc., and the Securityholders’ Representative (the “Geneva Agreement”), on the third anniversary date of the closing date, the Securityholders (as defined in the Geneva Agreement) are eligible to receive additional consideration in the form of cash payments, as well as shares of BioTelemetry common stock, with a total estimated present value of $32.0 million as of the March 1, 2019 acquisition date, for a total aggregate purchase price of $77.9 million. Concurrent with the closing of the acquisition, the Securityholders made elections as to the percentage mix of their total additional consideration to be settled in cash or common stock.
The estimated additional consideration of $32.0 million, as of the March 1, 2019 acquisition date, consists of the following:
|
|
|
|
•
|
The Securityholders will, subject to potential deductions pursuant to the Geneva Agreement, receive additional consideration of $20.0 million, a total of $11.1 million of which will be paid in cash, and the remaining value will be settled in shares. We will issue a total of 131,594 shares of our common stock to settle the share-related portion of the obligation, based on the elections made by the Securityholders and the formulas within the Geneva Agreement.
|
|
|
|
|
•
|
The estimated present value of the future cash payment of $11.1 million, which totals $9.7 million as of the acquisition date, as well as the estimated fair value of our common stock of $9.1 million, has been included within the purchase price for Geneva. The estimated present value of the future cash payment is recorded as a component of other long-term liabilities and will be accreted to its redemption value through interest expense through the payment date. The estimated fair value of the 131,594 shares our common stock has been recorded within paid-in-capital.
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
•
|
The Securityholders will also be eligible to receive additional consideration, in the form of both cash and shares, based on a predetermined formula that is driven by the future revenues of Geneva and does not have a predetermined limit. The total estimated acquisition-related contingent consideration as of the March 1, 2019 acquisition date is $13.2 million, which is also included in the purchase price of Geneva. The $13.2 million is recorded within other long-term liabilities and will be marked to market through earnings on a quarterly basis throughout the earn-out period. The equity portion of the acquisition-related contingent consideration requires liability classification and mark-to-market accounting pursuant to the provisions of ASC 815 - Derivatives and Hedging.
|
We acquired Geneva as part of our business strategy to go deeper and wider into the cardiac monitoring market. Geneva has developed an innovative proprietary cloud-based platform that aggregates data from the leading cardiac device manufacturers, enabling the Company to remotely monitor a physician’s patients with implantable cardiac devices such as pacemakers, defibrillators and loop recorders. Geneva’s platform provides physicians a single portal to order patient monitoring, review monitoring results and request routine device checks, helping drive significant in-office efficiencies and patient compliance. We plan to merge this functionality with that of the Healthcare segment user interface, which we believe will drive greater workflow and data management efficiencies to the clients we serve.
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 have recognized $62.8 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.
The amounts in the table below represent our final fair value estimates related to the Geneva acquisition as of March 1, 2019. Measurement period adjustments recorded during the second quarter of 2019 consisted primarily of decreasing additional consideration by $2.2 million. We finalized our fair value estimates related to the Geneva acquisition during the three months ended September 30, 2019, during which time there were no material measurement period adjustments recorded.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(in thousands, except years)
|
Amount
|
|
Weighted
Average Life
(Years)
|
|
Fair value of assets acquired:
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,376
|
|
|
|
|
Healthcare accounts receivable
|
1,500
|
|
|
|
|
Prepaid expenses and other current assets
|
234
|
|
|
|
|
Identifiable intangible assets:
|
|
|
|
|
Customer relationships
|
3,500
|
|
|
12
|
|
Technology
|
8,900
|
|
|
7
|
|
Trade names
|
2,500
|
|
|
15
|
|
Total identifiable intangible assets
|
14,900
|
|
|
|
|
Total assets acquired
|
18,010
|
|
|
|
|
Fair value of liabilities assumed:
|
|
|
|
|
Accounts payable
|
215
|
|
|
|
|
Accrued liabilities
|
872
|
|
|
|
|
Deferred tax liabilities
|
1,879
|
|
|
|
|
Total liabilities assumed
|
2,966
|
|
|
|
|
|
|
|
|
|
Total identifiable net assets
|
15,044
|
|
|
|
|
Goodwill
|
62,836
|
|
|
|
|
Net assets acquired
|
$
|
77,880
|
|
|
|
We have incurred $1.4 million of acquisition related costs associated with Geneva for the nine months ended September 30, 2019. The costs were included in other charges in our consolidated statements of income. The revenues and income of Geneva for periods prior to our acquisition were immaterial to our consolidated operating results.
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 potential earn-out payment of $2.0 million, which is contingent on the achievement of certain revenue targets by November 1, 2020. We accounted for the transaction as a business combination, and as such, all assets acquired 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, has been assigned to the Corporate and Other category and will be deductible for tax purposes. The acquired net assets primarily consisted of customer relationships and software developed by ActiveCare. The earn-out was assigned no value as of the acquisition date as it was and is currently not probable of achievement. We finalized our fair value estimates related to the ActiveCare acquisition during the three months ended March 31, 2019, and there were no changes to the amounts initially recorded. The transaction costs related to this acquisition and revenues and net income of ActiveCare prior to our acquisition were all immaterial.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Inventory
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30,
2019
|
|
December 31,
2018
|
|
Raw materials and supplies
|
$
|
4,421
|
|
|
$
|
3,667
|
|
|
Finished goods
|
1,968
|
|
|
3,656
|
|
|
Total inventory
|
$
|
6,389
|
|
|
$
|
7,323
|
|
5. Fair Value Measurements
We have determined that our long-term debt, classified as Level 2, has a fair value consistent with its carrying value, net of debt discount and deferred charges, of $195.6 million and $198.5 million as of September 30, 2019 and December 31, 2018, respectively.
Acquisition-related contingent consideration represents our contingent 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 acquisition-related 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 balance of the fair value of acquisition-related contingent consideration is recognized within other long-term liabilities on our consolidated balance sheet as of September 30, 2019. Changes in the fair value of the acquisition-related contingent consideration, after the final determination as of the acquistion date, resulting from changes in the variables used to compute the fair value, are recorded in other charges in the consolidated statements of operations.
The following table provides a reconciliation of the beginning and ending balances of acquisition-related contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Beginning balance
|
$
|
11,360
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
700
|
|
|
Acquisition-related contingent consideration
|
—
|
|
|
—
|
|
|
13,170
|
|
|
—
|
|
|
Changes in fair value of acquisition-related contingent consideration
|
90
|
|
|
—
|
|
|
(1,720
|
)
|
|
(700
|
)
|
|
Ending balance
|
$
|
11,450
|
|
|
$
|
—
|
|
|
$
|
11,450
|
|
|
$
|
—
|
|
In conjunction with the Geneva acquisition, we recognized $13.2 million of acquisition-related contingent consideration on March 1, 2019 as a component of other long-term liabilities, as the contingency will be finalized after the third anniversary of the closing date. There was no value assigned to the acquisition-related contingent consideration related to the ActiveCare acquisition as the achievement of the contingency was not probable as of September 30, 2019.
The estimated fair value of the acquisition-related contingent consideration related to the Geneva acquisition was determined using a Monte Carlo simulation, that considered numerous variables, including
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
estimates for projected revenues, future stock price, discount rates and discounts for lack of marketability of common stock. These estimates are subject to a significant level of judgment.
During the nine months ended September 30, 2019, excluding the measurement period adjustments, the acquisition-related contingent consideration related to the Geneva acquisition declined $1.7 million primarily due to changes in estimates associated with our future stock price. During the nine months ended September 30, 2018, the fair values of the acquisition-related contingent consideration related to our 2016 Telcare acquisition decreased $0.7 million, as it was no longer probable that any of the contingencies would be met.
6. 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 nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting Segment
|
|
Corporate and Other
|
|
|
|
(in thousands)
|
Healthcare
|
|
Research
|
|
|
Total
|
|
Balance at December 31, 2018
|
$
|
213,507
|
|
|
$
|
16,293
|
|
|
$
|
9,014
|
|
|
$
|
238,814
|
|
|
Goodwill acquired
|
65,408
|
|
|
—
|
|
|
—
|
|
|
65,408
|
|
|
Currency translation
|
(121
|
)
|
|
—
|
|
|
—
|
|
|
(121
|
)
|
|
Balance at September 30, 2019
|
$
|
278,794
|
|
|
$
|
16,293
|
|
|
$
|
9,014
|
|
|
$
|
304,101
|
|
The goodwill acquired in the Healthcare segment is related to the Geneva and BioTel Europe acquisitions. Refer to “Note 3. Acquisitions” for details.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The gross carrying amounts and accumulated amortization of our intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except years)
|
Weighted
Average Life
(Years)
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Gross Carrying Value:
|
|
|
|
|
|
|
Customer relationships
|
10.3
|
|
$
|
149,380
|
|
|
$
|
146,200
|
|
|
Technology including internally developed software
|
6.6
|
|
21,244
|
|
|
18,078
|
|
|
Backlog
|
3.9
|
|
3,100
|
|
|
6,860
|
|
|
Covenants not to compete
|
4.8
|
|
416
|
|
|
1,040
|
|
|
Trade names
|
15.0
|
|
2,500
|
|
|
—
|
|
|
Total intangible assets, gross
|
|
|
176,640
|
|
|
172,178
|
|
|
Accumulated Amortization:
|
|
|
|
|
|
|
Customer relationships
|
|
|
(34,626
|
)
|
|
(24,870
|
)
|
|
Technology including internally developed software
|
|
|
(5,394
|
)
|
|
(10,879
|
)
|
|
Backlog
|
|
|
(2,648
|
)
|
|
(5,827
|
)
|
|
Covenants not to compete
|
|
|
(282
|
)
|
|
(949
|
)
|
|
Trade names
|
|
|
(97
|
)
|
|
—
|
|
|
Total accumulated amortization
|
|
|
(43,047
|
)
|
|
(42,525
|
)
|
|
Total intangible assets, net
|
|
|
$
|
133,593
|
|
|
$
|
129,653
|
|
During the three months ended September 30, 2019, we wrote off certain fully amortized intangible assets, primarily technology and backlog, and incurred an immaterial amount of foreign currency translation impact related to the customer relationships and covenants not to compete related to the BioTel Europe acquisition.
As of September 30, 2019, the estimated amortization for our finite-lived intangible assets for the remainder of 2019, the next four fiscal years, and thereafter, is summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Remainder of 2019
|
$
|
4,910
|
|
|
2020
|
18,343
|
|
|
2021
|
17,708
|
|
|
2022
|
16,972
|
|
|
2023
|
16,678
|
|
|
Thereafter
|
58,982
|
|
|
Total estimated amortization
|
$
|
133,593
|
|
7. Equity Method Investments
On October 31, 2018, we acquired an ownership interest in ADEA, for approximately $0.9 million. This investment was accounted for under the equity method. During the second quarter of 2019, we acquired all of the remaining outstanding equity of ADEA. In conjunction with this step acquisition, we derecognized our equity method investment in ADEA and recognized the fair value of the assets acquired and liabilities
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
assumed related to ADEA in our consolidated financial statements. For more information, see “Note 3. Acquisitions.”
We hold an ownership interest in Well Bridge 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. There were no material related-party transactions between the parties during the three and nine months ended September 30, 2019.
As of September 30, 2019, our investment in Wellbridge represented 32.2% of their outstanding stock. A summary of our investments recorded as a component of other assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Beginning balance
|
$
|
1,112
|
|
|
$
|
1,247
|
|
|
$
|
2,044
|
|
|
$
|
1,431
|
|
|
Derecognition of ADEA investment
|
—
|
|
|
—
|
|
|
(746
|
)
|
|
—
|
|
|
Loss on equity method investments
|
(65
|
)
|
|
(54
|
)
|
|
(251
|
)
|
|
(238
|
)
|
|
Ending balance
|
$
|
1,047
|
|
|
$
|
1,193
|
|
|
$
|
1,047
|
|
|
$
|
1,193
|
|
8. Accrued Liabilities
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30,
2019
|
|
December 31,
2018
|
|
Compensation
|
$
|
11,307
|
|
|
$
|
13,443
|
|
|
Right of use liabilities - operating leases
|
5,291
|
|
|
—
|
|
|
Professional fees
|
4,661
|
|
|
4,260
|
|
|
Non-income taxes
|
2,180
|
|
|
906
|
|
|
Contract liabilities
|
1,650
|
|
|
3,080
|
|
|
Operating costs
|
776
|
|
|
1,095
|
|
|
Interest
|
583
|
|
|
702
|
|
|
Other
|
2,039
|
|
|
1,203
|
|
|
Total
|
$
|
28,487
|
|
|
$
|
24,689
|
|
9. Credit Agreement
In 2017, we entered into a credit agreement with SunTrust Bank, as a lender and an agent for the lenders (the “Lenders”) (the “SunTrust Credit Agreement”). Pursuant to the SunTrust 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 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
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
and Base Rate loans is determined by reference to our Consolidated Total Net Leverage Ratio, as defined in the SunTrust Credit Agreement. As of September 30, 2019, the applicable margin is 1.5% for LIBOR loans and 0.5% for base rate loans.
The carrying amount of the term loan was $195.6 million as of September 30, 2019, which is the principal amount outstanding, net of $3.5 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 our Consolidated Total Net Leverage Ratio (as defined in the SunTrust Credit Agreement). Our unused commitment fee as of September 30, 2019 was 0.2%, and the revolving credit facility remains undrawn as of that date.
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 September 30, 2019, we were in compliance with our covenants.
10. Leases
We lease our administrative and service facilities, as well as certain office equipment, monitoring devices and information technology equipment under arrangements classified as leases under ASC 842. We adopted ASC 842 using the optional modified retrospective transition method as of January 1, 2019; therefore prior period amounts are not restated.
We have non-cancelable operating leases expiring at various dates through 2028. Certain leases are renewable at the end of the lease term at our option, none of which are certain at this time. We have also entered into and acquired finance leases with various expiration dates through 2022, which are used primarily to finance office equipment, monitoring devices and other information technology equipment.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The components of our lease expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
(in thousands)
|
2019
|
|
2019
|
|
Operating lease cost:
|
|
|
|
|
Operating lease cost
|
$
|
1,449
|
|
|
$
|
4,370
|
|
|
Short-term lease cost
|
83
|
|
|
248
|
|
|
Total operating lease cost
|
1,532
|
|
|
4,618
|
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
181
|
|
|
1,894
|
|
|
Interest on lease liabilities
|
11
|
|
|
49
|
|
|
Total finance lease cost
|
192
|
|
|
1,943
|
|
|
|
|
|
|
|
Total lease cost
|
$
|
1,724
|
|
|
$
|
6,561
|
|
Supplemental balance sheet information related to leases as of September 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentage and years)
|
Operating
Leases
|
|
Finance
Leases
|
|
Property and equipment, net
|
$
|
—
|
|
|
$
|
757
|
|
|
Other assets
|
17,581
|
|
|
—
|
|
|
Total right-of-use assets
|
17,581
|
|
|
757
|
|
|
|
|
|
|
|
Accrued liabilities
|
5,291
|
|
|
—
|
|
|
Current portion of finance lease obligations
|
—
|
|
|
490
|
|
|
Long-term portion of finance lease obligations
|
—
|
|
|
348
|
|
|
Other long-term liabilities
|
15,156
|
|
|
—
|
|
|
Total lease obligations
|
$
|
20,447
|
|
|
$
|
838
|
|
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
5.2
|
|
|
2.0
|
|
|
Weighted average discount rate
|
4.4
|
%
|
|
4.7
|
%
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Future maturities of lease liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Operating
Leases
|
|
Finance
Leases
|
|
Remainder of 2019
|
$
|
1,638
|
|
|
$
|
176
|
|
|
2020
|
5,806
|
|
|
412
|
|
|
2021
|
4,422
|
|
|
191
|
|
|
2022
|
3,058
|
|
|
93
|
|
|
2023
|
2,268
|
|
|
—
|
|
|
Thereafter
|
5,806
|
|
|
—
|
|
|
Total minimum lease payments
|
22,998
|
|
|
872
|
|
|
Less imputed interest
|
(2,551
|
)
|
|
(34
|
)
|
|
Total
|
$
|
20,447
|
|
|
$
|
838
|
|
Supplemental cash flow information related to leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
(in thousands)
|
2019
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
(1,559
|
)
|
|
$
|
(4,424
|
)
|
|
Operating cash flows from finance leases
|
(11
|
)
|
|
(49
|
)
|
|
Financing cash flows from finance leases
|
(76
|
)
|
|
(1,735
|
)
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations, net of incentives:
|
|
|
|
|
Operating leases
|
(669
|
)
|
|
21,147
|
|
|
Finance leases
|
$
|
—
|
|
|
$
|
787
|
|
11. 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.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
We account for expenses associated with our acquisitions and certain litigation as other charges as incurred. These expenses are 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. We have reclassified the disclosure of these costs to more closely align with the discussion in “Part I; Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report and in our earnings release, which are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
LifeWatch AG integration costs
|
$
|
212
|
|
|
$
|
661
|
|
|
$
|
590
|
|
|
$
|
7,865
|
|
|
Geneva integration costs
|
122
|
|
|
—
|
|
|
2,726
|
|
|
—
|
|
|
Reserve for note receivable
|
—
|
|
|
—
|
|
|
—
|
|
|
1,793
|
|
|
Change in fair value of acquisition-related contingent consideration
|
90
|
|
|
—
|
|
|
(1,720
|
)
|
|
(700
|
)
|
|
Patent and other litigation
|
2,144
|
|
|
339
|
|
|
5,807
|
|
|
1,551
|
|
|
Other costs
|
30
|
|
|
330
|
|
|
499
|
|
|
1,114
|
|
|
Total
|
$
|
2,598
|
|
|
$
|
1,330
|
|
|
$
|
7,902
|
|
|
$
|
11,623
|
|
12. Equity
Common Stock
As of September 30, 2019 and December 31, 2018, we were authorized to issue 200,000,000 shares of common stock. As of September 30, 2019 and December 31, 2018, we had 33,991,107 and 33,406,364, respectively, shares issued and outstanding.
Preferred Stock
As of September 30, 2019 and December 31, 2018, we were authorized to issue 10,000,000 shares of preferred stock. As of September 30, 2019 and December 31, 2018, 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 Holding AG (“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 on our consolidated balance sheet; however, we reflected the net loss attributable to the noncontrolling interest in our consolidated statement of operations during 2018 for the period of time where we did not own the entire entity.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
13. 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 equity. 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 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 (OIP)
In May 2017, our stockholders approved the OIP, which replaced the 2008 Plan. Stock options, RSUs, PSUs and PSOs have been granted under the OIP. There were 1,987,190 shares available for grant under the OIP as of September 30, 2019.
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 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, 2018
|
2,661,282
|
|
|
$
|
15.94
|
|
|
|
|
|
|
|
Granted
|
317,142
|
|
|
66.79
|
|
|
|
|
|
|
|
Forfeited
|
(49,168
|
)
|
|
27.73
|
|
|
|
|
|
|
|
Exercised
|
(233,885
|
)
|
|
7.75
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2019
|
2,695,371
|
|
|
$
|
22.42
|
|
|
5.8
|
|
$
|
60,821
|
|
|
Exercisable as of September 30, 2019
|
1,751,943
|
|
|
$
|
9.92
|
|
|
4.5
|
|
$
|
54,075
|
|
|
Expected to vest as of September 30, 2019
|
856,160
|
|
|
$
|
45.63
|
|
|
8.2
|
|
$
|
6,122
|
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018
|
135,000
|
|
|
$
|
20.64
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
(105,000
|
)
|
|
20.41
|
|
|
|
|
|
|
Outstanding as of September 30, 2019
|
30,000
|
|
|
$
|
21.45
|
|
|
7.3
|
|
$
|
578
|
|
|
Exercisable as of September 30, 2019
|
30,000
|
|
|
$
|
21.45
|
|
|
7.3
|
|
$
|
578
|
|
The table below summarizes certain additional information with respect to our options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(in thousands, except per option amounts)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Aggregate intrinsic value of options exercised
|
$
|
1,261
|
|
|
$
|
20,398
|
|
|
$
|
18,184
|
|
|
$
|
38,277
|
|
|
Cash received from the exercise of stock options
|
614
|
|
|
3,493
|
|
|
3,955
|
|
|
8,485
|
|
|
Weighted average grant date fair value per option
|
$
|
24.00
|
|
|
$
|
33.12
|
|
|
$
|
38.64
|
|
|
$
|
20.91
|
|
The total compensation cost of options granted but not yet vested at September 30, 2019 was $21.1 million, which is expected to be recognized over a weighted average period of approximately three years.
RSU and PSU activity is summarized 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, 2018
|
358,683
|
|
|
$
|
22.22
|
|
|
87,109
|
|
|
$
|
37.79
|
|
|
Granted
|
77,248
|
|
|
65.53
|
|
|
34,088
|
|
|
86.29
|
|
|
Forfeited
|
(12,084
|
)
|
|
30.21
|
|
|
(25,000
|
)
|
|
37.79
|
|
|
Vested
|
(173,664
|
)
|
|
13.73
|
|
|
—
|
|
|
—
|
|
|
Units outstanding as of September 30, 2019
|
250,183
|
|
|
$
|
41.09
|
|
|
96,197
|
|
|
$
|
54.98
|
|
Consistent with 2018, during 2019, 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 34,088 2019 PSUs were granted at “target” levels; however, for share pool purposes, we have reserved an additional 34,088 shares in the event that the combined financial performance and market conditions achieve maximum levels. For the 2018 and 2019 PSUs combined, we have 96,197 shares reserved as of September 30, 2019 in the event that actual results exceed “target” levels. For the three and nine months ended September 30, 2019, stock-based compensation expense related to these PSUs was recognized in accordance with ASC 718 for both employees and non-employees, as amended by the adoption of ASU
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
2018-07 (see “Note 1. Summary of Significant Accounting Policies; m) Recent Accounting Pronouncements; Accounting Pronouncements Recently Adopted” for further detail regarding ASU 2018-07).
Additional information about our RSUs is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Aggregate market value of RSUs vested
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,833
|
|
|
$
|
7,873
|
|
The total compensation cost of RSUs and PSUs granted but not yet vested, inclusive of the PSUs for which vesting has been deemed probable at September 30, 2019, was $7.5 million, which is expected to be recognized over a weighted average period of approximately two years. Additionally, there were 588,359 RSUs vested but not released at September 30, 2019.
Employee Stock Purchase Plan
In May 2017, our stockholders approved the BioTelemetry, Inc. 2017 Employee Stock Purchase Plan (“2017 ESPP”) with 500,000 shares reserved for issuance, which replaced the 2008 Employee Stock Purchase Plan. Substantially all of our employees are eligible to participate in the 2017 ESPP. Under the 2017 ESPP, each participant may purchase option value of our shares, through payroll deductions, not to exceed $25,000 of grant date fair value in a calendar year. The price per share is equal to the lower of 85% of the closing market price on the first day of the offering period or 85% of the closing 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. Purchases under the 2017 ESPP are made in March and September. For the nine months ended September 30, 2019, an aggregate of 98,425 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 nine months ended September 30, 2019 were $3.1 million. At September 30, 2019, 232,671 shares remain available for purchase under the 2017 ESPP.
Our aggregate stock-based compensation expense is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Stock options
|
$
|
1,927
|
|
|
$
|
304
|
|
|
$
|
5,206
|
|
|
$
|
3,132
|
|
|
Restricted stock units
|
941
|
|
|
832
|
|
|
2,934
|
|
|
2,392
|
|
|
Performance stock units
|
121
|
|
|
—
|
|
|
192
|
|
|
—
|
|
|
Employee stock purchase plan
|
647
|
|
|
219
|
|
|
1,330
|
|
|
754
|
|
|
Total stock-based compensation expense
|
$
|
3,636
|
|
|
$
|
1,355
|
|
|
$
|
9,662
|
|
|
$
|
6,278
|
|
14. Income Taxes
The income tax provision for interim periods is determined using an estimated annual effective tax rate adjusted for discrete items, if any, which are taken into account in the quarterly period in which they
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
occur. We review and update our estimated annual effective tax rate each quarter. We recorded an income tax provision of $3.5 million and $6.2 million for the three and nine months ended September 30, 2019, respectively, based on our estimated annual effective tax rate adjusted for discrete items. We recognized an income tax benefit of $1.3 million and $2.9 million for the three and nine months ended September 30, 2018, respectively, primarily due to a discrete benefit recorded for equity compensation deductions.
At September 30, 2019 and December 31, 2018, we had deferred tax assets, net of deferred tax liabilities and valuation allowance, of $12.8 million and $20.0 million, respectively.
We recognize interest and penalties, where applicable, related to unrecognized tax benefits within the (provision for)/benefit from income taxes line in the consolidated statements of operations. During the nine months ended September 30, 2019, we recognized an immaterial amount of interest expense in the consolidated statements of operations associated with our unrecognized tax benefits.
At September 30, 2019 and December 31, 2018, we had net reserves of $34.3 million and $31.3 million, respectively, for unrecognized tax benefits, which are recorded as a component of other long-term liabilities within our consolidated balance sheets.
15. Segment Information
We operate under two reportable segments: Healthcare and Research. The Healthcare segment is focused on remote cardiac monitoring to identify cardiac arrhythmias or heart rhythm disorders and to monitor the functionality of implantable cardiac devices. 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 Holter, Pacemaker and International Normalized Ratio monitoring. 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. 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.
Expenses that can be specifically identified with a segment have been included as deductions in determining pre-tax segment income/(loss). Any remaining expenses including integration, restructuring and other charges, as well as the elimination of costs associated with intercompany revenue, are included in Corporate and Other. Also included in Corporate and Other is our net interest expense and other financing expenses. We do not allocate assets to the individual segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
Reporting Segment
|
|
Corporate
and Other
|
|
|
|
(in thousands)
|
Healthcare
|
|
Research
|
|
|
Consolidated
|
|
Revenue
|
$
|
93,873
|
|
|
$
|
14,236
|
|
|
$
|
3,182
|
|
|
$
|
111,291
|
|
|
Gross profit
|
62,780
|
|
|
5,758
|
|
|
801
|
|
|
69,339
|
|
|
Income/(loss) before income taxes
|
29,843
|
|
|
1,964
|
|
|
(20,056
|
)
|
|
11,751
|
|
|
Depreciation and amortization
|
8,337
|
|
|
1,059
|
|
|
899
|
|
|
10,295
|
|
|
Capital expenditures
|
6,428
|
|
|
774
|
|
|
392
|
|
|
7,594
|
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
Reporting Segment
|
|
Corporate
and Other
|
|
|
|
(in thousands)
|
Healthcare
|
|
Research
|
|
|
Consolidated
|
|
Revenue
|
$
|
84,196
|
|
|
$
|
13,464
|
|
|
$
|
2,353
|
|
|
$
|
100,013
|
|
|
Gross profit
|
56,040
|
|
|
5,938
|
|
|
759
|
|
|
62,737
|
|
|
Income/(loss) before income taxes
|
28,662
|
|
|
1,951
|
|
|
(15,893
|
)
|
|
14,720
|
|
|
Depreciation and amortization
|
8,413
|
|
|
944
|
|
|
992
|
|
|
10,349
|
|
|
Capital expenditures
|
2,765
|
|
|
472
|
|
|
4,324
|
|
|
7,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
Reporting Segment
|
|
Corporate
and Other
|
|
|
|
(in thousands)
|
Healthcare
|
|
Research
|
|
|
Consolidated
|
|
Revenue
|
$
|
276,886
|
|
|
$
|
41,079
|
|
|
$
|
9,108
|
|
|
$
|
327,073
|
|
|
Gross profit
|
187,031
|
|
|
15,427
|
|
|
1,899
|
|
|
204,357
|
|
|
Income/(loss) before income taxes
|
91,965
|
|
|
3,780
|
|
|
(61,275
|
)
|
|
34,470
|
|
|
Depreciation and amortization
|
24,955
|
|
|
2,991
|
|
|
2,562
|
|
|
30,508
|
|
|
Capital expenditures
|
19,950
|
|
|
2,562
|
|
|
1,174
|
|
|
23,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Reporting Segment
|
|
Corporate
and Other
|
|
|
|
(in thousands)
|
Healthcare
|
|
Research
|
|
|
Consolidated
|
|
Revenue
|
$
|
251,470
|
|
|
$
|
37,254
|
|
|
$
|
7,145
|
|
|
$
|
295,869
|
|
|
Gross profit
|
169,891
|
|
|
16,184
|
|
|
465
|
|
|
186,540
|
|
|
Income/(loss) before income taxes
|
81,261
|
|
|
4,257
|
|
|
(56,960
|
)
|
|
28,558
|
|
|
Depreciation and amortization
|
24,797
|
|
|
2,921
|
|
|
2,513
|
|
|
30,231
|
|
|
Capital expenditures
|
14,906
|
|
|
1,674
|
|
|
918
|
|
|
17,498
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018, and in conjunction with the accompanying quarterly unaudited consolidated financial statements and related notes. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those contained in these forward-looking statements due to a number of factors, including, but not limited to, those set forth herein and elsewhere in this report and in our other filings with the U.S. Securities and Exchange Commission (“SEC”). See the “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report. Unless otherwise noted, the figures in the following discussions are unaudited.
Company Background
We are the leading remote medical technology company focused on the delivery of health information to improve quality of life and reduce cost of care. We provide remote cardiac monitoring, centralized core laboratory services for clinical trials, remote blood glucose monitoring and original
equipment manufacturing that serves both healthcare and clinical research customers. We operate under two reportable segments: Healthcare and Research. Healthcare is focused on remote cardiac monitoring to identify cardiac arrhythmias or heart rhythm disorders and to monitor the functionality of implantable cardiac devices. 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 remote cardiac telemetry service to event, traditional Holter, extended Holter, Pacemaker and International Normalized Ratio monitoring. Research is engaged in centralized 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.
Recent Developments
In October 2019, we detected suspicious activity on our information technology network. As part of our comprehensive response plan, we immediately took certain systems offline to contain the activity and engaged an outside forensics team to conduct an independent investigation. While the incident did temporarily disrupt services, substantially all systems have resumed operation and our technical team continues to work closely with third-party consultants to further address this matter. Although the Company has insurance coverage for costs and business interruption resulting from cyber-attacks, disputes over the extent of insurance coverage for claims are not uncommon. As a result, we may incur expenditures related to addressing this incident, that may not be covered, and we anticipate fourth quarter financial results to be negatively impacted by the temporary disruption to normal operations. At this time, there is no evidence of any unauthorized transfer or misuse of customer or employee data.
Critical Accounting Policies and Estimates
We have prepared the consolidated financial statements and accompanying notes included in “Part I; Item 1. Financial Statements” of this report in accordance with U.S. generally accepted accounting principles. This requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. These estimates and assumptions are based on historical experience, analysis of current trends, and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions.
We periodically reevaluate our accounting policies, assumptions, and estimates and make adjustments when facts and circumstances warrant. Our significant accounting policies are described in “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 2. Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. The accounting policies and related assumptions that we consider to be more critical to the preparation of our consolidated financial statements and accompanying notes and involve the most significant management judgments and estimates are described in “Part II; Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Critical Accounting Policies and Estimates” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Except for the implementation of Accounting Standards Codification (“ASC”) 842 - Leases and the acquisition-related contingent consideration associated with the Geneva Healthcare Inc.
(“Geneva”) acquisition, there were no material changes in, or additions to, our critical accounting policies or in the assumptions or estimates we used to prepare the financial information appearing in this report.
Results of Operations
Three Months Ended September 30, 2019 and September 30, 2018
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Healthcare
|
$
|
93,873
|
|
|
$
|
84,196
|
|
|
$
|
9,677
|
|
|
11.5
|
%
|
|
Research
|
14,236
|
|
|
13,464
|
|
|
772
|
|
|
5.7
|
%
|
|
Other
|
3,182
|
|
|
2,353
|
|
|
829
|
|
|
35.2
|
%
|
|
Total revenue
|
$
|
111,291
|
|
|
$
|
100,013
|
|
|
$
|
11,278
|
|
|
11.3
|
%
|
Total revenue for the three months ended September 30, 2019 increased 11.3%, due to growth in revenue across all of our businesses. Healthcare revenue growth was driven by increased patient volume, primarily related to our mobile cardiac telemetry (“MCT”) and extended Holter services, as well as the addition of the implantable device monitoring revenue contributed by Geneva, which we acquired on March 1, 2019. The positive impact of the higher patient volume was partially offset by the reduction of MCT Medicare reimbursement, which went into effect January 1, 2019, as well as payor mix. Research revenue continues to benefit from new studies resulting from the utilization of ePatch™, our extended Holter device. Other revenue increased due to continued growth of diabetic product sales.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Gross profit
|
$
|
69,339
|
|
|
$
|
62,737
|
|
|
$
|
6,602
|
|
|
10.5
|
%
|
|
Percentage of revenue
|
62.3
|
%
|
|
62.7
|
%
|
|
|
|
|
Gross profit for the three months ended September 30, 2019 increased primarily due to the higher revenue. The 42 basis point decrease in gross profit percentage was due to the impact of the reduction of MCT Medicare reimbursement, which went into effect January 1, 2019, as well as increased costs to support Research studies. This was partially offset by the positive impact of Healthcare operational efficiencies.
General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
General and administrative expense
|
$
|
29,651
|
|
|
$
|
26,325
|
|
|
$
|
3,326
|
|
|
12.6
|
%
|
|
Percentage of revenue
|
26.6
|
%
|
|
26.3
|
%
|
|
|
|
|
General and administrative expense for the three months ended September 30, 2019 increased primarily due to costs associated with the ongoing investment in our business systems and infrastructure as well as the addition of Geneva.
Sales and Marketing Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Sales and marketing expense
|
$
|
12,572
|
|
|
$
|
10,120
|
|
|
$
|
2,452
|
|
|
24.2
|
%
|
|
Percentage of revenue
|
11.3
|
%
|
|
10.1
|
%
|
|
|
|
|
Sales and marketing expense for the three months ended September 30, 2019 increased primarily due to increased headcount-related expenses due to the ongoing investment in our Healthcare field sales force as well as the addition of Geneva.
Bad Debt Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Bad debt expense
|
$
|
5,858
|
|
|
$
|
5,157
|
|
|
$
|
701
|
|
|
13.6
|
%
|
|
Percentage of revenue
|
5.3
|
%
|
|
5.2
|
%
|
|
|
|
|
Bad debt expense for the three months ended September 30, 2019 increased primarily due to the increased Healthcare revenue and the timing of Healthcare collections. Bad debt expense for the three months ended September 30, 2019 in Research and the Other category was minimal and is recorded on a specific account basis.
Research and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Research and development expense
|
$
|
3,661
|
|
|
$
|
2,429
|
|
|
$
|
1,232
|
|
|
50.7
|
%
|
|
Percentage of revenue
|
3.3
|
%
|
|
2.4
|
%
|
|
|
|
|
Research and development expense for the three months ended September 30, 2019 increased due to our ongoing investment in new products and technologies, including the further incorporation of artificial intelligence and machine learning into our services.
Other Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Other charges
|
$
|
2,598
|
|
|
$
|
1,330
|
|
|
$
|
1,268
|
|
|
95.3
|
%
|
|
Percentage of revenue
|
2.3
|
%
|
|
1.3
|
%
|
|
|
|
|
Other charges for the three months ended September 30, 2019 increased primarily due to a $1.8 million increase in patent litigation and other legal expense partially offset by a reduction in acquisition and integration expenses. For further details, please see “Part I; Item 1, Financial Statements; Note 11. Other Charges.”
Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Interest expense
|
$
|
(2,338
|
)
|
|
$
|
(2,408
|
)
|
|
$
|
70
|
|
|
(2.9
|
)%
|
|
Loss on equity method investment
|
(65
|
)
|
|
(54
|
)
|
|
(11
|
)
|
|
20.4
|
%
|
|
Other non-operating expense, net
|
(845
|
)
|
|
(194
|
)
|
|
(651
|
)
|
|
335.6
|
%
|
|
Total other expense, net
|
$
|
(3,248
|
)
|
|
$
|
(2,656
|
)
|
|
$
|
(592
|
)
|
|
22.3
|
%
|
|
Percentage of revenue
|
2.9
|
%
|
|
2.7
|
%
|
|
|
|
|
Total other expense for the three months ended September 30, 2019 increased primarily due to the effect of non-cash foreign currency transaction losses.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
(Provision for)/benefit from income taxes
|
$
|
(3,468
|
)
|
|
$
|
1,281
|
|
|
$
|
(4,749
|
)
|
|
(370.7
|
)%
|
|
Effective tax rate
|
29.5
|
%
|
|
(8.7
|
)%
|
|
|
|
|
For the three months ended September 30, 2019, we recorded an income tax provision based on our estimated annual effective tax rate, adjusted for discrete items. For the three months ended September 30, 2018, we recorded an income tax benefit primarily due to a discrete benefit recorded for equity compensation deductions. After considering benefits from the exercise of stock options, we expect our 2019 annual effective tax rate to be in the range of 19% to 21%, absent changes in tax laws or significant changes in unrecognized tax benefits.
Nine Months Ended September 30, 2019 and September 30, 2018
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Healthcare
|
$
|
276,886
|
|
|
$
|
251,470
|
|
|
$
|
25,416
|
|
|
10.1
|
%
|
|
Research
|
41,079
|
|
|
37,254
|
|
|
3,825
|
|
|
10.3
|
%
|
|
Other
|
9,108
|
|
|
7,145
|
|
|
1,963
|
|
|
27.5
|
%
|
|
Total revenue
|
$
|
327,073
|
|
|
$
|
295,869
|
|
|
$
|
31,204
|
|
|
10.5
|
%
|
Total revenue for the nine months ended September 30, 2019 increased 10.5%, due to growth in revenue across all of our businesses. Healthcare revenue growth was driven by increased patient volume, primarily related to our MCT and extended Holter services, as well as the addition of the implantable device monitoring revenue contributed by Geneva, which we acquired on March 1, 2019. The positive impact of the higher patient volume was partially offset by the reduction of MCT Medicare reimbursement, which went into effect January 1, 2019, as well as payor mix. Research revenue continues to benefit from new studies resulting from the utilization of ePatch™, our extended Holter device. Other revenue increased due to continued growth of diabetic product sales.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Gross profit
|
$
|
204,357
|
|
|
$
|
186,540
|
|
|
$
|
17,817
|
|
|
9.6
|
%
|
|
Percentage of revenue
|
62.5
|
%
|
|
63.0
|
%
|
|
|
|
|
Gross profit for the nine months ended September 30, 2019 increased primarily due to the higher revenue. The 57 basis point decrease in gross profit percentage was due to the impact of the reduction of MCT Medicare reimbursement, which went into effect January 1, 2019, as well as increased costs to support Research studies. This was partially offset by the positive impact of Healthcare operational efficiencies.
General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
General and administrative expense
|
$
|
87,845
|
|
|
$
|
81,785
|
|
|
$
|
6,060
|
|
|
7.4
|
%
|
|
Percentage of revenue
|
26.9
|
%
|
|
27.6
|
%
|
|
|
|
|
General and administrative expense for the nine months ended September 30, 2019 increased primarily due to costs associated with the ongoing investment in our business systems and infrastructure, increased charitable contributions to fund pediatric cardiac procedures in developing countries as well as the addition of Geneva.
Sales and Marketing Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Sales and marketing expense
|
$
|
37,807
|
|
|
$
|
32,535
|
|
|
$
|
5,272
|
|
|
16.2
|
%
|
|
Percentage of revenue
|
11.6
|
%
|
|
11.0
|
%
|
|
|
|
|
Sales and marketing expense for the nine months ended September 30, 2019 increased primarily due to increased headcount-related expenses due to the ongoing investment in our Healthcare field sales force as well as the addition of Geneva.
Bad Debt Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Bad debt expense
|
$
|
16,385
|
|
|
$
|
16,911
|
|
|
$
|
(526
|
)
|
|
(3.1
|
)%
|
|
Percentage of revenue
|
5.0
|
%
|
|
5.7
|
%
|
|
|
|
|
Bad debt expense for the nine months ended September 30, 2019 decreased primarily due to a prior year $1.1 million specific reserve related to a customer bankruptcy in the Other category. This was partially offset by the increased Healthcare revenue and the timing of Healthcare collections. Bad debt expense for the nine months ended September 30, 2019 in Research and the Other category was minimal and is recorded on a specific account basis.
Research and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Research and development expense
|
$
|
10,526
|
|
|
$
|
8,451
|
|
|
$
|
2,075
|
|
|
24.6
|
%
|
|
Percentage of revenue
|
3.2
|
%
|
|
2.9
|
%
|
|
|
|
|
Research and development expense for the nine months ended September 30, 2019 increased due to our ongoing investment in new products and technologies, including the further incorporation of artificial intelligence and machine learning into our services.
Other Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Other charges
|
$
|
7,902
|
|
|
$
|
11,623
|
|
|
$
|
(3,721
|
)
|
|
(32.0
|
)%
|
|
Percentage of revenue
|
2.4
|
%
|
|
3.9
|
%
|
|
|
|
|
Other charges for the nine months ended September 30, 2019 decreased primarily due to a $7.3 million reduction of integration expense related to the LifeWatch AG (“LifeWatch”) acquisition, a $1.8 million prior year reserve for a note receivable with a bankrupt customer and the $1.0 million impact from
changes in acquisition-related contingent consideration. This decrease was partially offset by $2.7 million of costs related to our Geneva acquisition, and a $4.3 million increase in patent litigation and other legal expense. For further details, please see “Part I; Item 1, Financial Statements; Note 11. Other Charges.”
Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Interest expense
|
$
|
(7,358
|
)
|
|
$
|
(6,982
|
)
|
|
$
|
(376
|
)
|
|
5.4
|
%
|
|
Loss on equity method investment
|
(251
|
)
|
|
(238
|
)
|
|
(13
|
)
|
|
5.5
|
%
|
|
Other non-operating (expense)/income, net
|
(1,813
|
)
|
|
543
|
|
|
(2,356
|
)
|
|
(433.9
|
)%
|
|
Total other expense, net
|
$
|
(9,422
|
)
|
|
$
|
(6,677
|
)
|
|
$
|
(2,745
|
)
|
|
41.1
|
%
|
|
Percentage of revenue
|
2.9
|
%
|
|
2.3
|
%
|
|
|
|
|
Total other expense for the nine months ended September 30, 2019 increased primarily due to the effect of non-cash foreign currency transaction losses, the impact of higher interest rates due to changes in LIBOR on our long-term debt as well as interest expense on the deferred purchase consideration for Geneva. These increases were partially offset by a current year gain associated with the termination of a former LifeWatch foreign pension plan as well as prior year interest expense related to a legal settlement.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
(Provision for)/benefit from income taxes
|
$
|
(6,202
|
)
|
|
$
|
2,923
|
|
|
$
|
(9,125
|
)
|
|
(312.2
|
)%
|
|
Effective tax rate
|
18.0
|
%
|
|
(10.2
|
)%
|
|
|
|
|
For the nine months ended September 30, 2019, we recorded an income tax provision based on our estimated annual effective tax rate, adjusted for a net discrete benefit primarily related to equity compensation deductions. For the nine months ended September 30, 2018, we recorded an income tax benefit primarily due to a discrete benefit recorded for equity compensation deductions. After considering benefits from the exercise of stock options, we expect our 2019 annual effective tax rate to be in the range of 19% to 21%, absent changes in tax laws or significant changes in unrecognized tax benefits.
Liquidity and Capital Resources
The following table highlights certain information related to our liquidity and capital resources:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except ratios)
|
September 30,
2019
|
|
December 31,
2018
|
|
Cash and cash equivalents
|
$
|
61,573
|
|
|
$
|
80,889
|
|
|
Healthcare accounts receivable, net of allowance for doubtful accounts
|
56,832
|
|
|
37,754
|
|
|
Other accounts receivable, net of allowance for doubtful accounts
|
15,637
|
|
|
14,874
|
|
|
Availability under revolving credit facility
|
50,000
|
|
|
50,000
|
|
|
|
|
|
|
|
Working capital
|
$
|
89,066
|
|
|
$
|
97,037
|
|
|
Current ratio
|
2.5
|
|
|
3.0
|
|
|
|
|
|
|
|
Total operating lease obligations(1)
|
$
|
20,447
|
|
|
$
|
—
|
|
|
Total finance lease obligations
|
838
|
|
|
1,769
|
|
|
Total debt
|
$
|
195,638
|
|
|
$
|
198,549
|
|
________________
|
|
|
|
(1)
|
We adopted ASC 842 - Leases, effective January 1, 2019, which resulted in the recognition of most of our operating leases on our balance sheet, both as a right-of-use asset and right-of-use liability. Since we adopted this standard using the optional modified retrospective method, we have not restated prior year amounts.
|
The following table highlights certain cash flow activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
(in thousands)
|
September 30,
2019
|
|
September 30,
2018
|
|
Net income
|
$
|
28,268
|
|
|
$
|
31,481
|
|
|
Non-cash adjustments to net income
|
60,683
|
|
|
49,782
|
|
|
Cash used for working capital
|
(36,349
|
)
|
|
(36,976
|
)
|
|
Cash provided by operating activities
|
52,602
|
|
|
44,287
|
|
|
|
|
|
|
|
Cash used in investing activities
|
(68,452
|
)
|
|
(17,498
|
)
|
|
|
|
|
|
|
Cash (used in)/provided by financing activities
|
$
|
(3,489
|
)
|
|
$
|
500
|
|
For the nine months ended September 30, 2019, non-cash adjustments to income primarily relate to bad debt, depreciation, amortization and stock compensation expense and deferred taxes, offset by the changes in acquisition-related contingent consideration. The decrease in cash used for working capital was primarily due to the timing of cash receipts. The increase in cash used in investing activities was primarily due to the Geneva acquisition. The change in cash flows from financing activities was due to increased payments of tax withholdings related to vesting of share-based awards, the increase in our principal payments on our long-term debt and a decrease in the proceeds received related to the exercise of stock options, offset partially by the impact of the prior year acquistion of noncontrolling interests.
In 2017, we established a new credit agreement with SunTrust Bank and lenders named therein in the form of a $205.0 million term loan and a $50.0 million revolving credit facility. For further details regarding this agreement, please see “Part II; Item 8. Financial Statements and Supplementary Data;
Notes to Consolidated Financial Statements; Note 11. Credit Agreement” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. As of September 30, 2019, our revolving credit facility remains undrawn.