Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of BioTelemetry, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BioTelemetry, Inc. (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), cash flows and equity for each of the three years in the period ended December 31, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
|
|
|
|
|
Healthcare Segment Revenue
|
Description of the Matter
|
|
For the year ended December 31, 2019, the Company’s revenue derived from remote cardiac monitoring services in its Healthcare segment was $372.0 million. As explained in Note 3 to the consolidated financial statements, the Company measures and recognizes revenue for Contracted payors (including Medicare) at a transaction price negotiated with each payor for services provided, on a case rate basis.
Auditing the Company’s Healthcare segment revenue is complex and required a high degree of judgment in the application of our audit procedures and evaluating the results of those audit procedures to address the completeness and accuracy of the underlying data used to recognize Healthcare segment revenue, which is compiled using end-user computing applications.
|
How We Addressed the Matter in Our Audit
|
|
We tested the Company’s controls that address the risk of material misstatement relating to the occurrence and measurement of Healthcare segment revenue. For example, we tested management’s review of the contracted rates utilized to determine the transaction price for each service provided and controls over the completeness and accuracy of the underlying data used to recognize Healthcare segment revenue.
To test the Company’s Healthcare segment revenue, our audit procedures included, among others, performing analytical review procedures over key financial ratios, and selecting a representative sample of healthcare segment revenue transactions and comparing the components of the revenue calculations to source data including remote cardiac monitoring results and contracted rates to test the completeness and accuracy of the data compiled from end-user computing applications.
|
|
|
Accounting for acquisition of Geneva Healthcare, Inc.
|
Description of the Matter
|
|
As explained in Note 4 to the consolidated financial statements, on March 1, 2019, the Company completed its acquisition of Geneva Healthcare, Inc. (“Geneva”) for a total purchase price of $77.9 million. The transaction was accounted for using the acquisition method of accounting whereby the total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the respective fair values.
Auditing the Company's accounting for the acquisition of Geneva was complex due to the significant estimation uncertainty in determining the fair value of its identifiable intangible assets, which principally consisted of customer relationships, technology and trade names. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business that rely upon limited historical data on which to base those assumptions. The significant assumptions used to estimate the fair value of the customer relationships included the future operating performance and cash flows generated by the customer relationships and a discount rate. The significant assumptions used to estimate the fair value of the technology included the projected revenues generated by the technology, a royalty rate, and a discount rate. The significant assumptions used to estimate the fair value of the trade name included projected revenues generated by the trade name, a royalty rate, and a discount rate. These significant assumptions are forward looking and could be affected by future economic and market conditions.
|
|
|
|
|
How We Addressed the Matter in Our Audit
|
|
We tested the Company’s controls over its accounting for acquisitions, including the valuation of identifiable intangible assets. For example, we tested the Company's controls over management’s review of the identifiable intangible asset valuation models, as well as the significant assumptions used in the valuation models.
To test the estimated fair value of the intangible assets acquired, we performed audit procedures that included, among others, evaluating the Company's selection of the valuation methodologies used, evaluating the significant assumptions described above, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For example, we compared the significant assumptions to current industry, market and economic trends, as well as to the historical results of the acquired business. We involved our valuation specialists to assist in our evaluation of the methodologies used by the Company and the significant assumptions included in the fair value estimates. Additionally, we performed sensitivity analyses to evaluate changes in the fair value of the intangible assets that would result from changes in the significant assumptions.
|
|
|
Valuation of contingent consideration
|
Description of the Matter
|
|
As explained in Note 2 to the consolidated financial statements, the Company measures and records the fair value of contingent consideration on a recurring basis. As explained in Note 4 to the consolidated financial statements, the total purchase price for the acquisition of Geneva included the acquisition date fair value of contingent consideration of $13.2 million. As explained in Note 6 to the consolidated financial statements, this liability was remeasured to $12.9 million as of December 31, 2019.
Auditing the Company's valuations of the contingent consideration related to the Geneva acquisition was complex due to the significant estimation required by management. The significant estimation was primarily due to the complexity of the valuation model used by management to measure the fair value of the contingent consideration and the sensitivity of the respective fair values to the significant underlying assumptions. The Company used a Monte Carlo simulation to measure the fair value of the contingent consideration. The significant assumptions used in the simulation included estimated projected revenues, estimated stock price volatility in future periods, and discount rates. These significant assumptions are forward looking and could be affected by future economic and market conditions.
|
How We Addressed the Matter in Our Audit
|
|
We tested the Company’s controls over the valuations of the contingent consideration. For example, we tested controls over management’s review of the contingent consideration valuation models, as well as the significant assumptions used in the valuation models.
To test the estimated fair value of the contingent consideration related to the Geneva acquisition, our audit procedures included, among others, assessing the terms of the arrangement, including the conditions that must be met for the contingent consideration to become payable, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We also involved our valuation specialists to assist in evaluating the use of the Monte Carlo simulation for the contingent consideration and testing the significant assumptions used in the model. We compared the significant assumptions to current industry, market and economic trends and to the historical results for the acquired business.
|
|
|
|
/s/ ERNST & YOUNG LLP
|
|
|
|
We have served as the Company’s auditors since 2004.
|
|
|
Philadelphia, Pennsylvania
|
|
February 27, 2020
|
|
BIOTELEMETRY, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands, except shares and par value data)
|
2019
|
|
2018
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
68,614
|
|
|
$
|
80,889
|
|
Healthcare accounts receivable, net of allowance for doubtful accounts of $31,780 and $25,345 at December 31, 2019 and 2018, respectively
|
71,851
|
|
|
37,754
|
|
Other accounts receivable, net of allowance for doubtful accounts of $201 and $268 at December 31, 2019 and 2018, respectively
|
15,625
|
|
|
14,874
|
|
Inventory
|
5,738
|
|
|
7,323
|
|
Prepaid expenses and other current assets
|
6,505
|
|
|
5,820
|
|
Total current assets
|
168,333
|
|
|
146,660
|
|
Property and equipment, net
|
56,380
|
|
|
48,377
|
|
Intangible assets, net
|
129,596
|
|
|
129,653
|
|
Goodwill
|
301,321
|
|
|
238,814
|
|
Deferred tax assets
|
12,626
|
|
|
19,975
|
|
Other assets
|
17,464
|
|
|
3,322
|
|
Total assets
|
$
|
685,720
|
|
|
$
|
586,801
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
24,198
|
|
|
18,157
|
|
Accrued liabilities
|
27,318
|
|
|
24,689
|
|
Current portion of finance lease obligations
|
394
|
|
|
1,652
|
|
Current portion of long-term debt
|
3,844
|
|
|
5,125
|
|
Total current liabilities
|
55,754
|
|
|
49,623
|
|
Long-term portion of finance lease obligations
|
289
|
|
|
117
|
|
Long-term debt
|
190,823
|
|
|
193,424
|
|
Other long-term liabilities
|
71,937
|
|
|
33,152
|
|
Total liabilities
|
318,803
|
|
|
276,316
|
|
Stockholders’ equity:
|
|
|
|
Common stock—$.001 par value as of December 31, 2019 and 2018; 200,000,000 shares authorized as of December 31, 2019 and 2018; 34,023,053 and 33,406,364 shares issued and outstanding at December 31, 2019 and 2018, respectively
|
34
|
|
|
33
|
|
Paid-in capital
|
453,366
|
|
|
426,054
|
|
Accumulated other comprehensive (loss)/income
|
(469
|
)
|
|
256
|
|
Accumulated deficit
|
(86,014
|
)
|
|
(115,858
|
)
|
Total equity
|
366,917
|
|
|
310,485
|
|
Total liabilities and equity
|
$
|
685,720
|
|
|
$
|
586,801
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands, except per share data)
|
2019
|
|
2018
|
|
2017
|
Revenue
|
$
|
439,107
|
|
|
$
|
399,472
|
|
|
$
|
286,776
|
|
Cost of revenue
|
164,833
|
|
|
148,986
|
|
|
114,406
|
|
Gross profit
|
274,274
|
|
|
250,486
|
|
|
172,370
|
|
Operating expenses:
|
|
|
|
|
|
General and administrative
|
120,093
|
|
|
109,736
|
|
|
82,983
|
|
Sales and marketing
|
50,664
|
|
|
42,849
|
|
|
35,322
|
|
Bad debt expense
|
21,768
|
|
|
22,222
|
|
|
13,291
|
|
Research and development
|
13,994
|
|
|
11,206
|
|
|
11,101
|
|
Other charges
|
15,004
|
|
|
14,659
|
|
|
31,436
|
|
Total operating expenses
|
221,523
|
|
|
200,672
|
|
|
174,133
|
|
Income/(loss) from operations
|
52,751
|
|
|
49,814
|
|
|
(1,763
|
)
|
Other expense:
|
|
|
|
|
|
Interest expense
|
(9,482
|
)
|
|
(9,429
|
)
|
|
(4,897
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
(543
|
)
|
Loss on equity method investments
|
(1,298
|
)
|
|
(246
|
)
|
|
(384
|
)
|
Other non-operating (expense)/income, net
|
(2,243
|
)
|
|
1,365
|
|
|
(2,809
|
)
|
Total other expense, net
|
(13,023
|
)
|
|
(8,310
|
)
|
|
(8,633
|
)
|
Income/(loss) before income taxes
|
39,728
|
|
|
41,504
|
|
|
(10,396
|
)
|
(Provision for)/benefit from income taxes
|
(9,884
|
)
|
|
370
|
|
|
(6,747
|
)
|
Net income/(loss)
|
29,844
|
|
|
41,874
|
|
|
(17,143
|
)
|
Net loss attributable to noncontrolling interests
|
—
|
|
|
(946
|
)
|
|
(1,187
|
)
|
Net income/(loss) attributable to BioTelemetry, Inc.
|
$
|
29,844
|
|
|
$
|
42,820
|
|
|
$
|
(15,956
|
)
|
|
|
|
|
|
|
Net income/(loss) per common share attributable to BioTelemetry, Inc.:
|
|
|
|
|
|
Basic
|
$
|
0.88
|
|
|
$
|
1.31
|
|
|
$
|
(0.53
|
)
|
Diluted
|
$
|
0.82
|
|
|
$
|
1.20
|
|
|
$
|
(0.53
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
Basic
|
33,948
|
|
|
32,709
|
|
|
30,386
|
|
Dilutive common stock equivalents
|
2,492
|
|
|
3,074
|
|
|
—
|
|
Diluted
|
36,440
|
|
|
35,783
|
|
|
30,386
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
Net income/(loss) attributable to BioTelemetry, Inc.
|
$
|
29,844
|
|
|
$
|
42,820
|
|
|
$
|
(15,956
|
)
|
Other comprehensive income/(loss):
|
|
|
|
|
|
Foreign currency translation (loss)/gain
|
(725
|
)
|
|
370
|
|
|
(80
|
)
|
Comprehensive income/(loss) attributable to BioTelemetry, Inc.
|
$
|
29,119
|
|
|
$
|
43,190
|
|
|
$
|
(16,036
|
)
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
OPERATING ACTIVITIES
|
|
|
|
|
|
Net income/(loss)
|
$
|
29,844
|
|
|
$
|
41,874
|
|
|
$
|
(17,143
|
)
|
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
|
|
|
|
|
|
Bad debt expense
|
21,768
|
|
|
22,222
|
|
|
13,291
|
|
Depreciation and amortization
|
42,976
|
|
|
40,168
|
|
|
28,561
|
|
Impairment charge
|
—
|
|
|
—
|
|
|
12,045
|
|
Stock-based compensation
|
13,376
|
|
|
9,261
|
|
|
7,680
|
|
Write off of derivative premium
|
—
|
|
|
—
|
|
|
1,322
|
|
Accretion of debt discount
|
1,243
|
|
|
1,243
|
|
|
678
|
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
543
|
|
Gain on legal settlement
|
—
|
|
|
—
|
|
|
(1,333
|
)
|
Deferred income taxes
|
7,385
|
|
|
(2,294
|
)
|
|
6,050
|
|
Change in fair value of acquisition-related contingent consideration
|
(230
|
)
|
|
(700
|
)
|
|
(2,605
|
)
|
Other non-cash items
|
1,018
|
|
|
254
|
|
|
(39
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Healthcare and other accounts receivable
|
(55,027
|
)
|
|
(35,742
|
)
|
|
(15,455
|
)
|
Inventory
|
1,585
|
|
|
(1,991
|
)
|
|
665
|
|
Prepaid expenses and other assets
|
1,742
|
|
|
3,517
|
|
|
(694
|
)
|
Accounts payable
|
5,551
|
|
|
3,760
|
|
|
(8,320
|
)
|
Accrued and other liabilities
|
(3,681
|
)
|
|
(8,826
|
)
|
|
(1,464
|
)
|
Net cash provided by operating activities
|
67,550
|
|
|
72,746
|
|
|
23,782
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
(44,766
|
)
|
|
(3,750
|
)
|
|
(161,479
|
)
|
Purchases of property and equipment and investment in internally developed software
|
(30,707
|
)
|
|
(24,637
|
)
|
|
(13,697
|
)
|
Purchase of derivative instrument
|
—
|
|
|
—
|
|
|
(1,322
|
)
|
Investment in equity method investee
|
—
|
|
|
(464
|
)
|
|
(690
|
)
|
Net cash used in investing activities
|
(75,473
|
)
|
|
(28,851
|
)
|
|
(177,188
|
)
|
FINANCING ACTIVITIES
|
|
|
|
|
|
Proceeds related to the exercising of stock options and employee stock purchase plan
|
7,610
|
|
|
12,186
|
|
|
6,071
|
|
Payments of tax withholdings related to vesting of share-based awards
|
(4,955
|
)
|
|
(2,910
|
)
|
|
(1,933
|
)
|
Issuance of long-term debt
|
—
|
|
|
—
|
|
|
205,000
|
|
Repayments on revolving loans
|
—
|
|
|
—
|
|
|
(3,000
|
)
|
Payment of debt issuance costs
|
—
|
|
|
—
|
|
|
(6,213
|
)
|
Principal payments on long-term debt
|
(5,125
|
)
|
|
(2,050
|
)
|
|
(25,840
|
)
|
Principal payments on finance lease obligations
|
(1,909
|
)
|
|
(3,740
|
)
|
|
(2,863
|
)
|
Acquisition of noncontrolling interests
|
—
|
|
|
(2,885
|
)
|
|
(4,765
|
)
|
Net cash (used in)/provided by financing activities
|
(4,379
|
)
|
|
601
|
|
|
166,457
|
|
Effect of exchange rate changes on cash
|
27
|
|
|
371
|
|
|
(81
|
)
|
Net (decrease)/increase in cash and cash equivalents
|
(12,275
|
)
|
|
44,867
|
|
|
12,970
|
|
Cash and cash equivalents—beginning of period
|
80,889
|
|
|
36,022
|
|
|
23,052
|
|
Cash and cash equivalents—end of period
|
$
|
68,614
|
|
|
$
|
80,889
|
|
|
$
|
36,022
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
Non-cash purchases of property and equipment
|
$
|
3,302
|
|
|
$
|
505
|
|
|
$
|
498
|
|
Non-cash fair value of common stock returned in legal settlement
|
—
|
|
|
—
|
|
|
2,753
|
|
Non-cash fair value of equity issued for acquisition of business
|
2,142
|
|
|
—
|
|
|
117,440
|
|
Non-cash fair value of non-trade receivables exchanged for investment in equity method investee
|
—
|
|
|
395
|
|
|
—
|
|
Cash paid for interest
|
8,029
|
|
|
7,836
|
|
|
3,888
|
|
Cash paid for taxes, net of refunds
|
$
|
(89
|
)
|
|
$
|
763
|
|
|
$
|
1,648
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioTelemetry, Inc. Equity
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
(Loss)/Income
|
|
|
|
|
|
|
|
Common Stock
|
|
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
Noncontrolling Interests
|
|
Total
Equity
|
(in thousands, except shares)
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance December 31, 2016
|
28,261,503
|
|
|
$
|
28
|
|
|
$
|
281,642
|
|
|
$
|
(34
|
)
|
|
$
|
(142,722
|
)
|
|
$
|
—
|
|
|
$
|
138,914
|
|
Share issuances related to stock compensation plans
|
722,441
|
|
|
—
|
|
|
6,071
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,071
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
7,680
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,680
|
|
Shares withheld to cover taxes on vesting of share-based awards
|
(79,589
|
)
|
|
—
|
|
|
(1,933
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,933
|
)
|
Issuance of stock related to business combinations
|
3,615,840
|
|
|
4
|
|
|
116,788
|
|
|
—
|
|
|
—
|
|
|
11,224
|
|
|
128,016
|
|
Acquisition of noncontrolling interest
|
19,806
|
|
|
—
|
|
|
2,022
|
|
|
—
|
|
|
—
|
|
|
(11,091
|
)
|
|
(9,069
|
)
|
Common stock returned in legal settlement
|
(79,333
|
)
|
|
—
|
|
|
(2,753
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,753
|
)
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(80
|
)
|
|
—
|
|
|
—
|
|
|
(80
|
)
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,956
|
)
|
|
(1,187
|
)
|
|
(17,143
|
)
|
Balance December 31, 2017
|
32,460,668
|
|
|
32
|
|
|
409,517
|
|
|
(114
|
)
|
|
(158,678
|
)
|
|
(1,054
|
)
|
|
249,703
|
|
Share issuances related to stock compensation plans
|
972,415
|
|
|
1
|
|
|
12,185
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,186
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
9,261
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,261
|
|
Shares withheld to cover taxes on vesting of share-based awards
|
(85,505
|
)
|
|
—
|
|
|
(2,909
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,909
|
)
|
Acquisition of noncontrolling interest
|
58,786
|
|
|
—
|
|
|
(2,000
|
)
|
|
—
|
|
|
—
|
|
|
2,000
|
|
|
—
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
370
|
|
|
—
|
|
|
—
|
|
|
370
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42,820
|
|
|
(946
|
)
|
|
41,874
|
|
Balance December 31, 2018
|
33,406,364
|
|
|
33
|
|
|
426,054
|
|
|
256
|
|
|
(115,858
|
)
|
|
—
|
|
|
310,485
|
|
Share issuances related to stock compensation plans
|
631,107
|
|
|
1
|
|
|
7,609
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,610
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
13,376
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,376
|
|
Shares withheld to cover taxes on vesting of share-based awards
|
(64,418
|
)
|
|
—
|
|
|
(4,955
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,955
|
)
|
Issuance of stock related to business combinations
|
50,000
|
|
|
—
|
|
|
2,142
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,142
|
|
Deferred purchase price consideration - equity portion
|
—
|
|
|
—
|
|
|
9,140
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,140
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(725
|
)
|
|
—
|
|
|
—
|
|
|
(725
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29,844
|
|
|
—
|
|
|
29,844
|
|
Balance December 31, 2019
|
34,023,053
|
|
|
$
|
34
|
|
|
$
|
453,366
|
|
|
$
|
(469
|
)
|
|
$
|
(86,014
|
)
|
|
$
|
—
|
|
|
$
|
366,917
|
|
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
BioTelemetry, Inc. (“BioTelemetry,” “Company,” “we,” “our” or “us”), a Delaware corporation, is the leading remote medical technology company focused on delivery of health information to improve quality of life and reduce cost of care. We provide remote cardiac monitoring, 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. During the first quarter of 2018, we aggregated our Technology operating segment into the Corporate and Other category. 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 remote cardiac monitoring services. These services include mobile cardiac telemetry (“MCT”), event, traditional Holter, extended Holter, Pacemaker, International Normalized Ratio (“INR”), implantable loop recorder (“ILR”) and other implantable cardiac device 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.
We have grown both organically and through recent acquisitions; for further details related to our acquisitions, please see “Note 4. Acquisitions.”
Our common stock is traded on the NASDAQ Global Select Market under our symbol “BEAT.”
2. Summary of Significant Accounting Policies
a) Principles of Consolidation & Reclassifications
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of BioTelemetry and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Certain reclassifications have been made to prior period statements to conform to the current period presentation. These consist of:
|
|
•
|
combining our non-cash depreciation and amortization expense into one line on our consolidated statements of cash flows;
|
|
|
•
|
separating the non-cash operating item of change in fair value of acquisition-related contingent consideration from other non-cash items on our consolidated statements of cash flows; and
|
|
|
•
|
combining our contract liabilities into accrued liabilities in our consolidated balance sheets.
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The reclassifications had no impact on previously reported working capital, consolidated results of operations, cash flows from operating, financing and investing activities, 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.
|
|
|
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
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
goodwill, intangible assets, property and equipment and right-of-use (“ROU”) assets are subsequently measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. We assess the impairment of goodwill and intangible assets annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable.
d) Cash and Cash Equivalents
Cash and cash equivalents are held in financial institutions or in custodial accounts with financial institutions. Cash equivalents are defined as liquid investments and money market funds with maturity from date of purchase of 90 days or less that are readily convertible into cash and have minimal interest rate risk. We do not have restricted cash.
e) Accounts Receivable and Allowance for Doubtful Accounts
Healthcare accounts receivable, including contract assets, 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 healthcare 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 write off receivables when the likelihood for collection is remote, when we believe collection efforts have been fully exhausted and we do not intend to devote additional resources in attempting to collect. We perform write-offs on a monthly basis. In the Healthcare segment, we wrote-off $15.3 million and $11.2 million of receivables for the years ended December 31, 2019 and 2018, respectively. The impact was a reduction of gross receivables and a reduction in the allowance for doubtful accounts. There were no material write-offs in the Research segment. We recorded bad debt expense of $1.1 million and $0.8 million related to a customer bankruptcy in the Corporate and Other category during the years ended December 31, 2018 and 2017, respectively, and wrote off these amounts in 2018. We recorded consolidated bad debt expense of $21.8 million, $22.2 million and $13.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
f) 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 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
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
g) Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, Healthcare accounts receivable, including contract assets related to our cardiac monitoring services 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 collection efforts have ceased.
At December 31, 2019, 2018 and 2017, one payor, Medicare, accounted for 22%, 15% and 21%, respectively, of our gross healthcare accounts receivable.
h) Inventory
Inventory is valued at the lower of cost (using first-in, first-out cost method) or market (net realizable value or replacement cost). Management reviews inventory for specific future usage, and estimates of impairment of individual inventory items are recorded to reduce inventory to the lower of cost or market.
i) Property and Equipment
Property and equipment is recorded at cost, except for assets acquired in business combinations, which are recorded at fair value as of the acquisition date. Depreciation is recorded over the estimated useful life of each class of depreciable assets, and is computed using the straight-line method. Leasehold improvements and assets acquired under a finance lease are amortized over the shorter of the estimated asset life or term of the lease and included in depreciation expense. Repairs and maintenance costs are charged to expense as incurred. Costs of additions and improvements are capitalized.
j) Impairment of Long-Lived Assets
The carrying value of long-lived assets, other than goodwill, is evaluated when events or changes in circumstances indicate the carrying value may not be recoverable or the useful life has changed. We consider historical performance and anticipated future results in our evaluation of potential impairment. Accordingly, when indicators of impairment are present, we evaluate the carrying value of these assets in relation to the operating performance of the business and the undiscounted cash flows expected to result from the use of these assets. If the carrying amount of a long-lived asset exceeds its expected undiscounted cash flows, an impairment charge is recognized to the extent the carrying amount exceeds its fair value.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
k) 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 Accounting Standards Codification (“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.
We recognize 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, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments.
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. 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.
l) Derivative Instrument
During the second quarter of 2017, we purchased a foreign currency option with a notional value of $194.2 million to mitigate the foreign exchange risk related to the Swiss Franc-denominated purchase price of LifeWatch AG (“LifeWatch”). This derivative instrument was not designated as a hedge for accounting purposes. We did not exercise this option and the contract expired during the third quarter of 2017, resulting in a charge of $1.3 million, which was recorded as a component of other non-operating income/(expense), net in the consolidated statements of operations. We have not entered into any derivative transactions since.
m) Equity Method Investments
We account for investments using the equity method of accounting if the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
generally deemed to exist if our ownership interest in the voting stock of the investee ranges between 20% and 50%, although other factors, such as representation on the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment is recorded at cost in the consolidated balance sheets under other assets and is periodically adjusted for capital contributions, dividends received and our share of the investee’s earnings or losses together with other-than-temporary impairments which are recorded through loss on equity method investment in the consolidated statements of operations.
n) Noncontrolling Interests
The consolidated financial statements reflect the application of ASC 810 - Consolidations, which establishes accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within stockholder’s equity, but separate from the parent’s equity; (ii) the amount of consolidated net income/(loss) attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statements of operations; and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently.
We acquired approximately 97% of LifeWatch on July 12, 2017. On that date, we acquired control of LifeWatch and began consolidating its financial statements. As of December 31, 2017, we owned 100% of LifeWatch.
Also on July 12, 2017, LifeWatch owned 55% of LifeWatch Turkey Holding AG (“LifeWatch Turkey,” domiciled in Switzerland), with a partner company located in Ankara, Turkey, to provide digital health solutions to the Turkish market. Concurrent with our acquisition of LifeWatch, we acquired control of LifeWatch Turkey and began consolidating their financial statements.
During 2018, after a formal restructuring of shareholdings approved by the board of directors of LifeWatch Turkey, we became the sole shareholder of LifeWatch Turkey. No cash or other consideration was exchanged to effect this transaction. As a result, we no longer reflect a noncontrolling interest in our consolidated balance sheet; however, we continue to reflect the net loss attributable to the noncontrolling interest in our consolidated statement of operations for the period of time where we did not own the entire entity.
o) Goodwill and Acquired Intangible Assets
Goodwill is the excess of the purchase price of an acquired business over the amounts assigned to assets acquired and liabilities assumed in a business combination. In accordance with ASC 350 - Intangibles — Goodwill and Other (“ASC 350”), goodwill is reviewed for impairment annually, or when events arise that could indicate that an impairment exists. In order to test goodwill for impairment, ASC 350 allows reporting entities to take either a qualitative or quantitative approach to testing. Under the qualitative approach, an entity may assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. Such qualitative factors can include, among others, industry and market conditions, present and anticipated sales and cost factors, overall financial performance and relevant entity-specific events. If we conclude based on our qualitative assessment that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative analysis in accordance with ASC 350. Under the quantitative approach, an entity compares the fair value of its reporting units to their carrying value. If the reporting unit’s carrying value exceeds its fair value, an impairment loss equal to the difference is recognized. The loss recognized shall not exceed
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the total amount of goodwill allocated to the reporting unit, and the income tax effects from any deductible goodwill on the carrying value of the reporting unit when measuring the goodwill impairment loss, if any, are considered.
For the purpose of performing our goodwill impairment analysis, we consider our business to be composed of three reporting units: Healthcare, Research and Technology. When performing a quantitative analysis, we calculate the fair value of the reporting units utilizing the income and market approaches. The income approach is based on a discounted cash flow methodology that includes assumptions for, among other things, forecasted income, cash flow, growth rates, income tax rates, expected tax benefits and long-term discount rates, all of which require significant judgment. The market approach utilizes our market data as well as market data from publicly-traded companies that are similar to us. There are inherent uncertainties related to these factors and the judgment applied in the analysis. We believe that the income and market approaches provide a reasonable basis to estimate the fair value of our reporting units.
Acquired intangible assets are recorded at fair value on the acquisition date. The estimated fair values and useful lives of intangible assets are determined by assessing many factors including estimates of future operating performance and cash flows of the acquired business, the characteristics of the intangible assets and the experience of the acquired business. Independent appraisal firms may assist with the valuation of acquired assets. The impairment test for indefinite-lived intangible assets other than goodwill consists of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset. As a result of our impairment analysis for the year ended December 31, 2017, we noted entity-specific events which resulted in the write-off of the remainder of our indefinite-lived intangible assets other than goodwill, and a portion of our finite-lived intangible assets. See “Note 8. Goodwill and Intangible Assets” for further details regarding the impairment charges. We amortize our finite-lived intangible assets over each asset’s estimated useful life using the straight-line method and assess impairment indicators during each reporting period. Should an impairment indicator exist, we compare the carrying value of the asset to the undiscounted cash flows and record an impairment charge on the excess of the carrying value over the fair value.
p) Revenue Recognition
We adopted ASC 606 - Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018, which requires revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration that a company expects to receive in exchange for those goods or services.
We utilized the modified retrospective method for adoption, allowing us to not retrospectively adjust prior periods. We applied the modified retrospective method only to contracts that were not complete at January 1, 2018 and accounted for the aggregate effect of any contract modifications upon adoption. No cumulative adjustment to retained earnings was recorded.
Healthcare
Healthcare segment revenue includes revenue from MCT, event, traditional Holter, extended Holter, Pacemaker, INR and ILR monitoring services. A significant portion of our revenue is paid for by third-party commercial insurance organizations and governmental entities. We also receive reimbursement directly from patients through co-pays, deductibles and self-pay arrangements.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For contracted payors, including Medicare, we determine revenue based on negotiated prices for the services provided. Based on our history, we have experience collecting substantially all of the negotiated contracted rates and are therefore not providing an implicit price concession. As a result, any adjustments to the revenue recognized are due to patient default and are recorded as bad debt expense.
For non-contracted payors, we are providing an implicit price concession because we do not have a contract with the underlying payor. As a result, we estimate our expected revenue based on historical cash collections. Subsequent adjustments to the revenue recognized are recorded as an adjustment to Healthcare revenue and not as bad debt expense.
Research
Research segment revenue includes revenue for centralized core laboratory services. Our Research segment revenue is provided on a fee-for-service basis, and revenue is recognized as the related services are performed. We also provide consulting services on a time and materials basis, and this revenue is recognized as the services are performed. Our site support revenue, consisting of equipment rentals along with logistics management, are recognized at the time of service or over the rental period. Our research customer contracts have legally enforceable terms that are predominately thirty days due to termination for convenience clauses, which are held by the customer with no significant penalty. Given the short-term nature of these contracts and the structure of our billing practices, our billing practices approximate our performance if measured by an output method, where each output is an individual occurrence of each performance obligation. Accordingly, we utilize the invoice practical expedient as defined in ASC 606, resulting in recognition of revenue in the amount that we have the right to invoice. We record reimbursements received for out-of-pocket expenses, including freight, as revenue in the accompanying consolidated statements of operations.
Other
Other revenue 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 employer health plans, 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 goods or service.
Revenue is recognized net of any taxes collected from customers and subsequently remitted to government authorities.
See “Note 3. Revenue Recognition” for more information.
q) 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.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 our July 1, 2018 adoption of Accounting Standards Update (“ASU”) 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, we accounted for equity awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees.
We have historically recorded stock-based compensation expense based on the number of stock options or stock units we expect to vest using our historical forfeiture experience and we periodically update those forfeiture rates to apply to new grants. We 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.
r) Research and Development Costs
Research and development costs are charged to expense as incurred.
s) Foreign Currency Translation
We primarily operate our businesses in the United States, however, we have certain international subsidiaries. Our primary functional currency is the U.S. dollar. Assets and liabilities of non-U.S. dollar functional currency entities are translated to U.S. dollars at period-end exchange rates, and the currency impacts arising from the translation of the assets and liabilities are recorded as a cumulative translation adjustment, a component of our accumulated other comprehensive (loss)/income within our consolidated balance sheets. Revenues and expenses for those entities are translated at the average monthly currency exchange rates in effect during the period. Currency transaction gains and losses are included in other non-operating (expense)/income, net in the consolidated statements of operations as incurred. We recognized a $2.8 million transaction loss, a $1.3 million transaction gain, and a $0.3 million transaction loss as a component of other non-operating (expense)/income, net for the years ended December 31, 2019, 2018 and 2017, respectively.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
t) Income Taxes
We account for income taxes under the liability method, as described in ASC 740 - Income Taxes (“ASC 740”). Deferred income taxes are recognized for the tax consequences of temporary differences between the tax and financial statement reporting bases of assets and liabilities. When we determine that we will not be able to realize our deferred tax assets, we adjust the carrying value of the deferred tax assets through the valuation allowance.
We record 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.
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted in the U.S. The TCJA represents sweeping changes in U.S. tax law. Under ASC 740, the effects of changes in tax rates and tax laws on deferred tax balances are recognized in the period in which the new legislation is enacted. The total effect of tax law changes on deferred tax balances is recorded as a component of income tax expense.
In response to the TCJA, the Staff of the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance to registrants in applying ASC 740 in connection with the TCJA. SAB 118 provides that in the period of enactment, the income tax effects of the TCJA may be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a “measurement period.” The measurement period begins in the reporting period of the TCJA’s enactment and ends when a registrant has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC 740. SAB 118 also describes supplemental disclosures that should accompany the provisional amounts. We applied the guidance in SAB 118 to account for the financial accounting impacts of the TCJA and have provided the applicable supplemental disclosures in “Note 17. Income Taxes.”
As of December 31, 2017, we recorded the provisional impact from the TCJA in accordance with SAB 118. We finalized our adjustments related to the impact of the TCJA during the year ended December 31, 2018.
u) 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 the treasury stock method and shares expected to be issued in connection with acquisition-related contingent consideration arrangements when dilutive. Potentially dilutive common stock equivalents are not included in the weighted-average shares outstanding for determining net loss per share for the year ended December 31, 2017, as the result would be anti-dilutive.
Certain stock options, which are priced higher than the market price of our shares as of December 31, 2019, 2018 and 2017 would be anti-dilutive and therefore have been excluded from the weighted average
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 0.5 million shares for each of the years ended December 31, 2019 and 2018, as their effect would have been anti-dilutive on our net income per share.
v) Segment Information
ASC 280 - Segment Reporting, establishes standards for reporting information regarding operating segments in annual consolidated 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 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 remote cardiac monitoring services. The Research segment is engaged in centralized core laboratory services providing cardiac monitoring, imaging services, scientific consulting and data management services for drug and medical device trials. During the first quarter of 2018, as part of the LifeWatch integration, our forward-looking integration and rebranding plans, as well as re-evaluating the significance and materiality of our segments, we aggregated the Technology operating segment into the Corporate and Other category. Included in the Corporate and Other category is the manufacturing, testing and marketing of cardiac and blood glucose monitoring devices to medical companies, clinics and hospitals and corporate overhead and other items not allocated to any of our reportable segments.
w) 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 eligible cloud computing implementation costs are capitalized 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 consolidated statement of operations. This update did not have a material impact on our financial position, results of operations or disclosures.
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
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This update eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The update also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Additionally, ASU 2019-12 clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they can elect to do so. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, 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 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 will adopt this update on January 1, 2020, and this update will not impact our consolidated financial statements; however the update is expected to result in additional 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 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, and a modified retrospective approach
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
is required, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are currently in process of adopting this update as of January 1, 2020, and we currently do not anticipate that the adoption will have a material impact on our consolidated financial statements.
3. Revenue Recognition
We adopted ASC 606 on January 1, 2018, which requires revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration that a company expects to receive in exchange for those goods or services.
We utilized the modified retrospective method for adoption, allowing us to not retrospectively adjust prior periods. We applied the modified retrospective method only to contracts that were not complete at January 1, 2018 and accounted for the aggregate effect of any contract modifications upon adoption. No cumulative adjustment to retained earnings was recorded.
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by payor type and major service line. We determined that disaggregating revenue into these categories achieves the disclosure objective of illustrating the differences in the nature, amount, timing and uncertainty of our revenue streams. Disaggregated revenue by payor type and major service line was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
Reporting Segment
|
|
|
|
Total Consolidated
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(in thousands)
|
Healthcare
|
|
Research
|
|
Other
|
|
Payor/Service Line
|
|
|
|
|
|
|
|
Remote cardiac monitoring services - Medicare
|
$
|
153,743
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
153,743
|
|
Remote cardiac monitoring services - commercial payors
|
218,271
|
|
|
—
|
|
|
—
|
|
|
218,271
|
|
Clinical trial support and related services
|
—
|
|
|
54,450
|
|
|
—
|
|
|
54,450
|
|
Technology devices, consumable and related services
|
—
|
|
|
—
|
|
|
12,643
|
|
|
12,643
|
|
Total
|
$
|
372,014
|
|
|
$
|
54,450
|
|
|
$
|
12,643
|
|
|
$
|
439,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Reporting Segment
|
|
|
|
Total Consolidated
|
(in thousands)
|
Healthcare
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|
Research
|
|
Other
|
|
Payor/Service Line
|
|
|
|
|
|
|
|
Remote cardiac monitoring services - Medicare
|
$
|
137,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
137,600
|
|
Remote cardiac monitoring services - commercial payors
|
201,212
|
|
|
—
|
|
|
—
|
|
|
201,212
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|
Clinical trial support and related services
|
—
|
|
|
50,561
|
|
|
—
|
|
|
50,561
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|
Technology devices, consumables and related services
|
—
|
|
|
—
|
|
|
10,099
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|
|
10,099
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Total
|
$
|
338,812
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|
|
$
|
50,561
|
|
|
$
|
10,099
|
|
|
$
|
399,472
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BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 monitoring 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 remote cardiac monitoring services.
Performance obligations are determined based on the nature of the services provided. With our remote cardiac monitoring services, the patient receives the benefits of the service over time, resulting in revenue recognition over time based on the output method. We believe that this method provides an accurate depiction of the transfer of value over the term of the performance obligation because the level of effort in providing these services is consistent during the service period.
A summary of the payment arrangements with payors is as follows:
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•
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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.
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•
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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.
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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 during the years ended December 31, 2019 and 2018.
Clinical Trial Support and Related Services Revenue (Research segment)
Research segment revenue is generated by providing centralized core laboratory services, including cardiac monitoring, imaging services, scientific consulting and data management services for drug and medical device trials. These amounts are due from pharmaceutical companies and contract research organizations. We bill our customers on a fee for service basis. Under a typical contract, some customers
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 practical expedient as defined in ASC 606, resulting in recognition of revenue in the amount that we have the right to invoice.
We have not made any significant changes to judgments in applying ASC 606 during the years ended December 31, 2019 and 2018.
Other Revenue (Other category)
Our Other category revenue is primarily derived from the sale of non-invasive cardiac monitors to healthcare companies, wireless blood glucose meters and test strips to wholesale distributors of diabetes supplies and diabetic patients, as well as product repairs. Performance obligations are 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 during the years ended December 31, 2019 and 2018.
Contract Assets and Contract Liabilities
ASC 606 requires an entity to present a revenue contract as a contract asset when the entity performs its obligations under the contract by transferring goods or services to a customer before the customer pays consideration or before payment is due. ASC 606 also requires an entity to present a revenue contract as 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 December 31, 2019 and 2018, we had contract assets of $15.1 million and $2.1 million, respectively, related to cardiac monitoring services, which are included as a component of Healthcare accounts receivable on our consolidated balance sheets. We also had contract assets of $1.7 million and $0.2 million, respectively, related to our Other category revenue contracts, which are included as a component of Other accounts receivable on our consolidated balance sheets.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 2019 and 2018, we had contract liabilities of $1.6 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. For the year ended December 31, 2019, the amount recognized as revenue from the contract liability balance as of December 31, 2018 was $2.0 million. Similarly, for the year ended December 31, 2018, the amount recognized as revenue from the contract liability balance as of December 31, 2017 was $3.1 million. Our contract liabilities are included as a component of accrued liabilities on our consolidated balance sheets.
There were no significant changes or impairment losses related to our contract assets and contract liabilities for the years ended December 31, 2019 and 2018.
Practical Expedient Elections
We have elected the following practical expedients in applying ASC 606 across all reportable segments unless otherwise noted below.
Unsatisfied Performance Obligations: Because all of our performance obligations relate to contracts with a duration of less than one year, we have elected to apply the optional exemption provided in ASC 606 and, therefore, are not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
Contract Costs: All incremental customer contract acquisition costs are expensed as they are incurred as the amortization period of the asset that we otherwise would have recognized is one year or less in duration.
Significant Financing Component: We do not adjust the promised amount of consideration for the effects of a significant financing component as we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Sales Tax Exclusion from the Transaction Price: We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from the customer.
Shipping and Handling Activities: For our 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.
4. 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.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 $0.2 million in cash. The shares are restricted, with the restrictions related to 10,000 shares that expired in the fourth quarter of 2019, and the restrictions on the remaining 40,000 shares are set to expire 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 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 ADEA 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 recorded 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 ADEA 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 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 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 have 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, consisted of the following:
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•
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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
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BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 totaled $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.
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|
|
•
|
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 was $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 have continued 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 $59.9 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 2019 consisted primarily of decreasing additional consideration by $2.2 million and increasing net deferred tax assets by $2.9 million. We finalized our fair value estimates related to the Geneva acquisition during the three months ended December 31, 2019.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
(in thousands, except years)
|
March 1,
2019
|
|
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
|
|
|
|
Deferred tax assets
|
1,013
|
|
|
|
Total assets acquired
|
19,023
|
|
|
|
Fair value of liabilities assumed:
|
|
|
|
Accounts payable
|
215
|
|
|
|
Accrued liabilities
|
872
|
|
|
|
Total liabilities assumed
|
1,087
|
|
|
|
|
|
|
|
Total identifiable net assets
|
17,936
|
|
|
|
Goodwill
|
59,944
|
|
|
|
Net assets acquired
|
$
|
77,880
|
|
|
|
We have incurred $1.4 million of acquisition related costs associated with Geneva for the year ended December 31, 2019. The revenues and income of Geneva for periods prior to our acquisition and for the period from the acquistion date through December 31, 2019 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 included 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 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. 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. 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 income of ActiveCare prior to our acquisition were all immaterial.
LifeWatch AG
On July 12, 2017, we acquired, through our wholly owned subsidiary Cardiac Monitoring Holding Company, LLC, approximately 97.0% of the outstanding shares of LifeWatch AG for aggregate consideration of 3,615,840 shares of BioTelemetry common stock with a fair value of $116.8 million and
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
cash in the amount of $165.8 million. On that date, we acquired control of LifeWatch and began consolidating its financial statements.
Through December 31, 2017, we purchased 343,525 additional shares of LifeWatch for cash consideration of $4.8 million and the issuance of 19,806 shares with a fair value of $0.6 million. We acquired the remaining untendered LifeWatch shares pursuant to a squeeze-out procedure in accordance with Swiss law and takeover regulations related to the offering occurring in early January 2018, with the settlement of $2.9 million in cash, which was recorded as a component of accrued liabilities in our consolidated balance sheets, and 58,786 shares of our common stock with a fair market value of $2.0 million, which was recorded as a component of paid-in capital in our consolidated balance sheets, both as of December 31, 2017. As of December 31, 2017, we owned 100% of LifeWatch.
Also on July 12, 2017, in connection with the closing of the acquisition of LifeWatch, and refinancing of our existing debt, we entered into a credit agreement with SunTrust Bank, as a lender and an agent for the lenders (the “Lenders”) (together, the “SunTrust Credit Agreement”). For more information regarding the financing of this acquisition, please refer to “Note 11. Credit Agreement.”
The acquisition of LifeWatch strengthens our position as the leader in remote medical technology, creating the foremost connected health platform, significantly enhancing our ability to improve quality of life and reduce cost of care. We accounted for the transaction as a business combination, and as such, all assets acquired and liabilities assumed were recorded at their estimated fair values. The excess of the fair value of the purchase price over the fair value of the net assets acquired has been recognized as goodwill, which represents the expected future benefits arising from the assembled workforce and other synergies attributable to cost savings opportunities. We recognized $198.8 million of goodwill as a result of the acquisition, all of which has been assigned to the Healthcare segment. None of this goodwill will be deductible for tax purposes.
We finalized our estimates related to the LifeWatch acquisition by July 12, 2018. The measurement period adjustments recorded in 2018 were primarily due to a $5.7 million adjustment to increase accrued liabilities related to the ZTech legal matter (see “Note 19. Legal Proceedings” for details) and an $8.9 million increase to other long-term liabilities.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
(in thousands, except years)
|
July 12,
2017
|
|
Weighted
Average Life
(Years)
|
Fair value of assets acquired:
|
|
|
|
Cash and cash equivalents
|
$
|
4,303
|
|
|
|
Healthcare accounts receivable
|
10,089
|
|
|
|
Inventory
|
1,136
|
|
|
|
Prepaid expenses and other current assets
|
3,798
|
|
|
|
Property and equipment
|
27,507
|
|
|
|
Other assets
|
713
|
|
|
|
Identifiable intangible assets:
|
|
|
|
Customer relationships
|
126,800
|
|
|
10
|
Technology
|
3,217
|
|
|
3
|
Total identifiable intangible assets
|
130,017
|
|
|
|
Total assets acquired
|
177,563
|
|
|
|
Fair value of liabilities assumed:
|
|
|
|
Accounts payable
|
10,292
|
|
|
|
Accrued liabilities
|
15,579
|
|
|
|
Current portion of capital lease obligations
|
4,664
|
|
|
|
Current portion of long-term debt
|
3,027
|
|
|
|
Long-term capital lease obligations
|
3,420
|
|
|
|
Deferred tax liabilities
|
14,465
|
|
|
|
Other long-term liabilities
|
32,364
|
|
|
|
Total liabilities assumed
|
83,811
|
|
|
|
|
|
|
|
Total identifiable net assets
|
93,752
|
|
|
|
Fair value of noncontrolling interest
|
(9,961
|
)
|
|
|
Goodwill
|
198,783
|
|
|
|
Net assets acquired
|
$
|
282,574
|
|
|
|
We have integrated the operations of LifeWatch into our Healthcare segment. As a result of this integration, it is impracticable to disclose the amount of revenue and income/(loss) attributable to LifeWatch.
We incurred $31.0 million of acquisition related costs related to LifeWatch for the year ended December 31, 2017. These costs were included in other charges in our consolidated statements of operations.
The following unaudited pro forma financial information has been prepared using historical financial results of BioTelemetry and LifeWatch as if the acquisition had occurred as of January 1, 2016. Certain adjustments related to the elimination of transaction costs, as well as the addition of depreciation and amortization related to fair value adjustments on the tangible and identifiable intangible assets acquired, have been reflected for the purposes of the unaudited pro forma financial information presented below. We believe the assumptions used in preparing the unaudited pro forma financial information are reasonable, but not necessarily indicative of actual results should the acquisition have occurred on January 1, 2016.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro forma financial information for the year ended December 31, 2017 is summarized as follows:
|
|
|
|
|
|
|
Year Ended December 31,
|
(pro forma, unaudited, in thousands, except per share amounts)
|
2017
|
Revenue
|
$
|
349,900
|
|
Net loss
|
(1,800
|
)
|
Net loss per common share:
|
|
Basic
|
$
|
(0.05
|
)
|
Diluted
|
$
|
(0.05
|
)
|
Weighted average number of common shares outstanding:
|
|
Basic
|
34,022
|
|
Diluted
|
34,022
|
|
5. Inventory
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
2019
|
|
2018
|
Raw materials and supplies
|
$
|
4,429
|
|
|
$
|
3,667
|
|
Finished goods
|
1,309
|
|
|
3,656
|
|
Total inventory
|
$
|
5,738
|
|
|
$
|
7,323
|
|
6. Fair Value Measurements
We have determined that our long-term debt, classified as Level 2, has a fair value consistent with its carrying value, exclusive of debt discount and deferred charges, of $194.7 million and $198.5 million as of December 31, 2019 and 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 balances of the fair value of acquisition-related contingent consideration are recognized within other long-term liabilities on our consolidated balance sheets. 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.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table provides a reconciliation of the beginning and ending balances of acquisition-related contingent consideration:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2019
|
|
2018
|
Beginning balance
|
$
|
—
|
|
|
$
|
700
|
|
Additional acquisition-related contingent consideration
|
13,170
|
|
|
—
|
|
Changes in fair value of contingent consideration
|
(230
|
)
|
|
(700
|
)
|
Ending balance
|
$
|
12,940
|
|
|
$
|
—
|
|
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 December 31, 2019 and 2018.
The estimated fair value of the acquisition-related contingent consideration related to the Geneva acquisition was estimated using a Monte Carlo simulation, that considered numerous variables, including estimated 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 2018, the fair value of the contingent consideration decreased $0.7 million, as it was no longer probable that certain of the contingencies related to the Telcare acquisition would be met.
7. Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(Years)
|
|
December 31,
|
(in thousands, except years)
|
|
2019
|
|
2018
|
Cardiac monitoring devices, device parts and components
|
3 - 5
|
|
$
|
87,431
|
|
|
$
|
76,088
|
|
Computers and purchased software
|
3 - 5
|
|
18,756
|
|
|
16,800
|
|
Equipment, tools and molds
|
3 - 5
|
|
6,492
|
|
|
6,441
|
|
Furniture, fixtures and other
|
5 - 7
|
|
4,582
|
|
|
3,805
|
|
Leasehold improvements
|
*
|
|
7,714
|
|
|
5,877
|
|
Equipment under finance leases
|
*
|
|
7,500
|
|
|
6,568
|
|
Total property and equipment, at cost
|
|
|
132,475
|
|
|
115,579
|
|
Less accumulated depreciation
|
|
|
(76,095
|
)
|
|
(67,202
|
)
|
Total property and equipment, net
|
|
|
$
|
56,380
|
|
|
$
|
48,377
|
|
* shorter of useful life or term of lease
|
|
|
|
|
|
Depreciation expense associated with property and equipment, inclusive of amortization of assets recorded under finance leases, was $24.7 million, $23.0 million and $18.3 million, for the years ended December 31, 2019, 2018 and 2017, respectively.
During the year ended December 31, 2017, considering the LifeWatch integration and forward-looking integration plans, we determined that certain software was no longer going to be used and was
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
therefore impaired, resulting in $1.1 million of impairment charges included within the Corporate and Other category as a component of the other charges line in our consolidated statements of operations. There were no fixed asset impairments for the years ended December 31, 2019 and 2018.
8. Goodwill and Intangible Assets
Goodwill was recognized at the time of our acquisitions. The following table presents the carrying amount of goodwill allocated to our reportable segments, as well as the changes to goodwill during the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting Segment
|
|
Corporate and Other
|
|
|
(in thousands)
|
Healthcare
|
|
Research
|
|
|
Total
|
Balance at December 31, 2017
|
$
|
198,273
|
|
|
$
|
16,293
|
|
|
$
|
8,539
|
|
|
$
|
223,105
|
|
Initial goodwill acquired
|
—
|
|
|
—
|
|
|
475
|
|
|
475
|
|
Measurement period adjustments
|
15,234
|
|
|
—
|
|
|
—
|
|
|
15,234
|
|
Balance at December 31, 2018
|
213,507
|
|
|
16,293
|
|
|
9,014
|
|
|
238,814
|
|
Initial goodwill acquired
|
62,516
|
|
|
—
|
|
|
—
|
|
|
62,516
|
|
Currency translation
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
Balance at December 31, 2019
|
$
|
276,014
|
|
|
$
|
16,293
|
|
|
$
|
9,014
|
|
|
$
|
301,321
|
|
The goodwill acquired and the measurement period adjustments in the Healthcare segment are primarily due to the ADEA, Geneva and LifeWatch acquisitions; Research segment goodwill relates to the 2016 VirtualScopics acquisition; the Corporate and Other category goodwill primarily represents our 2018 ActiveCare acquisition and our 2016 Telcare and ePatch acquisitions. Refer to “Note 4. Acquisitions” above for details related to the Geneva and LifeWatch measurement period adjustments.
At December 31, 2019, 2018 and 2017, we performed our required annual impairment test of goodwill. Based on these impairment tests, we determined that there were no goodwill impairments. The carrying amount of our goodwill as of December 31, 2019 and 2018 was $301.3 million and $238.8 million, respectively.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The gross carrying amounts and accumulated amortization of our intangible assets as of December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Life (Years)
|
|
December 31,
|
(in thousands, except years)
|
|
2019
|
|
2018
|
Gross Carrying Value
|
|
|
|
|
|
Customer relationships
|
10.3
|
|
$
|
149,420
|
|
|
$
|
146,200
|
|
Technology including internally developed software
|
6.7
|
|
21,892
|
|
|
18,078
|
|
Backlog
|
4.0
|
|
3,100
|
|
|
6,860
|
|
Trade names
|
15.0
|
|
2,500
|
|
|
—
|
|
Covenants not to compete
|
4.7
|
|
424
|
|
|
1,040
|
|
Total intangible assets, gross
|
|
|
177,336
|
|
|
172,178
|
|
Accumulated Amortization
|
|
|
|
|
|
Customer relationships
|
|
|
(38,270
|
)
|
|
(24,870
|
)
|
Technology including internally developed software
|
|
|
(6,153
|
)
|
|
(10,879
|
)
|
Backlog
|
|
|
(2,842
|
)
|
|
(5,827
|
)
|
Trade names
|
|
|
(138
|
)
|
|
—
|
|
Covenants not to compete
|
|
|
(337
|
)
|
|
(949
|
)
|
Total accumulated amortization
|
|
|
(47,740
|
)
|
|
(42,525
|
)
|
Total intangible assets, net
|
|
|
$
|
129,596
|
|
|
$
|
129,653
|
|
During the year ended December 31, 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.
The estimated amortization expense for finite-lived intangible assets for the next five years and thereafter is summarized as follows at December 31, 2019:
|
|
|
|
|
|
(in thousands)
|
|
2020
|
$
|
18,290
|
|
2021
|
17,925
|
|
2022
|
17,417
|
|
2023
|
16,959
|
|
2024
|
16,427
|
|
Thereafter
|
42,578
|
|
Total estimated amortization
|
$
|
129,596
|
|
Amortization expense for the years ended December 31, 2019, 2018 and 2017 was $18.3 million, $17.2 million and $10.2 million, respectively. The 2017 amortization expense excludes impairment charges of $3.0 million related to indefinite-lived trade names and $8.0 million related to developed technology and customer relationships. See “Note 13. Other Charges” below. There were no intangible asset impairments for the years ended December 31, 2019 and 2018.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. 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 assumed related to ADEA in our consolidated financial statements. For more information, see “Note 4. Acquisitions.”
In December 2015, we acquired an ownership interest in Wellbridge Health, Inc. (“Wellbridge”). The investment is accounted for under the equity method. Our Chief Executive Officer sits on Wellbridge’s board of directors, and therefore, Wellbridge is considered a related party. There were no material related-party transactions between the parties during the years ended December 31, 2019, 2018 and 2017. As of December 31, 2019, our investment in Wellbridge represented 32.2% of their outstanding stock.
During the fourth quarter of 2019, as part of our review of Wellbridge’s financial results, their forward-looking business plan and outlook, we determined that there was an other-than-temporary impairment of our investment. As a result, we recorded a non-cash impairment charge of $1.0 million to write-off the carrying value of our investment. This charge is included as a component of loss on equity method investments in our consolidated statement of operations for the year ended December 31, 2019.
A summary of our investments, recorded as a component of other assets in our consolidated balance sheets, is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2019
|
|
2018
|
Beginning balance
|
$
|
2,044
|
|
|
$
|
1,431
|
|
Capital contributions
|
—
|
|
|
859
|
|
Derecognition of ADEA investment
|
(746
|
)
|
|
—
|
|
Loss on equity method investments
|
(1,298
|
)
|
|
(246
|
)
|
Ending balance
|
$
|
—
|
|
|
$
|
2,044
|
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Accrued Liabilities
Accrued liabilities consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
2019
|
|
2018
|
Compensation
|
$
|
13,167
|
|
|
$
|
13,443
|
|
Right-of-use liabilities - operating leases
|
5,187
|
|
|
—
|
|
Professional fees
|
4,128
|
|
|
4,260
|
|
Contract liabilities
|
1,584
|
|
|
3,080
|
|
Non-income taxes
|
427
|
|
|
906
|
|
Interest
|
569
|
|
|
702
|
|
Operating costs
|
637
|
|
|
1,095
|
|
Other
|
1,619
|
|
|
1,203
|
|
Total
|
$
|
27,318
|
|
|
$
|
24,689
|
|
11. Credit Agreement
2017 SunTrust Credit Agreement
Concurrent with the acquisition of LifeWatch discussed in “Note 4. Acquisitions” above, we entered into 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 proceeds of the loans were used to pay our prior GE Credit Agreement of $24.9 million and acquired LifeWatch debt of $3.0 million, pay a portion of the consideration for the acquisition of LifeWatch and pay related transaction fees and expenses of the acquisition of LifeWatch.
The loans bear interest at an annual rate, at our election, of (i) with respect to LIBOR rate loans, LIBOR plus the applicable margin and (ii) with respect to base rate loans, the Base Rate (the “prime rate” as published in the Wall Street Journal plus the applicable margin). The applicable margin for both LIBOR and Base Rate loans is determined by reference to our Consolidated Total Net Leverage Ratio, as defined in the SunTrust Credit Agreement. As of December 31, 2019, the applicable margin is 1.50% for LIBOR loans and 0.50% for base rate loans.
The outstanding principal of the loan is scheduled, in accordance with the SunTrust Credit Agreement, to be paid as follows:
|
|
•
|
Beginning January 1, 2018, the principal amount of the term loan will be repaid, on a quarterly basis, in installments of approximately $0.5 million, plus accrued interest;
|
|
|
•
|
Beginning January 1, 2019, the principal amount of the term loan will be repaid, on a quarterly basis, in installments of approximately $1.3 million, plus accrued interest;
|
|
|
•
|
Beginning January 1, 2020, the principal amount of the term loan will be repaid, on a quarterly basis, in installments of approximately $3.8 million, plus accrued interest;
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
•
|
Beginning January 1, 2021, the principal amount of the term loan will be repaid, on a quarterly basis, in installments of approximately $5.1 million, plus accrued interest;
|
|
|
•
|
The remaining principal balance is scheduled to be repaid on or before July 12, 2022 (or such earlier date upon an acceleration of the loans by Lenders upon an event of default or by our termination).
|
The loans are secured by substantially all of our assets and by a pledge of our capital stock as well as a pledge of 65% of the capital stock of our first tier material foreign subsidiaries, including 65% of the capital stock we own of LifeWatch.
The carrying amount of the term loan was $194.7 million as of December 31, 2019, which is the principal amount outstanding, net of $3.2 million of unamortized deferred financing costs to be amortized over the remaining term of the credit facility. The revolving credit facility is subject to an unused commitment fee, which is determined by reference to the our Consolidated Total Net Leverage Ratio, as defined in the SunTrust Credit Agreement. Our unused commitment fee as of December 31, 2019 was 0.2% and the revolving credit facility remains undrawn as of that date.
2014 GE Credit Agreement
On December 30, 2014, we entered into a Credit Agreement with Healthcare Financial Solutions, LLC, (“HFS”), previously The General Electric Capital Corporation (“GE Capital”), as agent for the lenders, and as a lender and swingline lender (the “GE Credit Agreement”). Pursuant to the GE Credit Agreement, the lenders agreed to make loans to us as follows: (i) Term Loans in an amount of $25.0 million as of the closing date with an uncommitted ability to increase such Term Loans up to an amount not to exceed $10.0 million and (ii) Revolving Loans up to $15.0 million.
Covenants
The SunTrust Credit Agreement contains affirmative and financial covenants regarding the operations of our business and certain negative covenants that, among other things, limit our ability to incur additional indebtedness, grant certain liens, make certain investments, merge or consolidate, make certain restricted payments and engage in certain asset dispositions, including a sale of all, or substantially all, of our property. As of December 31, 2019, we were in compliance with our covenants.
Debt Extinguishment
In connection with the SunTrust Credit Agreement in 2017, we paid the $24.9 million outstanding indebtedness under the Credit Agreement between BioTelemetry and HFS, previously GE Capital, as agent for the lenders, and as a lender, and we terminated the GE Credit Agreement. We wrote‑off the unamortized deferred financing fees related to the GE Credit Agreement of $0.5 million, which is included in loss on extinguishment of debt in our consolidated statements of operations for the year ended December 31, 2017.
Amendment
On January 27, 2020, we amended our SunTrust Credit Agreement; see “Note 21. Subsequent Event” for further information. As a result of this amendment, as of December 31, 2019, in accordance with applicable U.S. GAAP, we have reclassified our debt as long-term, with the exception of the portion that has been paid prior to the issuance of this report.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. 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.
The components of our lease expense under ASC 842 are as follows:
|
|
|
|
|
(in thousands)
|
Year Ended December 31,
2019
|
Operating lease cost:
|
|
Operating lease cost
|
$
|
5,828
|
|
Short-term lease cost
|
299
|
|
Total operating lease cost
|
6,127
|
|
|
|
Finance lease cost:
|
|
Amortization of right-of-use asset
|
2,073
|
|
Interest on lease liabilities
|
58
|
|
Total finance lease cost
|
2,131
|
|
|
|
Total lease cost
|
$
|
8,258
|
|
Rent expense under ASC 840, Leases was $6.3 million and $5.8 million for the years ended December 31, 2018 and 2017, respectively.
Supplemental balance sheet information related to leases as of December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
(in thousands, except percentage and years)
|
Operating
Leases
|
|
Finance
Leases
|
Property and equipment, net
|
$
|
—
|
|
|
$
|
493
|
|
Other assets
|
16,400
|
|
|
—
|
|
Total right-of-use assets
|
16,400
|
|
|
493
|
|
|
|
|
|
Accrued liabilities
|
5,187
|
|
|
—
|
|
Current portion of finance lease obligations
|
—
|
|
|
394
|
|
Long-term portion of finance lease obligations
|
—
|
|
|
289
|
|
Other long-term liabilities
|
14,029
|
|
|
—
|
|
Total lease obligations
|
$
|
19,216
|
|
|
$
|
683
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
5.0
|
|
|
1.9
|
|
Weighted average discount rate
|
4.4
|
%
|
|
4.5
|
%
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Future maturities of lease liabilities as of December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
Operating
Leases
|
|
Finance
Leases
|
2020
|
$
|
5,926
|
|
|
$
|
412
|
|
2021
|
4,423
|
|
|
191
|
|
2022
|
3,058
|
|
|
94
|
|
2023
|
2,268
|
|
|
—
|
|
2024
|
1,967
|
|
|
—
|
|
Thereafter
|
3,839
|
|
|
—
|
|
Total minimum lease payments
|
21,481
|
|
|
697
|
|
Less imputed interest
|
(2,265
|
)
|
|
(14
|
)
|
Present value of lease liabilities
|
$
|
19,216
|
|
|
$
|
683
|
|
Supplemental cash flow information related to leases is as follows:
|
|
|
|
|
(in thousands)
|
Year Ended December 31,
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
(6,026
|
)
|
Operating cash flows from finance leases
|
(58
|
)
|
Financing cash flows from finance leases
|
(1,909
|
)
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating leases
|
21,244
|
|
Finance leases
|
787
|
|
See “Note 2. Summary of Significant Accounting Policies; (w) Recent Accounting Pronouncements; Accounting Pronouncements Recently Adopted” for further discussion regarding the transition from ASC 840 to ASC 842 effective January 1, 2019.
13. Other Charges
We account for expenses associated with our acquisitions and activity associated with certain ongoing litigation as other charges as incurred. These expenses were primarily a result of activities surrounding our acquisitions and legal fees related to patent litigation in which we are the plaintiff. Integration costs are primarily due to employee-related costs. Other charges are costs that are not considered necessary to the ongoing business operations. A summary of these expenses is as follows:
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
Asset impairment charges
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,045
|
|
Acquisition and integration costs
|
4,863
|
|
|
10,089
|
|
|
18,656
|
|
Information technology incident costs
|
2,992
|
|
|
—
|
|
|
—
|
|
Reserve for note receivable
|
—
|
|
|
1,793
|
|
|
—
|
|
Change in fair value of acquisition-related contingent consideration
|
(230
|
)
|
|
(700
|
)
|
|
(2,605
|
)
|
Patent and other litigation
|
7,019
|
|
|
2,583
|
|
|
1,185
|
|
Other costs
|
360
|
|
|
894
|
|
|
2,155
|
|
Total
|
$
|
15,004
|
|
|
$
|
14,659
|
|
|
$
|
31,436
|
|
During our intangible asset impairment testing for the year ended December 31, 2017, considering the LifeWatch integration and forward-looking integration plans, we determined that certain trade names and certain internally developed software were no longer going to be used and were therefore impaired, resulting in impairment charges included within the Corporate and Other category. There were no other asset impairments for the year ended December 31, 2017, and no intangible asset impairments for the years ended December 31, 2019 and 2018. See “Note 8. Goodwill and Intangible Assets” above.
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. As a result of the information technology incident, we incurred approximately $3.0 million of direct expenses in the fourth quarter of 2019.
In 2018, we recorded a reserve for a note receivable with a bankrupt customer.
For the year ended December 31, 2019, the change in fair value of acquisition-related contingent consideration relates to our Geneva acquisition. For the year ended December 31, 2018 , the change relates to our Telcare acquisition, while the change for the year ended December 31, 2017 relates to both our Telcare and ePatch acquisitions.
14. Equity
Common Stock
As of December 31, 2019 and 2018, we were authorized to issue 200,000,000 shares of common stock. As of December 31, 2019 and 2018, we had 34,023,053 and 33,406,364 shares issued and outstanding, respectively.
Preferred Stock
As of December 31, 2019, we were authorized to issue 10,000,000 shares of preferred stock. As of December 31, 2019, we maintained an unregistered blank check preferred stock class, and no shares were authorized. As of December 31, 2019 and 2018, there were no shares of preferred stock issued or outstanding.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Noncontrolling Interest
During 2018, after a formal restructuring of shareholdings approved by the board of directors of LifeWatch Turkey, we became the sole shareholder of LifeWatch Turkey. No cash or other consideration was exchanged to effect this transaction. As a result, we no longer reflect a noncontrolling interest in our consolidated balance sheet; however, we continue to reflect the net loss attributable to the noncontrolling interest on our consolidated statement of operations for the period of time where we did not own the entire entity.
15. Stock-Based Compensation
We have three stock plans: our 2017 Omnibus Incentive Plan (“OIP”), our 2008 Equity Incentive Plan (the “2008 Plan”) and our 2003 Equity Incentive Plan (the “2003 Plan”) (collectively, the “Plans”). The OIP is the only remaining stock plan actively granting new stock options or units. The purpose of these stock plans was, and the OIP is, to grant incentive stock options to employees and non-qualified stock options, RSUs, PSOs, PSUs and other stock-based incentive awards to officers, directors, employees and consultants. The Plans are administered by our Board of Directors (the “Board”) or its delegates. The 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
On May 11, 2017, our stockholders approved the OIP, which replaced the 2008 Plan, with 3,000,000 shares reserved for issuance. Stock options, RSUs, PSUs and PSOs have been granted under the OIP. Under the terms of the OIP, any cancellation, forfeiture or expiry of equity awards granted under the 2008 Plan roll into the availability under the OIP. There were 1,952,041 shares available for grant under the OIP as of December 31, 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.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock option and PSO activity is summarized for the years ended December 31, 2019, 2018 and 2017 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
Number of
Stock Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average Remaining Contractual Term
(Years)
|
|
Aggregate Intrinsic Value
(in thousands)
|
Outstanding as of December 31, 2016
|
3,568,434
|
|
|
$
|
7.82
|
|
|
|
|
|
Granted
|
543,881
|
|
|
31.12
|
|
|
|
|
|
Forfeited
|
(154,510
|
)
|
|
16.22
|
|
|
|
|
|
Exercised
|
(383,366
|
)
|
|
9.91
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
3,574,439
|
|
|
$
|
10.78
|
|
|
|
|
|
Granted
|
387,306
|
|
|
43.82
|
|
|
|
|
|
Forfeited
|
(114,769
|
)
|
|
30.64
|
|
|
|
|
|
Exercised
|
(1,185,694
|
)
|
|
8.08
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
2,661,282
|
|
|
$
|
15.94
|
|
|
|
|
|
Granted
|
367,142
|
|
|
63.27
|
|
|
|
|
|
Forfeited
|
(71,534
|
)
|
|
31.61
|
|
|
|
|
|
Exercised
|
(265,831
|
)
|
|
8.94
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
2,691,059
|
|
|
$
|
22.67
|
|
|
5.7
|
|
$
|
72,621
|
|
Exercisable as of December 31, 2019
|
1,852,025
|
|
|
$
|
10.92
|
|
|
4.4
|
|
$
|
66,165
|
|
Expected to vest as of December 31, 2019
|
761,428
|
|
|
$
|
48.62
|
|
|
8.5
|
|
$
|
5,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Stock Options
|
Number of
PSOs
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average Remaining Contractual Term
(Years)
|
|
Aggregate Intrinsic Value
(in thousands)
|
Outstanding as of December 31, 2016
|
200,000
|
|
|
$
|
19.89
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(50,000
|
)
|
|
18.33
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
150,000
|
|
|
$
|
20.41
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(15,000
|
)
|
|
18.33
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
135,000
|
|
|
$
|
20.64
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(105,000
|
)
|
|
20.41
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
30,000
|
|
|
$
|
21.45
|
|
|
7.0
|
|
$
|
746
|
|
Exercisable as of December 31, 2019
|
30,000
|
|
|
$
|
21.45
|
|
|
7.0
|
|
$
|
746
|
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The PSOs met their performance criteria, vested, and were priced as follows:
|
|
|
|
|
|
|
Performance Achievement Date
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
October 4, 2016
|
|
100,000
|
|
|
$18.33
|
January 13, 2017
|
|
100,000
|
|
|
$21.45
|
A summary of total outstanding stock options and PSOs as of December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options & PSOs Outstanding
|
|
Stock Options & PSOs Exercisable
|
Range of Exercise Prices
|
|
Number of
Stock Options & PSOs
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Weighted
Average
Exercise Price
|
|
Number of
Stock Options & PSOs
Exercisable
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Weighted
Average
Exercise Price
|
$2.22 - $10.00
|
1,248,361
|
|
|
3.4
|
|
$
|
5.23
|
|
|
1,246,486
|
|
|
3.4
|
|
$
|
5.22
|
|
$10.01 - $25.00
|
529,091
|
|
|
6.1
|
|
16.26
|
|
|
439,160
|
|
|
5.9
|
|
15.25
|
|
$25.01 - $40.00
|
519,798
|
|
|
8.1
|
|
34.46
|
|
|
167,129
|
|
|
7.8
|
|
33.93
|
|
$40.01 - $70.00
|
136,000
|
|
|
9.2
|
|
53.79
|
|
|
11,250
|
|
|
8.7
|
|
58.99
|
|
$70.01 - $76.01
|
287,809
|
|
|
9.1
|
|
73.99
|
|
|
18,000
|
|
|
8.9
|
|
73.62
|
|
$2.22 - $76.01
|
2,721,059
|
|
|
5.7
|
|
$
|
22.66
|
|
|
1,882,025
|
|
|
4.5
|
|
$
|
11.08
|
|
The table below summarizes certain additional information with respect to our stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands, except per option amounts)
|
|
2019
|
|
2018
|
|
2017
|
Aggregate intrinsic value of stock options exercised during the year
|
$
|
19,062
|
|
|
$
|
49,188
|
|
|
$
|
7,562
|
|
Cash received from the exercise of stock options
|
4,519
|
|
|
9,855
|
|
|
4,714
|
|
Weighted average grant date fair value per option
|
$
|
36.52
|
|
|
$
|
25.96
|
|
|
$
|
18.05
|
|
The total compensation cost of options granted but not yet vested at December 31, 2019 was $19.8 million, which is expected to be recognized over a weighted average period of approximately three years.
The weighted average of the assumptions used to determine the fair value of stock options at the date of grant is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Expected volatility
|
54.9
|
%
|
|
55.2
|
%
|
|
59.2
|
%
|
Expected term (in years)
|
7.2
|
|
|
7.4
|
|
|
7.3
|
|
Risk-free interest rate
|
2.30
|
%
|
|
2.78
|
%
|
|
2.08
|
%
|
Expected dividends
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
RSU and PSU activity is summarized for the years ended December 31, 2019, 2018 and 2017 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Performance Stock Units
|
|
Number
of RSUs
|
|
Weighted Average
Grant Date Fair Value
|
|
Number
of PSUs
|
|
Weighted Average
Grant Date Fair Value
|
Units outstanding as of December 31, 2016
|
592,349
|
|
|
$
|
9.86
|
|
|
132,992
|
|
|
$
|
8.68
|
|
Granted
|
117,614
|
|
|
25.98
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(48,974
|
)
|
|
13.57
|
|
|
(132,992
|
)
|
|
8.68
|
|
Vested
|
(193,860
|
)
|
|
9.31
|
|
|
—
|
|
|
—
|
|
Units outstanding as of December 31, 2017
|
467,129
|
|
|
$
|
13.76
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
128,860
|
|
|
35.14
|
|
|
88,345
|
|
|
37.79
|
|
Forfeited
|
(12,466
|
)
|
|
22.88
|
|
|
(1,236
|
)
|
|
37.79
|
|
Vested
|
(224,840
|
)
|
|
12.02
|
|
|
—
|
|
|
—
|
|
Units outstanding as of December 31, 2018
|
358,683
|
|
|
$
|
22.22
|
|
|
87,109
|
|
|
$
|
37.79
|
|
Granted
|
109,998
|
|
|
59.16
|
|
|
34,088
|
|
|
86.29
|
|
Forfeited
|
(24,965
|
)
|
|
33.24
|
|
|
(31,177
|
)
|
|
40.95
|
|
Vested
|
(173,664
|
)
|
|
13.73
|
|
|
—
|
|
|
—
|
|
Units outstanding as of December 31, 2019
|
270,052
|
|
|
$
|
41.70
|
|
|
90,020
|
|
|
$
|
55.06
|
|
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 90,020 shares reserved as of December 31, 2019 in the event that actual results exceed “target” levels. For the year ended months ended December 31, 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 2018-07. As of December 31, 2019, none of the PSUs granted in 2018 or 2019 have vested.
In addition, a summary of total outstanding RSUs and PSUs as of December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
Range of Grant Date Fair Value
|
|
RSUs
Outstanding
|
|
PSUs
Outstanding*
|
$24.65 - $31.50
|
|
83,827
|
|
|
—
|
|
$31.51 - $44.16
|
|
108,508
|
|
|
57,963
|
|
$44.17 - $76.01
|
|
77,717
|
|
|
—
|
|
$76.02 - $86.29
|
|
—
|
|
|
32,057
|
|
$24.65 - $86.29
|
|
270,052
|
|
|
90,020
|
|
* See “Note 2. Summary of Significant Accounting Policies; q) Stock-Based Compensation” for discussion regarding the fair value of our PSUs.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Additional information about our RSUs and PSUs is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
|
2019
|
|
2018
|
|
2017
|
Aggregate market value of RSUs vested during the year
|
$
|
12,833
|
|
|
$
|
7,940
|
|
|
$
|
4,768
|
|
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 December 31, 2019, was $7.8 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 December 31, 2019.
Employee Stock Purchase Plan
In May 2017, the 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 purchase 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. In 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 year ended December 31, 2019 were $3.1 million. At December 31, 2019, 232,671 shares remain available for purchase under the 2017 ESPP.
Our aggregate stock-based compensation expense is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
Stock options
|
$
|
7,307
|
|
|
$
|
4,550
|
|
|
$
|
3,183
|
|
Performance stock options
|
—
|
|
|
—
|
|
|
1,534
|
|
Restricted stock units
|
3,719
|
|
|
3,052
|
|
|
2,273
|
|
Performance stock units
|
867
|
|
|
589
|
|
|
—
|
|
Employee stock purchase plan
|
1,483
|
|
|
1,070
|
|
|
690
|
|
Total stock-based compensation expense
|
$
|
13,376
|
|
|
$
|
9,261
|
|
|
$
|
7,680
|
|
For the years ended December 31, 2019, 2018 and 2017, we recognized $5.0 million, $11.6 million and $1.5 million, respectively, of tax benefit from stock options exercised during the period as a component of our (provision for)/benefit from income taxes.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Employee Benefit Plan
We sponsor a 401(k) Retirement Savings Plan (the “401k Plan”) for all eligible employees who meet certain requirements. Participants may contribute, on a pre-tax basis, up to the maximum allowable amount pursuant to Section 401(k) of the Internal Revenue Code (“IRC”). The plan also includes a Roth feature, allowing after-tax contributions, up to the maximum allowable amount pursuant to Section 401(k) of the IRC. The 401k Plan allows for an employer matching contribution of 100% of the first 3% of the employees’ salary, and 50% of the next 2% of the employees’ salary. For the years ended December 31, 2019, 2018 and 2017, we contributed $4.1 million, $3.5 million and $2.6 million, respectively. Employer contributions vest immediately.
17. Income Taxes
The components of our (provision for)/benefit from income taxes are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(178
|
)
|
|
$
|
—
|
|
|
$
|
(273
|
)
|
State
|
(1,397
|
)
|
|
(27
|
)
|
|
(424
|
)
|
Foreign
|
(924
|
)
|
|
(1,897
|
)
|
|
—
|
|
Total (provision for) income taxes
|
(2,499
|
)
|
|
(1,924
|
)
|
|
(697
|
)
|
Deferred:
|
|
|
|
|
|
Federal
|
(5,237
|
)
|
|
875
|
|
|
(4,353
|
)
|
State
|
(2,243
|
)
|
|
690
|
|
|
151
|
|
Foreign
|
95
|
|
|
729
|
|
|
(1,848
|
)
|
Total deferred (provision for)/benefit from income taxes
|
(7,385
|
)
|
|
2,294
|
|
|
(6,050
|
)
|
Total (provision for)/benefit from income taxes
|
$
|
(9,884
|
)
|
|
$
|
370
|
|
|
$
|
(6,747
|
)
|
Reconciliations between expected income taxes computed at the federal statutory rate for each of the years ended December 31, 2019, 2018 and 2017, and the (provision for)/benefit from income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
Income tax (provision)/benefit at statutory rate
|
$
|
(8,342
|
)
|
|
$
|
(8,716
|
)
|
|
$
|
3,638
|
|
Permanent difference
|
2,532
|
|
|
9,127
|
|
|
392
|
|
(Increase)/decrease in valuation allowance
|
(1,305
|
)
|
|
714
|
|
|
(976
|
)
|
State income tax, net of federal benefit
|
(1,532
|
)
|
|
240
|
|
|
(213
|
)
|
Deferred tax asset adjustments
|
826
|
|
|
208
|
|
|
(485
|
)
|
Unrecognized tax benefit
|
(831
|
)
|
|
(1,547
|
)
|
|
—
|
|
Foreign rate differential
|
12
|
|
|
(36
|
)
|
|
(1,107
|
)
|
Tax Reform impact
|
—
|
|
|
—
|
|
|
(8,048
|
)
|
Rate change impact
|
(814
|
)
|
|
366
|
|
|
36
|
|
Other
|
(430
|
)
|
|
14
|
|
|
16
|
|
(Provision for)/benefit from income taxes
|
$
|
(9,884
|
)
|
|
$
|
370
|
|
|
$
|
(6,747
|
)
|
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, 2019, 2018 and 2017, we recognized $5.0 million, $11.6 million and $1.5 million, respectively, of tax benefit from stock options exercised during the period as a component of our (provision for)/benefit from income taxes.
At December 31, 2019, we had federal net operating loss carryforwards of approximately $146.9 million to offset future federal taxable income expiring in various years starting in 2023 through 2037. At December 31, 2019, we had state net operating loss carryforwards of $73.7 million, which expire in various years starting in 2020 through 2039. We also had $121.1 million of foreign net operating loss carryforwards, which expire in various years starting in 2020 through 2026. We have recorded a valuation allowance against a portion of our foreign and state net operating losses.
The timing and manner in which we can utilize our net operating loss carryforwards and future income tax deductions in any year may be limited. Section 382 of the IRC (“Section 382”) imposes limitations on a corporation’s ability to utilize net operating losses if it experiences an “ownership change.” Section 382 imposes similar limitations on other tax attributes such as research and development credits. Currently, a portion of our loss carryforwards is limited under Section 382 and therefore, is not included in the total net operating losses disclosed above.
The U.S. Internal Revenue Service concluded its examination of our U.S. federal tax returns for all years through 2011. Because of net operating losses, our U.S. federal tax returns for those years will remain subject to examination until the statute of limitations passes for the tax returns which utilized those losses. Additionally, state tax return statutes generally remain open due to operating losses.
As of each reporting date, our management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred income tax assets.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The significant components of our deferred taxes are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
33,692
|
|
|
$
|
33,803
|
|
Allowance for doubtful accounts
|
8,107
|
|
|
6,526
|
|
Non-deductible accruals
|
2,427
|
|
|
4,980
|
|
Operating lease obligations
|
4,842
|
|
|
—
|
|
Stock based compensation expense
|
4,191
|
|
|
3,337
|
|
Transaction costs
|
2,030
|
|
|
2,186
|
|
Research and development and AMT credit carryforwards
|
275
|
|
|
1,092
|
|
Deferred revenue and deferred rent
|
111
|
|
|
1,019
|
|
Capital loss carryforwards
|
2,718
|
|
|
2,114
|
|
Other, net
|
785
|
|
|
917
|
|
Total deferred tax assets
|
59,178
|
|
|
55,974
|
|
Less valuation allowance
|
(3,877
|
)
|
|
(3,021
|
)
|
Net deferred tax assets
|
55,301
|
|
|
52,953
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
(31,463
|
)
|
|
(29,663
|
)
|
Property and equipment
|
(6,907
|
)
|
|
(3,173
|
)
|
Right-of-use assets
|
(4,132
|
)
|
|
—
|
|
Prepaid insurance
|
(173
|
)
|
|
(142
|
)
|
Total deferred tax liabilities
|
(42,675
|
)
|
|
(32,978
|
)
|
Net deferred tax assets
|
$
|
12,626
|
|
|
$
|
19,975
|
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the TCJA. The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In 2018, we completed our analysis of the provisional items of the TCJA under SAB 118, resulting in immaterial adjustments, primarily related to cumulative temporary differences.
The following summarizes the changes in our unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2019
|
|
2018
|
Unrecognized tax benefits at the beginning of the year
|
$
|
52,832
|
|
|
$
|
39,710
|
|
Additions to unrecognized tax benefits related to current year
|
—
|
|
|
—
|
|
Additions to unrecognized tax benefits related to prior years
|
2,446
|
|
|
13,122
|
|
Unrecognized tax benefits at the end of the year
|
$
|
55,278
|
|
|
$
|
52,832
|
|
As of December 31, 2019 and 2018, we have recorded a net reserve of $34.8 million and $31.3 million, respectively, for unrecognized tax benefits as a component of other long-term liabilities within our consolidated balance sheets. In addition, a portion of the unrecognized tax benefits is presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. As of December 31, 2019, a total of $34.8 million of unrecognized tax benefits, if recognized, would affect the effective tax rate.
We recognize interest and penalties related to unrecognized tax benefits on the (provision for)/benefit from income taxes line in the accompanying consolidated statements of operations. As of December 31, 2019, our accrued interest associated with our liability for unrecognized tax benefits was $2.7 million. In addition, we have not recorded any penalties on our uncertain tax positions for each of the years ended December 31, 2019 and 2018.
It is reasonably possible that a portion of these unrecognized tax benefits could be resolved within the next twelve months that may result in a decrease in our effective tax rate.
18. Segment Information
We operate under two reportable segments: Healthcare and Research. The Healthcare segment is focused on 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 remote cardiac monitoring services. These services include MCT, event, traditional Holter, extended Holter, Pacemaker, INR, ILR and other implantable cardiac device monitoring. The majority of our Healthcare revenue is derived from the monitoring of devices that BioTelemetry has developed, manufactured and marketed. The Research segment is engaged in centralized core laboratory services providing cardiac monitoring, imaging services, scientific consulting and data management services for drug and medical device trials. During the first quarter of 2018, as part of the LifeWatch integration, our forward-looking integration and rebranding plans, as well as re-evaluating the significance and materiality of our segments, we aggregated our Technology operating segment into our Corporate and Other category. Included in our 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.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 our Corporate and Other category. Also included in our Corporate and Other category is our net interest expense, other financing expenses, and income taxes. We do not allocate assets to the individual segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
Reporting Segment
|
|
Corporate
and Other
|
|
Consolidated
|
(in thousands)
|
Healthcare
|
|
Research
|
|
|
Revenue
|
$
|
372,014
|
|
|
$
|
54,450
|
|
|
$
|
12,643
|
|
|
$
|
439,107
|
|
Gross profit
|
251,114
|
|
|
20,164
|
|
|
2,996
|
|
|
274,274
|
|
Income/(loss) before income taxes
|
122,829
|
|
|
4,653
|
|
|
(87,754
|
)
|
|
39,728
|
|
Depreciation and amortization
|
34,972
|
|
|
4,047
|
|
|
3,957
|
|
|
42,976
|
|
Capital expenditures
|
25,543
|
|
|
3,591
|
|
|
1,573
|
|
|
30,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Reporting Segment
|
|
Corporate
and Other
|
|
Consolidated
|
(in thousands)
|
Healthcare
|
|
Research
|
|
|
Revenue
|
$
|
338,812
|
|
|
$
|
50,561
|
|
|
$
|
10,099
|
|
|
$
|
399,472
|
|
Gross profit
|
220,883
|
|
|
21,603
|
|
|
8,000
|
|
|
250,486
|
|
Income/(loss) before income taxes
|
98,135
|
|
|
6,228
|
|
|
(62,859
|
)
|
|
41,504
|
|
Depreciation and amortization
|
33,119
|
|
|
3,723
|
|
|
3,326
|
|
|
40,168
|
|
Capital expenditures
|
20,258
|
|
|
3,272
|
|
|
1,107
|
|
|
24,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Reporting Segment
|
|
Corporate
and Other
|
|
Consolidated
|
(reclassified, in thousands)
|
Healthcare
|
|
Research
|
|
|
Revenue
|
$
|
234,385
|
|
|
$
|
38,790
|
|
|
$
|
13,601
|
|
|
$
|
286,776
|
|
Gross profit
|
153,029
|
|
|
15,909
|
|
|
3,432
|
|
|
172,370
|
|
Income/(loss) before income taxes
|
52,054
|
|
|
1,214
|
|
|
(63,664
|
)
|
|
(10,396
|
)
|
Depreciation and amortization
|
29,255
|
|
|
4,148
|
|
|
(4,842
|
)
|
|
28,561
|
|
Capital expenditures
|
12,542
|
|
|
1,274
|
|
|
(119
|
)
|
|
13,697
|
|
19. Legal Proceedings
The final outcome of any current or future litigation or governmental or internal investigations cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be estimated.
Mednet Settlement
In the third quarter of 2017, a settlement was reached with the selling stockholder of Mednet Healthcare Technologies, Inc., Heartcare Corporation of America, Inc., Universal Medical, Inc., and Universal Medical Laboratory, Inc. (collectively, “Mednet”), whereby 79,333 shares of BioTelemetry common stock with a fair value of $2.8 million were returned to us. These shares were part of the
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
consideration paid in the acquisition of Mednet and had been subject to certain terms and conditions set forth in the Stock Purchase Agreement (the “Mednet Agreement”). In accordance with the terms of the Mednet Agreement, we sought indemnification for alleged breaches of certain representations and warranties. Accordingly, in 2016 we recorded a $1.4 million indemnification asset. However, as a result of the settlement’s fair value exceeding the indemnification asset recorded, a gain of $1.3 million was recorded as a component of other non-operating (expense)/income, net in our consolidated statements of operations for the year ended December 31, 2017.
United States Department of Health and Human Services’ Office for Civil Rights Settlement
In 2011, we experienced the theft of two unencrypted laptop computers and, as a result, were required to provide notices under the Health Insurance Portability and Accountability Act Breach Notification Rule to the United States Department of Health and Human Services’ Office for Civil Rights (“OCR”). During the first quarter of 2017, the OCR concluded its investigation into the matter and reached a settlement agreement with us. Per the agreement, we paid the OCR $2.5 million and agreed to submit a two-year corrective action plan. We did not admit any liability or wrongdoing. As a result of the settlement, we recorded a non-operating charge of $2.5 million to other non-operating (expense)/income, net in our consolidated statements of operations for the year ended December 31, 2017.
ZTech, Inc., Biorita LLC, and the Cleveland Clinic Foundation Arbitration
In January 2017, ZTech, Inc., Biorita LLC, and the Cleveland Clinic Foundation (collectively, the “Claimants”) filed an arbitration demand against LifeWatch with the American Arbitration Association. Claimants alleged that LifeWatch violated the 2015 Stock Purchase Agreement for the purchase of FlexLife Health, Inc., a remote INR monitoring business. The demand alleged LifeWatch did not make commercially reasonable efforts to achieve certain conditions precedent and did not have a reasonable basis for terminating the business line. On May 9, 2018, the arbitration panel issued an award including accrued interest against LifeWatch in the amount of $6.0 million. The award liability, plus the accrued interest through July 12, 2017, was recorded as a measurement period adjustment related to our LifeWatch acquisition due to new facts learned that existed as of the acquisition date (see “Note 4. Acquisitions”). The interest accrued since the acquisition date of LifeWatch was recorded as a component of other non-operating (expense)/income, net within our consolidated statements of operations for the year ended December 31, 2018. The total amount of the award and accrued interest was paid in May 2018.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. Quarterly Financial Data (Unaudited)
The following tables summarize the unaudited quarterly financial data for the last two fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
2019
|
|
|
|
|
|
|
|
Total revenue
|
$
|
103,979
|
|
|
$
|
111,803
|
|
|
$
|
111,291
|
|
|
$
|
112,034
|
|
Gross profit
|
64,778
|
|
|
70,240
|
|
|
69,339
|
|
|
69,917
|
|
Net income
|
11,685
|
|
|
8,300
|
|
|
8,283
|
|
|
1,576
|
|
Net income attributable to BioTelemetry, Inc.
|
11,685
|
|
|
8,300
|
|
|
8,283
|
|
|
1,576
|
|
Basic net income per share attributable to BioTelemetry, Inc.
|
$
|
0.35
|
|
|
$
|
0.25
|
|
|
$
|
0.24
|
|
|
$
|
0.05
|
|
Diluted net income per share attributable to BioTelemetry, Inc.
|
$
|
0.32
|
|
|
$
|
0.23
|
|
|
$
|
0.23
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
Total revenue
|
$
|
94,496
|
|
|
$
|
101,360
|
|
|
$
|
100,013
|
|
|
$
|
103,603
|
|
Gross profit
|
58,048
|
|
|
65,755
|
|
|
62,737
|
|
|
63,946
|
|
Net income
|
5,036
|
|
|
10,444
|
|
|
16,001
|
|
|
10,393
|
|
Net income attributable to BioTelemetry, Inc.
|
5,982
|
|
|
10,444
|
|
|
16,001
|
|
|
10,393
|
|
Basic net income per share attributable to BioTelemetry, Inc.
|
$
|
0.18
|
|
|
$
|
0.32
|
|
|
$
|
0.48
|
|
|
$
|
0.31
|
|
Diluted net income per share attributable to BioTelemetry, Inc.
|
$
|
0.17
|
|
|
$
|
0.29
|
|
|
$
|
0.45
|
|
|
$
|
0.29
|
|
21. Subsequent Event
On January 27, 2020, we entered into an Amended and Restated Credit Agreement (the “2020 Credit Agreement”) with Truist Bank (successor to SunTrust Bank) as agent (the “Agent”) for the lenders (the “Lenders”), and as issuing bank and swingline lender, which amends the SunTrust Credit Agreement entered into by the parties on July 12, 2017.
Pursuant to the 2020 Credit Agreement, the Lenders agreed to provide us a $400.0 million senior secured revolving credit facility, which includes a $25.0 million sublimit for the issuance of standby letters of credit and a $40.0 million sublimit for swingline loans. The proceeds of the revolving facility was used to refinance indebtedness under the SunTrust Credit Agreement and to fund working capital and general corporate purposes. We may increase commitments to the revolving facility or establish new incremental term loans at any time on or before the final maturity date of the revolving facility, which is January 27, 2025. Incremental term loans under the 2020 Credit Agreement will be used to fund future acquisitions, working capital and general corporate purposes.