UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 000-55039
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
1000 Cedar Hollow Road #102
Malvern, Pennsylvania
(Address of principal executive offices)
46-2568498
(I.R.S. Employer
Identification No.)
19355
(Zip Code)
(610) 729-7000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
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NASDAQ Global Select Market
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The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $931.4 million based on the closing sale price of the registrant’s
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As of February 15, 2018, 32,531,365 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2018 annual meeting of stockholders, which proxy statement will be filed no later than 120 days after the
close of the registrant’s fiscal year ended December 31, 2017, are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.
BioTelemetry, Inc.
Annual Report on Form 10-K
For The Fiscal Year Ended December 31, 2017
TABLE OF CONTENTS
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Item 16.
Exhibit Index
Signatures
Exhibits and Financial Statement Schedules
Form 10-K Summary
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Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” “BioTelemetry”
and the “Company,” as used in this Annual Report on Form 10-K, refer to BioTelemetry, Inc. and its directly
and indirectly owned subsidiaries as a combined entity, except where otherwise stated or where it is clear
that the terms mean only BioTelemetry, Inc. exclusive of its subsidiaries. We do not use the ® or ™ symbol
in each instance in which one of our registered or common law trademarks appears in this Annual Report
on Form 10-K, but this should not be construed as any indication that we will not assert our rights thereto
to the fullest extent permissible under applicable law.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document includes certain forward-looking statements within the meaning of the “Safe Harbor”
provisions of the Private Securities Litigation Reform Act of 1995 regarding, among other things, our
growth prospects, the prospects for our products and our confidence in our future. These statements may
be identified by words such as “expect,” “anticipate,” “estimate,” “intend,” “plan,” “believe,” “promises”
and other words and terms of similar meaning. Examples of forward-looking statements include statements
we make regarding our ability to increase demand for our products and services, to leverage our Mobile
Cardiac Outpatient Telemetry platform to expand into new markets to grow our market share, our
expectations regarding revenue trends in our segments and the achievement of cost efficiencies through
process improvement and gross margin improvements. Such forward-looking statements are based on
current expectations and involve inherent risks and uncertainties, including important factors that could
delay, divert or change any of these expectations, and could cause actual outcomes and results to differ
materially from current expectations. These factors include, among other things:
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our ability to identify acquisition candidates, acquire them on attractive terms and integrate their
operations into our business, including our recent acquisition of LifeWatch AG (“LifeWatch”);
our ability to educate physicians and continue to obtain prescriptions for our products and
services;
changes to insurance coverage and reimbursement levels by Medicare and commercial payors
for our products and services;
our ability to attract and retain talented executive management and sales personnel;
the commercialization of new competitive products;
our ability to obtain and maintain required regulatory approvals for our products, services and
manufacturing facilities;
changes in governmental regulations and legislation;
our ability to obtain and maintain adequate protection of our intellectual property;
acceptance of our new products and services;
adverse regulatory action;
interruptions or delays in the telecommunications systems that we use;
our ability to successfully resolve outstanding legal proceedings; and
the other factors that are described in “Part I; Item 1A. Risk Factors” of this Annual Report
on Form 10-K.
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We undertake no obligation to publicly update any forward-looking statement, whether as a result
of new information, future events, or otherwise, except as may be required by law.
Item 1. Business
Overview
PART I
BioTelemetry, Inc. provides monitoring services and digital population health management for
healthcare providers, medical device manufacturing and centralized core laboratory services for clinical
research. Since we became focused on cardiac monitoring in 1999, we have developed a proprietary
integrated patient management platform that incorporates a wireless data transmission network, U.S. Food
and Drug Administration (“FDA”) cleared algorithms, medical devices and 24-hour monitoring service
centers.
In July 2017, we acquired LifeWatch, a supplier of mobile cardiac monitoring solutions,
headquartered in Zug, Switzerland with U.S. operations based in Rosemont, IL. We believe the integration
of LifeWatch will create one of the most comprehensive connected healthcare platforms in the world, by
continuing to develop innovative remote cardiac monitoring solutions and delivering those solutions to
meet today’s healthcare challenges. See “Part II; Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations; Recent Developments” and “Part II; Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 3.
Acquisitions” below for further discussions related to this transaction.
BioTelemetry operates under three reportable segments: (1) Healthcare, (2) Research and
(3) Technology. The Healthcare segment, which generated 81% of our revenue in 2017, is focused on the
diagnosis and monitoring of cardiac arrhythmias or heart rhythm disorders. We offer cardiologists and
electrophysiologists, neurologists and primary care physicians a full spectrum of solutions which provides
them with a single source of cardiac monitoring services. These services range from the differentiated
mobile cardiac telemetry service (“MCT”), to event, traditional Holter, extended-wear Holter, Pacemaker
and International Normalized Ratio (“INR”) monitoring. The Research segment, which generated 14% of
our revenue in 2017, is engaged in central core laboratory services providing cardiac monitoring, imaging
services, scientific consulting and data management services for drug and medical device trials. The
Technology segment, which generated 5% of our revenue in 2017, focuses on the development,
manufacturing, testing and marketing of cardiovascular and blood glucose monitoring devices to medical
companies, clinics and hospitals. See “Part II; Item 8. Financial Statements and Supplementary Data;
Notes to Consolidated Financial Statements; Note 17. Segment Information” below for further
discussions related to segments.
As of July 31, 2013, we reorganized to create a holding company structure. CardioNet, Inc., which
was previously the public company, became a wholly owned subsidiary of a newly formed entity,
BioTelemetry, Inc., a Delaware corporation, and all the outstanding shares of CardioNet, Inc. were
exchanged, on a one-for-one basis, for shares of BioTelemetry, Inc. Our new holding company began
trading on August 1, 2013 on the NASDAQ Global Select Market under our same symbol “BEAT.”
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Business Strategy
Our goals are to solidify our position as the leading provider of outpatient cardiac monitoring
services, expand our presence in the research market and leverage our monitoring platform in new markets.
The key elements of the business strategy by which we intend to achieve these goals include:
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Increase Demand for Our Comprehensive Cardiac Monitoring Solutions. We believe that
we can increase demand for our comprehensive portfolio of outpatient cardiac monitoring
solutions by educating cardiologists, electrophysiologists and neurologists on the benefits of
using mobile cardiac telemetry to meet their arrhythmia monitoring needs, stressing the
increased diagnostic yield and their ability to use the clinically significant data to make timely
interventions and guide more effective treatments.
• Expand Our Presence in the Research Market. In December 2010, we entered the core lab
services business through our acquisition of Agility Centralized Research. We later were able
to expand our presence in clinical research with our acquisition of Cardiocore Lab, LLC
(“Cardiocore”) in August 2012 and our purchase of the assets of RadCore Lab, LLC (“RadCore”)
in June 2014. In 2016, we further expanded our core lab capabilities with the acquisition of
VirtualScopics, Inc. (“VirtualScopics”), a leading provider of clinical trial imaging solutions.
We continue to focus our efforts on increasing our presence in the research market and on
becoming a preferred global provider as it provides us with the ability to diversify our service
offerings.
• Leverage Our Core Competencies to New Market Opportunities. We believe our core
competencies can be leveraged for applications in multiple markets. While our initial focus has
been on arrhythmia diagnosis and monitoring, we intend to expand into new market areas that
require outpatient or ambulatory monitoring and management. In line with this goal, we acquired
Telcare, the first company to receive FDA clearance for a cellular-enabled Blood Glucose
Monitoring (“BGM”) system, increasing our presence in the large and rapidly growing digital
population health management market.
Healthcare
The Healthcare segment, or BioTel Heart, operating under the legal entities of CardioNet, LLC
(“CardioNet”), LifeWatch and Heartcare Corporation of America, Inc. (“Heartcare”), is focused on the
diagnosis and monitoring of cardiac arrhythmias, or heart rhythm disorders. We provide cardiologists,
electrophysiologists, neurologists and primary care physicians who prefer to use a single source of cardiac
monitoring services with a full spectrum of solutions, ranging from our differentiated MCT services to
event to extended wear and Holter monitoring and traditional Holter monitoring. We also provide Pacemaker
and INR monitoring.
Our MCT services incorporate a lightweight patient-worn sensor attached to electrodes that capture
two-channel electrocardiogram (“ECG”) data, measuring electrical activity of the heart, on a compact
wireless handheld monitor. The monitor analyzes incoming heartbeat-by-heartbeat information from the
sensor on a real-time basis by applying proprietary algorithms designed to detect arrhythmias. The monitor
can detect an arrhythmic event even in the absence of symptoms noticed by the patient. When the monitor
detects an arrhythmic event, it automatically transmits the ECG to our monitoring centers. At our monitoring
centers, which operate 24/7, experienced certified cardiac monitoring specialists analyze the sent data,
respond to urgent events and report results in the manner prescribed by the physician. The MCT devices
employ two-way wireless communications, enabling continuous transmission of patient data to the
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monitoring centers and permitting physicians to remotely adjust monitoring parameters and request previous
ECG data from the memory stored in the monitor. The MCT devices have the capability of storing 30 days
of continuous ECG data, in contrast to a maximum of 10 minutes for a typical event monitor and a maximum
of 24 hours for a typical Holter monitor. In 2016, we obtained FDA approval of our next generation MCT
in a patch form factor. The MCT patch is a four-lead, two-channel system which provides the same best
in class technology as the current MCT, in a more convenient form factor. The MCT patch was commercially
launched in limited accounts during 2017, with a full launch expected in the first quarter of 2018.
Our event monitoring services provide physicians with the flexibility to prescribe wireless event
monitors, digital loop event monitors, memory loop event monitors and non-loop event monitors. Event
data is transmitted, either through automatic transmission of event data with wireless event monitors or
through telephonic transmission of stored event data with our traditional event monitors, to one of our
monitoring centers where our trained cardiac technicians analyze the data.
Traditional Holter and extended-wear Holter monitors store an image of the electrical impulses of
every heartbeat or irregularity in digital format on a compact memory card. The memory card is mailed
or the data is sent electronically through a secure web transfer to one of our Holter labs, where our trained
cardiac technicians analyze the data. Our next generation Holter monitor, the CardioKey™ and ePatch™
are small, lightweight cardiac monitors, which can continuously store up to 7-14 days of cardiac images.
We market our services throughout the United States and receive reimbursement for the monitoring
provided to patients from Medicare and other third-party commercial payors.
Research
The Research segment, or BioTel Research, operating under the legal entities of Cardiocore and
VirtualScopics, is engaged in central core laboratory services that provide cardiac monitoring, imaging
services, scientific consulting and data management services for drug, medical treatment and device trials.
We entered the research field through the acquisition of Agility Centralized Research in December 2010,
and later expanded our presence with the asset acquisition of Cardiocore in August 2012 and RadCore in
June 2014. The centralized services include ECG, Holter monitoring, ambulatory blood pressure
monitoring, echocardiography, multigated acquisition scan (“MUGA”), a full range of imaging services,
protocol development, expert reporting and statistical analysis. Our imaging services offerings were
bolstered by our 2016 acquisition of VirtualScopics, a leading provider of clinical trial imaging solutions
and services in the cardiovascular, oncology, musculoskeletal and neurologic therapeutic areas. Through
these acquisitions, we gained global experience in central core laboratory services, which includes
experience in Phase I-IV and Thorough QT Trials. We also provide a full range of support services that
include project coordination, setup and management, equipment rental, data transfer, processing, analysis
and 24/7 customer support and site training. Our data management systems enable complete customization
for sponsors’ preferred data specifications, and our web service, CardioPortal™, provides access to rich
data from any web browser, without client-side plug-ins. Our primary customers are pharmaceutical
companies and contract research organizations. We operate locations domestically, which support both
domestic and international operations.
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Technology
The Technology segment, operating under the legal entities of Braemar Manufacturing, LLC
(“Braemar”), Telcare (“Telcare”) and to a lesser extent, LifeWatch, focuses on the manufacturing,
engineering and development of non-invasive cardiac monitors for leading healthcare companies
worldwide. We have been able to build successful customer relationships by providing reliable, quality
products and engineering services. We offer contract manufacturing services, developing and producing
devices to the specific requirements set by customers.
Braemar manufactures various devices including, but not limited to, cardiac event monitors, digital
Holter monitors and MCT monitors utilized by our Healthcare segment. Our facilities located in San Diego,
CA and Eagan, MN are responsible for research and product development under FDA guidelines.
Manufacturing of devices is performed in our Eagan, MN facility. We believe that our manufacturing
facilities will be sufficient to meet our manufacturing needs for the foreseeable future.
In addition, in December 2016, we acquired Telcare, the first company to receive FDA clearance
for a cellular-enabled BGM system. This wireless BGM system transmits real-time results to a cloud-based
analytical engine, which synthesizes the data, monitors trends and provides caregivers with critical
information about the patients’ health status and the potential need to intervene.
We believe our manufacturing operations are in compliance with regulations mandated by the
applicable governing bodies. We are subject to unannounced inspections by the FDA and we successfully
completed routine inspections by the FDA in October 2017 (Eagan, MN), May 2016 (Rosemont, IL) and
February 2016 (Concord, MA), with no significant findings noted or warnings issued. Our Eagan, MN,
San Diego, CA and Concord, MA facilities are ISO 13485 certified and registered with the FDA. ISO 13485
is a quality system standard used by medical companies providing design, development, manufacturing,
installation and servicing, and is the basis for acquiring European Conformity Marking (“CE Marking”)
for medical device product distribution in the European Union. Many of our devices also carry a CE
Marking.
There are a number of critical components and sub-assemblies in the devices. The vendors for these
materials are qualified through stringent evaluation and testing of their performance. We implement a strict
no-change policy with our contract manufacturers to ensure that no components are changed without our
approval.
Research and Development
For the years ended December 31, 2017, 2016 and 2015, we spent $11.1 million, $8.4 million and
$7.1 million, respectively, on research and development activities focused on developing new products and
enhancements to our existing products. We intend to continue to develop proof of superiority of our
technology through clinical data. The three primary sources of clinical data that we have used to date to
illustrate the clinical value of MCT include: (i) a randomized 300-patient clinical study; (ii) our cumulative
actual monitoring experience from our databases; and (iii) numerous other published studies.
We sponsored and completed a 17-center, 300-patient randomized clinical trial in March 2007. We
believe this study, at that time, represented the largest randomized study comparing two non-invasive
arrhythmia monitoring methods. The study was designed to evaluate patients who were suspected to have
an arrhythmic cause underlying their symptoms but who were a diagnostic challenge given that they had
already had a non-diagnostic 24-hour Holter monitoring session or four hours of telemetry monitoring
within 45 days prior to enrollment. Patients were randomized to either MCT or to a loop event monitor
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for up to 30 days. Of the 300 patients who were randomized, 266 patients who completed a minimum of
25 days of monitoring were analyzed (134 patients using MCT and 132 patients using loop event monitors).
The study specifically compared the success of MCT against loop event monitors in detecting
patients with clinically significant arrhythmias and demonstrated the superiority of MCT for confirming
the diagnosis of these types of arrhythmias. The study also demonstrated the advantage of using MCT
compared to the loop event monitor in the detection of asymptomatic atrial fibrillation or flutter. Diagnosis
and treatment of atrial fibrillation is important because it can lead to many other medical problems, including
stroke. The study concluded that MCT provided a significantly higher diagnostic yield, in detecting an
arrhythmic event in patients with symptoms of cardiac arrhythmia, compared to traditional loop event
monitoring, including such monitoring designed to automatically detect certain arrhythmias.
In addition to the aforementioned 300-patient randomized clinical trial, MCT has been cited and
referenced in over 40 publications and abstracts, which lends support to its clinical efficacy.
Sales and Marketing
We market our cardiac monitoring solutions through a direct sales force primarily to cardiologists,
electrophysiologists and neurologists who are the physician specialists who most commonly diagnose and
manage patients with arrhythmias. We sponsor peer-to-peer educational events and participate in targeted
public relations opportunities. We are a leading member of the Remote Cardiac Service Provider Group.
We market our research services to pharmaceutical companies, medical device companies, contract research
organizations and academic research organizations. Cardiocore is a founding member and the first cardiac
core lab to join the Cardiac Safety Research Consortium (“CSRC”). Through the CSRC, we are able to
network with representatives of major pharmaceutical companies, as well as discuss key cardiac safety
issues during the drug development process. Through the 2016 acquisition of VirtualScopics, we have
broadened our research service offerings, allowing us to more favorably compete for research studies
requiring a wider range of research services. We market our manufactured products to physicians, hospitals
and other cardiac monitoring providers.
We attend trade shows and medical conferences to promote our various product and service offerings.
The trade shows and conferences we attend are related to organizations such as: the Heart Rhythm Society,
American College of Cardiology, Society of Thoracic Surgeons, European Society of Cardiology, American
Heart Association and the American Telemedicine Association. We also attend the Medica, DIA and
Partnerships in Clinical Trials trade shows as well as the annual Boston Atrial Fibrillation Conference.
Healthcare Reimbursement
In the Healthcare segment, services are billed to government and commercial payors using specific
codes describing the services. Those codes are part of the Commercial Procedural Terminology (“CPT”)
coding system which was established by the American Medical Association (“AMA”) to describe services
provided by physicians and other suppliers. Physicians select the code that best describes the medical
services being prescribed. Approximately 34% of our total revenue is subject to reimbursement from the
Medicare program, a federal government health insurance program administered by the Centers for
Medicare and Medicaid Services (“CMS”), at rates that are set nationally and adjusted for certain regional
indices.
In addition to receiving reimbursement from Medicare, we enter into contracts with commercial
payors to receive reimbursement at specified rates for our technical services. Such contracts typically
provide for an initial term of between one and three years and provide for automatic renewal thereafter.
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Either party can typically terminate these contracts by providing between 60 and 120 days’ prior notice to
the other party at any time following the end of the initial term of the agreement. The contracts provide
for an agreed upon reimbursement rate, which in some instances is tied to the rate of reimbursement we
receive from Medicare.
In addition to receiving reimbursement from government and commercial payors, we have direct
arrangements with physicians who may purchase our monitoring services and then submit claims for these
services directly to commercial and government payors. In some cases, patients pay for their service out-
of-pocket.
Competition
Although we believe that we have a leading market share in the mobile cardiac monitoring industry,
the market in which our Healthcare segment operates is fragmented and characterized by a large number
of smaller regional service providers. Additionally, several larger healthcare companies offer certain cardiac
monitoring solutions, primarily Holter monitors. We believe that the principal competitive factors that
impact the success of our cardiac monitoring solutions include some or all of the following:
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quality of our algorithms used to detect symptoms;
quality of clinical data;
ease of use and reliability of cardiac monitoring solutions for patients and physicians;
technology performance, innovation, flexibility and range of application;
timeliness and clinical relevance of new product introductions;
quality and availability of customer support services;
size, experience, knowledge and training of sales and marketing staff;
reputation;
relationships with referring physicians, hospitals, managed care organizations and other third-
party payors;
reporting capabilities;
spectrum of solutions, ranging from our differentiated MCT services to event and Holter
monitoring, making us a single source for cardiac monitoring services; and
perceived value.
We believe that we compete favorably based on the factors described above. However, our industry
is evolving rapidly and is becoming increasingly competitive, and the basis on which we compete may
change over time. In addition, if companies with substantially greater resources than ours enter our market,
we will face increased competition.
Our Research segment competes directly with other core labs as well as contract research
organizations that offer core lab services. We believe that we compete favorably based on our comprehensive
cardiac and imaging service offerings, the scale of our operation and our ability to support the entire life
cycle of new drug development.
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Our Technology segment competes directly with other original equipment manufacturers. We
believe that we compete favorably based on our suite of quality products and innovative solutions, our
superior customer service and our extensive industry experience.
Intellectual Property
We rely on a combination of intellectual property laws, non-disclosure agreements and other
measures to protect our proprietary rights. We attempt to protect our intellectual property rights by filing
patent applications for new features and products we develop. In addition, we also seek to maintain certain
intellectual property and proprietary know-how as trade secrets, and generally require our partners to execute
non-disclosure agreements prior to any substantive discussions or disclosures of our technology or business
plans. Our business and competitive positions are dependent in part upon our ability to protect our
proprietary technology and our ability to avoid infringing the patents or proprietary rights of others.
We hold patents in the United States as well as many international jurisdictions on our products,
processes and related technologies. In furtherance of our overall global intellectual property strategy, we
also have patent applications currently on file in the United States and internationally. While we have
several patents expiring between 2018 and 2032, including patents that relate, in part, to our key products,
we do not believe such expirations will have a material impact on our ability to compete in the short term
since our technology is typically covered by several patents, creating a system of protected technology.
Our trademarks, certain of which are material to our business, are registered or otherwise legally
protected in the United States and in certain foreign countries and include, among others, the registered
trademarks CardioNet®, BioTelemetry® and LifeWatch® and the unregistered trademarks Mobile Cardiac
Outpatient Telemetry™, MCOT™, CardioPortal™, BioTel Heart™, BioTel Care™, BioTel Research™
and BioTel Technology™. We also have a significant amount of copyright-protected materials.
Government Regulation
The health care industry is highly regulated, with no guarantee that the regulatory environment in
which we operate will not change significantly and adversely in the future. We believe that health care
legislation, rules, regulations and interpretations will change, and we expect to modify our agreements and
operations in response to these changes.
U.S. Food and Drug Administration. The medical devices that we use to provide patient monitoring
services are regulated by the FDA under the Federal Food, Drug, and Cosmetic Act. The basic regulatory
requirements that manufacturers of medical devices distributed in the United Sates must comply with are
Premarket Notification 510(k), unless exempt, or Premarket Approval, establishment registration, medical
device listing, quality system regulation, labeling requirements and medical device reporting.
The algorithms we use in the MCT service maintain FDA 510(k) clearance as a Class II device
(“510(k) Clearance”). On October 28, 2003, the FDA issued a guidance document entitled: “Class II Special
Controls Guidance Document: Arrhythmia Detector and Alarm.” In addition to conforming to the general
requirements of the Federal Food, Drug, and Cosmetic Act, including the Premarket Notification
requirements described above, all of our cardiac related 510(k) submissions address the specific issues
covered in this special controls guidance document. The algorithms we use in the BGM service also
maintain FDA 510(k) Clearance as a Class II device.
Failure to comply with applicable regulatory requirements can result in enforcement action by the
FDA, which may include certain sanctions, such as fines, injunctions and civil penalties; recall or seizure
of our devices and intellectual property; operating restrictions; partial suspension or total shutdown of
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production; withdrawal of 510(k) Clearance of new components or algorithms; withdrawal of 510(k)
Clearance already granted to one or more of our existing components or algorithms; and criminal
prosecution.
CE Marking. Medical devices distributed within the European Economic Area require a CE
Marking. ISO 13485 is a quality system standard used by medical companies providing design,
development, manufacturing, installation and servicing, and is the basis for acquiring CE Marking for
medical device product distribution in the European Union. Failure to maintain appropriate CE Marking
could have an adverse effect on our ability to sell our devices within the European Union.
Health Care Fraud and Abuse. In the United States, there are state and federal anti-kickback laws
that generally prohibit the payment or receipt of kickbacks, bribes or other remuneration in exchange for
the referral of patients or other health care-related business. In addition, federal law (e.g., the “Stark” law)
and some state laws prohibit the existence of certain financial relationships between referring physicians
and health care providers and suppliers unless those relationships meet the requirements of specific
exceptions to the law. Anti-kickback laws constrain our sales, marketing and promotional activities by
limiting the kinds of financial arrangements we may have with physicians, medical centers and others in
a position to purchase, recommend or refer patients for our cardiac monitoring services or other products
or services we may develop and commercialize. Due to the breadth of some of these laws, it is possible
that some of our current or future practices might be challenged under one or more of these laws.
Furthermore, federal and state false claims laws prohibit anyone from presenting, or causing to be
presented, claims for payment to third-party payors that are false or fraudulent. Violations may result in
substantial civil penalties, including treble damages, and criminal penalties, including imprisonment, fines
and exclusion from participation in federal health care programs. The Federal False Claims Act also contains
“whistleblower” or “qui tam” provisions that allow private individuals to bring actions on behalf of the
government alleging that the defendant has defrauded the government. Various states have enacted laws
modeled after the Federal False Claims Act, including “qui tam” provisions, and some of these laws apply
to claims filed with commercial insurers. Any violations of anti-kickback and false claims laws could have
a material adverse effect on our business, financial condition and results of operations.
The Patient Protection and Affordable Care Act. On March 23, 2010, the Patient Protection and
Affordable Care Act was signed into law, and on March 30, 2010, the Health Care and Education
Reconciliation Act of 2010 was signed into law. Together, the two measures, collectively known as the
Affordable Care Act, make the most sweeping and fundamental changes to the United States health care
system since the creation of Medicare and Medicaid. The Affordable Care Act expanded Medicaid
eligibility, required most individuals have health insurance or pay a penalty, imposed new requirements
for health plans and insurance policy standards, established health insurance exchanges, changed Medicare
payment systems to encourage more cost-effective care and new expanded tools to address fraud and abuse
and required manufacturers of medical devices and other products reimbursed by Medicare to report
annually to the government certain payments to physicians and teaching hospitals.
As a result of the passage of the Affordable Care Act, manufacturers of certain medical devices are
subject to an excise tax, applicable to sales of taxable medical devices beginning January 1, 2013. Several
devices that are manufactured by our Technology segment are subject to these taxes. The tax equals 2.3%
of the sale price of the applicable medical device. As a manufacturer, we are responsible for remitting these
taxes to the federal government. The Consolidated Appropriations Act of 2016, enacted on December 18,
2015, included a moratorium on the medical devices tax commencing on January 1, 2016 and ending on
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December 31, 2017. Budget legislation signed in January 2018 extended that moratorium through
December 31, 2019.
Health Insurance Portability and Accountability Act of 1996. The Health Insurance Portability and
Accountability Act (“HIPAA”) was enacted by the United States Congress in 1996. Numerous state and
federal laws govern the collection, dissemination, use and confidentiality of patient and other health
information, including the administrative simplification and privacy provisions of HIPAA. Historically,
state law has governed confidentiality issues, and HIPAA preserves these laws to the extent they are more
protective of a patient’s privacy or provide the patient with greater access to his or her health information.
As a result of the implementation of the HIPAA regulations, many states are considering revisions to their
existing laws and regulations that may or may not be more stringent or burdensome than the federal HIPAA
provisions. HIPAA applies directly to covered entities, which include health plans, health care
clearinghouses and many health care providers. The HIPAA statute, as amended by the Health Information
Technology for Economic and Clinical Health (“HITECH”) Act in 2009, and its implementation rules are
concerned primarily with the privacy of protected health information when it is used and/or disclosed; the
confidentiality, integrity and availability of electronic health information; notifying federal regulators and
impacted patients in the event of a breach of unsecured protected health information; and the content and
format of certain identified electronic health care transactions. The laws governing health care information
privacy and security impose civil and criminal penalties for their violation and can require substantial
expenditures of financial and other resources for information technology system modifications and for
ongoing operational compliance.
Medicare. Medicare is a federal program administered by CMS and its Medicare administrative
contractors. The Medicare program provides qualified persons with health care benefits that cover the
major costs of medical care within prescribed limits, subject to certain deductibles and co-payments. The
Medicare program has established guidelines for local and national coverage determinations and
reimbursement of certain equipment, supplies and services, which are subject to change. The methodology
for determining coverage status and the basis and amount of Medicare reimbursement varies based upon,
among other factors, the setting in which a Medicare beneficiary receives health care items and services.
The Medicare program is subject to statutory and regulatory changes, retroactive and prospective
rate adjustments, administrative rulings, interpretations of policy, Medicare administrative contractor
determinations and government funding restrictions. All of these policies may materially increase or
decrease the rate of program payments to health care facilities and other health care suppliers and
practitioners, including those paid for our cardiac monitoring services. Any changes in federal legislation,
regulations or other policies affecting Medicare coverage or reimbursement relative to our cardiac
monitoring services could have an adverse effect on our performance.
Certain of our facilities are enrolled in Medicare as Independent Diagnostic Testing Facilities
(“IDTFs”). An IDTF is defined by CMS as an entity independent of a hospital or physician’s office in
which diagnostic tests are performed by licensed or certified non-physician personnel under appropriate
physician supervision. Medicare has set very detailed performance standards that every IDTF must meet
in order to obtain or maintain its billing privileges, including requirements to, among other things, operate
in compliance with all applicable federal and state licensure and regulatory requirements for the health and
safety of patients; maintain a physical facility on an appropriate site meeting specific criteria; have a
comprehensive liability insurance policy of at least $0.3 million per location; disclose certain ownership
information; have its testing equipment calibrated and maintained in accordance with specific standards;
have technical staff on duty with the appropriate credentials to perform tests; and permit on-site inspections.
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These requirements are subject to change. We believe that our facilities are in compliance with the IDTF
standards.
Environmental Regulation. We use materials and products regulated under environmental laws,
primarily in the manufacturing and sterilization processes. While it is difficult to quantify, we believe the
ongoing cost of compliance with environmental protection laws and regulations will not have a material
impact on our business, financial position or results of operations.
Supply Chain Diligence and Transparency
Section 1502 of the Dodd Frank Wall Street Reform and Consumer Protection Act was adopted to
further the humanitarian goal of ending the violent conflict and human rights abuses in the Democratic
Republic of the Congo and adjoining countries (“DRC”). This conflict has been partially financed by the
exploitation and trade of tantalum, tin, tungsten and gold (so called “conflict minerals”) that originate from
mines or smelters in the region. United States Securities and Exchange Commission (“SEC”) rules adopted
in August 2012 under Section 1502 require reporting companies to disclose annually on Form SD whether
any such minerals that are necessary to the functionality or production of products they manufactured, or
for which they contracted the manufacture, during the prior calendar year did, in fact, originate in the DRC
and, if so, if the related revenue was used to support the conflict and/or abuses.
Some of the products we manufacture may contain tantalum, tin, tungsten and/or gold.
Consequently, in compliance with SEC rules, we have adopted a policy on conflict minerals, which can be
found on our website, and have implemented a supply chain due diligence and risk mitigation process with
reference to the Organization for Economic Cooperation and Development (“OECD”) guidance approved
by the SEC to assess and report annually whether our products are “conflict free.”
We support efforts to end the violence and human rights abuses in the mining of certain minerals
in the DRC. We expect our suppliers to comply with the OECD guidance and industry standards and to
ensure that their supply chain conforms to our policy and the OECD guidance. We will mitigate identified
risks by working directly with our suppliers; however, we may need to alter our sources of supply or modify
our product design if circumstances require. We may incur certain costs in order to comply with these
disclosure requirements, including for due diligence to determine the source of the subject minerals used
in our products and other potential changes to products, processes or sources of supply as a consequence
of such verification activities. In addition, these rules could adversely affect the sourcing, supply and
pricing of materials used in our products throughout the supply chain beyond our control, whether or not
the subject minerals are “conflict free.”
Product Liability and Insurance
The design, manufacture and marketing of medical devices and services of the types we produce
entail an inherent risk of product liability claims. In addition, we provide information to health care providers
and payors upon which determinations affecting medical care are made, and claims may be made against
us resulting from adverse medical consequences to patients resulting from the information we provide. To
protect ourselves from product liability claims, we maintain professional liability and general liability
insurance on a “claims made” basis. Insurance coverage under such policies is contingent upon a policy
being in effect when a claim is made, regardless of when the events which caused the claim occurred.
While, as of the date of this Annual Report on Form 10-K, a material product liability claim has never been
made against us and we believe our insurance policies are adequate in amount and coverage for our current
operations, there can be no assurance that the coverage maintained by us is sufficient to cover all future
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claims. In addition, there can be no assurance that we will be able to obtain such insurance on commercially
reasonable terms in the future.
Employees
As of December 31, 2017, we employed approximately 1,600 employees. None of our employees
are represented by a collective bargaining agreement. We consider our relationship with our employees to
be good.
Available Information
We file electronically with the SEC our annual reports on Form 10-K, quarterly reports on Form 10-
Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”). We make these reports available on
our website at www.gobio.com, free of charge. Copies of these reports are made available as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Further
copies of these reports are located at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the
SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information
statements, and other information regarding our filings, at www.sec.gov.
Item 1A. Risk Factors
The factors discussed below are cautionary statements that identify important factors and risks that
could cause actual results to differ materially from those anticipated by the forward-looking statements
contained in this Annual Report on Form 10-K. For more information regarding the forward-looking
statements contained in this report, see the Table of Contents of this Annual Report on Form 10-K. You
should carefully consider the risks and uncertainties described below, together with all of the other
information included in this Annual Report on Form 10-K, in considering our business and prospects. The
risks and uncertainties described below are not the only ones facing BioTelemetry. Additional risks and
uncertainties not presently known to us may also impair our business operations. The occurrence of any
of the following risks could affect our business, liquidity, results of operations, financial condition or cash
flows.
Our businesses and those of many of our clients have been and continue to be subject to increased
legislation and regulatory scrutiny, and we face the risk of changes to this regulatory environment and
business in the future.
U.S. income tax reform efforts could have a material impact on our business. On December 22,
2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA enacts broad changes to the
existing U.S. federal income tax code, including reducing the federal corporate income tax rate from 35%
to 21% beginning in 2018, amongst many other complex provisions. The ultimate impact of such tax
reforms may differ from our current estimates due to changes in interpretations and assumptions made by
us as well as the issuance of any further regulations or guidance that may alter the operation of the U.S.
federal income tax code. Various uncertainties also exist in terms of how U.S. states and any foreign
countries within which we operate will react to these U.S. federal income tax reforms, which could have
additional impacts on our business.
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Reimbursement by Medicare is highly regulated and subject to change and our failure to comply with
applicable regulations could decrease our revenue, subject us to penalties or adversely affect our results
of operations.
The Medicare program is administered by CMS, which imposes extensive and detailed requirements
on medical product and services providers, including, but not limited to, rules that govern how we structure
our relationships with physicians, how and when we submit reimbursement claims, how we operate our
monitoring centers and how and where we provide our arrhythmia monitoring solutions. Our failure to
comply with applicable Medicare rules could result in the discontinuation of our reimbursement under the
Medicare payment program, a requirement to return funds already paid to us, civil monetary penalties,
criminal penalties and/or exclusion from the Medicare program.
Changes in the reimbursement rate that commercial payors and Medicare will pay for our products and
services could adversely affect our revenue.
We receive reimbursement for our products and services from commercial payors and from Medicare
administrative contractors with jurisdiction in the state where the services are performed. In addition, our
prescribing physicians receive reimbursement for professional interpretation of the information provided
by our products and services from commercial payors or Medicare. Average commercial reimbursement
rates have declined over a three and five year period. When commercial payors combine their operations,
the combined company may elect to reimburse for our products and services at the lowest rate paid by any
of the participants in the consolidation. If one of the payors participating in the consolidation does not
reimburse for one of our products or services, the combined company may elect not to reimburse for such
product or service. Additionally, commercial payors can typically terminate these contracts by providing
between 60 and 120 days’ prior notice at any time following the end of the initial term of the agreement.
In addition, CMS may reduce the reimbursement rate for our services, as it has in the past. CMS updates
the reimbursement rate via the Medicare physician fee schedule annually. Furthermore, CMS has adopted
a complex new system for reimbursing Medicare physician services as required by the Medicare Access
and CHIP Reauthorization Act of 2015. Under the new program, which began January 1, 2017, physicians
will either report under the Merit-based Incentive Payment System or an Advanced Alternative Payment
Model, and their 2017 performance will impact 2019 rates. CMS published a final rule on November 16,
2017, modifying program requirements for performance year 2018. The rule designates use of certain
patient-generated health data with an active feedback loop as a “high” weighted activity for purposes of
the Advancing Care Information bonus. We cannot predict the impact of this new framework on
reimbursement for our services. A decrease in Medicare or commercial reimbursement rates or termination
of commercial payor contracts would adversely affect our financial results.
The operation of our monitoring centers is subject to rules and regulations governing IDTFs and state
licensure requirements; failure to comply with these rules could prevent us from receiving reimbursement
from Medicare and some commercial payors.
We have several monitoring centers throughout the United States that analyze the data obtained
from cardiac monitors and report the results to physicians. In order for us to receive reimbursement from
Medicare and some commercial payors, our monitoring centers must be certified as IDTFs. Certification
as an IDTF requires that we follow strict regulations governing how our monitoring centers operate, such
as requirements regarding the experience and certifications of the technicians who review data transmitted
from our monitors. These rules and regulations vary from location to location and are subject to change.
If they change, we may have to change the operating procedures at our monitoring centers, which could
increase our costs significantly. If we fail to obtain and maintain IDTF certification, our services may no
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longer be reimbursed by Medicare and some commercial payors, which could have a material adverse
impact on our business.
Our failure to maintain accreditation could impact our DMEPOS operations.
Accreditation is required by most of our managed care payors and became a mandatory requirement
for all Medicare durable medical equipment, prosthetics, orthotics and supplies (“DMEPOS”) providers
effective October 1, 2009. In 2016, we acquired Telcare, a diabetes care management company. In 2017,
Telcare completed a nationwide accreditation renewal process conducted by the Healthcare Quality
Association on Accreditation, which renewed our accreditation for another three years. The Company will
undergo the next survey cycle in 2020. If we lose accreditation, our failure to maintain accreditation could
have an adverse effect on our business, financial condition, results of operations, cash flow, capital resources
and liquidity.
Failure to appropriately track and report certain payments to physicians and teaching hospitals may
violate certain federal reporting laws and subject us to fines and penalties.
Section 6002 of the Affordable Care Act requires certain medical device manufacturers that produce
devices covered by the Medicare and Medicaid programs to report annually to the government certain
payments to physicians and teaching hospitals. If we fail to appropriately track and report such payments
to the government, we could be subject to civil fines and penalties, which could adversely affect the results
of our operations.
Audits or denials of our claims by government agencies and private payors could reduce our revenue
and have an adverse effect on our results of operations.
As part of our business operations, we submit claims on behalf of patients directly to, and receive
payments from, Medicare, Medicaid and other third-party payors. We are subject to extensive government
regulation, including requirements for submitting reimbursement claims under appropriate codes and
maintaining certain documentation to support our claims. Medicare contractors and Medicaid agencies
periodically conduct pre-and post-payment reviews and other audits of claims and are under increasing
pressure to more closely scrutinize health care claims and supporting documentation. We have previously
been subject to pre-and post-payment reviews as well as audits of claims under CMS’ Recovery Audit
Program and may experience such reviews and audits of claims in the future. Such reviews and similar
audits of our claims could result in material delays in payment, as well as material recoupments or denials,
which would reduce our net sales and profitability, or result in our exclusion from participation in the
Medicare or Medicaid programs. We are also subject to similar review and audits from private payors,
which may result in material delays in payment and material recoupments and denials. In addition, state
agencies may conduct investigations or submit requests for information relating to claims data submitted
to private payors.
We have a concentrated number of payors and losing one of them would reduce our sales and adversely
affect our business and operating results.
Medicare, our largest payor, represents a significant percentage of our revenue. For the year ended
December 31, 2017, Medicare accounted for approximately 34% of our total revenue. No other payor
accounted for more than 4% of total revenue. Our agreements with commercial payors typically allow
either party to the contract to terminate the contract by providing between 60 and 120 days’ prior written
notice to the other party at any time following the end of the initial term of the contract. Our commercial
payors may elect to terminate or not to renew their contracts with us for any reason and, in some instances,
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can unilaterally change the reimbursement rates they pay. A commercial payor who terminates or does not
renew their contract with us may, or may not, alter their coverage of our services. In the event any of our
key commercial payors terminate their agreements with us, elect not to renew or enter into new agreements
with us upon expiration of their current agreements, or do not renew or establish new agreements on terms
as favorable as are currently contracted, our business, operating results and prospects would be adversely
affected.
Violation of federal and state laws regarding privacy and security of patient information may adversely
affect our business, financial condition or operations.
The use and disclosure of certain health care information by health care providers and their business
associates have come under increased public scrutiny. Federal standards under HIPAA establish rules
concerning how individually-identifiable health information may be used, disclosed and protected.
Historically, state law had governed confidentiality issues, and HIPAA preserves these laws to the extent
they are more protective of a patient’s privacy or provide the patient with more access to his or her health
information. Additionally, HITECH and associated changes to HIPAA impose additional requirements
relating to the privacy, security and transmission of individually identifiable health information. We must
operate our business in a manner that complies with all applicable laws, both federal and state, and that
does not jeopardize the ability of our customers to comply with all applicable laws. We believe that our
operations are consistent with these legal standards. Nevertheless, these laws and regulations present risks
for health care providers and their business associates that provide services to patients in multiple states.
As we continue to see how government regulators and courts interpret and enforce HIPAA’s requirements,
we may need to adjust our interpretations of these laws and regulations over time. If a challenge to our
activities is successful, it could have an adverse effect on our operations, may require us to forego
relationships with customers in certain states and may restrict the territory available to us to expand our
business. In addition, even if our interpretations of HIPAA and other federal and state laws and regulations
are correct, we could be held liable for unauthorized uses or disclosures of patient information as a result
of inadequate systems and controls to protect this information or as a result of the theft of information by
unauthorized computer programmers who penetrate our network security.
Violation of these laws against us could have a material adverse effect on our business, financial
condition and results of operations. For example, in 2011, we experienced the theft of two unencrypted
laptop computers and, as a result, were required to provide notices under the HIPAA Breach Notification
Rule and were subsequently investigated by the United States Department of Health and Human Services'
Office for Civil Rights (“OCR”). Although we have been in compliance with our obligations stemming
from these incidents, and believe that our operations are consistent with these legal standards imposed by
HIPAA, to avoid the uncertainty of administrative enforcement proceedings or protracted litigation, we
elected to settle the investigation by OCR in April 2017 by paying $2.5 million and entering into a 3-year
corrective action plan. This settlement did not contain any admission of liability by the Company.
The FDA may recommend a different approach to measuring the cardiac impact and safety of drugs as
part of the approval process. Such changes could make the systems and processes of our research segment
obsolete and adversely affect revenue and profitability.
As part of its approval process, the FDA has provided guidance reinforcing the need for cardiac
safety testing of all compounds entering the blood stream. The requirements vary based on the type and
history of each compound. This testing is accomplished by different methods, including cardiac imaging
such as MUGA and ECG analysis, which involves measuring the QT/QTc interval for prolongation. We
function as a core lab and have developed proprietary systems and processes to receive cardiac imaging
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studies and ECGs for analysis. It is possible that, in the future, the FDA may recommend a different
approach for evaluating the cardiac impact and safety of compounds which may diminish the need for a
core lab. This would considerably reduce the value of our existing systems and processes and would
substantially decrease our revenue and profitability in our Research segment.
In December 2015, the FDA published a report which called into question the need for certain QT
studies. In a series of public meetings throughout 2016 discussing the report, FDA speakers indicated that
certain studies were no longer mandatory and that future regulations will include some combination of
traditional study types along with early phase Exposure Response modeling. Further guidance around the
performance of QT studies from the FDA is expected. We cannot assess the impact of this expected guidance
at this time, but it may substantially decrease our revenue and profitability in our Research segment.
We are subject to numerous FDA regulations and decisions and it may be costly to comply with these
regulations and decisions and to develop compliant products and processes.
The devices that we manufacture are classified as medical devices and are subject to extensive
regulation by the FDA. Further, we maintain establishment registration with the FDA as a distributor of
medical devices. FDA regulations govern manufacturing, labeling, promotion, distribution, importing,
exporting, shipping and sale of these devices. Our devices and our arrhythmia detection algorithms have
510(k) Clearance status from the FDA. Modifications to our devices or our algorithms that could
significantly affect safety or effectiveness, or that could constitute a significant change in intended use,
would require a new clearance from the FDA. If in the future we make changes to our devices or our
algorithms, the FDA could determine that such modifications require new FDA clearance, and we may not
be able to obtain such FDA clearances timely, or at all.
We are subject to continuing regulation by the FDA, including quality regulations applicable to the
manufacture of our devices and various reporting regulations, as well as regulations that govern the
promotion and advertising of medical devices. The FDA could find that we have failed to comply with
one of these requirements, which could result in a wide variety of enforcement actions, ranging from a
warning letter to one or more severe sanctions. These sanctions could include fines, injunctions and civil
penalties; recall or seizure of devices; operating restrictions, partial suspension or total shutdown of
production; refusal to grant 510(k) Clearance of new components or algorithms; withdrawing 510(k)
Clearance already granted to one or more of our existing components or algorithms; and criminal
prosecution. Any of these enforcement actions could be costly and significantly harm our business, financial
condition and results of operations.
Our operations and our interactions with our physicians and patients are subject to regulation aimed
at preventing health care fraud and abuse and, if we are unable to fully comply with such laws, we could
face substantial penalties.
Our operations may be directly or indirectly affected by various broad state and federal health care
fraud and abuse laws, including the Federal Healthcare Programs’ Anti-Kickback Statute and the Federal
False Claims Act. For some of our services, we directly bill physicians or other health care entities, that,
in turn, bill payors. Although we believe such payments and practices are proper and in compliance with
laws and regulations, we may be subject to claims asserting that we have violated these laws and regulations.
If our past or present operations are found to be in violation of these laws, we or our officers may be subject
to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment and
exclusion from Medicare and Medicaid program participation. Furthermore, if we knowingly file, or
“cause” the filing of, false claims for reimbursement with government programs such as Medicare and
Medicaid, we may be subject to substantial civil penalties, including treble damages. The Federal False
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Claims Act also contains “whistleblower” or “qui tam” provisions that allow private individuals to bring
actions on behalf of the government alleging that the defendant has defrauded the government. In recent
years, the number of suits brought in the medical industry by private individuals has increased dramatically.
Various states have enacted laws modeled after the Federal False Claims Act, including “qui tam” provisions,
and some of these laws apply to claims filed with commercial insurers. Even if we are not found to have
violated any of these federal or state anti-fraud or false claims acts, the costs of defending these claims
could adversely affect our results of operations.
The medical device industry is the subject of numerous governmental investigations into marketing and
other business practices. These investigations could result in the commencement of civil and/or criminal
proceedings, substantial fines, penalties, and/or administrative remedies, divert the attention of our
management, and have an adverse effect on our financial condition and results of operations.
As mentioned above, we are subject to rigorous regulation by the FDA and numerous other federal,
state and foreign governmental authorities. These authorities have been increasing their scrutiny of our
industry. We occasionally receive subpoenas or other requests for information from state and federal
governmental agencies, including, among others, the United States Department of Justice and the Office
of Inspector General of the U.S. Department of Health and Human Services. These investigations typically
relate primarily to financial arrangements with health care providers, regulatory compliance and product
promotional practices.
We cooperate with these investigations and respond to such requests. However, when an
investigation begins, we cannot predict when it will be resolved, the outcome of the investigation or its
impact on us. An adverse outcome in one or more of these investigations could include the commencement
of civil and/or criminal proceedings, substantial fines, penalties and/or administrative remedies, including
exclusion from government reimbursement programs and entry into Corporate Integrity Agreements with
governmental agencies. In addition, resolution of any of these matters could involve the imposition of
additional and costly compliance obligations. Finally, if these investigations continue over a long period
of time, they could divert the attention of management from the day-to-day operations of our business and
impose significant administrative burdens, including cost, on us. These potential consequences, as well as
any adverse outcome from these investigations or other investigations initiated by the government at any
time, could have a material adverse effect on our financial condition and results of operations.
Our business is subject to the risks of international operations.
Compliance with applicable United States and foreign laws and regulations, such as import and
export requirements, anti-corruption laws, tax laws, foreign exchange controls and cash repatriation
restrictions, data privacy requirements, environmental laws, labor laws and anti-competition regulations,
increases the costs of doing business in foreign jurisdictions. Although we have implemented policies and
procedures to comply with these laws and regulations, a violation by our employees, contractors or agents
could nevertheless occur. In some cases, compliance with the laws and regulations of one country could
violate the laws and regulations of another country. Violations of these laws and regulations could materially
adversely affect our brand, international growth efforts and business.
We also could be affected by other risks associated with international activities including, but not
limited to, economic and labor conditions, increased duties, taxes (including taxes related to our international
operations) and other costs and political instability. Margins on sales of our products in foreign countries,
and on sales of products that include components obtained from foreign suppliers, could be materially
adversely affected by international trade regulations, including duties, tariffs and antidumping penalties.
For the year ended December 31, 2017, our international operations comprised less than 1% of our total
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revenue. We are also exposed to credit and collectability risk on our trade receivables with customers in
certain international markets. There can be no assurance that we can effectively limit its credit risk and
avoid losses.
If we do not obtain and maintain adequate protection for our intellectual property, it may adversely affect
the value of our technology and devices and future revenue and operating income.
Our business and competitive positions are in part dependent upon our ability to protect our
proprietary technology. To protect our proprietary rights, we rely on a combination of trademark, copyright,
patent, trade secret and other intellectual property laws, employment, confidentiality and invention
assignment agreements with our employees and contractors, and confidentiality agreements and protective
contractual provisions with other third parties. We attempt to protect our intellectual property position by
filing trademark applications and United States and international patent applications related to our
proprietary technology, inventions and improvements that are important to the development of our business.
We do not believe that any single patent, trademark or other intellectual property right of ours, or
combination of our intellectual property rights, is likely to prevent others from competing with us using a
similar business model. There are many issued patents and patent applications held by others in our industry
and the electronics field. Our competitors may independently develop technologies that are substantially
similar or superior to our technologies, or design around our patents or other intellectual property to avoid
infringement. In addition, we may not apply for a patent relating to products or processes that are patentable,
we may fail to receive any patent for which we apply or have applied, and any patent owned by us or issued
to us could be circumvented, challenged, invalidated, or held to be unenforceable or rights granted thereunder
may not adequately protect our technology or provide a competitive advantage to us. If a third-party
challenges the validity of any patents or proprietary rights of ours, we may become involved in intellectual
property disputes and litigation that would be costly and time-consuming. All of our patents will eventually
expire. Some of our patents, including patents protecting significant elements of our technology, will expire
between 2018 and 2032, at which point we can no longer enforce these against third parties to prevent them
from making, using, selling, offering to sell or importing our current clinical device. While we have several
patents expiring between 2018 and 2032, including patents that relate, in part, to our key products, our
technology is typically covered by several patents, creating a system of protected technology. The expiration
of our patents could expose us to more competition and have an adverse impact on our business.
Although third parties may infringe on our patents and other intellectual property rights, we may
not be aware of any such infringement, or we may be aware of potential infringement but elect not to seek
to prevent such infringement or pursue any claim of infringement, and the third-party may continue its
potentially infringing activities. Any decision whether or not to take further action in response to potential
infringement of our patent or other intellectual property rights may be based on a variety of factors, such
as the potential costs and benefits of taking such action, and business and legal issues and circumstances.
Litigation of claims of infringement of a patent or other intellectual property rights may be costly and time-
consuming, may divert the attention of key management personnel and may not be successful or result in
any significant recovery of compensation for any infringement or enjoining of any infringing activity.
Litigation or licensing discussions may also involve or lead to counterclaims that could be brought by a
potential infringer to challenge the validity or enforceability of our patents and other intellectual property.
To protect our trade secrets and other proprietary information, we generally require our employees,
consultants, contractors and outside collaborators to enter into written non-disclosure agreements. These
agreements, however, may not provide adequate protection to prevent any unauthorized use,
misappropriation or disclosure of our trade secrets, know-how or other proprietary information. These
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agreements may be breached, and we may not become aware of, or have adequate remedies in the event
of, any such breach. Also, others may independently develop the same or substantially equivalent
proprietary information and techniques or otherwise gain access to our trade secrets.
Our ability to innovate or market our products may be impaired by the intellectual property rights of
third parties.
Our success is dependent, in part, upon our ability to avoid infringing the patents or proprietary
rights of others. The cardiac monitoring industry is characterized by a large number of patents and patent
filings. Competitors may have filed applications for, or have been issued, patents and may obtain additional
patents and proprietary rights related to devices, services or processes that we use to compete. We may
not be aware of all of the patents or patent applications potentially adverse to our interests that may have
been filed or issued to others.
United States patent applications may be kept confidential while pending in the Patent and
Trademark Office. If other companies have or obtain patents relating to our products or services, we may
be required to obtain licenses to those patents or to develop or obtain alternative technology. We may not
be able to obtain any such licenses on acceptable terms, or at all. Any failure to obtain such licenses could
impair or foreclose our ability to make, use, market or sell our products and services.
Based on the fact that we may pose a competitive threat to some companies who own or control
various patents, it is possible that one or more third parties may assert a patent infringement claim seeking
damages and to enjoin the manufacture, use, sale and marketing of our products and services. If a third-
party asserts that we have infringed on its patent or proprietary rights, we may become involved in intellectual
property disputes and litigation that would be costly and time-consuming and could impair or foreclose
our ability to make, use, market or sell our products and services. Lawsuits may have already been filed
against us without our knowledge. Additionally, we may receive notices from other third parties suggesting
or asserting that we are infringing their patents and inviting us to license such patents. We do not believe
that we are infringing on any other party’s patents or that a license to any such patents is necessary. Should
litigation over such patents arise, we intend to vigorously defend against any allegation of infringement.
If we are found to infringe on the patents or intellectual property rights of others, we may be required
to pay damages, stop the infringing activity or obtain licenses or rights to the patents or other intellectual
property in order to use, manufacture, market or sell our products and services. Any required license may
not be available to us on acceptable terms, or at all. If we succeed in obtaining such licenses, payments
under such licenses would reduce any earnings from our products. In addition, licenses may be non-
exclusive and, accordingly, our competitors may have access to the same technology as that which may be
licensed to us. If we fail to obtain a required license or are unable to alter the design of our product candidates
to make a license unnecessary, we may be unable to manufacture, use, market or sell our products and
services, which could significantly affect our ability to achieve, sustain or grow our commercial business.
If we are unable to successfully integrate acquired companies and technology, we may not realize the
benefits anticipated and our future growth may be adversely affected.
We have grown through acquisitions of companies and technology, including our acquisitions of
the assets of the ePatch Division of DELTA in April 2016, VirtualScopics in May 2016, Telcare in December
2016 and LifeWatch in July 2017. Acquisitions involve risks associated with our assumption of the liabilities
of an acquired company, which may be liabilities that we were or are unaware of at the time of the acquisition,
potential write-offs of acquired assets and potential loss of the acquired company’s key employees or
customers. Physician, patient and customer satisfaction or performance problems with an acquired business,
21
technology, service or device could also have a material adverse effect on our reputation. Additionally,
potential disputes with the seller of an acquired business or its employees, suppliers or customers could
adversely affect our business, operating results and financial condition. If we fail to properly evaluate and
execute acquisitions, our business may be disrupted and our operating results and prospects may be harmed.
Furthermore, integrating acquired companies or new technologies into our business may prove more
difficult than we anticipate. We may encounter difficulties in successfully integrating our operations,
technologies, services and personnel with that of the acquired company, and our financial and management
resources may be diverted from our existing operations. Offices in multiple states create a strain on our
ability to effectively manage our operations and key personnel. If we elect to consolidate our facilities, we
may lose key personnel unwilling to relocate to the consolidated facility, may have difficulty hiring
appropriate personnel at the consolidated facility and may have difficulty providing continuity of service
through the consolidation.
The success of our business is partially dependent on our ability to raise capital, and failure to raise the
necessary capital may adversely affect our results of operations, financial condition and stock price.
We believe that our existing cash and cash equivalents, together with our term loan and revolving
credit facility pursuant to our Credit Agreement with SunTrust Bank and Lenders named therein, will be
sufficient to meet our anticipated cash requirements for the foreseeable future. However, our future funding
requirements will depend on many factors, including:
•
•
•
•
•
•
•
•
•
the results of our operations;
the reimbursement rates associated with our products and services;
our ability to secure contracts with additional commercial payors providing for the
reimbursement of our services;
the costs associated with manufacturing and building our inventory of our current and future
generation monitors;
the costs of hiring additional personnel and investing in infrastructure to support future growth;
the costs of undertaking future strategic initiatives, such as acquisitions or joint ventures;
the emergence of competing technologies and products and other adverse market developments;
the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other
intellectual property rights or defending against claims of infringement by others; and
actions taken by the FDA, CMS and other regulatory authorities affecting cardiac monitoring
devices and competitive products.
If we decide to raise additional capital in the future, such capital may not be available on reasonable
terms, or at all. If we raise additional funds by issuing equity securities, dilution to existing stockholders
would result. If we raise additional funds by incurring debt financing, the terms of the debt may involve
significant cash payment obligations as well as covenants and financial ratios that may restrict our ability
to operate our business.
22
We have outstanding debt, and may incur other debt in the future, which could adversely affect our
financial condition, liquidity and results of operations.
As of December 31, 2017, we had outstanding term loan pursuant to our Credit Agreement with
SunTrust Bank and Lenders named therein of $199.4 million, net of $5.6 million of deferred financing
costs. We may borrow additional amounts in the future and use the proceeds from any future borrowing
for general corporate purposes, future acquisitions or expansion of our business.
Our incurrence of this debt, and any increases in our levels of debt, may adversely affect our operating
results and financial condition by, among other things:
•
•
requiring a portion of our cash flow from operations to make payments on this debt; or
limiting our flexibility in planning for, or reacting to, changes in our business and the industry.
Our current credit facility imposes restrictions on us, including restrictions on our ability to create
liens on our assets, incur additional indebtedness, make acquisitions or dispose of assets, and also requires
us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be
affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from
our lender, then, subject to applicable cure periods, our outstanding indebtedness could be declared
immediately due and payable.
Our business depends on our ability to attract and retain talented employees.
Our business is based on successfully attracting and retaining talented employees, including our
executive team. The market for highly-skilled workers and leaders in our industry is extremely competitive.
If we are less successful in our recruiting efforts, or if we are unable to retain key employees, our ability
to develop and deliver successful products and services may be adversely affected.
Our cardiac monitoring and INR testing businesses are dependent upon physicians prescribing our
services and failure to obtain those prescriptions may adversely affect our revenue.
The success of our cardiac monitoring and INR testing businesses are dependent upon physicians
prescribing our services. Our success in obtaining prescriptions will be directly influenced by a number
of factors, including:
•
•
•
•
the ability of the physicians with whom we work to obtain sufficient reimbursement and be paid
in a timely manner for the professional services they provide in connection with the use of our
cardiac monitoring solutions;
our ability to continue to establish ourselves as a comprehensive cardiac monitoring and INR
services provider;
our ability to educate physicians regarding the benefits of our services over alternative diagnostic
monitoring solutions; and
the clinical efficacy of our devices.
If we are unable to educate physicians regarding the benefits of our products and obtain sufficient
prescriptions for our services, revenue from the provision of our cardiac monitoring and INR solutions
could potentially decrease.
23
We may experience difficulty in obtaining reimbursement for our services from commercial payors that
consider our technology to be experimental and investigational, which would adversely affect our revenue
and operating results.
Many commercial payors refuse to enter into contracts to reimburse the fees associated with medical
devices or services that such payors determine to be “experimental and investigational.” Commercial
payors typically label medical devices or services as “experimental and investigational” until such devices
or services have demonstrated product superiority evidenced by a randomized clinical trial. We completed
a clinical trial in March 2007 that showed that MCT provided higher diagnostic yield than traditional loop
event monitoring. Prior to our clinical trial, MCT was labeled “experimental and investigational” by
numerous commercial payors. Since the trial was published in March 2007, we have obtained contracts
with most of these commercial payors that previously labeled MCT as “experimental and investigational.”
We have not obtained contracts with certain remaining commercial payors however, and these payors have
informed us that they do not believe the data from this trial justifies the removal of the experimental
designation. As a result, these commercial payors may refuse to reimburse the technical and professional
fees associated with MCT.
If commercial payors decide not to reimburse our products or services or the related services provided
by physicians, or the rates of such reimbursement change, or if we fail to properly administer claims, our
revenue could be adversely affected.
We have a concentration of risk related to the accounts receivable from Medicare and failure to fully
collect outstanding balances from this customer, or a combination of other customers, may adversely
affect our results of operations.
As of December 31, 2017, we have balances owed to us from one customer, Medicare, representing
approximately 21% of our total gross accounts receivable. We maintain an allowance for doubtful accounts
based on the collections history and aging of outstanding receivables, as well as for any specific instances
we become aware of that may preclude us from reasonably assuring collection on outstanding balances.
Determining the allowance for doubtful accounts is judgmental in nature and often involves the use of
significant estimates. A determination that requires a change in our estimates could have a materially
adverse effect on our financial condition and operating results.
If we do not have enough equipment or experience delays in manufacturing, we may be unable to fill
prescriptions for cardiac and diabetic monitoring in a timely manner, physicians may elect not to prescribe
our services, and our revenue and growth prospects may be adversely affected.
When a physician prescribes cardiac monitoring to a patient, our customer service department begins
the patient set-up process. While our goal is to provide each patient with the appropriate device in a timely
manner, we have experienced, and may in the future experience, delays due to the availability of devices,
primarily when converting to a new generation of device or in connection with the increase in prescriptions
following potential acquisitions of other companies.
We may also experience shortages of devices due to manufacturing difficulties. Multiple suppliers
provide the components used in our devices, but our Minnesota and Massachusetts facilities are registered
and approved by the FDA as the manufacturer of record of our devices. Our manufacturing operations
could be disrupted by fire, earthquake or other natural disaster, a labor-related disruption, failure in supply
or other logistical channels, electrical outages or other reasons. If there were a disruption to our facilities
in Minnesota or Massachusetts, we would be unable to manufacture devices until we have restored and re-
qualified our manufacturing capability or developed alternative manufacturing facilities.
24
Our success in obtaining future cardiac monitor prescriptions from physicians is dependent upon
our ability to promptly deliver devices to our patients, and a failure in this regard would have an adverse
effect on our revenue and growth prospects.
Interruptions or delays in telecommunications systems could impair the delivery of our MCT, BGM and
wireless event services.
The success of our MCT, BGM and wireless event services is dependent upon our ability to transmit
and process data. Our MCT, BGM and wireless event devices rely on third-party wireless carriers to
transmit data over their data networks. We are dependent upon these third-party wireless carriers to provide
data transmission services to us through our various agreements. If we fail to maintain these relationships,
or if we lose wireless carrier services, we would be forced to seek alternative providers of data transmission
services, which might not be available on commercially reasonable terms, or at all.
As we expand our commercial activities, an increased burden will be placed upon our data processing
systems and the equipment upon which they rely. Interruptions of our data networks, or the data networks
of our wireless carriers for any extended length of time, loss of stored data or other computer problems
could have a material adverse effect on our business and operating results. Frequent or persistent
interruptions in our cardiac monitoring services could cause permanent harm to our reputation and could
cause current or potential users of our remote monitoring services or prescribing physicians to believe that
our systems are unreliable, leading them to switch to our competitors. Such interruptions could result in
liability claims and litigation against us for damages or injuries resulting from the disruption in service.
Our business may be impacted by political events, war, terrorism, public health issues, natural disasters
and other business interruptions.
War, terrorism, geopolitical uncertainties, public health issues and other business interruptions have
caused and could cause damage or disruption to commerce and the economy, and thus could have a material
adverse effect on us, our suppliers, logistics providers and customers. Our business operations are subject
to interruption by, among others, natural disasters, whether as a result of climate change or otherwise, fire,
power shortages, nuclear power plant accidents and other industrial accidents, terrorist attacks and other
hostile acts, labor disputes, public health issues and other events beyond our control. Such events could
decrease demand for our products, make it difficult or impossible for us to make and deliver products to
our customers or to receive components from its suppliers, and create delays and inefficiencies in our supply
chain. Our potential customers and monitoring centers could be impacted by natural disasters such as
hurricanes, tornados and earthquakes. In the event of a natural disaster, we could incur significant losses,
require substantial recovery time and experience significant expenditures in order to resume operations.
New products and technological advances by our competitors may negatively affect our market share,
commercial opportunities and results of operations.
The market for cardiac monitoring solutions is evolving rapidly and becoming increasingly
competitive. Our industry is highly fragmented and characterized by a small number of large providers
and a large number of smaller regional service providers. These third parties compete with us in marketing
to payors and prescribing physicians, recruiting and retaining qualified personnel, acquiring technology
and developing solutions complementary to our programs. In addition, as companies with substantially
greater resources than ours enter our market, we will face increased competition. If our competitors are
better able to develop and patent cardiac monitoring solutions than us, or develop more effective or less
expensive cardiac monitoring solutions that render our solutions obsolete or non-competitive, or deploy
25
larger or more effective marketing and sales resources than ours, our business would be harmed and our
commercial opportunities would be reduced or eliminated.
We operate in an intensely competitive industry, and our failure to respond quickly to technological
developments and incorporate new features into our products could harm our ability to compete.
We operate in an intensely competitive industry that experiences rapid technological developments,
changes in industry standards, changes in patient requirements and frequent new product introductions and
improvements. If we are unable to respond quickly and successfully to these developments, we may lose
our competitive position, and our products or technologies may become uncompetitive or obsolete. To
compete successfully, we must maintain a successful research and development effort, develop new products
and production processes and improve our existing products and processes at the same pace or ahead of
our competitors. Our research and development efforts are aimed at solving increasingly complex problems,
as well as creating new technologies, and we do not expect that all of our projects will be successful. If
our research and development efforts are unsuccessful, our future results of operations could be materially
affected.
We are increasingly dependent on sophisticated information technology systems to operate our business,
and if we fail to properly maintain the integrity of our data or if our products do not operate as intended
or we experience a cyber-attack or other breach of these systems, our business could be materially
affected.
We are increasingly dependent on sophisticated information technology for our products and
infrastructure. We rely on information technology systems to process, transmit and store electronic
information in our day-to-day operations. The size and complexity of our information technology systems
makes them vulnerable to increasingly sophisticated cyber-attacks, malicious intrusion, breakdown,
destruction, loss of data privacy or other significant disruption. Our information systems require an ongoing
commitment of significant resources to maintain, protect and enhance existing systems and develop new
systems to keep pace with continuing changes in information processing technology, evolving systems and
regulatory standards, the increasing need to protect patient and customer information and changing customer
patterns. As a result of technology initiatives, recently enacted regulations, changes in our system platforms
and integration of new business acquisitions, we have been consolidating and integrating the number of
systems we operate and have upgraded and expanded our information systems capabilities.
In addition, third parties may attempt to hack into our products or systems and may obtain data
relating to patients with our products or our proprietary information. If we fail to maintain or protect our
information systems and data integrity effectively, we could lose existing customers, have difficulty
attracting new customers, have problems in determining product cost estimates and establishing appropriate
pricing, have difficulty preventing, detecting and controlling fraud, have disputes with customers,
physicians and other health care professionals, have regulatory sanctions or penalties imposed, have
increases in operating expenses, incur expenses or lose revenue as a result of a data privacy breach or suffer
other adverse consequences. There can be no assurance that our process of consolidating the number of
systems we operate, upgrading and expanding our information systems capabilities, protecting and
enhancing our systems and developing new systems to keep pace with continuing changes in information
processing technology will be successful or that additional systems issues will not arise in the future. Any
significant breakdown, intrusion, interruption, corruption or destruction of these systems, as well as any
data breaches, could have a material adverse effect on our business.
26
Changes in the health care industry or tort reform could reduce the number of cardiac monitoring
solutions ordered by physicians, which could result in a decline in the demand for our solutions, pricing
pressure and decreased revenue.
Changes in the health care industry directed at controlling health care costs or perceived over-
utilization of cardiac monitoring solutions could reduce the volume of services ordered by physicians. If
more health care cost controls are broadly instituted throughout the health care industry, the volume of
cardiac monitoring solutions could decrease, resulting in pricing pressure and declining demand for our
services, which could harm our operating results. In addition, it has been suggested that some physicians
order cardiac monitoring solutions, even when the services may have limited clinical utility, primarily to
establish a record for defense in the event of a claim of medical malpractice against the physician. Legal
changes increasing the difficulty of initiating medical malpractice cases, known as tort reform, could reduce
the number of our services prescribed as physicians respond to reduced risks of litigation, which could
harm our operating results.
Legislation and policy changes reforming the United States health care system may have a material
adverse effect on our operating results and financial condition.
The Affordable Care Act makes the most sweeping and fundamental changes to the United States
health care system since the creation of Medicare and Medicaid. The Affordable Care Act includes a large
number of health-related provisions expanding Medicaid eligibility, requiring most individuals to have
health insurance, establishing new regulations on health plans, establishing health insurance exchanges,
requiring manufacturers to report payments or other transfers of value made to physicians and teaching
hospitals and modifying certain payment systems to encourage more cost-effective care.
Several provisions of the Affordable Care Act specifically affect the medical equipment industry.
In addition to changes in Medicare DMEPOS reimbursement and an expansion of the DMEPOS competitive
bidding program, the Affordable Care Act provides that for sales on or after January 1, 2013, manufacturers,
producers and importers of taxable medical devices must pay an annual excise tax of 2.3% of the price for
which the devices are sold. Subsequent legislation, the Consolidated Appropriations Act of 2016, includes
a two-year moratorium on the medical device excise tax commencing on January 1, 2016 and ending on
December 31, 2017. Budget legislation signed in January 2018 extended that moratorium through December
31, 2019.
The Affordable Care Act also establishes enhanced Medicare and Medicaid program integrity
provisions, including expanded documentation requirements for Medicare DMEPOS orders, more stringent
procedures for screening Medicare and Medicaid DMEPOS suppliers, and new disclosure requirements
regarding manufacturer payments to physicians and teaching hospitals, along with broader expansion of
federal fraud and abuse authorities. Subsequent legislation made additional changes to the DMEPOS
reimbursement policy. For instance, the Consolidated Appropriations Act of 2016 caps Medicaid durable
medical equipment reimbursement rates at Medicare fee-for-service rates applicable in the state, including
applicable competitive bidding rates, beginning January 1, 2019, and the 21st Century Cures Act moved
up implementation of this provision to January 1, 2018. There can be no assurances that future legislation
will not adversely impact reimbursement for our products and services.
In addition, various health care reform proposals have also emerged at the state level. We cannot
predict the full effect that these laws or any future legislation or regulation will have on us. However, the
implementation of new legislation and regulation may lower reimbursements for our products, reduce
medical prescriptions for our services and adversely affect our business.
27
If we or our suppliers fail to achieve or maintain regulatory approval of manufacturing facilities, our
growth could be limited and our business could be adversely affected.
We currently assemble and manufacture our cardiac monitoring and BGM devices. We purchase
INR monitoring devices from third parties. In order to maintain compliance with FDA and other regulatory
requirements, our manufacturing facilities must be periodically reevaluated and qualified under a quality
system to ensure they meet production and quality standards. Suppliers of components and products used
to manufacture MCT, BGM, event, and Holter devices and the manufacturers of the monitors used in INR
services must also comply with FDA regulatory requirements, which often require significant resources
and subject us and our suppliers to potential regulatory inspections and stoppages. If we or our suppliers
do not maintain regulatory approval for our manufacturing operations, our business could be adversely
affected.
If we fail to meet Medicare accreditation and surety bond requirements or DMEPOS supplier standards,
it could negatively affect our business operations.
Medicare DMEPOS suppliers (other than certain exempted professionals) must be accredited by
an approved accreditation organization as meeting DMEPOS quality standards adopted by CMS. Medicare
suppliers also are required to meet surety bond requirements. In addition, Medicare DMEPOS suppliers
must comply with Medicare supplier standards in order to obtain and retain billing privileges, including
meeting all applicable federal and state licensure and regulatory requirements. Furthermore, many of our
managed care contracts for the provision of diabetes services require that we qualify as an accredited
DMEPOS supplier. CMS periodically expands or otherwise clarifies the Medicare DMEPOS supplier
standards. We believe we are in compliance with these requirements. If we fail to maintain our Medicare
accreditation status and/or do not comply with Medicare surety bond or supplier standard requirements in
the future, or if these requirements are changed or expanded, it could adversely affect our profits and results
of operations.
Our dependence on a limited number of suppliers may prevent us from delivering our devices on a timely
basis.
We currently rely on a limited number of suppliers of components for the devices that we
manufacture. If these suppliers became unable to provide components in the volumes needed or at an
acceptable price, we would have to identify and qualify acceptable replacements from alternative sources
of supply. The process of qualifying suppliers is lengthy. Delays or interruptions in the supply of our
required components could limit or stop our ability to provide sufficient quantities of devices on a timely
basis and meet demand for our services, which could have a material adverse effect on our business, financial
condition and results of operations.
We could be subject to medical liability or product liability claims, which may not be covered by insurance
and which would adversely affect our business and results of operations.
The design, manufacture and marketing of services of the types we provide entail an inherent risk
of product liability claims. Any such claims against us may require us to incur significant defense costs,
irrespective of whether such claims have merit. In addition, we provide information to health care providers
and payors upon which determinations affecting medical care are made, and claims may be made against
us resulting from adverse medical consequences to patients resulting from the information we provide. In
addition, we may become subject to liability in the event that the devices we use fail to correctly record or
transfer patient information or if we provide incorrect information to patients or health care providers using
our services.
28
Our liability insurance is subject to deductibles and coverage limitations. In addition, our current
insurance may not continue to be available to us on acceptable terms, if at all, and, if available, the coverage
may not be adequate to protect us against any future claims. If we are unable to obtain insurance at an
acceptable cost or on acceptable terms with adequate coverage or otherwise protect against any claims
against us, we would be exposed to significant liabilities, which may adversely affect our business and
results of operations.
Regulations related to conflict minerals may adversely impact our business.
The Dodd Frank Wall Street Reform and Consumer Protection Act contains provisions to improve
transparency and accountability concerning the supply of certain minerals, known as conflict minerals,
originating from the DRC. Due to the materials used in certain of the products manufactured by our
subsidiaries, we must comply with annual disclosure and reporting rules adopted by the SEC by assessing
whether the subject minerals contained in our products originated in the DRC. Our supply chain is complex
since we do not source our minerals directly from the original mine or smelter. Consequently, we incur
costs in complying with these disclosure requirements, including for due diligence to determine the source
of the subject minerals used in our products and other potential changes to products, processes or sources
of supply as a consequence of such verification activities. The rules may adversely affect the sourcing,
supply and pricing of materials used in our products throughout the supply chain beyond our control,
whether or not the subject minerals are “conflict free.” Also, we may face reputational challenges if we
determine that certain of our products contain minerals not determined to be conflict free or if we are unable
to sufficiently verify the origins for all subject minerals used in our products through our diligence process.
We are reliant on the outsourcing of clinical research by pharmaceutical, clinical research and
biotechnology companies.
We are reliant on the ability and willingness of pharmaceutical, clinical research and biotechnology
companies to continue to outsource the types of research services that we provide. As such, we are impacted
and subject to risks, uncertainties and trends that affect companies in these industries. Any downturn in
these industries or reduction in spending or outsourcing could adversely affect our business.
Future sales of our common stock may depress our stock price.
Future issuance in connection with acquisitions and sales of a substantial number of shares of our
common stock in the public market could occur at any time. These sales, or the perception in the market
that the holders of a large number of shares intend to sell shares, could reduce the market price of our
common stock. As of December 31, 2017, we had 32,460,668 outstanding shares of common stock. In
addition, we had 3,574,439 stock options and 467,129 restricted stock units (“RSUs”) outstanding to
purchase shares of our common stock that will become exercisable over the next four years or vest over
the next three years. Further, we had 150,000 performance stock options that are exercisable. If exercised,
vested or earned, additional shares would become available for sale.
Anti-takeover provisions in our charter documents and Delaware law might deter acquisition bids for
us that our stockholders might consider favorable.
Our amended and restated certificate of incorporation and bylaws contain provisions that may make
the acquisition of our Company more difficult without the approval of our Board of Directors. These
provisions:
•
establish a classified Board of Directors so that not all members of the board are elected at one
time;
29
•
•
•
•
authorize the issuance of undesignated preferred stock, the terms of which may be established
and shares of which may be issued without stockholder approval, and which may include rights
superior to the rights of the holders of common stock;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken
at a meeting of our stockholders;
provide that the Board of Directors is expressly authorized to make, alter or repeal our bylaws;
and
establish advance notice requirements for nominations for elections to our Board of Directors
or for proposing matters that can be acted upon by stockholders at stockholder meetings.
In addition, because we are incorporated in Delaware, we are subject to Section 203 of the Delaware
General Corporation Law which, subject to certain exceptions, prohibits stockholders owning in excess of
15% of our outstanding voting stock from merging or combining with us. These anti-takeover provisions
and other provisions under Delaware law could discourage, delay or prevent a transaction involving a
change of control of our Company, even if doing so would benefit our stockholders. These provisions
could also discourage proxy contests and make it more difficult for our stockholders to elect directors of
their choosing and cause us to take other corporate actions such stockholders desire.
We have a history of net losses and future profitability is uncertain.
We previously incurred net losses for each annual period from our inception through December 31,
2014. For the years ended December 31, 2016 and 2015, we achieved net income attributable to the
Company of $53.4 million and $7.4 million, respectively; for the year ended December 31, 2017 we realized
a net loss attributable to the Company of $16.0 million. We may not be able to sustain or increase profitability
on a quarterly or annual basis. As of December 31, 2017, we had a total accumulated deficit of approximately
$158.7 million.
We may not be able to realize our net operating loss carryforwards.
We have deferred tax assets that include net operating loss carryforwards that can be used to offset
taxable income in future periods and reduce income taxes payable in those future periods. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences are deductible. The timing and manner in which we can
utilize our net operating loss carryforward and future income tax deductions in any year may be limited by
provisions of the Internal Revenue Code (“IRC”) regarding the change in ownership of corporations. Such
limitation may have an impact on the ultimate realization of our carryforwards and future tax deductions.
Section 382 of the IRC (“Section 382”) imposes limitations on a corporation’s ability to utilize net operating
losses if it experiences an “ownership change.” In general terms, an ownership change may result from
transactions increasing the ownership of certain stockholders in the stock of a corporation by more than
50 percentage points over a three-year period. Any unused annual limitation may be carried over to later
years, and the amount of the limitation may under certain circumstances be increased by the built-in gains
in assets held by us at the time of the change that are recognized in the five-year period after the change.
Currently, a portion of our loss carryforwards is limited under Section 382.
30
Resolution of income tax matters may impact our financial condition, results of operations and cash
flows.
We are subject to income taxes in many U.S. and certain foreign jurisdictions, which requires
significant judgment in determining our effective income tax rate and in evaluating tax positions, particularly
those related to uncertain tax positions. We have provided for uncertain tax positions when such tax positions
do not meet the recognition thresholds or measurement standards prescribed by the accounting standard
for uncertain tax positions. Changes in uncertain tax positions or other adjustments resulting from tax
audits and settlements with taxing authorities, including related interest and penalties, impact our effective
tax rate. When particular tax matters arise, a number of years could elapse before such matters are audited
and finally resolved. We believe our positions are appropriate, however, federal, state, or foreign tax
authorities could disagree. If the settlement of any unrecognized tax reserves is different than accrued, it
would impact our effective rate in the year of resolution. Any resolution of a tax matter may require the
adjustment of tax assets or tax liabilities and/or the use of cash in the year of resolution.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2017, we operate the following leased facilities:
Location
Malvern, PA
Rosemont, IL
Use
Corporate shared services, operations and
monitoring
Customer support center, distribution, and
administrative
Monitoring
Monitoring and manufacturing
Research
Ewing, NJ
Eagan, MN
Rochester, NY
San Francisco, CA Monitoring
Rehovot, Israel
Chester, PA
Rockville, MD
Phoenix, AZ
San Diego, CA
Concord, MA
Norfolk, VA
Research, development and manufacturing
Distribution center
Research
Distribution center
Research, development and engineering
Research and development and distribution
Monitoring
Segment(s)
Square
feet
Lease
expiry
C, H
61,000
2021
H, T
H
H, T
R
H
H
H
R
H
T
T
H
56,000
2019
28,000
24,000
22,000
17,000
17,000
16,000
16,000
11,000
8,000
7,000
5,000
2018
2022
2028
2019
2018
2020
2026
2020
2020
2018
2018
C = Corporate, H = Healthcare, R = Research, T = Technology
We believe that all of our existing facilities are adequate to meet our current needs and that suitable
additional alternative spaces will be available in the future on commercially reasonable terms.
Item 3. Legal Proceedings
From time to time, in the ordinary course of business and like others in the industry, we receive
requests for information from government agencies in connection with their regulatory or investigational
31
authority or are involved in traditional employment or business litigation. We review such requests and
notices and take appropriate action.
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.
For further details on the material legal proceedings to which we are currently a party, which is
incorporated herein by reference, please refer to “Part II; Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; Note 18. Legal Proceedings”
below.
Item 4. Mine Safety Disclosures
Not Applicable.
32
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
PART II
of Equity Securities
Unregistered Sales of Equity Securities
In connection with the tender offer and subsequent acquisition of LifeWatch, from the acquisition
date through December 31, 2017 we issued 3,635,646 shares of BioTelemetry Common Stock. The tender
offer was subject to a Tier I exemption pursuant to Rule 14d-1(c) of the Securities Exchange Act of 1934,
as amended, and the issuance of BioTelemetry Common Stock in connection therewith was exempt from
registration under the Securities Act of 1933, as amended, pursuant to Rule 802 thereof, because Life Watch
is a foreign private issuer and U.S. holders held less than 10% of the LifeWatch Shares that were the subject
of the tender offer.
Subsequent to December 31, 2017, in accordance with the squeeze-out procedures under Swiss
Law, we issued 58,786 shares to the remaining LifeWatch stockholders.
Market Information for Common Stock
Our common stock is traded on the NASDAQ Global Select Market under the symbol, “BEAT.”
The following table sets forth the range of high and low sale prices of our common stock for the periods
indicated:
Quarter Ended
March 31
June 30
September 30
December 31
2017
2016
High
Low
High
Low
$ 29.50 $ 21.05 $ 13.35 $
26.45
28.80
23.30
17.68
21.42
24.10
34.00
39.20
34.70
8.74
10.96
15.86
15.25
As of February 15, 2018, there were 32,531,365 shares of our common stock outstanding. Also as
of that date, we had 55 holders of record (this does not include persons whose stock is in nominee or “street
name” accounts through brokers).
Dividends
We have never declared or paid any cash dividends on our capital stock. We currently intend to
retain all available funds and any future earnings to support our operations and finance the growth and
development of our business. We do not intend to pay cash dividends on our common stock for the
foreseeable future. Any future determination related to dividend policy will be made at the discretion of
our Board of Directors.
Stock Performance Graph
The graph below compares the total stockholder return of an investment of $100 on December 31,
2012 through December 31, 2017 for (i) our common stock (ii) The NASDAQ Health Care Index and
(iii) The Russell 2000 Index. Each of the three measures of cumulative total return assumes reinvestment
of dividends, if any. The stock price performance shown on the graph below is based on historical data
and is not indicative of future stock price performance.
33
Comparison of 5 Year Cumulative Total Return
Among BioTelemetry, Inc., The NASDAQ Health Care Index
and The Russell 2000 Index
Company/Index
BioTelemetry, Inc.
NASDAQ Health Care Index
Russell 2000 Index
Base
Period
Dec 31,
2012
100.00
100.00
100.00
Dec 31,
2013
Dec 31,
2014
Dec 31,
2015
Dec 31,
2016
348.25
157.04
138.82
439.91
201.75
145.62
512.28
215.59
139.19
980.26
180.19
168.85
Dec 31,
2017
1,311.40
219.87
193.58
The foregoing graph and chart shall not be deemed incorporated by reference by any general
statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities
Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent
we specifically incorporate this information by reference, and shall not otherwise be deemed filed under
those acts.
Information regarding our equity compensation plans is incorporated by reference from our Proxy
Statement, unless our Proxy Statement is not filed on or before May 1, 2018, in which case we will amend
this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G
to Form 10-K.
Item 6. Selected Financial Data
The selected financial data set forth below are derived from our consolidated financial statements.
The statement of operations data for the years ended December 31, 2017, 2016 and 2015, and the balance
sheet data at December 31, 2017 and 2016 are derived from our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K. The statement of operations data for the years
ended December 31, 2014 and 2013 and the balance sheet data at December 2015, 2014 and 2013 are
derived from our audited consolidated financial statements, which are not included herein. Certain
reclassifications have been made below to prior period statements to conform to the current period
presentation.
34
The following selected financial data should be read in conjunction with “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial
Statements and Supplementary Data” included in this Annual Report on Form 10-K.
Statement of Operations Data:
(in thousands, except per share data)
2017
Year ended December 31,
2015
2014
2016
2013
$
234,385
$
165,664
$
145,963
$
133,178
$
100,386
Revenue:
Healthcare
Research
Technology
Total revenue
Cost of revenue:
Healthcare
Research
Technology
Total cost of revenue
Gross profit
Operating expenses:
General and administrative
Sales and marketing
Bad debt expense
Research and development
Other charges
Total operating expenses
Income/(loss) from operations
Other expense:
Interest expense
Loss on extinguishment of debt
Loss on equity method investment
Other non-operating expense, net
Total other expense
Income/(loss) before income taxes
Benefit from/(provision for) income taxes
Net income/(loss)
Net loss attributable to noncontrolling
interests
Net income/(loss) attributable to
BioTelemetry, Inc.
Net income/(loss) per common share
attributable to BioTelemetry, Inc.:
Basic
Diluted
Weighted average number of shares
outstanding:
Basic
Diluted
$
$
$
38,790
13,601
286,776
81,356
22,881
10,169
114,406
172,370
82,983
35,322
13,291
11,101
31,436
174,133
(1,763)
(4,897)
(543)
(384)
(2,809)
(8,633)
(10,396)
(6,747)
(17,143)
32,565
10,103
208,332
53,559
18,395
6,928
78,882
129,450
55,877
28,636
9,931
8,355
8,639
111,438
18,012
(1,830)
—
(287)
(125)
(2,242)
15,770
37,667
53,437
21,853
10,697
178,513
51,693
12,728
7,535
71,956
106,557
47,882
27,936
8,047
7,111
6,063
97,039
9,518
(1,534)
—
—
(88)
(1,622)
7,896
(468)
7,428
19,744
13,656
166,578
20,329
8,786
129,501
54,942
10,646
7,526
73,114
93,464
45,131
28,805
9,347
7,396
7,098
97,777
(4,313)
(713)
(372)
—
(6,708)
(7,793)
(12,106)
2,313
(9,793)
35,177
11,317
3,937
50,431
79,070
36,569
26,275
7,787
7,338
7,982
85,951
(6,881)
(88)
—
—
(135)
(223)
(7,104)
(215)
(7,319)
(1,187)
—
—
—
—
(15,956) $
53,437
$
7,428
$
(9,793) $
(7,319)
(0.53) $
(0.53) $
1.91
1.75
$
$
0.27
0.26
$
$
(0.37) $
(0.37) $
(0.29)
(0.29)
30,386
30,386
27,920
30,489
27,116
29,089
26,445
26,445
25,544
25,544
35
Balance Sheet Data:
(in thousands)
2017
2016
December 31,
2015
2014
2013
Cash and cash equivalents
$
36,022
$
23,052
$
18,986
$
20,007
$
Working capital
Total assets
Total debt
Total BioTelemetry, Inc.’s stockholders’
equity
Noncontrolling interests
Total equity
39,153
524,562
199,356
250,757
(1,054)
28,053
198,984
25,161
138,914
—
23,157
124,143
23,194
75,926
—
13,879
124,372
23,873
63,676
—
22,151
25,215
87,546
—
66,829
—
$
249,703
$
138,914
$
75,926
$
63,676
$
66,829
36
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of our
operations in conjunction with our consolidated financial statements and the related notes to those
statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-
looking statements reflecting our current expectations that involve risks and uncertainties. Our actual
results and the timing of events may differ materially from those contained in these forward-looking
statements due to a number of factors—see “Cautionary Note Regarding Forward-Looking Statements”
and “Part I; Item 1A; Risk Factors.” We report on a calendar year end, and except where otherwise
indicated below, “2017” refers to the year ended December 31, 2017, “2016” refers to the year ended
December 31, 2016 and “2015” refers to the year ended December 31, 2015.
Overview
Company Background
We provide monitoring services and digital population health management for healthcare providers,
medical device manufacturing and centralized core laboratory services for clinical research. We operate
under three reportable segments: (1) Healthcare, (2) Research and (3) Technology. The Healthcare segment
is focused on the diagnosis and monitoring of cardiac arrhythmias or heart rhythm disorders. We offer
cardiologists and electrophysiologists, neurologists and primary care physicians a full spectrum of solutions
which provides them with a single source of cardiac monitoring services. These services range from the
differentiated MCT to event, Holter, extended wear Holter, Pacemaker and INR monitoring. The Research
segment is engaged in central core laboratory services providing cardiac monitoring, imaging services,
scientific consulting and data management services for drug and medical device trials. The Technology
segment focuses on the development, manufacturing, testing and marketing of cardiovascular and blood
glucose monitoring devices to medical companies, clinics and hospitals.
Recent Developments
Acquisitions
On July 12, 2017, we acquired, through our wholly owned subsidiary Cardiac Monitoring Holding
Company, LLC, approximately 97% of the outstanding shares of LifeWatch AG (“LifeWatch”) for aggregate
consideration of 3,615,840 shares of BioTelemetry common stock with a fair value of $116.8 million and
cash in the amount of $165.8 million. On that date, we acquired control of LifeWatch AG and began
consolidating its financial statements. In September 2017, we purchased 343,525 additional shares of
LifeWatch for cash consideration of $4.8 million and the issuance of 19,806 of our shares with a fair value
of $0.6 million. We completed the acquisition of the remaining shares in December 2017, for aggregate
consideration of $2.9 million in cash and 58,786 shares with a fair market value of $2.0 million which was
settled in early January 2018. LifeWatch is included in the Healthcare segment.
On December 1, 2016, we entered into a Share and Asset Purchase Agreement (“Agreement”) with
Telcare, Inc. (“Telcare”) pursuant to which we acquired the stock of Telcare Medical Supply, Inc. and certain
assets of Telcare. The total consideration paid at closing amounted to $7.0 million in cash, with the potential
for a performance-based earn out up to $5.0 million upon reaching certain milestones, as defined in the
Agreement. The fair value of the total consideration transferred in the acquisition, including contingent
consideration, was $9.7 million at the acquisition date. Telcare is included in the Technology segment.
On May 11, 2016, we completed the acquisition of VirtualScopics, Inc. (“VirtualScopics”), a leading
provider of clinical trial imaging solutions. The all cash Tender Offer commenced on April 8, 2016 and
37
ended on May 9, 2016, pursuant to which we acquired the business and operations of VirtualScopics. The
total consideration paid at closing amounted to $15.0 million, net of cash acquired of $0.8 million.
VirtualScopics is included in the Research segment.
On April 1, 2016, we entered into an Asset Purchase Agreement (“APA”) with DELTA Danish
Electronics, Light, and Acoustics (“DELTA”), pursuant to which we acquired substantially all of the assets
of the ePatch division of DELTA, inclusive of all products and indications currently under development.
The total consideration paid at closing amounted to $3.0 million in cash and 244,519 shares of our common
stock valued at $2.9 million. In addition, there is the potential for a performance-based earn out up to $3.0
million upon reaching certain milestones, as defined in the APA. The fair value of the total consideration
transferred in the acquisition, including contingent consideration, was $6.5 million at the acquisition date.
ePatch is included in the Technology segment.
U.S. Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The TCJA reduced the
U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. We are required to revalue
our U.S. deferred tax assets and liabilities at the new federal corporate income tax rate as of the date of
enactment of the TCJA and to include the rate change effect in the tax provision for the period ended
December 31, 2017. As a result, we recognized a $8.0 million deferred tax expense based on a reasonable
estimate of the re-measurement of our deferred tax assets and liabilities as of December 22, 2017. This
significantly increased the effective tax rate for the period ended December 31, 2017 in comparison to the
effective tax rates for the last two comparable periods. As part of U.S. international tax reform, the TCJA
imposes a transition tax on certain accumulated foreign earnings aggregated across all non-U.S. subsidiaries,
net of foreign deficits. As we are in an aggregate net foreign deficit position for U.S. tax purposes, we are
not liable for the transition tax.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our
financial statements, which we have prepared in accordance with generally accepted accounting principles.
The preparation of these financial statements requires us to make estimates and assumptions that affect the
reported amount of assets and liabilities, revenues and expenses and related disclosures. We base our
estimates and judgments on historical experience and on various other factors that we believe to be
reasonable under the circumstances; however, actual results may differ from these estimates. We review
our estimates and judgments on an ongoing basis.
We believe that the following accounting policies and estimates are most critical to a full
understanding and evaluation of our reported financial results. Our significant accounting policies are more
fully described in “Part II; Item 8. Financial Statements and Supplementary Data; Notes to
Consolidated Financial Statements; Note 2. Summary of Significant Accounting Policies” below.
Revenue Recognition
Healthcare
Healthcare revenue includes revenue from MCT, event, Holter, Pacemaker and INR monitoring
services. We receive a significant portion of our revenue from third-party commercial insurance
organizations and governmental entities. We also receive reimbursement directly from patients through
co-pays, deductibles and self-pay arrangements. Billings for services reimbursed by contracted third-party
payors, including Medicare, are recorded as revenue net of contractual allowances. If we do not have
38
consistent historical information regarding collectability from a given payor to support revenue recognition
at the time of service, revenue is recognized when cash is received. Adjustments to the estimated receipts
for non-contractual revenue, based on final settlement with the third-party payors, are recorded upon
settlement. Unearned amounts are appropriately deferred until the service has been completed. Medicare
accounts for a significant portion of our Healthcare and total revenue.
Research
Research revenue includes revenue for core laboratory services. Our Research 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 and sales along with related supplies
and logistics management, are recognized at the time of sale or over the rental period. Under a typical
contract, customers pay us a portion of our fee for these services upon contract execution as an upfront
deposit. Unearned revenue, including upfront deposits, is deferred, and then recognized as the services are
performed.
For arrangements with multiple deliverables, the revenue is allocated to each element (both delivered
and undelivered items) based on their relative selling prices or management’s best estimate of their selling
prices, when vendor-specific or third-party evidence is unavailable.
We record reimbursements received for out-of-pocket expenses, including freight, as revenue in
the accompanying consolidated statements of operations and comprehensive income (loss).
Technology
Technology revenue includes revenue received from the sale of products, product repairs and
supplies to medical companies, clinics and hospitals. Our Technology revenue is recognized when products
are shipped, or as services are completed.
Accounts Receivable
Healthcare accounts receivable are related to the Healthcare segment and are recorded at the time
revenue is recognized, net of contractual allowances, and are presented on the consolidated balance sheet
net of allowance for doubtful accounts. The ultimate collection of accounts receivable may not be known
for several months after services have been provided and billed. We record an allowance for doubtful
accounts based on the aging of receivables using historical data. The percentages and amounts used to
record bad debt expense and the allowance for doubtful accounts are supported by various methods and
analyses, including current and historical cash collections and the aging of receivables by payor. Because
of continuing changes in the health care industry and third-party reimbursement, it is possible that our
estimates could change, which could have a material impact on our operations and cash flows.
Other accounts receivable are related to the Technology and Research segments and are recorded
at the time revenue is recognized, or when products are shipped or services are performed. We estimate
the allowance for doubtful accounts on a specific account basis, and consider several factors in our analysis
including customer specific information and the aging of the account.
We will write off receivables when the likelihood for collection is remote and when we believe
collection efforts have been fully exhausted and we do not intend to devote additional resources in attempting
to collect. We perform write-offs on a monthly basis. In the Healthcare segment, we wrote off $8.8 million
and $8.4 million of receivables for the years ended December 31, 2017 and 2016, respectively. The impact
39
was a reduction of gross receivables and a reduction in the allowance for doubtful accounts. There were
no material write-offs in the Technology and Research segments. We recorded bad debt expense of $13.3
million, $9.9 million and $8.0 million, respectively, for the years ended December 31, 2017, 2016 and
2015, respectively.
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 based on the grant-date fair value of the award and
recognize the cost of such awards over the period during which the employee is required to provide service
in exchange for the award (the vesting period). ASC 718 requires that an entity measure the cost of liability-
based service awards based on current fair value that is remeasured subsequently at each reporting date
through the settlement date. We also use the provisions of ASC 505-50, Equity Based Payments to Non-
Employees (“ASC 505-50”), to account for stock-based compensation awards issued to non-employees for
services. Such awards for services are recorded at either the fair value of the services rendered or the
instruments issued in exchange for such services, whichever is more readily determinable, using the
measurement date guidelines enumerated in ASC 505-50.
Stock-based compensation expense is only recognized for outstanding performance stock units
(“PSUs”) where the performance conditions are deemed probable for achievement. For PSUs deemed
probable for achievement, stock-based compensation expense is recognized ratably over the expected
vesting period. Performance stock options (“PSOs”) are valued and stock-based compensation expense is
only recognized once the performance conditions of the outstanding PSOs have been met.
We have historically recorded stock-based compensation expense based on the number of options
or restricted stock units we expect to vest using our historical forfeiture experience and periodically update
those forfeiture rates to apply to new grants. While we early adopted ASU 2016-09 in the year ended
December 31, 2016, we have elected to continue to estimate forfeitures under the true-up provision of ASC
718. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from estimates. Forfeitures are estimated based on our historical
experience.
We estimate the fair value of our stock options to employees and directors using the Black-Scholes
option valuation model. The Black-Scholes option valuation model requires the use of certain subjective
assumptions. The most significant of these assumptions are the estimates of 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 volatility of our stock price. The expected term represents the period of time that stock-
based awards granted are expected to be outstanding. Other assumptions used in the Black-Scholes option
valuation model include the risk-free interest rate and expected dividend yield. The risk-free interest rate
for periods pertaining to the contractual life of each option is based on the United States 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.
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
40
—Goodwill and Other (“ASC 350”), goodwill is reviewed for impairment annually, or when events arise
that could indicate that an impairment exists. Initially, we qualitatively assess whether it is more-likely-
than-not that an impairment exists for each reporting unit. 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
an impairment test in accordance with ASC 350. We compare the fair value of our reporting units to their
carrying value. If the reporting unit’s carrying value exceeds its fair value, an impairment loss equal to the
difference is recognized. The loss recognized shall not exceed the total amount of goodwill allocated to
the reporting unit, and the income tax effects from any deductible goodwill on the carrying value of the
reporting unit when measuring the goodwill impairment loss, if any, are considered.
For the purpose of performing our goodwill impairment analysis, we consider our business to be
composed of three reporting units: Healthcare, Technology and Research. When performing a quantitative
analysis, we calculate the fair value of the reporting units utilizing a weighting of 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 combination of an income and a market approach provides a reasonable basis to estimate the fair value
of our reporting units.
Acquired intangible assets are recorded at fair value on the acquisition date. The estimated fair
values and useful lives of intangible assets are determined by assessing many factors, including estimates
of future operating performance and cash flows of the acquired business, the characteristics of the intangible
assets and the experience of the acquired business. Independent appraisal firms may assist with the valuation
of acquired assets. The impairment test for indefinite-lived intangible assets other than goodwill consists
of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset.
We estimate the fair value of the indefinite-lived intangibles using the relief from royalty method.
We performed an impairment analysis of goodwill and indefinite-lived intangible assets for the
years ended December 31, 2017, 2016 and 2015. There was no goodwill impairment recorded as a result
of these analyses.
During our impairment testing of our intangible assets for the year ended December 31, 2017,
considering the LifeWatch integration and forward-looking integration plans, we determined that certain
trade names and internally developed software costs ceased being used and were no longer going to be
used and were therefore impaired, resulting in $11.0 million of intangible asset impairment charges included
within the Corporate and Other segment as a component of other costs within the other charges line in our
consolidated statements of operations and comprehensive income/(loss). There were no other intangible
asset impairments for the year ended December 31, 2017.
At December 31, 2016 and 2015, we performed our required annual impairment test of indefinite-
lived intangible assets. Based on these impairment tests, we determined that there was no impairment.
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
41
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 asset
through the valuation allowance.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process
in which (i) we determine whether it is more likely than not that the tax positions will be sustained on the
basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-
not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely
to be realized upon ultimate settlement with the related tax authority.
Statements of Operations Overview
Revenue
The vast majority of our revenue is derived from cardiac monitoring services in our Healthcare
segment. The amount of Healthcare revenue generated is based on the number of patients enrolled through
physician prescriptions and the rates reimbursed to us by commercial payors, physicians, patients and
Medicare. MCT Medicare pricing was down slightly in 2017 and will be flat for 2018. Over time, we
expect the price to remain relatively stable. We expect volumes to grow in the long-term as the market
grows and we continue to gain market share.
Revenue is generated in the Research segment through various study and consulting services, which
include activities such as core lab services, project management, data management, equipment rental and
customer support. Research revenue is driven by our ability to enter into service contracts at various phases
of the pharmaceutical drug development life cycle. We expect volume to increase as a result of our growing
capabilities as a multi-service provider. Negotiated pricing for service contracts is subject to market
pressures, and as a result has decreased slightly over the last few years. We expect revenue from the
Research segment to increase over the long-term as we continue to increase our study volume.
Revenue is generated in the Technology segment from the sale of cardiac and blood glucose
monitoring products to third-party distributors and service providers in our Technology segment.
Technology revenue is driven by the number of the units purchased by our customers and the relative per
unit pricing for various products. The sales volume for our Technology segment has increased in the current
year with integration of Telcare. We expect our Technology segment revenue to increase over the long-
term as we grow our new products.
Gross Profit
Gross profit consists of revenue less the cost of revenue.
Cost of revenue for the Healthcare segment includes:
•
•
salaries and benefits for personnel providing various services and customer support to physicians
and patients including customer service, monitoring services, distribution services (scheduling,
packaging and delivery of the devices to the patients and practices), device repair and
maintenance and quality assurance;
cost of patient-related services provided by third-party subcontractors including device
transportation to and from the patients and practices and wireless communication charges related
to transmission of data to the monitoring centers;
•
consumable supplies sent to patients along with the durable components of our devices; and
42
•
depreciation of our medical devices.
Cost of revenue for the Research segment includes:
•
•
•
•
cost of internal and third-party medical specialists and technicians;
salaries and benefits of personnel providing various services to customers including consulting,
customer support, project management and certain information technology support;
depreciation of our medical devices; and
cost of materials and transportation related to the shipment of products and supplies.
Cost of revenue for the Technology segment includes the cost of materials and labor related to the
manufacture of our products and product repair services.
We expect multiple factors to influence our gross profit margins in the foreseeable future. Changes
in reimbursement and payor mix are two such factors. While we expect reimbursement to be stable, payor
mix is unpredictable and dependent on the insurance coverage of patients that are prescribed our services.
We have a history of lowering the average cost of revenues as we increase volume. We expect to continue
to achieve efficiencies in cost of revenue through process improvements, as well as from a reduction in the
cost of our devices. We also expect to realize synergies from our LifeWatch acquisition. These factors
will have a favorable impact on our gross profit margins. While these factors could be offsetting, it is
difficult to predict how they will influence our gross profit margins.
We expect to achieve some efficiencies in our Research segment cost of revenue through process
improvements, and expect a favorable impact on gross margins due to the leveraging of the relatively fixed
cost infrastructure. If we experience service contract pricing or volume declines in our Research segment,
it would have an adverse effect on our gross profit margin.
If we experience volume or selling price declines in our Technology segment, or service contract
pricing, it would have an adverse effect on our gross profit margin. We expect the cost of products sold
and repairs to remain relatively consistent.
General and Administrative
General and administrative expense consists primarily of salaries and benefits related to general
and administrative personnel, management bonuses, professional fees primarily related to legal and audit
fees, amortization related to intangible assets, facilities expenses and the related overhead.
Sales and Marketing
Sales and marketing expense consists primarily of salaries, benefits and commissions related to
sales, travel and entertainment costs, marketing and contracting personnel. Also included are marketing
programs such as trade shows and advertising campaigns.
Research and Development
Research and development expense consists primarily of salaries and benefits of personnel, as well
as subcontractors who work on new product development and sustaining engineering of our existing
products.
43
Other Charges
We account for expenses associated with our acquisitions and certain litigation as other charges as
incurred. These expenses were primarily a result of legal fees related to activities surrounding our
acquisitions, including integration activities subsequent to our acquisitions and patent litigation in which
we are the plaintiff. Other charges, including intangible and fixed asset impairments, are costs that are not
considered necessary to the ongoing business operations.
Interest Expense
Interest expense consists primarily of the interest accrued related to our term loan, capital leases
and where applicable, our revolving credit agreement, along with the amortization of deferred debt
acquisition costs.
Loss on Extinguishment of Debt
Loss on extinguishment of debt consists primarily of the costs incurred related to the write off of
the unamortized debt issuance costs when we settled our prior credit agreements.
Loss on Equity Method Investment
Loss on equity method investment represents our portion of the results of operations of our equity
method investee.
Other Non-Operating Expense, net
Other non-operating expense, net represents other infrequently occurring non-operating items
including settlement charges and foreign exchange gains/(losses).
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests consists of the post-acquisition activity of the portion
of LifeWatch that we had not yet acquired during the period from July 12, 2017 through December 31,
2017 as well as the 45% of LifeWatch Turkey that we do not own over that same period.
Results of Operations
Years Ended December 31, 2017 and 2016
Revenue
(In thousands, except percentages)
Healthcare
Research
Technology
Total revenue
Year Ended
Change
$
December 31,
2017
234,385 $
38,790
13,601
286,776 $
December 31,
2016
165,664 $
32,565
10,103
208,332 $
$
$
68,721
6,225
3,498
78,444
%
41.5%
19.1%
34.6%
37.7%
Total revenue for the year ended December 31, 2017 increased due primarily to the Healthcare
segment, which was affected by the acquisition of LifeWatch, along with increased patient volumes as well
as a favorable service mix. While overall pricing was stable, we saw a decline in our Medicare rates.
Research revenue increased due to the full year impact of the acquisition of our imaging business,
VirtualScopics, which was acquired in May 2016, partially offset by lower cardiac study volumes.
44
Technology revenue also increased due to the full year impact of Telcare, which was acquired in December
2016.
Gross Profit
(In thousands, except percentages)
Gross profit
Percentage of revenue
Year Ended
Change
December 31,
2017
$ 172,370
December 31,
2016
$ 129,450
$
60.1%
62.1%
$
42,920
%
33.2%
Gross profit for the year ended December 31, 2017 increased due primarily to our recent acquisitions,
organic growth, and realized synergies from our acquisitions, partially offset by the impact of the decrease
in Medicare rates. The decrease in gross margin percentage was due to the impact of our recent acquisitions,
whose revenues carry lower profit margins than our existing business.
General and Administrative Expense
(In thousands, except percentages)
General and administrative expense
Percentage of revenue
Year Ended
Change
December 31,
2017
82,983
$
December 31,
2016
55,877
$
$
28.9%
26.8%
$
27,106
%
48.5%
General and administrative expense increased for the year ended December 31, 2017 due primarily
to the $19.9 million impact from our recent acquisitions, primarily LifeWatch, a $6.0 million impact from
intangible asset amortization attributed to LifeWatch, as well as a $2.2 million increase in technology costs,
offset partially by $0.7 million in headcount related savings. The increase in the general and administrative
expense as a percent of revenue was the result of the intangible asset amortization recorded stemming from
the LifeWatch acquisition.
Sales and Marketing Expense
(In thousands, except percentages)
Sales and marketing expense
Percentage of revenue
Year Ended
Change
December 31,
2017
35,322
$
December 31,
2016
28,636
$
$
12.3%
13.7%
$
6,686
%
23.3%
The increase to sales and marketing expense for the year ended December 31, 2017 was due primarily
to the $10.7 million impact from our recent acquisitions, primarily LifeWatch, and $2.2 million in added
employee related costs exclusive of our recent acquisitions, partially offset by approximately $5.0 million
of synergies obtained from the recent acquisitions and $1.1 million due to lower sales meetings costs. Sales
and marketing expense decreased as a percentage of revenue due to the leverage and synergies obtained
from our acquired businesses.
45
Bad Debt Expense
(In thousands, except percentages)
Bad debt expense
Percentage of revenue
Year Ended
Change
December 31,
2017
13,291
$
December 31,
2016
9,931
$
$
4.6%
4.8%
$
3,360
%
33.8%
The increase in bad debt expense for the year ended December 31, 2017 was due to increased
revenue from our recently acquired business and the timing of revenue and collections. Substantially all
of our bad debt expense relates to the Healthcare segment. Bad debt expense in the Research segments
was minimal and is recorded on a specific account basis.
Research and Development Expense
(In thousands, except percentages)
Research and development expense
Percentage of revenue
Year Ended
Change
December 31,
2017
11,101
$
December 31,
2016
8,355
$
$
3.9%
4.0%
$
2,746
%
32.9%
Research and development expense for the year ended December 31, 2017 increased due primarily
to the $5.2 million impact from our recent acquisitions, primarily LifeWatch, offset partially by $2.7 million
of synergies obtained from the recent acquisitions and other cost savings.
Other Charges
(In thousands, except percentages)
Other charges
Percentage of revenue
Year Ended
Change
December 31,
2017
31,436
$
December 31,
2016
8,639
$
$
11.0%
4.1%
$
22,797
%
263.9%
The increase in other charges for the year ended December 31, 2017 was primarily related to $12.0
million of asset impairment charges, $4.9 million in additional professional fees, $4.1 million of severance
and employee related costs, and $1.5 million of legal fees, primarily related to the acquisition of LifeWatch.
These charges were partially offset by a $2.6 million decrease in the fair value of acquisition-related
consideration recognized for previous acquisitions.
46
Other Expense
(In thousands, except percentages)
Interest expense
Loss on extinguishment of debt
Loss on equity method investment
Other non-operating expense, net
Total Other expense
Percentage of revenue
Year Ended
Change
$
December 31,
2017
(4,897)
(543)
(384)
(2,809)
(8,633)
$
$
December 31,
2016
(1,830)
—
(287)
(125)
(2,242)
$
$
(3,067)
(543)
(97)
(2,684)
(6,391)
$
$
%
167.6%
n/a
33.8%
2,147.2%
285.1%
3.0%
1.1%
Total other expense for the year ended December 31, 2017 increased due primarily to $3.1 million
of interest expense resulting from our new credit agreement entered into concurrent with our LifeWatch
acquisition and a $2.5 million non-operating charge for our settlement with the Office of Civil Rights related
to the theft of two unencrypted laptop computers in 2011. Additionally, we incurred a $1.3 million non-
operating charge related to the derivative instrument premium for the acquisition of LifeWatch, and a $0.5
million loss on the extinguishment of our previous credit agreement with Healthcare Financial Solutions,
LLC, offset partially by a non-operating gain of approximately $1.3 million related to the favorable
settlement with the former owner of Mednet.
Income Taxes
(In thousands, except percentages)
Benefit from/(provision for) income taxes
Effective tax benefit/(provision) rate
December 31,
2017
$ (6,747)
December 31,
2016
37,667
$
(64.9)%
238.9%
$
%
$
(44,414)
(117.9)%
Year Ended
Change
For the year ended December 31, 2017, we recognized a net tax provision primarily due to the re-
measurement of our deferred tax assets and liabilities at the new federal corporate rate of 21 percent, which
total $8.0 million.
For the year ended December 31, 2016, we recognized a net tax benefit due primarily to a $51.6
million benefit related to the release of our valuation allowance. The release of our valuation allowance
was partially offset by adjustments to deferred taxes and state taxes levied on fiscal 2016 taxable income.
47
Years Ended December 31, 2016 and 2015
Revenue
(In thousands, except percentages)
Healthcare
Research
Technology
Total revenue
Year Ended
Change
$
December 31,
2016
165,664 $
32,565
10,103
208,332 $
December 31,
2015
145,963 $
21,853
10,697
178,513 $
$
$
19,701
10,712
(594)
29,819
%
13.5 %
49.0 %
(5.6)%
16.7 %
Healthcare revenue increased for the year ended December 31, 2016 due to increased patient
volumes as well as higher MCT Medicare pricing. In addition, Research revenue increased due to the
acquisition of VirtualScopics. These increases were partially offset by a decrease in Technology revenue
due to lower sales volume resulting from customers delaying purchases as they await the release of upgraded
devices, partially offset by increases due to current year acquisitions.
Gross Profit
(In thousands, except percentages)
Gross profit
Percentage of revenue
Year Ended
Change
December 31,
2016
$ 129,450
December 31,
2015
$ 106,557
$
62.1%
59.7%
$
22,893
%
21.5%
The increase in gross margin percentage for the year ended December 31, 2016 was due to Healthcare
volume efficiencies and higher Healthcare pricing, as well as reduced costs related to shipping and device
communication. These increases were slightly offset by the impact of our acquisitions, which carry lower
profit margins than our existing business.
General and Administrative Expense
(In thousands, except percentages)
General and administrative expense
Percentage of revenue
Year Ended
Change
December 31,
2016
55,877
$
December 31,
2015
47,882
$
$
26.8%
26.8%
$
7,995
%
16.7%
General and administrative expense for the year ended December 31, 2016 increased due to the
addition of $3.8 million from our acquired businesses, as well as a $2.6 million increase in employee related
costs and a $1.6 million increase in stock compensation expense. $1.3 million of the increase in stock
compensation expense related to a performance bonus awarded to a third party.
48
Sales and Marketing Expense
(In thousands, except percentages)
Sales and marketing expense
Percentage of revenue
Year Ended
Change
December 31,
2016
28,636
$
December 31,
2015
27,936
$
13.7%
15.6%
$
$
700
%
2.5%
Sales and marketing expense for the year ended December 31, 2016 increased due to the addition
of $0.9 million from our acquired businesses, partially offset by a $0.2 million decrease in employee related
costs.
Bad Debt Expense
(In thousands, except percentages)
Bad debt expense
Percentage of revenue
Year Ended
Change
December 31,
2016
9,931
$
December 31,
2015
8,047
$
$
4.8%
4.5%
$
1,884
%
23.4%
Bad debt expense for the year ended December 31, 2016 increased due to the timing of revenue
and collections. Substantially all of our bad debt expense relates to the Healthcare segment. Bad debt
expense in the Technology and Research segments was minimal and is recorded on a specific account basis.
Research and Development Expense
(In thousands, except percentages)
Research and development expense
Percentage of revenue
Year Ended
Change
December 31,
2016
8,355
$
December 31,
2015
7,111
$
$
4.0%
4.0%
$
1,244
%
17.5%
Research and development expense for the year ended December 31, 2016 increased due to the
addition of $1.0 million from our acquired businesses as well as a $0.2 million increase in consulting costs
and a $0.1 million increase in employee related expenses.
Other Charges
(In thousands, except percentages)
Other charges
Percentage of revenue
Year Ended
Change
December 31,
2016
8,639
$
December 31,
2015
6,063
$
$
4.1%
3.4%
$
2,576
%
42.5%
Other charges for the year ended December 31, 2016 consisted of legal charges of $7.2 million
related primarily to patent litigation cases in which we are the plaintiff, professional fees of $0.7 million,
severance and employee related costs of $0.6 million and $0.1 million of other acquisition related costs
from our 2016 acquisitions.
49
Other charges for the year ended December 31, 2015 consisted of legal charges of $5.8 million
related primarily to patent litigation and severance and employee related costs of $0.3 million associated
with activities surrounding our 2014 acquisitions.
Other Expense
(In thousands, except percentages)
Interest expense
Loss on equity method investment
Other non-operating expense, net
Total Other expense
Percentage of revenue
Year Ended
Change
$
December 31,
2016
(1,830)
(287)
(125)
(2,242)
$
$
December 31,
2015
(1,534)
—
(88)
(1,622)
$
1.1%
0.9%
$
%
$
$
(296)
(287)
(37)
(620)
19.3%
n/a
42.0%
38.2%
Total other expense for the year ended December 31, 2016 increased due primarily to increased
interest expense related to our borrowings under our Revolving Loans as well as due to recognizing our
share of our equity method investee’s loss.
Income Taxes
(In thousands, except percentages)
Benefit from/(provision for) income taxes
Effective tax benefit/(provision) rate
December 31,
2016
37,667
$
238.9%
December 31,
2015
$
$
(468)
(5.9)%
$
38,135
%
8,148.5%
Year Ended
Change
For the year ended December 31, 2016, we recognized a net tax benefit due primarily to a $51.6
million benefit related to the release of our valuation allowance. The release of our valuation allowance
was partially offset by adjustments to deferred taxes and state taxes levied on fiscal 2016 taxable income.
For the year ended December 31, 2015, we recognized a tax provision due primarily to Alternative
Minimum Tax (“AMT”) levied on fiscal 2015 taxable income net of allowable AMT net operating loss
carryovers, as well as an increase in the deferred tax liability created by the book to tax differences on
indefinite lived assets.
50
Liquidity and Capital Resources
The following table highlights certain information related to our liquidity and capital resources:
Year Ended
(In thousands, except ratios)
Cash and cash equivalents
Healthcare accounts receivable, net of allowance for doubtful accounts
Other accounts receivable, net of allowance for doubtful accounts
Availability under revolving credit facility
Working capital
Current ratio
Total capital lease obligations
Total debt
The following table highlights certain cash flow activities:
(In thousands)
Net income/(loss)
Non-cash adjustments to net income
Cash used for working capital
Cash provided by operating activities
$
December 31,
2017
36,022 $
25,190
13,296
50,000
December 31,
2016
23,052
14,594
12,261
12,000
$
$
$
39,153 $
1.8
28,053
1.9
5,509 $
199,356 $
288
25,161
Year Ended
$
December 31,
2017
(17,143) $
66,193
(25,268)
23,782
December 31,
2016
53,437
(6,765)
(7,821)
38,851
Cash used for acquisitions of businesses, net of cash acquired
Purchases of property, equipment and investment in internally developed
(161,479)
(13,697)
(24,970)
(10,899)
software
Cash used in investing activities
(177,188)
(36,181)
Cash provided by financing activities
$
166,457 $
1,427
Non-cash adjustments to income primarily relate to bad debt, depreciation, amortization and stock
compensation expense offset by any non-cash tax benefit. For the year ended December 31, 2016, we
released a $51.6 million tax valuation allowance on the basis of management’s reassessment of the amount
of deferred income tax assets that are more likely than not to be realized, which was a component of the
non-cash adjustments recognized.
During the year ended December 31, 2017 we acquired LifeWatch for $161.5 million cash along
with $117.4 million in common stock. During the year ended December 31, 2016, we acquired Telcare for
$7.0 million cash, VirtualScopics for approximately $15.0 million, and the ePatch division of DELTA for
$3.0 million cash along with $2.9 million in common stock.
In conjunction with the LifeWatch acquisition, we established a new Credit Agreement with
SunTrust Bank and Lenders named therein in the amount of $205.0 million and extinguished the previous
51
Healthcare Financial Solutions Credit Agreement. For further details regarding the Credit Agreements,
please see “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated
Financial Statements; Note 10. Credit Agreement” below.
Contractual Obligations and Commitments
The following table describes our long-term contractual obligations and commitments as of
December 31, 2017:
Payments due by period
Less than 1
year
More than 5
Years
$
1-3 Years
3-5 Years
Total
23,655 $
5,509
236,083
2,184
$ 267,431 $
(in thousands)
Operating lease obligations
Capital lease obligations
Debt and interest obligations(1)
Purchase obligations
Total(2)(3)
________________
(1) Our debt bears a variable interest rate, at the election of the Company, with an applicable margin determined by the credit
agreement. The amounts above assume the rate and margin as of December 31, 2017 throughout the term. The rate and
margin may fluctuate, as may our election of LIBOR or Base Rate pricing, throughout the term of the loan. Excluded from
the amounts in the table is the 0.3% commitment fee payable on the unused portion of our line of credit.
5,871 $
4,023
8,197
2,184
20,275 $
4,261 $
—
193,110
—
8,008 $
1,486
34,776
—
5,515
—
—
—
5,515
44,270 $ 197,371 $
(2) In connection with certain acquisitions completed in 2016, we have contingent consideration obligations payable to the sellers
in these transactions upon the achievement of certain milestones. The maximum aggregate undiscounted amounts potentially
payable not included in the table above total $5.0 million.
(3) Our other long-term liabilities in our consolidated balance sheets consist primarily of reserves for uncertain tax positions,
pension obligations and contingent consideration. As of December 31, 2017, we are unable to make reasonably reliable
estimates of both the timing of tax audit outcomes and if unfavorable, the timing of payments; therefore, such amounts are
not included in the above contractual obligation table. See “Part II; Item 8. Financial Statements and Supplementary
Data; Notes to Consolidated Financial Statements; Note 16. Income Taxes” for further discussion related to uncertain
tax positions.
As of December 31, 2017, we were bound under facility leases and several office equipment leases
that are included in the table above. Our debt bears a variable interest rate of LIBOR plus the applicable
margin, or the prime rate plus the applicable margin. If LIBOR rates increase, obligations will increase
above the amounts disclosed above.
Recent Accounting Pronouncements
For further details on recently issued accounting pronouncements, please refer to “Part II; Item
8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements;
Note 2. Summary of Significant Accounting Policies; (t) Recent Accounting Pronouncements.”
Off-Balance Sheet Arrangements
As of December 31, 2017 and 2016, we did not have any relationships with unconsolidated entities
or financial partnerships, such as entities referred to as structured finance or special purpose entities, which
would have been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
52
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Our cash and cash equivalents as of December 31, 2017 were $36.0 million. We do not invest in
any short-term or long-term securities, nor do we hold any derivative financial instruments for trading or
speculative purposes.
At December 31, 2017, we had $199.4 million of variable rate debt, inclusive of debt discounts and
deferred charges, at a rate of LIBOR plus the applicable margin, or the prime rate plus the applicable margin.
A 1.0% change in either the LIBOR rate, prime rate, or the applicable margin would result in a change in
interest expense of approximately $2.1 million. For further details regarding the debt, rates or applicable
margin, please refer to “Part II; Item 8. Financial Statements and Supplementary Data; Notes to
Consolidated Financial Statements; Note 10. Credit Agreement” included in this Annual Report on
Form 10-K.
53
Item 8. Financial Statements and Supplementary Data
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, 2017 and 2016, and the related consolidated statements of operations and comprehensive income/
(loss), cash flows and equity for each of the three years in the period ended December 31, 2017, and the related
notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position
of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2017, 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, 2017, 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 26, 2018 expressed an unqualified
opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting
for share-based payments to employees as a result of the adoption of the amendments to the FASB Accounting
Standards Codification resulting from Accounting Standards Update No. 2016-09, “Improvements to Employee
Share-Based Payment Accounting,” in 2016 and 2017.
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.
54
/s/ ERNST & YOUNG LLP
We have served as BioTelemetry Inc.’s auditors since 2004.
Philadelphia, Pennsylvania
February 26, 2018
55
BIOTELEMETRY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and par value)
Assets
Current assets:
Cash and cash equivalents
Healthcare accounts receivable, net of allowance for doubtful accounts of
$15,556 and $12,198 at December 31, 2017 and 2016, respectively
Other accounts receivable, net of allowance for doubtful accounts of $1,425
and $665 at December 31, 2017 and 2016, respectively
Inventory
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Deferred tax asset
Other assets
Total assets
Liabilities and Equity
Current liabilities:
Accounts payable
Accrued liabilities
Current portion of capital leases obligations
Current portion of long-term debt
Deferred revenue
Total current liabilities
Long-term portion of capital lease obligations
Long-term debt
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Common stock—$.001 par value as of December 31, 2017 and 2016;
200,000,000 shares authorized as of December 31, 2017 and 2016;
32,460,668 and 28,261,503 shares issued and outstanding at December 31,
2017 and 2016, respectively
Paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total BioTelemetry, Inc.’s stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
December 31,
2017
2016
$
36,022 $
23,052
25,190
14,594
13,296
5,332
10,268
90,108
49,194
141,707
223,105
17,681
2,767
12,261
5,176
4,477
59,560
25,823
33,472
41,068
36,636
2,425
$ 524,562 $ 198,984
13,227
27,357
4,023
2,050
4,298
50,955
1,486
197,306
25,112
274,859
12,425
13,698
162
1,250
3,972
31,507
126
23,911
4,526
60,070
32
409,517
(114)
(158,678)
250,757
(1,054)
249,703
28
281,642
(34)
(142,722)
138,914
—
138,914
$ 524,562 $ 198,984
See accompanying Notes to Consolidated Financial Statements.
56
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
(In thousands, except per share amounts)
Revenue:
Healthcare
Research
Technology
Total revenue
Cost of revenue:
Healthcare
Research
Technology
Total cost of revenue
Gross profit
Operating expenses:
General and administrative
Sales and marketing
Bad debt expense
Research and development
Other charges
Total operating expenses
Income/(loss) from operations
Other expense:
Interest expense
Loss on extinguishment of debt
Loss on equity method investment
Other non-operating expense, net
Total other expense
Income/(loss) before income taxes
(Provision for)/benefit from income taxes
Net income/(loss)
Net loss attributable to noncontrolling interests
Net income/(loss) attributable to BioTelemetry, Inc.
Other comprehensive income/(loss):
Foreign currency translation loss
Comprehensive income/(loss) attributable to BioTelemetry, Inc.
Net income/(loss) per common share attributable to BioTelemetry, Inc.:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Dilutive stock options and restricted stock units
Diluted
Anti-dilutive stock options and restricted stock units excluded from
weighted average calculation
Year Ended December 31,
2016
2015
2017
$
$
$
$
$
$
$
$
$
$
$
234,385
38,790
13,601
286,776
81,356
22,881
10,169
114,406
172,370
82,983
35,322
13,291
11,101
31,436
174,133
(1,763)
(4,897)
(543)
(384)
(2,809)
(8,633)
(10,396)
(6,747)
(17,143)
(1,187)
(15,956) $
165,664
32,565
10,103
208,332
53,559
18,395
6,928
78,882
129,450
55,877
28,636
9,931
8,355
8,639
111,438
18,012
(1,830)
—
(287)
(125)
(2,242)
15,770
37,667
53,437
—
53,437
(80)
(16,036) $
(22)
53,415
(0.53) $
(0.53) $
30,386
—
30,386
1.91
1.75
27,920
2,569
30,489
145,963
21,853
10,697
178,513
51,693
12,728
7,535
71,956
106,557
47,882
27,936
8,047
7,111
6,063
97,039
9,518
(1,534)
—
—
(88)
(1,622)
7,896
(468)
7,428
—
7,428
(12)
7,416
0.27
0.26
27,116
1,973
29,089
463
380
1,103
See accompanying Notes to Consolidated Financial Statements.
57
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities
Net income/(loss)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Year Ended December 31,
2016
2015
2017
$
(17,143) $
53,437
$
7,428
Bad debt expense
Depreciation
Amortization of intangibles
Impairment charge
Stock-based compensation
Equity method investment loss
Change in fair value of acquisition-related contingent consideration
Write off of derivative premium
Accretion of debt discount and amortization of deferred charges
Loss on extinguishment of debt
Non-cash gain on legal settlement
Non-cash lease (income)/expense
Non-cash tax (benefit)/expense
Changes in operating assets and liabilities:
Healthcare and other accounts receivable
Inventory
Prepaid expenses and other assets
Accounts payable
Accrued and other liabilities
Liability associated with the Civil Investigative Demand
Net cash provided by operating activities
Investing activities
Acquisition of businesses, net of cash acquired
Purchases of property and equipment and investment in internally developed software
Purchase of derivative instrument
Investment in equity method investee
Net cash used in investing activities
Financing activities
Proceeds related to the exercising of stock options and employee stock purchase plan
Tax payments related to the vesting of shares
Issuance of long-term debt
Borrowings under revolving loans
Principal payments on revolving loans
Payment of debt issuance costs
Principal payments on long-term debt
Principal payments on capital lease obligations
Acquisition of noncontrolling interests
Net cash provided by/(used in) financing activities
Effect of exchange rate changes on cash
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents—beginning of period
Cash and cash equivalents—end of period
Supplemental disclosure of cash flow information
Non-cash purchases of property and equipment
Non-cash fair value of common stock returned in legal settlement
Non-cash fair value of equity issued for acquisition of business
Cash paid for interest
Cash paid for taxes
13,291
18,337
10,224
12,045
7,680
384
(2,605)
1,322
678
543
(1,333)
(423)
6,050
(15,455)
665
(694)
(9,622)
(162)
—
23,782
(161,479)
(13,697)
(1,322)
(690)
(177,188)
6,071
(1,933)
205,000
—
(3,000)
(6,213)
(25,840)
(2,863)
(4,765)
166,457
(81)
12,970
23,052
36,022
498
2,753
117,440
3,888
1,648
$
$
$
$
$
$
9,931
10,547
3,722
—
6,502
287
—
—
217
—
—
170
(38,141)
(8,707)
(753)
(1,050)
3,145
(456)
—
38,851
(24,970)
(10,899)
—
(312)
(36,181)
2,519
(2,333)
—
14,500
(11,500)
—
(1,438)
(321)
—
1,427
(31)
4,066
18,986
23,052
$
— $
—
2,885
1,273
359
$
8,047
8,987
3,501
—
4,952
—
—
—
259
—
—
(14)
245
(7,677)
188
(3)
(4,699)
(464)
(6,400)
14,350
—
(13,600)
—
—
(13,600)
1,222
(1,575)
—
—
—
—
(938)
(480)
—
(1,771)
—
(1,021)
20,007
18,986
—
—
—
1,044
384
See accompanying Notes to Consolidated Financial Statements.
58
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except shares)
Shares
Amount
Common Stock
BioTelemetry, Inc. Equity
Accumulated
Other
Comprehensive
Income/(Loss)
Paid-in
Capital
Accumulated
Deficit
Noncontrolling
Interests
Total
Equity
Balance December 31, 2014
26,693,248
$
27
$ 267,236
$
— $
(203,587) $
— $
63,676
Share issuances related to stock
compensation plans
Stock-based compensation
719,564
—
Shares withheld to cover taxes on
vesting of share based awards
(167,090)
Issuance of stock related to
business combinations
Currency translation adjustment
Net income
32,217
—
—
Balance December 31, 2015
27,277,939
Share issuances related to stock
compensation plans
Stock-based compensation
Shares withheld to cover taxes on
vesting of share based awards
Issuance of stock related to 2014
business combination
Currency translation adjustment
Net income
917,912
—
(178,867)
244,519
—
—
Balance December 31, 2016
28,261,503
Share issuances related to stock
compensation plans
Stock-based compensation
Shares withheld to cover taxes on
vesting of share based awards
Issuance of stock related to
business combination
Acquisition of noncontrolling
interest
Common stock returned in legal
settlement
Currency translation adjustment
Net loss
722,441
—
(79,589)
3,615,840
19,806
(79,333)
—
—
Balance December 31, 2017
32,460,668
$
—
—
—
—
—
—
27
1
—
—
—
—
—
28
—
—
—
4
—
—
—
—
32
1,222
4,952
(1,575)
235
—
—
272,070
2,518
6,502
(2,333)
2,885
—
—
281,642
6,071
7,680
(1,933)
116,788
2,022
(2,753)
—
—
—
—
—
—
(12)
—
(12)
—
—
—
—
(22)
—
(34)
—
—
—
—
—
—
(80)
—
—
—
—
—
—
7,428
(196,159)
—
—
—
—
—
53,437
(142,722)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,222
4,952
(1,575)
235
(12)
7,428
75,926
2,519
6,502
(2,333)
2,885
(22)
53,437
138,914
6,071
7,680
(1,933)
11,224
128,016
(11,091)
(9,069)
—
—
(2,753)
(80)
(17,143)
$ 409,517
$
(114) $
(158,678) $
(1,054) $
249,703
(15,956)
(1,187)
See accompanying Notes to Consolidated Financial Statements.
59
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
BioTelemetry, Inc. (“BioTelemetry,” “Company,” “we,” “our” or “us”), a Delaware corporation,
provides monitoring services and digital population health management for healthcare providers, medical
device manufacturing and centralized core laboratory services for clinical research.
We operate under three reportable segments: (1) Healthcare, (2) Research and (3) Technology. The
Healthcare segment is focused on the diagnosis and monitoring of cardiac arrhythmias, or heart rhythm
disorders. We offer cardiologists and electrophysiologists, neurologists and primary care physicians a full
spectrum of solutions which provides them with a single source of cardiac monitoring services. These
services range from the differentiated mobile cardiac telemetry service (“MCT”), to event, traditional Holter,
extended-wear Holter, Pacemaker and International Normalized Ratio (“INR”) monitoring. Since we
became focused on cardiac monitoring in 1999, we have developed a proprietary integrated patient
management platform that incorporates a wireless data transmission network, U.S. Food and Drug
Administration (“FDA”) cleared algorithms, medical devices and 24-hour monitoring service centers. The
Research segment is engaged in central core laboratory services providing cardiac monitoring, imaging
services, scientific consulting and data management services for drug and medical device trials. The
Technology segment focuses on the development, manufacturing, testing and marketing of cardiovascular
and blood glucose monitoring devices to medical companies, clinics and hospitals.
We have grown both organically and through recent acquisitions:
• On July 12, 2017, we acquired approximately 97% of the outstanding shares of LifeWatch AG
(“LifeWatch”). On that date, we acquired control of LifeWatch and began consolidating its
financial statements. In September 2017, we purchased 343,525 additional shares of LifeWatch
for cash consideration of $4.8 million and the issuance of 19,806 of our shares with a fair value
of $0.6 million. We completed the acquisition of the remaining shares in December 2017, for
aggregate consideration of $2.9 million in cash and 58,786 shares with a fair market value of
$2.0 million which was settled in early January 2018. LifeWatch is included in the Healthcare
segment.
• On December 1, 2016, we acquired the stock of Telcare Medical Supply, Inc. and certain assets
of Telcare Inc. (collectively, “Telcare”). Telcare is included in the Technology segment.
• On May 11, 2016, we acquired VirtualScopics, Inc. (“VirtualScopics”), a leading provider of
clinical trial imaging solutions. VirtualScopics is included in the Research segment.
• On April 1, 2016, we acquired substantially all of the assets of the ePatch division (“ePatch”)
of DELTA Danish Electronics, Light, and Acoustics (“DELTA”), inclusive of all products and
indications under development. ePatch is included in the Technology segment.
For further details related to our recent acquisitions, please see “Note 3. Acquisitions” below.
Our common stock is traded on the NASDAQ Global Select Market under our symbol “BEAT.”
60
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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:
•
•
•
disaggregating the components of other expense in the consolidated statements of operations,
disaggregating the equity method investment loss from the change in prepaid expenses and other
assets in the consolidated statements of cash flows,
reclassifying research and development costs from the Corporate and Other segment to the
Healthcare segment in our segment information disclosures.
The reclassifications had no impact on previously reported consolidated net income/(loss), cash
flows or accumulated deficit.
b) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires that
management make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual results may differ from
those estimates.
c) Fair Value of Financial Instruments
Fair value is defined as the exit price, the price that would be received to sell an asset or transfer a
liability in an orderly transaction between market participants at the measurement date. The fair value
hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels,
as defined below. Observable inputs are inputs a market participant would use in valuing an asset or liability
based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect
our own assumptions about the factors a market participant would use in valuing an asset or liability
developed using the best information available in the circumstances. The classification of an asset’s or
liability’s level within the fair value hierarchy is determined based on the lowest level input that is significant
to the fair value measurement.
Level 1 - Quoted prices in active markets for an identical asset or liability.
Level 2 - Inputs that are observable for the asset or liability, either directly or indirectly through
market corroboration, for substantially the full term of the asset or liability.
Level 3 - Inputs that are unobservable for the asset or liability, based on our own assumptions
about the assumptions a market participant would use in pricing the asset or liability.
61
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our financial instruments consist primarily of cash and cash equivalents, Healthcare accounts
receivable, other accounts receivable, accounts payable, contingent consideration, short-term debt and long-
term debt. With the exception of the contingent consideration and long-term debt, the carrying value of
these financial instruments approximates their fair value because of their short-term nature (classified as
Level 1).
Our long-term debt (classified as Level 2) is measured using market prices for similar instruments,
inputs such as the borrowing rates currently available, benchmark yields, actual trade data, broker/dealer
quotes and other similar data obtained from quoted market prices or independent pricing vendors.
The fair value of contingent consideration (classified as Level 3) is measured on a recurring basis
using unobservable inputs such as projected payment dates, probabilities of meeting specified milestones
and other such variables resulting in payment amounts which are discounted back to present value using
a probability-weighted discounted cash flow model. Adjustments to contingent consideration are recorded
in other charges in the consolidated statements of operations and comprehensive income/(loss).
In addition to the recurring fair value measurements, the fair value of certain assets acquired and
liabilities assumed in connection with a business combination are recorded at fair value primarily, using a
discounted cash flow model (classified as Level 3). This valuation technique requires us to make certain
assumptions, including, but not limited to, future operating performance and cash flows, royalty rate and
other such variables which are discounted to present value using a discount rate that reflects the risk factors
associated with future cash flow, the characteristics of the assets acquired and liabilities assumed and the
experience of the acquired business. Non-financial assets such as goodwill, intangible assets, and property,
plant, and equipment are subsequently measured at fair value when there is an indicator of impairment and
recorded at fair value only when an impairment is recognized. We assess the impairment of 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.
e) Accounts Receivable and Allowance for Doubtful Accounts
Healthcare accounts receivable is related to the Healthcare segment and is recorded at the time revenue
is recognized, net of contractual allowances, and is presented on the consolidated balance sheet net of an
allowance for doubtful accounts. The ultimate collection of accounts receivable may not be known for
several months after services have been provided and billed. The percentages and amounts used to record
bad debt expense and the allowance for doubtful accounts are supported by various methods and analyses,
including current and historical cash collections and the aging of receivables by payor. Because of
continuing changes in the health care industry and third-party reimbursement, it is possible that our estimates
of collectability could change, which could have a material impact on our operations and cash flows.
Other accounts receivable is related to the Technology and Research segments and is recorded at
the time revenue is recognized, or when products are shipped or services are performed. We estimate an
62
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
allowance for doubtful accounts on a specific account basis, and consider several factors in our analysis
including customer specific information and the aging of the account.
We write-off receivables when the likelihood for collection is remote and when we believe collection
efforts have been fully exhausted and we do not intend to devote additional resources in attempting to
collect. We perform write-offs on a monthly basis. In the Healthcare segment, we wrote-off $8.8 million
and $8.4 million of receivables for the years ended December 31, 2017 and 2016, respectively. The impact
was a reduction of gross accounts receivable and a reduction in the allowance for doubtful accounts. There
were no material write-offs in the Technology and Research segments. Additionally, we recorded bad debt
expense of $13.3 million, $9.9 million and $8.0 million for the years ended December 31, 2017, 2016 and
2015, respectively.
f) Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily
of cash, cash equivalents, Healthcare accounts receivables and other accounts receivables. We maintain
our cash and cash equivalents with high quality financial institutions to mitigate this risk. We perform
ongoing credit evaluations of our customers and generally do not require collateral. We record an allowance
for doubtful accounts in accordance with the procedures described above. Past-due amounts are written-
off against the allowance for doubtful accounts when collections are believed to be unlikely and all collection
efforts have ceased.
At December 31, 2017, 2016 and 2015, one payor, Medicare, accounted for 21%, 11% and 13%,
respectively, of our gross accounts receivable.
g) Inventory
Inventory is valued at the lower of cost (using first-in, first-out cost method) or market (net realizable
value or replacement cost). Management reviews inventory for specific future usage, and estimates of
impairment of individual inventory items are recorded to reduce inventory to the lower of cost or market.
h) Property and Equipment
Property and equipment is recorded at cost, except for assets acquired in business combinations,
which are recorded at fair value as of the acquisition date. Depreciation is recorded over the estimated
useful life of each class of depreciable assets, and is computed using the straight-line method. Leasehold
improvements are amortized over the shorter of the estimated asset life or term of the lease. Repairs and
maintenance costs are charged to expense as incurred. Costs of additions and improvements are capitalized.
i) Impairment of Long-Lived Assets
The carrying value of long-lived assets, other than goodwill and indefinite-lived intangible assets,
is evaluated when events or changes in circumstances indicate the carrying value may not be recoverable
or the useful life has changed. We consider historical performance and anticipated future results in our
evaluation of potential impairment. Accordingly, when indicators of impairment are present, we evaluate
the carrying value of these assets in relation to the operating performance of the business and the
undiscounted cash flows expected to result from the use of these assets. If the carrying amount of a long-
lived asset exceeds its expected undiscounted cash flows, an impairment charge is recognized to the extent
the carrying amount exceeds its fair value.
63
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
j) Derivative Instruments
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. 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 and comprehensive income/(loss).
k) Equity Method Investments
We account for investments using the equity method of accounting if the investment provides us
the ability to exercise significant influence, but not control, over the investee. Significant influence is
generally deemed to exist if our ownership interest in the voting stock of the investee ranges between 20%
and 50%, although other factors, such as representation on the investee’s board of directors, are considered
in determining whether the equity method of accounting is appropriate. Under the equity method of
accounting, the investment is recorded at cost in the consolidated balance sheets under other assets and is
periodically adjusted for capital contributions, dividends received and our share of the investee’s earnings
or losses together with other-than-temporary impairments which are recorded through loss on equity method
investment in the consolidated statements of operations and comprehensive income/(loss).
l) Noncontrolling Interest
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
attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face
of the consolidated statements of income; 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.
LifeWatch owns 55% of LifeWatch Turkey Holding AG (“LifeWatch Turkey,” domiciled in
Switzerland), with their partner, IKSIR TEKNOLOJI SAGLIK VE KIMYA SAN. ve TIC. A.S., a 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. As of December 31, 2017, LifeWatch Turkey’s net assets were $3.6 million and their loss since
July 12, 2017 was $2.3 million.
Amounts pertaining to the noncontrolling ownership interest of LifeWatch Turkey held by third
parties in our operating results are combined and reported as noncontrolling interests in the accompanying
consolidated financial statements.
m) Goodwill and Acquired Intangible Assets
Goodwill is the excess of the purchase price of an acquired business over the amounts assigned to
assets acquired and liabilities assumed in a business combination. In accordance with ASC 350, Intangibles
64
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
— Goodwill and Other (“ASC 350”), goodwill is reviewed for impairment annually, or when events arise
that could indicate that an impairment exists. Initially, we qualitatively assess whether it is more-likely-
than-not that an impairment exists for each of our reporting units. 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 an impairment test in accordance with ASC 350. We compare the fair value of our reporting
units to their carrying value. If the reporting unit’s carrying value exceeds its fair value, an impairment loss
equal to the difference is recognized. The loss recognized shall not exceed the total amount of goodwill
allocated to the reporting unit, and the income tax effects from any deductible goodwill on the carrying
value of the reporting unit when measuring the goodwill impairment loss, if any, are considered.
For the purpose of performing our goodwill impairment analysis, we consider our business to be
composed of three reporting units: Healthcare, Technology and Research. When performing a quantitative
analysis, we calculate the fair value of the reporting units utilizing a weighting of 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 combination of an income and a market approach provides a reasonable basis to estimate the fair value
of our reporting units.
Acquired intangible assets are recorded at fair value on the acquisition date. The estimated fair
values and useful lives of intangible assets are determined by assessing many factors including estimates
of future operating performance and cash flows of the acquired business, the characteristics of the intangible
assets and the experience of the acquired business. Independent appraisal firms may assist with the valuation
of acquired assets. The impairment test for indefinite-lived intangible assets other than goodwill consists
of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset.
We used a qualitative approach to determine impairment for our indefinite-lived as well as for our
amortizable intangible assets.
n) Revenue Recognition
We recognize approximately 81% of our total revenue from patient monitoring services in our
Healthcare segment. We receive a significant portion of this revenue from third-party commercial payors
and governmental entities. We also receive reimbursement directly from patients through co-pays,
deductibles and self-pay arrangements. Revenue from the Medicare program is based on reimbursement
rates set by CMS. For the years ended December 31, 2017, 2016 and 2015, revenue from Medicare as a
percentage of total revenue was 34%, 33% and 34%, respectively. Revenue from contracted commercial
payors is recorded at the negotiated contractual rate. Revenue from non-contracted commercial payors is
recorded at net realizable value based on historical payment patterns. Adjustments to the estimated net
realizable value, based on final settlement with the third-party payors, are recorded upon settlement. If we
do not have consistent historical information regarding collectability from a given payor, revenue is
recognized when cash is received. Unearned amounts are appropriately deferred until service has been
completed. For the years ended December 31, 2017 and 2016, deferred revenues related to the Healthcare
segment were $2.4 million and $1.1 million, respectively; none of these deferred revenues were refundable.
65
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Research revenue includes revenue for core laboratory services. Our Research 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 recognize revenue as we perform the services. Our
site support revenue, consisting of equipment rentals and sales along with related supplies and logistics
management, are recognized at the time of sale or over the rental period. Under a typical contract, customers
pay us a portion of our fee for these services upon contract execution as an upfront deposit. Unearned
revenue, including upfront deposits, are deferred, and then recognized as the services are performed. For
the years ended December 31, 2017 and 2016, deferred revenues related to the Research segment were
$4.2 million and $2.7 million, respectively; these deferred revenues were refundable.
Revenue in our Technology segment is received from the sale of products, product repair and supplies
which are recognized when shipped, or as service is completed. Deferred revenues related to our Technology
segment were immaterial for the years ended December 31, 2017 and 2016.
For arrangements with multiple deliverables, the revenue is allocated to each element (both delivered
and undelivered items) based on their relative selling prices or management’s best estimate of their selling
prices, when vendor-specific or third-party evidence is unavailable.
We record reimbursements received for out-of-pocket expenses, including freight, incurred as
revenue in the accompanying consolidated statements of operations and comprehensive income (loss).
Revenue generally is recognized net of any taxes collected from customers and subsequently remitted to
government authorities.
o) Stock-Based Compensation
ASC 718, Compensation—Stock Compensation (“ASC 718”), addresses the accounting for share-
based payment transactions in which an enterprise receives employee services in exchange for: (i) equity
instruments of the enterprise or (ii) liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity instruments. ASC 718 requires that an
entity measures the cost of equity-based service awards based on the grant-date fair value of the award and
recognizes the cost of such awards over the requisite service period (generally, the vesting period of the
award). ASC 718 requires that an entity measure the cost of liability-based service awards based on current
fair value that is remeasured subsequently at each reporting date through the settlement date. The
compensation expense associated with performance stock units is recognized over the period between when
the performance conditions are deemed probable of achievement and when the awards are vested. We
account for equity awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments
to Non-Employees.
Stock-based compensation expense is only recognized for outstanding performance stock units
(“PSUs”) where the performance conditions are deemed probable for achievement. For PSUs deemed
probable for achievement, stock-based compensation expense is recognized ratably over the expected
vesting period. Performance stock options (“PSOs”) are valued and stock-based compensation expense is
only recognized once the performance conditions of the outstanding PSOs have been met.
We have historically recorded stock-based compensation expense based on the number of options
or restricted stock units (“RSUs”) we expect to vest using our historical forfeiture experience and
periodically update those forfeiture rates to apply to new grants. While we early adopted ASU 2016-09 in
the year ended December 31, 2016, we have elected to continue to estimate forfeitures under the true-up
66
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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 contractual life 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.
p) Research and Development Costs
Research and development costs are charged to expense as incurred.
q) Income Taxes
We account for income taxes under the liability method, as described in ASC 740, Income
Taxes(“ASC 740”). Deferred income taxes are recognized for the tax consequences of temporary differences
between the tax and financial statement reporting bases of assets and liabilities. When we determine that
we will not be able to realize our deferred tax assets, we adjust the carrying value of the deferred tax asset
through the valuation allowance.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process
in which (i) we determine whether it is more likely than not that the tax positions will be sustained on the
basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-
not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely
to be realized upon ultimate settlement with the related tax authority.
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted in the United States.
The TCJA represents sweeping changes in U.S. tax law. Under ASC 740, the effects of changes in tax rates
and 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 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 have applied the guidance in SAB 118 to account for the financial accounting
impacts of the TCJA as of December 31, 2017, and have provided the applicable supplemental disclosures
in “Note 16. Income Taxes” below.
67
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
r) Net Income/(Loss) Per Share
We compute net income/(loss) per share in accordance with ASC 260, Earnings Per Share. Basic
net income/(loss) per share is computed by dividing net income/(loss) by the weighted average number of
common shares outstanding during the period. Diluted net income/(loss) per share is computed by giving
effect to all potential dilutive common shares, including stock options and restricted stock units (“RSUs”),
using the treasury stock method. Potentially dilutive common shares are not included in the weighted-
average shares outstanding for determining net loss per share, 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,
2017, 2016 and 2015 would be anti-dilutive and therefore have been excluded from the weighted average
shares used in computing diluted net income per share. These options could become dilutive in future
periods. Similarly, certain recently granted RSUs are also excluded using the treasury stock method as
their impact would be anti-dilutive.
s) Segment Information
ASC 280, Segment Reporting, establishes standards for reporting information regarding operating
segments in annual financial statements. Operating segments are identified as components of an enterprise
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 three segments: Healthcare, Research and Technology. The Healthcare
segment is focused on the monitoring of cardiac arrhythmias or heart rhythm disorders in a health care
setting. The Research segment provides central core laboratory services in a research environment, which
includes certain equipment rental and device sales. The Technology segment focuses on the development,
manufacturing, testing and marketing of medical devices to medical companies, clinics and hospitals.
t) Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting. The standard
revises the accounting for certain aspects of share-based compensation arrangements and requires any
excess tax benefits or tax deficiencies to be recorded directly in the income statement when such awards
vest or settle. In addition, the cash flows related to any excess tax benefits will no longer be separately
classified as a financing activity, but will rather be classified as an operating activity, along with all other
income tax cash flows. The standard also makes certain changes to the way the treasury stock method is
applied when calculating diluted net income per share, as well as allows for a policy election to account
for forfeitures as they occur, rather than using the estimation method currently prescribed by ASC
718, Compensation — Stock Compensation (“ASC 718”). The standard is effective for annual and interim
periods beginning after December 15, 2016, with early adoption permitted.
We elected to early adopt the standard during the fourth quarter of 2016. The standard requires the
recognition of any pre-adoption date net operating loss (“NOL”) carryforwards from share-based
compensation arrangements to be recognized on a modified retrospective basis, through an opening retained
earnings adjustment on January 1, 2016. Any income tax effects from share-based compensation
68
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
arrangements arising after January 1, 2016 will be recognized prospectively in the income statement during
the period of adoption.
Upon adoption, we recognized all previously unrecognized tax benefits which resulted in a
cumulative-effect adjustment of $1.8 million to our accumulated deficit. These previously unrecognized
tax benefits were recorded as a deferred tax asset, which was fully offset by a valuation allowance on
January 1, 2016, thus there was no net impact from the adoption of ASU 2016-9 as of the same date. In
addition, we recognized excess tax benefits as an adjustment to our previously reported benefit from/
(provision for) income taxes of $0.1 million, $0.4 million and $0.1 million for the quarters ended March 31,
2016, June 30, 2016 and September 30, 2016, respectively. The weighted average number of common
shares outstanding for calculating diluted net income per share increased by 340,000 to 550,000 for each
quarter of 2016. Basic and diluted net income per share increased by $0.01 for the three months ended
June 30, 2016. Net income per share for the three months ended March 30, 2016 and September 30, 2016
were not changed by the adoption of ASU 2016-9. Recast quarterly net income and basic and diluted net
income per share for the first three quarters of 2016 is disclosed in “Note 19. Quarterly Financial Data”
below.
Our adoption of the standard did not have any impact to our consolidated statements of cash flows
as no NOL carryforwards from share-based compensation arrangements were recognized prior to January 1,
2016, due to our use of the “with and without” method of accounting for equity-generated NOL
carryforwards. We have elected to continue to estimate forfeitures under the true-up provision of ASC 718.
The adoption of this standard decreased our effective tax rate by 11.1% for the year ended December 31,
2016.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The
standard requires inventory to be measured at the lower of cost or net realizable value. The guidance will
not apply to inventories for which cost is determined using the last-in, first-out method or the retail inventory
method. Our adoption of this standard in the first quarter of 2017 did not have a material impact on our
consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment.
The standard eliminates step two in the current two-step impairment test under ASC 350. Under the new
standard, a goodwill impairment is recorded for any excess of a reporting unit’s carrying value over its fair
value. A prospective transition approach is required. The standard is effective for annual and interim
reporting periods beginning after December 15, 2019 with early adoption permitted for annual and interim
goodwill impairment testing dates after January 1, 2017. Our adoption of this standard in the fourth quarter
of 2017 did not have a material impact on our consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In May 2017, the FASB released ASU 2017-09, Scope of Modification Accounting, which clarifies
the changes to terms or conditions of a share based payment award that requires application of modification
accounting under Topic 718. A change to an award should be accounted for as a modification unless the
fair value of the modified award is the same as the original award, the vesting conditions do not change
and the classification as an equity or liability instrument does not change. This update is effective for
annual reporting periods, and interim periods within those annual periods, beginning after December 15,
2017. Early application is permitted and prospective application is required for awards modified on or
69
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
after the adoption date. We will adopt this standard effective January 1, 2018, and this standard will not
have a material impact on our financial position, results of operations or disclosures.
In January 2017, the FASB released ASU 2017-01, Business Combinations: Clarifying the
Definition of a Business, which clarifies the definition of a business with the objective of adding guidance
to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals
of assets or businesses. The amendments in this ASU should be applied prospectively and are effective
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years,
with early adoption permitted. No disclosures are required at transition. We will adopt this standard effective
January 1, 2018 and do not expect the standard to have a material impact on our consolidated financial
statements.
In February 2016, the FASB issued ASU 2016-02, Leases. The standard will require lessees to
recognize most leases on their balance sheet and makes selected changes to lessor accounting. The standard
is effective for annual and interim reporting periods beginning after December 15, 2018. A modified
retrospective transition approach is required, with certain practical expedients available. We are currently
evaluating the impact the adoption of this standard will have on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU
2014-09), which has been updated through several revisions and clarifications since its original issuance
(collectively, the “Standard”). The Standard will require revenue recognized to represent the transfer of
promised goods or services to customers at an amount that reflects the consideration which a company
expects to receive in exchange for those goods or services. The Standard also requires new, expanded
disclosures regarding revenue recognition. The Standard is effective January 1, 2018.
We completed the detailed review of our contract portfolio and revenue streams to identify potential
differences in accounting resulting from adopting the Standard.
We implemented the following controls with respect to assessing the potential impact of adopting
the Standard:
• Created an implementation working group, which includes internal and third-party resources;
• Adopted implementation controls that will allow us to properly adopt the Standard;
• Developed a detailed project plan with key milestone dates;
• Outlined our revenue generating activities that fall within the scope of ASU 2014-09; and
• Monitored and assessed the impact of changes to ASU 2014-09 and its interpretations.
We have determined the following pertaining to the impact of adopting ASU 2014-09:
• Healthcare Revenue - We determined that contracts within our Healthcare segment meet the
definition of a contract under the Standard. We have elected to apply the portfolio approach
practical expedient to our contracts in the Healthcare segment and account for the contracts
within each portfolio as a collective group, rather than individual contracts. Based on our history
with these portfolios and the homogenous nature and characteristics of the patient accounts
within each portfolio, we have concluded that the financial statement effects are not expected
to be materially different than if accounting for revenue based on individual contracts. If the
Company has historical experience of collecting substantially all of the negotiated contractual
70
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
rates and the Company has determined, at contract inception, that customers have the intention
and ability to pay the promised consideration, the Company has concluded that it has not provided
an implicit price concession but, rather, that it has chosen to accept the risk of default by the
patient and adjustments to the transaction price would be presented as bad debts. For our non-
contracted portfolio, we have determined that we are providing an implicit price concession (a
form of variable consideration), resulting in the need to continually estimate our transaction
price based on historical cash collections, utilizing the expected value method. Subsequent
adjustments to the transaction price will be recorded as an adjustment to Healthcare revenue
and not as bad debt expense. Our current accounting policy is such that revenue is recognized
upon agreed upon reimbursement rates. If we do not have agreed upon reimbursement rates,
we recognize revenue based on historical experience, or if no historical experience, when cash
is received. Adjustments to the estimated net realizable value, based on final settlement with
the third-party payors, are recorded upon settlement.
• Research Revenue - We have concluded that our arrangements with customers meet the
definition of a contract under the Standard. We are in the process of finalizing our assessment
of whether our material promises within our contracts will represent a single or multiple
performance obligations, as well as allocation of the transaction price to the performance
obligation(s). We have determined that the legally enforceable term of our research contracts
are predominately thirty days due to termination for convenience clauses which are held by the
customer. Our current accounting policy dictates that Research revenue is recognized as the
related services are performed. Our revenue is allocated to each element (both delivered and
undelivered items) based on their relative selling prices as determined by our best estimate of
our selling prices.
• Technology Revenue - We determined that contracts within our Technology segment meet the
definition of a contract under the Standard and that contracts are predominantly short-term in
nature (i.e., approximately 30 days from receipt of purchase order to shipment). We determined
that the promised goods and services within our Technology segment revenue streams are
broadly grouped into three categories: (1) the sale of goods produced by the Company (2)
constructing, manufacturing, or developing an asset on behalf of a customer and (3) performing
an agreed-upon service for a customer. We have determined the following: (1) That all of the
transaction price with respect to our customer contracts consists of fixed consideration, (2) that
our individual contracts consist of one performance obligation and thus, the allocation of contract
consideration to separate performance obligations is not applicable and (3) that we will continue
recognizing revenue at a point in time in the Technology segment when control transfers as
dictated by the transfer of title on the underlying good sold or as services are rendered.
• Transition Method - We will be adopting ASU 2014-09 using the modified retrospective
approach.
In addition, the remaining significant implementation matters to be addressed prior to fully adopting
ASU 2014-09 include finalizing the transition adjustment analysis on our consolidated financial statements,
and finalizing updates to our business processes, systems and controls to comply with ASU 2014-09.
We expect to complete our assessment of the full financial impact of ASU 2014-09 before filing
our 10-Q for the three months ended March 31, 2018 which will include the required financial reporting
disclosures under ASU 2014-09.
71
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Acquisitions
LifeWatch AG
On July 12, 2017, the Company, through its wholly owned subsidiary Cardiac Monitoring Holding
Company, LLC, acquired approximately 97.0% of the outstanding shares of LifeWatch AG for aggregate
consideration of 3,615,840 shares of BioTelemetry common stock with a fair value of $116.8 million and
cash in the amount of $165.8 million. On that date, we acquired control of LifeWatch and began
consolidating its financial statements.
Through December 31, 2017, we purchased 343,525 additional shares of LifeWatch for cash
consideration of $4.8 million and the issuance of 19,806 shares with a fair value of $0.6 million. We
acquired the remaining untendered LifeWatch shares pursuant to a squeeze-out procedure in accordance
with Swiss law and takeover regulation related to the offering occurring in early January 2018, with the
settlement of $2.9 million cash, which was recorded as a component of accrued liabilities in our consolidated
balance sheets, and 58,786 shares with a fair market value of $2.0 million, which was recorded as a
component of paid-in capital in our consolidated balance sheets, both as of December 31, 2017. As of
December 31, 2017, we owned 100% of LifeWatch.
Also on July 12, 2017, in connection with the closing of the acquisition of LifeWatch, and refinancing
of its existing debt, we entered into a Credit Agreement pursuant to which the Company obtained loans as
follows; (i) a term loan (funded on July 12, 2017) in an aggregate principal amount equal to $205.0 million,
the proceeds of which were used to (a) pay our existing General Electric Credit Agreement of $24.9 million
and acquired LifeWatch debt of $3.0 million, (b) pay a portion of the cash consideration for the acquisition
of LifeWatch, and (c) pay related transaction fees and expenses of the acquisition of LifeWatch; and (ii) a
$50.0 million revolving credit facility for ongoing working capital purposes, which remains undrawn. The
term loan will be repaid in quarterly installments beginning January 1, 2018, with the remaining principal
balance repaid on or before July 12, 2022.
The acquisition of LifeWatch strengthens our position as the leader in wireless medicine, creating
the foremost connected health platform, significantly enhancing our ability to improve quality of life and
reduce cost of care. We accounted for the transaction as a business combination, and as such, all assets
acquired and liabilities assumed were recorded at their estimated fair values. The excess of the fair value
of the purchase price over the fair value of the net assets acquired has been recognized as goodwill, which
represents the expected future benefits arising from the assembled workforce and other synergies attributable
to cost savings opportunities. We recognized $183.5 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 below represent our preliminary fair value estimates as of December 31, 2017 and
are subject to subsequent adjustment as additional information is obtained during the applicable
measurement period. Measurement period adjustments recorded during the fourth quarter of 2017 consisted
primarily of increasing customer relationships by $17.5 million, increasing acquired technology by $0.9
million, increasing other long-term liabilities by $21.7 million, decreasing deferred tax liabilities by $7.5
million and decreasing fixed assets by $2.0 million. The primary areas of these preliminary estimates that
are not yet finalized related to certain tangible assets acquired and liabilities assumed, including deferred
taxes, unrecorded tax provisions and identifiable intangible assets. We expect to finalize all accounting
for the acquisition of LifeWatch within one year of the acquisition date.
72
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except lives)
Fair value of assets acquired:
Cash and cash equivalents
Healthcare accounts receivable
Inventory
Prepaid expenses and other current assets
Property and equipment
Other assets
Identifiable intangible assets:
Customer relationships
Technology
Total identifiable intangible assets
Total assets acquired
Fair value of liabilities assumed:
Accounts payable
Accrued liabilities
Current portion of capital lease obligations
Current portion of long-term debt
Long-term capital lease obligations
Deferred tax liabilities
Other long-term liabilities
Total liabilities assumed
Total identifiable net assets
Fair value of noncontrolling interest
Goodwill
Net assets acquired
Weighted
Average
Life
(Years)
Amount
10
3
$
4,303
9,467
1,136
4,392
28,241
713
126,900
3,005
129,905
178,157
10,424
9,747
4,664
3,027
3,420
14,454
23,435
69,171
108,986
(9,961)
183,549
$ 282,574
We have integrated the operations of LifeWatch which are included as components of our Healthcare
segment. As a result of this integration, it is impracticable to disclose the amount of revenue and earnings/
(loss) attributable to LifeWatch for the period from July 12, 2017 to December 31, 2017.
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
and comprehensive income/(loss).
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
73
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
believe the assumptions used in preparing the unaudited pro forma financial information are reasonable,
but not necessarily indicative of actual results should the acquisition have occurred on January 1, 2016.
Pro forma financial information for the periods presented is summarized as follows:
(pro forma, unaudited, in thousands, except share and per share amounts)
Revenue
Net income/(loss)
Net income/(loss) per common share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
Telcare, Inc.
$
$
$
Year Ended
December 31,
2017
349,900 $
(1,800)
2016
322,200
23,400
(0.05) $
(0.05) $
0.74
0.69
34,022
34,022
31,556
34,125
On December 1, 2016, the Company, through its wholly owned subsidiary BioTelemetry Care
Management, LLC, entered into the Agreement with Telcare pursuant to which the Company acquired the
stock of Telcare Medical Supply, Inc. and certain assets of Telcare Inc. The total consideration paid at
closing amounted to $7.0 million in cash, with the potential for a performance-based earn out up to $5.0
million upon reaching certain revenue milestones. The fair value of the total consideration transferred in
the acquisition, including the fair value of the contingent consideration, was $9.7 million at the acquisition
date.
The acquisition of Telcare provides us the opportunity to apply our expertise in remote monitoring
to the diabetes market and increases our presence in the digital population health management market. We
accounted for the transaction as a business combination, and as such, all assets acquired and liabilities
assumed were recorded at their estimated fair values. The excess of the fair value of the purchase price
over the fair value of the net assets acquired has been recognized as goodwill, which represents the expected
future benefits arising from the assembled workforce and other synergies attributable to cost savings
opportunities. We recognized $2.2 million of goodwill as a result of the acquisition, all of which has been
assigned to the Technology segment. We expect $0.3 million of this goodwill will be deductible for tax
purposes.
The amounts below represent our final fair value estimates, which were completed in the fourth
quarter ending December 31, 2017. Measurement period adjustments reducing the valuation of inventory
of $0.3 million and $0.1 million were recorded in the second and third quarters of 2017, respectively, and
a $1.5 million adjustment, increasing deferred tax assets and reducing deferred revenue, prior to completing
our valuation during the fourth quarter of 2017.
74
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The total consideration and related allocation for Telcare is summarized as follows:
(in thousands, except lives)
Fair value of assets acquired:
Other accounts receivable
Inventory
Prepaid expenses and other current assets
Property and equipment
Other assets
Deferred tax assets
Identifiable intangible assets:
Customer relationships
Technology
Tradename
Total identifiable intangible assets
Total assets acquired
Fair value of liabilities assumed:
Accounts payable
Accrued liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill
Net assets acquired
Weighted
Average
Life
(Years)
Amount
5
5
Indefinite
$
$
235
1,417
1,261
55
933
1,463
400
2,000
400
2,800
8,164
459
206
665
7,499
2,201
9,700
The acquisition has been included within the consolidated results of operations and financial
condition from the date of the acquisition.
The following unaudited pro forma financial information has been prepared using historical financial
results of BioTelemetry and Telcare as if the acquisition had occurred as of January 1, 2015. Certain
adjustments related to the elimination of transaction costs, as well as the addition of depreciation and
amortization related to fair value adjustments on the tangible and identifiable intangible assets acquired,
have been reflected for the purposes of the unaudited pro forma financial information presented below. We
believe the assumptions used in preparing the unaudited pro forma financial information are reasonable,
but not necessarily indicative of actual results should the acquisition have occurred on January 1, 2015.
75
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro forma financial information for the periods presented is summarized as follows:
(pro forma, unaudited, in thousands, except per share amounts)
Revenue
Net income
Net income per common share:
Basic
Diluted
Year
Ended
December
31,
2016
212,538 $
50,693
Year
Ended
December
31,
2015
182,755
948
$
$
$
1.82 $
1.66 $
0.03
0.03
The Agreement includes the potential for a performance-based earn out up to $5.0 million upon
reaching certain milestones. The fair value of the contingent consideration associated with the Telcare
acquisition was $2.7 million as of the acquisition date and was included as a component of other liabilities
in the accompanying consolidated balance sheets. For further details regarding contingent consideration,
refer to “Note 5. Fair Value Measurements” below.
VirtualScopics, Inc.
On March 25, 2016, the Company, through its wholly owned subsidiary BioTelemetry Research
Acquisition Corporation, entered into a definitive Agreement and Plan of Merger (“Merger Agreement”)
with VirtualScopics, Inc. (“VirtualScopics”), a leading provider of clinical trial imaging solutions. Under
the terms of the Merger Agreement, we purchased: (i) any and all outstanding shares of VirtualScopics’
$0.001 par value common stock for $4.05 per share; (ii) any and all outstanding shares of VirtualScopics’
$0.001 par value Series A and Series B Convertible Preferred Stock for $336.30 per share; and (iii) any
and all outstanding shares of VirtualScopics’ $0.001 par value Series C-1 Convertible Preferred Stock for
$920.00 per share. The all cash acquisition of VirtualScopics was completed on May 11, 2016. The total
consideration paid at closing amounted to $15.0 million, net of cash acquired of $0.8 million.
The acquisition of VirtualScopics expands our existing clinical research offerings and gives us
further access to established customer relationships. We accounted for the transaction as a business
combination, and as such, all assets acquired and liabilities assumed were recorded at their estimated fair
values. The excess of the consideration paid over the fair value of the net assets acquired has been recognized
as goodwill, which represents the expected future benefits arising from the assembled workforce and other
synergies attributable to cost savings opportunities. We recognized $4.3 million of goodwill as a result of
the acquisition, all of which has been assigned to the Research segment. None of this goodwill will be
deductible for tax purposes.
The amounts below represent our final fair value estimates, which were completed in the second
quarter of 2017. Measurement period adjustments were recorded in the fourth quarter of 2016 related to
the recognition of a $0.3 million deferred tax liability, and in the second quarter of 2017 primarily to
recognize $0.3 million of deferred tax assets resulting from state net operating losses.
76
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The total consideration and related allocation for VirtualScopics is summarized as follows:
(in thousands, except lives)
Fair value of assets acquired:
Cash and cash equivalents
Other accounts receivable
Inventory
Prepaid expenses and other current assets
Property and equipment
Deferred taxes
Identifiable intangible assets:
Customer relationships
Technology
Backlog
Total identifiable intangible assets
Total assets acquired
Fair value of liabilities assumed:
Accounts payable
Accrued liabilities
Current portion of capital lease obligations
Current portion of long-term debt
Deferred revenue
Long-term capital lease obligations
Long-term debt
Total liabilities assumed
Total identifiable net assets
Goodwill
Net assets acquired
Weighted
Average
Life
(Years)
Amount
12
10
4
$
$
849
3,679
111
396
500
20
5,200
2,000
3,100
10,300
15,855
325
2,945
59
91
700
162
97
4,379
11,476
4,343
15,819
The acquisition has been included within the consolidated results of operations and financial
condition from the date of the acquisition. For the period from May 11, 2016 to December 31, 2016,
VirtualScopics contributed revenue of approximately $12.3 million and net income of approximately $1.4
million to our consolidated results of operations.
The following unaudited pro forma financial information has been prepared using historical financial
results of BioTelemetry and VirtualScopics as if the acquisition had occurred as of January 1, 2015. Certain
adjustments related to the elimination of transaction costs and acquisition-related indebtedness, as well as
the addition of depreciation and amortization related to fair value adjustments on the tangible and identifiable
intangible assets acquired, have been reflected for the purposes of the unaudited pro forma financial
information presented below. No adjustments for synergies or certain other expected benefits of the
acquisition have been included. We believe the assumptions used in preparing the unaudited pro forma
77
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
financial information are reasonable, but not necessarily indicative of actual results should the acquisition
have occurred on January 1, 2015.
Pro forma financial information for the periods presented is summarized as follows:
(pro forma, unaudited, in thousands, except per share amounts)
Revenue
Net income
Net income per common share:
Basic
Diluted
Year
Ended
December
31,
2016
214,271 $
55,413
Year
Ended
December
31,
2015
191,230
7,232
$
$
$
1.98 $
1.82 $
0.27
0.25
ePatch Division of DELTA Danish Electronics, Light, and Acoustics
On April 1, 2016, we, through our wholly owned subsidiary BioTelemetry Technology ApS, entered
into an Asset Purchase Agreement (“APA”) with DELTA, pursuant to which we acquired substantially all
of the assets of the ePatch division of DELTA, inclusive of all products and indications currently under
development. The total consideration paid at closing amounted to $3.0 million in cash and 244,519 shares
of our common stock valued at $2.9 million. In addition, there is the potential for a performance-based
earn out up to $3.0 million upon reaching certain regulatory and revenue milestones, as defined in the APA.
The fair value of the total consideration transferred in the ePatch acquisition, including the fair value of
the contingent consideration, was $6.5 million at the acquisition date.
The ePatch acquisition is expected to generate future cost savings for us and will provide control
over proprietary components for our next generation MCT device. We accounted for the transaction as a
business combination, and as such, all assets acquired and liabilities assumed were recorded at their
estimated fair values. The excess of the fair value of the purchase price over the fair value of the net assets
acquired has been recognized as goodwill, which represents the expected future benefits arising from the
assembled workforce and other synergies attributable to cost savings opportunities. We recognized $3.2
million of goodwill as a result of the acquisition, all of which has been assigned to the Technology segment,
and we expect all of this goodwill to be deductible for tax purposes.
The amounts below represent our final fair value estimates, which we completed in the first quarter
of 2017. During the fourth quarter of 2016, we reduced the allocation to the technology intangible asset
by $0.2 million as a result of additional information obtained during the measurement period.
78
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The total consideration and related allocation for the ePatch acquisition is summarized as follows:
(in thousands, except lives)
Fair value of assets acquired:
Inventory
Property and equipment
Identifiable intangible assets:
Customer relationships
Technology
Trade names
Total identifiable intangible assets
Total assets acquired
Fair value of liabilities assumed:
Accrued liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill
Net assets acquired
Weighted
Average
Life
(Years)
Amount
10
10
Indefinite
$
$
100
175
400
2,800
100
3,300
3,575
266
266
3,309
3,181
6,490
While the ePatch acquisition provides control over proprietary components of our next generation
cardiac monitoring device, the acquisition did not have a material effect on our consolidated results of
operations.
The APA includes the potential for a performance-based earn out up to $3.0 million upon reaching
certain regulatory and revenue milestones. The fair value of the contingent consideration associated with
the ePatch acquisition was $0.6 million as of the acquisition date and was included as a component of other
liabilities in the accompanying consolidated balance sheets. For further details regarding contingent
consideration, refer to “Note 5. Fair Value Measurements” below.
4. Inventory
Inventory consists of the following:
(In thousands)
Raw materials and supplies
Finished goods
Total inventory
December 31,
2017
2016
$
$
3,128 $
2,204
5,332 $
2,866
2,310
5,176
Inventory, which includes purchased parts, materials, direct labor and applied manufacturing
overhead, is stated at the lower of cost or net realizable value, with cost determined by use of the first-in,
first-out method.
79
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
The fair value of our liabilities measured at fair value on a recurring basis is summarized as follows:
(in thousands)
Liabilities
Contingent consideration
(in thousands)
Liabilities
Contingent consideration
Balance at
December 31,
2017
Level 1
Level 2
Level 3
$
700
—
— $
700
Balance at
December 31,
2016
Level 1
Level 2
Level 3
$
3,305
—
— $
3,305
We have determined that our long term debt, classified as Level 2, has a fair value consistent with
its carry value, exclusive of debt discount and deferred charges, of $199.4 million and $25.2 million as of
December 31, 2017 and 2016, respectively.
Contingent consideration represents our contingent milestone payment obligations related to our
acquisitions and is measured at fair value, based on significant inputs not observable in the market, which
represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration
uses assumptions we believe would be made by a market participant. We assess these estimates on an
ongoing basis as additional data impacting the assumptions is obtained. The balances of the fair value of
contingent consideration are recognized within other long-term liabilities on our consolidated balance
sheets. Adjustments to contingent consideration are recorded in other charges in the consolidated statements
of operations and comprehensive income/(loss).
The following table provides a reconciliation of the beginning and ending balances of contingent
payments associated with acquisitions during the years ended December 31, 2017 and December 31, 2016:
(in thousands)
Beginning balance
Purchase price contingent consideration
Changes in fair value of contingent consideration
Ending balance
Year ended
December 31,
2017
December 31,
2016
$
$
3,305 $
—
(2,605)
700 $
—
3,305
—
3,305
During the year ended December 31, 2017, the fair value of the contingent consideration related to
the ePatch acquisition decreased $0.6 million as it is no longer probable that any of the contingencies will
be met. Additionally during the year, the fair value of the contingent consideration related to the Telcare
acquisition was reduced by $2.0 million as a result of reducing the probability of attaining all the revenue
contingencies.
80
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Property and Equipment
Property and equipment consists of the following:
(In thousands, except years)
Cardiac monitoring devices, device parts and components
Computers and purchased software
Equipment, tools and molds
Furniture, fixtures and other
Leasehold improvements
Capital leases
Total property and equipment, at cost
Less accumulated depreciation
Total property and equipment, net
* shorter of useful life or term of lease
Estimated
Useful Life
(Years)
3 - 5
3 - 5
3 - 5
5 - 7
*
3 - 7
December 31,
2017
2016
$
$
76,039 $
22,357
7,857
2,104
5,434
7,305
121,096
(71,902)
49,194 $
55,825
18,027
6,666
1,467
3,171
737
85,893
(60,070)
25,823
Depreciation expense associated with property and equipment, inclusive of amortization of assets
recorded under capital leases, was $18.3 million, $10.5 million and $9.0 million, for the years ended
December 31, 2017, 2016 and 2015, respectively.
During the year ended December 31, 2017, considering the LifeWatch integration and forward-
looking integration plans, we determined that certain software ceased being used and was no longer going
to be used and was therefore impaired, resulting in $1.1 million of impairment charges included within the
Corporate and Other segment as a component of other costs within the other charges line in our consolidated
statements of operations and comprehensive income/(loss). There were no fixed asset impairments for the
year ended December 31, 2016.
7. 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, 2017 and 2016:
(in thousands)
Balance at December 31, 2015
Initial goodwill acquired
Measurement period adjustments
Balance at December 31, 2016
Initial goodwill acquired
Measurement period adjustments
Balance at December 31, 2017
$
Healthcare
$
Reporting Segment
Research
Technology
Total
11,950 $
4,633
60
16,643
—
(350)
16,293 $
3,157 $
6,171
373
9,701
—
(1,162)
8,539 $
29,831
10,804
433
41,068
186,456
(4,419)
223,105
14,724 $
—
—
14,724
186,456
(2,907)
198,273 $
81
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The goodwill acquired in the Healthcare segment is due to the LifeWatch acquisition; Research
relates to the VirtualScopics acquisition; Technology represents our ePatch and Telcare acquisitions. Refer
to “Note 3. Acquisitions” above for details related to the measurement period adjustments.
At December 31, 2017, 2016 and 2015, we performed our required annual impairment test of
goodwill. Based on these impairment tests, we determined that there was no goodwill impairment. The
carrying amount of our goodwill as of December 31, 2017 and 2016 was $223.1 million and $41.1 million,
respectively.
The gross carrying amounts and accumulated amortization of our intangible assets as of
December 31, 2017 and 2016 are as follows:
(In thousands, except years)
Customer relationships
Technology including internally developed software
Backlog
Covenants not to compete
Total intangible assets, gross
Customer relationships
Technology including internally developed software
Backlog
Covenants not to compete
Total accumulated amortization
Indefinite-lived trade names
Total intangible assets, net
Estimated
Useful Life
(Years)
5 - 15
3 - 10
1 - 4
5 - 7
December 31,
2017
143,174 $
15,953
6,860
1,040
167,027
(10,868)
(8,573)
(5,052)
(827)
(25,320)
—
141,707 $
2016
16,700
21,135
6,860
1,040
45,735
(3,809)
(6,588)
(4,176)
(690)
(15,263)
3,000
33,472
$
$
During our intangible asset impairment testing for the year ended December 31, 2017, considering
the LifeWatch integration and forward-looking integration plans, we determined that certain trade names
and internally developed software costs ceased being used and were no longer going to be used and were
therefore impaired, resulting in $11.0 million of intangible asset impairment charges included within the
Corporate and Other segment as a component of other costs within the other charges line in our consolidated
statements of operations and comprehensive income/(loss). There were no other intangible asset
impairments for the year ended December 31, 2017.
At December 31, 2016 and 2015, we performed our required annual impairment test of indefinite-
lived intangible assets. Based on these impairment tests, we determined that there was no impairment.
82
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The estimated amortization expense for finite-lived intangible assets for the next five years and
thereafter is summarized as follows at December 31, 2017:
(in thousands)
Fiscal Year
2018
2019
2020
2021
2022
Thereafter
Total estimated amortization
$
$
16,718
16,231
15,420
14,687
14,238
64,413
141,707
Amortization expense for the years ended December 31, 2017, 2016 and 2015 was $10.2 million,
$3.7 million and $3.5 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. 12 Other Charges” below.
8. Equity Method Investment
In December 2015, we acquired an ownership interest in Well Bridge Health, Inc. (“WellBridge”)
through the conversion of an outstanding note receivable and the related accrued interest. The investment
is accounted for under the equity method. In December 2015, the equity method basis difference of $0.9
million was allocated to equity method goodwill. Our Chief Executive Officer sits on Wellbridge’s Board
of Directors, and therefore WellBridge is considered a related party. Except for our continued investment
in WellBridge through capital contributions, there were no related party transactions.
As of December 31, 2017, our investment in WellBridge represented 32.1% of its outstanding stock.
A summary of our investment in Wellbridge is as follows:
(in thousands)
Beginning balance
Capital contributions
Loss in equity method investment
Ending balance
Year ended
December 31,
2017
2016
$
$
1,125 $
690
(384)
1,431 $
1,100
312
(287)
1,125
83
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Accrued Liabilities
Accrued liabilities consists of the following:
(in thousands)
Accrued compensation
Accrued professional fees
Accrued squeeze-out
Accrued restructuring
Accrued non-income taxes
Accrued interest
Other
Total
10. Credit Agreement
Credit Agreements
December 31,
2017
2016
$
$
13,086 $
1,587
2,885
1,605
588
306
7,300
27,357 $
7,831
2,841
—
—
250
330
2,446
13,698
Concurrent with the acquisition of LifeWatch, as discussed in “Note 3. Acquisitions” above, we
entered into a credit agreement with SunTrust Bank, as a lender and an agent for the lenders (the “Lenders”)
(together, the “SunTrust Credit Agreement”). Pursuant to the credit agreement, the Lenders agreed to make
loans to the Company as follows; (i) a term loan in an aggregate principal amount equal to $205.0 million;
and (ii) a $50.0 million revolving credit facility for ongoing working capital purposes. The proceeds of
the loans were used to pay our existing GE Credit Agreement of $24.9 million and acquired LifeWatch
debt of $3.0 million, pay a portion of the consideration for the acquisition of LifeWatch and pay related
transaction fees and expenses of the acquisition of LifeWatch.
The loans bear interest at an annual rate, at the election of the Company, 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 the Company’s Consolidated Total Net
Leverage Ratio, as defined in the credit agreement. As of December 31, 2017, the applicable margin is
2.00% for LIBOR loans and 1.00% for base rate loans.
The outstanding principal of the loan will be paid as follows:
• Beginning January 1, 2018, the principal amount of the term loan will be repaid, on a quarterly
basis, in installments of approximately $0.5 million, plus accrued interest;
• Beginning January 1, 2019, the principal amount of the term loan will be repaid, on a quarterly
basis, in installments of approximately $1.3 million, plus accrued interest;
•
Beginning January 1, 2020, the principal amount of the term loan will be repaid, on a quarterly
basis, in installments of approximately $3.8 million, plus accrued interest;
• Beginning January 1, 2021, the principal amount of the term loan will be repaid, on a quarterly
basis, in installments of approximately $5.1 million, plus accrued interest;
84
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• The remaining principal balance will be repaid on or before July 12, 2022 (or such earlier date
upon an acceleration of the loans by Lenders upon an event of default or termination by the
Company).
The loans are secured by substantially all of the assets of the Company and by a pledge of the capital
stock of the Company’s U.S. based subsidiaries as well as a pledge of 65% of the capital stock of its first
tier material foreign subsidiaries, including 65% of the capital stock the Company owns of LifeWatch.
The carrying amount of the term loan was $199.4 million as of December 31, 2017, which is the
principal amount outstanding, net of $5.6 million of unamortized deferred financing costs to be amortized
over the remaining term of the credit facility. The revolving credit facility is subject to an unused
commitment fee, which is determined by reference to the our Consolidated Total Net Leverage Ratio, as
defined in the credit agreement. Our unused commitment fee as of December 31, 2017 was 0.3% and the
revolving credit facility remains undrawn as of that date.
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 (“Lenders”), and as a lender and swingline lender (the “General Electric Credit Agreement”).
Pursuant to the General Electric 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.
As of December 31, 2016, $3.0 million was drawn on the Revolving Loans. The loan, inclusive of Term
Loans and Revolving Loans, was recorded on our consolidated balance sheet as of December 31, 2016 in
the amount of $25.2 million, which is net of a debt discount and deferred charges of $0.7 million.
The loans bore interest at an annual rate of LIBOR plus 4.0%, subject to a LIBOR floor of 1.0%.
The outstanding principal of the Term Loans was to be paid as follows:
•
beginning April 1, 2015, the principal amount of the Term Loans were repaid, on a quarterly
basis, in installments of $0.3 million, plus accrued interest;
The loan was secured by substantially all of our assets and by a pledge of the capital stock of our
U.S. based subsidiaries as well as a pledge of 65% of the capital stock of our foreign subsidiaries. As noted
above, this agreement was paid off with the proceeds of the SunTrust Credit Agreement in 2017.
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, 2017, we were in compliance with our covenants.
Debt Extinguishment
In connection with the SunTrust Credit Agreement, we paid the $24.9 million outstanding
indebtedness under the Credit Agreement between the Company and Healthcare Financial Solutions, LLC,
previously the General Electric Capital Corporation, as agent for the lenders, and as a lender, and we
terminated the General Electric Credit Agreement. We wrote off the unamortized deferred financing fees
85
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
related to the existing debt of $0.5 million, which is included in loss on extinguishment of debt in our
consolidated statements of operations and comprehensive income/(loss).
11. Leases
We lease our principal administrative and service facilities as well as office equipment under non-
cancelable operating leases expiring at various dates through 2028. The terms of the leases are renewable
at the end of the lease term. Payments made under operating leases are charged to operations on a straight-
line basis over the period of the lease. Differences between straight-line expense and cash payments are
recorded as deferred rent. Rent expense was $5.8 million, $4.2 million and $3.8 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
We have entered into and acquired capital leases with various expiration dates through 2020 which
were used to finance equipment, furniture and monitoring devices.
Future minimum lease payments under non-cancelable operating and capital leases are summarized
as follows at December 31, 2017:
(in thousands)
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
12. Other Charges
Operating
Leases
Capital
Leases
$
$
5,871 $
4,240
3,768
2,535
1,726
5,515
23,655 $
4,023
1,358
128
—
—
—
5,509
We account for expenses associated with exit or disposal activities in accordance with ASC 420,
Exit or Disposal Cost Obligations, and record the expenses in other charges in our consolidated statements
of operations and comprehensive income/(loss), and record the related accrual in the accrued expenses line
of our consolidated balance sheets.
We account for expenses associated with our acquisitions and certain litigation as other charges as
incurred. These expenses were primarily a result of legal fees related to patent litigation in which we are
the plaintiff and activities surrounding our acquisitions. Other charges are costs that are not considered
necessary to the ongoing business operations. A summary of these expenses is as follows:
86
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands)
Asset impairment charges
Legal fees
Professional fees
Severance and employee related costs
Change in fair value of contingent consideration
Other costs
Total
Year ended December 31,
2016
2015
2017
$
$
12,045 $
8,689
5,614
4,747
(2,605)
2,946
31,436 $
— $
7,177
719
645
—
98
8,639 $
—
5,764
50
249
—
—
6,063
During the year ended December 31, 2017, in conjunction with the LifeWatch integration and
forward-looking integration plans, we determined that certain trade names and software costs ceased being
used and were no longer going to be used and were therefore impaired. We recognized impairment charges
within the Corporate and Other segment of $1.1 million related to purchased software, $3.0 million related
to indefinite-lived trade names and $8.0 million related to certain developed technology and customer
relationships. Professional fees, severance and employee related costs increased primarily due to integration
activities related to the LifeWatch acquisition. The change in fair value of contingent consideration is
partially the result of the contingent consideration related to the ePatch acquisition being written off as it
is no longer probable that any of the contingencies will be met. Additionally during the year, the fair value
of the contingent consideration related to the Telcare acquisition was reduced as a result of reducing the
probability of attaining all the revenue contingencies.
13. Equity
Common Stock
As of December 31, 2017 and 2016, we were authorized to issue 200,000,000 shares of common
stock. As of December 31, 2017 and 2016, we had 32,460,668 and 28,261,503 shares issued and outstanding,
respectively. Subsequent to December 31, 2017, in accordance with the squeeze-out procedures under
Swiss Law, we issued 58,786 shares to the remaining stockholders of LifeWatch. See “Note 3.
Acquisitions” above for further details related to the LifeWatch acquisition.
Preferred Stock
As of December 31, 2017, we were authorized to issue 10,000,000 shares of preferred stock. As of
December 31, 2016, we maintained an unregistered blank check preferred stock class, and no shares were
authorized. As of December 31, 2017 and 2016, there were no shares of preferred stock issued or
outstanding.
Noncontrolling Interest
As of December 31, 2017, the noncontrolling interest of $1.1 million on our consolidated balance
sheet represents our partner’s share of the accumulated deficit recorded within LifeWatch Turkey. See
“Note 1. Summary of Significant Accounting Policies; l) Noncontrolling Interests” above for further
details.
87
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. 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”). 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, performance stock
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 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 over three years.
2017 Omnibus Incentive Plan
In May 2017, the stockholders and Board approved the OIP, which replaces the 2008 Plan. Stock
options, RSUs, PSUs and PSOs are granted under the OIP. At December 31, 2017, 2,753,252 shares remain
available for grant under the OIP.
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 options under the 2003 Plan also automatically roll into the
2008 Plan. Beginning on January 1, 2009, and each year thereafter, the number of options available to be
granted under the plan increased by the lesser of 4% of the total number of common shares outstanding or
1,500,000 shares. The 2008 Plan had 2,637,019 shares available for grant as of December 31, 2016; there
are no shares available to grant under the 2008 Plan subsequent to the approval of the OIP.
88
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock option activity is summarized for the years ended December 31, 2017, 2016 and 2015 as
follows:
Stock Options
Performance Stock Options
Number of
Shares
Weighted
Average
Exercise
Price
Number of
Shares
Weighted
Average
Exercise
Price
Outstanding as of December 31, 2014
3,250,852
$
Granted
Forfeited
Exercised
Outstanding as of December 31, 2015
Granted
Forfeited
Exercised
Outstanding as of December 31, 2016
Granted
Forfeited
Exercised
Outstanding as of December 31, 2017
427,786
(181,777)
(76,342)
3,420,519
519,770
(49,709)
(322,146)
3,568,434
543,881
(154,510)
(383,366)
3,574,439
$
$
$
6.40
10.39
11.32
3.82
6.69
13.44
9.97
4.56
7.82
31.12
16.22
9.91
10.78
—
—
200,000
$
19.89
—
—
—
—
200,000
$
19.89
—
—
—
200,000
—
—
(50,000)
150,000
$
$
—
—
—
19.89
—
—
18.33
20.41
The PSOs met their performance criteria, vested, and were priced as follows:
Performance Achievement Date
October 4, 2016
January 13, 2017
Number of
Shares
Weighted
Average
Exercise
Price
100,000
100,000
$
$
18.33
21.45
A summary of total outstanding stock options as of December 31, 2017 is as follows:
Range of
Exercise Prices
$1.93 - $6.50
$6.51 - $10.00
$10.01 - $20.00
$20.01 - $30.00
$30.01 - $37.15
$1.93 - $37.15
Options Outstanding
Weighted
Average
Remaining
Contractual
Life (in
Years)
Number
Outstanding
Weighted
Average
Exercise
Price
Number
Exercisable
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (in
Years)
Weighted
Average
Exercise
Price
1,296,231
1,136,472
606,190
375,546
310,000
3,724,439
4.2
4.8
6.5
8.2
9.2
5.6
$
$
89
3.17
7.88
14.02
23.57
36.10
11.17
1,296,231
952,756
407,990
174,068
15,000
2,846,045
4.2
4.3
5.8
7.0
0.6
4.6
$
$
3.17
7.62
13.79
21.93
30.98
7.48
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below summarizes certain additional information with respect to our options:
(In thousands, except per share amounts)
Aggregate intrinsic value of options outstanding at year-
end
Year Ended December 31,
2016
2015
2017
$
71,680 $
52,671 $
19,436
Aggregate intrinsic value of options exercisable at year-
end
Aggregate intrinsic value of options exercised during the
year
Cash received from the exercise of stock options
Weighted average grant date fair value per option
$
63,834
43,750
16,124
7,562
4,714
18.05 $
3,546
1,470
9.47 $
662
291
6.58
The total compensation cost of options granted but not yet vested at December 31, 2017 was $11.0
million, which is expected to be recognized over a weighted average period of approximately three years.
The fair value of stock options was estimated at the date of grant using the following weighted
average assumptions:
Year Ended December 31,
2016
2015
2017
Expected volatility
Expected term (in years)
Weighted average risk-free interest rate
Expected dividends
59.2%
7.3
2.08%
0.0%
64.4%
8.0
1.61%
0.0%
66.5%
6.7
1.68%
0.0%
90
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
RSU activity is summarized for the years ended December 31, 2017, 2016 and 2015 as follows:
Restricted Stock Units
Performance Stock Units
Weighted
Average
Grant
Date Fair
Value
Number
of Shares
Weighted
Average
Grant
Date Fair
Value
Number
of Shares
Units outstanding as of December 31, 2014
864,634
$
Granted
Forfeited
Vested
Units outstanding as of December 31, 2015
Granted
Forfeited
Vested
Units outstanding as of December 31, 2016
Granted
Forfeited
Vested
Units outstanding as of December 31, 2017
328,060
(50,642)
(451,116)
690,936
225,198
(11,905)
(311,880)
592,349
117,614
(48,974)
(193,860)
467,129
$
4.23
9.70
6.90
3.89
6.85
11.06
9.50
4.08
9.86
25.98
13.57
9.31
13.76
284,423
$
—
(18,433)
—
265,990
—
—
(132,998)
132,992
—
(132,992)
—
— $
8.68
—
8.68
—
8.68
—
—
8.68
8.68
—
8.68
—
—
In addition, a summary of total outstanding RSUs as of December 31, 2017 is as follows:
Range of Grant Date
Fair Value
$8.93 - $9.75
$9.76 - $10.36
$10.37 - $33.05
$8.93 - $33.05
RSUs
Outstanding
154,335
184,395
128,399
467,129
Additional information about our RSUs and PSUs is summarized as follows:
(In thousands)
Aggregate market value of RSUs vested during the year
Aggregate market value of PSUs vested during the year
$
Year Ended December 31,
2016
2015
2017
4,768 $
—
3,826 $
2,093
4,460
—
The total compensation cost of RSUs granted but not yet vested at December 31, 2017 was $3.2
million, which is expected to be recognized over a weighted average period of approximately one year.
91
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Employee Stock Purchase Plan
In July 2008, we made available an Employee Stock Purchase Plan (“2008 ESPP”) in which
substantially all of our full-time employees became eligible to participate effective March 18, 2008. Under
the 2008 ESPP, employees may contribute through payroll deductions up to 15% of their compensation
toward the purchase of our common stock, or $21,500, whichever is lower. The price per share is equal to
the lower of 85% of the fair market price on the first day of the offering period, or 85% of the fair market
price on the day of purchase. Proceeds received from the issuance of shares are credited to stockholders’
equity in the period that the shares are issued. In May 2017, the Board of Directors and stockholders
approved the BioTelemetry, Inc. 2017 Employee Stock Purchase Plan (“2017 ESPP”), with 500,000 shares
reserved for issuance under the 2017 ESPP, which will replace the 2008 ESPP. The contribution limits,
price discount and the offering periods remain the same under the 2017 ESPP. In 2017, an aggregate of
95,215 shares were purchased in accordance with the Plans. Net proceeds from the issuance of shares of
common stock under the Plans for the year ended December 31, 2017 were $1.4 million. At December 31,
2017, 452,751 shares remain available for purchase under the 2017 ESPP.
Our aggregate stock-based compensation expense is summarized as follows:
(In thousands)
Stock options
Performance stock options
Restricted stock units
Performance stock units
Employee stock purchase plan
Total stock-based compensation expense
Year Ended December 31,
2016
2015
2017
$
$
3,183 $
1,534
2,273
—
690
7,680 $
2,030 $
1,297
2,211
444
520
6,502 $
1,782
—
2,039
711
420
4,952
For the years ended December 31, 2017, and 2016, we recognized $1.5 million and $1.7 million of
tax benefit from stock options exercised during the period as a component of our income tax provision/
(benefit).
15. Employee Benefit Plan
We sponsor a 401(k) Retirement Savings Plan (the “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. We are not required to contribute to the Plan. In January 2014, we adopted an amendment to the
Plan that allowed for an employer matching contribution of 100% of the first 3% of the employees’ salary,
and 50% of the next 2% of the employees’ salary. For the years ended December 31, 2017, 2016 and 2015,
we contributed $2.6 million, $2.1 million and $1.8 million, respectively. Employer contributions vest
immediately. Additionally, we sponsor an immaterial pension plan for five participants in Switzerland.
92
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Income Taxes
The components of our provision for/(benefit from) income taxes are summarized as follows:
(in thousands)
Current:
Federal
State
Total provision for income taxes
Deferred:
Federal
State
Total deferred provision for/(benefit from) income taxes
Total provision for/(benefit from) income taxes
Year Ended
December 31,
2016
2015
2017
$
$
273 $
424
697
321 $
153
474
6,201
(151)
6,050
6,747 $ (37,667) $
(32,484)
(5,657)
(38,141)
173
50
223
220
25
245
468
Reconciliations between expected income taxes computed at the federal rate of 35% for each of the
years ended December 31, 2017, 2016 and 2015, and the provision for/(benefit from) income taxes is as
follows:
(in thousands)
Income tax (benefit)/provision at statutory rate
State income tax, net of federal benefit
Research and development
Permanent difference
Deferred tax asset adjustments
Tax Reform impact
Unrecognized tax benefit
Foreign rate differential
Other
Increase/(decrease) in valuation allowance
Provision for/(benefit from) income taxes
Years ended December 31,
2016
2015
2017
$
$
(3,638) $
177
—
(392)
485
8,048
—
1,107
(16)
976
6,747 $
5,520 $
259
—
—
4,336
—
3,559
—
289
(51,630)
(37,667) $
2,763
(239)
634
—
—
—
—
—
549
(3,239)
468
At December 31, 2017, we had federal net operating loss carryforwards of approximately $140.4
million to offset future federal taxable income expiring in various years starting in 2023 through 2037. At
December 31, 2017, we had state net operating loss carryforwards of $83.5 million, which expire in various
years starting in 2018 through 2037. We also had $121.2 million of foreign net operating loss carryforwards,
for which we have recorded a valuation allowance against most of the net operating loss balance and expire
in various years starting in 2018 through 2024.
The timing and manner in which we can utilize our net operating loss carryforwards and future
income tax deductions in any year may be limited by provisions of the IRC. Section 382 of the IRC imposes
limitations on a corporation’s ability to utilize net operating losses if it experiences an “ownership change.”
93
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Section 383 of the IRC 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 statutes for those years
will remain subject to examination until the losses are utilized. Additionally, state tax return statutes
generally remain open due to operating losses.
We have deferred income tax assets totaling $57.7 million at December 31, 2017, consisting
primarily of federal and state net operating loss and credit carryforwards, stock-based compensation, non-
deductible accruals and allowance for doubtful accounts. Our provision from income taxes for 2017 of
$6.7 million primarily relates to the re-measurement of our deferred tax assets and liabilities at the new
federal corporate rate of 21 percent.
Deferred taxes result from temporary differences between the carrying amounts of assets and
liabilities used for financial reporting purposes and the amounts used for income tax purposes. As of
December 31, 2017, our deferred income tax assets were primarily the result of federal and state net
operating losses, stock-based compensation, non-deductible accruals and allowance for doubtful accounts.
A valuation allowance of $6.0 million and $0.1 million was recorded against our deferred income tax asset
balance as of December 31, 2017 and 2016, respectively.
As of each reporting date, our management considers new evidence, both positive and negative,
that could impact management’s view with regard to future realization of deferred income tax assets.
94
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The significant components of our deferred taxes are as follows:
(in thousands)
Deferred tax assets:
Net operating loss carryforwards
Research and development and AMT credit carryforwards
Stock option grants
Property and equipment
Non-deductible accruals
Transaction costs
Allowance for doubtful accounts
Deferred revenue
Other, net
Total deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Property and equipment
Intangible assets
Prepaid insurance
Total deferred tax liabilities
Net deferred tax asset/(liability)
December 31,
2017
2016
38,245 $
1,198
4,300
690
4,471
2,361
5,324
937
158
57,684
(6,032)
51,652
33,404
912
5,602
—
—
—
4,965
885
1,868
47,636
(95)
47,541
—
(33,854)
(117)
(33,971)
17,681 $
(3,604)
(7,124)
(177)
(10,905)
36,636
$
$
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly
referred to as the Tax Cuts and Jobs Act (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 (BEAT), 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.
95
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our accounting for the following elements of the TCJA is incomplete. However, we were able to
make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:
Reduction of US federal corporate tax rate: The TCJA reduces the corporate tax rate to 21 percent,
effective January 1, 2018. For certain of our DTAs and DTLs, we have recorded a provisional net decrease
of $8.0 million, with a corresponding net adjustment to deferred income tax expense for the year ended
December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduced corporate
rate, it may be affected by other analyses related to the TCJA, including, but not limited to, our calculation
of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal
temporary differences.
Deemed Repatriation Transition Tax: As part of U.S. international tax reform, the TCJA imposes
a transition tax on certain accumulated foreign earnings aggregated across all non-U.S. subsidiaries, net of
foreign deficits. As we are in an aggregate net foreign deficit position for U.S. tax purposes, we are not
liable for the transition tax. However, we are continuing to gather additional information to more precisely
compute our aggregate net foreign deficit position.
Cost recovery: While we have not yet completed all of the computations necessary or completed
an inventory of our 2017 expenditures that qualify for immediate expensing, we have recorded a provisional
benefit of $1.1 million based on our current intent to fully expense all qualifying expenditures.
Global intangible low-taxed income: The TJCA subjects a U.S. shareholder to current tax on global
intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A,
Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an
accounting policy election to either recognize deferred taxes for temporary differences expected to reverse
as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. We
have elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.
During 2017, in connection with our acquisitions, we identified uncertain tax positions for periods
prior to our ownership related to items recorded through purchase accounting. The following summarizes
the changes in our unrecognized tax benefit:
(in thousands)
Unrecognized tax benefit at the beginning of the year
Additions to uncertain tax positions related to current year
Additions to uncertain tax positions related to prior years
Unrecognized tax benefit at the end of the year
Year ended
December 31,
2017
December 31,
2016
$
$
3,899 $
35,811
—
39,710 $
—
—
3,899
3,899
The balance of unrecognized tax benefits, if recognized, would affect the effective tax rate. As of
December 31, 2017, we have recorded a net reserve of $22.0 million for uncertain tax positions as a
component of other long-term liabilities within our consolidated balance sheets. The unrecognized tax
benefit, or a portion of an unrecognized tax benefit, is presented in the financial statements as a reduction
to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward.
96
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense
line in the accompanying consolidated statements of operations and comprehensive income/(loss). As of
December 31, 2017, we have not recorded any interest and penalties on our uncertain tax positions.
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.
17. Segment Information
We operate under three reportable segments: Healthcare, Research and Technology. The Healthcare
segment is focused on the diagnosis and monitoring of cardiac arrhythmias or heart rhythm disorders. We
offer cardiologists and electrophysiologists, neurologists and primary care physicians a full spectrum of
solutions which provides them with a single source of cardiac monitoring services. The Research segment
is engaged in central core laboratory services providing cardiac monitoring, imaging services, scientific
consulting and data management services for drug and medical device trials. The Technology segment
focuses on the development, manufacturing, testing and marketing of cardiovascular and blood glucose
monitoring devices to medical companies, clinics and hospitals. Intercompany revenue relating to the
manufacturing of devices by the Technology segment for the other segments is included on the intersegment
revenue line.
Expenses that can be specifically identified with a segment have been included as deductions in
determining pre-tax segment income. Any remaining expenses including integration, restructuring and
other charges, as well as the elimination of costs associated with intercompany revenue are included in
Corporate and Other. Also included in Corporate and Other is our net interest expense and other financing
expenses. We do not allocate assets to the individual segments.
During the year ended December 31, 2017 we reclassified research and development costs not
utilized by our Research segment from the Corporate and Other segment to the Healthcare segment to
synchronize our external reporting with the way our chief operating decision maker reviews the segment
performance and makes decisions about the reportable segments.
(in thousands)
2017
Revenue
Intersegment revenue
Income/(loss) before income
taxes
Depreciation and amortization
Capital expenditures
Healthcare
Research
Technology
Corporate
and Other
Consolidated
$
234,385 $
—
38,790 $
—
13,601 $
14,793
— $
(14,793)
286,776
—
52,054
29,255
12,542
1,214
4,148
1,274
3,807
1,045
749
(67,471)
(10,396)
(5,887)
(868)
28,561
13,697
97
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(reclassified, in thousands)
2016
Revenue
Intersegment revenue
Income/(loss) before income
taxes
Depreciation and amortization
Capital expenditures
(reclassified, in thousands)
2015
Revenue
Intersegment revenue
Income/(loss) before income
taxes
Depreciation and amortization
Capital expenditures
18. Legal Proceedings
Healthcare
Research
Technology
Corporate
and Other
Consolidated
$
165,664 $
—
32,565 $
—
10,103 $
11,456
— $
(11,456)
208,332
—
53,025
10,216
8,885
2,229
3,837
1,941
3,862
(43,346)
517
73
(301)
—
15,770
14,269
10,899
Healthcare
Research
Technology
Corporate
and Other
Consolidated
$
145,963 $
7
38,322
7,790
9,155
21,853 $
—
10,697 $
10,224
— $
(10,231)
178,513
—
540
3,676
4,373
4,390
(35,356)
371
72
651
—
7,896
12,488
13,600
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. (together, “Mednet”), whereby 79,333 shares of BioTelemetry common
stock with a fair value of $2.8 million were returned to the Company. These shares were part of the
consideration paid in the acquisition of Mednet and had been subject to certain terms and conditions set
forth in the Stock Purchase Agreement (the “Agreement”). In accordance with the terms of the Agreement,
we sought indemnification for alleged breaches of certain representations and warranties. Accordingly, in
2016 we recorded a $1.4 million indemnification asset. However, as a result of the settlement’s fair value
exceeding the indemnification asset recorded, a gain of $1.3 million was recorded as a component of other
non-operating expense, net in the consolidated statements of operations for the year ended December 31,
2017.
United States Department of Health and Human Services’ Office for Civil Rights Settlement
In 2011, we experienced the theft of two unencrypted laptop computers and, as a result, were required
to provide notices under the HIPAA 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
98
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the OCR $2.5 million and agreed to submit a two-year corrective action plan. We did not admit any liability
or wrongdoing. As a result of the settlement, we recorded a non-operating charge of $2.5 million to other
non-operating expense, net in the consolidated statements of operations and comprehensive income/(loss)
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 (the “Claimants”)
filed an arbitration demand against LifeWatch with the American Arbitration Association. Claimants
alleging that LifeWatch violated the 2015 Stock Purchase Agreement for the purchase of FlexLife Health,
Inc., a remote international normalized ratio monitoring business. The demand alleges LifeWatch did not
make commercially reasonable efforts to achieve certain conditions precedent and did not have a reasonable
basis for terminating the business line. Claimants seek liquidated damages and attorneys’ fees. We are
vigorously defending against these claims and are seeking recovery of attorneys’ fees related to our defense.
The arbitration hearing was held in February 2018, and we are awaiting a decision. While we believe that
the risk of loss in this arbitration is improbable, we cannot determine, nor can we estimate, the range of
potential loss. Accordingly, as we do not believe that a loss is probable, in accordance with authoritative
guidance on the evaluation of loss contingencies, we have not recorded an accrual related to this matter.
ScottCare Litigation
In May 2012, CardioNet, Inc. (“CardioNet”) filed suit against The ScottCare Corporation and
Ambucor Health Solutions, Inc. (“ScottCare”) in the U.S. District Court for the Eastern District of
Pennsylvania for patent infringement. We are seeking an injunction against each defendant, as well as
monetary damages. ScottCare has asserted counterclaims alleging the patents in the suit are invalid and
not infringed. The trial court heard argument on motions for summary judgment and motions to limit expert
testimony in June 2015, but has not yet issued rulings on these motions. ScottCare has dropped all invalidity
challenges with respect to one of the patents in the suit. The parties are awaiting a trial date. We are
vigorously pursuing our claims and defending against the counterclaims. The probable outcome of this
matter cannot be determined, nor can we estimate a range of potential loss. Therefore, in accordance with
authoritative guidance on the evaluation of loss contingencies, we have not recorded an accrual related to
this matter.
InfoBionic Litigation
CardioNet, LLC and Braemar Manufacturing, LLC filed a patent infringement lawsuit against
InfoBionic, Inc. (“InfoBionic”) in May 2015, in the U.S. District Court for the District of Massachusetts,
and filed an amended complaint in March 2016. We are seeking an injunction and enhanced damages for
willful infringement because InfoBionic had prior knowledge of some or all of the asserted patents. We
are also asserting claims for unfair competition and misappropriation of trade secrets due to its discovery
that InfoBionic is in unauthorized possession of confidential and proprietary materials of ours, including
source code. A trial date has not been set.
In March 2017, we filed a second infringement action in the same District Court asserting
infringement of one additional patent seeking an injunction and enhanced damages for willful infringement.
InfoBionic moved to dismiss the complaint in this action in June 2017, and the parties are awaiting a ruling
from the Court.
99
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We also initiated an arbitration proceeding against InfoBionic with the American Arbitration
Association in July 2017 asserting claims of misappropriation of trade secrets, unfair competition, and
unjust enrichment as a result of our discovery that InfoBionic is in unauthorized possession of our
confidential and proprietary materials, including source code. We are seeking monetary and injunctive
relief.
In response to our infringement assertion, InfoBionic filed several petitions at the United States
Patent and Trademark Office (“USPTO”) for Inter Partes review (“IPR”) of certain of our patents. The
USPTO denied institution of IPR regarding certain patents and found certain of our claims in our patents
to be unpatentable. In July 2017 we filed an appeal with the Federal Circuit challenging the unpatentability
findings.
19. Quarterly Financial Data (Unaudited)
The following tables summarize the unaudited quarterly financial data for the last two fiscal years.
Net Income, basic net income per share and diluted net income per share for the first three quarters of 2016
have been recast in accordance with the adoption of ASU 2016-09.
(in thousands, except per share amounts)
2017
Total revenue
Gross profit
Net income/(loss)
Net income/(loss) attributable to
BioTelementry, Inc.
Basic net income/(loss) per share attributable
to BioTelemetry, Inc.
Diluted net income/(loss) per share
attributable to BioTelemetry, Inc.
2016
Total revenue
Gross profit
Net income
Net income attributable to BioTelementry, Inc.
Basic net income per share attributable to
BioTelemetry, Inc.
Diluted net income per share attributable to
BioTelemetry, Inc.
$
$
$
$
$
$
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
55,881 $
32,909
196
58,129 $
35,967
1,726
81,023 $
49,069
(2,564)
91,743
54,425
(16,501)
196
1,726
(2,285)
(15,593)
0.01 $
0.06 $
(0.07) $
(0.48)
0.01 $
0.05 $
(0.07) $
(0.48)
48,640 $
30,627
4,097
4,097
52,680 $
32,921
4,697
4,697
53,055 $
32,866
4,195
4,195
0.15 $
0.17 $
0.15 $
0.14 $
0.15 $
0.14 $
53,957
33,036
40,448
40,448
1.43
1.30
100
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Prior to the filing of this Annual Report on Form 10-K, an evaluation was performed under the
supervision of and with the participation of our management, including the Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based
on the evaluation, the CEO and CFO have concluded that, as of December 31, 2017, our disclosure controls
and procedures are effective to ensure that information required to be disclosed in reports that it files or
submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and is accumulated and communicated to our management, as appropriate,
to allow timely decisions regarding required disclosure. It should be noted that the design of any system
of controls is based in part upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.
Changes in Internal Control over Financial Reporting
On July 12, 2017, we completed the acquisition of LifeWatch. We are in the process of integrating
the acquired LifeWatch entities and our management is in the process of evaluating any related changes to
our internal control over financial reporting as a result of this integration. Except for any changes relating
to this integration, there has been no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the year ended December 31, 2017, that
materially affected or are reasonably likely to materially affect our internal control over financial reporting.
101
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over
financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes those policies and procedures
that:
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with U.S. generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with authorizations of
management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial
statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The effectiveness of our internal control over financial reporting did not include the internal controls
of LifeWatch, which were included in our consolidated financial statements for the year ended December 31,
2017, due to the timing of the acquisitions. LifeWatch comprised 19% of total assets and 40% of net assets
as of December 31, 2017.
Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2017. In making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated
Framework (2013). Based on management’s assessment and those criteria, management has concluded
that our internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been
audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report
included in this Annual Report on Form 10-K.
102
Report of Independent Registered Public Accounting Firm
The Stockholders and the Board of Directors of BioTelemetry, Inc.
Opinion on Internal Control over Financial Reporting
We have audited BioTelemetry, Inc.’s internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our
opinion, BioTelemetry, Inc. (the Company) maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2017, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting
did not include the internal controls of Lifewatch AG, which is included in the 2017 consolidated financial
statements of the Company and constituted 19% and 40% of total and net assets, respectively, as of December
31, 2017. Our audit of internal control over financial reporting of the Company also did not include an
evaluation of the internal control over financial reporting of Lifewatch AG.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and
2016, the related consolidated statements of operations and comprehensive income/(loss), cash flows and
equity for each of the three years in the period ended December 31, 2017, and the related notes and schedule
listed in the Index at Item 15(a) of the Company and our report dated February 26, 2018 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting included
in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit. We
are a public accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
103
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 26, 2018
104
Item 9B. Other Information
None.
105
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information with respect to this Item is incorporated by reference from our definitive proxy statement
in connection with the 2018 Annual Meeting of Stockholders, or the Proxy Statement, unless the Proxy
Statement is not filed by May 1, 2018, in which case we will amend this Form 10-K to provide the omitted
information in accordance with the requirements of Instruction G to Form 10-K.
BioTelemetry emphasizes the importance of professional business conduct and ethics through its
corporate governance initiatives. Our Board of Directors has adopted a code of business conduct and ethics
that applies to all employees, directors and officers, including our principal executive officer and principal
financial officer. Our corporate governance information and materials, including our Code of Business
Conduct and Ethics, are posted under “Corporate Governance” in the Investors section of our website at
www.gobio.com. Our Board of Directors regularly reviews corporate governance developments and
modifies these materials and practices as warranted. To the extent we make amendments to or grant waivers
from our Code of Business Conduct and Ethics in the future, we intend to disclose the amendments and
waivers on our website.
Item 11. Executive Compensation
Information required by this Item is incorporated by reference from the Proxy Statement unless the
Proxy Statement is not filed on or before May 1, 2018, in which case we will amend this Form 10-K to
provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information required by this Item is incorporated by reference from the Proxy Statement unless the
Proxy Statement is not filed on or before May 1, 2018, in which case we will amend this Form 10-K to
provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this Item is incorporated by reference from the Proxy Statement unless the
Proxy Statement is not filed on or before May 1, 2018, in which case we will amend this Form 10-K to
provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.
Item 14. Principal Accountant Fees and Services
Information required by this Item is incorporated by reference from the Proxy Statement unless the
Proxy Statement is not filed on or before May 1, 2018, in which case we will amend this Form 10-K to
provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.
106
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a) The following financial statements, schedules and exhibits are filed as part of this Annual Report
on Form 10-K
1. Financial Statements—The Financial Statements required by this item are listed on the
Index to Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
2. Financial Statement Schedules
•
Schedule II—Valuation and Qualifying Accounts and Reserves; and
• Other financial statement schedules are not included because they are not required or
the information is otherwise shown in the financial statements or notes thereto.
3. Exhibits—The exhibits listed on the accompanying Exhibit Index are filed as part of, or are
incorporated by reference into, this Annual Report on Form 10-K.
(b) See Item 15(a)(3) above.
(c) See Item 15(a)(2) above.
107
Item 16. Form 10-K Summary
None.
SCHEDULE II
(in thousands)
Allowance for Doubtful Accounts
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
Beginning
Balance
Additions
Deductions
Ending
Balance
$
$
$
12,863 $
11,601 $
10,662 $
13,291 $
9,931 $
8,047 $
(9,173) $
(8,669) $
(7,108) $
16,981
12,863
11,601
(in thousands)
Tax Valuation Allowance
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
Beginning
Balance
Additions
Deductions
Ending
Balance
$
$
$
95 $
49,759 $
52,998 $
5,937 $
1,966 $
1,734 $
— $
(51,630) $
(4,973) $
6,032
95
49,759
108
EXHIBIT INDEX
Exhibit
Number
Description
2.3 Share and Asset Purchase Agreement, dated December 1,
2016, by and among Telcare Acquisition, LLC,
BioTelemetry Care Management, LLC,
BioTelemetry, Inc. and Telcare, Inc.
Incorporated by Reference
File No.
Form
10-K 000-55039
Exhibit
2.3
Filing Date
February 22, 2017
Filed
Herewith
2.4 Transaction Agreement by and among Lifewatch AG,
10-Q 000-55039
2.1
November 7, 2017
Biotelemetry, Inc. and Cardiac Monitoring Holding
Company, LLC, dated April 4, 2017
3.1 Certificate of Incorporation of BioTelemetry, Inc.
3.2 Bylaws of BioTelemetry, Inc.
10.1 BioTelemetry, Inc. Form of Indemnity Agreement
10.2* BioTelemetry, Inc. 2017 Omnibus Incentive Plan
10.3* BioTelemetry, Inc. 2008 Non-Employee Directors’ Stock
Option Plan and Form of Stock Option Agreement
thereunder
10.4* BioTelemetry, Inc. 2017 Employee Stock Purchase Plan
10.5* CardioNet, Inc. Long Term Incentive Plan
10.6* CardioNet, Inc. Compensation Program for Non-
Employee Directors
10-Q 000-55039
10-Q 000-55039
S-1
S-8
S-1
S-8
8-K
8-K
333-145547
333-218228
333-145547
333-218228
001-33993
001-33993
3.1
3.2
10.1
10.1
10.4
10.2
10.2
99.5
August 8, 2017
August 8, 2017
August 17, 2007
May 25, 2017
February 28, 2008
May 25, 2017
October 28, 2008
January 28, 2009
10.7* Employment Agreement, dated as of June 15, 2010,
8-K
001-33993
99.2
June 18, 2010
between Joseph H. Capper and CardioNet, Inc.
10.8* Employment Agreement, dated as of January 28, 2010,
10-K 001-33993
10.36
February 23, 2010
between CardioNet, Inc. and Heather Getz
10.9* Employment Agreement, dated as of December 7, 2010,
between CardioNet, Inc. and Daniel Wisniewski
10-K 001-33993
10.38
February 25, 2011
10.10* Employment Agreement dated as of February 7, 2011,
10-Q 001-33993
10.1
May 6, 2011
between CardioNet, Inc. and Peter Ferola
10.11* Employment Agreement dated as of July 30, 2010,
10-K 001-33993
10.26
February 22, 2013
between CardioNet, Inc. and Fred Anthony Broadway III
10.12 Credit Agreement by and among Biotelemetry, Inc. and
10-Q 000-55039
10.1 November 7, 2017
SunTrust Bank, as agent for the lenders and swingline
lender, dated July 12, 2017
21 Subsidiaries of BioTelemetry, Inc.
23 Consent of Ernst & Young LLP.
†
†
109
Exhibit
Number
Description
Form
File No.
Exhibit
Filing Date
Incorporated by Reference
31.1 Certification of Chief Executive Officer pursuant to
Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities and Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities and Exchange Act of 1934, as amended.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
101.INS XBRL Instance Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase
Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase
Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase
Document.
*
Indicates a management plan or compensatory plan or arrangement.
Filed
Herewith
†
†
†
110
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February 26, 2018
BioTelemetry, Inc.
By
/s/ JOSEPH H. CAPPER
Joseph H. Capper
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ JOSEPH H. CAPPER
Joseph H. Capper
President and Chief Executive Officer (Principal
Executive Officer)
February 26, 2018
/s/ HEATHER C. GETZ
Heather C. Getz, CPA
Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)
February 26, 2018
/s/ KIRK E. GORMAN
Kirk E. Gorman
Chairman and Director
February 26, 2018
/s/ ANTHONY J. CONTI
Anthony J. Conti
Director
/s/ JOSEPH A. FRICK
Joseph A. Frick
Director
/s/ COLIN HILL
Colin Hill
Director
/s/ REBECCA RIMEL
Rebecca Rimel
Director
/s/ ROBERT J. RUBIN
Robert J. Rubin, M.D.
Director
111
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
BIOTELEMETRY, INC.
SUBSIDIARIES*
Exhibit 21
Name
CardioNet, LLC
Universal Medical Laboratory, Inc.
Heartcare Corporation of America, Inc.
Mednet Healthcare Technologies, Inc.
Universal Medical, Inc.
ECG Scanning & Medical Services LLC
Virtualscopics, LLC
BioTelemetry Care Management, LLC
Telcare Medical Supply, LLC
Telcare, LLC
LTHSE, LLC
Braemar Manufacturing, LLC
cardioCore Lab, LLC
LifeWatch Corp.
LifeWatch Services Inc.
Jurisdiction of
Incorporation
Delaware
New Jersey
New Jersey
New Jersey
New Jersey
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
* Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of BioTelemetry Inc.
are omitted because, considered in the aggregate, they would not constitute a significant subsidiary as of the
end of the year covered by this Annual Report on Form 10-K.
Consent of Independent Registered Public Accounting Firm
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-3 No. 333-216189) of BioTelemetry, Inc.,
(2) Registration Statement (Form S-8 No. 333-149800) pertaining to the 2003 Equity Incentive Plan, the
2008 Equity Incentive Plan, the 2008 Employee Stock Purchase Plan, and the 2008 Non-Employee
Directors’ Option Plan,
(3) Registration Statements (Forms S-8 No. 333-202280, No. 333-209646, No. 333-216181) pertaining
to the 2008 Equity Incentive Plan, and the 2008 Employee Stock Purchase Plan, and
(4) Registration Statement (Form S-8 No. 333-218228) pertaining to the 2017 Omnibus Incentive Plan,
and the 2017 Employee Stock Purchase Plan;
of our reports dated February 26, 2018, with respect to the consolidated financial statements and schedule
of BioTelemetry, Inc., and the effectiveness of internal control over financial reporting of BioTelemetry, Inc.
included in this Annual Report (Form 10-K) for the year ended December 31, 2017.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 26, 2018
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Joseph H. Capper, certify that:
1.
I have reviewed this annual report on Form 10-K of BioTelemetry, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: February 26, 2018
/s/ JOSEPH H. CAPPER
Joseph H. Capper
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Heather C. Getz, certify that:
1.
I have reviewed this annual report on Form 10-K of BioTelemetry, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: February 26, 2018
/s/ HEATHER C. GETZ
Heather C. Getz, CPA
Executive Vice President and Chief Financial Officer
(Principle Financial and Accounting Officer)
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of BioTelemetry, Inc. on Form 10- K for the year ended December 31, 2017, as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of Joseph H. Capper, the President
and Chief Executive Officer of BioTelemetry, Inc. and Heather C. Getz, the Chief Financial Officer of BioTelemetry, Inc.
hereby certifies, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that, to his or her knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of BioTelemetry, Inc.
/s/ JOSEPH H. CAPPER
Joseph H. Capper
President and Chief Executive Officer
/s/ HEATHER C. GETZ
Heather C. Getz, CPA
Executive Vice President and Chief Financial Officer
February 26, 2018
February 26, 2018