Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017March 31, 2018

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

oTRANSITION 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

BioTelemetry, Inc.

logo1a01.jpg
(Exact Name of Registrant as Specified in its Charter)

Delaware

46-2568498

DELAWARE46-2568498
(State or Other Jurisdictionother jurisdiction of Incorporationincorporation or Organization)

organization)

(I.R.S. Employer Identification Number)

No.)

1000 Cedar Hollow Road

#102

Malvern, Pennsylvania

19355

(Address of Principal Executive Offices)

principal executive offices)

(Zip Code)

(610) 729-7000

(Registrant’s Telephone Number, including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  xý  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  xý  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated  filer oý

Accelerated filer xo

Non-accelerated filer o

 (Do not check if a
smaller reporting company)

Smaller reporting company o

(Do not check if a smaller reporting company)

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  xý

As of August 1, 2017, 32,360,096April 19, 2018, 32,794,129 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.





Table of Contents



BIOTELEMETRY, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIODTHREE MONTHS ENDED June 30, 2017

MARCH 31, 2018


TABLE OF CONTENTS

Page
No.

PART I.

FINANCIAL INFORMATION

Page
PART I

Consolidated Financial Statements (Unaudited)

(unaudited)

3

Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations

19

23

24

24

24

24

24

24

24

25

26

Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” “BioTelemetry” and the “Company,” as used in this Quarterly Report on Form 10-Q, refer to BioTelemetry, Inc. and its directly and indirectly owned subsidiaries as a combined entity, except where otherwise stated or where it is clear through the context that the terms refermean only to BioTelemetry, Inc. exclusive of its subsidiariessubsidiaries. We do not use the ® or a specific subsidiary™ symbol in each instance in which one of BioTelemetry, Inc.

our registered or common law trademarks appears in this Quarterly Report on Form 10-Q, 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 offor 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 TelemetryTM (“MCOTTM”) 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.improvement. Such forward lookingforward-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:

·our ability to identify acquisition candidates, acquire them on attractive terms and integrate their operations into our business;

·                  the effectivenessbusiness, including our recent acquisition of our cost savings initiatives;

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. “RiskRisk Factors” of our latest Annual Report on Form 10-K.

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.


PART I — FINANCIAL INFORMATION


Item 1.  Financial Statements

BIOTELEMETRY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

(Unaudited)

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

26,898

 

$

23,052

 

Healthcare accounts receivable, net of allowance for doubtful accounts of $13,407 and $12,198, at June 30, 2017 and December 31, 2016, respectively

 

15,071

 

14,594

 

Other accounts receivable, net of allowance for doubtful accounts of $429 and $665, at June 30, 2017 and December 31, 2016, respectively

 

13,857

 

12,261

 

Inventory

 

4,121

 

5,176

 

Prepaid expenses and other current assets

 

5,925

 

4,477

 

Total current assets

 

65,872

 

59,560

 

 

 

 

 

 

 

Property and equipment, net

 

26,695

 

25,823

 

Intangible assets, net

 

31,625

 

33,472

 

Goodwill

 

40,963

 

41,068

 

Deferred tax asset

 

36,925

 

36,636

 

Other assets

 

1,872

 

2,425

 

Total assets

 

$

203,952

 

$

198,984

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

9,188

 

$

12,425

 

Accrued liabilities

 

15,905

 

13,698

 

Current portion of capital lease obligations

 

63

 

162

 

Current portion of long-term debt

 

1,875

 

1,250

 

Deferred revenue

 

5,365

 

3,972

 

Total current liabilities

 

32,396

 

31,507

 

 

 

 

 

 

 

Long-term capital lease obligations

 

93

 

126

 

Long-term debt

 

22,770

 

23,911

 

Other long-term liabilities

 

1,917

 

4,526

 

Total liabilities

 

57,176

 

60,070

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock—$.001 par value as of June 30, 2017 and December 31, 2016; 200,000,000 shares authorized as of June 30, 2017 and December 31, 2016; 28,744,176 and 28,261,503 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

29

 

28

 

Paid-in capital

 

287,562

 

281,642

 

Accumulated other comprehensive loss

 

(15

)

(34

)

Accumulated deficit

 

(140,800

)

(142,722

)

Total stockholders’ equity

 

146,776

 

138,914

 

Total liabilities and stockholders’ equity

 

$

203,952

 

$

198,984

 

(In thousands, except share and par value amounts)
(Unaudited)
March 31,
2018
 December 31,
2017
ASSETS   
Current assets:   
Cash and cash equivalents$36,346
 $36,022
Healthcare accounts receivable, net of allowance for doubtful accounts of $18,138 and $15,556, at March 31, 2018 and December 31, 2017, respectively31,802
 25,190
Other accounts receivable, net of allowance for doubtful accounts of $1,536 and $1,425, at March 31, 2018 and December 31, 2017, respectively15,370
 13,296
Inventory6,353
 5,332
Prepaid expenses and other current assets8,524
 10,268
Total current assets98,395
 90,108
Property and equipment, net of accumulated depreciation of $71,996 and $71,902, at March 31, 2018 and December 31, 2017, respectively47,838
 49,194
Intangible assets137,614
 141,707
Goodwill223,699
 223,105
Deferred tax asset17,988
 17,681
Other assets2,491
 2,767
Total assets$528,025
 $524,562
LIABILITIES AND EQUITY   
Current liabilities:   
Accounts payable$16,858
 $14,529
Accrued liabilities21,639
 26,055
Current portion of capital lease obligations3,817
 4,023
Current portion of long-term debt2,819
 2,050
Deferred revenue5,064
 4,298
Total current liabilities50,197
 50,955
Long-term portion of capital lease obligations726
 1,486
Long-term debt196,336
 197,306
Other long-term liabilities24,412
 25,112
Total liabilities271,671
 274,859
Stockholders’ equity: 
  
Common stock—$.001 par value as of March 31, 2018 and December 31, 2017; 200,000,000 shares authorized as of March 31, 2018 and December 31, 2017; 32,794,129 and 32,460,668 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively33
 32
Paid-in capital411,328
 409,517
Accumulated other comprehensive loss(311) (114)
Accumulated deficit(152,696) (158,678)
Total BioTelemetry, Inc.’s stockholders’ equity258,354
 250,757
Noncontrolling interest(2,000) (1,054)
Total equity256,354
 249,703
Total liabilities and equity$528,025
 $524,562
See accompanying notes.

Notes to Consolidated Financial Statements.

BIOTELEMETRY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND
(Unaudited)

 Three Months Ended
(In thousands, except per share data)March 31,
2018
 March 31,
2017
Revenue:   
Healthcare$80,551
 $42,511
Research11,244
 9,324
Other2,701
 4,046
Total revenue94,496
 55,881
Cost of revenue:   
Healthcare27,582
 14,648
Research6,326
 5,571
Other2,540
 2,753
Total cost of revenue36,448
 22,972
Gross profit58,048
 32,909
Operating expenses:   
General and administrative26,719
 15,917
Sales and marketing11,340
 7,701
Bad debt expense4,879
 2,791
Research and development3,289
 2,433
Other charges5,085
 1,739
Total operating expenses51,312
 30,581
Income from operations6,736
 2,328
Other expense:   
Interest expense(1,890) (388)
Loss on equity method investment(139) (95)
Other non-operating income/(expense), net187
 (2,515)
Total other expense(1,842) (2,998)
Income/(loss) before income taxes4,894
 (670)
Benefit from income taxes142
 866
Net income5,036
 196
Net loss attributable to noncontrolling interest(946) 
Net income attributable to BioTelemetry, Inc.$5,982
 $196
    
Net income per common share attributable to BioTelemetry, Inc.:   
Basic$0.18
 $0.01
Diluted$0.17
 $0.01
Weighted average number of common shares outstanding:   
Basic32,570
 28,429
Dilutive stock options and restricted stock units2,665
 2,886
Diluted35,235
 31,315
Anti-dilutive stock options and restricted stock units excluded from weighted average calculation579
 496
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except share and per share amounts)

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

Healthcare

 

$

44,070

 

$

42,165

 

$

86,581

 

$

83,314

 

Research

 

9,562

 

7,896

 

18,886

 

13,289

 

Technology

 

4,497

 

2,619

 

8,543

 

4,717

 

Total revenues

 

58,129

 

52,680

 

114,010

 

101,320

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Healthcare

 

14,375

 

13,470

 

29,023

 

26,632

 

Research

 

5,581

 

4,447

 

11,152

 

7,702

 

Technology

 

2,206

 

1,842

 

4,959

 

3,438

 

Total cost of revenues

 

22,162

 

19,759

 

45,134

 

37,772

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

35,967

 

32,921

 

68,876

 

63,548

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

General and administrative

 

14,366

 

14,388

 

30,283

 

26,724

 

Sales and marketing

 

7,631

 

7,124

 

15,332

 

14,669

 

Bad debt expense

 

2,416

 

2,664

 

5,207

 

5,302

 

Research and development

 

2,515

 

1,965

 

4,948

 

3,751

 

Other charges

 

4,651

 

1,659

 

6,390

 

3,447

 

Total operating expenses

 

31,579

 

27,800

 

62,160

 

53,893

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

4,388

 

5,121

 

6,716

 

9,655

 

Interest and other loss, net

 

(1,392

)

(633

)

(4,390

)

(1,056

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

2,996

 

4,488

 

2,326

 

8,599

 

(Provision for) benefit from income taxes

 

(1,270

)

209

 

(404

)

195

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,726

 

$

4,697

 

$

1,922

 

$

8,794

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

18

 

(150

)

19

 

(148

)

Comprehensive income

 

$

1,744

 

$

4,547

 

$

1,941

 

$

8,646

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

$

0.17

 

$

0.07

 

$

0.32

 

Diluted

 

$

0.05

 

$

0.15

 

$

0.06

 

$

0.29

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

28,687,064

 

27,960,776

 

28,558,134

 

27,665,800

 

Diluted

 

31,672,842

 

30,516,302

 

31,494,079

 

30,018,887

 


 Three Months Ended
(In thousands)March 31,
2018
 March 31,
2017
Net income attributable to BioTelemetry, Inc.$5,982
 $196
Other comprehensive income/(loss):   
Foreign currency translation gain/(loss)(197) 1
Comprehensive income attributable to BioTelemetry, Inc.$5,785
 $197



See accompanying notes.

Notes to Consolidated Financial Statements.

BIOTELEMETRY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

Six Months Ended
June 30,

 

 

 

2017

 

2016

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

1,922

 

$

8,794

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Bad debt expense

 

5,207

 

5,302

 

Depreciation

 

5,551

 

5,257

 

Non-cash lease (benefit) expense

 

(102

)

27

 

Deferred income tax expense (benefit)

 

3

 

(444

)

Change in fair value of acquisition-related contingent consideration

 

(605

)

 

Change in fair value of derivative instrument

 

898

 

 

Equity method investment loss

 

196

 

114

 

Stock-based compensation

 

4,200

 

2,619

 

Amortization of intangibles

 

1,989

 

1,673

 

Accretion of discount on debt

 

110

 

109

 

Changes in operating assets and liabilities:

 

 

 

 

 

Healthcare and other accounts receivables

 

(7,280

)

(5,866

)

Inventory

 

845

 

(786

)

Prepaid expenses and other assets

 

(289

)

391

 

Accounts payable

 

(3,237

)

1,789

 

Accrued and other liabilities

 

1,325

 

(1,453

)

Net cash provided by operating activities

 

10,733

 

17,526

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

(17,970

)

Purchases of property and equipment and investment in internally developed software

 

(6,197

)

(5,692

)

Purchases of derivative instrument

 

(1,322

)

 

Investment in equity method investee

 

(350

)

 

Net cash used in investing activities

 

(7,869

)

(23,662

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds related to the exercising of stock options and employee stock purchase plan

 

3,602

 

1,236

 

Tax payments related to the vesting of shares

 

(1,881

)

(2,325

)

Borrowings under revolving loans

 

 

14,500

 

Principal payments on long-term debt

 

(626

)

(635

)

Principal payments on capital lease obligations

 

(132

)

(183

)

Net cash provided by (used in) financing activities

 

963

 

12,593

 

Effect of exchange rate changes on cash

 

19

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

3,846

 

6,457

 

Cash and cash equivalents - beginning of period

 

23,052

 

18,986

 

Cash and cash equivalents - end of period

 

$

26,898

 

$

25,443

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

Non-cash purchases of property and equipment

 

$

498

 

$

 

Cash paid for interest

 

$

648

 

$

654

 

Cash paid for taxes

 

$

1,232

 

$

132

 



 Three Months Ended
(in thousands)March 31,
2018
 March 31,
2017
OPERATING ACTIVITIES   
Net income$5,036
 $196
Adjustments to reconcile net income to net cash provided by operating activities:   
Bad debt expense4,879
 2,791
Depreciation5,507
 2,720
Amortization of intangibles4,321
 995
Stock-based compensation2,065
 3,058
Equity method investment loss139
 95
Change in fair value of acquisition-related contingent consideration(700) (605)
Accretion of discount on debt311
 55
Non-cash lease income(3) (50)
Non-cash tax benefit(307) (635)
Changes in operating assets and liabilities:   
Healthcare and other accounts receivables(13,565) (7,286)
Inventory(1,021) 810
Prepaid expenses and other assets1,287
 368
Accounts payable2,329
 463
Accrued and other liabilities(1,204) 1,678
Net cash provided by operating activities9,074
 4,653
INVESTING ACTIVITIES   
Purchases of property and equipment and investment in internally developed software(3,938) (2,967)
Net cash used in investing activities(3,938) (2,967)
FINANCING ACTIVITIES   
Proceeds related to the exercising of stock options and employee stock purchase plan2,486
 2,617
Tax payments related to the vesting of shares(2,739) (1,881)
Principal payments on long-term debt(513) (312)
Principal payments on capital lease obligations(966) (65)
Acquisition of noncontrolling interests(2,885) 
Net cash (used in)/provided by financing activities(4,617) 359
Effect of exchange rate changes on cash(195) 1
Net increase in cash and cash equivalents324
 2,046
Cash and cash equivalents - beginning of period36,022
 23,052
Cash and cash equivalents - end of period$36,346
 $25,098
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION   
Non-cash purchases of property and equipment$441
 $498
Non-cash fair value of equity issued for acquisition of business1,972
 
Cash paid for interest1,497
 310
Cash paid for taxes$20
 $47
See accompanying notes.

Notes to Consolidated Financial Statements.



BIOTELEMETRY, INC.

CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
 BioTelemetry, Inc. Equity    
 Common Stock Paid-in Capital 
Accumulated
Other
Comprehensive
Loss
 Accumulated Deficit Noncontrolling Interest Total Equity
(In thousands, except shares)Shares Amount     
Balance at December 31, 201732,460,668
 $32
 $409,517
 $(114) $(158,678) $(1,054) $249,703
Share issuances related to stock compensation plans354,620
 1
 2,485
 
 
 
 2,486
Stock-based compensation
 
 2,065
 
 
 
 2,065
Shares withheld to cover taxes on vesting of share based awards(79,945) 
 (2,739) 
 
 
 (2,739)
Acquisition of noncontrolling interests58,786
 
 
 
 
 
 
Currency translation adjustment
 
 
 (197) 
 
 (197)
Net income/(loss)
 
 
 
 5,982
 (946) 5,036
Balance at March 31, 201832,794,129
 $33
 $411,328
 $(311) $(152,696) $(2,000) $256,354



See accompanying Notes to Consolidated Financial Statements.

BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)




1.Summary of Significant Accounting Policies

a) Principles of Consolidation & Reclassifications
The accompanying unaudited consolidated financial statements have been prepared in accordanceconformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and the requirements ofinstructions to Form 10-Q, and Article 10Rule 10-01 of Regulation S-X.  Accordingly, these consolidatedS-X and include the accounts of BioTelemetry, Inc. and its controlled subsidiaries (“BioTelemetry,” the “Company,” “we,” “our” or “us”). In the opinion of management, all adjustments (consisting only of normal recurring accruals, except as otherwise disclosed herein) considered necessary to present fairly the financial statements do not include allposition as of the informationMarch 31, 2018 and footnotes necessary for a complete presentation of financial position,the results of operations and cash flows.  Inflows for the opinion of management, theseinterim periods ended March 31, 2018 and 2017 have been included. All intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP, but which are not required for interim reporting purposes, have been omitted. The accompanying unaudited consolidated financial statements reflect all adjustments which are of a normal recurring natureshould be read in conjunction with the financial statements and necessarynotes thereto included in our Annual Report on Form 10-K for a fair presentation of BioTelemetry, Inc.’s (“BioTelemetry,” “Company,” “we,” “our” or “us” ) financial position as of June 30, 2017 andthe fiscal year ended December 31, 2016,2017.
Certain reclassifications have been made to prior period statements to conform to the current period presentation. These consist of:
reclassifying trade payable invoices received but not yet processed in our purchasing system from accrued liabilities to accounts payable in the consolidated balance sheets,
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 category to the Healthcare segment in our segment information disclosures, and
aggregating the Technology operating segment into the Corporate and Other category.
The reclassifications had no impact on previously reported consolidated results of operations, for the three months and six months ended June 30, 2017 and 2016 and cash flows foror accumulated deficit.
b) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires that we make estimates and assumptions that affect the six months ended June 30, 2017reported amounts of assets and 2016.  The financial dataliabilities and other information disclosed in these notes todisclosures of contingent assets and liabilities at the date of the consolidated financial statements related toand the threereported amounts of revenue and six months ended June 30, 2017 and 2016 are unaudited.  The results for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for any future period.

Net Income Per Share

We compute net income per share in accordance with Accounting Standards Codification (“ASC”) 260, Earnings Per Share.  Basic net income per share is computed by dividing net income by the weighted average number of common shares outstandingexpenses during the reporting period. Diluted net income per share is computed by giving effect to all potential dilutive common shares, including stock options and restricted stock units.

The following table presents the calculation of basic and diluted net income per share:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

1,726

 

$

4,697

 

$

1,922

 

$

8,794

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing basic net income per share

 

28,687,064

 

27,960,776

 

28,558,134

 

27,665,800

 

Potential dilutive common shares due to dilutive stock option and restricted stock units

 

2,985,778

 

2,555,526

 

2,935,945

 

2,353,087

 

Weighted average shares used in computing diluted net income per share

 

31,672,842

 

30,516,302

 

31,494,079

 

30,018,887

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.06

 

$

0.17

 

$

0.07

 

$

0.32

 

Diluted net income per share

 

$

0.05

 

$

0.15

 

$

0.06

 

$

0.29

 

Certain stock options, which are priced higher than the market price of our shares as of June 30, 2017 and 2016, would be anti-dilutive and therefore have been excludedActual results may differ from the weighted average shares used in computing diluted net income per share. These options could become dilutive in future periods.

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 the Company.us. Unobservable inputs are inputs that reflect the Company’s
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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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 the Company’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

Level 1 -Quoted prices in active markets for an identical asset or liability.
Level 2 -Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
Level 3 -Inputs that are unobservable for the asset or liability, based on our own assumptions about the assumptions a market participant would use in pricing the asset or liability.
Our financial instruments consist primarily of cash and cash equivalents, Healthcare accounts receivable, other accounts receivable, accounts payable, short-term debt and long-term debt. With the exception of thecontingent 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).  For
Our long-term debt based on(classified as Level 2) is measured using market prices for similar instruments, inputs such as the borrowing rates currently available, the fair value was determined to be $25,188 as of June 30, 2017.  This is equal to the nominal value, which is the carrying value, exclusive of debt discountbenchmark yields, actual trade data, broker/dealer quotes and deferred charges (classified as Level 2).

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 (classified as Level 3).model. Adjustments to contingent consideration are recorded underin other charges.

charges in the consolidated statements of operations.

In addition to the recurring fair value measurements, the fair value of certain assets acquired and liabilities assumed in connection with a business combination are recorded at the acquisition date,fair value, primarily using a discounted cash flow model (classified as Level 3). This valuation technique requires the Companyus 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.

Derivative Instruments

During Non-financial assets such as goodwill, intangible assets, and property and equipment are subsequently measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. We assess the second quarterimpairment of 2017, we purchased a foreign currency option with a notional valueintangible assets annually or whenever events or changes in circumstances indicate that the carrying amount of $194,185 to mitigate the foreign exchange riskan intangible asset may not be recoverable.

d) Accounts Receivable and Allowance for Doubtful Accounts
Healthcare accounts receivable is related to the Swiss Franc denominated purchase price of LifeWatch AG.  This derivative instrument was not designated as a hedge for accounting purposes.  The derivative instrumentHealthcare segment and is recorded at fair valuethe 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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estimates of collectability could change, which could have a material impact on our operations and cash flows.
Other accounts receivable is related to the Research segment and Corporate and Other category and is recorded at the time revenue is recognized, when products are shipped or services are performed. We estimate an allowance for doubtful accounts on a specific account basis, and consider several factors in our analysis including customer specific information 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. Additionally, we recorded bad debt expense of $4.9 million and $2.8 million for the three months ended March 31, 2018 and March 31, 2017, respectively.
e) Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, Healthcare accounts receivable and other accounts receivable. We maintain our cash and cash equivalents with high quality financial institutions to mitigate this risk. We perform ongoing credit evaluations of our customers and generally do not require collateral. We record an allowance for doubtful accounts in accordance with the procedures described above. Past-due amounts are written-off against the allowance for doubtful accounts when collections are believed to be unlikely and all collection efforts have ceased.
At March 31, 2018 and December 31, 2017, one payor, Medicare, accounted for 16% and 21%, respectively, of our gross accounts receivable.
f) Noncontrolling Interest
The consolidated financial statements reflect the application of Accounting Standards Codification (“ASC”) 810 - Consolidations, which establishes accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet as a componentwithin stockholders’ equity, but separate from the parent’s equity; (ii) the amount of prepaid expenses and other current assetsconsolidated net income/(loss) attributable to the parent and the noncontrolling interest to be clearly identified and presented in the consolidated statements of operations; and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently.
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 March 31, 2018, LifeWatch Turkey’s net assets were $0.1 million and their loss for the three months ended March 31, 2018 was $2.1 million.
Amounts pertaining to the noncontrolling ownership interest of LifeWatch Turkey held by third parties are reported as noncontrolling interests in the accompanying consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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g) 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 instrument are recorded as a componententerprise’s equity instruments or that may be settled by the issuance of interest and other loss, net insuch equity instruments. ASC 718 requires that an entity measures the consolidated statementscost of operations and comprehensive income.

The fair values of certain non-exchange-traded commodity derivatives designated as Level 2 areequity-based service awards based upon indicative price quotations available through brokers, industry price publications or recent market transactions and related market indicators. Theon the grant-date fair value of our Level 2 foreign currency option was based upon third-party quotes or indicative valuesthe 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 recent market transactions.

current fair value that is remeasured subsequently at each reporting date through the settlement date. The following summarizescompensation expense associated with performance stock units (“PSUs”) is recognized ratably over the changes in our derivative instruments duringperiod between when the six months ended June 30, 2017:

 

 

Derivative
instruments

 

Balance at December 31, 2016

 

$

 

Premium paid on derivative instrument

 

1,322

 

Change in fair value

 

(898

)

Balance at June 30, 2017

 

$

424

 

performance conditions are deemed probable of achievement and when the awards are vested. Performance stock options (“Equity MethodPSOs Investments

”) are valued and stock-based compensation expense is only recognized once the performance conditions of the outstanding PSOs have been met. We account for investments using the equity method of accounting if the investment provides us the abilityawards issued to exercise significant influence, but not control, over the investee.  Significant influence is generally deemed to exist if the Company’s 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 sheet as a component of 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 as a component of interest and other loss, net in the consolidated statements of operations and comprehensive income.

Goodwill and Acquired Intangible Assets

Goodwill is the excess of the purchase price of an acquired business over the amounts assigned to assets acquired and liabilities assumed in a business combination. In accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”), goodwill is reviewed for impairment annually, or when events arise that could indicate that an impairment exists. 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 a two-step impairment testnon-employees in accordance with ASC 350. In the first step, we compare the fair value of our reporting units505-50, Equity-Based Payments to the carrying value of the reporting units.  If the carrying value of the net assets assigned to the reporting units exceeds the fair value of the reporting units, then the second step of the impairment test is performed in order to determine the implied fair value of the reporting units’ goodwill.  If the carrying value of the reporting units’ goodwill exceeds the implied fair value of those reporting units, an impairment loss equal to the difference is recorded.Non-Employees

For the purpose of performing our goodwill impairment analysis, we consider our business to be comprised of three reporting units:  Healthcare, Research and Technology.  .

We calculate the fair value of the reporting units utilizing a weighting of the income and market approaches.  The income approach ishave historically recorded stock-based compensation expense based on a discounted cash flow methodology that includes assumptions for, among other things, forecasted income, cash flow, growththe number of options or restricted stock units (“RSUs”) we expect to vest using our historical forfeiture experience and periodically update those forfeiture 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.  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 basisapply 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 flow of the acquired business, the characteristics of the intangible assets acquired 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.

Accounting Pronouncements Recently Adopted

In March 2016, the Financial Accounting Standards Board (“FASB”) issuednew grants. While we early adopted Accounting Standards Update (“ASU”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. 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 arrangements arising after January 1,year ended December 31, 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 $1,752 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 2016-09 as of the same date. In addition, we recognized excess tax benefits as an adjustment to our previously reported (provision for) income taxes of $362 and $489 for the three and six months ended June 30, 2016, respectively. Corresponding adjustments were recorded in the operating section of our statement of cash flows for the six months ended June 30, 2016. The weighted average number of common shares outstanding for calculating diluted net income per share increased by 459,585 and 399,591 for the three and six months ended June 30, 2016.

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.

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 expected term of each option is based on the U.S. Treasury yield of a similar duration in effect at the time of grant. We have never paid, and do not expect to pay, dividends in the foreseeable future.
We estimate the fair value of our PSUs using a Monte Carlo simulation. This model uses assumptions, including the risk free interest rate, expected volatility of our stock price and those of the performance group, dividends of the performance group members, and expected life of the awards. As noted above, we continue to estimate forfeitures under the true-up provision of ASC 718. If it becomes probable that the PSU performance targets will be met, compensation expense will be recorded for these awards ratably over the requisite service period. The PSUs are forfeited to the extent the performance criteria are not met.
h) 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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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 U.S. 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 July 2015,response to the TCJA, the Staff of the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance to registrants in applying ASC 740 in connection with the TCJA. SAB 118 provides that in the period of enactment, the income tax effects of the TCJA may be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a measurement period. The measurement period begins in the reporting period of the TCJA’s enactment and ends when a registrant has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC 740. SAB 118 also describes supplemental disclosures that should accompany the provisional amounts. As of December 31, 2017, we applied the guidance in SAB 118 to account for the financial accounting impacts of the TCJA and have provided the applicable supplemental disclosures in “Note 13. Income Taxes.”
i) Net Income Per Share
We compute net income per share in accordance with ASC 260 - Earnings Per Share. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by giving effect to all potential dilutive common shares, including stock options and 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 March 31, 2018 and 2017 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.
j) 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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We report our business under two segments: Healthcare and Research. The Healthcare segment is focused on the remote cardiac monitoring to identify 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 centralized core laboratory services providing cardiac monitoring, imaging services, scientific consulting and data management services for drug and medical device trials. During the first quarter of 2018, as part of the continuing LifeWatch integration, our forward-looking integration and rebranding plans, considering full year 2018 financial forecasts of the results of the integrated company, and re-evaluating the significance and materiality of our segments, we aggregated the Technology operating segment into the Corporate and Other category. Included in the Corporate and Other category is the manufacturing, testing and marketing of cardiovascular and blood glucose monitoring devices to medical companies, clinics and hospitals and corporate overhead and other items not allocated to any of our reportable segments.
k) Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In March 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, to add various SEC paragraphs pursuant to the issuance of SAB 118 to ASC 740. SAB 118 was issued by the SEC in December 2017 to provide immediate guidance for accounting implications of U.S. tax reform under the TCJA. We have evaluated the potential impacts of SAB 118 and have applied this guidance to our consolidated financial statements and related disclosures as of January 1, 2018.
In May 2017, the FASB issuedreleased ASU 2015-11, Simplifying2017-09, Scope of Modification Accounting, which clarifies the Measurementchanges to terms or conditions of Inventory. Thea share based payment award that requires application of modification accounting under Topic 718. A change to an award should be accounted for as a modification unless the fair value of the modified award is the same as the original award, the vesting conditions do not change and the classification as an equity or liability instrument does not change. This update is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. We adopted this standard 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. The adoption ofeffective January 1, 2018, and this standard did not have a material impact on our consolidated financial statements.position, results of operations or disclosures.

Accounting Pronouncements Not Yet Adopted

In January 2017, the FASB issuedreleased ASU 2017-04, Simplifying2017-01, Business Combinations: Clarifying 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 will be recorded for any excessDefinition of a reporting unit’s carrying value over its fair value. A prospective transition approach is required.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 standard isamendments in this ASU should be applied prospectively and are effective for annual and interim reporting periodsfiscal years beginning after December 15, 20192017, including interim periods within those fiscal years, with early adoption permitted for annual and interim goodwill impairment testing dates afterpermitted. No disclosures are required at transition. We adopted this standard effective January 1, 2017. We plan to early adopt the2018, and this standard at the time of our 2017 goodwill impairment testing date and dodid not expect the standard to have a material impact on our consolidated financial statements.position, results of operations or disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which has been updated through several revisions and clarifications since its original issuance (collectively, the “Revenue Updates”). The Revenue Updates require revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration that a company expects to receive in exchange for those goods or services. The Revenue Updates also require new, expanded
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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disclosures regarding revenue recognition. We adopted the Revenue Updates effective January 1, 2018. See “Note 2. Revenue Recognition.”
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases. TheThis 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.


2. Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, We adopted ASC 606 - Revenue from Contracts with Customers which has been updated through several revisions and clarifications since its original issuance. (“ASC 606” or the “Revenue Standard”) on January 1, 2018. The standard will requireRevenue Standard requires revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration whichthat a company expects to receive in exchange for those goods or services. The standard also requires new, expanded disclosures regarding revenue recognition. The standard will be effective
We utilized the modified retrospective method for adoption, allowing us to not retrospectively adjust prior periods. We applied the modified retrospective method only to contracts that were not complete at January 1, 2018 and accounted for the aggregate effect of any contract modifications upon adoption. No cumulative adjustment to retained earnings was recorded.
Disaggregation of Revenue
We disaggregate revenue from contracts with early adoption permissible beginning January 1, 2017.customers by payor type and major service line. We determined that disaggregating revenue into these categories achieves the disclosure objective of illustrating the differences in the nature, amount, timing and uncertainty of our revenue streams. Disaggregated revenue by payor type and major service line for the three months ended March 31, 2018 was as follows:
(in thousands)Healthcare Research Other Total Consolidated
Payor/Service Line       
Remote cardiac monitoring services - Medicare$30,215
 $
 $
 $30,215
Remote cardiac monitoring services - commercial payors50,336
 
 
 50,336
Clinical trial support and related services
 11,244
 
 11,244
Technology devices, consumable and related services
 
 2,701
 2,701
Total$80,551
 $11,244
 $2,701
 $94,496
Remote Cardiac Monitoring Services Revenue (Healthcare segment)
Healthcare revenue is generated by remote cardiac monitoring to identify 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. We bill our customers after service commences.
Performance obligations are determined based on the nature of the services provided by us. With our remote cardiac monitoring services, the patient receives the benefits from the cardiac monitoring service
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over time, resulting in a time elapsed output method for revenue recognition. We believe that this method provides an accurate depiction of the transfer of value over the term of the performance obligation because the level of effort in providing these services is consistent during the service period.
A summary of the payment arrangements with payors is as follows:
Medicare and Contracted payors

: We determine the transaction price based negotiated prices for services provided, on a case rate basis, as provided for under the relevant Current Procedural Terminology (“CPT”) codes.

Non-contracted payors: Non-contracted commercial and government insurance carriers often reimburse out of network rates provided for under the relevant CPT codes on a case rate basis. Our transaction price includes implicit price concessions based on our historical collection experience for our non-contracted patients
We are continuing to evaluateutilizing the impact that ASU 2014-09 will haveportfolio approach practical expedient in ASC 606 for our patient contracts in the Healthcare segment. We account for the contracts within each portfolio as a collective group, rather than individual contracts. Based on our consolidated financial statementshistory with these portfolios and related disclosures.  As we continue the evaluationsimilar nature and implementation process, we expect that there will be an impact to our financial reporting disclosures as well as any related business operations processes and Internal Controls Over Financial Reporting (“ICFR”).  As partcharacteristics of the assessment performed through the date of this filing,patients within each portfolio, we have created an implementation working group, which includes internal and third-party resources.  As part of our implementation plan,concluded that the financial statement effects are not materially different than if accounting for revenue on a contract by contract basis
For the contracted portfolio, we have adopted implementation controls that will allow us to properly and timely adopt the new revenue accounting standard on its effective date.  In particular, we implemented the following:

·                  Developed a detailed project plan with key milestone dates;

·                  Performed educationhistorical experience of collecting substantially all of the new accounting standard;

·                  Outlined our revenue generating activities that fall within the scope of ASU 2014-09, and are continuing to assess what impact the new accounting standard will have on those activities, and;

·                  Monitoring and assessment of the impact of changes to ASU 2014-09 and its interpretations as they become available

Specific considerations made to date on the impact of adopting ASU 2014-09 include:

·                  Healthcare Revenue — the valuation of our Healthcare revenue and accounts receivable, including whether differences between our list prices and negotiated contractual rates forand determined at contract inception that these customers have the intention and ability to pay the promised consideration. As such, we are not providing an implicit price concession but, rather, have chosen to accept the risk of default, and adjustments to the transaction price are recorded as bad debt expense.

For our healthcare monitoring services constitutenon-contracted portfolio, we are providing an implicit price concessions or acceptance of the customer’s credit risk and how this impacts the timing of our healthcare revenue recognition. Our current accounting policy is revenue is recognized upon agreed upon reimbursement rates. Ifconcession because we do not have agreed upon reimbursement rates, we recognize revenuea contract with the underlying payor, the result of which requires us to estimate our transaction price based on historical experience, or if no historical experience, when cash is received. Adjustmentscollections utilizing the expected value method. Subsequent adjustments to the estimated net realizable value, based on final settlement with the third-party payors,transaction price are recorded upon settlement.

·as an adjustment to Healthcare revenue and not as bad debt expense.

We have not made any significant changes to judgments in applying ASC 606 during the three months ended March 31, 2018.
Clinical Trial Support and Related Services Revenue (Research segment)
Research revenue is generated by providing centralized core laboratory services including cardiac monitoring, imaging services, scientific consulting and data management services for drug and medical device trials. These amounts are due from pharmaceutical companies and contract research organizations. We bill our customers after the treatment of our long-term research contracts, including whether the various services promised in these contracts are distinct performance obligations, and the pattern of revenue recognition for these services. Under our current accounting policy, revenue for our Research segment is provided on a fee-for-service basis, and revenue is recognized as the related services are performed. Unearned revenue, includingUnder a typical contract, customers pay us a portion of our fee for these services upon contract execution as an upfront refundable deposit. Upfront deposits are deferred and then recognized as the services are performed.

·                  Technology If a contract is canceled prior to service being provided, the upfront deposit is refunded.

Performance obligations are determined based on the nature of the services provided by us. Our core laboratory services are provided over time as the customer receives benefits resulting in revenue recognition over the term of the contract. Our preliminary assessment wasresearch customer contracts have legally enforceable terms that are predominately thirty days due to termination for convenience clauses, which are held by the customer with no significant penalty. Given the short-term nature of these contracts and the structure of our billing
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


practices, our billing practices approximate our performance if measured by an output method, where each output is an individual occurrence of each performance obligation. Accordingly, we do not expectutilize the standard to have a material impact on Technology revenue.  We are confirming this assessment through various procedures, including evaluating the timinginvoice practical expedient as defined in ASC 606 resulting in recognition of revenue recognition for product shipments. Under our current accounting policy, revenuein the amount that we have the right to invoice.
We determine the transaction price based on the fixed consideration in our contractual agreements with our customers and allocate the transaction price to each performance obligation based on our relative stand-alone selling prices. We determine the relative stand-alone selling price utilizing either the adjusted market assessment or the cost-plus margin approach depending upon the type of contract.
We have not made any significant changes to judgments in applying ASC 606 during the three months ended March 31, 2018.
Technology segmentDevices, Consumable and Related Service Revenue (Other category)
Our technology device and other related revenue is receivedprimarily derived from two operations: (1) manufacturing, engineering and development of non-invasive cardiac monitors for healthcare companies and (2) manufacturing, engineering and development of cellular-enabled blood glucose meter systems for diabetes patients. We bill our customers after goods are delivered or services are performed.
Performance obligations are determined based on the nature of the services provided by us. Our performance obligations consist of the following two categories: (1) the sale of products, product repairmedical devices and supplies which are recognized when shipped, or as service is completed.

·                  Contract Costs - We are continuingrelated goods produced by us and (2) contract manufacturing on behalf of a customer. These contracts transfer control to assess the impact of ASU 2014-09a customer at a point in time based on the coststransfer of title for the underlying good or service. We provide standard warranty provisions.

We determine the transaction price based on fixed consideration in our contractual agreements with our customers and allocate the transaction price to acquireeach performance obligation based on the relative stand-alone selling price. We determine the relative stand-alone selling price utilizing our observable prices for the sale of the underlying goods.
We have not made any significant changes to judgments in applying ASC 606 during the three months ended March 31, 2018.
Deferred Revenue
ASC 606 requires an entity to present a revenue contract as a contract asset when the entity performs its obligations under the contract by transferring goods or services to a customer before the customer pays consideration or before payment is due. ASC 606 also requires an entity to present a revenue contract as a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g. receivable), before the entity transfers a good or service to the customer.
We currently do not have any contract assets. We recognize contract liabilities in the form of deferred revenue in the Research segment in instances where a customer pays an upfront deposit upon contract execution for future services to be performed by us. We receive payments from our customers based on standard terms and fulfillconditions. No significant changes or impairment losses occurred to contract balances during the three months ended March 31, 2018.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


As of March 31, 2018, we had deferred revenue of $5.1 million primarily related to the Research services where customers paid upfront deposits upon contract execution for future services to be performed by us. If the contract is canceled, these upfront deposits are refundable if service was not yet provided. For the three months ended March 31, 2018, amounts moved from deferred revenue to revenue were $1.5 million.
Practical Expedient Elections
We have elected the following practical expedients in applying ASC 606 across all reportable segments unless otherwise noted below.
Unsatisfied Performance Obligations: Because all of our customerperformance obligations relate to contracts including whetherwith a duration of less than one year, we canhave elected to apply the practical expedientoptional exemption provided in ASC 606 and, therefore, are not required to disclose the aggregate amount of expensingthe transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
Contract Costs: All incremental customer contract acquisition costs whenare expensed as they are incurred ifas the amortization period of the asset that we otherwise would have recognized is one year or less in duration.
Significant Financing Component: We do not adjust the promised amount of consideration for the effects of a significant financing component as we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Currently,
Sales Tax Exclusion from the Transaction Price: We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from the customer.
Shipping and Handling Activities: For our accounting policy is to expense contract costs as they are incurred.

·                  Transition Method —We are continuing to evaluate the transition method we will elect.

Significant assessment and implementation matters to be addressed prior to adopting ASU 2014-09 include completing our review of customer contracts, confirming our transition method of adoption, determining the impact the new accounting standard will have on our consolidated financial statementstechnology device, consumable and related disclosuresservice revenue, we account for shipping and updating,handling activities we perform after a customer obtains control of the good as needed,activities to fulfill the promise to transfer the good.


3. Acquisitions
LifeWatch
On July 12, 2017, we, through our business processes, systems and controls required to comply with ASU 2014-09 upon its effective date (January 1, 2018). We will make continuous updates to our quarterly and year-end disclosures,wholly-owned subsidiary Cardiac Monitoring Holding Company, LLC, acquired approximately 97% of the outstanding shares of LifeWatch for aggregate consideration of 3,615,840 shares of BioTelemetry common stock with a focus on implementation status updatesfair 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.  The acquisition of LifeWatch strengthens our market position as the leader in mobile cardiac monitoring.
We recorded our obligations to acquire the remaining untendered LifeWatch shares, pursuant to a squeeze-out procedure in accordance with Swiss law and takeover regulations related to the impact ASU 2014-09 will have onoffering, as components of accrued liabilities and paid-in capital, and reduced our noncontrolling interest related to our ownership of LifeWatch, in our consolidated financial statements and related footnotes.

The assessment and implementation procedures performed through June 30, 2017 have not includedbalance sheet as of December 31, 2017. As a result, we owned

BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


100% of LifeWatch AG, whichas of December 31, 2017. In early January 2018, we acquired on July 12, 2017. During the quarter ending September 30, 2017, we will assess the impactsettled those obligations with payment of the acquisition on our implementation plan and procedures, which may result in the identification of additional revenue streams.

We expect to confirm our method of adoption by September 30, 2017, and will include any known quantitative information on transition method impact on our third quarter 2017 Form 10-Q.  We expect to complete our assessment of the full financial impact of ASU 2014-09 during the next six months and expect to adopt ASU 2014-09 when it becomes effective for the Company on January 1, 2018.

2.Acquisitions

Telcare, Inc.

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 $7,000$2.9 million in cash and the issuance of 58,786 shares of our common stock with the potential for a performance-based earn out up to $5,000 upon reaching certain financial milestones. The fair market value of the total consideration transferred in the acquisition, including contingent consideration, was $9,700 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. $2.0 million.

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.  The CompanyWe recognized $3,608$184.1 million of goodwill as a result of the acquisition, all of which has been assigned to the TechnologyHealthcare segment. We expect $649None of this goodwill will be deductible for tax purposes.

The amounts below represent our preliminary fair value estimates as of June 30, 2017March 31, 2018 and are subject to subsequent adjustment as additional information is obtained during the applicable measurement period.  AThe measurement period adjustment was recorded induring the secondfirst quarter of 20172018 consisted of reducing the valuation of inventorycertain international non-income tax receivables by $269.$0.6 million. The primary areas of these preliminary estimates that are not yet finalized relatedrelate to certain tangible assets acquired and liabilities assumed, including deferred taxes, as well as theunrecorded tax provisions and identifiable intangible assets. The Company expectsWe expect to finalize all accounting for the acquisition of TelcareLifeWatch within one year of the acquisition date.

The total consideration

BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


(in thousands, except lives)Amount 
Weighted
Average Life
(Years)
Fair value of assets acquired:   
Cash and cash equivalents$4,303
  
Healthcare accounts receivable9,467
  
Inventory1,136
  
Prepaid expenses and other current assets3,798
  
Property and equipment28,241
  
Other assets713
  
Identifiable intangible assets:   
Customer relationships126,900
 10
Technology3,005
 3
Total identifiable intangible assets129,905
  
Total assets acquired177,563
  
Fair value of liabilities assumed:   
Accounts payable10,424
  
Accrued liabilities9,747
  
Current portion of capital lease obligations4,664
  
Current portion of long-term debt3,027
  
Long-term capital lease obligations3,420
  
Deferred tax liabilities14,454
  
Other long-term liabilities23,435
  
Total liabilities assumed69,171
  
    
Total identifiable net assets108,392
  
Fair value of noncontrolling interest(9,961)  
Goodwill184,143
  
Net assets acquired$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.
There were no acquisition-related costs related preliminary allocationto LifeWatch for Telcare is summarized as follows:

 

 

Amount

 

Weighted
Average Life
(Years)

 

Fair value of assets acquired:

 

 

 

 

 

Other accounts receivable

 

$

235

 

 

 

Inventory

 

1,522

 

 

 

Prepaid expenses and other current assets

 

1,261

 

 

 

Property and equipment

 

55

 

 

 

Other assets

 

933

 

 

 

Identifiable intangible assets:

 

 

 

 

 

Customer relationships

 

400

 

5

 

Technology

 

2,000

 

5

 

Tradename

 

400

 

Indefinite

 

Total identifiable intangible assets

 

2,800

 

 

 

Total assets acquired

 

6,806

 

 

 

Fair value of liabilities assumed:

 

 

 

 

 

Accounts payable

 

459

 

 

 

Accrued liabilities

 

206

 

 

 

Deferred revenue

 

49

 

 

 

Total liabilities assumed

 

714

 

 

 

Total identifiable net assets

 

6,092

 

 

 

Goodwill

 

3,608

 

 

 

Net assets acquired

 

$

9,700

 

 

 

the three month period ended March 31, 2018.

The following unaudited pro forma financial information has been prepared using historical financial results of the CompanyBioTelemetry and TelcareLifeWatch 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 interest on the debt, the addition of depreciation and amortization related to fair value adjustments on the tangible and identifiable intangible assets acquired, and the change in the share count resulting from the share issuance have been reflected for the purposes of the unaudited pro forma financial information presented below.  We believe
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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:

 

 

Three Months Ended
June 30, 2016

 

Six Months Ended
June 30, 2016

 

Revenue

 

$

53,986

 

$

103,746

 

Net Income

 

$

4,023

 

$

7,003

 

Net income per common share:

 

 

 

 

 

Basic

 

$

0.14

 

$

0.25

 

Diluted

 

$

0.13

 

$

0.23

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic

 

27,960,776

 

27,665,800

 

Diluted

 

30,516,302

 

30,018,887

 

Contingent Consideration

The Agreement includes the potential for a performance-based earn out up to $5,000 upon reaching certain milestones. The fair value of the contingent consideration associated with the Telcare acquisition was $2,700 as of the acquisition date and at June 30, 2017.  At June 30, 2017, contingent consideration is included as a component of accrued expenses and other long-term liabilities in the accompanying consolidated balance sheets in the amounts of $2,400 and $300 respectively.

 Three Months Ended
(pro forma, unaudited, in thousands, except per share amounts)March 31,
2017
Revenue$85,100
Net loss attributable to BioTelemetry, Inc.(6,100)
Net loss per common share attributable to BioTelemetry, Inc.: 
Basic$(0.19)
Diluted$(0.19)
Weighted average number of common shares outstanding: 
Basic32,123
Diluted32,123

The following summarizes the changes in our contingent consideration during the six months ended June 30, 2017:

 

 

Total Contingent
Consideration

 

Balance at December 31, 2016

 

$

2,700

 

Change in fair value of acquisition-related contingent consideration

 

 

Balance at June 30, 2017

 

$

2,700

 

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 with VirtualScopics, Inc. (“VirtualScopics”), a leading provider of clinical trial imaging solutions.  Under the terms of the Merger Agreement, the Company 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 $14,970, net of cash acquired of $849.

The acquisition of VirtualScopics expands the Company’s existing clinical research offerings and gives the Company 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.  The Company recognized $4,343 of goodwill as a result of the acquisition, all of which has been assigned to the Research segment.  We do not expect that any 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.  A measurement period adjustment was recorded in the second quarter of 2017 to recognize $292 of deferred tax assets resulting from state NOLs. The total consideration and related allocation for VirtualScopics is summarized as follows:

 

 

 

 

Weighted

 

 

 

 

 

Average Life

 

 

 

Amount

 

(Years)

 

Fair value of assets acquired:

 

 

 

 

 

Cash and cash equivalents

 

$

849

 

 

 

Other accounts receivable

 

3,679

 

 

 

Inventory

 

111

 

 

 

Prepaid expenses and other current assets

 

396

 

 

 

Property and equipment

 

500

 

 

 

Deferred taxes

 

20

 

 

 

Identifiable intangible assets:

 

 

 

 

 

Customer relationships

 

5,200

 

12

 

Technology

 

2,000

 

10

 

Backlog

 

3,100

 

4

 

Total identifiable intangible assets

 

10,300

 

 

 

Total assets acquired

 

15,855

 

 

 

Fair value of liabilities assumed:

 

 

 

 

 

Accounts payable

 

325

 

 

 

Accrued liabilities

 

2,945

 

 

 

Current portion of capital lease obligations

 

59

 

 

 

Current portion of long-term debt

 

91

 

 

 

Deferred revenue

 

700

 

 

 

Long-term capital lease obligations

 

162

 

 

 

Long-term debt

 

97

 

 

 

Total liabilities assumed

 

4,379

 

 

 

Total identifiable net assets

 

11,476

 

 

 

Goodwill

 

4,343

 

 

 

Net assets acquired

 

$

15,819

 

 

 

The following unaudited pro forma financial information has been prepared using historical financial results of the Company and VirtualScopics as if the acquisition had occurred as of January 1, 2016.  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 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:

 

 

Three Months Ended
June 30, 2016

 

Six Months Ended
June 30, 2016

 

Revenue

 

$

54,762

 

$

107,258

 

Net Income

 

$

5,383

 

$

10,132

 

Net income per common share:

 

 

 

 

 

Basic

 

$

0.19

 

$

0.37

 

Diluted

 

$

0.18

 

$

0.34

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic

 

27,960,776

 

27,665,800

 

Diluted

 

30,516,302

 

30,018,887

 

ePatch Division of DELTA Danish Electronics, Light, and Acoustics

On April 1, 2016, the Company, through its wholly-owned subsidiary BioTelemetry Technology ApS, entered into an Asset Purchase Agreement (“APA”) with DELTA Danish Electronics, Light, and Acoustics (“DELTA”), pursuant to which the Company 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 $3,000 in cash and 244,519 shares of the Company’s common stock valued at $2,885.  In addition, there is the potential for a performance based earn out up to $3,000 upon reaching certain milestones, as defined in the APA.  The fair value of the total consideration transferred in the ePatch acquisition, including contingent consideration, was $6,490 at the acquisition date.

The ePatch acquisition is expected to generate future cost savings for the Company and will provide control over proprietary components for the Company’s next generation Mobile Cardiac Outpatient TelemetryTM (“MCOTTM”) 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 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.  The company recognized $3,181 of goodwill as a result of the acquisition, all of which has been assigned to the Technology segment.  We expect all of this goodwill to be deductible for tax purposes.

The amounts below represent our final fair value estimates, which were completed in the first quarter of 2017.  The total consideration and related allocation for the ePatch acquisition is summarized as follows:

 

 

 

 

Weighted

 

 

 

 

 

Average Life

 

 

 

Amount

 

(Years)

 

Fair value of assets acquired:

 

 

 

 

 

Inventory

 

$

100

 

 

 

Property and equipment

 

175

 

 

 

Identifiable intangible assets:

 

 

 

 

 

Customer relationships

 

400

 

10

 

Technology

 

2,800

 

10

 

Trade names

 

100

 

Indefinite

 

Total identifiable intangible assets

 

3,300

 

 

 

Total assets acquired

 

3,575

 

 

 

Fair value of liabilities assumed:

 

 

 

 

 

Accrued liabilities

 

266

 

 

 

Total liabilities assumed

 

266

 

 

 

Total identifiable net assets

 

3,309

 

 

 

Goodwill

 

3,181

 

 

 

Net assets acquired

 

$

6,490

 

 

 

While the ePatch acquisition provides control over proprietary components of our next generation cardiac monitoring device, the acquisition did not have a material effect on our consolidated results of operations.

Contingent Consideration

The APA includes the potential for a performance based earn out up to $3,000 upon reaching certain milestones.  The fair value of the contingent consideration associated with the ePatch acquisition was $0 and $605 at June 30, 2017 and December 31, 2016, respectively, and is included as a component of other long-term liabilities in the accompanying consolidated balance sheets.

The following summarizes the changes in our contingent consideration during the six months ended June 30, 2017:

 

 

Total Contingent
Consideration

 

Balance at December 31, 2016

 

$

605

 

Change in fair value of acquisition-related contingent consideration

 

(605

)

Balance at June 30, 2017

 

$

 

3.

4. Inventory

Inventory consists of the following:

 

 

June 30, 2017

 

December 31, 2016

 

Raw materials

 

$

2,878

 

$

2,866

 

Finished goods

 

1,243

 

2,310

 

Total inventory

 

$

4,121

 

$

5,176

 

(in thousands)March 31,
2018
 December 31,
2017
Raw materials and supplies$3,861
 $3,128
Finished goods2,492
 2,204
Total inventory$6,353
 $5,332
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.


4.

5. Fair Value Measurements
We have determined that our long term debt, classified as Level 2, has a fair value consistent with its carry value, exclusive of debt discount and deferred charges, of $199.2 million and $199.4 million as of March 31, 2018 and December 31, 2017, respectively.
Contingent consideration represents our contingent milestone payment obligations related to our acquisitions and is measured at fair value, based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions we believe would be made by a market participant. We assess these estimates on an ongoing basis as additional data impacting the assumptions is obtained. The balances of the fair value of contingent consideration 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.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The following table provides a reconciliation of the beginning and ending balances of contingent payments associated with acquisitions that occurred during the year ended December 31, 2016:
 Three Months Ended
(in thousands)March 31,
2018
 March 31,
2017
Beginning balance$700
 $3,305
Changes in fair value of contingent consideration(700) (605)
Ending balance$
 $2,700
During the three months ended March 31, 2018 and 2017, the fair values of the contingent consideration decreased $0.7 million and $0.6 million, respectively, as it was no longer probable that certain of the contingencies related to the Telcare or ePatch acquisitions, respectively, would be met.

6. Goodwill

and Intangible Assets

Goodwill was recognized at the time of our acquisitions. The following table presents the carrying amount of goodwill allocated to our reportable segments, as of June 30, 2017 and December 31, 2016 was $40,963 and $41,068, respectively.  The decrease inwell as the changes to goodwill during the three and six months ended June 30, 2017March 31, 2018:
 Reporting Segment    
(in thousands)Healthcare Research Corporate and Other Total
Balance at December 31, 2017$198,273
 $16,293
 $8,539
 $223,105
Measurement period adjustment594
 
 
 594
Balance at March 31, 2018$198,867
 $16,293
 $8,539
 $223,699
The measurement period adjustment in the Healthcare segment is due to purchase period adjustmentsthe LifeWatch acquisition. Refer to “Note 3. Acquisitions” for details related to our 2016 acquisitions.

the measurement period adjustment.

BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The changes in thegross carrying amounts and accumulated amortization of goodwill by segment wereour intangible assets are as follows:

 

 

Reporting Segment

 

 

 

Healthcare

 

Research

 

Technology

 

Total

 

Balance at December 31, 2016

 

$

14,724

 

$

16,643

 

$

9,701

 

$

41,068

 

Goodwill adjustments related to 2016 acquisitions

 

 

(350

)

245

 

(105

)

Balance at June 30, 2017

 

$

14,724

 

$

16,293

 

$

9,946

 

$

40,963

 

5.

 
Estimated
Useful Life
(Years)
  
(in thousands, except years) March 31,
2018
 December 31,
2017
Customer relationships5 - 15 $143,174
 $143,174
Technology including internally developed software3 - 10 16,180
 15,953
Backlog1 - 4 6,860
 6,860
Covenants not to compete5 - 7 1,040
 1,040
Total intangible assets, gross  167,254
 167,027
Customer relationships  (14,354) (10,868)
Technology including internally developed software  (9,184) (8,573)
Backlog  (5,245) (5,052)
Covenants not to compete  (857) (827)
Total accumulated amortization  (29,640) (25,320)
Total intangible assets, net  $137,614
 $141,707

7. Equity Method Investment

In December 2015, we acquired

We hold an ownership interest in Well Bridge Health, Inc. (“WellBridge”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 differenceOur Chief Executive Officer sits on WellBridge’s Board of $891 was allocated to equity method goodwill. Directors, and therefore WellBridge is considered a related party. Except for our periodic investment in WellBridge through capital contributions, there were no related party transactions.
As of June 30, 2017,March 31, 2018, our investment in WellBridge represented 31%32.1% of its outstanding stock. A summary of our investment in WellbridgeWellBridge is as follows:

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Beginning balance

 

$

1,029

 

$

1,079

 

$

1,125

 

$

1,100

 

Capital contributions

 

350

 

 

350

 

 

Our share of the investee’s losses

 

(100

)

(93

)

(196

)

(114

)

Ending balance

 

$

1,279

 

$

986

 

$

1,279

 

$

986

 

6.

 Three Months Ended
(in thousands)March 31,
2018
 March 31,
2017
Beginning balance$1,431
 $1,125
Loss in equity method investment(139) (95)
Ending balance$1,292
 $1,030

BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


8. Accrued Liabilities
Accrued liabilities consists of the following:
(in thousands)March 31,
2018
 December 31,
2017
Compensation$10,783
 $13,086
Professional fees1,904
 1,587
Squeeze-out
 2,885
Severance758
 1,605
Non-income taxes1,345
 588
Interest341
 306
Other6,508
 5,998
Total$21,639
 $26,055

9. Credit Agreement

On December 30, 2014,Concurrent with the acquisition of LifeWatch, we entered into a credit agreement with SunTrust Bank (the “SunTrust Credit Agreement with Healthcare Financial Solutions, LLC (“HFS”), previously the General Electric Capital Corporation, as a lender and an agent for the lenders (“Lenders”(the “Lenders), and as a lender and swingline lender.. Pursuant to the SunTrust Credit Agreement, the Lenders agreed to make loans to us as follows:follows; (i) Term Loansa term loan in an aggregate principal amount of $25,000 asequal to $205.0 million; and (ii) a $50.0 million revolving credit facility for ongoing working capital purposes. The proceeds of the closing date with an uncommitted abilityloans were used to increase such Term Loans up to an amount not to exceed $10,000pay (i) our existing Healthcare Financial Solutions, LLC Credit Agreement of $24.9 million; (ii) acquired LifeWatch debt of $3.0 million; (iii) a portion of the consideration for the acquisition of LifeWatch; and (ii) Revolving Loans up to $15,000.  As(iv) related transaction fees and expenses for the acquisition of both June 30, 2017 and December 31, 2016, $3,000 was drawn on the Revolving Loans.  LifeWatch.
The loan, inclusive of Term Loans and Revolving Loans, is recorded on our consolidated balance sheets as of June 30, 2017 in the amount of $24,645, which is net of a debt discount and deferred charges of $543.

The loan bearsloans bear interest at an annual rate, at our election, of (i) with respect to LIBOR rate loans, LIBORplus 4.0%, subjectthe applicable margin and (ii) with respect to abase 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 floorand base rate loans is determined by reference to our Consolidated Total Net Leverage Ratio, as defined in the SunTrust Credit Agreement. As of 1.0%.  March 31, 2018, the applicable margin is 2.00% for LIBOR loans and 1.00% for base rate loans.

The outstanding principal of the Term Loans will be paid as follows:  (i) beginning Aprilloan is subject to the following payment schedule:
Beginning January 1, 2015,2018, the principal amount of the Term Loansterm loan will be repaid, on a quarterly basis, in installments of $312,approximately $0.5 million, plus accrued interest; (ii) beginning
Beginning January 1, 2018,2019, the principal amount of the Term Loansterm loan will be repaid, on a quarterly basis, in installments of $625,approximately $1.3 million, plus accrued interest; and (iii)
Beginning January 1, 2020, the remaining $16,563, along with any outstanding Revolving Loans,principal amount of the term loan will be paidrepaid, on a quarterly basis, in fullinstallments 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;
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The remaining principal balance will be repaid on or before December 30, 2019, orJuly 12, 2022 (or such earlier date upon an acceleration of the Term Loansloans by the Lenders upon an event of default or termination by us.  the Company).
The loan isloans are 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 first tier material foreign subsidiaries, including 65% of our ownership interest of LifeWatch.
The carrying amount of the Company’s foreign subsidiaries.

term loan was $199.2 million as of March 31, 2018, which is the principal amount outstanding, net of $5.3 million of unamortized deferred financing costs to be amortized over the remaining term of the credit facility. The revolving credit facility is subject to an unused commitment fee, which is determined by reference to our Consolidated Total Net Leverage Ratio, as defined in the SunTrust Credit Agreement. Our unused commitment fee as of March 31, 2018 was 0.3%, and the revolving credit facility remains undrawn as of that date.

Covenants
The SunTrust Credit Agreement contains affirmative and financial covenants regarding the operations of our business and certain negative covenants that, among other things, limit our ability to incur additional indebtedness, grant certain liens, make certain investments, merge or consolidate, make certain restricted payments and engage in certain asset dispositions, including a sale of all, or substantially all, of our property. As of June 30, 2017,March 31, 2018, we were in compliance with allour covenants.


10. Equity
Common Stock
7.As of March 31, 2018 and December 31, 2017, we were authorized to issue 200,000,000 shares of common stock. As of March 31, 2018 and December 31, 2017, we had 32,794,129 and 32,460,668 shares issued and outstanding, respectively. During the three months ended March 31, 2018, in accordance with the squeeze-out procedures under Swiss law, we issued 58,786 shares to the remaining stockholders of LifeWatch. See Stockholders’ Equity

“Note 3. Acquisitions” for further details related to the LifeWatch acquisition.

Preferred Stock
As of March 31, 2018, we were authorized to issue 10,000,000 shares of preferred stock. As of March 31, 2018 and December 31, 2017, there were no shares of preferred stock issued or outstanding.
Noncontrolling Interest
As of March 31, 2018, the noncontrolling interest of $2.0 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; f) Noncontrolling Interest” for further details.

11. Stock-Based Compensation

In May 2017, the shareholders and Board of Directors approved the BioTelemetry, Inc.We have three stock plans: our 2017 Omnibus Incentive Plan (“OIP”OIP”), our 2008 Equity Incentive Plan (the “2008 Plan”) and our 2003 Equity Incentive Plan (the “2003 Plan). The OIP is the only remaining
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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 after three years.
2017 Omnibus Incentive Plan (OIP)
In May 2017, our stockholders approved the OIP, which replaces the previous stock plan, the BioTelemetry, Inc. 2017 Equity Incentive2008 Plan. Stock options, restricted stock units (“RSUs”), performance stock units (“PSUs”)RSUs, PSUs and performance stock options (“PSOs”)PSOs are granted under the OIP. At June 30, 2017, 2,977,927March 31, 2018, 2,498,284 shares remain available for grant under the OIP.

We recognized $1,142

2008 Equity Incentive Plan
Our 2008 Plan became effective on March 18, 2008 and $1,441replaced our 2003 Plan. Under the terms of stock-based compensation expense for the three months ended June 30, 2017 and 2016, respectively. We recognized $4,200 and $2,6192008 Plan, all available shares in the 2003 Plan share reserve automatically rolled into the 2008 Plan. Any cancellations or forfeitures of stock-based compensation expense forgranted options under the six months ended June 30, 2017 and 2016, respectively.

2003 Plan also automatically roll into the 2008 Plan. There are no shares available to grant under the 2008 Plan subsequent to the approval of the OIP.

Stock option and RSUPSO activity is summarized as follows:

 

 

Stock Options

 

Restricted Stock Units

 

 

 

Number of
Shares

 

Weighted
Average
Exercise Price

 

Number of
Shares

 

Weighted Average
Grant Date Fair
Value

 

Stock outstanding as of December 31, 2016

 

3,568,434

 

$

7.82

 

592,349

 

$

9.86

 

Granted

 

173,881

 

24.12

 

78,991

 

24.65

 

Cancelled/forfeited

 

 

 

 

 

Exercised/vested

 

(191,998

)

7.45

 

(176,362

)

8.89

 

Stock outstanding as of March 31, 2017

 

3,550,317

 

$

8.64

 

494,978

 

$

12.57

 

Granted

 

25,000

 

31.59

 

36,623

 

28.47

 

Cancelled/forfeited

 

(85,448

)

17.97

 

(17,172

)

14.74

 

Exercised/vested

 

(82,840

)

7.47

 

(11,385

)

15.42

 

Stock outstanding as of June 30, 2017

 

3,407,029

 

$

8.60

 

503,044

 

$

13.59

 

PSO

 Stock Options Performance Stock Options
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Number of
Shares
 
Weighted
Average
Exercise Price
Outstanding as of December 31, 20173,574,439
 $10.78
 150,000
 $20.41
Granted185,806
 33.15
 
 
Forfeited(53,077) 28.37
 
 
Exercised(102,493) 12.94
 
 
Outstanding as of March 31, 20183,604,675
 $11.61
 150,000
 $20.41
The table below summarizes certain additional information with respect to our options:
  Three Months Ended
(in thousands, except per option amounts) March 31,
2018
 March 31,
2017
Aggregate intrinsic value of options outstanding at period end$73,400
 $73,660
Aggregate intrinsic value of options exercisable at period end65,819
 59,376
Aggregate intrinsic value of options exercised during the period2,164
 3,752
Cash received from the exercise of stock options during the period1,327
 1,981
Weighted average grant date fair value per option during the period$19.61
 $15.31
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The total compensation cost of options granted but not yet vested at March 31, 2018 was $12.5 million, which is expected to be recognized over a weighted average period of approximately three years.
RSU and PSU activity is summarized as follows:

 

 

Performance Stock Options

 

Performance Stock Units

 

 

 

Number of
Shares

 

Weighted
Average
Exercise Price

 

Number of
Shares

 

Weighted Average
Grant Date Fair
Value

 

Stock outstanding as of December 31, 2016

 

100,000

 

$

18.33

 

132,992

 

$

8.68

 

Vested

 

100,000

 

21.45

 

 

 

Cancelled/forfeited

 

 

 

(132,992

)

8.68

 

Exercised

 

(30,000

)

18.33

 

 

 

Stock outstanding as of March 31, 2017

 

170,000

 

$

20.17

 

 

$

 

Vested

 

 

 

 

 

Cancelled/forfeited

 

 

 

 

 

Exercised

 

(20,000

)

18.33

 

 

 

Stock outstanding as of June 30, 2017

 

150,000

 

$

20.41

 

 

$

 

Stock-based

 Restricted Stock Units Performance Stock Units
 
Number
of Shares
 
Weighted Average
Grant Date Fair
Value
 
Number
of Shares
 
Weighted Average
Grant Date Fair
Value
Units outstanding as of December 31, 2017467,129
 $13.76
 
 
Granted79,474
 32.99
 63,345
 $37.79
Forfeited(3,730) 17.84
 
 
Vested(186,650) 10.33
 
 
Units outstanding as of March 31, 2018356,223
 $19.81
 63,345
 $37.79
During the three months ended March 31, 2018, we granted awards to certain members of management in the form of PSUs. These PSUs will vest at the end of a three-year performance period only if specific financial performance metrics are met and the vested shares will then be modified based on relative total shareholder return. The 63,345 PSUs were granted at “target” levels, however, for share pool purposes, we have reserved an additional 63,345 shares if the combined financial performance and market conditions achieve maximum levels. As of March 31, 2018, no compensation expense related to these PSUs was recognized in accordance with ASC 718.
Additional information about our RSUs is onlysummarized as follows:
  Three Months Ended
(in thousands) March 31,
2018
 March 31,
2017
Aggregate market value of RSUs vested during the period$6,395
 $4,265
The total compensation cost of RSUs and PSUs granted but not yet vested at March 31, 2018 was $6.8 million, which is expected to be recognized over a weighted average period of approximately two years.
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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. In May 2017, our stockholders approved the BioTelemetry, Inc. 2017 Employee Stock Purchase Plan (“2017 ESPP”), with 500,000 shares reserved for outstanding PSUs whereissuance which replaced the performance conditions2008 ESPP. Under the 2017 ESPP, employees may contribute through payroll deductions up to $21,500. 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 deemed probable for achievement. For PSUs deemed probable for achievement, stock-based compensation expense is recognized ratably overcredited to stockholders’ equity in the expected vesting period.period that the shares are issued. For the three and six months ended June 30, 2017, no stock-based compensation expense was recognized related to the PSUs. For the three and six months ended June 30, 2016, we incurred PSU expenseMarch 31, 2018, an aggregate of $355 and $444, respectively.

PSOs are valued and stock-based compensation expense is only recognized once the performance conditions of the outstanding PSOs have been met. We incurred PSO expense of $1,533 for both the three and six months ended June 30, 2017. For the three and six months ended June 30, 2016, no stock-based compensation expense was recognized related to the PSOs.

Employee Stock Purchase Plan

For the six months ended June 30, 2017, 47,96665,477 shares were purchased in accordance with the 2008 Employee Stock Purchase Plan (“2008 ESPP”).2017 ESPP. Net proceeds from the issuance of shares of common stock under the 20082017 ESPP for the sixthree months ended June 30, 2017March 31, 2018 were $636. In May 2017, the shareholders and Board of Directors approved the BioTelemetry, Inc. 2017 Employee Stock Purchase Plan (“2017 ESPP”), which will replace the 2008 ESPP.$1.2 million. At June 30, 2017, 500,000March 31, 2018, 387,274 shares remain available for purchase under the 2017 ESPP.

Our aggregate stock-based compensation expense is summarized as follows:
 Three Months Ended
(in thousands)March 31,
2018
 March 31,
2017
Stock options$1,111
 $596
Performance stock options
 1,534
Restricted stock units720
 813
Employee stock purchase plan234
 115
Total stock-based compensation expense$2,065
 $3,058

8.

12. Other Charges

We account for expenses associated with exit or disposal activities in accordance with ASC 420 - Exit or Disposal Cost Obligations, and record the expenses in other charges in our consolidated statements of operations, and comprehensive income and record the related accrual in the accrued liabilitiesexpenses line onof our consolidated balance sheets. These costs are primarily disclosed as severance and employee related costs below.

BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


We account for expenses associated with acquisition and integration related costsour acquisitions and certain litigation as other charges as incurred. These expenses were primarily a result of activities surrounding our acquisitionsacquisition and legal fees related to patent litigation in which we are the plaintiff. Other charges are costs that are not considered necessary to the ongoing business operations. For the six months ending June 30, 2017, other charges has been partially offset by a reduction in contingent consideration. A summary of these expenses is as follows:

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Legal fees

 

$

1,885

 

$

1,242

 

$

2,867

 

$

2,611

 

Professional fees

 

2,172

 

278

 

3,332

 

446

 

Severance and employee related costs

 

347

 

72

 

532

 

323

 

Change in contingent consideration

 

 

 

(605

)

 

Other costs

 

247

 

67

 

264

 

67

 

Total

 

$

4,651

 

$

1,659

 

$

6,390

 

$

3,447

 

9.

 Three Months Ended
(in thousands)March 31,
2018
 March 31,
2017
Legal fees$1,536
 $982
Professional fees1,227
 1,160
Severance and employee related costs1,997
 185
Change in fair value of contingent consideration(700) (605)
Other costs1,025
 17
Total$5,085
 $1,739
Legal fees, severance and employee related costs and other costs increased primarily due to integration activities related to the LifeWatch acquisition. The change in fair value of contingent consideration is the result of the contingent consideration related to certain 2016 acquisitions being written off as it is no longer probable that certain of the contingencies will be met.

13. Income Taxes

The income tax provision for interim periods is determined using an estimated annual effective tax rate adjusted for discrete items, if any, which are taken into account in the quarterly period in which they occur.  We review and update our estimated annual effective tax rate each quarter.  IncomeAn income tax expensebenefit of $1,270$0.1 million and $404$0.9 million was recorded for the three and six months ended June 30,March 31, 2018 and 2017, respectively, primarily due to AMT levied on taxable income, net of allowable AMT net operating loss carryovers and certain state taxes.  Wea discrete benefit recorded an income  tax benefit of $209 and $195 for equity compensation deduction under the three and six months ended June 30, 2016, respectively.  These amounts have been recastpreviously adopted ASU 2016-9, Improvement to include excess tax benefits related to stock based compensation in association with the adoption of ASU 2016-09.

Employee Share Based Payment Accounting.

At June 30, 2017March 31, 2018 and December 31, 2016,2017, we had deferred tax assets, net of deferred tax liabilities and valuation allowance, of $36,925$18.0 million and $36,636,$17.7 million, respectively.

10.

On December 22, 2017, the TCJA was enacted in the U.S.  The TCJA represents sweeping changes in U.S. tax law. As of December 31, 2017, we recorded the provisional impact from the TCJA in accordance with SAB 118. As of March 31, 2018, we have not adjusted any of our provisional amounts that were recorded as of December 31, 2017. We will finalize our adjustments during 2018.

14. Segment Information

We operate under threetwo reportable segments: Healthcare Research and Technology.Research. During the first quarter of 2018, we aggregated the Technology operating segment into the “Corporate and Other” category. The Healthcare segment is focused on the diagnosis andremote cardiac monitoring ofto identify cardiac arrhythmias or heart rhythm disordersdisorders. We offer cardiologists and electrophysiologists, neurologists and primary care physicians a full spectrum of solutions which provides them with our comprehensive suitea single source of cardiac monitoring solutions in a healthcare setting.  Ourservices. The Research segment is engaged in centralcentralized core laboratory services providing cardiac monitoring, imaging
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


services, scientific consulting and data management services for drug and medical device trials. The Technology segment focuses onIncluded in the development,Corporate and Other category is the manufacturing, testing and marketing of medicalcardiovascular and blood glucose monitoring devices to medical companies, clinics and hospitals.  Intercompany revenues relatinghospitals and corporate overhead and other items not allocated to the manufacturingany of devices by the Technology segment for the other segments is included on the intersegment revenues line.

our reportable segments.

Expenses that can be specifically identified with a segment have been included as deductions in determining pre-tax segment income. Any remaining expenses including researchintegration, restructuring and development costs incurred by the Technology segment for the benefit of the other segments,charges, as well as the elimination of costs associated with intercompany revenuesrevenue are included in Corporate and Other. Also included in Corporate and Other is our net interest expense and other financing expenses as well as the loss from equity method investments.expenses. We do not allocate assets to the individual segments.

For

During the three months ended:

 

 

Healthcare

 

Research

 

Technology

 

Corporate and
Other

 

Consolidated

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

44,070

 

$

9,562

 

$

4,497

 

 

$

58,129

 

Intersegment revenues

 

 

 

4,007

 

$

(4,007

)

 

Income (loss) before income taxes

 

16,729

 

322

 

2,357

 

(16,412

)

2,996

 

Depreciation and amortization

 

2,706

 

1,039

 

270

 

(190

)

3,825

 

Capital expenditures

 

2,713

 

466

 

51

 

 

3,230

 

 

 

Healthcare

 

Research

 

Technology

 

Corporate and
Other

 

Consolidated

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

42,165

 

$

7,896

 

$

2,619

 

 

$

52,680

 

Intersegment revenues

 

 

 

2,282

 

$

(2,282

)

 

Income (loss) before income taxes

 

15,582

 

387

 

747

 

(12,228

)

4,488

 

Depreciation and amortization

 

2,500

 

1,080

 

142

 

(58

)

3,664

 

Capital expenditures

 

1,626

 

541

 

12

 

 

2,179

 

Foryear ended December 31, 2017 we reclassified research and development costs associated with cardiovascular devices utilized by our Research segment from the six months ended:

 

 

Healthcare

 

Research

 

Technology

 

Corporate and
Other

 

Consolidated

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

86,581

 

$

18,886

 

$

8,543

 

 

$

114,010

 

Intersegment revenues

 

 

 

8,217

 

$

(8,217

)

 

Income (loss) before income taxes

 

30,708

 

700

 

3,838

 

(32,920

)

2,326

 

Depreciation and amortization

 

5,567

 

2,072

 

513

 

(612

)

7,540

 

Capital expenditures

 

5,603

 

466

 

128

 

 

6,197

 

 

 

Healthcare

 

Research

 

Technology

 

Corporate and
Other

 

Consolidated

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

83,314

 

$

13,289

 

$

4,717

 

 

$

101,320

 

Intersegment revenues

 

 

 

5,674

 

$

(5,674

)

 

Income (loss) before income taxes

 

29,782

 

405

 

1,693

 

(23,281

)

8,599

 

Depreciation and amortization

 

4,981

 

1,884

 

192

 

(127

)

6,930

 

Capital expenditures

 

4,316

 

1,350

 

26

 

 

5,692

 

11.United States Department of HealthCorporate and Human Services 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 RuleOther category 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 agreementHealthcare segment to synchronize our external reporting with the Company.  Perway our chief operating decision maker reviews the agreement, BioTelemetry will paysegment performance and makes decisions about the OCR $2,500reportable segments.

(in thousands)Healthcare Research 
Corporate
and Other
 Consolidated
Three Months Ended March 31, 2018       
Revenue$80,551
 $11,244
 $2,701
 $94,496
Income/(loss) before income taxes17,724
 786
 (13,616) 4,894
Depreciation and amortization11,436
 1,010
 (2,618) 9,828
Capital expenditures5,064
 291
 (1,417) 3,938
(reclassified, in thousands)Healthcare Research 
Corporate
and Other
 Consolidated
Three Months Ended March 31, 2017       
Revenue$42,511
 $9,324
 $4,046
 $55,881
Income/(loss) before income taxes11,759
 378
 (12,807) (670)
Depreciation and amortization2,861
 1,033
 (179) 3,715
Capital expenditures2,890
 
 77
 2,967

15. Legal Proceedings
The final outcome of any current or future litigation or governmental or internal investigations cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and agreed to submit a two-year corrective action plan regarding the Company’s HIPAA compliance program.  We did not admit any liability or wrongdoing.  As a result of the settlement, we recorded a non-operating charge of $2,500 to Interest and other loss, net in the consolidated statements of operations for the three and six months ended June 30, 2017.

12.Subsequent Events

On July 12, 2017, we completed the acquisition of LifeWatch AG (“LifeWatch”), a Swiss corporation.  The acquisition follows a transaction agreement governing the acquisition, dated April 9, 2017, and the subsequent public tender offer.  At settlement, we paid an aggregate consideration of 3,615,840 shares of BioTelemetry Common Stock and cash in the amount of CHF157,503, approximately $162,967, to holders of tenderedthe loss can be estimated.

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 Shares.  The cash payment was funded with the proceedsAmerican Arbitration Association. Claimants alleged that LifeWatch violated the 2015 Stock Purchase Agreement for the purchase of FlexLife Health, Inc., a term loan.  Asremote international normalized ratio monitoring business. The demand alleges LifeWatch did not make
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


commercially reasonable efforts to achieve certain conditions precedent and did not have a resultreasonable 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 Offer,risk of loss in this arbitration is improbable, we becamecannot determine, nor can we estimate, the majority ownerrange of LifeWatch and intend to acquire the remaining untendered LifeWatch Shares pursuant topotential loss.  Accordingly, as we do not believe that a short-form merger or a squeeze-out procedureloss is probable, in accordance with Swiss law and takeover regulation.

Concurrent withauthoritative guidance on the acquisitionevaluation of LifeWatch,loss contingencies, we entered into a credit agreement with Suntrust Bank, as a lender andhave not recorded an agent for the lenders (the “Lenders”).  Pursuantaccrual related 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 $205,000; and (ii) a $50,000 revolving credit facility for ongoing working capital purposes, which remains undrawn.  The proceeds of the loans were used to refinance our existing indebtedness in the amount of approximately $25,000, 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 is determined by reference to the Company’s Consolidated Total Net Leverage Ratio, as defined in the credit agreement.  Currently, the applicable margin is 2.00% for LIBOR loans and 1.00% for base rate loans.

this matter.


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 $513, plus accrued interest;

·                  Beginning January 1, 2019, the principal amount of the term loan will be repaid, on a quarterly basis, in installments of $1,281, plus accrued interest;

·                  Beginning January 1, 2020, the principal amount of the term loan will be repaid, on a quarterly basis, in installments of $3,844, plus accrued interest;

·                  Beginning January 1, 2021, the principal amount of the term loan will be repaid, on a quarterly basis, in installments of $5,125, plus accrued interest;

·                  The remaining principal balance will be repaid on or before July 12, 2022 (or such earlier date upon an acceleration of the loans by Lenders upon an event of default or 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 AG.

In connection with the Suntrust credit agreement, we paid approximately $25,000 outstanding indebtedness under the Credit Agreement between the Company and Healthcare Financial Solutions, LLC (“HFS”), previously the General Electric Capital Corporation, as agent for the lenders, and as a lender, and we terminated the General Electric Credit Agreement.



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016,2017, and in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements.statements and related notes.  This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties.  Our actual results and the timing of certain events could differ materially from those contained in these forward-looking statements due to a number of factors, including, but not limited to, those set forth herein and elsewhere in this report and in our other filings with the U.S. Securities and Exchange Commission (“SEC”SEC).  See the “Forward-Looking“Cautionary Note Regarding Forward-Looking Statements” section at the beginning of this report.

  Unless otherwise noted, the figures in the following discussions are unaudited.

Company Background

We provide cardiac monitoring services and digital population health management for healthcare providers, medical device manufacturing and centralized core laboratory services and manufacture cardiac and blood glucose monitoring devices.for clinical research. We operate under threetwo reportable segments: Healthcare Research and Technology.Research. 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 (“MCT”)mobile cardiac telemetry service marketed as Mobile Cardiac Outpatient TelemetryTM (“MCOTTM”) or External Cardiac Ambulatory Telemetry (“ECAT”), to wireless and trans-telephonic event, Holter, extended wear Holter, Pacemaker and International Normalized Ratio (“INR”) monitoring. The Research segment is engaged in central core laboratory services providing cardiac monitoring, imaging services, scientific consulting and data management services for pharmaceuticaldrug and medical device clinical trials. The Technology segment focuses on the development, manufacturing, testingCorporate and marketingOther category includes corporate overhead and other items not allocated to any of medical devices to medical companies, clinics and hospitals.

our reportable segments.


Recent Developments
Acquisitions

On December 1, 2016, the Company entered into a Share and Asset Purchase Agreement (“Agreement”) with Telcare, Inc. (“Telcare”) pursuant to which the Company 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, the Company 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 ended on May 9, 2016, pursuant to which the business and operations of VirtualScopics were acquired by the Company. 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, the Company entered into an Asset Purchase Agreement (“APA”) with DELTA Danish Electronics, Light, and Acoustics (“DELTA”), pursuant to which the Company 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 the Company’s 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.

On July 12, 2017, we completedacquired, through our wholly owned subsidiary Cardiac Monitoring Holding Company, LLC, approximately 97% of the acquisition of LifeWatch.  At settlement, we paid an aggregate consideration of 3,615,840outstanding shares of BioTelemetry Common Stock and cash in the amount of CHF157.5 million, approximately $163.0 million, to holders of tendered LifeWatch Shares.  The cash payment was funded with the proceeds of a term loan.  As a result of the Offer,AG (“LifeWatch”). On that date, we became the majority owneracquired control of LifeWatch and intend to acquirebegan consolidating its financial statements. We recorded our obligations for the remaining untendered LifeWatch Sharesshares, pursuant to a short-form merger or a squeeze-out procedure in accordance with Swiss law and takeover regulation. LifeWatch  will be included in the Healthcare segment.

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 and self-pay arrangements.  Billings for services reimbursed by contracted third-party payors, including Medicare, are recorded as revenue, net of contractual allowances.  Adjustments to the estimated receipts, based on final settlement with the third-party payors, are recorded upon settlement.  If we do not have sufficient historical information regarding collectability from a given payor to support revenue recognition at the time of service, revenue is recognized when cash is received.  Unearned amounts are appropriately deferred until the service has been completed.  For the three months ended June 30, 2017 and 2016, revenue from Medicare as a percentage of our Healthcare revenue was 42.0% and 41.4%, respectively. For the six months ended June 30, 2017 and 2016, revenue from Medicare as a percentage of our Healthcare revenue was 41.2% and 41.6%, respectively.

Research

Research revenue includes revenue for core laboratory services, including cardiac monitoring, imaging, scientific consulting and data management 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, some of which is typically non-refundable upon contract termination.  Unearned revenue, including upfront deposits, are 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 incurred, including freight, as revenue in the accompanying consolidated statements of operations.

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 shipped, or as service is completed.

Reimbursement - Healthcare

We are dependent on reimbursement for our patient services by government and commercial insurance payors.  Medicare reimbursement rates for our MCT, event, Holter, Pacemaker and INR monitoring services have been established nationally by the Centers for Medicare and Medicaid Services (“CMS”) and fluctuate periodically based on the annually published CMS rate table.

In addition to government reimbursement through Medicare, we have successfully secured contracts with most national and regional commercial payors for our monitoring services.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivableregulations related to the Healthcare segment are recorded at the time revenue is recognized, netoffering, as components of contractual allowances,accrued liabilities and are presented on thepaid-in capital, and reduced our noncontrolling interest related to our ownership of LifeWatch, in our consolidated balance sheets netsheet as of an allowance for doubtful accounts.  The ultimate collectionDecember 31, 2017. As a result, we owned 100% of accounts receivable may not be known for several months after servicesLifeWatch as of December 31, 2017. In early January 2018, we settled those obligations with payment of $2.9 million in cash and the issuance of 58,786 shares of our common stock with a fair market value of $2.0 million.


Critical Accounting Policies and Estimates
We have been providedprepared the financial statements and billed.  We record an allowance for doubtful accountsaccompanying notes included in “Part I; Item 1. Financial Statements” of this report in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). This requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates and assumptions are based on historical


experience, analysis of current trends, and various other factors that we believe to be reasonable under the agingcircumstances. Actual results could differ from those estimates under different assumptions or conditions.
We periodically reevaluate our accounting policies, assumptions, and estimates and make adjustments when facts and circumstances warrant. Our significant accounting policies are described in “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 2. Summary of receivables using payor-specific historical data.Significant Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The percentagesaccounting policies and amounts usedrelated assumptions that we consider 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 healthcare industry and third-party reimbursement, it is possible that our estimates of collectability could change, which could have a material impact on our operations and cash flows.

Other accounts receivable relatedbe more critical to the Researchpreparation of our financial statements and Technology segmentsaccompanying notes and involve the most significant management judgments and estimates are recorded at the time revenue is recognized, or when products are shipped or services are performed.  We estimate the allowance for doubtful accountsdescribed in “Part II; Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Critical Accounting Policies and Estimates” of our Annual Report on 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 $3.8 million and $3.9 million of receivablesForm 10-K for the six monthsfiscal year ended June 30, 2017 and 2016, respectively.  The impact was a reductionDecember 31, 2017. Except for the implementation of gross receivables and a reduction in the allowance for doubtful accounts.  ThereASC 606 - Revenue from Contracts with Customers, there were no material write-offschanges in, or additions to, our critical accounting policies or in the Research and Technology segments.  We recorded bad debt expense of $2.4 million and $5.2 million, respectively, forassumptions or estimates we used to prepare the three and six months ended June 30, 2017. We recorded bad debt expense of $2.7 million and $5.3 million, respectively, for the three and six months ended June 30, 2016.

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 patent litigationfinancial information appearing 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.

this report.


Results of Operations

Three Months Ended June 30,Ended March 31, 2018 and March 31, 2017 and 2016

Revenues.

Revenue
 Three Months Ended Change
(in thousands, except percentages)March 31, 2018 March 31, 2017 $ %
Healthcare$80,551
 $42,511
 $38,040
 89.5 %
Research11,244
 9,324
 1,920
 20.6 %
Other2,701
 4,046
 (1,345) (33.2)%
Total revenue$94,496
 $55,881
 $38,615
 69.1 %
Total revenuesrevenue for the three months ended June 30, 2017 were $58.1 million comparedMarch 31, 2018 increased due primarily to $52.7 million for the three months ended June 30, 2016, reflecting an increase of $5.4 million, or 10.3%.higher Healthcare revenue, increased $1.9 million due to increased patient volumes and a favorable product mix, partially offsetwhich was driven by a reduction in MCT Medicare pricing effective January 1, 2017.  Research revenue increased $1.6 million, due to growth in andthe combination of the full quarter impact of the LifeWatch acquisition and 12% organic revenue growth. The organic revenue growth stemmed from higher patient volume as well as a favorable service mix. Research revenue increased due to higher image and electrocardiogram volumes. Other revenue decreased due primarily to a large, non-recurring sale of the imaging business, VirtualScopics, whichblood glucose meters and strips that occurred in the secondfirst quarter of 2016.  Technology revenue increased $1.9 million due to the acquisition of Telcare which occurred in the fourth quarter of 2016.

2017.

Gross Profit.Profit
 Three Months Ended Change
(in thousands, except percentages)March 31, 2018 March 31, 2017 $ %
Gross profit$58,048
 $32,909
 $25,139
 76.4%
Percentage of revenue61.4% 58.9%    
Gross profit increased to $36.0 million for the three months ended June 30, 2017March 31, 2018 increased due primarily to the full quarter impact of the LifeWatch acquisition, the organic revenue growth, and realized synergies from $32.9 million for the three months ended June 30, 2016, reflecting anour acquisitions. The increase of $3.1 million, or 9.3%.  Gross profit as a percentage of revenues was 61.9% for the three months ended June 30, 2017 compared to 62.5% for the three months ended June 30, 2016.  The decrease in gross margin percentage was due to the favorable Healthcare service mix and the impact of our acquisitions, which carry lower profit margins than our existing business, as well as the aforementioned reduction in MCT Medicare pricing effective January 1, 2017.

synergies resulting from the integration of LifeWatch.



General and Administrative Expense.Expense
 Three Months Ended Change
(in thousands, except percentages)March 31, 2018 March 31, 2017 $ %
General and administrative expense$26,719
 $15,917
 $10,802
 67.9%
Percentage of revenue28.3% 28.5%    
General and administrative expense was $14.4 million for both the three months ended June 30, 2017 andincreased for the three months ended June 30, 2016.  A $1.1March 31, 2018 due primarily to the $6.4 million full quarter impact of the LifeWatch acquisition, a $3.3 million impact from intangible asset amortization attributed to LifeWatch, $0.5 million higher consulting expense driven by system optimization efforts, as well as a $0.3 million increase related to our 2016 acquisitions was fullyin headcount-related expense, partially offset by a $0.9$0.2 million in headcount synergies. The decrease in employee related costs and $0.2 million decrease in amortization. As a percent of total revenues,the general and administrative expense as a percent of revenue was 24.7%the result of improved leverage due to the impact of synergies and higher revenue.
Sales and Marketing Expense
 Three Months Ended Change
(in thousands, except percentages)March 31, 2018 March 31, 2017 $ %
Sales and marketing expense$11,340
 $7,701
 $3,639
 47.3%
Percentage of revenue12.0% 13.8%    
The increase to sales and marketing expense for the three months ended June 30, 2017 comparedMarch 31, 2018 was due primarily to 27.3%the $5.4 million full quarter impact of the LifeWatch acquisition and $0.9 million due to higher sales meeting costs, partially offset by approximately $2.8 million of synergies due to the integration of LifeWatch. Sales and marketing expense decreased as a percentage of revenue due to improved leverage resulting from the synergies realized from our LifeWatch acquisition.
Bad Debt Expense
 Three Months Ended Change
(in thousands, except percentages)March 31, 2018 March 31, 2017 $ %
Bad debt expense$4,879
 $2,791
 $2,088
 74.8%
Percentage of revenue5.2% 5.0%    
The increase in bad debt expense for the three months ended June 30, 2016.

Sales and Marketing Expense.   Sales and marketing expense was $7.6 million for the three months ended June 30, 2017 compared to $7.1 million for the three months ended June 30, 2016. The increase of $0.5 million, or 7.1%,March 31, 2018 was due to a $0.4 million increase in employee related costs, driven in part by the creation of our strategic sales group,increased Healthcare revenue and a $0.1 million increase in travel and meeting expenses due to the timing of sales meetingsrevenue and tradeshows. As a percent of total revenues, sales and marketing expense was 13.1% for the three months ended June 30, 2017 compared to 13.5% for the three months ended June 30, 2016.

Bad Debt Expense.   Bad debt expense was $2.4 million for the three months ended June 30, 2017 compared to $2.7 million for the three months ended June 30, 2016. The decrease of $0.3 million, or 9.3%, was due to the timing of revenues and collections.  As a percentage of total revenues, bad debt expense was 4.2% for the three months ended June 30, 2017 compared to 5.1% for the three months ended June 30, 2016. Substantially all of our bad debt expense relates to the Healthcare segment. Bad debt expense in the Research segment and Technology segments, which include our recently acquired companies,the Corporate and Other category was minimal and is recorded on a specific account basis.



Research and Development Expense.Expense
 Three Months Ended Change
(in thousands, except percentages)March 31, 2018 March 31, 2017 $ %
Research and development expense$3,289
 $2,433
 $856
 35.2%
Percentage of revenue3.5% 4.4%    
Research and development expense was $2.5 million for the three months ended June 30, 2017 comparedMarch 31, 2018 increased due primarily to $2.0the $0.7 million full quarter impact of the LifeWatch acquisition, offset partially by $0.2 million of synergies realized from the integration of LifeWatch and other cost savings.
Other Charges
 Three Months Ended Change
(in thousands, except percentages)March 31, 2018 March 31, 2017 $ %
Other charges$5,085
 $1,739
 $3,346
 192.4%
Percentage of revenue5.4% 3.1%    
The increase in other charges for the three months ended June 30, 2016. The increaseMarch 31, 2018 was primarily related to $3.2 million for the consolidation and closure of certain legacy LifeWatch international locations and $0.7 million of higher legal expenses, offset by a $0.5 million or 28.0%, was due to the addition of $0.3 million from our acquired businesses and a $0.2 million increasedecrease in consulting servicesintegration expenses related to the development of new hardware. As a percent of total revenues, research and developmentour 2016 acquisitions.
Other Expense
 Three Months Ended Change
(in thousands, except percentages)March 31, 2018 March 31, 2017 $ %
Interest expense$(1,890) $(388) $(1,502) 387.1 %
Loss on equity method investment(139) (95) (44) 46.3 %
Other non-operating income/(expense), net187
 (2,515) 2,702
 (107.4)%
Total Other expense$(1,842) $(2,998) $1,156
 (38.6)%
Percentage of revenue1.9% 5.4%    
Total other expense was 4.3% for the three months ended June 30, 2017 compared to 3.7% for the three months ended June 30, 2016.

Other Charges.   During the three months ended June 30, 2017, we incurred $4.7March 31, 2018 was affected by $1.5 million of additional interest expense in the current year resulting from our new SunTrust Credit Agreement entered into concurrent with our LifeWatch acquisition, offset by the reduction of $2.7 million in other non-operating charges primarilyassociated with our 2017 settlement with the Office of Civil Rights related to professional service fees related to our pending and prior year acquisitions.  the theft of two unencrypted laptop computers in 2011.



Income Taxes
 Three Months Ended Change
(in thousands, except percentages)March 31, 2018 March 31, 2017 $ %
Benefit from income taxes$142
 $866
 $(724) (83.6)%
Effective tax benefit rate2.9% 129.3%    
For the three months ended June 30, 2017, other charges were 8.0% of total revenues.

During the three months ended June 30, 2016, we incurred $1.7 million of other charges primarily related to legal fees for patent litigation as well as professional service fees related to our 2016 acquisitions.  For the three months ended June 30, 2016, other charges were 3.1% of total revenue.

InterestMarch 31, 2018 and Other Loss, net.   Interest and other loss, net was $1.4 million for the three months ended June 30, 2017 compared to $0.6 million for the three months ended June 30, 2016.  The increase was due to a non-operating charge of $0.9 million related to the change in fair value of a derivative instrument.

Income Taxes.   For the three months ended June 30, 2017, we recorded anrecognized a modest income tax provision of $1.3 million.benefit. After considering discrete taxwindfall benefits from the exercise of stock options, but excluding the impact of the acquisition of LifeWatch, we expect our 20172018 annual effective tax rate to be approximately 34%,in the range of 25% to 27% absent changes in tax laws or significant changes in uncertain tax positions.  For the three months ended June 30, 2016, we recorded an income tax benefit of $0.2 million.

Net Income.   We recognized net income of $1.7 million for the three months ended June 30, 2017 compared to net income of $4.7 million for the three months ended June 30, 2016.

Six Months Ended June 30, 2017


Liquidity and 2016

Revenues.   Total revenues for the six months ended June 30, 2017 were $114.0 million compared to $101.3 million for the six months ended June 30, 2016, reflecting an increase of $12.7 million, or 12.5%.  Healthcare revenue increased $3.3 million due to increased patient volumes and a favorable product mix, partially offset by a reduction in MCT Medicare pricing effective January 1, 2017.  Research revenue increased $5.6 million, due to growth in and the full year impact of the acquisition of the imaging business, VirtualScopics, which occurred during the second quarter of 2016. Technology revenue increased $3.8 million, due to the acquisition of Telcare during the fourth quarter of 2016.

Gross Profit.   Gross profit increased to $68.9 million for the six months ended June 30, 2017 from $63.5 million for the six months ended June 30, 2016, reflecting an increase of $5.4 million, or 8.4%.  Gross profit as a percentage of revenues was 60.4% for the six months ended June 30, 2017 compared to 62.7% for the six months ended June 30, 2016.  Capital Resources

The decrease in gross margin percentage was due to the impact of our acquisitions, which carry lower profit margins than our existing business, as well as the aforementioned reduction in MCT Medicare pricing effective January 1, 2017.

General and Administrative Expense.   General and administrative expense was $30.3 million for the six months ended June 30, 2017 compared to $26.7 million for the six months ended June 30, 2016.  The increase of $3.6 million, or 13.3%, was due to the addition of $3.1 million from our acquired businesses, a $0.3 million increase in employee related costs and a $0.3 million increase technology costs.  As a percent of total revenues, general and administrative expense was 26.6% for the six months ended June 30, 2017 compared to 26.4% for the six months ended June 30, 2016.

Sales and Marketing Expense.   Sales and marketing expense was $15.3 million for the six months ended June 30, 2017 compared to $14.7 million for the six months ended June 30, 2016.  The increase of $0.6 million, or 4.5%, was due to an increase in employee related costs, driven by the creation of our strategic sales group.  As a percent of total revenues, sales and marketing expense was 13.4% for the six  months ended June 30, 2017 compared to 14.5% for the six months ended June 30, 2016.

Bad Debt Expense.   Bad debt expense was $5.2 million for the six months ended June 30, 2017 compared to $5.3 million for the six months ended June 30, 2016. The decrease of $0.1 million, or 1.8%, was due to the timing of revenues and collections.  As a percentage of total revenues, bad debt expense was 4.6% for the six months ended June 30, 2017 compared to 5.2% for the six months ended June 30, 2016.  Substantially all of our bad debt expense relates to the Healthcare segment.  Bad debt expense in the Research and Technology segments, which include our recently acquired companies, was minimal and is recorded on a specific account basis.

Research and Development Expense.   Research and development expense was $4.9 million for the six months ended June 30, 2017 compared to $3.8 million for the six months ended June 30, 2016. The increase of $1.1 million, or 31.9%, was due to the addition of $0.8 million from our acquired businesses, a $0.1 million increase in consulting services related to the development of new hardware and a $0.1 million increase in employee related expenses. As a percent of total revenues, research and development expense was 4.3% for the six months ended June 30, 2017 compared to 3.7% for the six months ended June 30, 2016.

Other Charges.   During the six months ended June 30, 2017, we incurred $6.4 million of other charges primarily related to professional service feesfollowing table highlights certain information related to our pendingliquidity and prior year acquisitions.  These charges were partially offset by a $0.6 million decrease in fair value of acquisition-related contingent consideration. For the six months ended June 30, 2017, other charges were 5.6% of total revenues.

During the six months ended June 30, 2016, we incurred $3.4 million of other chargescapital resources:

(in thousands, except ratios)March 31, 2018 December 31, 2017
Cash and cash equivalents$36,346
 $36,022
Healthcare accounts receivable, net of allowance for doubtful accounts31,802
 25,190
Other accounts receivable, net of allowance for doubtful accounts15,370
 13,296
Availability under revolving credit facility50,000
 50,000
    
Working capital$48,198
 $39,153
Current ratio2.0
 1.8
    
Total capital lease obligations$4,543
 $5,509
Total debt$199,155
 $199,356
The following table highlights certain cash flow activities:
 Three Months Ended
(in thousands)March 31, 2018 March 31, 2017
Net income$5,036
 $196
Non-cash adjustments to net income16,212
 8,424
Cash used for working capital(12,174) (3,967)
Cash provided by operating activities9,074
 4,653
    
Cash used in investing activities(3,938) (2,967)
    
Cash provided by/(used in) financing activities$(4,617) $359
Non-cash adjustments to income primarily related to legal fees for patent litigation as well as professional services related to our acquisitions.  For the six months ended June 30, 2016, other charges were 3.4% of total revenue.

Interest and Other Loss, net.   Interest and other loss, net was $4.4 million for the six months ended June 30, 2017 compared to $1.1 million for the six months ended June 30, 2016.  The increase was due to a non-operating charge of $2.5 million recorded for a settlement with the Office for Civil Rights related to the theft of two unencrypted laptop computers in 2011 and a $0.9 million charge related to the change in fair value of a derivative instrument.

Income Taxes.   For the six months ended June 30, 2017, we recorded an income tax provision of $0.4 million.  After considering discrete tax benefits from the exercise of stock options, but excluding the impact of the acquisition of LifeWatch, we expect our 2017 annual effective tax rate to be approximately 34%, absent changes in tax laws or significant changes in uncertain tax positions.  For the six months ended June 30, 2016, we recorded an income tax benefit of $0.2 million.

Net (Loss) Income.   We recognized net income of $1.9 million for the six months ended June 30, 2017 compared to net income of $8.8 million for the six months ended June 30, 2016.

Liquidity and Capital Resources

Our Annual Report on Form 10-K for the year ended December 31, 2016 includes a detailed discussion of our liquidity, contractual obligations and commitments.  The information presented below updates and should be read in conjunction with the information disclosed in that Form 10-K.

As of June 30, 2017, our principal source of liquidity was cash and cash equivalents of $26.9 million and net healthcare and other accounts receivables of $28.9 million.  We had working capital of $33.5 million as of June 30, 2017.

We generated $10.7 million of cash from operations for the six months ended June 30, 2017.  Our ongoing operations during this period resulted in net income of $1.9 million, which included $17.4 million of non-cash items primarily relatedrelate to bad debt, depreciation, amortization and stock-basedstock compensation expense. These items were partially offset by $8.6For the three months ended March 31, 2018, our non-cash adjustments increased



compared to the comparative prior year period due primarily to $3.3 million of cash used for working capital.

We used $7.9increased amortization, $2.8 million of cash in investing activities for the six months ended June 30, 2017.  We used $6.2increased depreciation and $2.1 million of cash for capital purchases primarilyincreased bad debt expense, all related to medical devicesthe acquisition of LifeWatch, offset partially by a decrease of $1.0 million of stock compensation expense related to the prior year recognition of performance stock options.

In conjunction with the LifeWatch acquisition in 2017, we established a new Credit Agreement with SunTrust Bank and lenders named therein in the Healthcareamount of $205.0 million and Research segments for use in our ongoing operations and an investment in internally developed software forextinguished the six months ended June 30, 2017.

In December 2014, we entered into a $25.0 million Term Loan and $15.0 million Revolving Loan with previous Healthcare Financial Solutions, LLC previouslyCredit Agreement. For further details regarding the General Electric Capital Corporation.  At June 30, 2017, $3.0 million was drawn under the Revolving Loan.

In July 2017, we entered into a $205.0 million Term Loan and $50 million revolving credit facility with Suntrust Bank, as a lender and an agent for the lenders.  The proceeds of the Loans were usedCredit Agreements, please see “Part I; Item 1. Financial Statements; Notes to refinance our existing indebtedness in the amount of approximately $25 million, pay a portion of the consideration for the acquisition of LifeWatch and pay related transaction fees and expenses of the acquisition of LifeWatch.

Consolidated Financial Statements; Note 9. Credit Agreement.”

Item 3. Quantitative and Qualitative Disclosures aboutAbout Market Risk

Our cash balanceand cash equivalents as of June 30, 2017 was $26.9March 31, 2018 were $36.3 million. We do not invest in any short-term or long-term securities, nor do we hold any derivative financial instruments for trading securities.

or speculative purposes.

At June 30, 2017,March 31, 2018, we had $25.2$199.2 million of variable rate debt, exclusiveinclusive of debt discounts and deferred charges, based offat a rate of LIBOR rates.plus the applicable margin, or the prime rate plus the applicable margin. A 1.0% change in either the LIBOR ratesrate, prime rate, or the applicable margin would result in an incrementala change in interest expense.

expense of approximately $2.0 million. For further details regarding the debt, rates or applicable margin, please refer to
“Part I; Item 1. Financial Statements; Notes to Consolidated Financial Statements; Note 9. Credit Agreement.”

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (“Exchange Act”Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in Companyour reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer (the Principal Executive Officer) and Chief Financial Officer (the Principal Financial Officer) have concluded that our disclosure controls and procedures were effective as of June 30, 2017 to ensure that information required to be disclosed in these reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the six months ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

March 31, 2018. 


PART II - OTHER INFORMATION

Item 1.  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 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 projected.

estimated.
For further details regarding certain legal proceedings to which we are currently a party, which is incorporated herein by reference, please refer to “Part I; Item 1. Financial Statements; Notes to Consolidated Financial Statements; Note 15. Legal Proceedings.”



Item 1A.  Risk Factors

In evaluating an investment in BioTelemetry common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I,I; Item 1A1A. Risk Factors” of theour Annual Report on Form 10-K for the year ended December 31, 2016,2017, as well as the information contained in this Quarterly Report and other reports and registration statements filed by us with the SEC.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In January 2018, in conjunction with the settlement of the squeeze-out procedures under Swiss law, we issued 58,786 shares of our common stock to the former LifeWatch stockholders.
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.

Not applicable.

Item 3.  Defaults Upon Senior Securities

Not applicable.


Item 4.  Mine Safety Disclosures

Not applicable.


Item 5.  Other Information

Not applicable.





Item 6.  Exhibits

EXHIBIT INDEX

Exhibit
Number

3.1

Certificate of Incorporation of

Incorporated by ReferenceFiled/Furnished Herewith
Exhibit
Number
DescriptionFormFile No.ExhibitFiling Date
10.1*

3.2

10.2*

Bylaws

31.1

10.3*

10.4*
31.1

31.2

31.2

32.1

32

+

101.INS

101.INS

XBRL Instance Document

Document.

101.SCH

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.
101.SCHXBRL Taxonomy Extension Schema Document

Document.

101.CAL

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

Document.

101.LAB

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

Document.

101.PRE

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

Document.

101.DEF

*

XBRL Taxonomy Definition Linkbase Document

Indicates a management plan or compensatory plan or arrangement.
Filed herewith.

+Furnished herewith.




BioTelemetry, Inc.

SIGNATURES

Pursuant to the requirements 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.

BIOTELEMETRY, INC.

BIOTELEMETRY, INC.

Date: August 8, 2017

April 27, 2018

By:

/s/ Heather C. Getz

Heather C. Getz CPA

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and authorized officer of the Registrant)

26



40