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 SeptemberJune 30, 20172018

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

logo1a02.jpg
BioTelemetry, Inc.

(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 November 1, 2017, 32,408,118July 16, 2018, 32,723,308 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 PERIOD ENDED SEPTEMBERJUNE 30, 2017

2018


TABLE OF CONTENTS

Page
No.

PART I.

FINANCIAL INFORMATION

Page
PART I

Consolidated Financial Statements (Unaudited)

(unaudited)

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

26

31

31

32

32

32

32

32

32

33

34

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. 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 successfully integrate their operations into our business;

·                  the effectiveness of our cost savings initiatives;

·

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.

10-K for the year ended December 31, 2017.

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.  Consolidated Financial Statements

BIOTELEMETRY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

(Unaudited)

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

26,242

 

$

23,052

 

Healthcare accounts receivable, net of allowance for doubtful accounts of $14,498 and $12,198, at September 30, 2017 and December 31, 2016, respectively

 

23,651

 

14,594

 

Other accounts receivable, net of allowance for doubtful accounts of $567 and $665, at September 30, 2017 and December 31, 2016, respectively

 

13,109

 

12,261

 

Inventory

 

6,086

 

5,176

 

Prepaid expenses and other current assets

 

9,295

 

4,477

 

Total current assets

 

78,383

 

59,560

 

 

 

 

 

 

 

Property and equipment, net

 

56,680

 

25,823

 

Intangible assets, net

 

140,064

 

33,472

 

Goodwill

 

227,524

 

41,068

 

Deferred tax asset

 

15,498

 

36,636

 

Other assets

 

2,562

 

2,425

 

Total assets

 

$

520,711

 

$

198,984

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

14,367

 

$

12,425

 

Accrued liabilities

 

23,048

 

13,698

 

Current portion of capital lease obligations

 

4,728

 

162

 

Current portion of long-term debt

 

1,546

 

1,250

 

Deferred revenue

 

5,171

 

3,972

 

Total current liabilities

 

48,860

 

31,507

 

 

 

 

 

 

 

Long-term capital lease obligations

 

2,480

 

126

 

Long-term debt

 

197,815

 

23,911

 

Other long-term liabilities

 

3,242

 

4,526

 

Total liabilities

 

252,397

 

60,070

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock—$.001 par value as of September 30, 2017 and December 31, 2016; 200,000,000 shares authorized as of September 30, 2017 and December 31, 2016; 32,408,118 and 28,261,503 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

32

 

28

 

Paid-in capital

 

405,859

 

281,642

 

Accumulated other comprehensive income (loss)

 

1

 

(34

)

Accumulated deficit

 

(143,085

)

(142,722

)

Total stockholders’ equity

 

262,807

 

138,914

 

Noncontrolling interests

 

5,507

 

 

Total equity

 

268,314

 

138,914

 

Total liabilities and equity

 

$

520,711

 

$

198,984

 

(In thousands, except share and par value amounts)
(Unaudited)
June 30,
2018
 December 31,
2017
ASSETS   
Current assets:   
Cash and cash equivalents$39,434
 $36,022
Healthcare accounts receivable, net of allowance for doubtful accounts of $22,004 and $15,556, at June 30, 2018 and December 31, 2017, respectively35,332
 25,190
Other accounts receivable, net of allowance for doubtful accounts of $2,198 and $1,425, at June 30, 2018 and December 31, 2017, respectively14,601
 13,296
Inventory7,708
 5,332
Prepaid expenses and other current assets8,111
 10,268
Total current assets105,186
 90,108
Property and equipment, net of accumulated depreciation of $73,642 and $71,902, at June 30, 2018 and December 31, 2017, respectively47,653
 49,194
Intangible assets133,812
 141,707
Goodwill238,339
 223,105
Deferred tax assets20,939
 17,681
Other assets2,446
 2,767
Total assets$548,375
 $524,562
LIABILITIES AND EQUITY   
Current liabilities:   
Accounts payable$13,815
 $14,529
Accrued liabilities20,855
 26,055
Current portion of capital lease obligations3,223
 4,023
Current portion of long-term debt3,588
 2,050
Deferred revenue4,456
 4,298
Total current liabilities45,937
 50,955
Long-term portion of capital lease obligations313
 1,486
Long-term debt195,365
 197,306
Other long-term liabilities33,559
 25,112
Total liabilities275,174
 274,859
Stockholders’ equity: 
  
Common stock—$.001 par value as of June 30, 2018 and December 31, 2017; 200,000,000 shares authorized as of June 30, 2018 and December 31, 2017; 32,715,190 and 32,460,668 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively33
 32
Paid-in capital415,701
 409,517
Accumulated other comprehensive loss(281) (114)
Accumulated deficit(142,252) (158,678)
Total BioTelemetry, Inc.’s stockholders’ equity273,201
 250,757
Noncontrolling interest
 (1,054)
Total equity273,201
 249,703
Total liabilities and equity$548,375
 $524,562
See accompanying notes.

Notes to Consolidated Financial Statements.

BIOTELEMETRY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND
(Unaudited)

 Three Months Ended Six Months Ended
(In thousands, except per share data)June 30,
2018
 June 30,
2017
 June 30,
2018
 June 30,
2017
Revenues$101,360

$58,129
 $195,856
 $114,010
Cost of revenues35,605
 22,162
 72,053
 45,134
Gross profit65,755
 35,967
 123,803
 68,876
Operating expenses:       
General and administrative28,741
 14,366
 55,460
 30,283
Sales and marketing11,075
 7,631
 22,415
 15,332
Bad debt expense6,875
 2,416
 11,754
 5,207
Research and development2,733
 2,515
 6,022
 4,948
Other charges5,208
 4,651
 10,293
 6,390
Total operating expenses54,632
 31,579
 105,944
 62,160
Income from operations11,123
 4,388
 17,859
 6,716
Other expense:       
Interest expense(2,684) (392) (4,574) (781)
Loss on equity method investment(45) (101) (184) (196)
Other non-operating income/(expense), net550
 (899) 737
 (3,413)
Total other expense(2,179) (1,392) (4,021) (4,390)
Income before income taxes8,944
 2,996
 13,838
 2,326
Benefit from/(provision for) income taxes1,500
 (1,270) 1,642
 (404)
Net income10,444
 1,726
 15,480
 1,922
Net loss attributable to noncontrolling interest
 
 (946) 
Net income attributable to BioTelemetry, Inc.$10,444
 $1,726
 $16,426
 $1,922
        
Net income per common share attributable to BioTelemetry, Inc.:       
Basic$0.32
 $0.06
 $0.51
 $0.07
Diluted$0.29
 $0.05
 $0.46
 $0.06
Weighted average number of common shares outstanding:       
Basic32,435
 28,687
 32,227
 28,558
Dilutive stock options and restricted stock units3,143
 2,986
 3,187
 2,936
Diluted35,578
 31,673
 35,414
 31,494
See accompanying Notes to Consolidated Financial Statements.
BIOTELEMETRY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except share and per share amounts)

 

 

Three Months Ended
September 30,

 

Nine months Ended
September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

Healthcare

 

$

69,528

 

$

40,395

 

$

156,109

 

$

123,709

 

Research

 

9,313

 

10,420

 

28,199

 

23,709

 

Technology

 

2,182

 

2,240

 

10,725

 

6,957

 

Total revenues

 

81,023

 

53,055

 

195,033

 

154,375

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Healthcare

 

24,493

 

13,030

 

53,516

 

39,662

 

Research

 

5,581

 

5,604

 

16,733

 

13,306

 

Technology

 

1,880

 

1,555

 

6,839

 

4,993

 

Total cost of revenues

 

31,954

 

20,189

 

77,088

 

57,961

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

49,069

 

32,866

 

117,945

 

96,414

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

General and administrative

 

25,320

 

13,853

 

55,603

 

40,577

 

Sales and marketing

 

9,719

 

7,018

 

25,051

 

21,687

 

Bad debt expense

 

3,768

 

2,495

 

8,975

 

7,797

 

Research and development

 

3,277

 

2,137

 

8,225

 

5,888

 

Other charges

 

8,152

 

2,397

 

14,542

 

5,844

 

Total operating expenses

 

50,236

 

27,900

 

112,396

 

81,793

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(1,167

)

4,966

 

5,549

 

14,621

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(1,841

)

(544

)

(2,622

)

(1,402

)

Loss on extinguishment of debt

 

(543

)

 

(543

)

 

Loss on equity method investment

 

(106

)

(69

)

(302

)

(184

)

Other non-operating income (expense), net

 

658

 

(17

)

(2,755

)

(100

)

Total other income (expense)

 

(1,832

)

(630

)

(6,222

)

(1,686

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(2,999

)

4,336

 

(673

)

12,935

 

Benefit from (provision for) income taxes

 

435

 

(141

)

31

 

54

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(2,564

)

4,195

 

(642

)

12,989

 

Net loss attributable to noncontrolling interests

 

(279

)

 

(279

)

 

Net income (loss) attributable to BioTelemetry, Inc.

 

$

(2,285

)

$

4,195

 

$

(363

)

$

12,989

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation gain

 

16

 

150

 

35

 

2

 

Comprehensive income (loss)

 

$

(2,269

)

$

4,345

 

$

(328

)

$

12,991

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share attributable to BioTelemetry, Inc.:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

$

0.15

 

$

(0.01

)

$

0.47

 

Diluted

 

$

(0.07

)

$

0.14

 

$

(0.01

)

$

0.43

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

31,897,237

 

28,102,196

 

29,682,210

 

27,810,763

 

Diluted

 

31,897,237

 

30,880,773

 

29,682,210

 

30,306,017

 


 Three Months Ended Six Months Ended
(In thousands)June 30,
2018
 June 30,
2017
 June 30,
2018
 June 30,
2017
Net income attributable to BioTelemetry, Inc.$10,444
 $1,726
 $16,426
 $1,922
Other comprehensive income/(loss):       
Foreign currency translation gain/(loss)30
 18
 (167) 19
Comprehensive income attributable to BioTelemetry, Inc.$10,474
 $1,744
 $16,259
 $1,941



See accompanying notes.

Notes to Consolidated Financial Statements.

BIOTELEMETRY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

Nine months Ended
September 30,

 

 

 

2017

 

2016

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income (loss)

 

$

(642

)

$

12,989

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Bad debt expense

 

8,975

 

7,797

 

Depreciation

 

11,233

 

7,884

 

Amortization of intangibles

 

5,326

 

2,735

 

Stock-based compensation

 

5,685

 

3,757

 

Equity method investment loss

 

302

 

184

 

Change in fair value of acquisition-related contingent consideration

 

(2,005

)

 

Write off of derivative premium

 

1,322

 

 

Accretion of discount on debt

 

369

 

163

 

Loss on extinguishment of debt

 

543

 

 

Non-cash gain on legal settlement

 

(1,333

)

 

Non-cash lease (benefit) expense

 

(63

)

111

 

Deferred income tax benefit

 

(563

)

(476

)

Changes in operating assets and liabilities:

 

 

 

 

 

Healthcare and other accounts receivables

 

(9,413

)

(8,390

)

Inventory

 

(89

)

(1,221

)

Prepaid expenses and other assets

 

365

 

(2,079

)

Accounts payable

 

(8,724

)

934

 

Accrued and other liabilities

 

(627

)

2,017

 

Net cash provided by operating activities

 

10,661

 

(26,405

)

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

(166,244

)

(17,970

)

Purchases of property and equipment and investment in internally developed software

 

(11,940

)

(8,507

)

Purchases of derivative instrument

 

(1,322

)

 

Investment in equity method investee

 

(490

)

 

Net cash used in investing activities

 

(179,996

)

(26,477

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

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

 

5,705

 

2,380

 

Tax payments related to the vesting of shares

 

(1,881

)

(2,324

)

Issuance of long-term debt

 

205,000

 

 

Borrowings under revolving loans

 

 

14,500

 

Repayments of revolving loans

 

(3,000

)

 

Payment of debt issuance costs

 

(6,319

)

 

Principal payments on long-term debt

 

(25,851

)

(958

)

Principal payments on capital lease obligations

 

(1,164

)

(257

)

Net cash provided by financing activities

 

172,490

 

13,341

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

35

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

3,190

 

13,269

 

Cash and cash equivalents - beginning of period

 

23,052

 

18,986

 

Cash and cash equivalents - end of period

 

$

26,242

 

$

32,255

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

Non-cash purchases of property and equipment

 

$

498

 

$

 

Non-cash fair value of common stock returned in legal settlement

 

2,753

 

 

Non-cash fair value of equity issued for acquisition of business

 

117,440

 

 

Cash paid for interest

 

2,353

 

965

 

Cash paid for taxes

 

$

1,355

 

$

289

 



 Six Months Ended
(in thousands)June 30,
2018
 June 30,
2017
OPERATING ACTIVITIES   
Net income$15,480
 $1,922
Adjustments to reconcile net income to net cash provided by operating activities:   
Bad debt expense11,754
 5,207
Depreciation11,236
 5,551
Amortization of intangibles8,646
 1,989
Stock-based compensation4,923
 4,200
Equity method investment loss184
 196
Change in fair value of acquisition-related contingent consideration(700) (605)
Change in fair value of derivative instrument
 898
Accretion of discount on debt621
 110
Non-cash lease income(64) (102)
Non-cash tax (benefit)/expense(3,258) 3
Changes in operating assets and liabilities:   
Healthcare and other accounts receivables(22,579) (7,280)
Inventory(2,376) 845
Prepaid expenses and other assets1,700
 (289)
Accounts payable(582) (3,237)
Accrued and other liabilities(8,849) 1,325
Net cash provided by operating activities16,136
 10,733
INVESTING ACTIVITIES   
Purchases of property and equipment and investment in internally developed software(9,937) (6,197)
Purchase of derivative instrument
 (1,322)
Investment in equity method investee
 (350)
Net cash used in investing activities(9,937) (7,869)
FINANCING ACTIVITIES   
Proceeds related to the exercising of stock options and employee stock purchase plan6,152
 3,602
Tax payments related to the vesting of shares(2,890) (1,881)
Principal payments on long-term debt(1,025) (626)
Principal payments on capital lease obligations(1,973) (132)
Acquisition of noncontrolling interests(2,885) 
Net cash (used in)/provided by financing activities(2,621) 963
Effect of exchange rate changes on cash(166) 19
Net increase in cash and cash equivalents3,412
 3,846
Cash and cash equivalents - beginning of period36,022
 23,052
Cash and cash equivalents - end of period$39,434
 $26,898
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION   
Non-cash purchases of property and equipment$1,131
 $498
Non-cash acquisitions of noncontrolling interests3,972
 
Cash paid for interest3,675
 648
Cash paid for taxes$1,107
 $1,232
See accompanying notes.

Notes to Consolidated Financial Statements.



BIOTELEMETRY, INC.

CONSOLIDATED STATEMENTSSTATEMENT OF EQUITY

(Unaudited)

(In thousands, except share amounts)

 

 

BioTelemetry, Inc. Equity

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Accumulated
Other
Comprehensive

 

Accumulated

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Capital

 

Income (Loss)

 

Deficit

 

Interests

 

Equity

 

Balance December 31, 2016

 

28,261,503

 

$

28

 

$

281,642

 

$

(34

)

$

(142,722

)

 

$

138,914

 

Exercise of stock options and purchase of shares related to the employee stock purchase plan

 

480,433

 

 

 

5,705

 

 

 

 

5,705

 

Stock-based compensation

 

187,747

 

 

5,685

 

 

 

 

5,685

 

RSUs and PSUs withheld to cover taxes

 

(77,878

)

 

(1,881

)

 

 

 

(1,881

)

Business combination

 

3,615,840

 

4

 

116,788

 

 

 

11,224

 

128,016

 

Acquistion of noncontrolling interest

 

19,806

 

 

673

 

 

 

(5,438

)

(4,765

)

Common shares returned to Company in legal settlement

 

(79,333

)

 

(2,753

)

 

 

 

(2,753

)

Currency translation adjustment

 

 

 

 

35

 

 

 

35

 

Net loss

 

 

 

 

 

(363

)

$

(279

)

(642

)

Balance September 30, 2017

 

32,408,118

 

$

32

 

$

405,859

 

$

1

 

$

(143,085

)

$

5,507

 

$

268,314

 

 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 plans280,913
 1
 6,151
 
 
 
 6,152
Stock-based compensation
 
 4,923
 
 
 
 4,923
Shares withheld to cover taxes on vesting of share based awards(85,177) 
 (2,890) 
 
 
 (2,890)
Acquisition of noncontrolling interests58,786
 
 (2,000) 
 
 2,000
 
Currency translation adjustment
 
 
 (167) 
 
 (167)
Net income/(loss)
 
 
 
 16,426
 (946) 15,480
Balance at June 30, 201832,715,190
 $33
 $415,701
 $(281) $(142,252) $
 $273,201



See accompanying notes.

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 consolidated financial statements do notS-X and include allthe accounts of BioTelemetry, Inc. and its controlled subsidiaries (“BioTelemetry,” the information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows.Company,” “we,” “our” or “us”). In the opinion of management, these consolidated financial statements reflect all adjustments which are(consisting only of a normal recurring nature andaccruals, except as otherwise disclosed herein) considered necessary for a fair presentation of BioTelemetry, Inc.’s (“BioTelemetry,” “Company,” “we,” “our” or “us” )to present fairly the financial position as of SeptemberJune 30, 2017 and December 31, 2016,2018, the results of operations for the interim three months and nine monthssix month periods ended SeptemberJune 30, 20172018 and 20162017, and cash flows for the nine monthsinterim six month periods ended SeptemberJune 30, 2018 and 2017 have been included. All intercompany transactions and 2016.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 financial data and other information disclosed in these notes to theaccompanying unaudited consolidated financial statements related toshould be read in conjunction with the threefinancial statements and nine months ended September 30, 2017 and 2016 are unaudited.  The resultsnotes thereto included in our Annual Report on Form 10-K for the three and nine monthsfiscal year ended September 30, 2017 are not necessarily indicative of the results to be expected for any future period.

Net Income (Loss) Per ShareDecember 31, 2017.

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

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

 

 

Three Months Ended
September 30,

 

Nine months Ended
September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to BioTelemetry, Inc.

 

$

(2,285

)

$

4,195

 

$

(363

)

$

12,989

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing basic net income (loss) per share

 

31,897,237

 

28,102,196

 

29,682,210

 

27,810,763

 

Dilutive stock option and restricted stock units

 

 

2,778,577

 

 

2,495,254

 

Weighted average shares used in computing diluted net income per share

 

31,897,237

 

30,880,773

 

29,682,210

 

30,306,017

 

Net income (loss) per share attributable to BioTelemetry, Inc:

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

 

$

(0.07

)

$

0.15

 

$

(0.01

)

$

0.47

 

Diluted net income (loss) per share

 

$

(0.07

)

$

0.14

 

$

(0.01

)

$

0.43

 

Certain stock options, which are priced higher than the market price of our shares as of September 30, 2017 and 2016, would be anti-dilutive and thereforereclassifications have been excluded from the weighted average shares used in computing diluted net income (loss) per share.  These options could become dilutive in future periods.

Reclassifications

Certainmade to prior year amounts have been reclassified for consistency withperiod statements to conform to the current period presentation. This consists of 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,
reclassifying amounts among the various categories within the accrued expense disclosure,
disaggregating the components withinof other income (expense)expense in the consolidated statements of operations.  operations,
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 reclassificationreclassifications had no impact on previously reported net income (loss),consolidated results of operations, cash flows or accumulated deficit.

b) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.
c) Fair Value of Financial Instruments

Fair value is defined as the exit price, the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as defined below. Observable inputs are inputs a market participant would use in valuing an asset or liability based on market data obtained from sources independent of the Company.us. Unobservable inputs are inputs that reflect the Company’s
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


our own assumptions about the factors a market participant would use in valuing an asset or liability developed using the best information available in the circumstances. The classification of an asset’s or liability’s level within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Level 1—Quoted prices in active markets for an identical asset or liability.

Level 2—Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.

Level 3—Inputs that are unobservable for the asset or liability, based on our own assumptions about the assumptions a market participant would use in pricing the asset or liability.

Level 1 -Quoted prices in active markets for an identical asset or liability.
Level 2 -Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
Level 3 -Inputs that are unobservable for the asset or liability, based on our own assumptions about the assumptions a market participant would use in pricing the asset or liability.
Our financial instruments consist primarily of cash and cash equivalents, Healthcare accounts receivable, other accounts receivable, accounts payable, contingent consideration, short-term debt and long-term debt. With the exception of contingent consideration and long-term debt, the carrying value of these financial instruments approximates their fair value because of their short-term nature (classified as Level 1).  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 $205,000 (classified as Level 2) as of September 30, 2017.

benchmark yields, actual trade data, broker/dealer quotes and other similar data obtained from quoted market prices or independent pricing vendors.

The fair value of contingent consideration (classified as Level 3) is measured on a recurring basis using unobservable inputs such as projected payment dates, probabilities of meeting specified milestones and other such variables resulting in payment amounts which are discounted back to present value using a probability-weighted discounted cash flow model (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 fair value, primarily using a discounted cash flow model (classified as Level 3). This valuation technique requires us to make certain assumptions, including, but not limited to, future operating performance and cash flows, royalty rate and other such variables which are discounted to present value using a discount rate that reflects the risk factors associated with future cash flow, the characteristics of the assets acquired and liabilities assumed and the experience of the acquired business.

Derivative Instruments

During the second quarter Non-financial assets such as goodwill, intangible assets, and property and equipment are subsequently measured at fair value when there is an indicator of 2017, we purchased a foreign currency option with a notional value of $194,185 to mitigate the foreign exchange risk related to the Swiss Franc denominated purchase price of LifeWatch AG (“LifeWatch”).  This derivative instrument was not designated as a hedge for accounting purposes.  The derivative instrument wasimpairment and recorded at fair value only when an impairment is recognized. We assess the impairment of goodwill and indefinite lived assets annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable.

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


d) Accounts Receivable and Allowance for Doubtful Accounts
Healthcare accounts receivable is recorded at the time Healthcare segment revenue is recognized, net of contractual allowances, and is presented on the consolidated balance sheet as a componentnet of prepaid expensesan allowance for doubtful accounts. The ultimate collection of accounts receivable may not be known for several months after services have been provided and other current assets.  We did not exercise this optionbilled. The percentages and amounts used to record bad debt expense and the contract expired duringallowance for doubtful accounts are supported by various methods and analyses, including current and historical cash collections and the third quarteraging of 2017, resulting in a write offreceivables by payor. Because of the premium of $1,322 which was recorded as a component of other non-operating income (expense), netcontinuing changes in the consolidated statementshealth care industry and third-party reimbursement, it is possible that our estimates of collectability could change, which could have a material impact on our operations and comprehensive income (loss).

Equity Method Investments

We account for investments usingcash flows.

Other accounts receivable is related to the equity method of accounting if the investment provides us the ability to exercise significant influence, but not control, over the investee.  Significant influence is generally deemed to exist if the Company’s ownership interest in the voting stock of the investee ranges between 20%Research segment 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 investmentCorporate and Other category and is recorded at costthe 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 consolidated balance sheet as a component of other assets and is periodically adjusted for capital contributions, dividends received and our shareaging of the investee’s earnings or losses togetheraccount.
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.
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 other-than-temporary impairments whichhigh 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 recorded as loss on equity method investment inwritten-off against the consolidated statementsallowance for doubtful accounts when collections are believed to be unlikely and all collection efforts have ceased.
At June 30, 2018 and December 31, 2017, one payor, Medicare, accounted for 17% and 21%, respectively, of operations and comprehensive income (loss).

our gross accounts receivable.

f) Noncontrolling interests

Interest

The consolidated financial statements reflect the application of Accounting Standards Codification (“ASC”) 810 - Consolidations, which establishes accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within shareholder’sstockholders’ equity, but separate from the parent’s equity; (ii) the amount of consolidated net incomeincome/(loss) attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face ofin the consolidated statements of income;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 97.0% of LifeWatch AG on July 12, 2017.  On that date, we acquired control of LifeWatch AG and began consolidating its financial statements.  The interest represented by

g) Stock-Based Compensation
ASC 718, Compensation—Stock Compensation (“ASC 718”), addresses the shares not tendered or subsequently acquired through September 30, 2017 are presented as noncontrolling interestsaccounting for share-based payment transactions in our consolidated financial statements.  The fair valuewhich an enterprise receives employee services in exchange for: (i) equity instruments of the noncontrolling interest was determinedenterprise or (ii) liabilities that are based on the observable quoted share price as of the acquisition date.  As of September 30, 2017, we owned 98.5% of LifeWatch AG and expect to acquire the remaining outstanding shares in the fourth quarter of 2017 or shortly thereafter.

LifeWatch AG owns 55% of LifeWatch Turkey Holding AG (“LifeWatch Turkey”) 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 AG, we acquired control of LifeWatch Turkey and began consolidating their financial statements.  As of September 30, 2017, LifeWatch Turkey’s net assets were $3,097 and their loss since July 12, 2017 was $526.

Amounts pertaining to the noncontrolling ownership interest of both LifeWatch AG and LifeWatch Turkey Holding AG held by third parties in the operating results of the Company are combined and reported as noncontrolling interests in the accompanying consolidated financial statements.

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 test in accordance with ASC 350.  In the first step, we compare the fair value of our reporting units 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 reportingenterprise’s equity instruments or that may be settled by the issuance of such equity instruments. ASC 718 requires that an

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


entity measure the cost of equity-based service awards issued to employees, such as stock options and restricted stock units then(“RSUs”), based on the second step of the impairment test is performed in order to determine the impliedgrant-date fair value of the reporting units’ goodwill.  Ifaward and recognize the carrying valuecost of such awards over the requisite service period (generally, the vesting period of the reporting units’ goodwill exceedsaward). ASC 718 requires that an entity measure the impliedcost of liability-based service awards based on current fair value that is remeasured subsequently at each reporting date through the settlement date. The compensation expense associated with performance stock units (“PSUs”) is recognized ratably over the period between when the performance conditions are deemed probable of those reporting units, an impairment loss equal toachievement and when the differenceawards are vested. Performance stock options (“PSOs”) are valued and stock-based compensation expense is recorded.

Foronly recognized once 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 valueperformance conditions of the reporting units utilizing a weighting of the income and market approaches.  The income approach isoutstanding PSOs have been met. We account for equity awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees.

We have historically recorded stock-based compensation expense based on a discounted cash flow methodology that includes assumptions for, among other things, forecasted income, cash flow, growththe number of stock options or RSUs we expect to vest using our historical forfeiture experience and we 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, Compensation — Stock Compensation (“ASC 718”).  The standard is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted.

We elected to early adopt the standard during the fourth quarter of 2016.  The standard requires the recognition of any pre-adoption date net operating loss (“NOL”) carryforwards from share-based compensation arrangements to be recognized on a modified retrospective basis, through an opening retained earnings adjustment on January 1, 2016.  Any income tax effects from share-based compensation 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 $94 and $583 for the three and nine months ended September 30, 2016, respectively.  Corresponding adjustments were recorded in the operating section of our statement of cash flows for the nine months ended September 30, 2016.  The weighted average number of common shares outstanding for calculating diluted net income per share increased by 547,196 and 448,792 for the three and nine months ended September 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.

In July 2015, We record additional expense if the FASB issued ASU 2015-11, Simplifyingactual forfeiture rate is lower than estimated, and record a recovery of prior expense if the Measurementactual forfeiture rate is higher than estimated.

We estimate the fair value of Inventory.our stock options using the Black‑Scholes option valuation model. The standardBlack‑Scholes option valuation model requires inventorythe 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 measuredoutstanding. 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 lowertime of cost or net realizable value.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 guidancePSUs 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 we will not applybe able to inventoriesrealize 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-
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted in the U.S. The TCJA represents sweeping changes in U.S. tax law. Under ASC 740, the effects of changes in tax rates and tax laws on deferred tax balances are recognized in the period in which the new legislation is enacted. The total effect of tax law changes on deferred tax balances is recorded as a component of income tax expense.
In response to the TCJA, the Staff of the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance to registrants in applying ASC 740 in connection with the TCJA. SAB 118 provides that, in the period of enactment, the income tax effects of the TCJA may be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a measurement period. The measurement period begins in the reporting period of the TCJA’s enactment and ends when a registrant has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC 740. SAB 118 also describes supplemental disclosures that should accompany the provisional amounts. 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 stock equivalents, including stock options, RSUs, PSOs and PSUs, using the treasury stock method.
Certain stock options, which are priced higher than the market price of our shares as of June 30, 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 and PSUs are also excluded using the treasury stock method as their impact would be anti-dilutive. The dilutive effect of weighted average shares outstanding excludes approximately 0.6 million and 0.7 million shares for the three and six month periods ended June 30, 2018, respectively, and excludes approximately 0.3 million and 0.4 million shares for the three and six month periods ended June 30, 2017, respectively, as their effect would have been anti-dilutive on our net income per share.
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 costseparate discrete financial information is determined usingavailable for evaluation by the last-in, first-out methodchief operating decision maker, or the retail inventory method.  Our adoptiondecision-making group, in making decisions on how to allocate resources and assess performance.
We report our business under two segments: Healthcare and Research. The Healthcare segment is focused on remote cardiac monitoring to identify cardiac arrhythmias or heart rhythm disorders. We offer cardiologists, electrophysiologists, neurologists and primary care physicians a full spectrum of this standardsolutions
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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, and considering the 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 released ASU 2017-09, Scope of Modification Accounting, which clarifies the changes to terms or conditions of a share based payment award that requires application of modification accounting under Topic 718. A change to an award should be accounted for as a modification unless the fair value of the modified award is the same as the original award, the vesting conditions do not change and the classification as an equity or liability instrument does not change. This update is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. We adopted this standard effective January 1, 2018, and this standard did not have a material impact on our consolidated financial statements.position, results of operations or disclosures.

Accounting Pronouncements Not Yet Adopted

In January 2017, the FASB released ASU 2017-01,Business Combinations: Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this ASU should be applied prospectively and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. No disclosures are required at transition. We will adoptadopted this standard effective January 1, 2018, and dothis standard did not expect the standard to have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment.  The standard eliminates step two in the current two-step impairment test under ASC 350.  Under the new standard, a goodwill impairment will be recorded for any excessposition, results of a reporting unit’s carrying value over its fair value.  A prospective transition approach is required.  The standard is effective for annual and interim reporting periods beginning after December 15, 2019 with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017.  We plan to early adopt the standard at the time of our 2017 goodwill impairment testing date and do not expect the standard to have a material impact on our consolidated financial statements.operations or disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases.  The standard will require lessees to recognize most leases on their balance sheet and makes selected changes to lessor accounting.  The standard is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted.  A modified retrospective transition approach is required, with certain practical expedients available.  We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which has been updated through several revisions and clarifications since its original issuance.issuance (collectively, the “Revenue Updates”). The standard willRevenue Updates require 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 standardRevenue Updates also requiresrequire new, expanded disclosures regarding revenue recognition. The standard will beWe adopted the Revenue Updates effective January 1, 2018. See “Note 2. Revenue Recognition.”
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Accounting Pronouncements Not Yet Adopted
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with earlyselling goods or services to customers as part of a contract accounted for under ASC 606 - Revenue from Contracts with Customers (“ASC 606”). The amendments in ASU 2018-07 are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption permissibleis permitted. We are currently evaluating the potential effects of this updated guidance on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases. This standard requires lessees to recognize most leases on their balance sheet, make selected changes to lessor accounting and disclose additional key information about leases. The standard is effective for annual and interim reporting periods beginning after December 15, 2018. A modified retrospective transition approach is required, with certain practical expedients available.
Specific determinations and considerations that are in process related to the impact of ASU 2016-02 include:
Adoption of this standard on January 1, 2017.

We have substantially completed the detailed review2019.

Continuing evaluation of our contract portfolioexisting leases, including identifying all contracts that are, or contain, leases and revenue streamsaccumulating all the necessary information required to identify potential differences in accounting as a result ofproperly account for the leases under the new standard.

We expect that there will be an impact to

Continuing evaluation of our financial reporting disclosures as well as any related business operations processes and internal controls over financial reporting.  As partto ensure we meet the new reporting and disclosure requirements.
Determining the systems and procedures to identify and track leases.
Determining the standard’s impact, if any, on our debt covenants.
Applying the practical expedients related to historical lease classification.
Analysis of the impact to the presentation and disclosure of our financial statements. The quantification of amounts has not yet been determined. We do not believe that these changes will materially impact our liquidity or ability to enter or exit leases.
We expect to complete our assessment performed throughof the datefull financial impact shortly after December 31, 2018, and will include all required presentation and disclosures under ASU 2016-02 in our Form 10-Q for the three months ending March 31, 2019.

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


2. Revenue Recognition
We adopted ASC 606 on January 1, 2018, which requires revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration that a company expects to receive in exchange for those goods or services.
We utilized the modified retrospective method for adoption, allowing us to not retrospectively adjust prior periods. We applied the modified retrospective method only to contracts that were not complete at January 1, 2018 and accounted for the aggregate effect of any contract modifications upon adoption. No cumulative adjustment to retained earnings was recorded.
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by payor type and major service line. We determined that disaggregating revenue into these categories achieves the disclosure objective of illustrating the differences in the nature, amount, timing and uncertainty of our revenue streams. Disaggregated revenue by payor type and major service line for the three and six months ended June 30, 2018 was as follows:
 Three Months Ended June 30, 2018
(in thousands)Healthcare Research Other Total Consolidated
Payor/Service Line       
Remote cardiac monitoring services - Medicare$36,599
 $
 $
 $36,599
Remote cardiac monitoring services - commercial payors50,124
 
 
 50,124
Clinical trial support and related services
 12,546
 
 12,546
Technology devices, consumable and related services
 
 2,091
 2,091
Total$86,723
 $12,546
 $2,091
 $101,360
 Six Months Ended June 30, 2018
(in thousands)Healthcare Research Other Total Consolidated
Payor/Service Line       
Remote cardiac monitoring services - Medicare$66,814
 $
 $
 $66,814
Remote cardiac monitoring services - commercial payors100,460
 
 
 100,460
Clinical trial support and related services
 23,790
 
 23,790
Technology devices, consumable and related services
 
 4,792
 4,792
Total$167,274
 $23,790
 $4,792
 $195,856
Remote Cardiac Monitoring Services Revenue (Healthcare segment)
Healthcare segment revenue is generated by remote cardiac monitoring to identify cardiac arrhythmias or heart rhythm disorders. We offer cardiologists, electrophysiologists, neurologists and primary care physicians a full spectrum of solutions which provides them with a single source of cardiac monitoring services. We bill 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 over time, resulting in a time elapsed output method for revenue recognition. We believe that this filing,method
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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 on negotiated prices for services provided, on a case rate basis, as provided for under the relevant Current Procedural Terminology (“CPT”) codes.
Non-contracted payors: Non-contracted commercial and government insurance carriers often reimburse out of network rates provided for under the relevant CPT codes on a case rate basis. Our transaction price includes implicit price concessions based on our historical collection experience for our non-contracted patients
We are utilizing the portfolio approach practical expedient in ASC 606 for our patient contracts in the Healthcare segment. We account for the contracts within each portfolio as a collective group, rather than individual contracts. Based on our history with these portfolios and the similar nature and characteristics of the patients within each portfolio, we have 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 education of the new accounting standard;

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

·                  Monitored and assessed the impact of changes to ASU 2014-09 and its interpretations.

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

·                  Healthcare Revenue —We continue to evaluate the valuation of our Healthcare revenue and accounts receivable with respect to adopting ASU 2014-09.  This evaluation includes determining whether the Company has historical experience of collecting substantially all of the negotiated contractual rates or any implicit price concessionsand determined at contract inception that these customers have the intention and ability to pay the promised consideration. As such, we are provided.  If the Company determines it has not providedproviding an implicit price concession but, rather, that it hashave chosen to accept the risk of default, by the patient,and adjustments to the transaction price would be presentedare recorded as bad debts.  This impacts whether revenue will be recognized on a gross basis or a net basis.  debt expense.

For this assessment,our non-contracted portfolio, we combined LifeWatch revenue with the existing legacy Healthcare revenue streams.  Our current accounting policy is such that revenue is recognized upon agreed upon reimbursement rates.  Ifare providing an implicit price concession 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,transaction price are recorded as an adjustment to Healthcare segment revenue and not as bad debt expense.
We have not made any significant changes to judgments in applying ASC 606 during the three and six months ended June 30, 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 services are performed. Under a typical contract, some customers pay us a portion of our fee for these services upon contract execution as an upfront refundable deposit. Upfront deposits are deferred and then recognized as the services are performed. If a contract is canceled prior to service being provided, the upfront deposit is refunded.
Performance obligations are determined based on final settlement with the third-party payors, are recorded upon settlement.

·                  Research revenue — The Company has concluded that the majoritynature of the clinicalservices provided by us. Our core laboratory services are provided over time as the customer receives benefits resulting in revenue recognition over the term of the contract. Our research arrangementscustomer contracts have legally enforceable terms that are predominately thirty days due to termination for convenience clauses, which are held by the customer with no significant penalty. Given the short-term nature of these contracts and the structure of our billing practices, our billing practices approximate our performance if measured by an output method, where each

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


output is an individual occurrence of each performance obligation. Accordingly, we utilize the invoice practical expedient as defined in ASC 606, resulting in recognition of revenue in the amount that we have the right to invoice.
We 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 and six months ended June 30, 2018.
Technology Devices, Consumable and Related Service Revenue (Other category)
Our technology device, consumable and other related revenue is primarily 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 wholesale distributors of diabetes supplies and diabetic 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 medical devices and related goods produced by us and (2) contract manufacturing on behalf of a customer. These contracts transfer control to a customer at a point in time based on the transfer of title for the underlying good or service. We provide standard warranty provisions.
We determine the transaction price based on fixed consideration in our contractual agreements with our customers and allocate the transaction price to each performance obligation based on the relative stand-alone selling price. We determine the relative stand-alone selling price utilizing our observable prices for the sale of the underlying goods.
We have not made any significant changes to judgments in applying ASC 606 during the three and six months ended June 30, 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 will representin instances where a single performance obligation.  We expect to accountcustomer pays an upfront deposit upon contract execution for revenue for this single performance obligation over time using either an input or output method to measure progress.  We are still evaluating the appropriate selection of the measure of progress for these arrangements.

·                  Technology revenue — The Company has concluded that the standard will not have a material impact on Technology revenue.  We will continue to recognize revenue in our Technology segment when products are shipped or asfuture services are rendered.

·                  Contract Costs — The Company has concluded that all material costs to acquire customer contracts will continue to be expensedperformed by us. We receive payments from our customers based on standard terms and conditions. No significant changes or impairment losses occurred to contract balances during the three and six months ended June 30, 2018.

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


As of June 30, 2018, we had deferred revenue of $4.5 million primarily related to the Research segment where customers paid upfront deposits upon contract execution for future services to be performed by us. If the contract is canceled, these upfront deposits are refundable if service was not yet provided. For the three months ended June 30, 2018, the amount recognized as revenue from the deferred revenue balance at March 31, 2018 was $1.4 million, while for the six months ended June 30, 2018, the amount recognized as revenue from the deferred revenue balance as of December 31, 2017 was $2.2 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 performance obligations relate to contracts with a duration of less than one year, we have 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 as the amortization period of the asset that we otherwise would have recognized is one year or less.  less in duration.
Significant Financing Component: We are evaluatingdo not adjust the impactpromised amount of fulfillment cost capitalization in conjunction with its measureconsideration for the effects of progress selection undera significant financing component as we expect, at contract inception, that the inputperiod between when we transfer a promised good or output methodservice to a customer and when the customer pays for Research revenue.  We currently expense all contract costs.

·                  Transition Method —Wethat good or service will be electing to adopt ASU 2014-09 using the modified retrospective approach.

In addition to the open matters discussed above, significant implementation matters to be addressed prior to adopting ASU 2014-09 include determining the transition adjustment resultingone year or less.

Sales Tax Exclusion from the new accounting standardTransaction Price: We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on our consolidated financial statements, and updating, as needed, our business processes, systems and controls required to comply with ASU 2014-09 upon its effective date.  We will make continuous updates to our year-end disclosures,concurrent with a focus on implementation status updates related tospecific revenue-producing transaction and collected by us from the impact ASU 2014-09 will have oncustomer.
Shipping and Handling Activities: For our consolidated financial statementstechnology device, consumable and related footnotes.

We expect to complete our assessmentservice revenue, we account for shipping and handling activities we perform after a customer obtains control of the full financial impact of ASU 2014-09 duringgood as activities to fulfill the next three months and expectpromise to adopt ASU 2014-09 when it becomes effective on January 1, 2018.

transfer the good.

2.

3. Acquisitions

LifeWatch AG

On July 12, 2017, the Company,we, through its wholly-ownedour wholly owned subsidiary Cardiac Monitoring Holding Company, LLC, acquired approximately 97.0%97% of the outstanding shares of LifeWatch AG for aggregate consideration of 3,615,840 shares of BioTelemetry common stock with a fair value of $116,792$116.8 million and cash in the amount of $165,782.$165.8 million. On that date, we acquired control of LifeWatch AG and began consolidating its financial statements.  The interest represented by the shares not tendered or subsequently acquired through September 30, 2017 are presented as noncontrolling interests in our consolidated financial statements.  The fair value of the noncontrolling interest was determined based on the observable quoted share price as of the acquisition date.

Through September 30, 2017, we purchased 343,525 additional shares of LifeWatch for cash consideration of $4,765 andstrengthens our market position as the issuance of 19,806 shares with a fair value of $648.  leader in remote cardiac monitoring.

We intendrecorded our obligations to acquire the remaining untendered LifeWatch shares, pursuant to a squeeze-out procedure in accordance with Swiss law and takeover regulation.regulations related to the offering, as components of accrued liabilities and paid-in capital, and reduced our noncontrolling interest related to our
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


ownership of LifeWatch, in our consolidated balance sheet as of December 31, 2017. As of September 30, 2017,a result, we owned 98.5%100% of LifeWatch AGas of December 31, 2017. In early January 2018, we settled those obligations with payment of $2.9 million in cash and expect to acquire the remaining outstandingissuance of 58,786 shares in the fourth quarter of 2017 or shortly thereafter.

Also on July 12, 2017, in connectionour common stock with the closinga fair market value of the acquisition of LifeWatch, and refinancing of its existing debt, the Company entered into a Credit Agreement pursuant to which the Company obtained loans as follows; (i) a term loan (funded on July 12, 2017) in an aggregate principal amount equal to $205,000, the proceeds of which were used to (a) pay our existing General Electric Credit Agreement of $24,875 and acquired LifeWatch debt of $3,027, (b) pay a portion of the cash consideration for the acquisition of LifeWatch, and (c) pay related transaction fees and expenses of the acquisition of LifeWatch; and (ii) a $50,000 revolving credit facility for ongoing working capital purposes, which remains undrawn.  The term loan will be repaid in quarterly installments beginning January 1, 2018, with the remaining principal balance repaid on or before July 12, 2022.

The acquisition of LifeWatch strengthens our position as the leader in wireless medicine, creating the foremost connected health platform, significantly enhancing our ability to improve quality of life and reduce cost of care.  $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 $186,456$198.8 million of goodwill as a result of the acquisition, all of which has been assigned to the Healthcare segment.

None of this goodwill will be deductible for tax purposes.

The amounts below represent our preliminary fair value estimates as of SeptemberJune 30, 20172018 and are subject to subsequent adjustment as additional information is obtained during the applicable measurement period.  The primary areas of these preliminary estimates that are not yet finalized relatedrelate to certain tangible assets acquired and liabilities assumed, including deferred taxes identifiable intangible assets, as well asand uncertain tax positions. The measurement period adjustments recorded during the determinationsix months ended June 30, 2018 were due primarily to a $5.7 million adjustment to increase accrued liabilities related to the ZTech legal matter (see “Note 15. Legal Proceedings” for details) and an $8.9 million increase to other long-term liabilities.
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 receivable10,089
  
Inventory1,136
  
Prepaid expenses and other current assets3,798
  
Property and equipment27,507
  
Other assets713
  
Identifiable intangible assets:   
Customer relationships126,800
 10
Technology3,217
 2.5
Total identifiable intangible assets130,017
  
Total assets acquired177,563
  
Fair value of liabilities assumed:   
Accounts payable10,292
  
Accrued liabilities15,579
  
Current portion of capital lease obligations4,664
  
Current portion of long-term debt3,027
  
Long-term capital lease obligations3,420
  
Deferred tax liabilities14,465
  
Other long-term liabilities32,364
  
Total liabilities assumed83,811
  
    
Total identifiable net assets93,752
  
Fair value of noncontrolling interest(9,961)  
Goodwill198,783
  
Net assets acquired$282,574
  
We have integrated the operations of LifeWatch into our Healthcare segment. As a result of this integration, it is impracticable to disclose the amount of the goodwill that will be deductible for tax purposes.  The Company expectsrevenue and income/(loss) attributable to finalize all accounting for the acquisition of LifeWatch within one year of the acquisition date.

 

 

Amount

 

Weighted
Average Life
(Years)

 

Fair value of assets acquired:

 

 

 

 

 

Cash and cash equivalents

 

$

4,303

 

 

 

Healthcare accounts receivable

 

9,467

 

 

 

Inventory

 

1,136

 

 

 

Prepaid expenses and other current assets

 

4,392

 

 

 

Property and equipment

 

30,200

 

 

 

Other assets

 

713

 

 

 

Identifiable intangible assets:

 

 

 

 

 

Customer relationships

 

109,400

 

10

 

Technology

 

2,100

 

5

 

Total identifiable intangible assets

 

111,500

 

 

 

Total assets acquired

 

161,711

 

 

 

Fair value of liabilities assumed:

 

 

 

 

 

Accounts payable

 

10,666

 

 

 

Accrued liabilities

 

8,879

 

 

 

Current portion of capital lease obligations

 

4,664

 

 

 

Current portion of long-term debt

 

3,027

 

 

 

Long-term capital lease obligations

 

3,420

 

 

 

Deferred tax liabilities

 

21,993

 

 

 

Other liabilities

 

1,720

 

 

 

Total liabilities assumed

 

54,369

 

 

 

 

 

 

 

 

 

Total identifiable net assets

 

107,342

 

 

 

Fair value of noncontrolling interest

 

(11,224

)

 

 

Goodwill

 

186,456

 

 

 

Net assets acquired

 

$

282,574

 

 

 

For the period from July 12, 2017 to September 30, 2017, LifeWatch contributed revenues of $27,386 and net loss of $1,998 to our consolidated results of operations and comprehensive income (loss), and are included as components of our Healthcare and Technology segments.

We incurred $3,148 and $8,188 ofLifeWatch.

There were no acquisition-related costs related to LifeWatch for the three and ninesix month periods ended SeptemberJune 30, 2017, respectively. These costs were included in other charges in our consolidated statements of operations and comprehensive income (loss).

2018.

The following unaudited pro forma financial information has been prepared using historical financial results of the CompanyBioTelemetry and LifeWatch as if the acquisition had occurred as of January 1, 2016.  Certain adjustments related to the elimination of transaction costs, as well as the addition of 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 September 30,

 

Nine months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Revenue

 

$

84,349

 

$

80,881

 

$

257,976

 

239,215

 

Net income (loss) attributable to BioTelemetry, Inc

 

(3,681

)

1,612

 

(2,753

)

(9,073

)

Net income (loss) per common share attributable to BioTelemetry, Inc:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.11

)

$

0.05

 

$

(0.09

)

$

(0.29

)

Diluted

 

$

(0.11

)

$

0.05

 

$

(0.09

)

$

(0.29

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

32,350,858

 

31,737,842

 

32,245,396

 

31,446,409

 

Diluted

 

32,350,858

 

34,516,419

 

32,245,396

 

31,446,409

 

(pro forma, unaudited, in thousands, except per share amounts)Three Months Ended
June 30,
2017
 Six Months Ended
June 30,
2017
Revenue$88,500
 $173,600
Net income/(loss) attributable to BioTelemetry, Inc.2,600
 (3,500)
Net income/(loss) per common share attributable to BioTelemetry, Inc.:   
Basic$0.08
 $(0.11)
Diluted$0.07
 $(0.11)
Weighted average number of common shares outstanding:   
Basic32,381
 32,282
Diluted35,921
 32,282

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 in cash, with the potential for a performance-based earn out up to $5,000 upon reaching certain financial milestones.  The fair 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.  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 Company recognized $3,713 of goodwill as a result of the acquisition, all of which has been assigned to the Technology segment.  We expect $668 of this goodwill will be deductible for tax purposes.

The amounts below represent our preliminary fair value estimates as of September 30, 2017 and are subject to subsequent adjustment as additional information is obtained during the applicable measurement period.  Measurement period adjustments reducing the valuation of inventory of $269 and $105 were recorded in the second and third quarters of 2017, respectively.  The primary areas of these preliminary estimates that are not yet finalized related to deferred taxes.  We expect to finalize all accounting for the acquisition of Telcare within one year of the acquisition date.

The total consideration and related preliminary allocation for Telcare is summarized as follows:

 

 

Amount

 

Weighted
Average Life
(Years)

 

Fair value of assets acquired:

 

 

 

 

 

Other accounts receivable

 

$

235

 

 

 

Inventory

 

1,417

 

 

 

Prepaid expenses and other current assets

 

1,261

 

 

 

Property and equipment

 

55

 

 

 

Other assets

 

933

 

 

 

Identifiable intangible assets:

 

 

 

 

 

Customer relationships

 

400

 

5

 

Technology

 

2,000

 

5

 

Tradename

 

400

 

Indefinite

 

Total identifiable intangible assets

 

2,800

 

 

 

Total assets acquired

 

6,701

 

 

 

Fair value of liabilities assumed:

 

 

 

 

 

Accounts payable

 

459

 

 

 

Accrued liabilities

 

206

 

 

 

Deferred revenue

 

49

 

 

 

Total liabilities assumed

 

714

 

 

 

Total identifiable net assets

 

5,987

 

 

 

Goodwill

 

3,713

 

 

 

Net assets acquired

 

$

9,700

 

 

 

The following unaudited pro forma financial information has been prepared using historical financial results of the Company and Telcare as if the acquisition had occurred as of January 1, 2016.  Certain adjustments related to the elimination of transaction costs, as well as the addition of depreciation and amortization related to fair value adjustments on the tangible and identifiable intangible assets acquired, have been reflected for the purposes of the unaudited pro forma financial information presented below.  We believe the assumptions used in preparing the unaudited pro forma financial information are reasonable, but not necessarily indicative of actual results should the acquisition have occurred on January 1, 2016.

Pro forma financial information for the periods presented is summarized as follows:

 

 

Three Months Ended
September 30, 2016

 

Nine Months Ended
September 30, 2016

 

Revenue

 

$

54,169

 

$

157,915

 

Net Income

 

$

3,414

 

$

10,417

 

Net income per common share:

 

 

 

 

 

Basic

 

$

0.12

 

$

0.37

 

Diluted

 

$

0.11

 

$

0.34

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic

 

28,102,196

 

27,810,763

 

Diluted

 

30,880,773

 

30,306,017

 

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 $1,300 at September 30, 2017.  At September 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 $1,000 and $300 respectively.

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

 

 

Total Contingent
Consideration

 

Balance at December 31, 2016

 

$

2,700

 

Change in fair value of acquisition-related contingent consideration

 

(1,400

)

Balance at September 30, 2017

 

$

1,300

 

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.  None of this goodwill will be deductible for tax purposes.

The amounts below represent our final fair value estimates, which were completed in the second quarter of 2017.  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:

 

 

Nine Months Ended
September 30, 2016

 

Revenue

 

$

160,314

 

Net Income

 

$

14,933

 

Net income per common share:

 

 

 

Basic

 

$

0.54

 

Diluted

 

$

0.49

 

Weighted average number of common shares outstanding:

 

 

 

Basic

 

27,810,763

 

Diluted

 

30,306,017

 

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 September 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 nine months ended September 30, 2017:

 

 

Total Contingent
Consideration

 

Balance at December 31, 2016

 

$

605

 

Change in fair value of acquisition-related contingent consideration

 

(605

)

Balance at September 30, 2017

 

$

 

3.

4. Inventory

Inventory consists of the following:

 

 

September 30, 2017

 

December 31, 2016

 

Raw materials

 

$

3,185

 

$

2,866

 

Finished goods

 

2,901

 

2,310

 

Total inventory

 

$

6,086

 

$

5,176

 

(in thousands)June 30,
2018
 December 31,
2017
Raw materials and supplies$5,012
 $3,128
Finished goods2,696
 2,204
Total inventory$7,708
 $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.Property


5. Fair Value Measurements
We have determined that our long-term debt, classified as Level 2, has a fair value consistent with its carrying value, exclusive of debt discount and Equipment

Propertydeferred charges, of $199.0 million and equipment consists$199.4 million as of June 30, 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 following:

 

 

Estimated
Useful Life
(Years)

 

September
30,
2017

 

December
31,
2016

 

Cardiac monitoring devices, device parts and components

 

3 - 5

 

$

72,541

 

$

55,825

 

Computers

 

3 - 5

 

24,303

 

18,027

 

Equipment, tools and molds

 

3 - 5

 

8,049

 

6,666

 

Furniture, fixtures and other

 

5 - 7

 

2,005

 

1,467

 

Leasehold improvements

 

Life of lease

 

6,111

 

3,171

 

Capital leases

 

3 - 7

 

7,305

 

737

 

Total property and equipment, at cost

 

 

 

120,314

 

85,893

 

Less accumulated depreciation

 

 

 

(63,634

)

(60,070

)

Total property and equipment, net

 

 

 

$

56,680

 

$

25,823

 

Depreciation expensefair value of contingent consideration were recognized within accrued liabilities and other long-term liabilities on our

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


consolidated balance sheets. Adjustments to contingent consideration are recorded in other charges in the consolidated statements of operations.
The following table provides a reconciliation of the beginning and ending balances of contingent consideration associated with propertyour Telcare and equipment, inclusive of amortization of assets recorded under capital leases, was $5,682 and $2,627 forePatch acquisitions that occurred during the threeyear ended December 31, 2016:
 Three Months Ended Six Months Ended
(in thousands)June 30,
2018
 June 30,
2017
 June 30,
2018
 June 30,
2017
Beginning balance$
 $2,700
 $700
 $3,305
Changes in fair value of contingent consideration
 
 (700) (605)
Ending balance$
 $2,700
 $
 $2,700
During the six months ended SeptemberJune 30, 2018 and 2017, the fair values of the contingent consideration decreased $0.7 million and 2016,$0.6 million, respectively, and $11,233 and $7,884 foras it was no longer probable that certain of the nine months ended September 30, 2017 and 2016, respectively.

5.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 September 30, 2017 and December 31, 2016 was $227,524 and $41,068, respectively.  The increase inwell as the changes to goodwill during the three and ninesix months ended SeptemberJune 30, 2017 was primarily due to the LifeWatch acquisition, partially offset by2018:
 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 adjustments15,234
 
 
 15,234
Balance at June 30, 2018$213,507
 $16,293
 $8,539
 $238,339
The measurement period adjustments related to our 2016 acquisitions.

The changes in the carrying amounts of goodwill by segment were 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

)

350

 

 

Goodwill acquired during the year

 

186,456

 

 

 

186,456

 

Balance at September 30, 2017

 

$

201,180

 

$

16,293

 

$

10,051

 

$

227,524

 

The change to goodwill in the Research segment relate to measurement period changes in the first quarter of 2017 to accrued liabilities and in the second quarter of 2017 to accrued liabilities and deferred taxes for our VirtualScopics, Inc. acquisition.  The change to goodwill in the Technology segement relate to measurement period changes in the first quarter of 2017 to inventory and accrued liabilities, and in the second and third quarters of 2017 for inventory for our Telcare, Inc. acquisition.  The increase in the Healthcare segment isare due to the LifeWatch acquisition.

Refer to “Note 3. Acquisitions” for details related to the measurement period adjustments.

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


The gross carrying amounts and accumulated amortization of our intangible assets as of September 30, 2017 and December 31, 2016 are as follows:

 

 

Estimated
Useful Life

 

September
30,

2017

 

December
31,

2016

 

 

 

(Years)

 

 

 

 

 

Customer relationships

 

5 - 15

 

$

126,750

 

$

16,700

 

Technology including internally developed software

 

3 - 10

 

23,654

 

21,135

 

Backlog

 

1 - 4

 

6,860

 

6,860

 

Covenants not to compete

 

5 - 7

 

1,040

 

1,040

 

Total intangible assets, gross

 

 

 

158,304

 

45,735

 

Customer relationships

 

 

 

(7,715

)

(3,809

)

Technology including internally developed software

 

 

 

(7,896

)

(6,588

)

Backlog

 

 

 

(4,833

)

(4,176

)

Covenants not to compete

 

 

 

(796

)

(690

)

Total accumulated amortization

 

 

 

(21,240

)

(15,263

)

Indefinite-lived trade names

 

 

 

3,000

 

3,000

 

Total intangible assets, net

 

 

 

$

140,064

 

$

33,472

 

The estimated amortization expense for remainder of 2017, the next four years and thereafter is summarized as follows at September 30, 2017:

2017

 

$

3,836

 

2018

 

15,573

 

2019

 

15,845

 

2020

 

15,294

 

2021

 

14,868

 

Thereafter

 

71,648

 

Total estimated amortization

 

$

137,064

 

Amortization expense for the three months ended September 30, 2017 and 2016 was $3,337 and $1,062, respectively, and amortization expense for the nine months ended September 30, 2017 and 2016 was $5,326 and $2,735, respectively.

6.

 
Estimated
Useful Life
(Years)
  
(in thousands, except years) June 30,
2018
 December 31,
2017
Customer relationships5 - 15 $143,100
 $143,174
Technology including internally developed software1.5 - 10 16,779
 15,953
Backlog1 - 4 6,860
 6,860
Covenants not to compete5 - 7 1,040
 1,040
Total intangible assets, gross  167,779
 167,027
Customer relationships  (17,836) (10,868)
Technology including internally developed software  (9,804) (8,573)
Backlog  (5,439) (5,052)
Covenants not to compete  (888) (827)
Total accumulated amortization  (33,967) (25,320)
Total intangible assets, net  $133,812
 $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 SeptemberJune 30, 2017,2018, our investment in WellBridge represented 31%32.2% of its outstanding stock. A summary of our investment in WellbridgeWellBridge is as follows:

 

 

Three Months Ended September 30,

 

Nine months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Beginning balance

 

$

1,279

 

$

985

 

$

1,125

 

$

1,100

 

Capital contributions

 

140

 

312

 

490

 

312

 

Our share of the investee’s losses

 

(106

)

(69

)

(302

)

(184

)

Ending balance

 

$

1,313

 

$

1,228

 

$

1,313

 

$

1,228

 

7.

 Three Months Ended Six Months Ended
(in thousands)June 30,
2018
 June 30,
2017
 June 30,
2018
 June 30,
2017
Beginning balance$1,292
 $1,030
 $1,431
 $1,125
Capital contributions
 350
 
 350
Loss in equity method investment(45) (101) (184) (196)
Ending balance$1,247
 $1,279
 $1,247
 $1,279

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


8. Accrued Liabilities
Accrued liabilities consist of the following:
(in thousands)June 30,
2018
 December 31,
2017
Compensation$11,171
 $13,694
Professional fees4,932
 3,816
Squeeze-out
 2,885
Severance363
 1,605
Non-income taxes547
 588
Interest658
 306
Operating costs1,296
 1,170
Facility costs719
 802
Other1,169
 1,189
Total$20,855
 $26,055

9. Credit Agreement

Concurrent with the acquisition of LifeWatch, as discussed in Note 2. Acquisitions, we entered into a credit agreement with SunTrust Bank (the “SunTrust Credit Agreement”), as a lender and an agent for the lenders (the “Lenders”Lenders). Pursuant to the credit agreement,SunTrust Credit Agreement, the Lenders agreed to make loans to the Companyus as follows; (i) a term loan in an aggregate principal amount equal to $205,000;$205.0 million; and (ii) a $50,000$50.0 million revolving credit facility for ongoing working capital purposes, which remains undrawn.  The proceeds of the loans were used to pay our existing General Electric Credit Agreement of $24,875 and acquired LifeWatch debt of $3,027, 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 purposes.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.

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.

The carrying amount of the term loan was $199,047$199.0 million as of SeptemberJune 30, 2017,2018, which is the principal amount outstanding, net of $5,953$5.0 million of unamortized deferred financing costs to be amortized over the remaining term of the credit facility.

In connection 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 June 30, 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, 2018, we were in compliance with our covenants.

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


10. Equity
Common Stock
As of June 30, 2018 and December 31, 2017, we were authorized to issue 200,000,000 shares of common stock. As of June 30, 2018 and December 31, 2017, we had 32,715,190 and 32,460,668 shares issued and outstanding, respectively. During the three months ended March 31, 2018, in accordance with the SunTrust credit agreement,squeeze-out procedures under Swiss law, we paidissued 58,786 shares to the $24,875 outstanding indebtedness under the Credit Agreement between the Company and Healthcare Financial Solutions, LLC, previously the General Electric Capital Corporation, as agentremaining stockholders of LifeWatch. See “Note 3. Acquisitions” for the lenders, and as a lender, and we terminated the General Electric Credit Agreement.  We wrote-off the unamortized deferred financing feesfurther details related to the existing debtLifeWatch acquisition.
Preferred Stock
As of $543, which is included in loss on extinguishmentJune 30, 2018, we were authorized to issue 10,000,000 shares of debtpreferred stock. As of June 30, 2018 and December 31, 2017, there were no shares of preferred stock issued or outstanding.
Noncontrolling Interest
During 2018, after a formal restructuring of shareholdings approved by the board of directors of LifeWatch Turkey Holdings AG (“LifeWatch Turkey”), we became the sole shareholder of LifeWatch Turkey. No cash or other consideration was exchanged to effect this transaction. As a result, we no longer reflect a noncontrolling interest in our consolidated statementsbalance sheet; however, we continue to reflect the net loss attributable to the noncontrolling interest on our consolidated statement of operations and comprehensive income (loss).

8.for the period of time where we did not own the entire entity.Equity


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 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 stock options granted expire on a date specified by the Board but generally not more than ten years from the grant date. Stock option grants to employees generally vest over four years while RSUs generally vest after three years.
2017 Omnibus Incentive Plan (OIP)
In May 2017, our stockholders approved the OIP, which replaces the previous stock plan, the BioTelemetry, Inc. 2008 Equity Incentive 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 SeptemberJune 30, 2017, 2,780,9652018, 2,333,880 shares remain available for grant under the OIP.

We recognized $1,485

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


2008 Equity Incentive Plan
Our 2008 Plan became effective on March 18, 2008 and $1,138replaced our 2003 Plan. Under the terms of stock-based compensation expense for the three months ended September 30, 2017 and 2016, respectively.  We recognized $5,685 and $3,7572008 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 stock options under the nine months ended September 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

 

Granted

 

280,000

 

35.79

 

 

 

Cancelled/forfeited

 

(44,015

)

13.78

 

(19,023

)

12.53

 

Exercised/vested

 

(60,380

)

22.93

 

 

 

Stock outstanding as of September 30, 2017

 

3,582,634

 

$

10.42

 

484,021

 

$

13.63

 

PSO

Stock Options
Number of
Shares
 
Weighted
Average
Exercise Price
 Weighted Average Remaining Contractual Term
(years)
 Aggregate Intrinsic Value
(in thousands)
Outstanding as of December 31, 20173,574,439
 $10.78
 
 

Granted270,806
 33.43
 
 

Forfeited(60,577) 27.31
 
 

Exercised(553,259) 8.53
 
 

Outstanding as of June 30, 20183,231,409
 $12.76
 5.7 $104,190
Exercisable as of June 30, 20182,215,761
 $6.59
 4.3 $85,097
Expected to vest as of June 30, 2018926,897
 $26.20
 8.7 $17,424
Performance Stock Options
Number of
Shares
 
Weighted
Average
Exercise Price
 Weighted Average Remaining Contractual Term
(years)
 Aggregate Intrinsic Value
(in thousands)
Outstanding as of December 31, 2017150,000
 $20.41
    
Granted
 
    
Forfeited
 
    
Exercised(15,000) 18.33
    
Outstanding as of June 30, 2018135,000
 $20.64
 8.5 $3,288
Exercisable as of June 30, 2018135,000
 $20.64
 8.5 $3,288
The table below summarizes certain additional information with respect to our options:
  Three Months Ended Six Months Ended
(in thousands, except per option amounts)June 30,
2018
 June 30,
2017
 June 30,
2018
 June 30,
2017
Aggregate intrinsic value of options exercised$15,715
 $2,073
 $17,879
 $5,825
Cash received from the exercise of stock options3,665
 985
 4,992
 2,966
Weighted average grant date fair value per option$20.17
 $18.42
 $19.79
 $15.57
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The total compensation cost of options granted but not yet vested at June 30, 2018 was $13.3 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

 

 

$

 

Vested

 

 

 

 

 

Cancelled/forfeited

 

 

 

 

 

Exercised

 

 

 

 

 

Stock outstanding as of September 30, 2017

 

150,000

 

$

20.41

 

 

$

 

Stock-based compensation expense is

 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
 
 
Granted125,860
 34.38
 88,345
 $37.79
Forfeited(7,980) 17.60
 
 
Vested(223,723) 12.03
 
 
Units outstanding as of June 30, 2018361,286
 $21.93
 88,345
 $37.79
During 2018, we granted awards to certain participants in the form of PSUs. These PSUs will vest at the end of a three-year performance period only recognizedif specific financial performance metrics are met, and the vested shares will then be modified based on relative total shareholder return. The 88,345 PSUs were granted at “target” levels; however, for outstanding PSUs whereshare pool purposes, we have reserved an additional 88,345 shares if the combined financial performance and market conditions are deemed probable for achievement.  For PSUs deemed probable for achievement, stock-based compensation expense is recognized ratably over the expected vesting period.achieve maximum levels. For the three and ninesix months ended SeptemberJune 30, 2017,2018, no stock-based compensation expense related to these PSUs was recognized relatedin accordance with ASC 718 and ASC 505-50 for employees and non-employees, respectively.
Additional information about our RSUs is summarized as follows:
  Three Months Ended Six Months Ended
(in thousands)June 30,
2018
 June 30,
2017
 June 30,
2018
 June 30,
2017
Aggregate market value of RSUs vested$1,478
 $320
 $7,873
 $4,585
The total compensation cost of RSUs and PSUs granted but not yet vested at June 30, 2018 was $9.2 million, which is expected to the PSUs.  For the three and nine months ended Septemberbe recognized over a weighted average period of approximately two years. Additionally, there were 576,546 RSUs vested but not released at June 30, 2016, we incurred stock-based compensation expense of $0 and $444, respectively, related to PSUs.

PSOs are valued and stock-based compensation expense is only recognized once the performance conditions of the outstanding PSOs have been met.  We incurred stock-based compensation expense of $0 and $1,533 for the three and nine months ended September 30, 2017 related to the PSOs.  For the three and nine months ended September 30, 2016, no stock-based compensation expense was recognized related to the PSOs.

2018.

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


Employee Stock Purchase Plan

For the nine months ended September 30, 2017, 47,966 shares were purchased in accordance with theIn July 2008, we made available an Employee Stock Purchase Plan (“2008 ESPP”).  Net proceeds from the issuance of shares of common stock under the 2008 ESPP for the nine months ended September 30, 2017 were $636.”) in which substantially all of our full-time employees became eligible to participate effective March 18, 2008. In May 2017, the shareholders and Board of Directorsour stockholders approved the BioTelemetry, Inc. 2017 Employee Stock Purchase Plan (“2017 ESPP”ESPP), with 500,000 shares reserved for issuance which replaced the 2008 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 credited to stockholders’ equity in the period that the shares are issued. Purchases under the 2017 ESPP which will replace the 2008 ESPP.are made in March and September. For the ninesix months ended SeptemberJune 30, 2017, 47,2492018, an aggregate of 65,477 shares were purchased in accordance with the 2017 ESPP. Net proceeds from the issuance of shares of common stock under the 2017 ESPP for the ninesix months ended SeptemberJune 30, 20172018 were $720.$1.2 million. At SeptemberJune 30, 2017, 452,7512018, 387,274 shares remain available for purchase under the 2017 ESPP.

9.

Our aggregate stock-based compensation expense is summarized as follows:
 Three Months Ended Six Months Ended
(in thousands)June 30,
2018
 June 30,
2017
 June 30,
2018
 June 30,
2017
Stock options$1,717
 $560
 $2,828
 $1,156
Performance stock options
 
 
 1,534
Restricted stock units840
 413
 1,560
 1,226
Employee stock purchase plan301
 169
 535
 284
Total stock-based compensation expense$2,858
 $1,142
 $4,923
 $4,200

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 (loss) and record theoperations. The related accrualaccruals are recorded in the accrued liabilities line onof our consolidated balance sheets.  These costs are primarily comprised of severance and employee related costs.

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 acquisitions and legal fees related to patent litigation in which we are the plaintiff. Other charges are costs that are not considered necessary to the ongoing business operations. For the periods ending September 30, 2017, other charges have been partially offset by reductions in contingent consideration.  A summary of these expenses is as follows:

 

 

Three Months Ended September 30,

 

Nine months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Legal fees

 

$

930

 

$

1,965

 

$

3,797

 

$

4,576

 

Professional fees

 

4,462

 

144

 

7,794

 

590

 

Severance and employee related costs

 

3,210

 

238

 

3,742

 

561

 

Change in contingent consideration

 

(1,400

)

 

(2,005

)

 

Other costs

 

950

 

50

 

1,214

 

117

 

Total

 

$

8,152

 

$

2,397

 

$

14,542

 

$

5,844

 

10.

 Three Months Ended Six Months Ended
(in thousands)June 30,
2018
 June 30,
2017
 June 30,
2018
 June 30,
2017
Legal fees$1,305
 $1,885
 $2,841
 $2,867
Professional fees525
 2,172
 1,752
 3,332
Severance and employee related costs1,294
 347
 3,291
 532
Change in fair value of contingent consideration
 
 (700) (605)
Reserve for note receivable1,793
 
 1,793
 
Other costs291
 247
 1,316
 264
Total$5,208
 $4,651
 $10,293
 $6,390
Other charges are due primarily to integration activities related to the LifeWatch acquisition and a reserve for a note receivable with a bankrupt customer. 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.  IncomeWe recorded an income tax benefit of $435$1.5 million and $31 was recorded$1.6 million for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, due primarily due to a discrete benefit recorded for an equity compensation deduction under the previously adopted ASU 2016-09.  We recorded an income tax expense of $141 2016-9, Improvement to Employee Share Based Payment Accounting and an income tax benefitprovision of $54$0.4 million for the three and ninesix months ended SeptemberJune 30, 2016, respectively.  These amounts have been recast to include excess tax benefits related to stock based compensation in association with the adoption of ASU 2016-09.

2017.

At SeptemberJune 30, 20172018 and December 31, 2016,2017, we had deferred tax assets, net of deferred tax liabilities and valuation allowance, of $15,498$20.9 million and $36,636,$17.7 million, respectively.
During the three months ended June 30, 2018, in connection with our acquisitions, we identified uncertain tax positions for periods prior to our ownership related to items recorded through purchase accounting, resulting in an additional unrecognized tax benefit of approximately $15.0 million. As a result, a net reserve of $8.9 million, inclusive of pre-acquisition interest, was recorded as a component of other long-term liabilities within our consolidated balance sheets related to these uncertain tax positions. The netunrecognized tax benefit, or a portion of an unrecognized tax benefit, is presented in the consolidated financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward.
We recognize interest and penalties, where applicable, related to unrecognized tax benefits within the benefit from/(provision for) income taxes line in the consolidated statements of operations. During the three months ended June 30, 2018, we recorded $0.9 million of interest in the consolidated statements of
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


operations associated with our unrecognized tax benefits, net of $0.4 million of deductible future interest which was recorded as a deferred tax asset on our consolidated balance sheet.
At June 30, 2018 and December 31, 2017, we had net reserves of $31.2 million and $22.0 million, respectively, for uncertain tax positions.
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 June 30, 2018, we have not adjusted any of our provisional amounts that were recorded as of September 30, 2017 reflects a preliminary estimate of the deferred taxes from the LifeWatch acquisition.

11.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, 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 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

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

69,528

 

$

9,313

 

$

2,182

 

 

$

81,023

 

Intersegment revenues

 

 

 

5,217

 

$

(5,217

)

 

Income (loss) before income taxes

 

14,721

 

217

 

508

 

(18,445

)

(2,999

)

Depreciation and amortization

 

7,337

 

1,040

 

404

 

238

 

9,019

 

Capital expenditures

 

4,796

 

608

 

339

 

 

5,743

 

 

 

Healthcare

 

Research

 

Technology

 

Corporate and
Other

 

Consolidated

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

40,395

 

$

10,420

 

$

2,240

 

 

$

53,055

 

Intersegment revenues

 

 

 

3,396

 

$

(3,396

)

 

Income (loss) before income taxes

 

14,722

 

1,442

 

1,059

 

(12,887

)

4,336

 

Depreciation and amortization

 

2,434

 

1,180

 

141

 

(66

)

3,689

 

Capital expenditures

 

2,481

 

327

 

7

 

 

2,815

 

Foryear ended December 31, 2017, we reclassified research and development costs associated with cardiovascular devices from the nine months ended:

 

 

Healthcare

 

Research

 

Technology

 

Corporate and
Other

 

Consolidated

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

156,109

 

$

28,199

 

$

10,725

 

 

$

195,033

 

Intersegment revenues

 

 

 

13,434

 

$

(13,434

)

 

Income (loss) before income taxes

 

45,429

 

917

 

4,346

 

(51,365

)

(673

)

Depreciation and amortization

 

12,904

 

3,112

 

917

 

(374

)

16,559

 

Capital expenditures

 

10,399

 

1,074

 

467

 

 

11,940

 

 

 

Healthcare

 

Research

 

Technology

 

Corporate and
Other

 

Consolidated

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

123,709

 

$

23,709

 

$

6,957

 

 

$

154,375

 

Intersegment revenues

 

 

 

9,070

 

$

(9,070

)

 

Income (loss) before income taxes

 

44,504

 

1,847

 

2,752

 

(36,168

)

12,935

 

Depreciation and amortization

 

7,415

 

3,064

 

333

 

(193

)

10,619

 

Capital expenditures

 

6,797

 

1,677

 

33

 

 

8,507

 

12.Corporate and Other category to the Healthcare segment to synchronize our external reporting with the way our chief operating decision maker reviews segment performance and makes decisions about the reportable segments.

 Three Months Ended June 30, 2018
(in thousands)Healthcare Research 
Corporate
and Other
 Consolidated
Revenues$86,723
 $12,546
 $2,091
 $101,360
Gross profit60,882
 5,328
 (455) 65,755
Income/(loss) before income taxes34,875
 1,520
 (27,451) 8,944
Depreciation and amortization4,948
 967
 4,139
 10,054
Capital expenditures7,077
 911
 (1,989) 5,999
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


 Three Months Ended June 30, 2017
(reclassified, in thousands)Healthcare Research 
Corporate
and Other
 Consolidated
Revenues$44,070
 $9,562
 $4,497
 $58,129
Gross profit29,695
 3,981
 2,291
 35,967
Income/(loss) before income taxes15,528
 324
 (12,856) 2,996
Depreciation and amortization2,706
 1,039
 80
 3,825
Capital expenditures2,713
 466
 51
 3,230
 Six Months Ended June 30, 2018
(in thousands)Healthcare Research 
Corporate
and Other
 Consolidated
Revenues$167,274
 $23,790
 $4,792
 $195,856
Gross profit113,851
 10,246
 (294) 123,803
Income/(loss) before income taxes52,599
 2,306
 (41,067) 13,838
Depreciation and amortization16,384
 1,977
 1,521
 19,882
Capital expenditures12,141
 1,202
 (3,406) 9,937
 Six Months Ended June 30, 2017
(reclassified, in thousands)Healthcare Research 
Corporate
and Other
 Consolidated
Revenues$86,581
 $18,886
 $8,543
 $114,010
Gross profit57,558
 7,734
 3,584
 68,876
Income/(loss) before income taxes28,546
 703
 (26,923) 2,326
Depreciation and amortization5,567
 2,072
 (99) 7,540
Capital expenditures5,603
 466
 128
 6,197

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 the amount of the loss can be estimated.

In

ZTech, Inc., Biorita LLC, and the third quarter of 2017, a settlement was reached with the selling stockholder of Mednet Healthcare Technologies, Inc., Heartcare Corporation of America, Inc., Universal Medical, Inc., and Universal Medical Laboratory, Inc. (together, “Mednet”), whereby 79,333 shares of BioTelemetry common stock with a fair value of $2,753 were returned to the Company.  These shares were part of the consideration paid in the January 31, 2014 acquisition of Mednet and had been subject to certain terms and conditions set forth in the Stock Purchase Agreement ( the “Agreement”).  In accordance with the terms of the Agreement, BioTelemetry sought indemnification for alleged breaches of certain representations and warranties.  Accordingly, in 2016 the company recorded a $1,420 indemnification asset.  However, as a result of the settlement’s fair value exceeding the indemnification asset recorded, a gain of $1,333 was recorded as a component of other non-operating income (expense), net in the consolidated statements of operations for the nine months ended September 30, 2017.

In 2011, we experienced the theft of two unencrypted laptop computers and, as a result, were required to provide notices under the HIPAA Breach Notification Rule to the United States Department of Health and Human Services’ Office for Civil Rights (“OCR”).  During the first quarter of 2017, the OCR concluded its investigation into the matter and reached a settlement agreement with the Company.  Per the agreement, BioTelemetry paid the OCR $2,500 and agreed to submit a two-year corrective action plan regarding our 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 other non-operating income (expense), net in the consolidated statements of operations and comprehensive income (loss) for the nine months ended September 30, 2017.

Cleveland Clinic Foundation Arbitration

In January 2017, ZTech, Inc., Biorita LLC, and the Cleveland Clinic Foundation (the “Claimants”Claimants) filed an arbitration demand against LifeWatch with the American Arbitration Association. Claimants allegealleged that LifeWatch violated the 2015 Stock Purchase Agreement for the purchase of FlexLife Health, Inc., a remote international normalized ratio (“INR”) monitoring business. Claimants filed the pending demand after LifeWatch terminated the INR business in late 2016.  The demand allegesalleged LifeWatch did not make commercially reasonable efforts to achieve certain conditions precedent and did not have a reasonable basis for terminating the business line. Claimants seeksought liquidated damages and attorneys’ fees. We are vigorously defending against these claims and are seeking recovery of attorneys’ fees related to our defense.  Discovery is ongoing, andOn May 9, 2018, the arbitration hearing is scheduledpanel issued an award including accrued interest against LifeWatch in the amount of
BIOTELEMETRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


$6.0 million. The award liability, plus the accrued interest through July 12, 2017, was recorded as a measurement period adjustment for February 2018,our LifeWatch acquisition (see “Note 3. Acquisitions”). The interest accrued since the acquisition date of LifeWatch was recorded as a component of other non-operating expense and accrued liabilities within our consolidated financial statements. The total amount of the award and accrued interest was paid in Cleveland, Ohio.  The probable outcome of this matter cannot be determined, nor can we estimate a range of potential loss.  Therefore, in accordance with authoritative guidance on the evaluation of loss contingencies, we have not recorded an accrual related to this matter.

May 2018.




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 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

Company Background

We provide cardiacremote 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.  TheResearch. 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”)remote cardiac telemetry service marketed as Mobile Cardiac Outpatient TelemetryTM (“MCOTTM”), External Cardiac Ambulatory Telemetry (“ECAT”) or Ambulatory Cardiac Telemetry (“ACT”) to wireless and trans-telephonic event, Holter, extended 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 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.

Recent Acquisitions

On July 12, 2017, we acquired control of LifeWatch AG (“LifeWatch”) via the acquisition of approximately 97% of their outstanding shares.  At settlement, we paid aggregate consideration of 3,615,840 shares of BioTelemetry common stockhospitals and cash in the amount of approximately $165.8 million.  On that date, we acquired control of LifeWatch AGcorporate overhead and began consolidating its financial statements.  The interest represented by the sharesother items not tendered or subsequently acquired through September 30, 2017 are presented as noncontrolling interests in our consolidated financial statements.  The fair value of the noncontrolling interest was determined based on the observable quoted share price as of the acquisition date.  As of September 30, 2017, we owned 98.5% of LifeWatch AG and expectallocated to acquire the remaining untendered LifeWatch shares pursuant to a squeeze-out procedure in accordance with Swiss law and takeover regulation in the fourth quarter of 2017 or shortly thereafter.

On December 1, 2016, we entered into a Share and Asset Purchase Agreement (“Agreement”) with Telcare, Inc. (“Telcare”) pursuant to which we acquired the stock of Telcare Medical Supply, Inc. and certain assets of Telcare.  The total consideration paid at closing amounted to $7.0 million in cash, with the potential for a performance-based earn out up to $5.0 million upon reaching certain milestones, as defined in the Agreement.  The fair value of the total consideration transferred in the acquisition, including contingent consideration, was $9.7 million at the acquisition date.  Telcare is included in the Technology segment.

On May 11, 2016, we completed the acquisition of VirtualScopics, Inc. (“VirtualScopics”), a leading provider of clinical trial imaging solutions.  The all cash Tender Offer commenced on April 8, 2016 and ended on May 9, 2016, pursuant to which the business and operations of VirtualScopics were acquired by us.  The total consideration paid at closing amounted to $15.0 million, net of cash acquired of $0.8 million.  VirtualScopics is included in the Research segment.

On April 1, 2016, we entered into an Asset Purchase Agreement (“APA”) with DELTA Danish Electronics, Light, and Acoustics (“DELTA”), pursuant to which we acquired substantially all of the assets of the ePatch division of DELTA, inclusive of all products and indications currently under development.  The total consideration paid at closing amounted to $3.0 million in cash and 244,519 sharesany of our common stock valued at $2.9 million.  In addition, there is the potential for a performance-based earn out up to $3.0 million upon reaching certain milestones, as defined in the APA.  The fair value of the total consideration transferred in the acquisition, including contingent consideration, was $6.5 million at the acquisition date.  ePatch is included in the Technology segment.

reportable segments.

Critical Accounting Policies and Estimates
We have prepared the financial statements and accompanying notes included in 

Revenue Recognition“Part I; Item 1. Financial Statements”

Healthcare of this report in conformity with U.S. generally accepted accounting principles (“

Healthcare revenue includes revenueU.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 circumstances. Actual results could differ from MCT, Event, Holter, Pacemakerthose estimates under different assumptions or conditions.

We periodically reevaluate our accounting policies, assumptions, and INR monitoring services.  We receive aestimates and make adjustments when facts and circumstances warrant. Our significant portionaccounting policies are described in “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 2. Summary of Significant Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The accounting policies and related assumptions that we consider to be more critical to the preparation of our revenue from third-party commercial insurance organizationsfinancial statements and governmental entities.  We also receive reimbursement directly from patients through co-paysaccompanying notes and self-pay arrangements.  Billings for services reimbursed by contracted third-party payors, including Medicare,involve the most significant management judgments and estimates are recorded as revenue, netdescribed in “Part II; Item 7. Management’s Discussion and Analysis 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 timeFinancial Condition and Results 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 September 30, 2017Operations; Critical Accounting Policies and 2016, revenue from Medicare as a percentageEstimates” of our Healthcare revenue was 42.7% and 41.5%, respectively.  For the nine months ended September 30, 2017 and 2016, revenue from Medicare as a percentage of our Healthcare revenue was 41.9% 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 providedAnnual Report on a fee-for-service basis, and revenue is recognized as the related services are performed.  We also provide consulting services on a time and materials basis and this revenue is recognized as the services are performed.  Our site support revenue, consisting of equipment rentals and sales along with related supplies and logistics management, are recognized at the time of sale or over the rental period.  Under a typical contract, customers pay us a portion of our fee for these services upon contract execution as an upfront deposit.  Unearned revenue, including upfront deposits, 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 receivable related to the Healthcare segment are recorded at the time revenue is recognized, net of contractual allowances, and are presented on the consolidated balance sheets 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.  We record an allowance for doubtful accounts based on the aging of receivables using payor-specific historical data.  The percentages and amounts used to record bad debt expense and the allowance for doubtful accounts are supported by various methods and analyses, including current and historical cash collections and the aging of receivables by payor.  Because of continuing changes in the 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 related to the Research and Technology segments are recorded at the time revenue is recognized, or when products are shipped or services are performed.  We estimate the allowance for doubtful accounts on a specific account basis and consider several factors in our analysis, including customer-specific information and the aging of the account.

We 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 $6.4 million and $6.3 million of receivablesForm 10-K for the nine monthsfiscal year ended September 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 $3.8 million and $9.0 million, respectively, forassumptions or estimates we used to prepare the three and nine months ended September 30, 2017.  We recorded bad debt expense of $2.5 million and $7.8 million, respectively, for the three and nine months ended September 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 as well as 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 SeptemberJune 30, 20172018 and 2016

June 30, 2017

Revenues
 Three Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Healthcare$86,723
 $44,070
 $42,653
 96.8 %
Research12,546
 9,562
 2,984
 31.2 %
Other2,091
 4,497
 (2,406) (53.5)%
Total revenues$101,360
 $58,129
 $43,231
 74.4 %
Revenues.Total revenues for the three months ended SeptemberJune 30, 2017 were $81.0 million compared2018 increased 74.4% driven by a 96.8% increase in Healthcare revenue and a 31.2% increase in Research revenue. The Healthcare revenue increase was due to $53.1 milliona 70% increase in Healthcare patient volume resulting primarily from the LifeWatch acquisition. On an organic basis, Healthcare revenue grew 16%. The organic revenue growth stemmed from higher mobile cardiac telemetry (MCT) and extended Holter patient volume as well as a favorable payor mix. The Research revenue increase was driven by higher imaging volume from oncology studies as well as increased cardiac revenue from early phase studies. The strength in Healthcare and Research revenue was partially offset by lower Other revenue due to several large product sales in the second quarter of 2017.
Gross Profit
 Three Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Gross profit$65,755
 $35,967
 $29,788
 82.8%
Percentage of revenues64.9% 61.9%    
Gross profit for the three months ended SeptemberJune 30, 2016, reflecting an increase of $27.9 million, or 52.7%.  Healthcare revenue2018 increased $29.1 million due to the impact of the LifeWatch acquisition, organic revenue growth and realized synergies from our acquisition of LifeWatch, which accounted for $27.4 million in revenue, as well as increased patient volumes and a favorable product mix, partially offset by a reduction in MCT Medicare pricing effective January 1, 2017.  Research revenue decreased $1.1 million, due to lower cardiac study volumes.  Technology revenue was consistent with the prior year quarter.

Gross Profit.  Gross profit increased to $49.1 million for the three months ended September 30, 2017 from $32.9 million for the three months ended September 30, 2016, reflecting anacquisitions. The 300 basis point increase of $16.2 million, or 49.3%.  Gross profit as a percentage of revenues was 60.6% for the three months ended September 30, 2017 compared to 61.9% for the three months ended September 30, 2016.  The decrease in gross margin percentage was due to the impact of our recent acquisitions, which carry lower profit margins than our existing business, as well assynergies resulting from the aforementioned reduction in MCT Medicare pricing effective January 1, 2017.

integration of LifeWatch.

General and Administrative Expense.Expense
 Three Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
General and administrative expense$28,741
 $14,366
 $14,375
 100.1%
Percentage of revenues28.4% 24.7%    
General and administrative expense was $25.3 millionincreased for the three months ended SeptemberJune 30, 2017 compared2018 due to $13.9the $10.4 million impact of the LifeWatch acquisition, $3.3 million of additional intangible asset amortization attributable to LifeWatch, $2.0 million of additional headcount related expense and $1.3 million higher stock compensation expense, partially offset by $2.6 million in synergies stemming from the integration of LifeWatch.


Sales and Marketing Expense
 Three Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Sales and marketing expense$11,075
 $7,631
 $3,444
 45.1%
Percentage of revenues10.9% 13.1%    
The increase in sales and marketing expense for the three months ended SeptemberJune 30, 2016.  The increase2018 was due primarily to the $5.1 million of $11.4the LifeWatch acquisition, partially offset by $1.2 million or 82.8%, wasof synergies due to the additionintegration of $11.1 million from the acquisition of LifeWatch as well as a $0.3 millionLifeWatch.
Bad Debt Expense
 Three Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Bad debt expense$6,875
 $2,416
 $4,459
 184.6%
Percentage of revenues6.8% 4.2%    
The increase in consulting expenses, partially offset by acquisition synergies.  As a percent of total revenues, general and administrativebad debt expense was 31.3% for the three months ended SeptemberJune 30, 2017 compared to 26.1% for the three months ended September 30, 2016.

Sales and Marketing Expense.  Sales and marketing expense was $9.7 million for the three months ended September 30, 2017 compared to $7.0 million for the three months ended September 30, 2016.  The increase of $2.7 million, or 38.5%,2018 was due to a $3.2 million increase from the acquisition of LifeWatch, partially offset by a $0.5 million decrease in travel and meeting expenses dueprimarily to the timing$2.6 million impact of sales meetings and tradeshows.  As a percent of total revenues, sales and marketing expense was 12.0% for the three months ended September 30, 2017 compared to 13.2% forLifeWatch acquisition, the three months ended September 30, 2016.

Bad Debt Expense.  Bad debt expense was $3.8 million for the three months ended September 30, 2017 compared to $2.5 million for the three months ended September 30, 2016.  The increase of $1.3 million, or 51.0%, was due to increased Healthcare revenue from our acquisition of LifeWatch and the timing of revenues and collections.  As a percentage of total revenues, bad debt expense was 4.7% for the three months ended September 30, 2017 and for the three months ended September 30, 2016.  Substantially all of our bad debt expense relates to the Healthcare segment.collections, as well as a $1.1 million specific reserve related to a customer bankruptcy in the Corporate and Other category. Bad debt expense in the Research and Technology segments was minimal and is recorded on a specific account basis.

Research and Development Expense.Expense
 Three Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Research and development expense$2,733
 $2,515
 $218
 8.7%
Percentage of revenues2.7% 4.3%    
Research and development expense was $3.3 million for the three months ended September 30, 2017 compared to $2.1 million for the three months ended September 30, 2016.  The increase of $1.2 million, or 53.3%, was due to the addition of $0.6 million from the acquisition of LifeWatch, a $0.3 million increase in consulting services related to the development of new hardware, as well as a $0.2 million increase in employee related costs.  As a percent of total revenues, research and development expense was 4.0% for the three months ended September 30, 2017 and September 30, 2016.

Other Charges.  During the three months ended September 30, 2017, we incurred $8.2 million of other charges primarily related to legal and professional fees, as well as severance costs related to the acquisition of LifeWatch.  For the three months ended September 30, 2017, other charges were 10.1% of total revenues.

During the three months ended September 30, 2016, we incurred $2.4 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 September 30, 2016, other charges were 4.5% of total revenues.

Interest Expense.  Interest expense was $1.9 million for the three months ended September 30, 2017 compared to $0.5 million for the three months ended September 30, 2016.  The increase was primarily due to the interest from the $205.0 million term loan entered into in July 2017.

Loss on Extinguishment of Debt.  Loss on extinguishment of debt was $0.5 million for the three months ended September 30, 2017 and represented a write off of the unamortized debt issuance costs when we paid off our General Electric Credit Agreement in July 2017.  There was no loss on extinguishment of debt for the three months ended September 30, 2016.

Loss on Equity Method Investment.  Loss on equity method investment was $0.1 million for the three months ended September 30, 2017 and 2016, respectively.

Other non-operating income (expense), net.  Other non-operating income was $0.7 million for the three months ended September 30, 2017 compared to a nominal expense for the three months ended SeptemberJune 30, 2016.  The increase was2018 increased due primarily to the $0.8 million impact of the LifeWatch acquisition, offset partially by $0.7 million of synergies realized from the integration of LifeWatch.

Other Charges
 Three Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Other charges$5,208
 $4,651
 $557
 12.0%
Percentage of revenues5.1% 8.0%    
Other charges for the three months ended June 30, 2018 were due primarily to $2.2 million for the continued integration and restructuring activities related to the LifeWatch acquisition, a $1.8 million reserve for a note receivable with a bankrupt customer, $0.8 million for patent litigation and $0.4 million of other expenses, including legal and depreciation.


Other charges for the three months ended June 30, 2017 were due to a gain of $1.3$3.4 million for a settlementtransaction costs, primarily legal and professional fees, associated with a former ownerthe LifeWatch acquisition, $0.7 million for patent litigation and $0.6 million related to other restructuring and nonrecurring activities.
Other Expense
 Three Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Interest expense$(2,684) $(392) $(2,292) 584.7 %
Loss on equity method investment(45) (101) 56
 (55.4)%
Other non-operating income/(expense), net550
 (899) 1,449
 (161.2)%
Total Other expense$(2,179) $(1,392) $(787) 56.5 %
Percentage of revenues2.2% 2.4%    
Total other expense for the three months ended June 30, 2018 was affected by $2.3 million of Mednet,additional interest expense resulting from the new Credit Agreement entered into concurrent with the LifeWatch acquisition and $0.3 million of interest related to the ZTech ruling (see “Part I; Item 1. Financial Statements; Notes to Consolidated Financial Statements; Note 15. Legal Proceedings”), partially offset by $0.4an unrealized foreign exchange gain of $1.0 million related toassociated with our uncertain tax positions. Other non-operating expense for the write offthree months ended June 30, 2017 was impacted by a $0.9 million change in the fair value of a foreign currency option purchased in connection with the derivative instrument premium.

LifeWatch acquisition.

Income Taxes.Taxes
 Three Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Benefit from/(provision for) income taxes$1,500
 $(1,270) $2,770
 (218.1)%
Effective tax rate16.8% (42.4)%    
For the three months ended SeptemberJune 30, 2018, we recognized an income tax benefit due primarily to a discrete benefit recorded for equity compensation deductions. For the three months ended June 30, 2017, we recorded an income tax benefit of $0.4 million.expense. 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 35%in the range of 14% to 16%, absent changes in tax laws or significant changes in uncertain tax positions.  For the three months ended September 30, 2016, we recorded an income tax expense of $0.1 million.

Net Loss Attributable to Noncontrolling Interests.  The amount of net loss attributable to noncontrolling interests of $0.3 million for the three months ended September 30, 2017 is related to the post-acquisition activity of the 1.5% of LifeWatch shares that we have not yet acquired and the 45% of LifeWatch Turkey that we do not own.

Net Income (Loss) Attributable to BioTelemetry, Inc.  We recognized a net loss attributable to BioTelemetry of $2.3 million for the three months ended September 30, 2017 compared to net income attributable to BioTelemetry of $4.2 million for the three months ended September 30, 2016.

Nine



Six Months Ended SeptemberJune 30, 20172018 and 2016

Revenues.June 30, 2017

Revenues
 Six Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Healthcare$167,274
 $86,581
 $80,693
 93.2 %
Research23,790
 18,886
 4,904
 26.0 %
Other4,792
 8,543
 (3,751) (43.9)%
Total revenues$195,856
 $114,010
 $81,846
 71.8 %
Total revenues for the ninesix months ended SeptemberJune 30, 2017 were $195.0 million compared to $154.4 million for the nine months ended September 30, 2016, reflecting an2018 increased 71.8%, driven by a 93.2% increase of $40.6 million, or 26.3%.in Healthcare revenue increased $32.4 million primarilyand a 26% increase in Research revenue. The Healthcare revenue increase was due to our acquisition of LifeWatch, which accounted for $27.4 milliona 66% increase in revenue, and increasedHealthcare patient volumes and a favorable product mix, partially offset by a reduction in MCT Medicare pricing effective January 1, 2017.  Research revenue increased $4.5 millionvolume due to the impact of the LifeWatch acquisition. On an organic basis, Healthcare revenue grew 14%. The organic revenue growth instemmed from higher MCT and extended Holter patient volume as well as the full year impact of the acquisition of thea favorable payor mix. The Research revenue increase was driven by higher imaging business, VirtualScopics, which occurred during the second quarter of 2016,volume. The strength in Healthcare and Research revenue was partially offset by lower cardiac study volumes.  TechnologyOther revenue increased $3.7 million, due to several large product sales in the acquisitionfirst half of Telcare during the fourth quarter of 2016.

2017.

Gross Profit.Profit
 Six Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Gross profit$123,803
 $68,876
 $54,927
 79.7%
Percentage of revenues63.2% 60.4%    
Gross profit increased to $117.9 million for the ninesix months ended SeptemberJune 30, 20172018 increased due primarily to the impact of the LifeWatch acquisition, the organic revenue growth and realized synergies from $96.4 million for the nine months ended September 30, 2016, reflecting anour acquisitions. The 280 basis point increase of $21.5 million, or 22.3%.  Gross profit as a percentage of revenues was 60.5% for the nine months ended September 30, 2017 compared to 62.5% for the nine months ended September 30, 2016.  The decrease in gross margin percentage was due to the impact of our recent acquisitions, which carry lower profit margins than our existing business, as well assynergies resulting from the aforementioned reduction in MCT Medicare pricing effective January 1, 2017.

integration of LifeWatch.

General and Administrative Expense.Expense
 Six Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
General and administrative expense$55,460
 $30,283
 $25,177
 83.1%
Percentage of revenues28.3% 26.6%    
General and administrative expense was $55.6 millionincreased for the ninesix months ended SeptemberJune 30, 2017 compared2018 due primarily to $40.6the $19.6 million impact of the LifeWatch acquisition, $6.6 million of intangible asset amortization attributable to LifeWatch and $3.7 million of additional headcount-related expense, partially offset by $4.2 million in synergies stemming from the integration of LifeWatch.


Sales and Marketing Expense
 Six Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Sales and marketing expense$22,415
 $15,332
 $7,083
 46.2%
Percentage of revenues11.4% 13.4%    
The increase in sales and marketing expense for the ninesix months ended SeptemberJune 30, 2016.  The increase of $15.0 million, or 37.0%,2018 was due to the addition$10.4 million impact of $11.1 million from the LifeWatch acquisition of LifeWatch, $1.4 million of additional employee related costs, aand $1.0 million increase in technology costs and a $0.8 million increase in consultingdue to higher sales meeting costs, partially offset by $4.0 million of synergies relateddue to the acquisitions.  As a percentintegration of total revenues, generalLifeWatch and administrative$0.4 million of lower training and travel costs.
Bad Debt Expense
 Six Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Bad debt expense$11,754
 $5,207
 $6,547
 125.7%
Percentage of revenues6.0% 4.6%    
The increase in bad debt expense was 28.5% for the ninesix months ended SeptemberJune 30, 2017 compared to 26.3% for the nine months ended September 30, 2016.

Sales and Marketing Expense.  Sales and marketing expense was $25.1 million for the nine months ended September 30, 2017 compared to $21.7 million for the nine months ended September 30, 2016.  The increase of $3.4 million, or 15.5%,2018 was due to a $3.2the $4.4 million increase related toimpact of the LifeWatch acquisition, of LifeWatch and a $2.0 million 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 12.8% for the nine months ended September 30, 2017 compared to 14.0% for the nine months ended September 30, 2016.

Bad Debt Expense.  Bad debt expense was $9.0 million for the nine months ended September 30, 2017 compared to $7.8 million for the nine months ended September 30, 2016.  The increase of $1.2 million, or 15.1%, was due to increased Healthcare revenue due in part to our acquisition of LifeWatch and the timing of revenuesHealthcare collections, as well as a $1.1 million specific reserve related to a customer bankruptcy in the Corporate and collections.  As a percentage of total revenues, bad debt expense was 4.6% for the nine months ended September 30, 2017 compared to 5.1% for the nine months ended September 30, 2016.  Substantially all of our bad debt expense relates to the Healthcare segment.Other category. Bad debt expense in the Research and Technology segments was minimal and is recorded on a specific account basis.

Research and Development Expense.Expense
 Six Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Research and development expense$6,022
 $4,948
 $1,074
 21.7%
Percentage of revenues3.1% 4.3%    
Research and development expense was $8.2 million for the ninesix months ended SeptemberJune 30, 2017 compared to $5.9 million for the nine months ended September 30, 2016.  The increase of $2.3 million, or 39.7%, was2018 increased due to the addition$1.7 million impact of $0.6the LifeWatch acquisition, offset partially by $0.9 million of synergies realized from the acquisitionintegration of LifeWatch.
Other Charges
 Six Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Other charges$10,293
 $6,390
 $3,903
 61.1%
Percentage of revenues5.3% 5.6%    
Other charges for the six months ended June 30, 2018 were due to $7.2 million related to the integration of LifeWatch, a $1.0$1.8 million increase in consulting services related to the development of our next generation devicereserve for a note receivable with a bankrupt customer, $1.2 million for patent litigation and a $0.6 million increase in employee related costs.  As a percent of total revenues, research and development expense was 4.2% for the nine months ended September 30, 2017 compared to 3.8% for the nine months ended September 30, 2016.

Other Charges.  During the nine months ended September 30, 2017, we incurred $14.5$0.8 million of other charges primarilyexpenses including legal, professional fees and depreciation, partially offset by a $0.7 million reduction in contingent consideration related to a 2016 acquisition.



Other charges for the six months ended June 30, 2017 were due to $5.0 million for transaction costs, primarily legal and professional fees, as well as severance costsassociated with the LifeWatch acquisition, $0.6 million related to other restructuring activities, $0.5 million for patent litigation and $0.3 million of other expenses.
Other Expense
 Six Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Interest expense$(4,574) $(781) $(3,793) 485.7 %
Loss on equity method investment(184) (196) 12
 (6.1)%
Other non-operating income/(expense), net737
 (3,413) 4,150
 (121.6)%
Total Other expense$(4,021) $(4,390) $369
 (8.4)%
Percentage of revenues2.1% 3.9%    
Total other expense for the six months ended June 30, 2018 was affected by $3.8 million of additional interest expense resulting from the new SunTrust Credit Agreement entered into concurrent with the LifeWatch acquisition and $0.3 million of interest related to the acquisition of LifeWatch.  These charges wereZTech ruling (see “Part I; Item 1. Financial Statements; Notes to Consolidated Financial Statements; Note 15. Legal Proceedings”), partially offset by a $2.0an unrealized foreign exchange gain of $1.0 million decrease in fair value of acquisition-related contingent consideration.  For the nine months ended September 30, 2017, other charges were 7.5% of total revenues.

During the nine months ended September 30, 2016, we incurred $5.8 million of other charges primarily related to legal fees for patent litigation as well as professional services related toassociated with our acquisitions.  For the nine months ended September 30, 2016, other charges were 3.8% of total revenues.

Interest Expense.  Interest expense was $2.6 million for the nine months ended September 30, 2017 compared to $1.4 million for the nine months ended September 30, 2016.  The increase was primarily due to the interest from the $205.0 million term loan entered into in July 2017.

Loss on Extinguishment of Debt.  Loss on extinguishment of debt was $0.5 million for the nine months ended September 30, 2017 and represented a write off of the unamortized debt issuance costs when we paid off our General Electric Credit Agreement in July 2017.  There was no loss on extinguishment of debt for the nine months ended September 30, 2016.

Loss on Equity Method Investment.  Loss on equity method investment was $0.3 million for the nine months ended September 30, 2017 compared to $0.2 million for the nine months ended September 30, 2016.

uncertain tax positions. Other non-operating expense net.  Other non-operating expense was $2.8 million for the ninesix months ended SeptemberJune 30, 2017 compared to other expense of $0.1 million for the nine months ended September 30, 2016.  The increase was primarily due to a non-operating charge ofimpacted by $2.5 million recorded in the first quarter ofassociated with our 2017 for a settlement with the United States Department of Health and Human Services - Office for Civil Rights related to the theft of two unencrypted laptop computers in 2011 and the $0.9 million change in the fair value of a $1.3 million charge related toforeign currency option purchased in connection with the write off of the derivative instrument premium, partially offset by a gain of $1.3 million for a settlement with a former owner of Mednet.

LifeWatch acquisition.

Income Taxes.Taxes
 Six Months Ended Change
(in thousands, except percentages)June 30,
2018
 June 30,
2017
 $ %
Benefit from/(provision for) income taxes$1,642
 $(404) $2,046
 (506.4)%
Effective tax rate11.9% (17.4)%    
For the ninesix months ended SeptemberJune 30, 2018, we recognized an income tax benefit due primarily to a discrete benefit recorded for equity compensation deductions. For the three months ended June 30, 2017, we recorded a nominal income tax benefit.expense. 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 35%in the range of 14% to 16%, absent changes in tax laws or significant changes in uncertain tax positions.  For the nine months ended September 30, 2016, we recorded an income tax benefit of $0.1 million.

Net Loss Attributable to Noncontrolling Interests.  The amount of net loss attributable to noncontrolling interests of $0.3 million for the nine months ended September 30, 2017 is related to the post-acquisition activity of the 1.5% of LifeWatch shares that we have not yet acquired and the 45% of LifeWatch Turkey that we do not own.

Net Income (Loss) attributable to BioTelemetry, Inc.  We recognized a net loss attributable to BioTelemetry of $0.4 million for the nine months ended September 30, 2017 compared to net income attributable to BioTelemetry of $13.0 million for the nine months ended September 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

The following table highlights certain information related to our liquidity contractual obligations and commitments.  capital resources:
(in thousands, except ratios)June 30,
2018
 December 31,
2017
Cash and cash equivalents$39,434
 $36,022
Healthcare accounts receivable, net of allowance for doubtful accounts35,332
 25,190
Other accounts receivable, net of allowance for doubtful accounts14,601
 13,296
Availability under revolving credit facility50,000
 50,000
    
Working capital$59,249
 $39,153
Current ratio2.3
 1.8
    
Total capital lease obligations$3,536
 $5,509
Total debt$198,953
 $199,356
The information presented below updates and should be read in conjunction with the information disclosed in that Form 10-K.

As of September 30, 2017, our principal source of liquidity wasfollowing table highlights certain cash and cash equivalents of $26.2 million and net healthcare and other accounts receivables of $36.8 million.  We had working capital of $29.5 million as of September 30, 2017.

We generated $10.7 million of cash from operations for the nine months ended September 30, 2017.  Our ongoing operations during the nine months ended September 30, 2017 resulted in a net loss of $0.6 million, which included $29.8 million of non-cash itemsflow activities:

 Six Months Ended
(in thousands)June 30,
2018
 June 30,
2017
Net income$15,480
 $1,922
Non-cash adjustments to net income33,342
 17,447
Cash used for working capital(32,686) (8,636)
Cash provided by operating activities16,136
 10,733
    
Cash used in investing activities(9,937) (7,869)
    
Cash (used in)/provided by financing activities$(2,621) $963
Non-cash adjustments to income primarily relatedrelate to bad debt, depreciation, amortization and stock-basedstock compensation expense. These items were partially offset by $18.5For the six months ended June 30, 2018, our non-cash adjustments increased compared to the comparative prior year period due primarily to $6.7 million of cash used for working capital.

We used $180.0increased amortization, $5.7 million of cash in investing activities for the nine months ended September 30, 2017.  We used $166.2increased depreciation and $6.5 million of cash, net of cash acquired, forincreased bad debt expense, predominantly related to the acquisition of LifeWatch, and $11.9offset partially by a $3.3 million of cash for capital purchases primarily related to medical devicesincrease in the Healthcare and Research segments for use in our ongoing operations and an investment in internally developed software for the nine months ended September 30, 2017.

non-cash tax benefit.

In Julyconjunction with the LifeWatch acquisition in 2017, we entered intoestablished a $205.0 million term loan and a $50.0 million revolving credit facilitynew Credit Agreement with SunTrust Bank as a lender and an agent forlenders named therein in the lenders.  The proceedsamount of the Loans were used pay off our General Electric Credit Agreement balance of $24.9$205.0 million and acquired LifeWatch debt of $3.0 million, pay a portion ofextinguished the consideration for the acquisition of LifeWatchprevious Healthcare Financial Solutions, LLC Credit Agreement. For further details regarding these agreements, please see “Part II; Item 8. Financial Statements and pay related transaction fees and expenses for the acquisition of LifeWatch.  At September 30, 2017, the revolving credit facility remained undrawn.

Supplementary Data; Notes to Consolidated Financial Statements; Note 10. Credit Agreement”Contractual Obligations and Commitments

Our contractual obligations reflected in Part II, Item 7 of our 2016 Annual Report on Form 10-K for the fiscal year ended December 31, 2016 have materially changed as a result of the LifeWatch acquisition.  Except for the debt obligation as of December 31, 2016, which was refinanced with SunTrust Bank in conjunction with the LifeWatch acquisition, our existing obligations at December 31, 2016 have not materially changed.  Below are the updates to the undiscounted payment commitments as of September 30, 2017 in conjunction with the LifeWatch acquisition and the related SunTrust refinancing:

 

 

(in thousands)
Payments due by period

 

Contractual obligations

 

Total

 

2017

 

2018

 

2019

 

2020

 

2021

 

Beyond

 

Additional operating lease obligations

 

$

6,081

 

$

772

 

$

2,763

 

$

1,100

 

$

616

 

$

577

 

$

253

 

Additional capital lease obligations

 

7,652

 

1,239

 

4,561

 

1,763

 

89

 

 

 

Revised debt principal repayment obligations*

 

$

205,000

 

 

$

2,050

 

$

5,125

 

$

15,375

 

$

20,500

 

$

161,950

 

2017.

* the accrued interest has been excluded from these amounts as the rate is variable, determined annually, as defined by the credit agreement.



Item 3. Quantitative and Qualitative Disclosures aboutAbout Market Risk

Our cash balanceand cash equivalents as of SeptemberJune 30, 2017 was $26.22018 were $39.4 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 SeptemberJune 30, 2017,2018, we had $205.0$199.0 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 II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 10. Credit Agreement” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

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 SeptemberJune 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.  This evaluation of  the effectiveness of the Company’s internal control over financial reporting did not include the internal controls of LifeWatch, which was acquired in the third quarter of 2017, due to the timing of the acquisition.  LifeWatch will be included in our evaluation of  the effectiveness of the Company’s internal control over financial reporting for periods beginning after January 1, 2018.

Changes in Internal Control over Financial Reporting

On July 12, 2017, we completed the acquisition of LifeWatch.  We are in the process of integrating the acquired LifeWatch entities and our management is in the process of evaluating any related changes to our internal control over financial reporting as a result of this integration.  Except for any changes relating to this integration, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the nine months ended September 30, 2017, that materially affected or are reasonably likely to materially affect our internal control over financial reporting.




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 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

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

2.1

Transaction Agreement by and among Lifewatch AG, Biotelemetry, Inc. and Cardiac Monitoring Holding Company, LLC, dated April 4, 2017.

10.1

Credit Agreement

Incorporated by and among Biotelemetry, Inc. and SunTrust Bank, as agent for the lenders and swingline lender, dated July 12, 2017.

Reference
Filed/Furnished Herewith

31.1

Exhibit
Number

Description

FormFile No.ExhibitFiling Date
31.1

31.2

31.2

32

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

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: November 7, 2017

July 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)

34



45