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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2017

 

OR

 

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

 

For the transition period from            to

 

Commission File Number 000-55039

 

BioTelemetry, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

(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  x   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  x   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  o		Accelerated filer  x
Non-accelerated filer o		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   x

 

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

 

 

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BIOTELEMETRY, INC.

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

TABLE OF CONTENTS

 

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	24
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
SIGNATURES		26

 

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Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” “BioTelemetry” and the “Company,” as used in this 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 refer only to BioTelemetry, Inc. exclusive of its subsidiaries or a specific subsidiary of BioTelemetry, Inc.

 

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 of our products and our confidence in our future. These statements may be identified by words such as “expect,” “anticipate,” “estimate,” “intend,” “plan,” “believe,” “promises” and other words and terms of similar meaning. Examples of forward-looking statements include statements we make regarding our ability to increase demand for our products and services, to leverage our Mobile Cardiac Outpatient Telemetry TM  (“MCOT TM ”) platform to expand into new markets, our market share, our expectations regarding revenue trends in our segments and the achievement of cost efficiencies through process improvement and gross margin improvements. Such forward looking statements are based on current expectations and involve inherent risks and uncertainties, including important factors that could delay, divert or change any of these expectations, and could cause actual outcomes and results to differ materially from current expectations. These factors include, among other things:

 

·                   our ability to identify acquisition candidates, acquire them on attractive terms and 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 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 Item 1A. “Risk Factors” of our latest Annual Report on Form 10-K.

 

We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as may be required by law.

 

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PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

BIOTELEMETRY, INC.

CONSOLIDATED BALANCE SHEETS

( In thousands, except share and per share amounts )

 

		(Unaudited)
		June 30, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents		$	26,898		$	23,052
Healthcare accounts receivable, net of allowance for doubtful accounts of $13,407 and $12,198, at June 30, 2017 and December 31, 2016, respectively		15,071			14,594
Other accounts receivable, net of allowance for doubtful accounts of $429 and $665, at June 30, 2017 and December 31, 2016, respectively		13,857			12,261
Inventory		4,121			5,176
Prepaid expenses and other current assets		5,925			4,477
Total current assets		65,872			59,560
Property and equipment, net		26,695			25,823
Intangible assets, net		31,625			33,472
Goodwill		40,963			41,068
Deferred tax asset		36,925			36,636
Other assets		1,872			2,425
Total assets		$	203,952		$	198,984
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	9,188		$	12,425
Accrued liabilities		15,905			13,698
Current portion of capital lease obligations		63			162
Current portion of long-term debt		1,875			1,250
Deferred revenue		5,365			3,972
Total current liabilities		32,396			31,507
Long-term capital lease obligations		93			126
Long-term debt		22,770			23,911
Other long-term liabilities		1,917			4,526
Total liabilities		57,176			60,070
Stockholders’ equity:
Common stock—$.001 par value as of June 30, 2017 and December 31, 2016; 200,000,000 shares authorized as of June 30, 2017 and December 31, 2016; 28,744,176 and 28,261,503 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively		29			28
Paid-in capital		287,562			281,642
Accumulated other comprehensive loss		(15		)	(34		)
Accumulated deficit		(140,800		)	(142,722		)
Total stockholders’ equity		146,776			138,914
Total liabilities and stockholders’ equity		$	203,952		$	198,984

 

See accompanying notes.

 

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BIOTELEMETRY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

( In thousands, except share and per share amounts )

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2017			2016			2017			2016
Revenues:
Healthcare		$	44,070		$	42,165		$	86,581		$	83,314
Research		9,562			7,896			18,886			13,289
Technology		4,497			2,619			8,543			4,717
Total revenues		58,129			52,680			114,010			101,320
Cost of revenues:
Healthcare		14,375			13,470			29,023			26,632
Research		5,581			4,447			11,152			7,702
Technology		2,206			1,842			4,959			3,438
Total cost of revenues		22,162			19,759			45,134			37,772
Gross profit		35,967			32,921			68,876			63,548
Operating expenses:
General and administrative		14,366			14,388			30,283			26,724
Sales and marketing		7,631			7,124			15,332			14,669
Bad debt expense		2,416			2,664			5,207			5,302
Research and development		2,515			1,965			4,948			3,751
Other charges		4,651			1,659			6,390			3,447
Total operating expenses		31,579			27,800			62,160			53,893
Income from operations		4,388			5,121			6,716			9,655
Interest and other loss, net		(1,392		)	(633		)	(4,390		)	(1,056		)
Income before income taxes		2,996			4,488			2,326			8,599
(Provision for) benefit from income taxes		(1,270		)	209			(404		)	195
Net income		$	1,726		$	4,697		$	1,922		$	8,794
Other comprehensive income:
Foreign currency translation gain (loss)		18			(150		)	19			(148		)
Comprehensive income		$	1,744		$	4,547		$	1,941		$	8,646
Net income per common share:
Basic		$	0.06		$	0.17		$	0.07		$	0.32
Diluted		$	0.05		$	0.15		$	0.06		$	0.29
Weighted average number of common shares outstanding:
Basic		28,687,064			27,960,776			28,558,134			27,665,800
Diluted		31,672,842			30,516,302			31,494,079			30,018,887

 

See accompanying notes.

 

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BIOTELEMETRY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

( In thousands )

 

		Six Months Ended June 30,
		2017			2016
OPERATING ACTIVITIES
Net income		$	1,922		$	8,794
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense		5,207			5,302
Depreciation		5,551			5,257
Non-cash lease (benefit) expense		(102		)	27
Deferred income tax expense (benefit)		3			(444		)
Change in fair value of acquisition-related contingent consideration		(605		)	—
Change in fair value of derivative instrument		898			—
Equity method investment loss		196			114
Stock-based compensation		4,200			2,619
Amortization of intangibles		1,989			1,673
Accretion of discount on debt		110			109
Changes in operating assets and liabilities:
Healthcare and other accounts receivables		(7,280		)	(5,866		)
Inventory		845			(786		)
Prepaid expenses and other assets		(289		)	391
Accounts payable		(3,237		)	1,789
Accrued and other liabilities		1,325			(1,453		)
Net cash provided by operating activities		10,733			17,526
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired		—			(17,970		)
Purchases of property and equipment and investment in internally developed software		(6,197		)	(5,692		)
Purchases of derivative instrument		(1,322		)	—
Investment in equity method investee		(350		)	—
Net cash used in investing activities		(7,869		)	(23,662		)
FINANCING ACTIVITIES
Proceeds related to the exercising of stock options and employee stock purchase plan		3,602			1,236
Tax payments related to the vesting of shares		(1,881		)	(2,325		)
Borrowings under revolving loans		—			14,500
Principal payments on long-term debt		(626		)	(635		)
Principal payments on capital lease obligations		(132		)	(183		)
Net cash provided by (used in) financing activities		963			12,593
Effect of exchange rate changes on cash		19			—
Net increase in cash and cash equivalents		3,846			6,457
Cash and cash equivalents - beginning of period		23,052			18,986
Cash and cash equivalents - end of period		$	26,898		$	25,443
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash purchases of property and equipment		$	498		$	—
Cash paid for interest		$	648		$	654
Cash paid for taxes		$	1,232		$	132

 

See accompanying notes.

 

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BIOTELEMETRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

( In thousands, except share and per share amounts )

 

1.               Summary of Significant Accounting Policies

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows.  In the opinion of management, these consolidated financial statements reflect all adjustments which are of a normal recurring nature and necessary for a fair presentation of BioTelemetry, Inc.’s (“BioTelemetry,” “Company,” “we,” “our” or “us” ) financial position as of June 30, 2017 and December 31, 2016, the results of operations for the three months and six months ended June 30, 2017 and 2016 and cash flows for the six months ended June 30, 2017 and 2016.  The financial data and other information disclosed in these notes to the consolidated financial statements related to the three and six months ended June 30, 2017 and 2016 are unaudited.  The results for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for any future period.

 

Net Income Per Share

 

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

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2017			2016			2017			2016
Numerator:
Net income		$	1,726		$	4,697		$	1,922		$	8,794
Denominator:
Weighted average shares used in computing basic net income per share		28,687,064			27,960,776			28,558,134			27,665,800
Potential dilutive common shares due to dilutive stock option and restricted stock units		2,985,778			2,555,526			2,935,945			2,353,087
Weighted average shares used in computing diluted net income per share		31,672,842			30,516,302			31,494,079			30,018,887
Net income per share:
Basic net income per share		$	0.06		$	0.17		$	0.07		$	0.32
Diluted net income per share		$	0.05		$	0.15		$	0.06		$	0.29

 

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

 

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.  Unobservable inputs are inputs that reflect the Company’s 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.

 

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

 

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

 

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

 

Our financial instruments consist primarily of cash and cash equivalents, Healthcare accounts receivable, other accounts receivable, accounts payable, short-term debt and long-term debt.  With the exception of the 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 long-term debt, based on the borrowing rates currently available, the fair value was determined to be $25,188 as of June 30, 2017.  This is equal to the nominal value, which is the carrying value, exclusive of debt discount and deferred charges (classified as Level 2).

 

The fair value of contingent consideration 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).  Adjustments to contingent consideration are recorded under other charges.

 

In addition to the recurring fair value measurements, the fair value of assets acquired and liabilities assumed in connection with a business combination are recorded at the acquisition date, primarily using a discounted cash flow model (classified as Level 3).  This valuation technique requires the Company 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 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.  This derivative instrument was not designated as a hedge for accounting purposes.  The derivative instrument is recorded at fair value in the consolidated balance sheet as a component of prepaid expenses and other current assets and the changes to the fair value of the instrument are recorded as a component of interest and other loss, net in the consolidated statements of operations and comprehensive income.

 

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

 

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

 

		Derivative instruments
Balance at December 31, 2016		$	—
Premium paid on derivative instrument		1,322
Change in fair value		(898		)
Balance at June 30, 2017		$	424

 

Equity Method Investments

 

We account for investments using the equity method of accounting if the investment provides us the ability to exercise significant influence, but not control, over the investee.  Significant influence is generally deemed to exist if the Company’s ownership interest in the voting stock of the investee ranges between 20% and 50%, although other factors, such as representation on the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate.  Under the equity method of accounting, the investment is recorded at cost in the consolidated balance sheet as a component of other assets and is periodically adjusted for capital contributions, dividends received and our share of the investee’s earnings or losses together with other-than-temporary impairments which are recorded as a component of interest and other loss, net in the consolidated statements of operations and comprehensive income.

 

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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 reporting units, then the second step of the impairment test is performed in order to determine the implied fair value of the reporting units’ goodwill.  If the carrying value of the reporting units’ goodwill exceeds the implied fair value of those reporting units, an impairment loss equal to the difference is recorded.

 

For the purpose of performing our goodwill impairment analysis, we consider our business to be comprised of three reporting units:  Healthcare, Research and Technology.  We calculate the fair value of the reporting units utilizing a weighting of the income and market approaches.  The income approach is based on a discounted cash flow methodology that includes assumptions for, among other things, forecasted income, cash flow, growth rates, income tax rates, expected tax benefits and long-term discount rates, all of which require significant judgment.  The market approach utilizes our market data.  There are inherent uncertainties related to these factors and the judgment applied in the analysis.  We believe that the combination of an income and a market approach provides a reasonable basis to estimate the fair value of our reporting units.

 

Acquired intangible assets are recorded at fair value on the acquisition date.  The estimated fair values and useful lives of intangible assets are determined by assessing many factors including estimates of future operating performance and cash 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”) issued Accounting Standards Update (“ASU”) 2016-09,  Improvements to Employee Share-Based Payment Accounting . The standard revises the accounting for certain aspects of share-based compensation arrangements and requires any excess tax benefits or tax deficiencies to be recorded directly in the income statement when such awards vest or settle. In addition, the cash flows related to any excess tax benefits will no longer be separately classified as a financing activity, but will rather be classified as an operating activity, along with all other income tax cash flows. The standard also makes certain changes to the way the treasury stock method is applied when calculating diluted net income per share, as well as allows for a policy election to account for forfeitures as they occur, rather than using the estimation method currently prescribed by ASC 718. 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, 2016 will be recognized prospectively in the income statement during the period of adoption.

 

Upon adoption, we recognized all previously unrecognized tax benefits which resulted in a cumulative-effect adjustment of $1,752 to our accumulated deficit. These previously unrecognized tax benefits were recorded as a deferred tax asset, which was fully offset by a valuation allowance on January 1, 2016, thus there was no net impact from the adoption of ASU 2016-09 as of the same date. In addition, we recognized excess tax benefits as an adjustment to our previously reported (provision for) income taxes of $362 and $489 for the three and six months ended June 30, 2016, respectively. Corresponding adjustments were recorded in the operating section of our statement of cash flows for the six months ended June 30, 2016. The weighted average number of common shares outstanding for calculating diluted net income per share increased by 459,585 and 399,591 for the three and six months ended June 30, 2016.

 

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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, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory . The standard requires inventory to be measured at the lower of cost or net realizable value. The guidance will not apply to inventories for which cost is determined using the last-in, first-out method or the retail inventory method. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

Accounting Pronouncements Not Yet Adopted

 

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 excess of a reporting unit’s carrying value over its fair value. A prospective transition approach is required. The standard is effective for annual and interim reporting periods beginning after December 15, 2019 with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017. 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.

 

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

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which has been updated through several revisions and clarifications since its original issuance. The standard will require revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration which a company expects to receive in exchange for those goods or services. The standard also requires new, expanded disclosures regarding revenue recognition. The standard will be effective January 1, 2018 with early adoption permissible beginning January 1, 2017.

 

We are continuing to evaluate the impact that ASU 2014-09 will have on our consolidated financial statements and related disclosures.  As we continue the evaluation and implementation process, we expect that there will be an impact to our financial reporting disclosures as well as any related business operations processes and Internal Controls Over Financial Reporting (“ICFR”).  As part of the assessment performed through the date of this filing, we have created an implementation working group, which includes internal and third-party resources.  As part of our implementation plan, 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 are continuing to assess what impact the new accounting standard will have on those activities, and;

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

 

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

 

·                   Healthcare Revenue — the valuation of our Healthcare revenue and accounts receivable, including whether differences between our list prices and negotiated contractual rates for our healthcare monitoring services constitute price concessions or acceptance of the customer’s credit risk and how this impacts the timing of our healthcare revenue recognition. Our current accounting policy is revenue is recognized upon agreed upon reimbursement rates. If we do not have agreed upon reimbursement rates, we recognize revenue based on historical experience, or if no historical experience, when cash is received. Adjustments to the estimated net realizable value, based on final settlement with the third-party payors, are recorded upon settlement.

·                   Research revenue — the treatment of our long-term research contracts, including whether the various services promised in these contracts are distinct performance obligations, and the pattern of revenue recognition for these services. Under our current accounting policy, revenue for our Research segment is provided on a fee-for-service basis, and revenue is recognized as the related services are performed.  Unearned revenue, including upfront deposits, are deferred, and then recognized as the services are performed.

 

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·                   Technology revenue — Our preliminary assessment was we do not expect the standard to have a material impact on Technology revenue.  We are confirming this assessment through various procedures, including evaluating the timing of revenue recognition for product shipments. Under our current accounting policy, revenue in our Technology segment is received from the sale of products, product repair and supplies which are recognized when shipped, or as service is completed.

·                   Contract Costs - We are continuing to assess the impact of ASU 2014-09 on the costs to acquire and fulfill our customer contracts, including whether we can apply the practical expedient of expensing contract costs when incurred if the amortization period of the asset that we would have recognized is one year or less. Currently, our accounting policy is to expense contract costs as they are incurred.

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

 

Significant assessment and implementation matters to be addressed prior to adopting ASU 2014-09 include completing our review of customer contracts, confirming our transition method of adoption, determining the impact the new accounting standard will have on our consolidated financial statements and related disclosures and updating, as needed, our business processes, systems and controls required to comply with ASU 2014-09 upon its effective date (January 1, 2018). We will make continuous updates to our quarterly and year-end disclosures, with a focus on implementation status updates related to the impact ASU 2014-09 will have on our consolidated financial statements and related footnotes.

 

The assessment and implementation procedures performed through June 30, 2017 have not included LifeWatch AG, which we acquired on July 12, 2017. During the quarter ending September 30, 2017, we will assess the impact of the acquisition on our implementation plan and procedures, which may result in the identification of additional revenue streams.

 

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

 

2.               Acquisitions

 

Telcare, Inc.

 

On December 1, 2016, the Company, through its wholly-owned subsidiary BioTelemetry Care Management, LLC, entered into the Agreement with Telcare pursuant to which the Company acquired the stock of Telcare Medical Supply, Inc. and certain assets of Telcare, Inc. The total consideration paid at closing amounted to $7,000 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 $3,608 of goodwill as a result of the acquisition, all of which has been assigned to the Technology segment. We expect $649 of this goodwill will be deductible for tax purposes.

 

The amounts below represent our preliminary fair value estimates as of June 30, 2017 and are subject to subsequent adjustment as additional information is obtained during the applicable measurement period. A measurement period adjustment was recorded in the second quarter of 2017 reducing the valuation of inventory by $269. The primary areas of these preliminary estimates that are not yet finalized related to certain tangible assets acquired and liabilities assumed, including deferred taxes, as well as the identifiable intangible assets. The Company expects to finalize all accounting for the acquisition of Telcare within one year of the acquisition date.

 

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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		1,522
Prepaid expenses and other current assets		1,261
Property and equipment		55
Other assets		933
Identifiable intangible assets:
Customer relationships		400			5
Technology		2,000			5
Tradename		400			Indefinite
Total identifiable intangible assets		2,800
Total assets acquired		6,806
Fair value of liabilities assumed:
Accounts payable		459
Accrued liabilities		206
Deferred revenue		49
Total liabilities assumed		714
Total identifiable net assets		6,092
Goodwill		3,608
Net assets acquired		$	9,700

 

The 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 June 30, 2016			Six Months Ended June 30, 2016
Revenue		$	53,986		$	103,746
Net Income		$	4,023		$	7,003
Net income per common share:
Basic		$	0.14		$	0.25
Diluted		$	0.13		$	0.23
Weighted average number of common shares outstanding:
Basic		27,960,776			27,665,800
Diluted		30,516,302			30,018,887

 

Contingent Consideration

 

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

 

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

 

		Total Contingent Consideration
Balance at December 31, 2016		$	2,700
Change in fair value of acquisition-related contingent consideration		—
Balance at June 30, 2017		$	2,700

 

VirtualScopics, Inc .

 

On March 25, 2016, the Company, through its wholly-owned subsidiary BioTelemetry Research Acquisition Corporation, entered into a definitive Agreement and Plan of Merger with VirtualScopics, Inc. (“VirtualScopics”), a leading provider of clinical trial imaging solutions.  Under the terms of the Merger Agreement, the Company purchased:  (i) any and all outstanding shares of VirtualScopics’ $0.001 par value common stock for $4.05 per share; (ii) any and all outstanding shares of VirtualScopics’ $0.001 par value Series A and Series B Convertible Preferred Stock for $336.30 per share; and (iii) any and all outstanding shares of VirtualScopics’ $0.001 par value Series C-1 Convertible Preferred Stock for $920.00 per share.  The all cash acquisition of VirtualScopics was completed on May 11, 2016.  The total consideration paid at closing amounted to $14,970, net of cash acquired of $849.

 

The acquisition of VirtualScopics expands the Company’s existing clinical research offerings and gives the Company further access to established customer relationships.  We accounted for the transaction as a business combination, and as such, all assets acquired and liabilities assumed were recorded at their estimated fair values.  The excess of the consideration paid over the fair value of the net assets acquired has been recognized as goodwill, which represents the expected future benefits arising from the assembled workforce and other synergies attributable to cost savings opportunities.  The Company recognized $4,343 of goodwill as a result of the acquisition, all of which has been assigned to the Research segment.  We do not expect that any of this goodwill will be deductible for tax purposes.

 

The amounts below represent our final fair value estimates, which were completed in the second quarter of 2017.  A measurement period adjustment was recorded in the second quarter of 2017 to recognize $292 of deferred tax assets resulting from state NOLs. The total consideration and related allocation for VirtualScopics is summarized as follows:

 

					Weighted
					Average Life
		Amount			(Years)
Fair value of assets acquired:
Cash and cash equivalents		$	849
Other accounts receivable		3,679
Inventory		111
Prepaid expenses and other current assets		396
Property and equipment		500
Deferred taxes		20
Identifiable intangible assets:
Customer relationships		5,200			12
Technology		2,000			10
Backlog		3,100			4
Total identifiable intangible assets		10,300
Total assets acquired		15,855
Fair value of liabilities assumed:
Accounts payable		325
Accrued liabilities		2,945
Current portion of capital lease obligations		59
Current portion of long-term debt		91
Deferred revenue		700
Long-term capital lease obligations		162
Long-term debt		97
Total liabilities assumed		4,379
Total identifiable net assets		11,476
Goodwill		4,343
Net assets acquired		$	15,819

 

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The following unaudited pro forma financial information has been prepared using historical financial results of the Company and VirtualScopics as if the acquisition had occurred as of January 1, 2016.  Certain adjustments related to the elimination of transaction costs and acquisition related indebtedness, as well as the addition of depreciation and amortization related to fair value adjustments on the tangible and identifiable intangible assets acquired, have been reflected for the purposes of the unaudited pro forma financial information presented below.  No adjustments for synergies or certain other expected benefits of the acquisition have been included.  We believe the assumptions used in preparing the unaudited pro forma financial information are reasonable, but not necessarily indicative of actual results should the acquisition have occurred on January 1, 2016.

 

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

 

		Three Months Ended June 30, 2016			Six Months Ended June 30, 2016
Revenue		$	54,762		$	107,258
Net Income		$	5,383		$	10,132
Net income per common share:
Basic		$	0.19		$	0.37
Diluted		$	0.18		$	0.34
Weighted average number of common shares outstanding:
Basic		27,960,776			27,665,800
Diluted		30,516,302			30,018,887

 

ePatch Division of DELTA Danish Electronics, Light, and Acoustics

 

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

 

The ePatch acquisition is expected to generate future cost savings for the Company and will provide control over proprietary components for the Company’s next generation Mobile Cardiac Outpatient Telemetry TM   (“MCOT TM ”) 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.

 

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

 

					Weighted
					Average Life
		Amount			(Years)
Fair value of assets acquired:
Inventory		$	100
Property and equipment		175
Identifiable intangible assets:
Customer relationships		400			10
Technology		2,800			10
Trade names		100			Indefinite
Total identifiable intangible assets		3,300
Total assets acquired		3,575
Fair value of liabilities assumed:
Accrued liabilities		266
Total liabilities assumed		266
Total identifiable net assets		3,309
Goodwill		3,181
Net assets acquired		$	6,490

 

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

 

Contingent Consideration

 

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

 

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

 

		Total Contingent Consideration
Balance at December 31, 2016		$	605
Change in fair value of acquisition-related contingent consideration		(605		)
Balance at June 30, 2017		$	—

 

3.               Inventory

 

Inventory consists of the following:

 

		June 30, 2017			December 31, 2016
Raw materials		$	2,878		$	2,866
Finished goods		1,243			2,310
Total inventory		$	4,121		$	5,176

 

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.

 

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4.               Goodwill

 

Goodwill was recognized at the time of our acquisitions.  The carrying amount of goodwill as of June 30, 2017 and December 31, 2016 was $40,963 and $41,068, respectively.  The decrease in goodwill during the three and six months ended June 30, 2017 is due to purchase 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		)	245			(105		)
Balance at June 30, 2017		$	14,724		$	16,293		$	9,946		$	40,963

 

5.               Equity Method Investment

 

In December 2015, we acquired an ownership interest in Well Bridge Health, Inc. (“WellBridge”) through the conversion of an outstanding note receivable and the related accrued interest.  The investment is accounted for under the equity method. In December 2015, the equity method basis difference of $891 was allocated to equity method goodwill. As of June 30, 2017, our investment in WellBridge represented 31% of its outstanding stock.  A summary of our investment in Wellbridge is as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2017			2016			2017			2016
Beginning balance		$	1,029		$	1,079		$	1,125		$	1,100
Capital contributions		350			—			350			—
Our share of the investee’s losses		(100		)	(93		)	(196		)	(114		)
Ending balance		$	1,279		$	986		$	1,279		$	986

 

6.               Credit Agreement

 

On December 30, 2014, we entered into a Credit Agreement with Healthcare Financial Solutions, LLC (“HFS”), previously the General Electric Capital Corporation, as agent for the lenders (“Lenders”), and as a lender and swingline lender.  Pursuant to the Credit Agreement, the Lenders agreed to make loans to us as follows:  (i) Term Loans in an amount of $25,000 as of the closing date with an uncommitted ability to increase such Term Loans up to an amount not to exceed $10,000 and (ii) Revolving Loans up to $15,000.  As of both June 30, 2017 and December 31, 2016, $3,000 was drawn on the Revolving Loans.  The loan, inclusive of Term Loans and Revolving Loans, is recorded on our consolidated balance sheets as of June 30, 2017 in the amount of $24,645, which is net of a debt discount and deferred charges of $543.

 

The loan bears interest at an annual rate of LIBOR plus 4.0%, subject to a LIBOR floor of 1.0%.  The outstanding principal of the Term Loans will be paid as follows:  (i) beginning April 1, 2015, the principal amount of the Term Loans will be repaid, on a quarterly basis, in installments of $312, plus accrued interest; (ii) beginning January 1, 2018, the principal amount of the Term Loans will be repaid, on a quarterly basis, in installments of $625, plus accrued interest; and (iii) the remaining $16,563, along with any outstanding Revolving Loans, will be paid in full on or before December 30, 2019, or such earlier date upon an acceleration of the Term Loans by the Lenders upon an event of default or termination by us.  The loan is secured by substantially all of our assets and by a pledge of the capital stock of our U.S. based subsidiaries, as well as a pledge of 65% of the capital stock of the Company’s foreign subsidiaries.

 

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

 

7.                                       Stockholders’ Equity

 

Stock-Based Compensation

 

In May 2017, the shareholders and Board of Directors approved the BioTelemetry, Inc. 2017 Omnibus Incentive Plan (“OIP”). The OIP plan replaces the previous stock plan, the BioTelemetry, Inc. 2017 Equity Incentive Plan. Stock options, restricted stock units (“RSUs”), performance stock units (“PSUs”) and performance stock options (“PSOs”) are granted under the OIP. At June 30, 2017, 2,977,927 shares remain available for grant under the OIP.

 

We recognized $1,142 and $1,441 of stock-based compensation expense for the three months ended June 30, 2017 and 2016, respectively. We recognized $4,200 and $2,619 of stock-based compensation expense for the six months ended June 30, 2017 and 2016, respectively.

 

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Stock option and RSU activity is summarized as follows:

 

		Stock Options					Restricted Stock Units
		Number of Shares		Weighted Average Exercise Price			Number of Shares		Weighted Average Grant Date Fair Value
Stock outstanding as of December 31, 2016		3,568,434		$	7.82		592,349		$	9.86
Granted		173,881		24.12			78,991		24.65
Cancelled/forfeited		—		—			—		—
Exercised/vested		(191,998	)	7.45			(176,362	)	8.89
Stock outstanding as of March 31, 2017		3,550,317		$	8.64		494,978		$	12.57
Granted		25,000		31.59			36,623		28.47
Cancelled/forfeited		(85,448	)	17.97			(17,172	)	14.74
Exercised/vested		(82,840	)	7.47			(11,385	)	15.42
Stock outstanding as of June 30, 2017		3,407,029		$	8.60		503,044		$	13.59

 

PSO and PSU activity is summarized as follows:

 

		Performance Stock Options					Performance Stock Units
		Number of Shares		Weighted Average Exercise Price			Number of Shares		Weighted Average Grant Date Fair Value
Stock outstanding as of December 31, 2016		100,000		$	18.33		132,992		$	8.68
Vested		100,000		21.45			—		—
Cancelled/forfeited		—		—			(132,992	)	8.68
Exercised		(30,000	)	18.33			—		—
Stock outstanding as of March 31, 2017		170,000		$	20.17		—		$	—
Vested		—		—			—		—
Cancelled/forfeited		—		—			—		—
Exercised		(20,000	)	18.33			—		—
Stock outstanding as of June 30, 2017		150,000		$	20.41		—		$	—

 

Stock-based compensation expense is only recognized for outstanding PSUs where the performance conditions are deemed probable for achievement. For PSUs deemed probable for achievement, stock-based compensation expense is recognized ratably over the expected vesting period. For the three and six months ended June 30, 2017, no stock-based compensation expense was recognized related to the PSUs. For the three and six months ended June 30, 2016, we incurred PSU expense of $355 and $444, respectively.

 

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

 

Employee Stock Purchase Plan

 

For the six months ended June 30, 2017, 47,966 shares were purchased in accordance with the 2008 Employee Stock Purchase Plan (“2008 ESPP”). Net proceeds from the issuance of shares of common stock under the 2008 ESPP for the six months ended June 30, 2017 were $636. In May 2017, the shareholders and Board of Directors approved the BioTelemetry, Inc. 2017 Employee Stock Purchase Plan (“2017 ESPP”), which will replace the 2008 ESPP. At June 30, 2017, 500,000 shares remain available for purchase under the 2017 ESPP.

 

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