UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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)
Delaware | 46-2568498 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1000 Cedar Hollow Road #102 | ||
Malvern, Pennsylvania | 19355 | |
(Address of principal executive offices) | (Zip Code) | |
(610) 729-7000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.001 par value | NASDAQ Global Select Market | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No ý
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 ý No o
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | 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 ý
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1.5 billion based on the closing sale price of the registrant’s common stock as reported by the NASDAQ Global Select Market on the last business day of the registrant’s most recently completed second fiscal quarter ended June 30, 2018. As of February 5, 2019, 33,607,798 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2019 annual meeting of stockholders, which proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2018, are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.
BioTelemetry, Inc.
Annual Report on Form 10-K
For The Fiscal Year Ended December 31, 2018
TABLE OF CONTENTS
Page | ||
Item 16. | Form 10-K Summary | |
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Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” “BioTelemetry” and the “Company,” as used in this Annual Report on Form 10-K, refer to BioTelemetry, Inc. and its directly and indirectly owned subsidiaries as a combined entity, except where otherwise stated or where it is clear that the terms mean only BioTelemetry, Inc. exclusive of its subsidiaries. We do not use the ® or ™ symbol in each instance in which one of our registered or common law trademarks appears in this Annual Report on Form 10-K, but this should not be construed as any indication that we will not assert our rights thereto to the fullest extent permissible under applicable law.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document includes certain forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995 regarding, among other things, our growth prospects, the prospects for our products and our confidence in our future. These statements may be identified by words such as “expect,” “anticipate,” “estimate,” “intend,” “plan,” “believe,” “promises” and other words and terms of similar meaning. Examples of forward-looking statements include statements we make regarding our ability to increase demand for our products and services, to leverage our Mobile Cardiac Outpatient Telemetry platform, to expand into new markets, to grow our market share, our expectations regarding revenue trends in our segments and the achievement of cost efficiencies through process improvement. 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; |
• | 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; |
• | acceptance of our new products and services, such as our mobile cardiac telemetry (“MCT”) patch; |
• | our ability to obtain and maintain required regulatory approvals for our products, services and manufacturing facilities; |
• | changes in governmental regulations and legislation; |
• | adverse regulatory action; |
• | our ability to obtain and maintain adequate protection of our intellectual property; |
• | interruptions or delays in the telecommunications systems that we use; |
• | our ability to successfully resolve outstanding legal proceedings; and |
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• | the other factors that are described in “Part I; Item 1A. Risk Factors” of this Annual Report on Form 10-K. |
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as may be required by law.
PART I
Item 1. Business
Overview
BioTelemetry, Inc. is the leading remote medical technology company focused on delivery of health information to improve quality of life and reduce cost of care. We provide remote cardiac monitoring, remote blood glucose monitoring, centralized core lab services for clinical trials and original equipment manufacturing that serves both healthcare and clinical research customers.
With over 30,000 unique referring physicians per month, we provide cardiac monitoring and reporting for over one million patients per year, processing over four billion heart beats per day. More information can be found at www.gobio.com.
BioTelemetry operates under two reportable segments: Healthcare and Research. The Healthcare segment, which generated 85% of our revenue in 2018, is focused on the diagnosis and monitoring of cardiac arrhythmias or heart rhythm disorders. Since we focused on cardiac monitoring in 1999, we have developed a proprietary integrated patient management platform that incorporates wireless data transmission, U.S. Food and Drug Administration (“FDA”) cleared algorithms, medical devices and 24-hour monitoring service centers. 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. These services range from the differentiated MCT service, to event, traditional Holter, extended-wear Holter, Pacemaker and International Normalized Ratio (“INR”) monitoring. The Research segment, which generated 13% of our revenue in 2018, is engaged in central core laboratory services providing cardiac monitoring, imaging services, scientific consulting and data management services for drug and medical device trials. During the first quarter of 2018, as part of the LifeWatch AG (“LifeWatch”) integration, our forward-looking integration and rebranding plans, as well as re-evaluating the significance and materiality of our segments, we aggregated the Technology operating segment into the Corporate and Other category. See “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 18. Segment Information” below for further discussions related to segments.
As of July 31, 2013, we reorganized to create a holding company structure. CardioNet, Inc., which was previously the public company, became a wholly owned subsidiary of a newly formed entity, BioTelemetry, Inc., a Delaware corporation, and all the outstanding shares of CardioNet, Inc. were exchanged, on a one-for-one basis, for shares of BioTelemetry, Inc. Our new holding company continued trading on the NASDAQ Global Select Market under our same symbol “BEAT.”
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Business Strategy
Our goals are to solidify our position as the leading provider of outpatient cardiac monitoring services, expand our presence in the research market and leverage our monitoring platform in new markets. The key elements of the business strategy by which we intend to achieve these goals include:
• | Increase Overall Demand for Our Cardiac Monitoring Services. We believe that we can increase demand for our comprehensive portfolio of cardiac monitoring solutions by educating cardiologists, electrophysiologists, neurologists and primary care physicians on the benefits of using our services, including MCT, to meet their arrhythmia monitoring needs, stressing the increased diagnostic yield and their ability to use the clinically significant data to make timely interventions and guide more effective treatments. We also believe we can become further incorporated into the practices’ workflow by offering solutions such as the bi-directional integration of our data into Electronic Medical Record systems. |
• | Expand Our Presence in the Research Market. We continue to focus our efforts on increasing our presence in the research market and on becoming a preferred global provider as it provides us with the ability to diversify our service offerings. We have experienced an increase in dual-service studies that require both cardiac and imaging service, which we see as a key element of our strategic growth plan. We are also starting to have success incorporating our proprietary ePatch™ monitor as an element of our new cardiac studies creating cross-segment, top-line synergies. |
• | Leverage Our Core Competencies to New Market Opportunities. We believe our core competencies can be leveraged for applications in multiple markets. While our initial focus has been on arrhythmia diagnosis and monitoring, we intend to expand into new market areas that require outpatient or ambulatory monitoring and management. During the second quarter of 2018, we announced the commercial introduction of our latest generation wireless Blood Glucose Monitoring (“BGM”) system, increasing our presence in the large and rapidly growing digital population health management market. This wireless BGM system transmits real-time results to a cloud-based analytical engine, which synthesizes the data, monitors trends and provides caregivers with critical information about a patient’s health status and the potential need to intervene. We continue to evaluate numerous connected health technologies and solutions to better understand where we can best leverage our capabilities. |
Healthcare
The Healthcare segment, or BioTel Heart®, is focused on the diagnosis and monitoring of 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. These services range from the differentiated MCT service, to event, traditional Holter, extended-wear Holter, Pacemaker and INR monitoring.
Our MCT services incorporate a lightweight patient-worn sensor attached to electrodes that capture two-channel electrocardiogram (“ECG”) data, measuring electrical activity of the heart, on a compact wireless handheld monitor. The monitor analyzes incoming heartbeat-by-heartbeat information from the sensor on a real-time basis by applying proprietary algorithms designed to detect arrhythmias. The monitor can detect an arrhythmic event even in the absence of symptoms noticed by the patient. When the monitor detects an arrhythmic event, it automatically transmits the ECG to our monitoring centers. At our 24-hour monitoring centers, trained cardiac technicians analyze the data, respond to urgent events and report results
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in the manner prescribed by the physician. The MCT devices employ two-way wireless communications, enabling continuous transmission of patient data to the monitoring centers and permitting physicians to remotely adjust monitoring parameters and request previous ECG data from the memory stored in the monitor. The MCT devices have the capability of storing 30 days of continuous ECG data, in contrast to a maximum of 10 minutes for a typical event monitor and a maximum of 24 hours for a typical Holter monitor.
In 2016, we obtained FDA approval of our next generation MCT device, in a patch form factor. The MCT patch is a four-lead, two-channel system that provides the same best-in-class technology as our current MCT devices, in a more convenient form factor. The MCT patch was commercially launched in limited accounts during 2017, with a full launch in the first quarter of 2018.
Our event monitoring services provide physicians with the flexibility to prescribe wireless event monitors, digital loop event monitors, memory loop event monitors and non-loop event monitors. Event data is transmitted, either through automatic transmission of event data with wireless event monitors or through telephonic transmission of stored event data with our traditional event monitors, to one of our monitoring centers where our trained cardiac technicians analyze the data.
Traditional Holter and extended-wear Holter monitors locally store, on a compact memory card, ECG data of every heartbeat or irregularity. The device is mailed or the data is sent electronically through a secure web transfer to one of our Holter labs, where our trained cardiac technicians analyze the data. Our next generation Holter monitors, the CardioKey® and ePatch™ are small, lightweight cardiac monitors, which can continuously store up to 14 days of ECG data.
We market our services generally throughout the United States and receive reimbursement for the monitoring provided to patients from government and commercial payors.
Research
The Research segment, or BioTel Research™, is engaged in central core laboratory services that provide cardiac monitoring, imaging services, scientific consulting and data management services for drug and medical device trials. The centralized services include ECG, Holter monitoring, ambulatory blood pressure monitoring, echocardiography, multigated acquisition scan (“MUGA”), a full range of imaging services, protocol development, expert reporting and statistical analysis. Our imaging services offerings were bolstered by our 2016 acquisition of VirtualScopics, Inc. (“VirtualScopics”), a leading provider of clinical trial imaging solutions and services in the cardiac, oncology, musculoskeletal and neurologic therapeutic areas. Through our acquisitions, we gained global experience in central core laboratory services, which includes experience in Phase I-IV and Thorough QT Trials. We also provide a full range of support services that include project coordination, setup and management, equipment rental, data transfer, processing, analysis and 24/7 customer support and site training. Our data management systems enable complete customization for sponsors’ preferred data specifications, and our web service, CardioPortal™, provides access to data from any web browser, without client-side plug-ins. Our primary customers in this segment are pharmaceutical companies and contract research organizations.
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Other Businesses
The “Corporate and Other” category contains our other operating business brands: BioTel Care® and BioTel Alliance™, which focus on the sale, manufacturing, engineering and development of non-invasive cardiac monitors and other population health management devices for leading healthcare companies worldwide. We have been able to build successful customer relationships by providing reliable, quality products and engineering services. We offer contract manufacturing services, developing and producing devices to the specific requirements set by customers.
We manufacture various devices, including MCT monitors, cardiac event monitors and digital Holter monitors utilized by our Healthcare and Research segments. Our facilities located in San Diego, CA and Concord, MA are responsible for research and product development under FDA guidelines. Manufacturing of devices is performed in part in our Eagan, MN facility. We believe that our manufacturing capacity will be sufficient to meet our manufacturing needs for the foreseeable future.
We believe our manufacturing operations are in compliance with regulations mandated by the applicable regulatory governing bodies. We are subject to unannounced inspections by the FDA and we successfully completed routine inspections in recent years with no significant findings noted or warnings issued. Our Eagan, MN, San Diego, CA and Concord, MA facilities are ISO 13485 certified and registered with the FDA. ISO 13485 is an international quality system standard used by medical device manufacturing companies and is the basis for acquiring European Conformity Marking (“CE Marking”) for medical device product distribution in the European Union. In addition to FDA clearance, many of our devices also carry a CE Marking, which is a certification mark that indicates conformity with health, safety and environmental protection standards for products sold within the European Economic Area (“EEA”).
There are a number of critical components and sub-assemblies in the devices. The vendors for these materials are qualified through stringent evaluation and testing of their performance. We implement a strict no-change policy with our contract manufacturers to ensure that no components are changed without our approval.
Research and Development
We make significant investments in research and development activities focused on developing new products and enhancements to our existing products. We intend to continue to develop proof of superiority of our technology through clinical data. Our aim is to create products that are smaller, faster, more efficient and that provide more useful and relevant information to physicians on a more timely basis. We employ a dedicated internal core research and development team, primarily based in San Diego. We have been consolidating parts of the process across the organization to bring cross-company synergies and benefits. Our San Diego location also houses our rapid prototype lab, which has 3-D printing capability. In addition, we consult with external consultants and partners on certain projects or prototype work.
The three primary sources of clinical data that we have used to date to illustrate the clinical value of MCT include: (i) a randomized 300-patient clinical study; (ii) our cumulative actual monitoring experience from our databases; and (iii) numerous other published studies.
We sponsored and completed a 17-center, 300-patient randomized clinical trial in March 2007 - Steven A. Rothman M.D. et al. “The Diagnosis of Cardiac Arrhythmias: A Prospective Multi-Center Randomized Study Comparing Mobile Cardiac Outpatient Telemetry Versus Standard Loop Event Monitoring,” Journal of Cardiovascular Electrophysiology. We believe this study represented the largest
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randomized study comparing two non-invasive arrhythmia monitoring methods. The study was designed to evaluate patients who were suspected to have an arrhythmic cause underlying their symptoms but who were a diagnostic challenge given that they had already had a non-diagnostic 24-hour Holter monitoring session or four hours of telemetry monitoring within 45 days prior to enrollment. Patients were randomized to either MCT or to a loop event monitor for up to 30 days. Of the 300 patients who were randomized, 266 patients who completed a minimum of 25 days of monitoring were analyzed (134 patients using MCT and 132 patients using loop event monitors).
The study specifically compared the success of MCT against loop event monitors in detecting patients with clinically significant arrhythmias and demonstrated the superiority of MCT for confirming the diagnosis of these types of arrhythmias. The study also demonstrated the advantage of using MCT compared to the loop event monitor in the detection of asymptomatic atrial fibrillation (“Afib”) or flutter. Diagnosis and treatment of Afib is important because it can lead to many other medical problems, including stroke. The study concluded that MCT provided a significantly higher diagnostic yield, in detecting an arrhythmic event in patients with symptoms of cardiac arrhythmia, compared to traditional loop event monitoring, including such monitoring designed to automatically detect certain arrhythmias.
With over 30,000 unique referring physicians per month, we provide cardiac monitoring and reporting for over one million patients per year, processing over four billion heart beats per day.
In addition to the aforementioned 300-patient randomized clinical trial, MCT has been cited and referenced in over 40 publications and abstracts, which lends support to its clinical efficacy.
We also continue to research study setup automation and workflow management for use in our Research segment. Our continued efforts to integrate machine learning and artificial intelligence to improve our automated patient management tracking in our Research segment services will drive efficiencies, and we believe it will help us acquire more dual-service studies from our partners.
Additionally, we continue to build out our coaching platform for our wireless BGM, through patient and 3rd party feedback. We are analyzing data to determine where machine learning can provide additional technological leverage and efficiencies to the physician and the patient.
Sales and Marketing
We market our cardiac monitoring solutions in our Healthcare segment through our direct sales force primarily to cardiologists, electrophysiologists, neurologists and primary care physicians who most commonly diagnose and treat patients with arrhythmias. We differentiate ourselves through the seemless integration of our data in the practice’s electronic medical records.
We are the leading member of the Remote Cardiac Service Provider Group (“RCSPG”), with our Senior Vice President of Medical Affairs being the current President of the RCSPG. The RCSPG collaborates with physician specialty societies as well as the American Telemedicine Association to advocate to the Centers for Medicare and Medicaid Services (“CMS”) and Congress for appropriate valuation of remote diagnostic services that the RCSPG members provide.
Our Healthcare segment experiences some seasonality during the third quarter as well as during the year-end holiday season. We believe that this is the result of patients electing to delay our monitoring services during the summer months or holidays.
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We market our Research segment services to pharmaceutical companies, medical device companies, contract research organizations and academic research organizations. We are a founding member and the first cardiac core lab to join the Cardiac Safety Research Consortium (“CSRC”). Through the CSRC, we are able to network with key thought leaders and decision makers of major pharmaceutical companies, as well as discuss key cardiac safety issues during the drug development process. Through our integration of VirtualScopics, we have experienced an increase in acquiring studies that include both cardiac and imaging requirements. Expanding our research service offerings is a key element of our strategic growth plan, allowing us to more favorably compete for research studies requiring a wider range of research services. Our team has also had success incorporating our proprietary ePatch monitor as a critical element of new cardiac studies creating cross-segment, top-line synergies.
Our BioTel Alliance™ brand, currently included in the Corporate and Other category, markets our manufactured products to physicians, hospitals and other cardiac monitoring providers. BioTel Care® is actively working to expand our position in the digital population health space, and continues to evaluate numerous connected health technologies and solutions to better understand where we can best leverage our capabilities. Specifically, we are engaged in increasing awareness and utilization of our wireless BGM and our Diabetes Management Platform. Our commercial team is primarily focused on securing contracted relationships for our diabetes management services with:
• | commercial managed care plans; |
• | accountable care organizations; |
• | integrated delivery networks; |
• | physicians groups; |
• | durable medical equipment distributors; and |
• | employer groups. |
We attend trade shows and medical conferences to promote our various product and service offerings. The trade shows and conferences we attend are related to organizations such as: the Heart Rhythm Society, American College of Cardiology, American Telemedicine Association, Society of Thoracic Surgeons, American Heart Association, and the European Society of Cardiology. We also attend the Medica, Drug Information Association and Partnerships in Clinical Trials trade shows as well as the annual Boston Atrial Fibrillation Symposium. We have had limited product and service-based advertising in certain national newspapers and medical journals.
Healthcare Reimbursement
In the Healthcare segment, services are billed to government and commercial payors using specific codes describing the services. Those codes are part of the Current Procedural Terminology (“CPT”) coding system, which was established by the American Medical Association to describe services provided by physicians and other suppliers. Physicians select the code that best describes the medical services being prescribed. Approximately 34% of our total revenue is subject to reimbursement from the Medicare program, a federal government health insurance program administered by CMS, at rates that are set nationally and adjusted for certain regional indices.
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In addition to receiving reimbursement from government payors, we enter into contracts with commercial payors to receive reimbursement at specified rates for our services. Such contracts typically provide for an initial term of between one and three years and provide for automatic renewal thereafter. Either party can typically terminate these contracts by providing between 30 and 180 days’ prior notice to the other party at any time following the end of the initial term of the agreement. The contracts provide for an agreed upon reimbursement rate, which in some instances is tied to the rate of reimbursement we receive from Medicare.
In addition to receiving reimbursement from government and commercial payors, we have direct arrangements with physicians who may purchase our monitoring services and then submit claims for these services directly to government and commercial payors. In some cases, patients pay for their service out-of-pocket.
Competition
Although we believe that we have a leading market share in mobile cardiac monitoring in the U.S., the market in which our Healthcare segment operates is fragmented and characterized by a number of smaller regional service providers.
Our Research segment competes directly with other core labs as well as contract research organizations that offer core lab services. We believe that we compete favorably based on our comprehensive cardiac and imaging service offerings, the scale of our operation and our ability to support the entire life cycle of new drug development.
We also compete directly with other original diagnostic equipment manufacturers.
We believe that the principal competitive factors that impact the success of our businesses include some or all of the following:
• | quality of algorithms used to detect arrhythmias; |
• | quality and accuracy of clinical data; |
• | turnaround times; |
• | ease of use and reliability of cardiac monitoring solutions for patients and physicians; |
• | technology performance, innovation, flexibility and range of application generating the highest yields; |
• | timeliness and clinical relevance of new product introductions; |
• | quality and availability of superior customer support services; |
• | size, experience, knowledge and training of sales and marketing staff; |
• | reputation; |
• | relationships with referring physicians, hospitals, managed care organizations and other third-party payors; |
• | reporting capabilities; |
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• | providing a full spectrum of cardiac monitoring solutions, ranging from MCT services to event, traditional and extended-wear Holter monitoring; |
• | a widening range of clinical cardiac and imaging services and best-in-class solutions; |
• | perceived value; and |
• | extensive industry expertise. |
We believe that we compete favorably based on the factors described above. However, our industry is evolving rapidly and is becoming increasingly competitive, and the basis on which we compete may change over time. In addition, if companies with substantially greater resources than ours enter our market, we will face increased competition.
Intellectual Property
We rely on a combination of intellectual property laws, non-disclosure agreements and other measures to protect our proprietary rights. We attempt to protect our intellectual property rights by filing patent applications for new features and products we develop. In addition, we also seek to maintain certain intellectual property and proprietary know-how as trade secrets, and generally require our partners to execute non-disclosure agreements prior to any substantive discussions or disclosures of our technology or business plans. Our business and competitive positions are dependent in part upon our ability to protect our proprietary technology and our ability to avoid infringing the patents or proprietary rights of others.
We hold patents in the United States as well as many international jurisdictions on our products, processes and related technologies. In furtherance of our overall global intellectual property strategy, we also have patent applications currently on file in the United States and internationally. While we have several patents expiring through 2032, including patents that relate, in part, to our key products, we do not believe such expirations will have a material impact on our ability to compete in the short term since our technology is typically covered by several patents, creating a system of protected technology.
Our trademarks, certain of which are material to our business, are registered or otherwise legally protected in the United States and in certain foreign countries and include, among others, the registered trademarks CardioNet®, BioTelemetry®, LifeWatch®, BioTel Care®, BioTel Heart® and the unregistered trademarks Mobile Cardiac Outpatient Telemetry™, MCOT™, ePatch™, CardioPortal™, BioTel Research™ and BioTel Alliance™. We also have a significant amount of copyright-protected materials.
Government Regulation
The health care industry is highly regulated, with no guarantee that the regulatory environment in which we operate will not change significantly and adversely in the future. We believe that health care legislation, rules, regulations and interpretations will change, and we expect to modify our agreements and operations in response to these changes.
U.S. Food and Drug Administration. The medical devices that we use to provide patient monitoring services are regulated by the FDA under the Federal Food, Drug, and Cosmetic Act (“FDCA”). Unless exempt, medical devices distributed in the United States must receive marketing authorization by the FDA through either a full Premarket Approval (“PMA”) or the Premarket Notification 510(k) process. Based on the classification and characteristics of a medical device, it may receive marketing authorization through
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a PMA, pathway, which requires the demonstration of safety and effectiveness through adequate and well-controlled clinical studies, or receive clearance under the 510(k) pathway after demonstrating substantial equivalence to a predicate device. In addition to marketing authorization requirements, device manufacturers must also comply generally with establishment registration, medical device listing, quality system regulation, labeling and medical device reporting requirements, and any special controls specific to a particular device and used to support reclassification.
The algorithms we use in the MCT service maintain FDA 510(k) clearance as a Class II device. On October 28, 2003, the FDA issued a guidance document entitled: “Class II Special Controls Guidance Document: Arrhythmia Detector and Alarm.” In addition to conforming to the general requirements of the FDCA, including the Premarket Notification requirements described above, all of our cardiac related 510(k) submissions address the specific issues covered in this special controls guidance document. The algorithms we use in the BGM service also maintain FDA 510(k) clearance as a Class II device.
Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, including certain sanctions, such as fines, penalties or injunctions; recall or seizure of our devices and intellectual property; operating restrictions; partial suspension or total shutdown of production; withdrawal of 510(k) clearance of new components or algorithms; withdrawal of 510(k) clearance already granted to one or more of our existing components or algorithms; and criminal prosecution.
CE Marking. Medical devices distributed within the EEA require the CE Marking, which is a certification mark that indicates conformity with health, safety, and environmental protection standards for products sold within the EEA. The CE Marking is also found on products sold outside the EEA that are manufactured in, or designed to be sold in, the EEA. Although ISO 13485 certification is not a direct requirement for CE marking medical devices under the European Medical Device Directives, it is recognized as a harmonized standard by the European Commission. ISO 13485 is aligned with the three European medical device directives that are applicable to different types of medical devices in Europe. Failure to maintain appropriate CE Marking could have an adverse effect on our ability to sell our devices within the European Union.
Health Care, Fraud, Waste and Abuse. In the United States, state and federal laws and regulations restrict healthcare providers from billing and collecting for products or services connected with fraudulent, wasteful or abusive conduct. These state and federal laws include civil and criminal false claims provisions, health fraud and false statements provisions, anti-kickback provisions, physician self-referral provisions, and more, violation of which may subject us to criminal penalties as well as potential exclusion from federal healthcare programs and civil monetary penalties.
Federal and state anti-kickback laws generally prohibit the payment or receipt of anything of value to induce prescription or referral of reimbursed products or services. Stark law limits certain relationships between referring physicians and providers of certain designated healthcare services. Anti-kickback laws limit financial arrangements we may have with healthcare professionals in a position to purchase, recommend or refer patients for our cardiac monitoring services or other products or services we may develop and commercialize. Due to the breadth of some of these laws, it is possible that some of our current or future practices might be challenged under one or more of these laws.
Federal and state false claims laws prohibit anyone from presenting, or causing to be presented, claims for payment to third-party payors that are false or fraudulent. Violations may result in substantial civil penalties including treble damages, as well as criminal penalties, including imprisonment, fines and exclusion from participation in federal health care programs. The False Claims Act (“FCA”) also contains “whistleblower” or “qui tam” provisions that allow private individuals to bring actions on behalf of the
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government alleging false claims and potentially other violations of fraud and abuse laws. Various states have enacted laws modeled after the FCA, including “qui tam” provisions, and some of these laws apply to claims filed with commercial insurers. Violation of federal and state fraud and abuse laws could have a material adverse effect on our business, financial condition and results of operations.
The Patient Protection and Affordable Care Act. On March 23, 2010, the Patient Protection and Affordable Care Act was signed into law, and on March 30, 2010, the Health Care and Education Reconciliation Act of 2010 was signed into law. Together, the two measures, collectively known as the Affordable Care Act (“ACA”), made fundamental changes to the United States health care system. The ACA expanded Medicaid eligibility, required most individuals have health insurance or pay a penalty, imposed new requirements for health plans and insurance policy standards, established health insurance exchanges, changed Medicare payment systems to encourage more cost-effective care and new expanded tools to address fraud and abuse and required manufacturers of medical devices and other products reimbursed by Medicare to report annually to the government certain payments to physicians and teaching hospitals. In 2018, certain provisions of the ACA were modified and repealed effective 2019 and beyond.
As a result of the passage of the ACA, manufacturers of certain medical devices are subject to an excise tax applicable to sales of taxable medical devices. Several devices that are manufactured by us are subject to these taxes. The tax equals 2.3% of the sale price of the applicable medical device. As a manufacturer, we are responsible for remitting these taxes to the federal government. The Consolidated Appropriations Act of 2016, enacted on December 18, 2015, included a moratorium on the medical devices tax commencing on January 1, 2016 and ending on December 31, 2017. Budget legislation signed in January 2018 extended that moratorium through December 31, 2019.
Health Insurance Portability and Accountability Act of 1996. The Health Insurance Portability and Accountability Act was enacted in 1996, amended by the Health Information Technology for Economic and Clinical Health (“HITECH”) Act in 2009, and implemented through regulation (collectively, “HIPAA”). HIPAA, together with other data privacy and security laws such as the General Data Protection Regulations (“GDPR”), dictate privacy and security standards governing the collection, storage, maintenance, dissemination, use and confidentiality of individually identifiable patient health information. HIPAA applies directly to “covered entities,” which include health plans, health care clearinghouses and many health care providers, who electronically transmit health information and thereby engage in HIPAA “covered transactions.” HIPAA also applies to “business associates,” individuals who perform certain functions or activities for or on behalf of covered entities that require the individual to create, receive, maintain, or transmit protected health information (“PHI”). HIPAA is concerned primarily with the privacy of PHI when it is used and/or disclosed; the confidentiality, integrity and availability of electronic PHI; notifying federal regulators and impacted patients in the event of a breach of unsecured PHI; and the content and format of certain identified electronic health care transactions. The laws governing health care information privacy and security impose civil and criminal penalties for their violation. Compliance with these laws requires substantial expenditures of financial and other resources for information technology system compliance, maintenance, monitoring, validation and evaluation. Historically, state law has governed confidentiality issues, and HIPAA preserves these laws to the extent they are more protective of a patient’s privacy or provide the patient with greater access to his or her health information. Many states continue to consider revisions to their existing laws and regulations that may or may not be more stringent or burdensome than the federal HIPAA provisions.
Medicare. Medicare is a federal program administered by CMS and its Medicare Administrative Contractors (“MAC”). The Medicare program provides qualified persons with health care benefits that cover the major costs of medical care within prescribed limits, subject to certain deductibles and co-
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payments. The Medicare program has established guidelines for local and national coverage determinations and reimbursement of certain equipment, supplies and services, which are subject to change. The methodology for determining coverage status and the basis and amount of Medicare reimbursement varies based upon, among other factors, the location in which a Medicare beneficiary receives health care items and services, the type of items and services provided, and the benefits available to individual beneficiaries.
The Medicare program is subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, interpretations of policy, billing guidelines, MAC contractor local coverage determinations and government funding restrictions. All of these policies may materially increase or decrease the rate of program payments to health care facilities and other health care suppliers and practitioners, including those paid for our cardiac monitoring services. Other regulations such as facility standards, billing requirements, rules of participation and other regulations affecting the provision of and reimbursement for products and services also affect the ability to provide, bill and receive reimbursement for services or products provided under the program. Any changes in federal legislation, regulations or other policies affecting Medicare coverage, reimbursement or eligibility relative to our cardiac monitoring services could have an adverse effect on our performance.
Certain of our facilities are enrolled in Medicare as Independent Diagnostic Testing Facilities (“IDTFs”). An IDTF is defined by CMS as an entity independent of a hospital or physician’s office in which diagnostic tests are performed, often by licensed or certified non-physician personnel, and under appropriate physician supervision. Medicare prescribes detailed certification standards that every IDTF must meet in order to obtain or maintain its billing privileges, including requirements to, among other things, operate in compliance with all applicable federal and state licensure and regulatory requirements for the health and safety of patients; maintain a physical facility on an appropriate site meeting specific criteria; have a comprehensive liability insurance policy of at least $0.3 million per location; disclose certain ownership information; have its testing equipment calibrated and maintained in accordance with specific standards; have technical staff on duty with the appropriate credentials to perform tests; and permit on-site inspections. These requirements are subject to change. Our IDTF facilities are periodically inspected by CMS to confirm our compliance with the IDTF standards, and we believe that our facilities are in compliance with these standards.
Environmental Regulation. We use materials and products regulated under environmental laws, primarily in the manufacturing and sterilization processes. While it is difficult to quantify, we believe the ongoing cost of compliance with environmental protection laws and regulations will not have a material impact on our business, financial position or results of operations.
Supply Chain Diligence and Transparency
Section 1502 of the Dodd Frank Wall Street Reform and Consumer Protection Act was adopted to further the humanitarian goal of ending the violent conflict and human rights abuses in the Democratic Republic of the Congo and adjoining countries (“DRC”). This conflict has been partially financed by the exploitation and trade of tantalum, tin, tungsten and gold (so called “conflict minerals”) that originate from mines or smelters in the region. United States Securities and Exchange Commission (“SEC”) rules adopted in August 2012 under Section 1502 require reporting companies to disclose annually on Form SD whether any such minerals that are necessary to the functionality or production of products they manufactured, or for which they contracted to manufacture, during the prior calendar year did, in fact, originate in the DRC and, if so, if the related revenue was used to support the conflict and/or abuses.
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Some of the products we manufacture may contain tantalum, tin, tungsten and/or gold. Consequently, in compliance with SEC rules, we have adopted a policy on conflict minerals, which can be found on our website, and have implemented a supply chain due diligence and risk mitigation process with reference to the Organization for Economic Cooperation and Development (“OECD”) guidance approved by the SEC to assess and report annually whether our products are “conflict free.”
We support efforts to end the violence and human rights abuses in the mining of certain minerals in the DRC. We expect our suppliers to comply with the OECD guidance and industry standards and to ensure that their supply chain conforms to our policy and the OECD guidance.
Product Liability and Insurance
The design, manufacture and marketing of medical devices and services of the types we produce entail an inherent risk of product liability claims. In addition, we provide information to health care providers and payors upon which determinations affecting medical care are made, and claims may be made against us resulting from adverse medical consequences to patients allegedly resulting from the information we provide. To protect ourselves from product liability claims, we maintain professional liability and general liability insurance on a “claims made” basis. Insurance coverage under such policies is contingent upon a policy being in effect when a claim is made, regardless of when the events which caused the claim occurred. While, as of the date of this Annual Report on Form 10-K, a material product liability claim has never been made against us and we believe our insurance policies are adequate in amount and coverage for our current operations, there can be no assurance that the coverage maintained by us is sufficient to cover all future claims. In addition, there can be no assurance that we will be able to obtain such insurance on commercially reasonable terms in the future.
Employees
As of December 31, 2018, we employed approximately 1,500 employees. None of our employees are represented by a collective bargaining agreement. We consider our relationship with our employees to be good.
Available Information
We file electronically with the SEC our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”). We make these reports available on our website at www.gobio.com, free of charge. Copies of these reports are made available as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding our filings, at www.sec.gov. We do not utilize social media platforms as our primary means of distributing material company information.
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Item 1A. Risk Factors
The factors discussed below are cautionary statements that identify important factors and risks that could cause actual results to differ materially from those anticipated by the forward-looking statements described under “Cautionary Note Regarding Forward-Looking Statements” contained in this Annual Report on Form 10-K. For more information regarding the forward-looking statements contained in this report, see the Table of Contents of this Annual Report on Form 10-K. You should carefully consider the risks and uncertainties described below, together with all of the other information included in this Annual Report on Form 10-K, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing BioTelemetry. Additional risks and uncertainties not presently known to us may also impair our business operations. The occurrence of any of the following risks could affect our business, liquidity, results of operations, financial condition or cash flows.
Reimbursement by Medicare is highly regulated and subject to change and our failure to comply with applicable regulations could decrease our revenue, subject us to penalties or adversely affect our results of operations.
The Medicare program is administered by CMS, which imposes extensive and detailed requirements on medical product and services providers, including, but not limited to, rules that govern how we structure our relationships with physicians, how and when we submit reimbursement claims, how we operate our monitoring centers and how and where we provide our arrhythmia monitoring solutions. Our failure to comply with applicable Medicare rules could result in the discontinuation of our reimbursement under the Medicare payment program, a requirement to return funds already paid to us, civil monetary penalties, criminal penalties and/or exclusion from the Medicare program.
Changes in the reimbursement rate that commercial payors and Medicare will pay for our products and services could adversely affect our revenue.
We receive reimbursement for our products and services from commercial payors and from MAC with jurisdiction in the state where the services are performed. In addition, our prescribing physicians receive reimbursement for professional interpretation of the information provided by our products and services from commercial payors or Medicare. Average commercial reimbursement rates have declined over a three and five year period. When commercial payors combine their operations, the combined company may elect to reimburse for our products and services at the lowest rate paid by any of the participants in the consolidation. If one of the payors participating in the consolidation does not reimburse for one of our products or services, the combined company may elect not to reimburse for such product or service. Additionally, commercial payors can typically terminate these contracts by providing between 30 and 180 days’ prior notice at any time following the end of the initial term of the agreement. In addition, CMS may reduce the reimbursement rate for our services, as it has in the past. CMS updates the reimbursement rate via the Medicare physician fee schedule annually. Furthermore, CMS has adopted a complex new system for reimbursing Medicare physician services as required by the Medicare Access and CHIP Reauthorization Act of 2015. Under the new program, which began January 1, 2017, physicians will either report under the Merit-based Incentive Payment System or an Advanced Alternative Payment Model, and their 2017 performance will impact 2019 rates. CMS published a final rule on November 1, 2018, modifying program requirements for performance year 2019. The rule designates use of certain patient-generated health data with an active feedback loop as a “high” weighted activity for purposes of the Advancing Care Information bonus. We cannot predict the impact of this new framework or potential future revisions to physician payment policy on reimbursement for our services. A decrease in Medicare or commercial
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reimbursement rates or termination of commercial payor contracts would adversely affect our financial results.
Our operations and our interactions with our physicians and patients are subject to regulation aimed at preventing health care fraud and abuse and, if we are unable to fully comply with such laws, we could face substantial penalties.
Our operations may be directly or indirectly affected by various broad state and federal health care fraud and abuse laws, including the Federal Healthcare Programs’ Anti-Kickback Statute and the FCA. For some of our services, we directly bill physicians or other health care entities, that, in turn, bill payors. Although we believe such payments and practices are proper and in compliance with laws and regulations, we may be subject to claims asserting that we have violated these laws and regulations. If our past or present operations are found to be in violation of these laws, we or our officers may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment and exclusion from Medicare and Medicaid program participation. Furthermore, if we knowingly file, or “cause” the filing of, false claims for reimbursement with government programs such as Medicare and Medicaid, we may be subject to substantial civil penalties, including treble damages. The FCA also contains “whistleblower” or “qui tam” provisions that allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the government. In recent years, the number of suits brought in the medical industry by private individuals has increased dramatically. Various states have enacted laws modeled after the FCA, including “qui tam” provisions, and some of these laws apply to claims filed with commercial insurers. Even if we are not found to have violated any of these federal or state anti-fraud or false claims acts, the costs of defending these claims could adversely affect our results of operations.
The operation of our monitoring centers is subject to rules and regulations governing IDTFs and state licensure requirements; failure to comply with these rules could prevent us from receiving reimbursement from Medicare and some commercial payors.
We have several monitoring centers throughout the United States that analyze the data obtained from cardiac monitors and report the results to physicians. In order for us to receive reimbursement from Medicare and some commercial payors, our monitoring centers must be certified as IDTFs. Certification as an IDTF requires that we follow strict regulations governing how our monitoring centers operate, such as requirements regarding certification of the technicians who review data transmitted from our monitors. These rules can vary from location to location and are subject to change. If they change, we may have to change the operating procedures at our monitoring centers, which could increase our costs significantly. If we fail to obtain and maintain IDTF certification, our services may no longer be reimbursed by Medicare and some commercial payors, which could have a material adverse impact on our business.
Our failure to maintain accreditation could impact our DMEPOS operations.
Accreditation is required by most of our managed care payors and became a mandatory requirement for all Medicare durable medical equipment, prosthetics, orthotics and supplies (“DMEPOS”) providers effective October 1, 2009. In 2016, we acquired Telcare Medical Supply, Inc. (“Telcare”), a diabetes care management company. In 2017, Telcare completed a nationwide accreditation renewal process conducted by the Healthcare Quality Association on Accreditation, which renewed our accreditation for another three years. We will undergo the next survey cycle in 2020. If we lose accreditation, our failure to maintain accreditation could have an adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.
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Failure to appropriately track and report certain payments to physicians and teaching hospitals may violate certain federal reporting laws and subject us to fines and penalties.
Section 6002 of the ACA requires certain medical device manufacturers that produce devices covered by the Medicare and Medicaid programs to report annually to the government certain payments and transfers of value to physicians and teaching hospitals. If we fail to appropriately track and report such payments to the government, we could be subject to civil fines and penalties, which could adversely affect the results of our operations.
Audits or denials of our claims by government agencies and commercial payors could reduce our revenue and have an adverse effect on our results of operations.
As part of our business operations, we submit claims on behalf of patients directly to, and receive payments from, Medicare, Medicaid and other third-party payors. We are subject to extensive government regulation, including requirements for submitting reimbursement claims under appropriate codes and maintaining certain documentation to support our claims. Medicare contractors and Medicaid state agencies periodically conduct pre-and post-payment reviews and other audits of claims and are under increasing pressure to more closely scrutinize health care claims and supporting documentation. The Medicare and Medicaid programs also have broad authority to impose payment suspensions and supplier number revocations when they believe credible allegations of fraud or other supplier standard noncompliance issues exist. We have previously been subject to pre-and post-payment reviews as well as audits of claims under CMS’ Recovery Audit Program and may experience such reviews and audits of claims in the future. Such reviews and similar audits of our claims could result in restrictions on our ability to bill for our services, material delays in payment, as well as material recoupments or denials, which would reduce our net sales and profitability, or result in our exclusion from participation in the Medicare or Medicaid programs. We are also subject to similar review and audits from commercial payors, which may result in material delays in payment and material recoupments and denials. In addition, state agencies may conduct investigations or submit requests for information relating to claims data submitted to commercial payors.
We have a concentrated number of payors and losing one of them would reduce our sales and adversely affect our business and operating results.
Medicare, our largest payor, represents a significant percentage of our revenue. For the year ended December 31, 2018, Medicare accounted for approximately 34% of our total revenue. No other payor accounted for more than 6% of total revenue. Our agreements with commercial payors typically allow either party to the contract to terminate the contract by providing between 30 and 180 days’ prior written notice to the other party at any time following the end of the initial term of the contract. Our commercial payors may elect to terminate or not to renew their contracts with us for any reason and, in some instances, can unilaterally change the reimbursement rates they pay. A commercial payor who terminates or does not renew their contract with us may, or may not, alter their coverage of our services. In the event any of our key commercial payors terminate their agreements with us, elect not to renew or enter into new agreements with us upon expiration of their current agreements, or do not renew or establish new agreements on terms as favorable as are currently contracted, our business, operating results and prospects would be adversely affected.
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Our cardiac monitoring and INR testing businesses are dependent upon physicians prescribing our services and failure to obtain those prescriptions may adversely affect our revenue.
The success of our cardiac monitoring and INR testing businesses are dependent upon physicians prescribing our services. Our success in obtaining prescriptions will be directly influenced by a number of factors, including:
• | the ability of the physicians with whom we work to obtain sufficient reimbursement and be paid in a timely manner for the professional services they provide in connection with the use of our cardiac monitoring solutions; |
• | our ability to continue to establish ourselves as a comprehensive cardiac monitoring and INR services provider; |
• | our ability to educate physicians regarding the benefits of our services over alternative diagnostic monitoring solutions; and |
• | the clinical efficacy of our devices. |
If we are unable to educate physicians regarding the benefits of our products and obtain sufficient prescriptions for our services, revenue from the provision of our cardiac monitoring and INR solutions could potentially decrease.
If we are unable to provide service in a timely manner, physicians may elect not to prescribe our services, and our revenue and growth prospects may be adversely affected.
While our goal is to provide each patient with the appropriate device in a timely manner, we have experienced, and may in the future experience, service delays or delays due to the availability of devices. This can occur when converting to a new generation of device or in connection with the increase in prescriptions following acquisitions of other companies.
We may also experience shortages of devices due to manufacturing difficulties. Multiple suppliers provide the components used in our devices, but our Minnesota and Massachusetts facilities are registered and approved by the FDA as the manufacturer of record of our devices. Our manufacturing operations could be disrupted by fire, earthquake or other natural disaster, a labor-related disruption, failure in supply or other logistical channels, electrical outages or other reasons. If there were a disruption to our facilities in Minnesota or Massachusetts, we would be unable to manufacture devices until we have restored and re-qualified our manufacturing capability or developed alternative manufacturing facilities.
Our success in obtaining future cardiac monitor prescriptions from physicians is dependent upon our ability to promptly deliver devices to our patients, and a failure in this regard would have an adverse effect on our revenue and growth prospects.
We are increasingly dependent on sophisticated information technology systems to operate our business, and if we fail to properly maintain the integrity of our data or if our products do not operate as intended or we experience a cyber-attack or other breach of these systems, our business could be materially affected.
We are increasingly dependent on sophisticated information technology for our products and infrastructure. We rely on information technology systems to process, transmit and store electronic information in our day-to-day operations. The size and complexity of our information technology systems makes them vulnerable to increasingly sophisticated cyber-attacks, malicious intrusion, breakdown,
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destruction, loss of data privacy or other significant disruption. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards, the increasing need to protect patient and customer information and changing customer patterns. As a result of technology initiatives, recently enacted regulations, changes in our system platforms and integration of new business acquisitions, we have been consolidating and integrating the number of systems we operate and have upgraded and expanded our information systems capabilities.
In addition, third parties may attempt to hack into our products or systems and may obtain data relating to patients with our products or our proprietary information. If we fail to maintain or protect our information systems and data integrity effectively, we could lose existing customers, have difficulty attracting new customers, have problems in determining product cost estimates and establishing appropriate pricing, have difficulty preventing, detecting and controlling fraud, have disputes with customers, physicians and other health care professionals, have regulatory sanctions or penalties imposed, have increases in operating expenses, incur expenses or lose revenue as a result of a data privacy breach or suffer other adverse consequences. There can be no assurance that our process of consolidating the number of systems we operate, upgrading and expanding our information systems capabilities, protecting and enhancing our systems and developing new systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future. Any significant breakdown, intrusion, interruption, corruption or destruction of these systems, as well as any data breaches, could have a material adverse effect on our business.
Violation of federal and state laws regarding privacy and security of patient information may adversely affect our business, financial condition or operations.
The use and disclosure of certain health care information by HIPAA-covered entities and their business associates have come under increased public scrutiny. Federal standards under HIPAA establish rules concerning how individually-identifiable health information may be used, disclosed and protected. Historically, state law had governed confidentiality issues, and HIPAA preserves these laws to the extent they are more protective of a patient’s privacy or provide the patient with more access to his or her health information. Additionally, changes to HIPAA (e.g. HITECH) impose additional requirements relating to the privacy, security and transmission of individually identifiable health information. We must operate our business in a manner that complies with all applicable laws, both federal and state, and that does not jeopardize the ability of our customers to comply with all applicable laws. We believe that our operations are consistent with these legal standards. Nevertheless, these laws and regulations present risks for covered entities and their business associates that provide services to patients in multiple states. As we continue to see how government regulators and courts interpret and enforce HIPAA’s requirements, we may need to adjust our interpretations of these laws and regulations over time. If a challenge to our activities is successful, it could have an adverse effect on our operations, may require us to forgo relationships with customers in certain states and may restrict the territory available to us to expand our business. In addition, even if our interpretations of HIPAA and other federal and state laws and regulations are correct, we could be held liable for unauthorized uses or disclosures of patient information as a result of inadequate systems and controls to protect this information or as a result of the theft of information by unauthorized computer programmers who penetrate our network security.
Violation of these laws against us could have a material adverse effect on our business, financial condition and results of operations. For example, in 2011, we experienced the theft of two unencrypted laptop computers and, as a result, were required to provide notices under the HIPAA Breach Notification Rule and were subsequently investigated by the United States Department of Health and Human
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Services’ (“HHS”) Office for Civil Rights (“OCR”). Although we have been in compliance with our obligations stemming from these incidents, and believe that our operations are consistent with the legal standards imposed by HIPAA, to avoid the uncertainty of administrative enforcement proceedings or protracted litigation, we elected to settle the investigation by OCR in April 2017 by paying $2.5 million and entering into a 3-year corrective action plan. This settlement did not contain any admission of liability by us.
The FDA may recommend a different approach to measuring the cardiac impact and safety of drugs as part of the approval process. Such changes could make the systems and processes of our research segment obsolete and adversely affect revenue and profitability.
As part of its approval process, the FDA has provided guidance reinforcing the need for cardiac safety testing of all compounds entering the blood stream. The requirements vary based on the type and history of each compound. This testing is accomplished by different methods, including cardiac imaging such as MUGA and ECG analysis, which involves measuring the QT/QTc interval for prolongation. We function as a core lab and have developed proprietary systems and processes to receive cardiac imaging studies and ECGs for analysis. It is possible that, in the future, the FDA may recommend a different approach for evaluating the cardiac impact and safety of compounds which may diminish the need for a core lab. This would considerably reduce the value of our existing systems and processes and would substantially decrease our revenue and profitability in our Research segment.
In December 2015, the FDA published a report which called into question the need for certain QT studies. In a series of public meetings throughout 2016 discussing the report, FDA speakers indicated that certain studies were no longer mandatory and that future regulations will include some combination of traditional study types along with early phase Exposure Response modeling. Further guidance around the performance of QT studies from the FDA is expected. We cannot assess the impact of this expected guidance at this time, but it may substantially decrease our revenue and profitability in our Research segment.
We are subject to numerous FDA regulations and decisions, and it may be costly to comply with these regulations and decisions and to develop compliant products and processes.
The devices that we manufacture are classified as medical devices and are subject to extensive regulation by the FDA. Further, we maintain establishment registration with the FDA as a distributor of medical devices. FDA regulations govern manufacturing, labeling, promotion, distribution, importing, exporting, shipping, advertising, promotion and sale of these devices. Our devices and our arrhythmia detection algorithms have 510(k) clearance status from the FDA. Modifications to our devices or our algorithms that could significantly affect safety or effectiveness, or that could constitute a significant change in intended use, would require a new clearance from the FDA. If in the future we make changes to our devices or our algorithms, the FDA could determine that such modifications require new FDA clearance, and we may not be able to obtain such FDA clearances timely, or at all.
We are subject to continuing regulation by the FDA, including general controls, special controls and quality system regulations applicable to the manufacture of our devices and various reporting regulations, as well as regulations that govern the promotion and advertising of medical devices. The FDA could find that we have failed to comply with one of these requirements, which could result in a wide variety of enforcement actions, ranging from a warning letter to one or more severe sanctions. These sanctions could include criminal fines, injunctions and civil money penalties; recall or seizure of devices; operating restrictions, partial suspension or total shutdown of production; refusal to grant 510(k) clearance of new components or algorithms; withdrawing 510(k) clearance already granted to one or more of our
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existing components or algorithms; and criminal prosecution. Any of these enforcement actions could be costly and significantly harm our business, financial condition and results of operations.
The healthcare industry is the subject of numerous governmental investigations into marketing and other business practices. These investigations could result in the commencement of civil and/or criminal proceedings, substantial fines, penalties, and/or administrative remedies, divert the attention of our management, and have an adverse effect on our financial condition and results of operations.
As mentioned above, we are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. These authorities have been increasing their scrutiny of our industry. We occasionally receive subpoenas or other requests for information from state and federal governmental agencies, including, among others, the United States Department of Justice and the Office of Inspector General of HHS. These investigations typically relate primarily to financial arrangements with health care providers, regulatory compliance and product promotional practices.
We cooperate with these investigations and respond to such requests. However, when an investigation begins, we cannot predict when it will be resolved, the outcome of the investigation or its impact on us. An adverse outcome in one or more of these investigations could include the commencement of civil and/or criminal proceedings, substantial fines, penalties and/or administrative remedies, including exclusion from government reimbursement programs and entry into Corporate Integrity Agreements with governmental agencies. In addition, resolution of any of these matters could involve the imposition of additional and costly compliance obligations. Finally, if these investigations continue over a long period of time, they could divert the attention of management from the day-to-day operations of our business and impose significant administrative burdens, including cost, on us. These potential consequences, as well as any adverse outcome from these investigations or other investigations initiated by the government at any time, could have a material adverse effect on our financial condition and results of operations.
Resolution of income tax matters may impact our financial condition, results of operations and cash flows.
We are subject to income taxes in many U.S. and certain foreign jurisdictions, which requires significant judgment in determining our effective income tax rate and in evaluating tax positions, particularly those related to uncertain tax positions. We have provided for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by the accounting standard for uncertain tax positions. Changes in uncertain tax positions or other adjustments resulting from tax audits and settlements with taxing authorities, including related interest and penalties, impact our effective tax rate. When particular tax matters arise, a number of years could elapse before such matters are audited and finally resolved. We believe our positions are appropriate, however, federal, state, or foreign tax authorities could disagree. If the settlement of any unrecognized tax reserves is different than accrued, it would impact our effective rate in the year of resolution. Any resolution of a tax matter may require the adjustment of tax assets or tax liabilities and/or the use of cash in the year of resolution.
Our business is subject to the risks of international operations.
Compliance with applicable United States and foreign laws and regulations, such as import and export requirements, anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions, data privacy requirements (e.g. GDPR), environmental laws, labor laws and anti-competition regulations, increases the costs of doing business in foreign jurisdictions. Although we have implemented policies and procedures to comply with these laws and regulations, a violation by our employees, contractors or agents could nevertheless occur. In some cases, compliance with the laws and regulations of one country
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could violate the laws and regulations of another country. Violations of these laws and regulations could materially adversely affect our brand, international growth efforts and business.
If we do not obtain and maintain adequate protection for our intellectual property, it may adversely affect the value of our technology and devices and future revenue and operating income.
Our business and competitive positions are in part dependent upon our ability to protect our proprietary technology. To protect our proprietary rights, we rely on a combination of trademark, copyright, patent, trade secret and other intellectual property laws, employment, confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements and protective contractual provisions with other third parties. We attempt to protect our intellectual property position by filing trademark applications and United States and international patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business.
We do not believe that any single patent, trademark or other intellectual property right of ours, or combination of our intellectual property rights, is likely to prevent others from competing with us using a similar business model. There are many issued patents and patent applications held by others in our industry and the electronics field. Our competitors may independently develop technologies that are substantially similar or superior to our technologies, or design around our patents or other intellectual property to avoid infringement. In addition, we may not apply for a patent relating to products or processes that are patentable, we may fail to receive any patent for which we apply or have applied, and any patent owned by us or issued to us could be circumvented, challenged, invalidated, or held to be unenforceable or rights granted thereunder may not adequately protect our technology or provide a competitive advantage to us. If a third-party challenges the validity of any patents or proprietary rights of ours, we may become involved in intellectual property disputes and litigation that would be costly and time-consuming. All of our patents will eventually expire. Some of our patents, including patents protecting significant elements of our technology, have expiration dates through 2032, at which point we can no longer enforce these against third parties to prevent them from making, using, selling, offering to sell or importing our current clinical device. While we have several patents that have expiration dates through 2032, including patents that relate, in part, to our key products, our technology is typically covered by several patents, creating a system of protected technology. The expiration of our patents could expose us to more competition and have an adverse impact on our business.
Although third parties may infringe on our patents and other intellectual property rights, we may not be aware of any such infringement, or we may be aware of potential infringement but elect not to seek to prevent such infringement or pursue any claim of infringement, and the third-party may continue its potentially infringing activities. Any decision whether or not to take further action in response to potential infringement of our patent or other intellectual property rights may be based on a variety of factors, such as the potential costs and benefits of taking such action, and business and legal issues and circumstances. Litigation of claims of infringement of a patent or other intellectual property rights may be costly and time-consuming, may divert the attention of key management personnel and may not be successful or result in any significant recovery of compensation for any infringement or enjoining of any infringing activity. Litigation or licensing discussions may also involve or lead to counterclaims that could be brought by a potential infringer to challenge the validity or enforceability of our patents and other intellectual property.
To protect our trade secrets and other proprietary information, we generally require our employees, consultants, contractors and outside collaborators to enter into written non-disclosure agreements. These agreements, however, may not provide adequate protection to prevent any unauthorized use, misappropriation or disclosure of our trade secrets, know-how or other proprietary information. These
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agreements may be breached, and we may not become aware of, or have adequate remedies in the event of, any such breach. Also, others may independently develop the same or substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.
Our ability to innovate or market our products may be impaired by the intellectual property rights of third parties.
Our success is dependent, in part, upon our ability to avoid infringing the patents or proprietary rights of others. The cardiac monitoring industry is characterized by a large number of patents and patent filings. Competitors may have filed applications for, or have been issued, patents and may obtain additional patents and proprietary rights related to devices, services or processes that we use to compete. We may not be aware of all of the patents or patent applications potentially adverse to our interests that may have been filed or issued to others.
United States patent applications may be kept confidential while pending in the Patent and Trademark Office. If other companies have or obtain patents relating to our products or services, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. We may not be able to obtain any such licenses on acceptable terms, or at all. Any failure to obtain such licenses could impair or foreclose our ability to make, use, market or sell our products and services.
Based on the fact that we may pose a competitive threat to some companies who own or control various patents, it is possible that one or more third parties may assert a patent infringement claim seeking damages and to enjoin the manufacture, use, sale and marketing of our products and services. If a third-party asserts that we have infringed on its patent or proprietary rights, we may become involved in intellectual property disputes and litigation that would be costly and time-consuming and could impair or foreclose our ability to make, use, market or sell our products and services. Lawsuits may have already been filed against us without our knowledge. Additionally, we may receive notices from other third parties suggesting or asserting that we are infringing their patents and inviting us to license such patents. We do not believe that we are infringing on any other party’s patents or that a license to any such patents is necessary. Should litigation over such patents arise, we intend to vigorously defend against any allegation of infringement.
If we are found to infringe on the patents or intellectual property rights of others, we may be required to pay damages, stop the infringing activity or obtain licenses or rights to the patents or other intellectual property in order to use, manufacture, market or sell our products and services. Any required license may not be available to us on acceptable terms, or at all. If we succeed in obtaining such licenses, payments under such licenses would reduce any earnings from our products. In addition, licenses may be non-exclusive and, accordingly, our competitors may have access to the same technology as that which may be licensed to us. If we fail to obtain a required license or are unable to alter the design of our product candidates to make a license unnecessary, we may be unable to manufacture, use, market or sell our products and services, which could significantly affect our ability to achieve, sustain or grow our commercial business.
We may not be able to consummate future acquisitions or successfully integrate acquisitions into our business, which could result in unanticipated expenses and losses.
We have grown, in part, through acquisitions of companies and technology, including our acquisitions of the assets of the ePatch Division of DELTA Danish Electronics, Light & Acoustics (“DELTA”) in April 2016, VirtualScopics in May 2016, Telcare in December 2016 and LifeWatch in July 2017. Our strategy is largely based on our ability to grow through acquisitions of additional businesses to build an integrated group. Consummating acquisitions of related businesses, or our failure to integrate
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such businesses successfully into our existing businesses, could result in unanticipated expenses and losses. Furthermore, we may not be able to realize any of the anticipated benefits from acquisitions.
We anticipate that any future acquisitions we may pursue as part of our business strategy may be partially financed through additional debt or equity. If new debt is added to current debt levels, or if we incur other liabilities, including contingent liabilities, in connection with an acquisition, the debt or liabilities could impose additional constraints and requirements on our business and operations, which could materially adversely affect our financial condition and results of operation. In addition, to the extent our common stock is used for all or a portion of the consideration to be paid for future acquisitions, dilution may be experienced by existing stockholders.
In connection with our completed and future acquisitions, the process of integrating acquired operations into our existing group operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with acquisitions include:
• | unexpected losses of key employees or customers of the acquired company; |
• | conforming the acquired company’s standards, processes, procedures and controls with our operations; |
• | negotiating with labor unions; and |
• | increasing the scope, geographic diversity and complexity of our current operations. |
We may encounter unforeseen obstacles or costs in the integration of businesses that we may acquire. In addition, general economic and market conditions or other factors outside of our control could make our operating strategies difficult or impossible to implement. Any failure to implement these operational improvements successfully and/or the failure of these operational improvements to deliver the anticipated benefits could have a material adverse effect on our results of operations and financial condition.
Any due diligence by us in connection with an acquisition may not reveal all relevant considerations or liabilities of the target business, which could have a material adverse effect on our financial condition or results of operations.
We intend to conduct such due diligence as we deem reasonably practicable and appropriate based on the facts and circumstances applicable to any potential acquisition. The objective of the due diligence process will be to identify material issues which may affect the decision to proceed with any one particular acquisition target or the consideration payable for an acquisition. We also intend to use information revealed during the due diligence process to formulate our business and operational planning for, and our valuation of, any target company or business. While conducting due diligence and assessing a potential acquisition, we may rely on publicly available information, if any, information provided by the relevant target company to the extent such company is willing or able to provide such information and, in some circumstances, third party investigations.
There can be no assurance that the due diligence undertaken with respect to an acquisition will reveal all relevant facts that may be necessary to evaluate such acquisition including the determination of the price we may pay for an acquisition target or to formulate a business strategy. Furthermore, the information provided during due diligence may be incomplete, inadequate or inaccurate. As part of the due diligence process, we will also make subjective judgments regarding the results of operations, financial condition and prospects of a potential target. If the due diligence investigation fails to correctly identify
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material issues and liabilities that may be present in a target company or business, or if we consider such material risks to be commercially acceptable relative to the opportunity, and we proceed with an acquisition, we may subsequently incur substantial impairment charges or other losses.
In addition, following an acquisition, we may be subject to significant, previously undisclosed liabilities of the acquired business that were not identified during due diligence and which could contribute to poor operational performance, undermine any attempt to restructure the acquired company or business in line with our business plan and have a material adverse effect on our financial condition and results of operations.
The success of our business is partially dependent on our ability to raise capital, and failure to raise the necessary capital may adversely affect our results of operations, financial condition and stock price.
We believe that our existing cash and cash equivalents, together with our term loan and revolving credit facility pursuant to our Credit Agreement with SunTrust Bank and Lenders named therein (the “SunTrust Credit Agreement” and “Lenders”, respectively), will be sufficient to meet our anticipated cash requirements for the foreseeable future. However, our future funding requirements will depend on many factors, including:
• | the results of our operations; |
• | the reimbursement rates associated with our products and services; |
• | our ability to secure contracts with additional commercial payors providing for the reimbursement of our services; |
• | the costs associated with manufacturing and building our inventory of our current and future generation monitors; |
• | the costs of hiring additional personnel and investing in infrastructure to support future growth; |
• | the costs of undertaking future strategic initiatives, such as acquisitions or joint ventures; |
• | the emergence of competing technologies and products and other adverse market developments; |
• | the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights or defending against claims of infringement by others; and |
• | actions taken by the FDA, CMS and other regulatory authorities affecting cardiac monitoring devices and competitive products. |
If we decide to raise additional capital in the future, such capital may not be available on reasonable terms, or at all. If we raise additional funds by issuing equity securities, dilution to existing stockholders would result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and financial ratios that may restrict our ability to operate our business.
We have outstanding debt, and may incur other debt in the future, which could adversely affect our financial condition, liquidity and results of operations.
As of December 31, 2018, we had an outstanding term loan pursuant to our SunTrust Credit Agreement with the Lenders of $198.5 million, net of $4.4 million of deferred financing costs. We may
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borrow additional amounts in the future and use the proceeds from any future borrowing for general corporate purposes, future acquisitions or expansion of our business.
Our incurrence of this debt, and any increases in our levels of debt, may adversely affect our operating results and financial condition by, among other things:
• | requiring a portion of our cash flow from operations to make payments on this debt; or |
• | limiting our flexibility in planning for, or reacting to, changes in our business and the industry. |
Our current credit facility imposes restrictions on us, including restrictions on our ability to create liens on our assets, incur additional indebtedness, make acquisitions or dispose of assets, and also requires us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from our lender, then, subject to applicable cure periods, our outstanding indebtedness could be declared immediately due and payable.
Our financing costs may be adversely affected by changes in LIBOR.
LIBOR, the London interbank offered rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We use LIBOR as a reference rate in our term loan and revolving credit facility to calculate interest due to our lender. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced its intention to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to exist, we may need to renegotiate our SunTrust Credit Agreement with the Lenders. This could have an adverse effect on our financing costs.
Our business depends on our ability to attract and retain talented employees.
Our business is based on successfully attracting and retaining talented employees, including our executive team. The market for highly-skilled workers and leaders in our industry is extremely competitive. If we are less successful in our recruiting efforts, or if we are unable to retain key employees, our ability to develop and deliver successful products and services may be adversely affected.
We have a concentration of risk related to the accounts receivable from Medicare and failure to fully collect outstanding balances from this customer, or a combination of other customers, may adversely affect our results of operations.
As of December 31, 2018, we have balances owed to us from Medicare representing approximately 15% of our total gross accounts receivable. A change in our collection trends could have an adverse effect on our financial condition and operating results.
Interruptions or delays in telecommunications systems could impair the delivery of our MCT, BGM and wireless event services.
The success of our MCT, BGM and wireless event services is dependent upon our ability to transmit and process data. Our MCT, BGM and wireless event devices rely on third-party wireless carriers to transmit data over their data networks. We are dependent upon these third-party wireless carriers to provide data transmission services to us through our various agreements. If we fail to maintain these relationships, or if we lose wireless carrier services, we would be forced to seek alternative providers of data transmission services, which might not be available on commercially reasonable terms, or at all.
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As we expand our commercial activities, an increased burden will be placed upon our data processing systems and the equipment upon which they rely. Interruptions of our data networks, or the data networks of our wireless carriers for any extended length of time, loss of stored data or other computer problems could have a material adverse effect on our business and operating results. Frequent or persistent interruptions in our cardiac monitoring services could cause permanent harm to our reputation and could cause current or potential users of our remote monitoring services or prescribing physicians to believe that our systems are unreliable, leading them to switch to our competitors. Such interruptions could result in liability claims and litigation against us for damages or injuries resulting from the disruption in service.
Our business may be impacted by political events, war, terrorism, public health issues, natural disasters and other business interruptions.
War, terrorism, geopolitical uncertainties, public health issues and other business interruptions have caused and could cause damage or disruption to commerce and the economy, and thus could have a material adverse effect on us, our suppliers, logistics providers and customers. Our business operations are subject to interruption by, among others, natural disasters, whether as a result of climate change or otherwise, fire, power shortages, nuclear power plant accidents and other industrial accidents, terrorist attacks and other hostile acts, labor disputes, public health issues and other events beyond our control. Such events could decrease demand for our products, make it difficult or impossible for us to make and deliver products to our customers or to receive components from our suppliers, and create delays and inefficiencies in our supply chain. Our potential customers and monitoring centers could be impacted by natural disasters such as hurricanes, tornadoes and earthquakes. In the event of a natural disaster, we could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume operations.
New products and technological advances by our competitors may negatively affect our market share, commercial opportunities and results of operations.
The market for cardiac monitoring solutions is evolving rapidly and becoming increasingly competitive. The mobile cardiac monitoring industry in the U.S. is highly fragmented and characterized by a number of smaller regional service providers. These third parties compete with us in marketing to payors and prescribing physicians, recruiting and retaining qualified personnel, acquiring technology and developing solutions complementary to our programs. In addition, as companies with substantially greater resources than ours enter our market, we will face increased competition. If our competitors are better able to develop and patent cardiac monitoring solutions than us, or develop more effective or less expensive cardiac monitoring solutions that render our solutions obsolete or non-competitive, or deploy larger or more effective marketing and sales resources than ours, our business would be harmed and our commercial opportunities would be reduced or eliminated.
Our efforts to develop new products may not be successful or the new products may not provide the revenue we expect.
We plan to add to our product portfolio through internal development efforts, acquisitions and other strategic partnerships. To be successful, we must continue to develop and commercialize new products and to enhance versions of our existing products. Our products are technologically complex and require significant research, planning, design, development and testing before they may be marketed. These new products and technologies may fail to reach the market or may only have limited commercial success because of:
• | efficacy or safety concerns; |
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• | the limited scope of approved uses; |
• | excessive costs to manufacture, failure to establish or maintain intellectual property rights, or infringement of the intellectual property rights of others; |
• | inability to achieve positive clinical outcomes; |
• | inability to recruit engineers; |
• | inability to timely and accurately identify new market trends; |
• | inability to assess customer needs; |
• | inability to obtain necessary regulatory approvals or minimize related costs; |
• | inability to adopt competitive pricing; |
• | inability to timely manufacture and deliver products; |
• | inability to accurately predict and control costs associated with the development, manufacturing and support of our products; and |
• | inability to anticipate and compete effectively with our competitors’ efforts. |
Even if we successfully develop new products or enhancements or new generations of our existing products, they may be quickly rendered obsolete by changing customer preferences, changing industry standards, or competitors’ innovations. Innovations may not be accepted quickly in the marketplace because of, among other things, entrenched patterns of clinical practice or uncertainty over third-party reimbursement. We cannot provide certainty as to when or whether any of our products under development will be launched, whether we will be able to develop, license, or otherwise acquire products, or whether any products will be commercially successful. Failure to launch successful new products or technologies, or new indications or uses for existing products, may cause our products or technologies to become obsolete, causing our revenues and operating results to suffer.
We operate in an intensely competitive industry, and our failure to respond quickly to technological developments and incorporate new features into our products could harm our ability to compete.
We operate in an intensely competitive industry that experiences rapid technological developments, changes in industry standards, changes in patient requirements and frequent new product introductions and improvements. If we are unable to respond quickly and successfully to these developments, we may lose our competitive position, and our products or technologies may become uncompetitive or obsolete. To compete successfully, we must maintain a successful research and development effort, develop new products and production processes and improve our existing products and processes at the same pace or ahead of our competitors. Our research and development efforts are aimed at solving increasingly complex problems, as well as creating new technologies, and we do not expect that all of our projects will be successful. If our research and development efforts are unsuccessful, our future results of operations could be materially affected.
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Changes in the health care industry or tort reform could reduce the number of cardiac monitoring solutions ordered by physicians, which could result in a decline in the demand for our solutions, pricing pressure and decreased revenue.
Changes in the health care industry directed at controlling health care costs or perceived over-utilization of cardiac monitoring solutions could reduce the volume of services ordered by physicians. If more health care cost controls are broadly instituted throughout the health care industry, the volume of cardiac monitoring solutions could decrease, resulting in pricing pressure and declining demand for our services, which could harm our operating results. In addition, it has been suggested that some physicians order cardiac monitoring solutions, even when the services may have limited clinical utility, primarily to establish a record for defense in the event of a claim of medical malpractice against the physician. Legal changes increasing the difficulty of initiating medical malpractice cases, known as tort reform, could reduce the number of our services prescribed as physicians respond to reduced risks of litigation, which could harm our operating results.
Legislation and policy changes reforming the United States health care system may have a material adverse effect on our operating results and financial condition.
The ACA makes the most sweeping and fundamental changes to the United States health care system since the creation of Medicare and Medicaid. The ACA includes a large number of health-related provisions expanding Medicaid eligibility, requiring most individuals to have health insurance, establishing new regulations on health plans, establishing health insurance exchanges, requiring manufacturers to report payments or other transfers of value made to physicians and teaching hospitals and modifying certain payment systems to encourage more cost-effective care.
Several provisions of the ACA specifically affect the medical equipment industry. In addition to changes in Medicare DMEPOS reimbursement and an expansion of the DMEPOS competitive bidding program, the ACA provides that for sales on or after January 1, 2013, manufacturers, producers and importers of taxable medical devices must pay an annual excise tax of 2.3% of the price for which the devices are sold. Subsequent legislation, the Consolidated Appropriations Act of 2016, included a two-year moratorium on the medical device excise tax commencing on January 1, 2016 and ending on December 31, 2017. Budget legislation signed in January 2018 extended that moratorium through December 31, 2019.
The ACA also establishes enhanced Medicare and Medicaid program integrity provisions, including expanded documentation requirements for Medicare DMEPOS orders, more stringent procedures for screening Medicare and Medicaid DMEPOS suppliers, and new disclosure requirements regarding manufacturer payments to physicians and teaching hospitals, along with broader expansion of federal fraud and abuse authorities. Subsequent legislation made additional changes to the DMEPOS reimbursement policy. For instance, the Consolidated Appropriations Act of 2016 caps Medicaid durable medical equipment reimbursement rates at Medicare fee-for-service rates applicable in the state, including applicable competitive bidding rates, beginning January 1, 2019, and the 21st Century Cures Act moved up implementation of this provision to January 1, 2018. There can be no assurances that future legislation will not adversely impact reimbursement for our products and services.
In addition, various health care reform proposals have also emerged at the state level. We cannot predict the full effect that these laws or any future legislation or regulation will have on us. However, the implementation of new legislation and regulation may lower reimbursements for our products, reduce medical prescriptions for our services and adversely affect our business.
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If we or our suppliers fail to achieve or maintain regulatory approval of manufacturing facilities, our growth could be limited and our business could be adversely affected.
We currently assemble and manufacture our cardiac monitoring and BGM devices. We purchase INR monitoring devices from third parties. In order to maintain compliance with FDA and other regulatory requirements, our manufacturing facilities must be periodically reevaluated and qualified under a quality system to ensure they meet production and quality standards. Suppliers of components and products used to manufacture MCT, BGM, event, and Holter devices and the manufacturers of the monitors used in INR services must also comply with FDA regulatory requirements, which often require significant resources and subject us and our suppliers to potential regulatory inspections and stoppages. If we or our suppliers do not maintain regulatory approval for our manufacturing operations, our business could be adversely affected.
If we fail to meet Medicare accreditation and surety bond requirements or DMEPOS supplier standards, it could negatively affect our business operations.
Medicare DMEPOS suppliers (other than certain exempted professionals) must be accredited by an approved accreditation organization as meeting DMEPOS quality standards adopted by CMS. Medicare suppliers also are required to meet surety bond requirements. In addition, Medicare DMEPOS suppliers must comply with Medicare supplier standards in order to obtain and retain billing privileges, including meeting all applicable federal and state licensure and regulatory requirements. Furthermore, many of our managed care contracts for the provision of diabetes services require that we qualify as an accredited DMEPOS supplier. CMS periodically expands or otherwise clarifies the Medicare DMEPOS supplier standards. We believe we are in compliance with these requirements. If we fail to maintain our Medicare accreditation status and/or do not comply with Medicare surety bond or supplier standard requirements in the future, or if these requirements are changed or expanded, it could adversely affect our profits and results of operations.
Our dependence on a limited number of suppliers may prevent us from delivering our devices on a timely basis.
We currently rely on a limited number of suppliers of components for the devices that we manufacture. If these suppliers became unable to provide components in the volumes needed, which has occurred, or at an acceptable price, we would have to identify and qualify acceptable replacements from alternative sources of supply. The process of qualifying suppliers is lengthy. Delays or interruptions in the supply of our required components could limit or stop our ability to provide sufficient quantities of devices on a timely basis and meet demand for our services, which could have a material adverse effect on our business, financial condition and results of operations.
We could be subject to medical liability or product liability claims, which may not be covered by insurance and which would adversely affect our business and results of operations.
The design, manufacture and marketing of services of the types we provide entail an inherent risk of product liability claims. Any such claims against us may require us to incur significant defense costs, irrespective of whether such claims have merit. In addition, we provide information to health care providers and payors upon which determinations affecting medical care are made, and claims may be made against us resulting from adverse medical consequences to patients resulting from the information we provide. In addition, we may become subject to liability in the event that the devices we use fail to correctly record or transfer patient information or if we provide incorrect information to patients or health care providers using our services.
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Our liability insurance is subject to deductibles and coverage limitations. In addition, our current insurance may not continue to be available to us on acceptable terms, if at all, and, if available, the coverage may not be adequate to protect us against any future claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against any claims against us, we would be exposed to significant liabilities, which may adversely affect our business and results of operations.
Our products may in the future be subject to product recalls that could harm our reputation and product liability claims.
The FDA has the authority to require the recall of commercialized products in the event of material regulatory deficiencies or defects in design or manufacture. Any recalls of our products or products that we distribute would divert managerial and financial resources, harm our reputation with customers and have an adverse effect on our financial condition and results of operations.
Regulations related to conflict minerals may adversely impact our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the DRC. Due to the materials used in certain of the products manufactured by our subsidiaries, we must comply with annual disclosure and reporting rules adopted by the SEC by assessing whether the subject minerals contained in our products originated in the DRC. Our supply chain is complex since we do not source our minerals directly from the original mine or smelter. Consequently, we incur costs in complying with these disclosure requirements, including for due diligence to determine the source of the subject minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. The rules may adversely affect the sourcing, supply and pricing of materials used in our products throughout the supply chain beyond our control, whether or not the subject minerals are “conflict free.” Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all subject minerals used in our products through our diligence process.
We are reliant on the outsourcing of clinical research by pharmaceutical, clinical research and biotechnology companies.
We are reliant on the ability and willingness of pharmaceutical, clinical research and biotechnology companies to continue to outsource the types of research services that we provide. As such, we are impacted and subject to risks, uncertainties and trends that affect companies in these industries. Any downturn in these industries or reduction in spending or outsourcing could adversely affect our business.
Future sales of our common stock may depress our stock price.
Future issuances in connection with acquisitions and sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of December 31, 2018, we had 33,406,364 outstanding shares of common stock. In addition, as of December 31, 2018, we had 2,661,282 stock options, 358,683 restricted stock units (“RSUs”) and 87,109 performance stock units (“PSUs”) outstanding to purchase shares of our common stock that will become exercisable over the next four years or vest over the next three years. Further, we had 135,000 performance stock options that are exercisable as of December 31, 2018. If exercised, vested or earned, additional shares would become available for sale.
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In addition, in connection with the acquisition of Geneva Healthcare, Inc (“Geneva”) discussed under “Item 7: Management’s Discussion and Analysis of Financial Condition - Recent Developments,” each equity holder of Geneva shall be eligible to receive additional consideration on the third anniversary of the closing date based on Geneva’s performance following the closing (the “Earn-Out Amount”). The Earn-Out Amount will be payable, at the election of the equity holder either (1) 100% in cash, (2) 50% in cash and 50% in shares of BioTelemetry common stock, or (3) 75% in cash and 25% in BioTelemetry common stock. The number of shares of BioTelemetry common stock issuable to each electing equity holder in partial payment of the Earn-Out Amount will be calculated based on a share price of $67.85.
Anti-takeover provisions in our charter documents and Delaware law might deter acquisition bids for us that our stockholders might consider favorable.
Our amended and restated certificate of incorporation and bylaws contain provisions that may make the acquisition of BioTelemetry more difficult without the approval of our Board of Directors. These provisions:
• | establish a classified Board of Directors so that not all members of the board are elected at one time; |
• | authorize the issuance of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval, and which may include rights superior to the rights of the holders of common stock; |
• | prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; |
• | provide that the Board of Directors is expressly authorized to make, alter or repeal our bylaws; and |
• | establish advance notice requirements for nominations for elections to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. |
In addition, because we are incorporated in Delaware, we are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change of control of BioTelemetry, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors of their choosing and cause us to take other corporate actions such stockholders desire.
Our future profitability is uncertain.
In recent years we have realized net income. We may not, however, be able to sustain or increase our profitability in the future on a quarterly or annual basis. While our recent results have been positive, as of December 31, 2018, we had a total accumulated deficit of approximately $115.9 million.
We may not be able to realize our net operating loss carryforwards.
We have deferred tax assets that include net operating loss carryforwards that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
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periods in which those temporary differences are deductible. The timing and manner in which we can utilize our net operating loss carryforward and future income tax deductions in any year may be limited by provisions of the Internal Revenue Code (“IRC”) regarding the change in ownership of corporations. Such limitation may have an impact on the ultimate realization of our carryforwards and future tax deductions. Section 382 of the IRC (“Section 382”) imposes limitations on a corporation’s ability to utilize net operating losses if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. Any unused annual limitation may be carried over to later years, and the amount of the limitation may under certain circumstances be increased by the built-in gains in assets held by us at the time of the change that are recognized in the five-year period after the change. Currently, a portion of our loss carryforwards is limited under Section 382.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2018, the following were our material leased facilities:
Location | Use | Segment/ Category | Square feet | Lease expiry | |
Malvern, PA | Corporate shared services, operations and monitoring | H, C&O | 61,000 | 2021 | |
Rosemont, IL | Corporate shared services, operations, monitoring and distribution | H, C&O | 58,000 | 2024 | |
Ewing, NJ | Monitoring | H | 28,000 | 2019 | |
Rochester, NY | Research services | R | 27,000 | 2028 | |
Eagan, MN | Manufacturing | C&O | 24,000 | 2022 | |
San Francisco, CA | Monitoring, research services | H, R | 20,000 | 2019 | |
Chester, PA | Distribution center | H | 16,000 | 2020 | |
Rockville, MD | Research services | R | 13,000 | 2026 | |
Phoenix, AZ | Distribution center | H | 11,000 | 2020 | |
San Diego, CA | Research, development and engineering | C&O | 8,000 | 2020 | |
Norfolk, VA | Monitoring | H | 8,000 | 2024 | |
Concord, MA | Research and development and distribution | C&O | 7,000 | 2019 | |
H = Healthcare segment, R = Research segment, C&O = Corporate and Other category
We believe that all of our existing facilities are adequate to meet our current needs and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.
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Item 3. Legal Proceedings
From time to time, in the ordinary course of business and like others in the industry, we receive requests for information from government agencies in connection with their regulatory or investigational authority or are involved in traditional employment or business litigation. We review such requests and notices and take appropriate action.
The final outcome of any current or future litigation or governmental or internal investigations cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be estimated.
For further details on the material legal proceedings to which we are currently a party, which is incorporated herein by reference, please refer to “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 19. Legal Proceedings” below.
Item 4. Mine Safety Disclosures
Not Applicable.
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PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Unregistered Sales of Equity Securities
In early 2018, in connection with the squeeze-out procedures under Swiss Law related to the acquisition of LifeWatch, we issued 58,786 shares of BioTelemetry Common Stock. The tender offer was subject to a Tier I exemption pursuant to Rule 14d-1(c) of the Exchange Act, as amended, and the issuance of BioTelemetry Common Stock in connection therewith was exempt from registration under the Securities Act of 1933, as amended, pursuant to Rule 802 thereof, because Life Watch is a foreign private issuer and U.S. holders held less than 10% of the LifeWatch Shares that were the subject of the tender offer.
Market Information for Common Stock
Our common stock is traded on the NASDAQ Global Select Market under the symbol: “BEAT.”
As of February 5, 2019, there were 33,607,798 shares of our common stock outstanding. Also as of that date, we had 60 holders of record (this does not include persons whose stock is in nominee or “street name” accounts through brokers).
Dividends
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our Board of Directors.
Stock Performance Graph
The graph below compares the total stockholder return of an investment of $100 on December 31, 2013 through December 31, 2018 for (i) our common stock (ii) The NASDAQ Health Care Index and (iii) The Russell 2000 Index. Each of the three measures of cumulative total return assumes reinvestment of dividends, if any. The stock price performance shown on the graph below is based on historical data and is not indicative of future stock price performance.
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Comparison of 5 Year Cumulative Total Return
Among BioTelemetry, Inc., The NASDAQ Health Care Index
and The Russell 2000 Index
Year Ended December 31, | ||||||||||||||||||
Company/Index | 2013* | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||
BioTelemetry, Inc. | 100.00 | 126.32 | 147.10 | 281.49 | 376.57 | 752.14 | ||||||||||||
NASDAQ Health Care Index | 100.00 | 128.47 | 137.28 | 114.74 | 140.01 | 134.92 | ||||||||||||
Russell 2000 Index | 100.00 | 104.89 | 100.26 | 121.63 | 139.44 | 124.09 | ||||||||||||
* Base Period | ||||||||||||||||||
The foregoing graph and chart shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those acts.
Information regarding our equity compensation plans is incorporated by reference from our Proxy Statement, unless our Proxy Statement is not filed on or before May 1, 2019, in which case we will amend this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.
Item 6. Selected Financial Data
The selected financial data set forth below are derived from our consolidated financial statements. The statement of operations data for the years ended December 31, 2018, 2017 and 2016, and the balance sheet data at December 31, 2018 and 2017 are derived from our audited consolidated financial statements
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included elsewhere in this Annual Report on Form 10-K. The statement of operations data for the years ended December 31, 2015 and 2014 and the balance sheet data at December 31, 2016, 2015 and 2014 are derived from our audited consolidated financial statements, which are not included herein. Certain reclassifications have been made below to prior period statements to conform to the current period presentation.
The following selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” included in this Annual Report on Form 10-K.
Statement of Operations Data: | Year Ended December 31, | ||||||||||||||||||
(in thousands, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||
Revenue | $ | 399,472 | $ | 286,776 | $ | 208,332 | $ | 178,513 | $ | 166,578 | |||||||||
Cost of revenue | 148,986 | 114,406 | 78,882 | 71,956 | 73,114 | ||||||||||||||
Gross profit | 250,486 | 172,370 | 129,450 | 106,557 | 93,464 | ||||||||||||||
Operating expenses: | |||||||||||||||||||
General and administrative | 109,736 | 82,983 | 55,877 | 47,882 | 45,131 | ||||||||||||||
Sales and marketing | 42,849 | 35,322 | 28,636 | 27,936 | 28,805 | ||||||||||||||
Bad debt expense | 22,222 | 13,291 | 9,931 | 8,047 | 9,347 | ||||||||||||||
Research and development | 11,206 | 11,101 | 8,355 | 7,111 | 7,396 | ||||||||||||||
Other charges | 14,659 | 31,436 | 8,639 | 6,063 | 7,098 | ||||||||||||||
Total operating expenses | 200,672 | 174,133 | 111,438 | 97,039 | 97,777 | ||||||||||||||
Income/(loss) from operations | 49,814 | (1,763 | ) | 18,012 | 9,518 | (4,313 | ) | ||||||||||||
Other expense: | |||||||||||||||||||
Interest expense | (9,429 | ) | (4,897 | ) | (1,830 | ) | (1,534 | ) | (713 | ) | |||||||||
Loss on extinguishment of debt | — | (543 | ) | — | — | (372 | ) | ||||||||||||
Loss on equity method investment | (246 | ) | (384 | ) | (287 | ) | — | — | |||||||||||
Other non-operating income/(expense), net | 1,365 | (2,809 | ) | (125 | ) | (88 | ) | (6,708 | ) | ||||||||||
Total other expense | (8,310 | ) | (8,633 | ) | (2,242 | ) | (1,622 | ) | (7,793 | ) | |||||||||
Income/(loss) before income taxes | 41,504 | (10,396 | ) | 15,770 | 7,896 | (12,106 | ) | ||||||||||||
Benefit from/(provision for) income taxes | 370 | (6,747 | ) | 37,667 | (468 | ) | 2,313 | ||||||||||||
Net income/(loss) | 41,874 | (17,143 | ) | 53,437 | 7,428 | (9,793 | ) | ||||||||||||
Net loss attributable to noncontrolling interests | (946 | ) | (1,187 | ) | — | — | — | ||||||||||||
Net income/(loss) attributable to BioTelemetry, Inc. | $ | 42,820 | $ | (15,956 | ) | $ | 53,437 | $ | 7,428 | $ | (9,793 | ) | |||||||
Net income/(loss) per common share attributable to BioTelemetry, Inc.: | |||||||||||||||||||
Basic | $ | 1.31 | $ | (0.53 | ) | $ | 1.91 | $ | 0.27 | $ | (0.37 | ) | |||||||
Diluted | $ | 1.20 | $ | (0.53 | ) | $ | 1.75 | $ | 0.26 | $ | (0.37 | ) | |||||||
Weighted average number of shares outstanding: | |||||||||||||||||||
Basic | 32,709 | 30,386 | 27,920 | 27,116 | 26,445 | ||||||||||||||
Diluted | 35,783 | 30,386 | 30,489 | 29,089 | 26,445 | ||||||||||||||
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Balance Sheet Data: | December 31, | ||||||||||||||||||
(in thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||
Cash and cash equivalents | $ | 80,889 | $ | 36,022 | $ | 23,052 | $ | 18,986 | $ | 20,007 | |||||||||
Working capital | 97,037 | 39,153 | 28,053 | 23,157 | 13,879 | ||||||||||||||
Total assets | 586,801 | 524,562 | 198,984 | 124,143 | 124,372 | ||||||||||||||
Total long-term obligations | 226,693 | 223,904 | 28,563 | 24,329 | 25,375 | ||||||||||||||
Total BioTelemetry, Inc.’s stockholders’ equity | 310,485 | 250,757 | 138,914 | 75,926 | 63,676 | ||||||||||||||
Noncontrolling interests | — | (1,054 | ) | — | — | — | |||||||||||||
Total equity | $ | 310,485 | $ | 249,703 | $ | 138,914 | $ | 75,926 | $ | 63,676 | |||||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of our operations in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors—see “Cautionary Note Regarding Forward-Looking Statements” and “Part I; Item 1A; Risk Factors.” We report on a calendar year end, and except where otherwise indicated below, “2018” refers to the year ended December 31, 2018, “2017” refers to the year ended December 31, 2017 and “2016” refers to the year ended December 31, 2016.
Overview
Company Background
We are the leading remote medical technology company focused on delivery of health information to improve quality of life and reduce cost of care. We provide remote cardiac monitoring, remote blood glucose monitoring, centralized core lab services for clinical trials and original equipment manufacturing that serves both healthcare and clinical research customers. We operate under two reportable segments: Healthcare and Research. The Healthcare segment is focused on the diagnosis and monitoring of 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. These services range from the differentiated MCT service, to event, traditional Holter, extended-wear Holter, Pacemaker and INR monitoring. The Research segment is engaged in central core laboratory services providing cardiac monitoring, imaging services, scientific consulting and data management services for drug and medical device trials. Included in the Corporate and Other category is the revenue received from the sale of non-invasive cardiac monitors to healthcare companies, wireless blood glucose meters and test strips to wholesale distributors of diabetes supplies and diabetic patients as well as product repairs, corporate overhead and other items not allocated to any of our reportable segments.
Recent Developments
Subsequent Event
On January 25, 2019, we entered into an Agreement and Plan of Merger (the “Geneva Agreement”) with Geneva, a Delaware corporation and early stage company that provides remote monitoring for implantable cardiac devices utilizing a proprietary cloud-based platform, whereby Geneva will become a wholly-owned subsidiary of BioTelemetry.
Pursuant to the terms of the Geneva Agreement, the holders of Geneva’s common and preferred stock and options exercisable for Geneva’s common stock outstanding at closing will receive cash in the aggregate of $45.0 million, subject to certain closing and post-closing adjustments, in addition to an earn-out of at least $20.0 million, payable either in cash or a combination of cash and stock, with no maximum Earn-Out Amount. The closing of the transactions contemplated by the Geneva Agreement is expected to be completed later in the first quarter of 2019.
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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, revenues and expenses and related disclosures. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances; however, actual results may differ from these estimates. We review our estimates and judgments on an ongoing basis.
We believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results. Our significant accounting policies are more fully described in “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 2. Summary of Significant Accounting Policies” below.
Revenue Recognition
Healthcare
Healthcare segment revenue includes revenue from MCT, event, traditional Holter, extended-wear Holter, Pacemaker and INR monitoring services. A significant portion of our revenue is paid for by third-party commercial insurance organizations and governmental entities. We also receive reimbursement directly from patients through co-pays, deductibles and self-pay arrangements.
For contracted payors, including Medicare, we determine revenue based on negotiated prices for the services provided. Based on our history, we have experience collecting substantially all of the negotiated contracted rates and are therefore not providing an implicit price concession. As a result, any adjustments to the revenue recognized are due to patient default and are recorded as bad debt expense.
For non-contracted payors, we are providing an implicit price concession because we do not have a contract with the underlying payor. As a result, we estimate our expected revenue based on historical cash collections. Subsequent adjustments to the revenue recognized are recorded as an adjustment to Healthcare revenue and not as bad debt expense.
Research
Research segment revenue includes revenue for core laboratory services. Our Research segment revenue is provided on a fee-for-service basis, and revenue is recognized as the related services are performed. We also provide consulting services on a time and materials basis, and this revenue is recognized as the services are performed. Our site support revenue, consisting of equipment rentals and sales along with related supplies and logistics management, are recognized at the time of sale or over the rental period. We record reimbursements received for out-of-pocket expenses, including freight, as revenue in the accompanying consolidated statements of operations.
See “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 3. Revenue Recognition” for more information.
Accounts Receivable
Healthcare accounts receivable are related to the Healthcare segment and are recorded at the time revenue is recognized and are presented on the consolidated balance sheet net of allowance for doubtful accounts. For contracted payors, including Medicare, we determine revenue based on negotiated prices
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for the services provided. Based on our history, we have experience collecting substantially all of the negotiated contracted rates and are therefore not providing an implicit price concession. As a result, we record an allowance for doubtful accounts based on historical collection trends to account for the risk of patient default. Because of continuing changes in the health care industry and third-party reimbursement, it is possible that our estimates could change, which could have a material impact on our operations and cash flows.
Other accounts receivable are related to the Research segment and Corporate and Other category and are recorded at the time revenue is recognized, or when products are shipped or services are performed. We estimate the allowance for doubtful accounts on a specific account basis, and consider several factors in our analysis including customer specific information.
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 $11.2 million and $8.8 million of receivables for the years ended December 31, 2018 and 2017, respectively. The impact was a reduction of gross receivables and a reduction in the allowance for doubtful accounts. There were no material write-offs in the Research segment. We recorded bad debt expense of $1.1 million and $0.8 million related to a customer bankruptcy in the Corporate and Other category during the years ended December 31, 2018 and 2017, respectively, and wrote off these amounts in 2018. We recorded consolidated bad debt expense of $22.2 million, $13.3 million and $9.9 million, respectively, for the years ended December 31, 2018, 2017 and 2016, respectively.
Stock-Based Compensation
Accounting Standards Codification (“ASC”) 718 - Compensation—Stock Compensation (“ASC 718”), addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for: (i) equity instruments of the enterprise or (ii) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. ASC 718 requires that an entity measure the cost of equity-based service awards issued to employees, such as stock options and RSUs, based on the grant-date fair value of the award and recognize the cost of such awards over the requisite service period (generally, the vesting period of the award). ASC 718 requires that an entity measure the cost of liability-based service awards based on current fair value that is remeasured subsequently at each reporting date through the settlement date. The compensation expense associated with PSUs is recognized ratably over the period between when the performance conditions are deemed probable of achievement and when the awards are vested. Performance stock options (“PSOs”) are valued and stock-based compensation expense is recorded once the performance conditions of the outstanding PSOs have achieved probability. Prior to July 1, 2018, we accounted for equity awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees; see “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 2. Summary of Significant Accounting Policies; t) Recent Accounting Pronouncements” for further details related to our adoption of Accounting Standards Update (“ASU”) 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, during the quarter ended September 30, 2018 and our current accounting for equity awards issued to non-employees.
We have historically recorded stock-based compensation expense based on the number of stock options or RSUs we expect to vest using our historical forfeiture experience and we periodically update those forfeiture rates to apply to new grants. While we early adopted ASU 2016-09, Improvements to
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Employee Share-Based Payment Accounting, during the year ended December 31, 2016, we have elected to continue to estimate forfeitures under the true-up provision of ASC 718. We record additional expense if the actual forfeiture rate is lower than estimated, and record a recovery of prior expense if the actual forfeiture rate is higher than estimated.
We estimate the fair value of our stock options using the Black‑Scholes option valuation model. The Black‑Scholes option valuation model requires the use of certain subjective assumptions. The most significant of these assumptions are the estimates of the expected volatility of the market price of our stock and the expected term of the award. We base our estimates of expected volatility on the historical average of our stock price. The expected term represents the period of time that share‑based awards granted are expected to be outstanding. Other assumptions used in the Black‑Scholes option valuation model include the risk‑free interest rate and expected dividend yield. The risk‑free interest rate for periods pertaining to the expected term of each option is based on the U.S. Treasury yield of a similar duration in effect at the time of grant. We have never paid, and do not expect to pay, dividends in the foreseeable future.
We estimate the fair value of our PSUs using a Monte Carlo simulation. This model uses assumptions, including the risk free interest rate, expected volatility of our stock price and those of the performance group, dividends of the performance group members and expected life of the awards. As noted above, we continue to estimate forfeitures under the true-up provision of ASC 718. If it is deemed probable that the PSU performance targets will be met, compensation expense is recorded for these awards ratably over the requisite service period. The PSUs are forfeited to the extent the performance criteria are not met within the service period.
Goodwill and Acquired Intangible Assets
Goodwill is the excess of the purchase price of an acquired business over the amounts assigned to assets acquired and liabilities assumed in a business combination. In accordance with ASC 350 - Intangibles - Goodwill and Other (“ASC 350”), goodwill is reviewed for impairment annually, or when events arise that could indicate that an impairment exists. In order to test goodwill for impairment, ASC 350 allows reporting entities to take either a qualitative or quantitative approach to testing. Under the qualitative approach, an entity may assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. Such qualitative factors can include, among others, industry and market conditions, present and anticipated sales and cost factors, overall financial performance and relevant entity-specific events. If we conclude based on our qualitative assessment that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative analysis in accordance with ASC 350. Under the quantitative approach, an entity compares the fair value of its reporting units to their carrying value. If the reporting unit’s carrying value exceeds its fair value, an impairment loss equal to the difference is recognized. The loss recognized shall not exceed the total amount of goodwill allocated to the reporting unit, and the income tax effects from any deductible goodwill on the carrying value of the reporting unit when measuring the goodwill impairment loss, if any, are considered.
For the purpose of performing our goodwill impairment analysis, we consider our business to be composed of three reporting units: Healthcare, Research and Technology. When performing a quantitative analysis, we calculate the fair value of the reporting units utilizing the income and market approaches. The income approach is based on a discounted cash flow methodology that includes assumptions for, among other things, forecasted income, cash flow, growth rates, income tax rates, expected tax benefits and long-term discount rates, all of which require significant judgment. The market approach utilizes our market data as well as market data from publicly-traded companies that are similar to us. There are inherent
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uncertainties related to these factors and the judgment applied in the analysis. We believe that the income and market approaches provide a reasonable basis to estimate the fair value of our reporting units.
Acquired intangible assets are recorded at fair value on the acquisition date. The estimated fair values and useful lives of intangible assets are determined by assessing many factors, including estimates of future operating performance and cash flows of the acquired business, the characteristics of the intangible assets and the experience of the acquired business. Independent appraisal firms may assist with the valuation of acquired assets. The impairment test for indefinite-lived intangible assets other than goodwill consists of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset. We estimate the fair value of the indefinite-lived intangibles using the relief from royalty method. We amortize our finite-lived intangible assets over each asset’s estimated useful life using the straight-line method.
We performed an impairment analysis of goodwill and indefinite-lived intangible assets for the years ended December 31, 2018, 2017 and 2016. There was no goodwill impairment recorded as a result of these analyses.
During our impairment testing of our intangible assets for the year ended December 31, 2017, giving particular consideration to the LifeWatch integration and forward-looking integration plans, we determined that certain trade names and internally developed software costs were no longer going to be used and were therefore impaired. This resulted in $11.0 million of intangible asset impairment charges included within the Corporate and Other category as a component of the other charges line in our consolidated statements of operations. There were no other intangible asset impairments for the year ended December 31, 2017, and there were no intangible asset impairments for the year ended December 31, 2018.
At December 31, 2016, we performed our required annual impairment tests of indefinite-lived intangible assets. Based on that analysis, we determined that there was no impairment.
Income Taxes
We account for income taxes under the liability method, as described in ASC 740 - Income Taxes (“ASC 740”). Deferred income taxes are recognized for the tax consequences of temporary differences between the tax and financial statement reporting bases of assets and liabilities. When we determine that we will not be able to realize our deferred tax assets, we adjust the carrying value of the deferred tax assets through the valuation allowance.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (i) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
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Statements of Operations Overview
Revenue
The vast majority of our revenue is derived from remote cardiac monitoring services in our Healthcare segment. The amount of Healthcare segment revenue generated is based on the number of patients enrolled through physician prescriptions and the rates reimbursed to us by commercial payors, physicians, patients and Medicare. MCT Medicare pricing was flat in 2018 but will decline slightly for 2019. Over time, we expect the price to remain relatively stable. We expect volumes to grow in the long-term as the market grows and we continue to gain market share.
Revenue is generated in the Research segment through various study and consulting services, which include activities such as core laboratory services, project management, data management, equipment rental and customer support. Research segment revenue is driven by our ability to enter into service contracts at various phases of the pharmaceutical drug development life cycle. We expect volume to increase as a result of our growing capabilities as a multi-service provider. Negotiated pricing for service contracts is subject to market pressures, and as a result has decreased slightly over the last few years. With recent market consolidation, we are experiencing stabilization in our prices. We expect revenue from the Research segment to increase over the long-term as we continue to increase our study volume.
Revenue is generated in the Corporate and Other category from the sale of non-invasive cardiac monitors to healthcare companies, the sale of wireless blood glucose monitoring meters and test strips to wholesale distributors of diabetic supplies and diabetic patients as well as product repairs and is recognized when products are shipped, or as services are completed. The sales volume for our Corporate and Other category has decreased in the current year due to the timing of several large product sales during the year ended December 31, 2017. We expect our revenue in the Corporate and Other category to increase over the long-term as we introduce new products.
Gross Profit
Gross profit consists of revenue less the cost of revenue.
Cost of revenue for the Healthcare segment includes:
• | salaries and benefits for personnel providing various services and customer support to physicians and patients including customer service, monitoring services, distribution services (scheduling, packaging and delivery of the devices to the patients and practices), device repair and maintenance and quality assurance; |
• | cost of patient-related services provided by third-party subcontractors including device transportation to and from the patients and practices and wireless communication charges related to transmission of data to the monitoring centers; |
• | consumable supplies sent to patients along with the durable components of our devices; and |
• | depreciation of our medical devices. |
Cost of revenue for the Research segment includes:
• | cost of internal and third-party medical specialists and technicians; |
• | salaries and benefits of personnel providing various services to customers including consulting, customer support, project management and certain information technology support; |
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• | depreciation of our medical devices; and |
• | cost of materials and transportation related to the shipment of products and supplies. |
Cost of revenue for the Corporate and Other category includes the cost of materials and labor related to the manufacture of our products and product repair services.
We expect multiple factors to influence our gross profit margins in the foreseeable future. Changes in reimbursement and payor mix are two such factors. While we expect reimbursement to be stable, payor mix is unpredictable and dependent on the insurance coverage of patients that are prescribed our services. We have a history of lowering the average cost of revenue as we increase volume. We expect to continue to achieve efficiencies in cost of revenue through process improvements, as well as from a reduction in the cost of our devices. We expect these factors will have a favorable impact on our gross profit margins. While these factors could be offsetting, it is difficult to predict how they will influence our gross profit margins.
We expect to achieve some efficiencies in our Research segment cost of revenue through process improvements, and expect a favorable impact on gross margins due to the leveraging of the relatively fixed-cost infrastructure. If we experience increased service contract pricing or volume declines in our Research segment, it would have an adverse effect on our gross profit margin.
General and Administrative
General and administrative expense consists primarily of salaries and benefits related to general and administrative personnel, management bonuses, professional fees primarily related to legal and audit services, amortization related to intangible assets, facilities expenses and the related overhead.
Sales and Marketing
Sales and marketing expense consists primarily of salaries, benefits and commissions related to sales personnel, travel and entertainment costs and marketing costs. Also included are costs associated with marketing programs such as trade shows and advertising campaigns.
Research and Development
Research and development expense consists primarily of salaries and benefits of personnel, as well as subcontractors who work on new product development and sustaining engineering of our existing products.
Other Charges
We account for expenses associated with our acquisitions and certain litigation as other charges as incurred. These expenses are primarily a result of legal and professional fees surrounding our acquisitions, integration activities including severance and asset impairments, as well as legal expense related to our patent litigation for which we are the plaintiff. Other charges are costs that are not considered indicative of the ongoing business operations.
Interest Expense
Interest expense consists primarily of the interest accrued related to our term loan, capital leases and where applicable, our revolving credit agreement, along with the amortization of deferred debt issuance costs.
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Loss on Extinguishment of Debt
Loss on extinguishment of debt consists primarily of the write-off of the unamortized debt issuance costs upon settlement of our prior credit agreements.
Loss on Equity Method Investment
Loss on equity method investment represents our portion of the results of operations of our equity method investees.
Other Non-Operating Income/(Expense), net
Other non-operating income/(expense), net represents other infrequently occurring non-operating items including settlement charges and foreign exchange gains/(losses).
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests consists of the post-acquisition activity of the portion of LifeWatch that we had not yet acquired during the period from July 12, 2017 through December 31, 2017, as well as the 45% of LifeWatch Turkey Holding AG that we did not own.
Results of Operations
Years Ended December 31, 2018 and 2017
Revenue
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2018 | 2017 | $ | % | ||||||||||
Healthcare | $ | 338,812 | $ | 234,385 | $ | 104,427 | 44.6 | % | ||||||
Research | 50,561 | 38,790 | 11,771 | 30.3 | % | |||||||||
Other | 10,099 | 13,601 | (3,502 | ) | (25.7 | )% | ||||||||
Total revenue | $ | 399,472 | $ | 286,776 | $ | 112,696 | 39.3 | % | ||||||
Total revenue increased for the year ended December 31, 2018. Healthcare revenues increased due primarily to an increase in patient volume from the full-year impact of the LifeWatch acquisition, which closed on July 12, 2017. On an organic basis, Healthcare revenue grew 13.8% due to an increase in patient volume driven by double-digit MCT growth and triple-digit extended-wear Holter growth, as well as a favorable payor mix. The Research revenue increase was driven by higher volume in oncology, early phase and Afib studies. The strength in Healthcare and Research revenue was partially offset by lower revenue in the Corporate and Other category due to the timing of several large product sales during the year ended December 31, 2017.
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Gross Profit
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2018 | 2017 | $ | % | ||||||||||
Gross profit | $ | 250,486 | $ | 172,370 | $ | 78,116 | 45.3 | % | ||||||
Percentage of revenue | 62.7 | % | 60.1 | % | ||||||||||
Gross profit increased for the year ended December 31, 2018 due primarily to the full-year impact of the LifeWatch acquisition, organic revenue growth and realized synergies from the integration of LifeWatch. The 260 basis point increase in gross margin percentage was due to the impact of volume-related efficiencies, a favorable payor mix and synergies.
General and Administrative Expense
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2018 | 2017 | $ | % | ||||||||||
General and administrative expense | $ | 109,736 | $ | 82,983 | $ | 26,753 | 32.2 | % | ||||||
Percentage of revenue | 27.5 | % | 28.9 | % | ||||||||||
General and administrative expense increased for the year ended December 31, 2018 due primarily to the $14.9 million full-year impact of the LifeWatch acquisition, $9.0 million of additional headcount-related expense, $7.2 million of intangible asset amortization attributable to LifeWatch, $1.2 million of increased information technology expense as we continue to invest in our business systems and $0.8 million of increased professional fees, partially offset by $6.1 million of additional synergies stemming from the integration of LifeWatch.
Sales and Marketing Expense
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2018 | 2017 | $ | % | ||||||||||
Sales and marketing expense | $ | 42,849 | $ | 35,322 | $ | 7,527 | 21.3 | % | ||||||
Percentage of revenue | 10.7 | % | 12.3 | % | ||||||||||
Sales and marketing expense increased for the year ended December 31, 2018 due primarily to the $8.9 million full-year impact of the LifeWatch acquisition, $1.2 million of additional headcount-related expense and $1.2 million due to higher sales meeting costs and travel expense, partially offset by $3.9 million of additional synergies from the integration of LifeWatch.
Bad Debt Expense
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2018 | 2017 | $ | % | ||||||||||
Bad debt expense | $ | 22,222 | $ | 13,291 | $ | 8,931 | 67.2 | % | ||||||
Percentage of revenue | 5.6 | % | 4.6 | % | ||||||||||
Bad debt expense increased for the year ended December 31, 2018 due primarily to increased Healthcare segment revenue. Bad debt expense in Research was minimal and is recorded on a specific account basis.
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Research and Development Expense
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2018 | 2017 | $ | % | ||||||||||
Research and development expense | $ | 11,206 | $ | 11,101 | $ | 105 | 0.9 | % | ||||||
Percentage of revenue | 2.8 | % | 3.9 | % | ||||||||||
Research and development expense increased slightly for the year ended December 31, 2018 due to the $3.2 million full-year impact of the LifeWatch acquisition, partially offset by $2.0 million of synergies realized from the integration of LifeWatch, as well as $1.0 million of lower headcount-related expenses.
Other Charges
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2018 | 2017 | $ | % | ||||||||||
Other charges | $ | 14,659 | $ | 31,436 | $ | (16,777 | ) | (53.4 | )% | |||||
Percentage of revenue | 3.7 | % | 11.0 | % | ||||||||||
Other charges decreased for the year ended December 31, 2018 due primarily to a $7.5 million reduction of LifeWatch integration charges and a $2.1 million reduction of other costs associated with previous acquisitions, as well as a $12.1 million asset impairment charge that occurred in 2017. These reductions were partially offset by increases related to a $1.9 million impact from changes in contingent consideration, a $1.8 million write-off of a note receivable, as well as a $1.2 million increase in patent litigation fees in 2018.
Other Expense
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2018 | 2017 | $ | % | ||||||||||
Interest expense | $ | (9,429 | ) | $ | (4,897 | ) | $ | (4,532 | ) | 92.5 | % | |||
Loss on extinguishment of debt | — | (543 | ) | 543 | (100.0 | )% | ||||||||
Loss on equity method investment | (246 | ) | (384 | ) | 138 | (35.9 | )% | |||||||
Other non-operating income/(expense), net | 1,365 | (2,809 | ) | 4,174 | (148.6 | )% | ||||||||
Total Other expense | $ | (8,310 | ) | $ | (8,633 | ) | $ | 323 | (3.7 | )% | ||||
Percentage of revenue | 2.1 | % | 3.0 | % | ||||||||||
Total other expense decreased slightly for the year ended December 31, 2018. Interest expense increased due to the full-year impact of the higher debt obligation, resulting from the SunTrust Credit Agreement entered into concurrent with the LifeWatch acquisition. Other non-operating income, net in 2018 was primarily composed of a current year foreign currency gain. Other non-operating expense, net in 2017 was due primarily to a $2.5 million legal settlement.
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Income Taxes
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2018 | 2017 | $ | % | ||||||||||
Benefit from/(provision for) income taxes | $ | 370 | $ | (6,747 | ) | $ | 7,117 | (105.5 | )% | |||||
Effective tax benefit/(provision) rate | (0.9 | )% | (64.9 | )% | ||||||||||
For the year ended December 31, 2018, we recognized a net tax benefit due primarily to favorable tax deductions related to stock compensation.
For the year ended December 31, 2017, we recognized a net tax provision due primarily to the re-measurement of our deferred tax assets and liabilities at the new federal corporate rate of 21%, net of the associated state tax impact, related to the Tax Cuts and Jobs Act, which resulted in an $8.0 million tax expense.
Years Ended December 31, 2017 and 2016
Revenue
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2017 | 2016 | $ | % | ||||||||||
Healthcare | $ | 234,385 | $ | 165,664 | $ | 68,721 | 41.5 | % | ||||||
Research | 38,790 | 32,565 | 6,225 | 19.1 | % | |||||||||
Other | 13,601 | 10,103 | 3,498 | 34.6 | % | |||||||||
Total revenue | $ | 286,776 | $ | 208,332 | $ | 78,444 | 37.7 | % | ||||||
Total revenue increased for the year ended December 31, 2017 due primarily to the Healthcare, which was affected by the acquisition of LifeWatch, along with increased patient volumes as well as a favorable service mix. While overall pricing was stable, we saw a decline in our Medicare rates. Research revenue increased due to the full year impact of the acquisition of our imaging business, VirtualScopics, which was acquired in May 2016, partially offset by lower cardiac study volumes. Other revenue also increased due to the full year impact of Telcare, which was acquired in December 2016.
Gross Profit
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2017 | 2016 | $ | % | ||||||||||
Gross profit | $ | 172,370 | $ | 129,450 | $ | 42,920 | 33.2 | % | ||||||
Percentage of revenue | 60.1 | % | 62.1 | % | ||||||||||
Gross profit increased for the year ended December 31, 2017 due primarily to our recent acquisitions, organic growth, and realized synergies from our acquisitions, partially offset by the impact of the decrease in Medicare rates. The decrease in gross margin percentage was due to the impact of our recent acquisitions, whose revenue carry lower profit margins than our existing business.
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General and Administrative Expense
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2017 | 2016 | $ | % | ||||||||||
General and administrative expense | $ | 82,983 | $ | 55,877 | $ | 27,106 | 48.5 | % | ||||||
Percentage of revenue | 28.9 | % | 26.8 | % | ||||||||||
General and administrative expense increased for the year ended December 31, 2017 due primarily to the $19.9 million impact from our recent acquisitions, primarily LifeWatch, a $6.0 million impact from intangible asset amortization attributed to LifeWatch, as well as a $2.2 million increase in technology costs, offset partially by $0.7 million in headcount related savings. The increase in the general and administrative expense as a percent of revenue was the result of the intangible asset amortization recorded stemming from the LifeWatch acquisition.
Sales and Marketing Expense
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2017 | 2016 | $ | % | ||||||||||
Sales and marketing expense | $ | 35,322 | $ | 28,636 | $ | 6,686 | 23.3 | % | ||||||
Percentage of revenue | 12.3 | % | 13.7 | % | ||||||||||
Sales and marketing expense increased for the year ended December 31, 2017 due primarily to the$10.7 million impact from our recent acquisitions, primarily LifeWatch, and $2.2 million in added employee related costs exclusive of our recent acquisitions, partially offset by approximately $5.0 million of synergies obtained from the recent acquisitions and $1.1 million due to lower sales meetings costs. Sales and marketing expense decreased as a percentage of revenue due to the leverage and synergies obtained from our acquired businesses.
Bad Debt Expense
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2017 | 2016 | $ | % | ||||||||||
Bad debt expense | $ | 13,291 | $ | 9,931 | $ | 3,360 | 33.8 | % | ||||||
Percentage of revenue | 4.6 | % | 4.8 | % | ||||||||||
Bad debt expense increased for the year ended December 31, 2017 due primarily to increased revenue from our recently acquired business and the timing of revenue and collections. Substantially all of our bad debt expense relates to the Healthcare segment. Bad debt expense in the Research segment was minimal and is recorded on a specific account basis.
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Research and Development Expense
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2017 | 2016 | $ | % | ||||||||||
Research and development expense | $ | 11,101 | $ | 8,355 | $ | 2,746 | 32.9 | % | ||||||
Percentage of revenue | 3.9 | % | 4.0 | % | ||||||||||
Research and development expense increased for the year ended December 31, 2017 due primarily to the $5.2 million impact from our recent acquisitions, primarily LifeWatch, offset partially by $2.7 million of synergies obtained from the recent acquisitions and other cost savings.
Other Charges
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2017 | 2016 | $ | % | ||||||||||
Other charges | $ | 31,436 | $ | 8,639 | $ | 22,797 | 263.9 | % | ||||||
Percentage of revenue | 11.0 | % | 4.1 | % | ||||||||||
Other charges increased for the year ended December 31, 2017 due primarily to $12.0 million of asset impairment charges, $4.9 million in additional professional fees, $4.1 million of severance and employee related costs, and $1.5 million of legal fees, primarily related to the acquisition of LifeWatch. These charges were partially offset by a $2.6 million decrease in the fair value of acquisition-related consideration recognized for previous acquisitions.
Other Expense
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2017 | 2016 | $ | % | ||||||||||
Interest expense | $ | (4,897 | ) | $ | (1,830 | ) | $ | (3,067 | ) | 167.6 | % | |||
Loss on equity method investment | (384 | ) | (287 | ) | (97 | ) | n/a | |||||||
Other non-operating expense, net | (2,809 | ) | (125 | ) | (2,684 | ) | 2,147.2 | % | ||||||
Total Other expense | $ | (8,090 | ) | $ | (2,242 | ) | $ | (5,848 | ) | 260.8 | % | |||
Percentage of revenue | 3.0 | % | 1.1 | % | ||||||||||
Total other expense increased for the year ended December 31, 2017 due primarily to $3.1 million of interest expense resulting from our new credit agreement entered into concurrent with our LifeWatch acquisition and a $2.5 million non-operating charge for our settlement with the Office of Civil Rights related to the theft of two unencrypted laptop computers in 2011. Additionally, we incurred a $1.3 million non-operating charge related to the derivative instrument premium for the acquisition of LifeWatch, and a $0.5 million loss on the extinguishment of our previous credit agreement with Healthcare Financial Solutions, LLC, offset partially by a non-operating gain of approximately $1.3 million related to the favorable settlement with the former owner of Mednet.
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Income Taxes
Year Ended December 31, | Change | |||||||||||||
(in thousands, except percentages) | 2017 | 2016 | $ | % | ||||||||||
Benefit from/(provision for) income taxes | $ | (6,747 | ) | $ | 37,667 | $ | (44,414 | ) | 117.9 | % | ||||
Effective tax benefit/(provision) rate | (64.9 | )% | 238.9 | % | ||||||||||
For the year ended December 31, 2017, we recognized a net tax provision due primarily to the re-measurement of our deferred tax assets and liabilities at the new federal corporate rate of 21%, net of the associated state tax impact, related to the Tax Cuts and Jobs Act, which resulted in an $8.0 million tax expense.
For the year ended December 31, 2016, we recognized a net tax benefit due primarily to a $51.6 million benefit related to the release of our valuation allowance. The release of our valuation allowance was partially offset by adjustments to deferred taxes and state taxes levied on fiscal 2016 taxable income.
Liquidity and Capital Resources
The following table highlights certain information related to our liquidity and capital resources:
(In thousands, except ratios) | December 31, 2018 | December 31, 2017 | |||||
Cash and cash equivalents | $ | 80,889 | $ | 36,022 | |||
Healthcare accounts receivable, net of allowance for doubtful accounts | 37,754 | 25,190 | |||||
Other accounts receivable, net of allowance for doubtful accounts | 14,874 | 13,296 | |||||
Availability under revolving credit facility | 50,000 | 50,000 | |||||
Working capital | $ | 97,037 | $ | 39,153 | |||
Current ratio | 3.0 | 1.8 | |||||
Total capital lease obligations | $ | 1,769 | $ | 5,509 | |||
Total debt | $ | 198,549 | $ | 199,356 | |||
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The following table highlights certain cash flow activities:
Year Ended December 31, | |||||||
(In thousands) | 2018 | 2017 | |||||
Net income/(loss) | $ | 41,874 | $ | (17,143 | ) | ||
Non-cash adjustments to net income | 70,154 | 66,193 | |||||
Cash used for working capital | (39,282 | ) | (25,268 | ) | |||
Cash provided by operating activities | 72,746 | 23,782 | |||||
Cash used for acquisitions of businesses, net of cash acquired | (3,750 | ) | (161,479 | ) | |||
Purchases of property, equipment and investment in internally developed software | (24,637 | ) | (13,697 | ) | |||
Cash used in investing activities | (28,851 | ) | (177,188 | ) | |||
Cash provided by financing activities | $ | 601 | $ | 166,457 | |||
The increase in cash provided by operating activities was due primarily to the increase in net income. Non-cash adjustments to net income increased for the year ended December 31, 2018 due primarily to increases in bad debt expense, depreciation , amortization of intangible assets, stock-based compensation and the impact from changes in contingent consideration, offset partially by the decrease in impairment charges and the change in deferred taxes. Cash used for working capital increased due primarily to the timing of cash receipts and payments.
During the year ended December 31, 2018 we had nominal spending on acquisitions of businesses, whereas during the year ended December 31, 2017 we acquired LifeWatch for $161.5 million in cash and $117.4 million in common stock. We increased our purchases for equipment in 2018, due primarily to higher Healthcare segment service volumes and the launch of our next generation products used in our monitoring services.
In conjunction with the LifeWatch acquisition, we established a new SunTrust Credit Agreement with the Lenders in the amount of $205.0 million and extinguished the previous Healthcare Financial Solutions Credit Agreement. For further details regarding the Credit Agreements, please see “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 11. Credit Agreement” below.
Subsequent to December 31, 2018, we entered into the Geneva Agreement, whereby Geneva will become a wholly owned subsidiary of BioTelemetry. We expect to complete this acquisition later in the first quarter of 2019 with a cash outlay of approximately $45.0 million.
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Contractual Obligations and Commitments
The following table describes our long-term contractual obligations and commitments as of December 31, 2018:
Payments due by period | ||||||||||||||||||||
(in thousands) | Total | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
Operating lease obligations | $ | 23,458 | $ | 5,047 | $ | 7,828 | $ | 4,776 | $ | 5,807 | ||||||||||
Capital lease obligations | 1,769 | 1,652 | 117 | — | — | |||||||||||||||
Debt and interest obligations(1) | 231,279 | 13,111 | 51,142 | 167,026 | — | |||||||||||||||
Total(2)(3) | $ | 256,506 | $ | 19,810 | $ | 59,087 | $ | 171,802 | $ | 5,807 | ||||||||||
________________
(1) | Our debt bears a variable interest rate, at our election, with an applicable margin determined by the credit agreement. The amounts above assume the rate and margin as of December 31, 2018 throughout the remaining term. The rate and margin may fluctuate, as may our election of LIBOR or Base Rate pricing, throughout the term of the loan. Excluded from the amounts in the table is the 0.25% commitment fee payable on the unused portion of our line of credit. |
(2) | In connection with certain acquisitions completed in 2016 and 2018, we have contingent consideration obligations payable to the sellers in these transactions upon the achievement of certain milestones. The maximum aggregate undiscounted amounts potentially payable not included in the table above total $5.0 million. |
(3) | As of December 31, 2018, our other long-term liabilities in our consolidated balance sheet consist primarily of reserves for uncertain tax positions. We are unable to make reasonably reliable estimates of both the timing of tax audit outcomes and if unfavorable, the timing of payments; therefore, such amounts are not included in the above contractual obligation table. See “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 17. Income Taxes” for further discussion related to uncertain tax positions. |
As of December 31, 2018, we were bound under facility leases and several office equipment leases that are included in the table above. Our debt bears a variable interest rate of LIBOR plus the applicable margin, or the prime rate plus the applicable margin. If LIBOR rates, the prime rates, or the applicable margin increase, the interest obligation amounts on our debt disclosed above will be affected.
Recent Accounting Pronouncements
For further details on recently issued accounting pronouncements, please refer to “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 2. Summary of Significant Accounting Policies; t) Recent Accounting Pronouncements.”
Off-Balance Sheet Arrangements
As of December 31, 2018, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our cash and cash equivalents as of December 31, 2018 were $80.9 million. We do not invest in any short-term or long-term marketable securities, nor do we hold any derivative financial instruments for trading or speculative purposes.
At December 31, 2018, we had $198.5 million of variable rate debt, inclusive of debt discounts and deferred charges, at a rate of LIBOR plus the applicable margin, or the prime rate plus the applicable margin. A 1.0% change in either the LIBOR rate, prime rate, or the applicable margin would result in a change in annual interest 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 11. Credit Agreement” included in this Annual Report on Form 10-K.
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of BioTelemetry, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BioTelemetry, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), cash flows and equity for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 21, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP | |
We have served as the Company’s auditors since 2004. | |
Philadelphia, Pennsylvania | |
February 21, 2019 | |
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December 31, | |||||||
(in thousands, except shares and par value) | 2018 | 2017 | |||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 80,889 | $ | 36,022 | |||
Healthcare accounts receivable, net of allowance for doubtful accounts of $25,345 and $15,556 at December 31, 2018 and 2017, respectively | 37,754 | 25,190 | |||||
Other accounts receivable, net of allowance for doubtful accounts of $268 and $1,425 at December 31, 2018 and 2017, respectively | 14,874 | 13,296 | |||||
Inventory | 7,323 | 5,332 | |||||
Prepaid expenses and other current assets | 5,820 | 10,268 | |||||
Total current assets | 146,660 | 90,108 | |||||
Property and equipment, net | 48,377 | 49,194 | |||||
Intangible assets, net | 129,653 | 141,707 | |||||
Goodwill | 238,814 | 223,105 | |||||
Deferred tax asset | 19,975 | 17,681 | |||||
Other assets | 3,322 | 2,767 | |||||
Total assets | $ | 586,801 | $ | 524,562 | |||
LIABILITIES AND EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | 18,157 | 14,529 | |||||
Accrued liabilities | 21,609 | 26,055 | |||||
Current portion of capital lease obligations | 1,652 | 4,023 | |||||
Current portion of long-term debt | 5,125 | 2,050 | |||||
Contract liabilities | 3,080 | 4,298 | |||||
Total current liabilities | 49,623 | 50,955 | |||||
Long-term portion of capital lease obligations | 117 | 1,486 | |||||
Long-term debt | 193,424 | 197,306 | |||||
Other long-term liabilities | 33,152 | 25,112 | |||||
Total liabilities | 276,316 | 274,859 | |||||
Stockholders’ equity: | |||||||
Common stock—$.001 par value as of December 31, 2018 and 2017; 200,000,000 shares authorized as of December 31, 2018 and 2017; 33,406,364 and 32,460,668 shares issued and outstanding at December 31, 2018 and 2017, respectively | 33 | 32 | |||||
Paid-in capital | 426,054 | 409,517 | |||||
Accumulated other comprehensive income/(loss) | 256 | (114 | ) | ||||
Accumulated deficit | (115,858 | ) | (158,678 | ) | |||
Total BioTelemetry, Inc.’s stockholders’ equity | 310,485 | 250,757 | |||||
Noncontrolling interests | — | (1,054 | ) | ||||
Total equity | 310,485 | 249,703 | |||||
Total liabilities and equity | $ | 586,801 | $ | 524,562 | |||
See accompanying Notes to Consolidated Financial Statements.
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Year Ended December 31, | |||||||||||
(in thousands, except per share amounts) | 2018 | 2017 | 2016 | ||||||||
Revenue | $ | 399,472 | $ | 286,776 | $ | 208,332 | |||||
Cost of revenue | 148,986 | 114,406 | 78,882 | ||||||||
Gross profit | 250,486 | 172,370 | 129,450 | ||||||||
Operating expenses: | |||||||||||
General and administrative | 109,736 | 82,983 | 55,877 | ||||||||
Sales and marketing | 42,849 | 35,322 | 28,636 | ||||||||
Bad debt expense | 22,222 | 13,291 | 9,931 | ||||||||
Research and development | 11,206 | 11,101 | 8,355 | ||||||||
Other charges | 14,659 | 31,436 | 8,639 | ||||||||
Total operating expenses | 200,672 | 174,133 | 111,438 | ||||||||
Income/(loss) from operations | 49,814 | (1,763 | ) | 18,012 | |||||||
Other expense: | |||||||||||
Interest expense | (9,429 | ) | (4,897 | ) | (1,830 | ) | |||||
Loss on extinguishment of debt | — | (543 | ) | — | |||||||
Loss on equity method investments | (246 | ) | (384 | ) | (287 | ) | |||||
Other non-operating income/(expense), net | 1,365 | (2,809 | ) | (125 | ) | ||||||
Total other expense, net | (8,310 | ) | (8,633 | ) | (2,242 | ) | |||||
Income/(loss) before income taxes | 41,504 | (10,396 | ) | 15,770 | |||||||
(Provision for)/benefit from income taxes | 370 | (6,747 | ) | 37,667 | |||||||
Net income/(loss) | 41,874 | (17,143 | ) | 53,437 | |||||||
Net loss attributable to noncontrolling interests | (946 | ) | (1,187 | ) | — | ||||||
Net income/(loss) attributable to BioTelemetry, Inc. | $ | 42,820 | $ | (15,956 | ) | $ | 53,437 | ||||
Net income/(loss) per common share attributable to BioTelemetry, Inc.: | |||||||||||
Basic | $ | 1.31 | $ | (0.53 | ) | $ | 1.91 | ||||
Diluted | $ | 1.20 | $ | (0.53 | ) | $ | 1.75 | ||||
Weighted average number of common shares outstanding: | |||||||||||
Basic | 32,709 | 30,386 | 27,920 | ||||||||
Dilutive stock options and restricted stock units | 3,074 | — | 2,569 | ||||||||
Diluted | 35,783 | 30,386 | 30,489 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
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Year Ended December 31, | |||||||||||
(in thousands) | 2018 | 2017 | 2016 | ||||||||
Net income/(loss) attributable to BioTelemetry, Inc. | $ | 42,820 | $ | (15,956 | ) | $ | 53,437 | ||||
Other comprehensive income/(loss): | |||||||||||
Foreign currency translation gain/(loss) | 370 | (80 | ) | (22 | ) | ||||||
Comprehensive income/(loss) attributable to BioTelemetry, Inc. | $ | 43,190 | $ | (16,036 | ) | $ | 53,415 | ||||
See accompanying Notes to Consolidated Financial Statements.
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Year Ended December 31, | |||||||||||
(in thousands) | 2018 | 2017 | 2016 | ||||||||
OPERATING ACTIVITIES | |||||||||||
Net income/(loss) | $ | 41,874 | $ | (17,143 | ) | $ | 53,437 | ||||
Adjustments to reconcile net income/(loss) to net cash provided by operating activities: | |||||||||||
Bad debt expense | 22,222 | 13,291 | 9,931 | ||||||||
Depreciation | 22,963 | 18,337 | 10,547 | ||||||||
Amortization of intangibles | 17,205 | 10,224 | 3,722 | ||||||||
Impairment charge | — | 12,045 | — | ||||||||
Stock-based compensation | 9,261 | 7,680 | 6,502 | ||||||||
Write off of derivative premium | — | 1,322 | — | ||||||||
Accretion of debt discount | 1,243 | 678 | 217 | ||||||||
Loss on extinguishment of debt | — | 543 | — | ||||||||
Gain on legal settlement | — | (1,333 | ) | — | |||||||
Tax (benefit)/expense | (2,294 | ) | 6,050 | (38,141 | ) | ||||||
Other non-cash items | (446 | ) | (2,644 | ) | 457 | ||||||
Changes in operating assets and liabilities: | |||||||||||
Healthcare and other accounts receivable | (35,742 | ) | (15,455 | ) | (8,707 | ) | |||||
Inventory | (1,991 | ) | 665 | (753 | ) | ||||||
Prepaid expenses and other assets | 3,517 | (694 | ) | (1,050 | ) | ||||||
Accounts payable | 3,760 | (8,320 | ) | 3,145 | |||||||
Accrued and other liabilities | (8,826 | ) | (1,464 | ) | (456 | ) | |||||
Net cash provided by operating activities | 72,746 | 23,782 | 38,851 | ||||||||
INVESTING ACTIVITIES | |||||||||||
Acquisition of businesses, net of cash acquired | (3,750 | ) | (161,479 | ) | (24,970 | ) | |||||
Purchases of property and equipment and investment in internally developed software | (24,637 | ) | (13,697 | ) | (10,899 | ) | |||||
Purchase of derivative instrument | — | (1,322 | ) | — | |||||||
Investment in equity method investee | (464 | ) | (690 | ) | (312 | ) | |||||
Net cash used in investing activities | (28,851 | ) | (177,188 | ) | (36,181 | ) | |||||
FINANCING ACTIVITIES | |||||||||||
Proceeds related to the exercising of stock options and employee stock purchase plan | 12,186 | 6,071 | 2,519 | ||||||||
Tax payments related to the vesting of shares | (2,910 | ) | (1,933 | ) | (2,333 | ) | |||||
Issuance of long-term debt | — | 205,000 | — | ||||||||
Borrowings under revolving loans | — | — | 14,500 | ||||||||
Repayments on revolving loans | — | (3,000 | ) | (11,500 | ) | ||||||
Payment of debt issuance costs | — | (6,213 | ) | — | |||||||
Principal payments on long-term debt | (2,050 | ) | (25,840 | ) | (1,438 | ) | |||||
Principal payments on capital lease obligations | (3,740 | ) | (2,863 | ) | (321 | ) | |||||
Acquisition of noncontrolling interests | (2,885 | ) | |||||||||