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BEAT > SEC Filings for BEAT > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for BIOTELEMETRY, INC.

Form 10-Q for BIOTELEMETRY, INC.


1-Aug-2014

Quarterly Report


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

The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013, and in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements. This discussion contains certain forward-looking statements that involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this report and in the Company's other filings with the Securities and Exchange Commission. See the "Forward-Looking Statements" section at the beginning of this report.

Company Background

BioTelemetry operates under three segments: Patient Services, Product and Research Services. The Patient Services segment is focused on the diagnosis and monitoring of cardiac arrhythmias, or heart rhythm disorders. The Company offers cardiologists and electrophysiologists with a full spectrum of solutions which provides them with a single source of cardiac monitoring services. These services range from the differentiated Mobile Cardiac Outpatient Telemetry™ ("MCOT™") service to wEvent, event, Holter, Pacemaker and International Normalized Ratio ("INR") monitoring. INR monitoring is a measurement of blood coagulation in the circulatory system and is prescribed for patients on long-term warfarin therapy. The Product business segment focuses on the development, manufacturing, testing and marketing of medical devices to medical companies, clinics and hospitals. The Research Services segment is engaged in central core laboratory services providing cardiac monitoring, scientific consulting and data management services for drug and medical device trials.

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 stock of CardioNet, Inc. was exchanged, on a one for one basis, for stock of BioTelemetry, Inc. Our new holding company began trading on August 1, 2013 on NASDAQ under our same symbol "BEAT".

Recent Acquisitions

On January 31, 2014, the Company, through its wholly owned subsidiary CardioNet, LLC ("CardioNet"), acquired Mednet Healthcare Technologies, Inc., Heartcare Corporation of America, Inc., Universal Medical, Inc., and Universal Medical Laboratory, Inc. (together, "Mednet"). Pursuant to the terms of the Purchase Agreement, CardioNet purchased all of the outstanding capital stock of the Mednet entities from the Seller for consideration of $5.5 million in cash and 96,649 shares of the Company's common stock, valued at $0.7 million at closing. In addition, as a result of the acquisition, the Company, through CardioNet, assumed indebtedness from the Mednet entities in the aggregate amount of $9.7 million, including interest.

On April 3, 2014, the Company, through its wholly-owned subsidiary CardioNet, LLC, completed the acquisition of substantially all of the assets of the cardiac monitoring business of Biomedical Systems Corporation ("BMS"). Pursuant to the terms of the Purchase Agreement, CardioNet acquired substantially all of the assets relating to BMS's cardiac event monitoring, Holter monitoring and mobile telemetry monitoring services (other than certain ECG services and monitoring in connection with clinical trials) in consideration of $8.0 million in cash and $0.7 million of the Company's common stock (based on the trailing average closing stock price for the 20 trading days ending immediately prior to the closing date). Of this amount, $1.1 million (consisting of cash and shares of common stock) will be deposited in escrow for a period of 12 to 18 months as security for any breach of the representations, warranties and covenants of the Seller contained in the Purchase Agreement. The $8.0 million cash was funded through the revolving loan commitment with Midcap Financial.

On June 3, 2014, the Company, through its wholly owned subsidiary CardioCore Lab, LLC ("CardioCore"), acquired the assets of RadCore Lab, LLC ("RadCore"), an imaging core lab serving the biopharmaceutical and medical device research market. This acquisition broadens the Companys offerings and adds new oncology, musculoskeletal and neurological imaging capabilities, supported by a state-of-the-art, cloud-based analysis platform. The Company paid $0.4 million in cash at closing and 22,513 shares of the Company's common stock, valued at $0.2 million at closing. While this acquisition provides growth potential, the acquisition of RadCore did not have a material effect on our financial condition, results of operations or cash flows.

Revenue Recognition

Patient Services

Patient Services revenue includes revenue from MCOT™, wEvent, event, Holter, Pacemaker and INR monitoring services. The Company receives a significant portion of its revenue from third party commercial insurance organizations and governmental entities. It also receives reimbursement directly from patients through co-pays and self-pay arrangements. Billings for services reimbursed by contracted third party payors, including Medicare, are recorded as revenue net of contractual allowances. Adjustments to the estimated receipts, based on final settlement with third party payors, are recorded upon settlement. If the Company does not have sufficient


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historical information regarding collectability from a given payor to support revenue recognition at the time of service, revenue is recognized when cash is received. Unearned amounts are appropriately deferred until service is performed. For the three months ended June 30, 2014 and 2013, revenue from Medicare as a percentage of the Company's total revenue was 32.0% and 35.1%, respectively. For the six months ended June 30, 2014 and 2013, revenue from Medicare as a percentage of the Company's total revenue was 32.0% and 34.7%, respectively.

Research Services

Research Services revenue includes revenue for project management and core laboratory services. The Company's Research Services revenue is provided on a fee for services basis, and revenue is recognized as the related services are performed. The Company also provides consulting services on a time and materials basis and this revenue is recognized as the services are performed. Site support revenue, consisting of equipment rentals and sales along with related supplies and logistics management, is recognized at the time of sale or over the rental period. Under a typical contract, customers pay a portion of the fee for these services upon contract execution as an upfront deposit, some of which is typically nonrefundable upon contract termination. Unearned revenues are deferred, and then recognized as the services are performed.

For arrangements with multiple deliverables, the revenue is allocated to each element (both delivered and undelivered items) based on their relative selling prices or management's best estimate of their selling prices, when vendor-specific or third-party evidence is unavailable.

The Company records reimbursements received for out-of-pocket expenses incurred, including freight, as revenue in the accompanying consolidated statements of operations.

Product

Product revenue includes revenue from the sale and repair of medical devices to medical companies, clinics and hospitals. The Company's product revenue is recognized at the time of sale.

Reimbursement-Patient Services

The Company is dependent on reimbursement for its Patient Services by government and commercial insurance payors. Medicare reimbursement rates for the Company's MCOT™, wEvent, event, Holter, Pacemaker and INR monitoring services have been established nationally by the Centers for Medicare and Medicaid Services ("CMS") and fluctuate periodically based on the CMS rate table published annually.

In addition to government reimbursement through Medicare, the Company has successfully secured contracts with most national and regional commercial payors for its MCOT™, wEvent, event, Holter, Pacemaker and INR monitoring services.

Accounts Receivable

Accounts receivable related to the Patient Services segment are recorded at the time revenue is recognized, net of contractual allowances, and are presented on the balance sheet net of allowance for doubtful accounts. The ultimate collection of accounts receivable may not be known for several months after services have been provided and billed. The Company records allowance for doubtful accounts based on the aging of the receivable using historical payor specific data. The percentages and amounts used to record bad debt expense and the allowance for doubtful accounts are supported by various methods and analyses, including current and historical cash collections, and the aging of receivables by payor. Because of continuing changes in the healthcare industry and third party reimbursement, it is possible the Company's estimates of collectability could change, which could have a material impact on operations and cash flows

Accounts receivable related to the Product and Research Services segments are recorded at the time revenue is recognized, or when products or services become billable. The Company estimates allowance for doubtful accounts on a specific account basis, and considers several factors in its analysis including customer specific information and aging of the account.

The Company will write-off receivables when the likelihood for collection is remote, the receivables have been fully reserved, and when the Company believes collection efforts have been fully exhausted and it does not intend to devote additional resources in attempting to collect. The Company performs write-offs on a monthly basis. The Company wrote off $2.9 million and $4.6 million of receivables for the six months ended June 30, 2014 and 2013. 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 Product and Research Services segments. For the three and six months ended June 30, 2014, the Company recorded bad debt expense of $2.7 million and $5.1 million, respectively. For the three and six months ended June 30, 2013, the Company recorded bad debt expense of $2.0 million and $4.4 million, respectively.


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Integration, Restructuring and Other Charges

During the three and six months ended June 30, 2014, the Company incurred $1.0 million and $4.0 million, respectively, of integration, restructuring and other charges. Legal charges of $0.3 million and $2.7 million, respectively, related primarily to legal fees for patent litigation, as well as the Civil Investigative Demand. The remaining expense is related to activities surrounding the Company's acquisitions.

For the three and six months ended June 30, 2013, the Company incurred integration, restructuring and other charges of $2.5 million and $3.7 million, respectively. The costs included legal charges of $2.1 million and $2.7 million, primarily relating to patent litigation, as well as the Civil Investigative Demand. The remaining expenses related to internal restructuring activities including the creation of the Company's holding company structure.

Results of Operations

Three Months Ended June 30, 2014 and 2013

Revenues. Total revenues for the three months ended June 30, 2014 were $42.7 million compared to $32.1 million for the three months ended June 30, 2013, an increase of $10.6 million, or 32.8%. Approximately $8.4 million of the increase resulted from the acquisitions of Mednet and BMS. Excluding acquisitions, the remaining increase was due to increased volume in the Patient Services and Product segments which was partially offset by the previously announced price reduction from Medicare, as well as reduced rates from commercial contracts tied to Medicare.

Gross Profit. Gross profit increased to $23.6 million for the three months ended June 30, 2014 from $19.5 million for the three months ended June 30, 2013. The increase of $4.1 million, or 21.1%, was primarily due to the acquisitions of Mednet and BMS. Gross profit as a percentage of revenue decreased to 55.4% for the three months ended June 30, 2014 compared to 60.7% for the three months ended June 30, 2013. The decrease in the gross profit percentage was related to the acquisitions, including the impact of a lower margin patient mix of 350 basis points and the impact of integration related activities of 230 basis points, of which 130 basis points will not reoccur. The benefit of our increased volume in the base business substantially offset the impact of the reduced rates.

General and Administrative Expense. General and administrative expense was $11.1 million for the three months ended June 30, 2014 compared to $9.1 million for the three months ended June 30, 2013. The increase of $2.0 million, or 22.7%, was due primarily to the additional expense associated with the Mednet and BMS acquisitions as well as the addition of the Company's 401K match. As a percent of total revenue, general and administrative expense was 26.1% for the three months ended June 30, 2014 compared to 28.3% for the three months ended June 30, 2013.

Sales and Marketing Expense. Sales and marketing expense was $7.2 million for the three months ended June 30, 2014 compared to $6.3 million for the three months ended June 30, 2013. The increase of $0.9 million, or 14.4%, was primarily related to the inclusion of expenses associated with the Mednet and BMS acquisitions. As a percent of total revenue, sales and marketing expense was 16.8% for the three months ended June 30, 2014 compared to 19.5% for the three months ended June 30, 2013.

Bad Debt Expense. Bad debt expense was $2.7 million for the three months ended June 30, 2014 compared to $2.0 million for the three months ended June 30, 2013. The increase of $0.7 million, or 39.6%, was due to increased revenue related primarily to the acquisitions of Mednet and BMS. The bad debt expense recorded was based upon an evaluation of historical collection experience of accounts receivable by payor class, the age of the receivables, as well as specific payor circumstances. As a percentage of total revenue, bad debt expense was 6.4% for the three months ended June 30, 2014 compared to 6.1% for the three months ended June 30, 2013. Substantially all of the Company's bad debt expense relates to the Patient Services segment.

Research and Development Expense. Research and development expense was $2.0 million for the three months ended June 30, 2014 compared to $1.9 million for the three months ended June 30, 2013. As a percent of total revenue, research and development expense was 4.6% for the three months ended June 30, 2014 compared to 5.9% for the three months ended June 30, 2013.

Integration, Restructuring and Other Charges. During the three months ended June 30, 2014, the Company incurred $1.0 million of integration, restructuring and other charges. Legal charges of $0.3 million related primarily to legal fees for patent litigation as well as the Civil Investigative Demand. The remaining expense is related to activities surrounding the Company's acquisitions. For the three months ended June 30, 2014, integration, restructuring and other charges were 2.3% of total revenue.


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For the three months ended June 30, 2013, the Company incurred total integration, restructuring and other charges of $2.5 million. The total costs included charges of $2.1 million primarily relating to legal fees associated with patent litigation, as well as the Civil Investigative Demand. The remaining expenses related to internal restructuring activities including the creation of the Company's holding company structure. For the three months ended June 30, 2013, integration, restructuring and other charges were 7.9% of total revenues.

Interest and Other Loss, net. Interest and other loss, net was $3.6 million for the three months ended June 30, 2014. The Company recorded a non-operating charge of $3.3 million as a potential settlement cost with the Department of Justice and $0.3 million related primarily to interest expense and financing fees.

Income Taxes. The Company's estimated annual effective tax rate was zero for the three months ended June 30, 2014 and 2013.

Net Loss. The Company incurred a net loss of $4.0 million for the three months ended June 30, 2014 compared to a net loss of $2.3 million for the three months ended June 30, 2013.

Six Months Ended June 30, 2014 and 2013

Revenues. Total revenues for the six months ended June 30, 2014 were $79.8 million compared to $64.5 million for the six months ended June 30, 2013, an increase of $15.3 million, or 23.7%. Approximately $12.9 million of the increase resulted from the acquisitions of Mednet and BMS. Excluding acquisitions, the remaining increase was due to increased patient volume which was partially offset by the previously announced price reduction from Medicare, as well as reduced rates from commercial contracts tied to Medicare.

Gross Profit. Gross profit increased to $45.2 million for the six months ended June 30, 2014 from $39.0 million for the six months ended June 30, 2013. The increase of $6.2 million, or 15.9%, was primarily due to the acquisitions of Mednet and BMS. Gross profit as a percentage of revenue decreased to 56.7% for the six months ended June 30, 2014 compared to 60.5% for the six months ended June 30, 2013. Impacting the 2014 gross profit percentage were the acquisitions, including the mix of patient volume of 200 basis points and duplicative labor expense of 50 basis points related to integration activities including the planned relocation of certain business functions. The Company's gross profit percentage also declined due to the reduction in the reimbursement rates which was partially offset by the increased patient volume in the base business.

General and Administrative Expense. General and administrative expense was $21.9 million for the six months ended June 30, 2014 compared to $18.6 million for the six months ended June 30, 2013. The increase of $3.3 million, or 17.8%, was due primarily to an increase in expense of $3.4 million related to the Mednet and BMS acquisitions offset by lower facility and consulting expense in the base business. As a percent of total revenue, general and administrative expense was 27.5% for the six months ended June 30, 2014 compared to 28.8% for the six months ended June 30, 2013.

Sales and Marketing Expense. Sales and marketing expense was $14.6 million for the six months ended June 30, 2014 compared to $13.0 million for the six months ended June 30, 2013. The increase of $1.6 million, or 12.1%, was primarily related to the Mednet and BMS acquisitions, as well as an increase in higher employee related expenses in the base business. As a percent of total revenue, sales and marketing expense was 18.3% for the six months ended June 30, 2014 compared to 20.2% for the six months ended June 30, 2013.

Bad Debt Expense. Bad debt expense was $5.1 million for the six months ended June 30, 2014 compared to $4.4 million for the six months ended June 30, 2013. The increase of $0.7 million, or 15.1%, was due to increased revenue related primarily to the acquisitions of Mednet and BMS. This increase was offset by a decrease in the base Patient Services business due to increased overall collections due to process improvements. The bad debt expense recorded was based upon an evaluation of historical collection experience of accounts receivable by payor class, the age of the receivables, as well as specific payor circumstances. As a percentage of total revenue, bad debt expense was 6.4% for the six months ended June 30, 2014 compared to 6.9% for the six months ended June 30, 2013. Substantially all of the Company's bad debt expense relates to the Patient Services segment.

Research and Development Expense. Research and development expense was $3.7 million for the six months ended June 30, 2014 compared to $3.5 million for the six months ended June 30, 2013. As a percent of total revenue, research and development expense was 4.7% for the six months ended June 30, 2014 compared to 5.4% for the six months ended June 30, 2013.

Integration, Restructuring and Other Charges. During the six months ended June 30, 2014, the Company incurred $4.0 million of integration, restructuring and other charges. Legal charges of $2.7 million primarily related to patent litigation, as well as the Civil Investigative Demand. The remaining expense is related to activities surrounding the Company's acquisitions. For the six months ended June 30, 2014, integration, restructuring and other charges were 5.0% of total revenue.


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For the six months ended June 30, 2013, the Company incurred integration, restructuring and other charges of $3.7 million, respectively. The costs included other charges of $2.7 million primarily relating to legal fees associated with patent litigation, as well as the Civil Investigative Demand. The remaining expenses related to internal restructuring activities including the creation of the Company's holding company structure. Integration, restructuring and other charges were 5.8% of total revenue for the six months ended June 30, 2013.

Interest and Other Loss, net. Interest and other loss, net was $6.9 million for the six months ended June 30, 2014. The Company recorded a non-operating charge of $6.4 million as a potential settlement cost with the Department of Justice and $0.5 million related primarily to interest expense and financing fees.

Income Taxes. The Company's estimated annual effective tax rate was zero for the six months ended June 30, 2014 and 2013. The Company recorded $2.9 million of a tax benefit for the six months ended June 30, 2014 related to the Mednet acquisition that occurred in January 2014.

Net Loss. The Company incurred a net loss of $8.1 million for the six months ended June 30, 2014 compared to a net loss of $4.4 million for the six months ended June 30, 2013.

Liquidity and Capital Resources

The Company's Annual Report on Form 10-K for the year ended December 31, 2013 includes a detailed discussion of our liquidity, contractual obligations and commitments. The information presented below updates and should be read in conjunction with the information disclosed in that Form 10-K.

As of June 30, 2014, the Company's principal source of liquidity was cash and cash equivalents of $13.5 million and net accounts receivable of $23.6 million. The Company had working capital of $5.9 million as of June 30, 2014.

In connection with the Company's acquisition of the Mednet entities, the Company entered into a promissory note in the principal amount of $9.8 million. The Company used $8.6 million to repay the assumed debt for Mednet and $1.2 million to fund Mednet's working capital needs. As of June 30, 2014, the Company's outstanding balance on the note was $9.6 million.

The Company used $8.0 million from its existing credit facility with Midcap Financial in connection with the purchase of the cardiac monitoring business of BMS on April 3, 2014. As of June 30, 2014, the Company's outstanding balance on the credit agreement was $8.0 million which provides the Company access to borrowings up to $15.0 million.

The Company had $3.9 million of cash provided by operations for the six months ended June 30, 2014. The Company's ongoing operations during the six month period resulted in a loss of $8.1 million, which included $13.1 million of non-cash items related to bad debt, depreciation, amortization and stock compensation expense, as well as $6.4 million relating to the potential settlement cost with the Department of Justice. These items were offset by a $2.9 million tax benefit related to the Mednet acquisition and $4.6 million of cash used primarily for working capital.

The Company used $5.7 million for the purchase of Mednet, $8.0 million for the purchase of BMS, $0.4 million for the purchase of Radcore and $7.6 million for capital purchases, primarily related to the investment in medical devices in the Patient and Research Services segments for use in its ongoing operations for the six months ended June 30, 2014.

If the Company determines that it needs to raise additional capital, such capital may not be available on reasonable terms, or at all. If the Company raises additional funds by issuing equity securities, its existing stockholders' ownership will be diluted. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict the ability to operate its business.


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