What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 75 added, 78 removed, 213 unchanged (42% of the section changed)

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Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this Quarterly Report on Form 10-Q entitled “Risk Factors".

The unaudited condensed consolidated interim financial statements for the three and six months ended June 30, 2019 have been revised to correct prior period errors as discussed in Note 1, “Organization and Description of Business” and Note, 13.

“Revision of Prior Period Financial Statements” to our unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q.

Accordingly, this Management’s Discussion and Analysis reflects the impact of those revisions.

We are a digital healthcare company redefining the way cardiac arrhythmias are clinically diagnosed by combining our wearable biosensing technology with cloud-based data analytics and deep-learning capabilities.

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Our revenue in the third-party commercial payor category is primarily contracted, which means we have entered into pricing contracts with these payors.

Third-party contracted payors accounted for approximately 51% and 47% of our revenue for the six months ended June 30, 2020 and 2019, respectively.

Approximately, 27% of our total revenue for each of the six months ended June 30, 2020 and 2019, is received from Centers for Medicare and Medicaid Services ("CMS"), which is under established reimbursement codes.

Healthcare institutions, which are typically hospitals or private physician practices accounted for approximately 17% and 21% of our revenue for the six months ended June 30, 2020 and 2019, respectively.

Non-contracted third party payors and self-pay

accounted for 5% of our total revenue for each of the six months ended June 30, 2020 and June 30, 2019.

Third-party contracted payors accounted for approximately 51% and 47% of our revenue for the nine months ended September 30, 2020 and 2019, respectively.

Approximately, 27% of our total revenue for each of the nine months ended September 30, 2020 and 2019, is received from Centers for Medicare and Medicaid Services ("CMS"), which is under established reimbursement codes.

Healthcare institutions, which are typically hospitals or private physician practices accounted for approximately 16% and 20% of our revenue for the nine months ended September 30, 2020 and 2019, respectively.

Non-contracted third party payors and self-pay accounted for 6% and 5% of our total revenue for the nine months ended September 30, 2020 and September 30, 2019, respectively.

We rely on a third-party billing partner, XIFIN, Inc., to submit patient claims and collect from commercial payors, certain government agencies, and patients.

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In addition, we will continue exploring sales and marketing expansion opportunities in international geographies.

As further explained in Note 1.

Organization and Description of Business and Note 13.

Revision of Prior Period Financial Statements in the notes to the accompanying condensed consolidated financial statements, we have revised our previously issued interim financial statements as of and for the three and six months ended June 30, 2019.

This Management's Discussion and Analysis has been revised to reflect the correction of these prior period errors.

COVID-19 Impact

We cannot currently predict the extent or duration of the ongoing impact to its financial statements and has suspended guidance.

Although we cannot currently predict the extent or duration of the COVID-19 related impact to its financial results, we expect the impact of COVID-19 to be more significant in the near-term.

Beginning in mid-March 2020, we experienced decreasing levels in the Zio service patient registrations which impacted our revenues for the three and six months ended June 30, 2020.

We cannot currently predict the extent or duration of the ongoing impact to our financial results and have suspended forward-looking guidance.

Although we cannot currently predict the extent or duration of the COVID-19 related impact to our financial results, we expect the impact of COVID-19 to be more significant in the near-term.

Beginning in mid-March 2020, we experienced decreasing levels in the Zio service patient registrations which impacted our revenues for the three and nine months ended September 30, 2020.

This decrease in revenue is due to a variety of challenges associated with the COVID-19 pandemic in the United States, including, among others:

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• patients who have lost jobs, been furloughed, have reduced work hours or are worried about the continuation of medical insurance being unable to afford the Zio service.

During the second quarter of the fiscal year 2020, we observed a modest recovery of patient registration for the Zio service.

However, it is expected that the challenges of the COVID-19 pandemic will continue to adversely impact the number of patients who register for the Zio service for some period of time depending on the rate at which the number of COVID-19 cases declines and the economy recovers.

During the third quarter of fiscal year 2020, we saw recovery of patient registrations for the Zio service to pre-COVID levels of the first quarter of 2020.

However, it is expected that the challenges of the COVID-19 pandemic will potentially impact the number of patients who register for the Zio service for some period of time depending on the rate at which the number of COVID-19 cases increases or declines and the economy recovers.

We are taking a variety of measures to promote the safety and security of our employees and customers.

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Our digital service platform enables physician ordering, results reporting, data curation and patient support independent of location, across virtual or in-office care models.

As an example, we have significantly increased the utilization of our home enrollment service which allows patients to receive and wear the single-use Zio device without going to a healthcare facility.

Home enrollment also eliminates clinical staff exposure to cleaning or reusing traditional Holter and event monitors that may have been exposed to viruses or other pathogens.

In addition, health systems with acute needs to facilitate a reduction in healthcare provider contact and the additional need for monitoring capacity are looking to deploy Zio AT for in-patient monitoring.

The FDA informed us that Zio AT usage for this application is consistent with the FDA COVID-19 Remote Monitoring guidance.

As an example, we have significantly increased the utilization of our “Home Enrollment” service.

This service allows patients to receive and wear the single-use Zio monitor without going to a healthcare facility.

Physicians can prescribe the Zio service for their patients, either in-office or through a virtual care setting, and we ship the Zio monitor directly to the patient’s residence.

We pay for the costs of shipping the Zio monitor, which represents additional expense for us.

We also guide patients through the patch application process and inform them of instructions for wear.

Home enrollment also eliminates clinical staff exposure to patients, as well as application, cleaning or reusing traditional Holter and event monitors that may have been exposed to viruses or other pathogens.

In addition, health systems with acute needs to facilitate a reduction in healthcare provider contact or for additional monitoring capacity can deploy Zio AT for in-patient monitoring.

FDA informed us that Zio AT usage for this application is consistent with the FDA COVID-19 Remote Monitoring guidance.

• Adjusting our operating plan as appropriate to ensure continued financial strength.

We continue to maintain a strong cash position and has taken initiatives to adjust our operating plan to ensure we maintain appropriate liquidity during these uncertain times.

We have proactively taken initial steps to reduce spend, including eliminating or delaying project spend for non-essential programs, reducing spend on travel and consulting, implementing a hiring freeze, and reducing payroll costs through employee furloughs and pay cuts.

We continue to maintain a strong cash position and have taken initiatives to adjust our operating plan to ensure we maintain appropriate liquidity during these uncertain times.

We have proactively taken steps to reduce spend, including eliminating or delaying project spend for non-essential programs, and reducing spend on travel and consulting.

In addition, we raised $206.8 million in proceeds from a follow-on public offering in August 2020 to fund growth initiatives and for working capital and other general corporate purposes

Components of Results of Operations

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We are subject to seasonality similar to other companies in our field, as vacations by physicians and patients tend to affect enrollment in the Zio service more during the summer months and during the end of calendar year holidays compared to other times of the year.

During the three and six months ended June 30, 2020, we experienced a decline in revenue as a result of the COVID-19 pandemic.

Cost of Revenue and Gross Margin

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Material costs include both the disposable materials costs of the Zio monitors and amortization of the re-usable printed circuit board assemblies (“PCBAs”).

Each Zio XT monitor includes a PCBA, and each Zio AT monitor includes a PCBA and gateway board, the cost of which is

amortized over the anticipated number of uses of the board.

Each Zio XT monitor includes a PCBA, and each Zio AT monitor includes a PCBA and gateway board, the cost of which is amortized over the anticipated number of uses of the board.

We expect cost of revenue to increase in absolute dollars to the extent our revenue grows.

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We expect to continue to decrease the cost of service per device by obtaining volume purchase discounts for our material costs and implementing scan-time algorithm improvements and software-driven and other workflow enhancements to reduce labor costs.

Gross margin for the three and six months ended June 30, 2020 was negatively impacted due to the COVID-19 pandemic and absorption of fixed costs.

Gross margin for the nine months ended September 30, 2020 was negatively impacted due to the COVID-19 pandemic and absorption of fixed costs.

We expect this impact to continue in the near term.

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Results of Operations

Comparison of the Three Months Ended June 30, 2020 and 2019

Three Months Ended June 30,

Comparison of the Three Months Ended September 30, 2020 and 2019

Three Months Ended September 30,

2020 2019 $ Change

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$ (4,677) $ (18,293) $ 13,616 (74) %

Revenue decreased $1.6 million, or 3%, to $50.9 million during the three months ended June 30, 2020 from $52.4 million during the three months ended June 30, 2019.

The decrease in revenue was primarily attributable to the decrease in volume of the Zio services performed as a result of the COVID-19 pandemic.

Revenue increased $17.3 million, or 32%, to $71.9 million during the three months ended September 30, 2020 from $54.7 million during the three months ended September 30, 2019.

The increase in revenue was primarily attributable to the increase in volume of the Zio services as a result of increased in demand from our customers.

Cost of Revenue and Gross Margin

Cost of revenue increased $2.5 million, or 19%, to $15.5 million during the three months ended June 30, 2020 from $13.0 million during the three months ended June 30, 2019.

The increase in cost of revenue was primarily due costs incurred to support a larger cost structure in 2020, partially offset by the decrease in service volume as result of the COVID-19 pandemic.

Gross margin for the three months ended June 30, 2020 decreased to 70%, compared to 75% for the three months ended June 30, 2019.

The decrease in gross margin was primarily driven by product mix, as well as fixed costs that we continue to incur as we see lower revenue due to a decrease in patient registrations as a result of the COVID-19 pandemic.

Cost of revenue increased $4.4 million, or 32%, to $18.2 million during the three months ended September 30, 2020 from $13.8 million during the three months ended September 30, 2019.

The increase in cost of revenue was primarily due to increased Zio service volume as well as costs incurred to support a larger cost structure in 2020.

Gross margin for the three months ended September 30, 2020 was 75%, compared to 75% for the three months ended September 30, 2019.

Research and Development Expenses

Research and development expenses increased $4.7 million, or 60%, to $12.5 million during the three months ended June 30, 2020 from $7.8 million during the three months ended June 30, 2019.

The increase was primarily attributable to a $3.0 million increase related to the Verily milestone achievement in the second quarter of 2020 and a $2.5 million increase in employee related costs due to increased headcount, partially offset by a $0.6 million reduction of expense due to an increase in costs capitalized to internal use software.

Research and development expenses decreased $4.7 million, or 35%, to $8.8 million during the three months ended September 30, 2020 from $13.5 million during the three months ended September 30, 2019.

The decrease was primarily attributable to a $5.0 million decrease related to the Verily milestone achievement in the third quarter of 2019 and a $1.3 million reduction of expense due to an increase in costs capitalized to internal use software, partially offset by a $2.0 million increase of employee related costs due to increased headcount and stock-based compensation.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $0.9 million, or 2%, to $43.0 million during the three months ended June 30, 2020 from $42.2 million during the three months ended June 30, 2019.

The increase was primarily attributable to a $4.4 million increase in payroll and stock-based compensation as a result of increased headcount, offset by a $4.2 million reduction in travel expenses and temporary consultants, legal and claims processing fees driven by COVID-19 volume reduction.

Selling, general and administrative expenses increased $4.1 million, or 9%, to $49.7 million during the three months ended September 30, 2020 from $45.6 million during the three months ended September 30, 2019.

The increase was primarily attributable to a $12.3 million increase in payroll and stock-based compensation as a result of increased headcount, partially offset by a $2.6 million reduction in travel expenses, $2.4 million reduction in temporary consultants, and $0.8 million decrease in bad debt expense.

Interest Expense

Interest expense was $0.4 million for the three months ended June 30, 2020, compared to $0.4 million for the three months ended June 30, 2019.

There were no significant changes in interest expense during the three months ended June 30, 2020 compared with the three months ended June 30, 2019.

Interest expense was $0.4 million for the three months ended September 30, 2020, compared to $0.4 million for the three months ended September 30, 2019.

There were no significant changes in interest expense during the three months ended September 30, 2020 compared with the three months ended September 30, 2019.

Other Income, Net

Other income, net was $0.2 million for the three months ended June 30, 2020, compared to $0.3 million for the three months ended June 30, 2019.

There were no significant changes in other income, net during the three months ended June 30, 2020 compared with the three months ended June 30, 2019.

Other income, net was $0.6 million for the three months ended September 30, 2020, compared to $0.4 million for the three months ended September 30, 2019.

There were no significant changes in other income, net during the three months ended September 30, 2020 compared with the three months ended September 30, 2019.

Results of Operations

Comparison of the Six Months Ended June 30, 2020 and 2019

Six Months Ended June 30,

Comparison of the Nine Months Ended September 30, 2020 and 2019

Nine Months Ended September 30,

2020 2019 $ Change % Change

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Net loss $ (34,179) $ (37,268) $ 3,089 (8) %

Revenue increased $13.6 million, or 14%, to $114.4 million during the six months ended June 30, 2020 from $100.8 million during the six months ended June 30, 2019.

The increase in revenue was primarily attributable to the increase in volume of the Zio services performed as a result of the expansion of coverage and the increase in the number of payors.

Revenue increased $30.9 million, or 20%, to $186.4 million during the nine months ended September 30, 2020 from $155.4 million during the nine months ended September 30, 2019.

The increase in revenue was primarily attributable to the increase in volume of the Zio services as a result of increased in demand from our customers.

Cost of Revenue and Gross Margin

Cost of revenue increased $6.8 million, or 27%, to $31.5 million during the six months ended June 30, 2020 from $24.8 million during the six months ended June 30, 2019.

Cost of revenue increased $11.2 million, or 29%, to $49.8 million during the nine months ended September 30, 2020 from $38.6 million during the nine months ended September 30, 2019.

The increase in cost of revenue was primarily due to increased Zio service volume and costs incurred to support a larger cost structure in 2020.

Gross margin for the six months ended June 30, 2020 decreased to 72%, compared to 75% for the six months ended June 30, 2019.

Gross margin for the nine months ended September 30, 2020 decreased to 73%, compared to 75% for the nine months ended September 30, 2019.

The decrease in gross margin was primarily driven by product mix, as well as fixed costs that we continue to incur, partially offset by increased volume.

Research and Development Expenses

Research and development expenses increased $6.4 million, or 44%, to $21.0 million during the six months ended June 30, 2020 from $14.5 million during the six months ended June 30, 2019.

The increase was primarily attributable to a $4.4 million increase in employee related costs and a $3.0 million increase related to the Verily milestone achievement in the second quarter of 2020, partially offset by a $1.8 million reduction of expense due to an increase in costs capitalized to internal use software.

Research and development expenses increased $1.7 million, or 6%, to $29.7 million during the nine months ended September 30, 2020 from $28.0 million during the nine months ended September 30, 2019.

The increase was primarily attributable to a $5.5 million increase in employee related costs and stock-based compensation as a result of increased headcount, partially offset by a $3.1 million reduction of expense due to an increase in costs capitalized to internal use software and $2.0 million decrease related to the Verily milestone achievement in the third quarter of 2020.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $11.0 million, or 14%, to $91.2 million during the six months ended June 30, 2020 from $80.2 million during the six months ended June 30, 2019.

The increase was primarily attributable to a $6.7 million increase in payroll and stock-based compensation as a result of increased headcount, a $2.4 million in rent expense due to expansion of the San Francisco headquarters and increased facility related costs, and a $1.9 million in bad debt expense.

Selling, general and administrative expenses increased $15.1 million, or 12%, to $140.9 million during the nine months ended September 30, 2020 from $125.9 million during the nine months ended September 30, 2019.

The increase was primarily attributable to a $16.8 million increase in payroll and stock-based compensation as a result of increased headcount, a $2.8 million in rent expense due to expansion of the San Francisco headquarters and increased facility related costs, partially offset by decrease of $5.2 million in travel and related expenses as a result of the COVID-19 pandemic.

Interest Expense

Interest expense was $0.8 million for the six months ended June 30, 2020, compared to $0.8 million for the six months ended June 30, 2019.

There were no significant changes in interest expense during the six months ended June 30, 2020 compared with the six months ended June 30, 2019.

Interest expense was $1.1 million for the nine months ended September 30, 2020, compared to $1.3 million for the nine months ended September 30, 2019.

There were no significant changes in interest expense during the nine months ended September 30, 2020 compared with the nine months ended September 30, 2019.

Other Income, Net

Other income, net was $0.7 million for the six months ended June 30, 2020, compared to $0.7 million for the six months ended June 30, 2019.

There were no significant changes in other income, net during the six months ended June 30, 2020 compared with the six months ended June 30, 2019.

Other income, net was $1.3 million for the nine months ended September 30, 2020, compared to $1.1 million for the nine months ended September 30, 2019.

There were no significant changes in other income, net during the nine months ended September 30, 2020 compared with the nine months ended September 30, 2019.

Liquidity and Capital Expenditures

We are continuously reviewing our liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 global pandemic.

We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements, although current liquidity will constrain the level of growth investments that can be made.

As of June 30, 2020, we had cash and cash equivalents of $81.7 million, short-term investments of $33.2 million, and an accumulated deficit of $290.4 million.

We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements.

As of September 30, 2020, we had cash and cash equivalents of $95.3 million, short-term investments of $231.9 million, and an accumulated deficit of $295.0 million.

Our expected future capital requirements may depend on many factors including expanding our customer base, the expansion of our salesforce, and the timing and extent of spending on the development of our technology to increase our product offerings.

If we raise additional funds by issuing equity securities, our stockholders may experience dilution.

Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions.

Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on

our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions.

Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.

The following table summarizes our cash flows for the periods indicated (in thousands):

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash (used in) provided by:

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Financing activities 211,357 108,380

Net increase (decrease) in cash and cash equivalents $ 61,268 $ (4,039)

Net increase in cash and cash equivalents $ 74,874 $ 14,611

Cash Used in Operating Activities

During the six months ended June 30, 2020, cash used in operating activities was $32.5 million, which consisted of a net loss of $29.5 million, adjusted by non-cash charges of $29.7 million and a net change of $32.8 million in our net operating assets and liabilities.

The non-cash charges were primarily comprised of a change in the allowance for doubtful accounts and contractual allowances of $13.5 million, stock-based compensation of $10.1 million, depreciation and amortization of $3.2 million and amortization of right of use assets of $3.0 million.

The change in our net operating assets and liabilities was primarily due to an increase of $13.0 million in accounts receivable, an increase of $9.7 million in accrued liabilities and an increase of $4.5 million in accounts payable.

During the six months ended June 30, 2019, cash used in operating activities was $16.1 million, which consisted of a net loss of $19.0 million, adjusted by non-cash charges of $30.1 million and a net change of $27.3 million in our net operating assets and liabilities.

The non-cash charges were primarily comprised of a change in allowance for doubtful accounts and contractual allowance of $12.4 million, and stock-based compensation of $11.7 million.

During the nine months ended September 30, 2020, cash used in operating activities was $21.6 million, which consisted of a net loss of $34.2 million, adjusted by non-cash charges of $57.4 million and a net change of $44.8 million in our net operating assets and liabilities.

The non-cash charges were primarily comprised of a change in stock-based compensation of $27.5 million, allowance for doubtful accounts and contractual allowances of $20.5 million, depreciation and amortization of $4.9 million and amortization of right of use assets of $4.5 million.

The change in our net operating assets and liabilities was primarily due to an increase of $26.0 million in accounts receivable, a decrease of $5.4 million in accrued liabilities, an decrease of $4.7 million in accounts payable and a decrease of $3.5 million in operating lease liability.

During the nine months ended September 30, 2019, cash used in operating activities was $17.0 million, which consisted of a net loss of $37.3 million, adjusted by non-cash charges of $45.8 million and a net change of $25.5 million in our net operating assets and liabilities.

The non-cash charges were primarily comprised of a change in stock-based compensation of $19.1 million, allowance for doubtful accounts and contractual allowance of $17.6 million, and amortization of right of use assets of $7.5 million.

The change in our net operating assets and liabilities was primarily due to an increase of $22.8 million in accounts receivable.

Cash Provided by Investing Activities

Cash provided by investing activities during the six months ended June 30, 2020 was $89.6 million, which consisted of cash received from the maturities of available for sale investments of $88.6 million and sales of available for sale investments of $14.5 million.

This was partially offset by $8.0 million in purchases of available for sale investments and $5.6 million of capital expenditures associated with leasehold improvements and internal use software.

Cash provided by investing activities during the six months ended June 30, 2019 was $10.3 million, which consisted primarily of $60.6 million in cash received from the maturities of available for sale investments, partially offset by purchases of available for sale investments of $45.0 million, and $5.3 million of capital expenditures to purchase property and equipment.

Cash used in investing activities during the nine months ended September 30, 2020 was $114.9 million, which consisted of $214.9 million in purchases of available for sale investments and $11.2 million of capital expenditures, partially offset by cash received from the maturities of available for sale investments of $96.6 million and sales of available for sale investments of $14.5 million.

Cash provided by investing activities during the nine months ended September 30, 2019 was $76.8 million, which consisted primarily of purchases of available for sale investments of $146.0 million, and $8.6 million of capital expenditures to purchase property and equipment.

This was partially offset by $77.9 million in cash received from the maturities of available for sale investments.

Cash Provided by Financing Activities

During the six months ended June 30, 2020, cash provided by financing activities was $4.2 million, primarily due to $9.4 million in proceeds from the issuance of common stock in connection with employee options exercises and our Employee Stock Purchase Program, partially offset by $5.1 million in tax withholding upon the vesting of RSUs.

During the six months ended June 30, 2019, cash provided by financing activities was $1.8 million, primarily due to $5.4 million in proceeds from the issuance of common stock in connection with employee options exercises and our Employee Stock Purchase Program, partially offset by $3.6 million in tax withholding upon the vesting of RSUs.

During the nine months ended September 30, 2020, cash provided by financing activities was $211.4 million, primarily due to $206.4 million from the issuance of common stock in connection with the follow-on public offering, net discounts and issuance costs, $13.7 million in proceeds from the issuance of common stock in connection with employee options exercises and our Employee Stock Purchase Program, partially offset by $8.7 million in tax withholding upon the vesting of RSUs.

During the nine months ended September 30, 2019, cash provided by financing activities was $108.4 million, primarily due to $107.1 million from the issuance of common stock in a public offering, net discounts and issuance costs, $6.4 million in proceeds from the issuance of common stock in connection with employee options exercises and our Employee Stock Purchase Program, partially offset by $5.1 million in tax withholding upon the vesting of RSUs.

In December 2015, we entered into a Second Amended and Restated Loan and Security Agreement with SVB, (the “SVB Loan Agreement”).

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We may borrow up to 75% of eligible accounts receivable, up to the maximum of $25.0 million.

As of June 30, 2020 no amount was outstanding under the revolving credit line.

As of September 30, 2020 no amount was outstanding under the revolving credit line.

The Third Amended and Restated Loan Agreement requires us to maintain a minimum consolidated liquidity ratio or minimum adjusted Earnings Before Interest, Tax, Depreciation, and Amortization during the term of the loan facility.

In addition, the SVB Loan Agreement contains customary affirmative and negative covenants and events of default.

We were in compliance with loan covenants as of June 30, 2020.

We were in compliance with loan covenants as of September 30, 2020.

The obligations under the Third Amended and Restated Loan Agreement are collateralized by substantially all of our assets.

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Critical Accounting Policies and Estimates

For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2019 ("Annual Report").

Refer to Note 2.

Summary of Significant Accounting Policies , in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, for all significant accounting policies.

With the exception of the accounting policy described below, there have been no significant changes to our critical accounting policies as described in our Annual Report.

Stock-Based Compensation

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We recognize compensation expense related to RSUs based on the grant date fair value on a straight-line basis over the period during which the employee is required to provide service in exchange for the award (generally the vesting period).

Where there is a minimum performance condition required to vest in RSUs, we perform a probability assessment to estimate the number of shares that are probable to vest.

We recognize compensation expense related to the Employee Stock Purchase Program (“ESPP”) based on the estimated fair value on the date of grant, net of estimated forfeitures.

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The grant date fair value is expensed on a straight-line basis over the offering period.

Refer to Note 2.

Recently Adopted Accounting Guidance

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis