What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-03-02 · 101 added, 94 removed, 272 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 Annual Report on Form 10-K entitled “Risk Factors.”

The Company identified errors and made revisions to prior fiscal years as discussed in Note 1.Organization and Description of Business in our accompanying consolidated financial statements.

The Company identified errors and made revisions to prior fiscal years as discussed in Note 1.

Organization and Description of Business in our accompanying consolidated financial statements.

Accordingly, this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the effects of the revisions.

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Since our Zio service was cleared by the U.S.

Food and Drug Administration (“FDA”), we have provided the Zio service to over two million patients and have collected over 500 million hours of curated heartbeat data.

Food and Drug Administration (“FDA”), we have provided the Zio service to over three million patients and have collected over 750 million hours of curated heartbeat data.

We believe the Zio service is well-positioned to disrupt an already-established $1.8 billion U.S.

ambulatory cardiac monitoring market by offering a user-friendly device to patients, actionable information to physicians and value to payors.

We market our ambulatory cardiac monitoring solution in the United States through a direct sales organization comprised of sales management, field billing specialists, quota-carrying sales representatives, and a customer experience team.

Our sales representatives focus on initial introduction into new customers, penetration across a sales region, driving adoption within existing accounts and conveying our message of clinical and economic value to service line managers and hospital administrators and other clinical departments.

We continue to increase the size of our U.S.

sales organization to expand the current customer account base and increase utilization of our Zio service.

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

COVID-19 Impact

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 year ended December 31, 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:

• reduction in physician prescriptions for our Zio service due to:

◦ directives from the Centers for Disease Control and Prevention, CMS, various medical societies and other entities that suggested cancelling or deferring elective, non-essential procedures;

◦ a reduction in diagnostic testing outside of those tests related to severe respiratory distress;

◦ closure or reduction in the hours of most physicians’ offices;

◦ physicians and hospitals prioritizing the treatment of critically ill patients;

◦ patient reluctance to visit physicians or hospitals for fear of contracting COVID-19;

• cancellation and reduction of physician attendance at professional medical society meetings and trade shows and our decision not to attend them;

• travel restrictions and changing hospital policies that have limited access of our sales professionals to hospitals where the Zio services are prescribed and where patients have historically been enrolled;

• delays in receiving Zio XT back from patients with some patients not returning the device at all;

• 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 half 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.

Our response to COVID-19 is focused on:

• Protecting and supporting the health and well-being of our employees, our communities and our customers by limiting the transmission of COVID-19.

Following recommendations from federal and local government and healthcare agencies, we transitioned employees to a remote work environment beginning in early March 2020.

For a small number of our employees who continue to support essential operations at our facilities, we have instituted social distancing and other measures to ensure the safety of our employees.

We rapidly implemented business continuity protocols and have been able to transition to a remote operating environment while continuing to deliver our Zio service.

We will continue to follow local and national guidelines to determine the appropriate time to resume in-office functions.

• Delivering uninterrupted patient care for both Zio XT and Zio AT and supporting efforts to monitor COVID-19 patients.

While hospital systems and healthcare facilities shift their focus and resources to treating COVID-19 patients and combating the spread of COVID-19, we have adapted our service to meet the immediate needs of our physician customers and patients.

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.

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.

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.

The 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 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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These estimates require significant judgment by management.

In determining the amount to accrue for a delivered report, and Zio service provided, the Company considers factors such as claim payment history from both payors and patient out-of-pocket costs, payor coverage, whether there is a contract between the payor or healthcare institution and the Company, historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments.

We expect our revenue to increase as we expand our sales and marketing infrastructure, increase awareness of our product offerings, increase the number of covered and contracted lives for our Zio service, expand the range of indications for our Zio service and develop new products and services.

In determining the amount to accrue for a delivered report, and Zio service provided, we consider factors such as claim payment history from both payors and patient out-of-pocket costs, payor coverage, whether there is a contract between the payor or healthcare institution and the Company, historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments.

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.

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Our gross margin has been and will continue to be affected by a variety of factors, including increased contracting with third-party payors and institutional providers.

Historically, we have increased our average selling price by entering into contracts with third-party commercial payors at rates that were higher than amounts typically collected from payors without contracts or from institutional customers.

We have in the past been able to increase our pricing as third-party payors become more familiar with the benefits of the Zio service and move to contracted pricing arrangements.

We believe we will be able to continue to achieve pricing increases as more payors contract with us due to the benefits the Zio service provide compared to other available products.

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.

We expect further decreases in the cost of service as we spread the fixed portion of our overhead costs over a larger number of units produced, which will result in a decrease in our per unit manufacturing costs.

Gross margin for year ended December 31, 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.

Research and Development Expenses

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Our sales and marketing expenses consist of payroll and personnel-related costs, including stock-based compensation, sales commissions, travel expenses, consulting, public relations costs, direct marketing, tradeshow and promotional expenses and allocated facility overhead costs.

We expect our sales and marketing expenses to increase in absolute dollars as we hire additional sales personnel and increase our sales support infrastructure in order to further penetrate the U.S.

market and expand into international markets.

Our general and administrative expenses consist primarily of payroll and personnel-related costs for executive, finance, legal and administrative personnel, including stock-based compensation.

Other significant expenses include professional fees for legal and accounting services, consulting fees, recruiting fees, bad debt expense, third-party claims processing fees and travel expenses.

Other significant expenses include professional fees for legal and accounting services, consulting fees, recruiting fees, bad debt expense, third-party patient claims processing fees and travel expenses.

Interest Expense

Interest expense consists of cash and non-cash components.

The cash component of interest expense is attributable to borrowings under our loan agreements.

Interest expense is attributable to borrowings under our loan agreements.

Refer to Note 7.

Debt , for further information on our loan agreements.

The non-cash component consists of interest expense recognized from the amortization of debt discounts derived from the issuance of warrants and debt issuance costs capitalized on our balance sheets and, for 2017, “paid-in-kind” interest when debt payments were interest only and a portion of interest payments were added back to the debt balance.

Other Income (Expense), Net

Other Income, Net

Other income, net consists primarily of interest income which consists of interest received on our cash, cash equivalents and investments balances.

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Other income, net 1,591 1,895 (304) 16 %

Loss on extinguishment of debt — (3,029) 3,029 n/a

Loss before income taxes (43,601) (54,503) 10,902 20 %

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Revenue increased $50.6 million, or 24%, to $265.2 million during the year ended December 31, 2020 from $214.6 million during the year ended December 31, 2019.

The increase in revenue was 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 under contract, increasing physician acceptance and expansion of our sales force as we continue to gain market acceptance for our Zio service.

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 $17.8 million, or 34%, to $70.3 million during the year ended December 31, 2020 from $52.5 million during the year ended December 31, 2019.

The increase in cost of revenue was primarily due to increased Zio service volume in 2019.

This increase was partially offset by the reduction in costs to provide the Zio service, which was

achieved through manufacturing efficiencies in the production of our device and reductions in cardiographic technician labor costs through algorithm improvements and software driven workflow enhancements.

Gross margin for the year ended December 31, 2019 increased to 76%, compared to 74% for the year ended December 31, 2018.

The increase was driven primarily by the reduction in the cost of the Zio service due to our continued efforts to lower manufacturing costs, fixed costs absorption and reduced labor costs per device through our algorithm improvements and software-driven and other workflow enhancements.

In addition, we experienced some mix shift and average selling price growth driven by the success of our contracting efforts, which also improved our gross margin during the year ended December 31, 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 year ended December 31, 2020 decreased to 73%, compared to 76% for the year ended December 31, 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 $4.0 million, or 11%, to $41.3 million during the year ended December 31, 2020 from $37.3 million during the year ended December 31, 2019.

The increase was primarily attributable to a $7.4 million increase in payroll and personnel-related expenses as a result of increased headcount, $6.0 million payment to Verily, and $3.3 million for allocated facility-related expenses.

The increase was primarily attributable to a $8.3 million increase in payroll and employee stock-based compensation as a result of increased headcount and an increase of $1.0 million Verily milestone expense.

This was partially offset by $4.7 million increase in capitalization of internal use software.

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Selling, general and administrative expenses increased $17.7 million, or 10%, to $197.2 million during the year ended December 31, 2020 from $179.5 million during the year ended December 31, 2019.

The increase was primarily attributable to a $19.8 million increase in payroll and personnel-related expenses and $9.9 million increase in employee stock-based compensation as a result of increased headcount to support the growth in our operations.

The increase was also driven by an increase in professional services of $8.1 million.

The increase was primarily attributable to a $29.5 million increase in payroll and employee stock-based compensation as a result of increased headcount to support the growth in our operations, a $2.9 million increase in facilities and rent due to expansion of the San Francisco headquarters and increased facility related costs, partially offset by decrease of $8.9 million in travel, entertainment and office meals as a result of the COVID-19 pandemic and a decrease of $4.4 million in professional services fees.

A significant amount of selling, general, and administrative incremental spend can be directly attributed to our continued focus on salesforce expansion and its support infrastructure to support our growth strategy.

Interest Expense

Interest expense decreased $1.5 million to $1.6 million during the year ended December 31, 2019 from $3.1 million during the year ended December 31, 2018 due to the extinguishment of the loan agreement with Biopharma Secured Investments III Holdings Cayman LP in October 2018.

Interest expense decreased $0.1 million to $1.5 million during the year ended December 31, 2020 from $1.6 million during the year ended December 31, 2019 due to principal re-payments on SVB Loan starting in November 2020 and decrease in interest rate in 2020.

Other Income, Net

Other income, increased to $1.9 million for the year ended December 31, 2019, compared to $1.5 million for year ended December 31, 2018.

The increase in other income is primarily due to an increase in our investment portfolio during the fourth quarter of 2019.

Other income, decreased $0.3 million to $1.6 million for the year ended December 31, 2020, compared to $1.9 million for year ended December 31, 2019.

The decrease in other income is primarily due to a decrease in amortization of investments, partially offset by increase in interest income, and prior year value added tax reclaims.

Comparison of the Year Ended December 31 2019, and 2018

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Loss before income taxes (54,503) (50,334) (4,169) 8 %

Income tax provision 44 — 44 n/a

Income tax provision 65 44 21 48 %

Net loss $ (54,568) $ (50,378) (4,190) 8 %

Revenue increased $67.3 million, or 46%, to $214.6 million during the year ended December 31, 2019 from $147.3 million during the year ended December 31, 2018.

The increase in revenue was primarily attributable to the increase in volume of the Zio service performed as a result of the expansion of coverage and the increase in the number of payors under contract, increasing physician acceptance and expansion of our sales force as we continue to gain market acceptance for our Zio service.

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

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Research and Development Expenses

Research and development expenses increased $16.4 million, or 79%, to $37.3 million during the year ended December 31, 2019 from $20.9 million during the year ended December 31, 2018.

The increase was primarily attributable to a $4.7 million increase in payroll and personnel-related expenses as a result of increased headcount, and $1.5 million for allocated facility-related expenses.

The increase was primarily attributable to a $7.4 million increase in payroll and personnel-related expenses as a result of increased headcount, $6.0 million in Verily milestone and upfront payment expense, and $3.3 million for allocated facility-related expenses.

This was partially offset by $3.3 million increase in capitalization of internal use software.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $48.1 million, or 56%, to $133.3 million during the year ended December 31, 2018 from $85.3 million December 31, 2017.

The increase was primarily attributable to a $33.6 million increase in payroll and personnel-related expenses as a result of increased headcount to support the growth in our operations, which included an increase of $12.0 million in commissions and bonuses primarily as a result of increased revenues.

The increase was also driven by an increase in professional services of $3.5 million and bad debt expense of $2.2 million.

Selling, general and administrative expenses increased $46.2 million, or 35%, to $179.5 million during the year ended December 31, 2019 from $133.3 million during the year ended December 31, 2018.

The increase was also driven by an increase in professional services of $8.1 million.

Interest Expense

Interest expense decreased $0.3 million to $3.1 million during the year ended December 31, 2018 from $3.4 million during the year ended December 31, 2017 due to the extinguishment of the loan agreement with Biopharma Secured Investments III Holdings Cayman LP in October 2018 as well as repayment of the loan agreement with California HealthCare Foundation in May 2018.

Other Income, Net

Other income, net increased $0.3 million to income of $1.5 million during the year ended December 31, 2018 from $1.2 million during the year ended December 31, 2017.

The increase in other income is due to interest income on our investment portfolio.

Other income, increased to $1.9 million for the year ended December 31, 2019, compared to $1.5 million for the year ended December 31, 2018.

The increase in other income is primarily due to an increase in our investment portfolio during the fourth quarter of 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.

As of December 31, 2020, we had cash and cash equivalents of $88.6 million, short-term investments of $246.6 million, and an accumulated deficit of $304.7 million.

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Financing activities 214,316 111,576 6,303

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 439 $ 11,352 $ (43,063)

Net increase in cash, cash equivalents, and restricted cash $ 68,166 $ 439 $ 11,352

Cash Used in Operating Activities

During the year ended December 31, 2020, cash used in operating activities was $13.8 million which consisted of a net loss of $43.8 million, adjusted by non-cash charges of $86.3 million and a net change of $56.2 million in our net operating assets and liabilities.

The non-cash charges are primarily comprised of stock-based compensation expense of $26.2 million, as well as depreciation and amortization expense of $3.4 million and a change in allowance for doubtful accounts and contractual allowance of $24.6 million.

an increase of $6.0 million in accrued liabilities, primarily related to increased accrued payroll and related compensation accruals.

The non-cash charges are primarily comprised of stock-based compensation expense of $41.5 million, as well as depreciation and amortization expense of $6.9 million and a change in allowance for doubtful accounts and contractual

allowance of $31.4 million and amortization of right of use assets of $6.0 million.

The change in our net operating assets and liabilities compared to December 31, 2019 was primarily due to an increase of $38.0 million in the change in accounts receivable as a result of the increase in our revenue, an increase of $6.1 million in other assets, primarily related to increase in PCBA boards due to increased customer demand and sales, a decrease of $4.8 million in operating lease liability and a decrease of $3.9 million in accounts payable.

During the year ended December 31, 2019 cash used in operating activities was $21.9 million, which consisted of a net loss of $54.6 million, adjusted by non-cash charges of $62.4 million and a net change of $29.7 million in our net operating assets and liabilities.

The non-cash charges are primarily comprised of stock-based compensation expense of $16.3 million, as well as a change in allowance for doubtful accounts and contractual allowance of $16.4 million.

The change in our net operating assets and liabilities compared to December 31, 2018 was primarily due to an increase of $28.7 million in the change in accounts receivable as a result of the increase in our revenue, and an increase of $6.0 million in accrued liabilities, primarily related to increased accrued payroll and related compensation accruals.

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Cash From Investing Activities

Cash used in investing activities during the year ended December 31, 2020 was $132.4 million, which consisted primarily of $277.5 million in purchases of available for sale investments, $13.6 million of capital expenditures to purchase property and equipment and $1.9 million in repayment of long-term debt, partially offset by $144.1 million cash received from the maturities of available for sale investments and $14.5 million in cash received from sales of available for sale investments.

Cash used in investing activities during the year ended December 31, 2019 was $89.3 million, which consisted primarily of $165.9 million in purchases of available for sale investments and $20.5 million of capital expenditures to purchase property and equipment partially offset by $95.6 million cash received from the maturities of available for sale investments and $1.5 million in cash received from sales of available for sale investments.

Cash provided by investing activities during the year ended December 31, 2018 was $34.1 million, which consisted of $126.5 million cash received from the maturities of available for sale investments and $6.0 million in cash received from sales of available for sale investments partially offset by $93.1 million in purchases of investments and $5.2 million of capital expenditures to purchase property and equipment.

Cash used in investing activities during the year ended December 31, 2017 was $34.7 million, which consisted of $129.8 million in purchases of investments and $3.6 million of capital expenditures to purchase property and equipment, partially offset by maturities of available for sale investments of $98.7 million.

Cash From Financing Activities

During the year ended December 31, 2020, cash provided by financing activities was $214.3 million, primarily due to $206.0 million from the issuance of common stock in a public offering, net of discounts and issuance costs and $20.2 million in proceeds from the issuance of common stock in connection with employee option exercises and our Employee Stock Purchase Program.

This was partially offset by $10.0 million in tax withholding upon the vesting of RSUs and $1.9 million in re-payment of long term debt.

During the year ended December 31, 2019, cash provided by financing activities was $111.6 million, primarily due to $107.4 million from the issuance of common stock in a public offering, net of discounts and issuance costs and $9.5 million in proceeds from the issuance of common stock in connection with employee option exercises and our Employee Stock Purchase Program.

This was partially offset by $5.3 million in tax withholding upon the vesting of RSUs.

During the year ended December 31, 2018, cash provided by financing activities was $6.3 million, primarily due to proceeds from the issuance of debt of $35.0 million and $9.3 million in proceeds from the issuance of common stock in connection with employee option exercises and our Employee Stock Purchase Program, partially offset by repayment of debt of $31.5 million, $3.9 million in tax withholding upon the vesting of RSUs and $2.5 million in premiums paid on loss on extinguishment of debt.

During the year ended December 31, 2017, cash provided by financing activities was $6.5 million, consisting primarily of net proceeds of $6.4 million from the issuance of common stock related to employee option exercises and our Employee Stock Purchase Program.

In December 2015, we entered into a Loan Agreement with Biopharma Secured Investments III Holdings Cayman LP (the “Pharmakon Loan Agreement”).

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Any principal amount outstanding under the SVB Loan Agreement shall bear interest at a floating rate per annum equal to the rate published by The Wall Street Journal as the “Prime Rate” plus 0.25%.

We may borrow up to 80% of its eligible accounts receivable, up to the maximum of $15.0 million.

In August 2016, we obtained a $3.1 million standby letter of credit pursuant to the SVB Loan Agreement in connection with a lease for the San Francisco office.

We could borrow up to 80% of our eligible accounts receivable, up to the maximum of $15.0 million.

In October 2018, we entered into the Third Amended and Restated Loan and Security Agreement with SVB (“Third Amended and Restated SVB Loan Agreement”).

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Total proceeds from the SVB Term Loan were used to pay off the loan agreement with Biopharma Secured Investments III Holdings Cayman LP (“Pharmakon”), totaling $35.8 million.

We will make interest-only payments through October 31, 2020, followed by 36 monthly payments of principal plus interest on the SVB Term Loan.

We made interest-only payments through October 31, 2020, followed by 36 monthly payments of principal plus interest on the SVB Term Loan.

Interest charged on the SVB Term Loan will be the greater of (a) a floating rate based on the “Prime Rate” published by The Wall Street Journal minus 0.75%, or (b) 4.25%.

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

California HealthCare Foundation Note

In November 2012, we entered into a Note Purchase Agreement and Promissory Note with the California HealthCare Foundation (the “CHCF Note”) through which we borrowed $1.5 million.

The CHCF Note accrued simple interest of 2.0%.

The accrued interest and the principal was to mature in November 2016.

In partial consideration for the issuance of the CHCF Note, we issued warrants to purchase 22,807 shares of the Company’s Series D convertible preferred stock.

In June 2015, we amended the CHCF Note to extend the maturity date to May 2018.

The CHCF Note was subordinate to other debt.

The debt balance, net of debt discount, as of December 31, 2017 was $1.5 million.

In May 2018, we repaid the principal amount of $1.5 million and related $0.2 million in accrued interest on the CHCF Note.

Critical Accounting Policies and Estimates

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Our Zio AT service revenue is recognized over the prescription period and delivery of an electronic Zio Report.

We adopted Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), on January 1, 2018.

We recognized revenue in prior years in accordance with Accounting Standard Codification Topic 954-605, Health Care Entities - Revenue Recognition and Accounting Standard Codification Topic 605, Revenue Recognition .

We account for contract revenue with a customer when there is a legally enforceable contract between us and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable.

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Each time the PCBA and gateway board is used in a wearable Zio XT and Zio AT monitor, a portion of the cost of the PCBA and gateway board is recorded as a cost of revenue.

We have based our estimates of how many times a PCBA and gateway board can be used on testing in research and

development, loss rates, product obsolescence, and the amount of time it takes the device to go through the manufacturing, shipping, customer shelf and patient wear time and upload process.

We have based our estimates of how many times a PCBA and gateway board can be used on testing in research and development, loss rates, product obsolescence, and the amount of time it takes the device to go through the manufacturing, shipping, customer shelf and patient wear time and upload process.

We periodically evaluate the use estimate.

Stock-Based Compensation

We recognize compensation costs related to stock option grants, restricted stock unit grants (“RSUs”), and shares under the employee stock purchase program (“ESPP”) based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures.

We recognize compensation costs related to stock option grants, restricted stock unit grants (“RSUs”), and shares under the employee stock purchase program (“ESPP”), and market condition awards based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures.

We estimate the grant date fair value, and the resulting stock-based compensation expense for options and shares under the ESPP, using the Black-Scholes option pricing model.

We estimate the

grant date fair value, and the resulting stock-based compensation expense for market condition awards using the Monte-Carlo option pricing model.

The RSU grant date fair value is based on the closing price on the date of the grant.

The grant date fair value of stock-based awards is expensed 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).

We estimate the fair value of our stock-based awards using the Black-Scholes option-pricing model, which requires the input of highly subjective assumptions.

We estimate the fair value of our stock-based awards using the Black-Scholes and Monte-Carlo option-pricing models, which requires the input of highly subjective assumptions.

Our assumptions are as follows:

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• Expected volatility.

As our common stock has been publicly traded for a limited time, the expected volatility is derived from the average historical volatilities of publicly traded companies within our industry that we consider to be comparable to our business over a period approximately equal to the expected term for employees’ options and the remaining contractual life for nonemployees’ options.

The expected volatility is derived from the average implied volatility of our common stock .

As our common stock has been publicly traded for a limited time, in some cases expected volatility is derived from the average historical volatilities of publicly traded companies within our industry that we consider to be comparable to our business over a period approximately equal to the expected term for employees’ options and the remaining contractual life for nonemployees’ options.

• Risk-free interest rate.

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The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.

In addition to the assumptions used in the Black-Scholes option-pricing model, we also estimate a forfeiture rate to calculate the stock-based compensation for our equity awards.

In addition to the assumptions used in the Black-Scholes and Monte-Carlo option-pricing model, we also estimate a forfeiture rate to calculate the stock-based compensation for our equity awards.

We will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis.

Stock-based compensation expense for options granted to non-employees as consideration for services received is measured on the date of performance at the fair value of the consideration received or the fair value of the equity instruments issued, using the Black-Scholes option-pricing model, whichever can be more reliably measured.

Stock-based compensation expense for options granted to non-employees is periodically re-measured as the underlying options vest.

We recognize compensation expense related to restricted stock units 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).

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

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.

We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model for each purchase period.

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Recently Adopted Accounting Guidance

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-2, Leases (“Topic 842”), which requires lessees to recognize lease liabilities and corresponding right-of-use assets on the consolidated balance sheet for all leases.

For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset and, for operating leases, the lessee would recognize a straight-line lease expense.

As of December 31, 2019, the Company does not have any finance leases.

Topic 842 also changes the definition of a lease and expands the disclosure requirements of lease arrangements.

The Company has no embedded leases with suppliers.

Upon adoption of Topic

842 on January 1, 2019 using the modified retrospective method, the Company recognized right-of-use assets of $10.2 million and lease liabilities of $10.0 million.

There was no cumulative-effect adjustment recorded on January 1, 2019.

The Company adopted the following practical expedients allowed under Topic 842:

The package of three practical expedients, which allows entities to make an election that allows them not to reassess (1) whether existing or expired contracts contain embedded leases under Topic 842, (2) lease classification of existing or expiring leases, and (3) indirect costs for existing or expired leases;

Combining lease and non-lease components practical expedient, which allows lessees, as an accounting policy election by class of underlying asset, to choose not to separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component;

Comparative reporting practical expedient, which allows entities to initially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

For further details, refer to Note 6.

Commitments and Contingencies.

Recent Accounting Standards or Updates Not Yet Effective

In June 2016, the FASB issued ASU No.

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It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities.

The Company will adopt this standard in the first quarter of fiscal 2020 and is evaluating the impact of adopting this amendment to its consolidated financial statements.

The Company adopted ASC 326 on January 1, 2020, using the modified retrospective transition method through a non-cash $0.5 million cumulative-effect increase to accumulated deficit and the allowance for doubtful accounts.

The Company considered the current and expected future economic and market conditions surrounding the novel COVID-19 pandemic and recorded additional reserves that were not individually material to the estimate.

Actual results may differ from these estimates.

In August 2018, the FASB issued ASU No.

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Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which amended its guidance for costs of implementing a cloud computing service arrangement to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

This new standard also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement.

This new standard becomes effective for the Company in the first quarter of fiscal year 2020, with early adoption permitted.

This new standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.

The Company is evaluating the impact of adopting this amendment to its consolidated financial statements.

This new standard also

requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement.

The Company adopted ASU No.

2018-15 on January 1, 2020, using the prospective transition method.

The impact of adoption on the Company's consolidated financial statements was not material.

In December 2019, the FASB issued ASU No.

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Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles for income taxes.

ASU 2019-12 will be effective for us beginning January 1, 2021, and early adoption is permitted.

The Company is currently evaluating the impact of adoption on our consolidated financial statements.

The Company elected to early adopt ASU 2019-12 effective as of January 1, 2020, and the impact of adoption on the Company's condensed consolidated financial statements was not material.

Off-Balance Sheet Arrangements

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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-K

Item 7. Management’s Discussion and Analysis