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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-02-26 · 95 added, 124 removed, 249 unchanged (47% of the section changed)

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You should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and related notes included elsewhere in Item 8 of Part II of this Annual Report on Form 10-K.

This discussion and other parts of this Annual Report on Form 10-K reflect the revisions disclosed in our Form 10-Q filed on December 23, 2019 and contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions.

This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions.

Our actual results could differ materially from those discussed in these forward-looking statements.

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.

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

The objectives of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are to provide users of our consolidated financial statements with the following

• a narrative explanation of the financial statements from the perspective of management that includes our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results;

• a discussion on matters that are reasonably likely to have a material impact on future operations.

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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• wearable patch-based biosensors, Zio XT and Zio AT monitors, which continuously record and store ECG data from every patient heartbeat for up to 14 consecutive days;

Zio AT offers the option of timely transmission of data during the prescribed wear period;

Zio AT offers the option of timely, detection based transmission of data during the prescribed wear period;

• cloud-based analysis of the recorded cardiac rhythms using our proprietary, deep-learned algorithms;

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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 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.

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

We believe the Zio service is well-positioned to penetrate 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 service 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.

administrators and other clinical departments.

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.

Beginning in mid-March 2020, we experienced decreasing levels in the Zio service patient registrations which impacted our revenues during the years ended December 31, 2021 and 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 physician prescriptions for our Zio service due to:

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

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

◦ reduction in the hours of most physicians’ offices;

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

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• 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.

and 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.

Government mandates related to the COVID-19 pandemic have impacted, and are expected to continue to impact, our personnel and personnel at third-party manufacturing facilities in the United States and other countries, and the availability or cost of materials, which could disrupt our supply chain and reduce margins.

For instance, on or about March 16, 2020, the Health Officers for the counties of San Francisco (where our headquarters are located), Santa Clara, San Mateo, Marin, Contra Costa and Alameda, where many employees are located, issued mandatory shelter-in-place orders and all employees transitioned to a remote work environment.

We are also subject to orders in Southern California that temporarily shut down its manufacturing and distribution facilities in Cypress, California.

For a limited number of employees who continue to support essential operations, including those at our manufacturing facilities, the we have instituted protective equipment policies and, to the degree practical, social distancing measures to protect the safety of its employees.

While we have continued to deliver the Zio service by operating with remote employees and essential employees on site, an extended implementation of these government mandates could further impact the Company's ability to effectively provide its Zio service, and could impede progress of all ongoing initiatives.

Appropriate social distancing techniques and other measures at our facilities have been implemented for the limited number of employees who have returned to work to support essential operations, and will not return until the risk to employee health has meaningfully diminished.

While hospital systems and healthcare facilities shift their focus and resources to treating COVID-19 patients and combating the spread of the coronavirus, we have adapted our service to meet the immediate needs of physicians, customers, and patients and significantly increased the utilization of its home enrollment service which allows patients to receive and wear the single-use Zio device without going to a healthcare facility.

Government mandates related to the COVID-19 pandemic have impacted, and are expected to continue to impact, payor processing times of our claims and appeals.

This increase in response times may be due, in part, to staffing shortages at the payors.

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.

During the six months ended June 30, 2021, we experienced an increase in the level of Zio service patient registration.

This increase may be due in part to re-opening of certain regions within the United States and increases in the vaccination status of patients and providers.

During the six months ended December 31, 2021, we experienced a decrease in the level of Zio service patient registrations.

This decrease may be due, in part, to staffing shortages at providers in certain regions of the United States.

The status of provider capacity and resource prioritization, vaccination levels and other pandemic-related effects could materially impact the volume of our patient registrations in future periods.

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

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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 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.

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

Substantially all of our revenue is derived from sales of our Zio service in the United States.

The majority of our revenue is derived from provision of our Zio service to customers in the United States.

We earn revenue from the provision of our Zio service primarily from contracted third-party payors, CMS and healthcare institutions.

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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.

Revenue may be impacted by the outcome of adjudications with contracted and non-contracted payors, as well as changes in the CMS reimbursement rates.

Clinical capacity limitations may also restrict our ability to complete the performance obligations to achieve revenue recognition.

Cost of Revenue and Gross Margin

Cost of revenue includes direct labor, material costs, equipment and infrastructure expenses, amortization of internal-use software, allocated overhead, and shipping and handling.

Direct labor includes payroll and personnel-related costs including stock-based compensation involved in manufacturing, data analysis, and customer service.

Cost of revenue includes direct labor, material costs, equipment and infrastructure expenses, device scrap and loss, amortization of internal-use software, allocated overhead, and shipping and handling.

Direct labor includes payroll and personnel-related costs including stock-based compensation involved in manufacturing, clinical data curation, and customer

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.

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

We expect cost of revenue to increase in absolute dollars as our revenue increases due to increased direct labor, direct materials, and variable spending, partially offset by economies of scale in relation to fixed costs such as overhead, depreciation and amortization, and facilities costs.

We calculate gross margin as gross profit divided by revenue.

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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 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 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.

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

These decreases may be offset by increases to materials and electronics components pricing, labor rates, shipping rates, depreciation and amortization of investments, and increases in the general level of inflation.

Gross margin for the year ended December 31, 2021 was negatively impacted due to the decrease in reimbursement rates from Novitas Solutions, increased costs associated with capacity constraints, and COVID-related labor costs, offset by volume benefits, with limited impact of higher Zio AT volumes, and improved payor adjudications.

Although a large majority of our commercial customers have renewed their contracts for the Zio XT service since the establishment of the Category I codes on January 1, 2021 matching to pre-existing rates, if we are unsuccessful in improving the Medicare rates, we believe that commercial rates may begin to be more negatively impacted, which would have a negative impact on our gross margins.

Research and Development Expenses

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Research and development expenses include payroll and personnel-related costs, including stock-based compensation, consulting services, clinical studies, laboratory supplies and allocated facility overhead costs.

We expect our research and development costs to increase in absolute dollars as we hire additional personnel to develop new product and service offerings and product enhancements.

We expect our research and development costs to increase in absolute dollars as we hire additional personnel to develop new product and service offerings, product enhancements and clinical evidence.

Selling, General and Administrative Expenses

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Interest expense is attributable to borrowings under our loan agreements.

Refer to Note 7.

Debt , for further information on our loan agreements.

Other Income, Net

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

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

Results of Operations

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Revenue increased $57.7 million, or 22%, to $322.8 million during the year ended December 31, 2021 from $265.2 million during the year ended December 31, 2020.

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.

The increase in revenue was primarily attributable to the increase in volume of the Zio services as a result of increased demand from our customers, partially offset by a decrease in revenue recognized from CMS, based on the updated 2021 published rates.

Cost of Revenue and Gross Margin

Cost of revenue increased $39.0 million, or 55%, to $109.3 million during the year ended December 31, 2021 from $70.3 million during the year ended December 31, 2020.

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.

The increase in cost of revenue was primarily due to increased Zio service volume, increase in costs resulting from capacity limitations associated with clinical operations, as well as costs incurred to support a larger cost structure in 2021.

Gross margin for the year ended December 31, 2021 decreased to 66%, compared to 73% for the year ended December 31, 2020.

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.

The decrease in gross margin is primarily due to the updated reimbursement rates announced by Novitas Solutions in April 2021 with an effective date of January 1, 2021, increased costs associated with capacity constraints, with limited impact of higher Zio AT volumes and COVID-related labor costs, offset by volume benefits.

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 $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.

Research and development expenses decreased $2.7 million, or 6%, to $38.7 million during the year ended December 31, 2021 from $41.3 million during the year ended December 31, 2020.

The decrease was primarily attributable to a $4.0 million decrease of Verily milestone expense offset by a $1.7 million increase in payroll and employee stock-based compensation.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $77.6 million, or 39%, to $274.8 million during the year ended December 31, 2021 from $197.2 million during the year ended December 31, 2020.

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.

The increase was primarily attributable to a $64.6 million increase in payroll and employee stock-based compensation as a result of increased headcount and executive hires to support the growth in our operations, a $5.1 million increase in facilities and rent due to increased facility maintenance costs, and an increase of $4.5 million in professional services fees.

In February 2022, the our Board of Directors approved a decision to pursue reducing our leased space for our headquarters in San Francisco, California.

We expect these decisions will result in an impairment of the right of use asset lease and we are assessing the impact to our Consolidated Financial Statements for the quarter ending March 31, 2022.

Interest Expense

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.

Interest expense decreased $0.4 million to $1.2 million during the year ended December 31, 2021 from $1.5 million during the year ended December 31, 2020 due to principal re-payments on the SVB Loan starting in November 2020.

Other Income, Net

Other income, decreased $1.5 million to $0.1 million for the year ended December 31, 2021, compared to $1.6 million for year ended December 31, 2020.

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.

The decrease in other income is primarily due to a decrease in interest income and value added tax reclaims.

Comparison of the Year Ended December 31 2020, and 2019

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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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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 in Verily milestone and upfront payment expense, 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 in 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.

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 payments on the SVB Loan starting in November 2020 and a decrease in the 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 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.

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 an increase in interest income, and prior year value added tax reclaims.

Liquidity and Capital Expenditures

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During the year ended December 31, 2021, cash used in operating activities was $37.8 million which consisted of a net loss of $101.4 million, adjusted by non-cash charges of $109.8 million and a net change of $46.2 million in our net operating assets and liabilities.

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.

The non-cash charges are primarily comprised of stock-based compensation expense of $54.5 million, as well as depreciation and amortization expense of $9.8 million and a change in allowance for doubtful accounts and contractual allowance of $37.1 million and amortization of right of use assets of $6.8 million.

The change in our net operating assets and liabilities compared to December 31, 2020 was primarily due to an increase of $53.6 million in the change in accounts receivable as a result of the CPT code changes that took effect January 1, 2021.

The number of claims from the first half of 2021 which contained differences between the submitted price and reimbursement and overall denials increased significantly compared to our historical experience as a result of CPT code transition issues with the payors.

We continue to work with the payors to collect on these claims and the collection cycle for these claims is significantly longer than usual.

While we believe we have properly estimated the impact to our contractual allowances and allowance for doubtful accounts, the inherent uncertainty caused by longer collection cycle and claims adjudication process could result in additional provisions for contractual allowances and doubtful accounts which would negatively impact our results of operations in future periods.

We believe we have adequate balance sheet liquidity to manage through these delays.

Accrued liabilities increased $7.9 million primarily due to increased compensation and benefit accruals as a result of increased head count, and an increase in accounts payable of $6.1 million, primarily due to milestone achievements on our collaboration with Verily, partially offset by an increase of $5.0 million in inventory.

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.

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.

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 an increase in PCBA boards due to increased 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.

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 provided by investing activities during the year ended December 31, 2021 was $105.3 million, which consisted primarily of $122.2 million in purchases of available for sale investments partially offset by $28.1 million of capital expenditures to purchase property and equipment and $255.5 million in cash received from the maturities of available for sale investments.

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, 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 in 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 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.

During the year ended December 31, 2021, cash used in financing activities was $28.6 million, primarily due to $25.9 million in tax withholding upon the vesting of RSUs and $11.7 million in repayment of long term debt.

This was partially offset by $8.9 million in proceeds from the issuance of common stock in connection with employee option exercises and our Employee Stock Purchase Plan.

This amount 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.

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.

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

The Pharmakon Loan Agreement provided for up to $55.0 million in term loans split into two tranches as follows:

(i) the Tranche A Loans were $30.0 million in term loans, and (ii) the Tranche B Loans were up to $25.0 million in term loans.

The Tranche A Loans were drawn on December 4, 2015.

The Tranche B Loans were available to be drawn prior to December 4, 2016.

No additional draw was taken.

The Tranche A Loans bore interest at a fixed rate equal to 9.50% per annum that was due and payable quarterly in arrears.

During the first eight calendar quarters, 50% of the interest due and payable was added to the then outstanding principal.

In December 2015, we used the proceeds from the Pharmakon Loan Agreement to repay $4.9 million of bank debt to SVB.

The issuance costs and debt discount were netted against the borrowed funds on the balance sheet.

On October 23, 2018, we repaid the principal amount of the Tranche A Loan of $30.0 million and related accrued interest of $3.3 million.

We incurred a $3.0 million loss in connection with the early extinguishment of the Pharmakon Loan Agreement which included a prepayment premium fee of $1.0 million and additional consideration related to prepayment of $1.5 million.

The debt balance as of December 31, 2017 was $32.5 million.

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

Under the SVB Loan Agreement we could borrow, repay and reborrow under a revolving credit line, but not in excess of the maximum loan amount of $15.0 million, until December 4, 2018, when all outstanding principal and accrued interest became due and payable.

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

As of December 31, 2020 we were eligible to borrow up to $7.7 million and 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.

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We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

All policies described below have not significantly changed over the last fiscal year.

In addition, the policies below are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and it is likely that materially different amounts would be reported under different conditions or using different assumptions.

Revenue Recognition

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We recognize revenue on an accrual basis based on estimates of the amount that will ultimately be realized, which is the difference between the amount submitted for payment and the amount received.

These estimates require significant judgment by management.

Revenue recognition is subject to uncertainty because these estimates require significant judgment by management.

In determining the amount to accrue for a delivered report, 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 us, historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments.

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Allowance for Doubtful Accounts and Contractual Allowance

We establish an allowance for doubtful accounts for estimated uncollectible receivables based on our historical collections, review of specific outstanding claims, consideration of relevant qualitative factors and an established allowance percentage by aging category.

Allowance for doubtful accounts and contractual allowance is subject to uncertainty because we establish an allowance for doubtful accounts for estimated uncollectible receivables based on our historical collections, review of specific outstanding claims, consideration of relevant qualitative factors and an established allowance percentage by aging category, all of which are inherently uncertain.

We write off outstanding accounts against the allowance for doubtful accounts when they are deemed to be uncollectible.

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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.

Estimated usage of PCBAs is subject to uncertainty because we base 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.

These estimates can be subjective, complex, and inherently uncertain.

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”), and market condition awards 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 plan (“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.

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.

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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 recognize compensation expense related to the 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.

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

Stock-based compensation is subject to uncertainty due to management estimates used in monte-carlo and black scholes valuations, as well as probability assessments performed to estimated numbers of shares probable to vest where awards have minimum performance conditions.

We recorded stock-based compensation expense of $54.5 million, $41.5 million, and $26.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.

We expect to continue to grant RSUs and other equity-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

Recently Adopted Accounting Guidance

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables.

2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates.

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 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.

2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):

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.

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.

2019-12, Income Taxes (Topic 740):

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

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

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

Contractual Obligations

Payments Due by Period

Debt interest payments (1)

$ 1,194 $ 883 $ — $ — $ 2,077

Debt principal payments $ 11,666 $ 21,389 $ — $ — $ 33,055

Operating leases $ 9,513 $ 23,214 $ 24,389 $ 75,420 $ 132,536

Total contractual obligations $ 22,373 $ 45,486 $ 24,389 $ 75,420 $ 167,668

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(1) Debt interest payments calculated based on interest rates in effect as of December 31, 2020

The table above does not include approximately $4.4 million in non-cancelable purchase orders related to inventory and printed circuit board assemblies entered into in the normal course of operations, which we expect to be paid in less than one year.

The table excludes unrecognized tax benefits of $2.3 million as of December 31, 2020 because these uncertain tax positions, if recognized, would be an adjustment to our net deferred tax assets.

Material Cash Requirements

The Company's material cash requirements include the following contractual and other obligations.

• Debt interest and principal payments - In October 2018, we entered into the Third Amended and Restated Loan and Security Agreement with Silicon Valley Bank, Pursuant to which we obtained a term loan (“SVB Term Loan”) for $35.0 million.

We made interest-only payments through October 31, 2020, and began making monthly payments of principal plus interest in November 2020.

• Operating leases - We lease our facilities under non-cancelable operating leases that have remaining lease terms of up to 9.75 years.

As of December 31, 2021, we had fixed lease payment obligations of $136.5 million, with $12.6 million payable within 12 months.

• Purchase obligations - Purchase obligations represent an estimate of open purchase orders and contractual obligations, in the ordinary course of business for which we have not received the goods or services.

As of December 31, 2021, we had $53.5 million of such purchase obligations.

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What changed 10-K

Item 7. Management’s Discussion and Analysis