What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-28 compared with 2021-02-26 · 173 added, 297 removed, 842 unchanged (36% of the section changed)

21 unchanged sentences

We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Changes in Accounting Principles

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.

Basis for Opinions

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A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit

preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

4 unchanged sentences

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Contractual Allowance and Allowance for Doubtful Accounts – Contracted Third-Party Payors

As described in Note 2 to the consolidated financial statements, a large part of the Company’s transactions are covered by third-party payors with whom there is a contractual agreement or established amount the third-party payor will pay (contracted third-party payors).

Contractual Allowance – Contracted Third-Party Payors

As described in Note 2 to the consolidated financial statements, a large portion of the Company’s transactions are covered by third-party payors with whom there is a contractual agreement or established amount the third-party payor will pay (contracted third-party payors).

These contracts impose a number of obligations regarding billing and other matters, and the Company’s noncompliance with a material term of such contracts may result in a denial of the claim.

The Company recognizes revenue from contracted third-party payors, net of contractual allowances, and recognizes an allowance for doubtful accounts for uncollectible patient accounts receivable.

As of December 31, 2020, the Company’s contractual allowance balance was $21.3 million and allowance for doubtful accounts balance was $12.7 million, a portion of which relates to revenue from services provided to patients insured by contracted third-party payors.

Management accounts for denied claims as a form of variable consideration that is included as a reduction to the transaction price and recorded as an adjustment to revenue as a contractual allowance.

Management accounts for the allowance for doubtful accounts at the time revenue is recognized, with such provisions presented as bad debt expense within selling, general and administrative expenses.

The estimated denied claims and uncollectible receivables are based on historical information which require judgment by management in determining which historical period is used.

The principal considerations for our determination that performing procedures relating to the contractual allowances and allowance for doubtful accounts for contracted third-party payors is a critical audit matter are the significant judgment by management in developing estimates of the contractual allowances and allowance for doubtful accounts.

This in turn led to a high degree of auditor subjectivity, judgment, and effort in performing procedures and evaluating the audit evidence obtained related to management’s estimates of the contractual allowances and allowance for doubtful accounts, relating to management’s judgments regarding the historical period used on which to base the estimate.

As disclosed by management, a material weakness existed during the year related to this matter.

The number of claims from the first half of 2021 which had differences between the submitted price and reimbursement, and the overall denials, increased significantly compared to the Company’s historical experience as a result of the Current Procedural Terminology (CPT) code transition issues with certain payors.

The Company recognizes revenue from contracted third-party payors, net of contractual allowances.

As of December 31, 2021, the Company’s contractual allowance balance was $31.3 million, a significant portion of which relates to revenue from services provided to patients where contracted third-party payors pay for the service on the patient's behalf.

As disclosed by management, management accounts for denied claims as a form of variable consideration that is included as a reduction to the transaction price and records as an adjustment to revenue as a contractual allowance.

The contractual allowance requires judgment by management and is based on historical collections, review of specific outstanding claims and consideration of relevant qualitative factors.

The principal considerations for our determination that performing procedures relating to the contractual allowance for contracted third-party payors is a critical audit matter are the significant judgment by management when developing the estimate of the contractual allowance;

this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the contractual allowance based on historical collections, review of specific outstanding claims and consideration of relevant qualitative factors.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included, among others, (i) evaluating management’s process for developing estimates of the contractual allowances and allowance for doubtful accounts, including comparing the historical period used by management with reasonable alternative historical periods based on current and past history of denied claims and uncollectible amounts, (ii) testing the completeness and accuracy of the historical information used by management in the estimate, by testing a sample of transactions, and (iii) testing management’s process for developing the estimate on the data on which it is based.

These procedures included testing the effectiveness of controls relating to the contractual allowance for contracted third party payors, including controls over the historical collections, review of specific outstanding claims and consideration of relevant qualitative factors.

These procedures also included, among others (i) testing management’s process for developing the estimate of the contractual allowance;

(ii) testing the completeness and accuracy of the underlying data used in the estimate;

(iii) testing, on a sample basis, the accuracy of revenue transactions and collections from the historical billing and collection data used in management’s analysis;

(iv) performing a retrospective comparison of actual collections subsequent to year-end to evaluate the reasonableness of certain of the estimates;

and (v) evaluating the reasonableness of adjustments made by management to contractual allowances.

/s/ PricewaterhouseCoopers LLP

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Short-term investments 111,569 246,589

Accounts receivable, net of allowances for doubtful accounts of $ 12,711 and $ 9,049 as of December 31, 2020 and December 31, 2019, respectively

29,932 23,867

Accounts receivable, net 46,430 29,932

Inventory 10,268 5,313

1 unchanged sentence

Total current assets 305,522 377,825

Long-term investments — 8,030

Property and equipment, net 55,944 34,247

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Additional paid-in capital 685,594 646,258

Accumulated other comprehensive income 11 82

Accumulated other comprehensive income (loss) ( 61 ) 11

Accumulated deficit ( 406,045 ) ( 304,684 )

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Other income, net 118 1,591 1,895

Loss on extinguishment of debt — — ( 3,029 )

Loss before income taxes ( 100,994 ) ( 43,601 ) ( 54,503 )

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Balances at December 31, 2018 24,368,073 $ 23 $ 257,955 $ ( 205,825 ) -205825000 $ ( 16 ) $ 52,137

Accounting Standards Codification 606 cumulative effect adjustment upon adoption — — — 1,354 — 1,354

Issuance of common stock in connection with employee equity incentive plans, net 734,453 — 9,495 — — 9,495

Warrants exercised

Issuance of common stock in connection with follow-on public offering, net of issuance costs 1,575,342 2 107,292 — 107,294

Tax withholding upon vesting of restricted stock awards

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Issuance of common stock in connection with employee equity incentive plans 1,079,488 — 20,244 — — 20,244

Warrants exercised 4,852 — — — — —

Issuance of common stock in connection with follow-on public offering, net of issuance costs 1,257,142 2 206,023 — — 206,025

1 unchanged sentence

Stock-based compensation expense — — 34,305 — — 34,305

Accounting Standards Codification 326 cumulative effect adjustment upon adoption ( 461 ) ( 461 )

Net loss — — — ( 43,830 ) — ( 43,830 )

3 unchanged sentences

Issuance of common stock in connection with employee equity incentive plans 474,376 — 8,943 — — 8,943

Issuance of common stock in connection with follow-on public offering, net of issuance costs 1,257,142 2 206,023 — — 206,025

Tax withholding upon vesting of restricted stock awards — ( 25,853 ) ( 25,853 )

Stock-based compensation expense — — 56,246 — — 56,246

Accounting Standards Codification 326 cumulative effect adjustment upon adoption — — — ( 461 ) — ( 461 )

Net loss — — — ( 101,361 ) — ( 101,361 )

14 unchanged sentences

Accretion of discounts on investments, net of premium amortization 1,641 430 ( 884 )

Loss on disposal of assets — — 75

Provision for bad debt and contractual allowance 37,074 31,431 24,647

Loss on extinguishment of debt — — 3,029

Repayment of interest paid in kind — — ( 3,141 )

Cost of operating lease right-of-use assets 6,752 6,030 8,953

6 unchanged sentences

Accrued liabilities 7,946 1,308 6,002

Deferred rent — — 105

Deferred revenue 2,119 ( 321 ) 28

10 unchanged sentences

— 206,025 107,369

Proceeds from issuance of common stock in connection with employee equity incentive plans 20,244 9,495 9,319

Proceeds from issuance of common stock in connection with employee

equity incentive plans 8,943 20,244 9,495

Tax withholding upon vesting of restricted stock awards ( 25,853 ) ( 10,009 ) ( 5,288 )

Proceeds from long-term debt, net of debt discount — — 35,000

Repayments of long-term debt ( 11,667 ) ( 1,944 ) —

Payments of issuance costs for long term debt — — ( 121 )

Premiums paid on extinguishment of debt — — ( 2,518 )

Net cash provided by financing activities 214,316 111,576 6,303

Net cash (used in) provided by financing activities ( 28,577 ) 214,316 111,576

Net increase in cash and cash equivalents 38,934 68,166 439

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In March 2016, the Company formed a wholly-owned subsidiary in the United Kingdom.

Additionally, in June 2021, the Company formed a wholly-owned subsidiary in Singapore.

The Company manages its operations as a single operating segment.

Substantially all of the Company’s assets are maintained in the United States.

The Company derives substantially all of its revenue from sales to customers in the United States.

The Company derives substantially all of its revenue from the provision of services to customers in the United States.

On September 10, 2019, the Company issued and sold an aggregate of 1,575,342 shares (the "2019 Shares") of common stock, in a public offering at a price of $ 73.00 per share.

4 unchanged sentences

Total proceeds received from the offering were $ 206.8 million, after deducting discounts and issuance costs.

Revision of Prior Period Financial Statements

In 2019, and as previously disclosed in the Company’s Quarterly Report on Form 10-Q for the three and nine-months ended September 30, 2019, the Company identified errors in its historical accounting for revenues, contractual allowances, allowance for doubtful accounts and certain other items.

The identified errors impacted the Company's accompanying 2018 unaudited quarterly and annual financial statements and its 2019 unaudited first and second quarter financial statements.

In accordance with SEC Staff Accounting Bulletin No.

99, "Materiality," and SEC Staff Accounting Bulletin No.

108,"Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements;" the Company evaluated the errors and determined that the related impacts were not material to any prior annual or interim period, but that correcting the cumulative impact of such errors would be significant to our results of operations for the three and nine months ended September 30, 2019 and the year-ended December 31, 2019.

Accordingly, the Company has revised the accompanying 2018 annual consolidated financial statements to correct for such immaterial errors.

A summary of the impact of the revisions to our previously issued annual financial statements is included in Note 14, Revision of Prior Period Financial Statements.

Further, a summary of the impact of the revisions on the unaudited quarterly financial data is included in Note 13.

Selected Quarterly Financial Data (unaudited).

The affected balances in the accompanying footnotes to these consolidated financial statements have also been revised accordingly.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S.

generally accepted accounting principles and include the accounts of iRhythm Technologies, Inc.

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.

GAAP”) and include the accounts of iRhythm Technologies, Inc.

and its wholly-owned subsidiary.

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Risks and Uncertainties

As a result of the COVID-19 pandemic, the Company has experienced significant business disruptions, restrictions on its ability to travel, reduction in access to customers due to diverted resources at hospitals, and shortened business hours as governments institute prolonged shelter-in-place and/or self-quarantine mandates.

Governmental mandates related to the COVID-19 pandemic have impacted, and is expected to continue to impact, Company 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 of the counties of San Francisco (where the Company's headquarters is 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.

As a result of the COVID-19 pandemic, the Company has experienced significant business disruptions, restrictions on its ability to travel, reduction in access to customers due to diverted resources at hospitals, slower response times from payors who are also facing business interruptions, and shortened business hours as governments institute prolonged shelter-in-place and/or self-quarantine mandates.

Government mandates related to the COVID-19 pandemic have impacted, and are expected to continue to impact, Company 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 the Company's headquarters is 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.

The Company is 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 Company has instituted protective equipment policies and, to the degree practical, social distancing measures to protect the safety of its employees.

While the Company has continued to deliver its Zio service by operating with remote employees and essential employees on site, an extended implementation of these governmental 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 the Company's 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 diminishe d .

While the Company has continued to deliver its 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 the Company's 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 diminishe d .

While hospital systems and healthcare facilities shift their focus and resources to treating COVID-19 patients and combating the spread of the coronavirus, the Company has adapted its 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.

Given the disruption in demand and an uncertain length of time to recovery, the Company adjusted its operating plan in the second quarter of 2020 by taking steps to reduce operating spend.

These steps included eliminating or delaying spending on non-essential programs, reducing spend on travel and consulting, implementing a hiring freeze, furloughing approximately 5 % of employees, conducting a layoff of approximately 2 % of employees and implementing temporary pay reductions for our salaried workforce.

From May 2020 to July 2020, the Company’s Chief Executive Officer, other named executive officers and other senior executives agreed to temporary base salary reductions and the Board of Directors agreed to a reduction in its fees until business and economic conditions improve.

The Company also increased it’s bad debt reserve in anticipation of a potential increase in uncollectible co-payments from patients using the Zio Service.

In August 2020, the Company reinstated furloughed employees, removed pay reductions for its salaried employees, and resumed hiring for most positions.

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 six months ended June 30, 2021, the Company 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, the Company 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 within the United States.

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

The Company is continuously reviewing its liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 pandemic.

The Company believes it will have adequate liquidity over the next 12 months to operate its business and to meet its cash requirements.

As of December 31, 2020, the Company is in compliance with its financial covenants in its debt agreement.

On March 27, 2020, as a result of the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to support businesses during the COVID-19 pandemic, including deferment of the employer portion of certain payroll taxes, refundable payroll tax credits, and technical amendments to tax depreciation methods for qualified improvement property.

The primary provisions of the CARES Act which are potentially applicable to us include:

• certain amendments to the limitations on the deductibility of interest contained in Section 163(j) of the Internal Revenue Code of 1986, as amended, for taxable years beginning in 2019 and 2020;

• an allowance of net operating loss carrybacks for taxable years beginning in 2018 and before 2021.

The Company did not qualify for the Paycheck Protection Program under the CARES Act due to the number of employees in our organization.

The CARES Act did not have material impact on the Company’s overall consolidated financial statements.

As of December 31, 2021, the Company is in compliance with its debt covenants.

The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change.

This impact is having a material, adverse impact on liquidity, capital resources, operations and business and those of the third parties on which the

Company relies, and could worsen over time.

This impact is having a material, adverse impact on liquidity, capital resources, supply chain, operations and business and those of the third parties on which the Company relies, and could worsen over time.

The extent to which the COVID-19 pandemic impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions to contain the COVID-19 pandemic or treat its impact, among others.

1 unchanged sentence

Additionally, while the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing the Company’s ability to raise additional capital through equity, equity-linked or debt financings, which could negatively impact short-term and long-term liquidity and the ability to operate on a timely basis, or at all.

Furthermore, capital markets and economies worldwide have been negatively impacted by the COVID-19 pandemic, which may result in a period of regional, national, and global economic slowdown or regional, national, or global recessions that could curtail or delay demand for the Zio service as well as increase the risk of customer defaults or delays in payments.

COVID-19 and the current financial, economic, and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to the Company's performance, financial condition, volume of business, results of operations, and cash flows.

Reimbursement

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For Zio XT, the Company had historically utilized temporary CPT codes (or Category III CPT codes) used for newly introduced technologies and specific to our category of diagnostic monitoring.

The process to convert Category III CPT codes to Category I CPT codes is governed by the AMA and CMS.

The process to convert Category III CPT codes to Category I CPT codes is governed by the AMA and Centers for Medicare and Medicaid (“CMS”).

On October 25, 2019, the AMA’s CPT Editorial Panel established two new Category I CPT codes which are applicable to the Zio service and took effect on January 1, 2021.

In August 2020, CMS published the Calendar Year 2021 Medicare Physician Fee Schedule Proposed Rule which proposed reimbursement for the Category I CPT codes that were higher than their associated Category III CPT codes.

Following a comment period through October 2020, CMS published its Calendar Year 2021 Medicare Physician Fee Schedule Final Rule (the “Final Rule”) in December 2020.

In the Final Rule, CMS chose not to finalize national pricing for four of the eight Category I CPT codes, 93241, 93243, 93245 and 93247 which include the CPT codes that the Company will primarily use to seek reimbursement for Zio XT.

Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through a national coverage determination (“NCD”) by CMS, or at the local level through a local coverage determination, or an LCD, by one or more of the regional Medicare Administrative Contractors ("MACs") who are private contractors that process and pay claims on behalf of CMS for different regions.

In November 2021, CMS published the Calendar Year 2022 Medicare Physician Fee Schedule Final Rule (the “2022 Final Rule”).

In the Final Rule, CMS did not issue national pricing and continued carrier pricing for calendar year 2022 on Category I CPT codes 93241, 93243, 93245 and 93247 for extended external ECG monitoring, the relevant codes for the Company’s Zio XT service.

These codes were designated by CMS for contractor pricing in calendar 2022, which means that prices will be determined regionally by each Medicare Administrative Contractor (“MAC” or “MACs”).

Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through a national coverage determination (“NCD”) by CMS, or at the local level through a local coverage determination (“LCD”), by one or more of the regional Medicare Administrative Contractors (“MACs”) who are private contractors that process and pay claims on behalf of CMS for different regions.

In the absence of a specific NCD, as is the case with Zio XT historically and for Calendar Year 2022 following the Final Rule, the MAC with jurisdiction over a specific geographic region will have the discretion to make an LCD.

The Company is seeking to establish LCD pricing with one or more MACs to establish pricing for 2022 and will be subject to LCD pricing until such time CMS establishes a NCD.

On January 29, 2021, Novitas Solutions, the MAC which covers the region where the Company's IDTF in Houston, Texas is located and where almost all Medicare services for Zio XT are processed, published rates for 2021 that were significantly below our historical Medicare rates for Zio XT.

The Company believes that the published rates by Novitas on January 29, 2021, are cross walked from CPT codes 93224 and 93226, which are existing CPT codes for external continuous electrocardiographic recording up to 48 hours, while the Zio service is capable of continuous monitoring for up to 14 days.

The Company is the process of negotiating with Novitas to establish higher pricing for the Category I CPT Codes but can offer no assurances as to the timing or outcome of those discussions.

If the published rates by Novitas remain unchanged or are not significantly improved for the CPT codes listed above thereby allowing us to obtain adequate Medicare reimbursement for the Zio service in the future, the Company may be unable to provide the Zio service or would experience a significant loss of revenue, either of which would have a material adverse effect on our cash flows, results of operations, and financial condition.

The Company is currently holding a majority of Zio XT claims due to the CPT code transition.

Claims are being held due to a combination of negotiations with payors and administrative delays with payors.

The Company expects the level of held claims to remain high through the end of the first quarter of 2021 and potentially beyond.

The high level of held claims will delay most first quarter 2021 cash flows into the second quarter of 2021 or potentially beyond, and may impact the timing and accounting for various income statement items, particularly revenue recognition and bad debt expense.

The Company has adequate balance sheet liquidity to manage through these delays in cash flow timing.

In January 2022, Novitas Solutions, the MAC which covers the region where our Independent Diagnostic Testing Facility (“IDTF”) in Houston, Texas is located and where almost all of our Medicare services for Zio XT are processed, updated reimbursement rates for CPT codes 93243 and 93247 for the Houston jurisdiction to $ 223 and $ 233 , respectively.

These updated rates are retroactive to January 1, 2022.

These rates were higher than the rates posted by Novitas in 2021, but continue to be significantly below our historical Medicare rates for our Zio XT service.

We are continuing to negotiate with Novitas and other MACs to establish higher pricing for the Category I CPT Codes but can offer no assurances as to the timing or outcome of those discussions.

If the published Medicare reimbursement rates are not adequate to support our cost structure, or we are unable to reduce our overall cost structure, the Company may be unable to provide the Zio service or would experience a significant loss of revenue, either of which would have a material adverse effect on our cash flows, results of operations, and financial condition.

Further, a reduction in coverage by Medicare could cause some commercial third-party payors to implement similar reductions in their coverage or level of reimbursement of the Zio service.

Given the evolving nature of the healthcare industry and on-going healthcare cost reforms, the Company will continue to be subject to changes in the level of Medicare coverage for its products, and unfavorable coverage determinations at the national or local level could adversely affect its results of operations.

If published rates by Novitas are not increased to above the cost of revenue for the Zio service, and the Company is unable to achieve a level of revenues adequate to support its cost structure, this would raise substantial doubts about the Company's ability to continue as a going concern.

Although a large majority of commercial customers have re-contracted the Zio XT service since the establishment of the Category I codes on January 1, 2021 matching to pre-existing rates, if the Company is unsuccessful in improving the Medicare rates, the Company believes that commercial rates may begin to be more negatively impacted next year.

If the Company is unable to achieve a level of revenues adequate to support its cost structure, or is unable to reduce its overall cost structure, this would raise substantial doubts about the Company's ability to continue as a going concern.

Use of Estimates

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Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the date of purchase.

Short-term investments consist of debt securities classified as available-for-sale and have maturities greater than 90 days, but less than one year as of the balance sheet date.

Short-term investments consist of debt securities classified as available-for-sale and have maturities less than one year as of the balance sheet date.

Long-term investments have maturities greater than one year as of the balance sheet date.

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The Company regularly reviews the allowances by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.

The Company submitted the majority of Zio XT claims from the first and second quarter of 2021 on a delayed basis due to the CPT code transition.

Claims were being held due to administrative delays with payors and a combination of negotiations with payors.

Most of the held claims were released and submitted by the end of the second quarter of 2021.

For the contracted portfolio, once submitted, 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, inherent uncertainty caused by the 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.

The following table presents the changes in the allowance for doubtful accounts (in thousands):

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Cash equivalents are invested in highly rated money market funds.

The Company invests in a variety of financial instruments, such as, but not limited to, United States Government securities, corporate notes, commercial paper and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer.

The Company invests in a variety of financial instruments, such as, but not limited to, U.S.

government securities, corporate notes, commercial paper and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer.

The Company has not experienced any material losses on its deposits of cash and cash equivalents or investments.

4 unchanged sentences

CMS accounted for 8 % and 20 % of accounts receivable as of December 31, 2021 and 2020, respectively.

Inflationary Risk

The Company continuously monitors the effects of inflationary factors, such as increases in cost of goods sold and selling and operating expenses, which may adversely affect its results of operations.

Specifically, the Company may experience inflationary pressure affecting the cost of the components for our Zio service and in the wages paid to its employees due to challenging labor market conditions.

Competitive and regulatory conditions may restrict the Company's ability to fully recover these costs through price increases.

As a result, it may be difficult to fully offset the impact of persistent inflation.

The Company's inability or failure to do so could have a material adverse effect on our business, financial condition and results of operations or cause us to need to obtain additional capital in future earlier than anticipated.

The Company relies on single-source vendors to supply some of its disposable housings, instruments and other materials used to manufacture the Zio monitor and the adhesive that binds the Zio monitor to a patient’s body.

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The semiconductor supply shortage may have an impact on the Company until global supply is sufficient for global demand.

Supply Chain Constraints

Economies worldwide have also seen other indirect COVID-19 pandemic related disruptions including supply chain impacts, material inflation, and labor constraints in certain markets and geographies.

Such economic disruption has had an adverse effect on the Company's business environment as increased lead times and component shortages have resulted in higher inventory costs.

While the Company has increased inventory safety stock levels to help mitigate the delays and disruptions in supply, the Company cannot be certain that any prolonged, intensified or worsened effect from the COVID-19 pandemic would not further impact its supply chain.

Inventory owned by the Company is valued at cost, on the first in, first out (“FIFO”) basis, or the lower of cost or net realizable value.

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To date, there have been no such impairments of long-lived assets.

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

The Company expects this decision will result in an impairment of the right of use asset for the San Francisco office lease and is assessing the impact to its Consolidated Financial Statements for the quarter ending March 31, 2022.

Refer to Note 13.

Subsequent Events for further details.

The Company uses Printed Circuit Board Assemblies (“PCBAs”), in each wearable Zio XT and Zio AT monitor as well as the wireless gateway used in conjunction with the ZIO AT monitor.

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The Company has concluded that the Zio XT service is one performance obligation on the basis that the customer cannot benefit from each component of the service on its own or together with other resources that are readily available to the customer.

The Zio AT mobile cardiac telemetry monitor, a wearable patch-based biosensor, offers what the Zio XT offers plus the additional capability of transmissions during the wear period to assist physicians in diagnosing and treating the small percentage of the population requiring more timely action.

During the wear period, physicians will receive notifications if there are significant events that meet predetermined arrhythmia detection criteria.

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Separate contractual arrangements exist between the Company and third-party payors that establish amounts the third-party payor will pay on behalf of a patient for covered services rendered.

A small portion of the Company’s transactions are covered by third-party payors with whom there is no contractual agreement or an established amount the third-party payor will pay.

A small portion of the Company’s transactions are covered by third-party payors with whom there is neither a contractual agreement nor an established amount that the third-party payor will pay.

In determining the collectability and transaction price for its service, the Company considers factors such as insurance claims which are adjudicated as allowable under the applicable policy and 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.

1 unchanged sentence

A summary of the payment arrangements with third-party payors and healthcare institutions is as follows:

• Contracted third-party payors – The Company has contracts with negotiated prices for services provided for patients with commercial healthcare insurance carriers.

• CMS – The Company has received independent diagnostic testing facility approval from regional Medicare Administrative Contractors and will receive reimbursement per the relevant Current Procedural Terminology (“CPT”) code rates for the services rendered to the patient covered by CMS.

• Contracted third-party payors – The Company has contracts with negotiated prices for services provided to patients with commercial healthcare insurance coverage.

• CMS – The Company has received independent diagnostic testing facility approval from regional Medicare Administrative Contractors and will receive reimbursement per the relevant CPT code rates for the services rendered to the patient covered by CMS.

• Non-contracted third-party payors – Non-contracted commercial and government payors often reimburse out-of-network rates provided under the relevant CPT codes on a case-by-case basis.

13 unchanged sentences

The Company monitors the estimated denied claims against the latest available information, and subsequent changes to the estimated denied claims are recorded as an adjustment to revenue in the periods during which such changes occur.

Delays in claims submissions could lead to an increase in denials if we miss the payors’ filing deadlines and could result in a reduction in the Company’s receipt of payments.

Historical cash collection indicates that it is probable that substantially all of the transaction price, less the estimate of denied claims, will be received.

2 unchanged sentences

Adjustments to these estimates for actual experience are also recorded as an adjustment to bad debt expense.

We submitted the majority of Zio XT claims from the first and second quarter of 2021 on a delayed basis due to the CPT code transition.

Claims were being held due to a combination of negotiations with payors and administrative delays with payors.

Most of the held claims were released and submitted by the end of the second quarter of 2021.

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.

For non-contracted portfolios, the Company is providing an implicit price concession due to the lack of a contracted rate with the underlying payor, the result of which requires the Company to estimate the transaction price based on historical cash collections utilizing the expected value method.

19 unchanged sentences

During the year ended December 31, 2021, $ 0.9 million relating to the contract liability balance at the beginning of 2021 was recognized as revenue.

Total revenue recognized during the year ended December 30, 2020 that was included in the contract liability balance at the beginning of 2020 was $ 1.2 million.

Contract Costs

28 unchanged sentences

For restricted stock, the compensation cost for these awards is based on the closing price of the Company’s common stock on the date of grant, and recognized as compensation expense on a straight-line basis over the requisite service period.

The Company recognizes 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.

The Company recognizes compensation expense related to the Employee Stock Purchase Plan (“ESPP”) based on the estimated fair value of the options on the date of grant, net of estimated forfeitures.

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

10 unchanged sentences

Discount rate for leases

On January 1, 2019, the rate implicit in the Company’s leases was not readily determinable.

As such, the Company used its incremental borrowing rate to calculate its right-of-use assets and lease liabilities upon the adoption of ASC 842.

The Company determined the appropriate incremental borrowing rate by utilizing the interest rate obtained in connection with the Third Amended and Restated Loan and Security Agreement with Silicon Valley Bank (“Third Amended and Restated SVB Loan Agreement”) which was finalized on October 23, 2018.

On October 4, 2018, the Company entered into an office lease (“San Francisco Lease”) to rent approximately 117,560 rentable square feet in San Francisco, California, which became the Company’s new headquarters in October 2019.

The San Francisco Lease commenced on May 13, 2019 and the Company determined that the interest rate associated with the Third Amended and Restated SVB Loan Agreement could not be utilized as the incremental borrowing rate associated with the San Francisco Lease due to the term of the lease, as well as annual rental payments.

The Company determined the appropriate incremental borrowing rate by using a synthetic credit rating which was estimated based on an analysis of outstanding debt of companies with similar credit and financial profiles.

As the rate implicit in the lease is not readily determinable for our operating leases, the Company generally uses an incremental borrowing rate based on information available at the commencement date such as a synthetic credit rating and current cost of borrowing to determine the present value of future lease payments.

The lease term is generally the minimum noncancellable period of each lease.

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Upon the commencement of the San Francisco Lease, the existing lease which had an original expiration date of February 2020, was modified to expire in September 2019 and accordingly the right-of-use asset and lease liability was remeasured as of the modification date.

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.

In May 2014, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) No.

2014-09, Revenue from Contracts with Customers (Topic 606).

Areas of revenue recognition affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures.

The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services.

ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than were required under previous GAAP.

In addition, Topic 606 requires more detailed disclosures to enable users of financial statements to understand the nature, timing and uncertainty of revenue and cash flows arising from a review of historical accounting policies and practices to identify potential differences in applying Topic 606.

The Company adopted this standard on January 1, 2018 and used the modified retrospective approach.

Upon adoption, the Company recognized the cumulative effect of $ 1.4 million as an adjustment to decrease the opening balance of the Company’s accumulated deficit.

This adjustment did not have a material impact on the Company’s consolidated financial statements.

Prior periods were not retrospectively adjusted.

The following table presents the impact of adoption of ASU 2014-09 on the Consolidated Statement of Operations and the Consolidated Balance Sheet (in thousands):

Year Ended December 31, 2018

Consolidated Statement of Operations Impact:

As Reported Without the adoption of Topic 606 Impact

Revenue $ 147,293 $ 145,320 $ 1,973

Sales, General & Administrative Expense $ 131,582 $ 132,603 $ ( 1,021 )

Net Loss $ ( 48,280 ) $ ( 51,274 ) $ 2,994

Year Ended December 31, 2018

Consolidated Balance Sheet Impact:

As Reported Without the adoption of Topic 606 Impact

Accounts Receivable, net $ 21,977 $ 17,629 $ 4,348

Accumulated Deficit $ ( 203,515 ) $ ( 207,863 ) $ 4,348

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

2016-02, 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.

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

Cash Equivalents and Investments

6 unchanged sentences

Commercial paper 29,982 — — 29,982

Total available-for-sale marketable debt securities $ 306,401 $ 18 $ ( 7 ) $ 306,412

Total cash equivalents and available-for-sale investments $ 221,767 $ — $ ( 61 ) $ 221,706

Classified as:

1 unchanged sentence

Short-term investments 111,569

Long-term investments —

Total cash equivalents and available-for-sale investments $ 221,706

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Commercial paper 29,489 — — 29,489

Total available-for-sale marketable debt securities $ 141,934 $ 83 $ ( 1 ) $ 142,016

Total cash equivalents and available-for-sale investments $ 306,401 $ 18 $ ( 7 ) $ 306,412

Classified as:

1 unchanged sentence

Short-term investments 246,589

Long-term investments 8,030

Total cash equivalents and available-for-sale investments $ 306,412

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Available-for-sale securities held as of December 31, 2021 had a weighted average maturity of 95 days.

At December 31, 2020, six investments were in an unrealized loss position and no investments have been in an unrealized loss position for more than one year.

At December 31, 2021, 13 investments were in an unrealized loss position and no investments have been in an unrealized loss position for more than one year.

Fair Value Measurements

35 unchanged sentences

Total $ 10,268 $ 5,313

The Company uses Printed Circuit Board Assemblies (“PCBAs”), in each wearable Zio XT and Zio AT monitor as well as the wireless gateway used in conjunction with the Zio AT monitor.

The Company uses PCBAs in each wearable Zio XT and Zio AT monitor as well as the wireless gateway used in conjunction with the Zio AT monitor.

The PCBAs are used numerous times and have useful lives beyond one year .

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The Company is entitled to one option to extend the San Francisco Lease for a five-year term, subject to certain requirements.

In addition, the landlord will provide a tenant improvement allowance of up to $ 2.4 million for leasehold improvements in connection with the cost of construction of the initial alterations within the premises.

The Company has obtained a standby letter of credit in the amount of $ 6.9 million, which may be drawn down by the landlord to be applied upon the Company’s breach of any provisions under the San Francisco Lease.

As of December 31, 2020, maturities of operating lease liabilities were as follows (in thousands):

Year Ended December 31:

Thereafter 75,420

imputed interest ( 43,072 )

Total lease liabilities $ 89,464

On October 29, 2009, the Company entered into a lease for a clinic (“Lincolnshire Lease”) to rent approximately 41,500 rentable square feet in Lincolnshire, Illinois, which became the Company’s clinic facilities.

The term of the Lincolnshire Lease began on November 1, 2009, and expires on July 31, 2022.

On March 18, 2021, the Company entered into an office/industrial lease (“Cypress Lease”) to rent approximately 68,933 rentable square feet in Cypress, California, which became the Company’s new office and warehouse facilities.

The term of the Cypress Lease began on October 25, 2021, and expires on April 30, 2032.

The Company is entitled to one option to extend the Cypress Lease for a five-year term, subject to certain requirements.

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

The Company expects these decisions will result in an impairment of the right of use asset for the San Francisco office lease and is assessing the impact to its Consolidated Financial Statements for the quarter ending March 31, 2022.

As of December 31, 2021, maturities of operating lease liabilities were as follows (in thousands):

Year Ended December 31:

2022 $ 12,617

Thereafter 69,898

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The weighted average discount rate of the Company's operating leases was 7.27 % as of December 31, 2021.

In December 2021, the Company entered into a lease for 44,616 rentable square feet in Deerfield Illinois ("Deerfield Lease").

The Deerfield Lease commenced in January 2022, and will be recorded as a right of use asset to the Company's financial statements in the first quarter of 2022.

The Company is currently assessing the impact to its consolidated financial statements.

Legal Proceedings

From time to time, we are involved in claims and legal proceedings or investigations, that arise in the ordinary course of business.

Such matters could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business.

From time to time, the Company is involved in claims and legal proceedings or investigations, that arise in the ordinary course of business.

Such matters could have an adverse impact on its reputation, business and the financial condition and divert the attention of its management from the operation of its business.

These matters are subject to many uncertainties and outcomes that are not predictable.

On February 1, 2021, a putative class action lawsuit was filed in the United States District Court for the Northern District of California alleging that the Company and our former chief executive officer violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder.

The purported class includes all persons who purchased or acquired our securities between August 4, 2020 and January 28, 2021.

The complaint seeks unspecified damages purportedly sustained by the class.

The Company believes the complaint to be without merit and plans to vigorously defend itself.

On February 1, 2021, a putative class action lawsuit was filed in the United States District Court for the Northern District of California alleging that the Company and its former Chief Executive Officer, Kevin M.

King, violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder.

On August 2, 2021, the lead plaintiff filed an amended complaint, and filed a further amended complaint on September 24, 2021.

The amended complaint names as defendants, in addition to the Company and Mr.

King, the Company's former Chief Executive Officer, Michael J.

Coyle, and current Chief Financial Officer, Douglas J.

The purported class in the amended complaint includes all persons who purchased or acquired the Company's common stock between August 4, 2020 and July 13, 2021, and seeks unspecified damages purportedly sustained by the class.

On October 27, 2021, the Company filed a motion to dismiss the amended complaint.

The motion to dismiss was fully briefed and the Court held a hearing on the motion on February 4, 2022, after which the Court took the matter under submission.

The Court has not yet issued a ruling.

The Company believes the class action to be without merit and plans to vigorously defend itself.

On March 26, 2021, the Company received a grand jury subpoena from the U.S.

Attorney’s Office for the Northern District of California requesting information related to communications with the Food and Drug Administration and the Company’s products.

On October 14, 2021, the Company received a second subpoena requesting additional information.

The Company is cooperating fully and is providing the requested information.

Development Agreement

5 unchanged sentences

Under the terms of the Development Agreement, the Company paid Verily an upfront fee of $ 5.0 million in 2019.

In addition, the Company has agreed to make additional payments to Verily up to an

aggregate of $ 12.75 million in milestone payments upon achievement of various development and regulatory milestones over the 24 months of the Development Agreement, which payments will be made in cash to Verily.

During the year ended December 31, 2019 the company achieved a milestone resulting in additional expense of $ 1.0 million which was included in accounts payable as of December 31, 2019 and paid in the first quarter of 2020.

During the year ended December 31, 2020, the Company recognized $ 7.0 million of research and development expense related to Verily milestones, of which $ 4.0 million is in included in accrued liabilities.

In addition, the Company has agreed to make additional payments to Verily up to an aggregate of $ 12.75 million in milestone payments upon achievement of various development and regulatory milestones over the 24 months of the Development Agreement, which payments will be made in cash to Verily.

We have achieved milestones tied to payments totaling $ 11.0 million to date, $ 3.0 million of which is associated with a milestone achieved during the quarter ended December 31, 2021 and is included in Accounts Payable on December 31, 2021.

We have agreed to make additional payments over the term of the Development Agreement up to an aggregate of $ 1.75 million, subject to the achievement of certain development and regulatory milestones including provision Zio Watch and completion of market evaluation scheduled to begin between late 2022 and early 2023.

The Development Agreement provides each party with licenses to use certain intellectual property of the other party for development activities in the field of AF screening, detection, or monitoring.

1 unchanged sentence

Indemnifications

In the ordinary course of business, the Company enters into agreements pursuant to which it agrees to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including losses arising out of the breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties.

In the ordinary course of business, the Company enters into agreements pursuant to which it agrees to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including losses arising out of the breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties.

Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party.

5 unchanged sentences

The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions, and believes that the estimated fair value of these indemnification obligations is not material and it has not accrued any amounts for these obligations.

In December 2015, the Company entered into a Second Amended and Restated Loan and Security Agreement ("Loan Agreement") with Silicon Valley Bank ("SVB").

Under the SVB Loan Agreement, the Company 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 %.

The Company could borrow up to 80 % of its eligible accounts receivable, up to the maximum of $ 15.0 million.

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

2 unchanged sentences

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.

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

The Company made interest-only payments through October 31, 2020.

Beginning in November 2020, the Company began monthly payments of principal plus interest, which will continue through October 31, 2023.

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 %.

4 unchanged sentences

The Company 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.

As of December 31, 2021, the Company was eligible to borrow up to $ 13.8 million and no amount was outstanding under the revolving credit line.

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

27 unchanged sentences

Tax at statutory federal rate $ ( 21,198 ) $ ( 9,172 ) $ ( 11,446 )

State income taxes, net of federal benefit 223 181 —

Stock-based compensation ( 7,049 ) ( 20,762 ) ( 5,560 )

Meals and Entertainment 182 177 409

Other 805 614 148

Section 162(m) limitation - officers compensation

( 347 ) 89 614

Tax credits ( 381 ) ( 1,426 ) ( 1,128 )

2017 Tax Act — — 44

Foreign Rate Differential ( 30 ) ( 9 ) —

Change in valuation allowance 24,111 30,607 17,176

33 unchanged sentences

Effective January 1, 2019, the Company adopted ASC 740-10 (formerly known as FIN 48), Accounting for Income Taxes, guidance that addresses the recognition, measurement, and disclosure of uncertain tax positions.

Total unrecognized income tax benefits was $ 2.3 million and $ 1.8 million at December 31, 2020 and 2019, respectively.

The Company does not anticipate the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months.

A reconciliation of the Company’s unrecognized tax benefit amount is as follows (in thousands):

48 unchanged sentences

Options become exercisable and expire as determined by the Compensation Committee, provided that the term of ISOs may not exceed ten years from the date of grant.

Employee Stock Purchase Program (“ESPP”)

Employee Stock Purchase Plan (“ESPP”)

In October 2016, the Company’s Board of Directors and stockholders approved the Employee Stock Purchase Plan (the “ESPP”).

Under the ESPP, the Company initially reserved 483,031 shares of common stock for issuance as of its effective date of October 19, 2019 On the first day of each calendar year, the number of shares reserved increases by the least of 966,062 shares, 1.5 % of the shares of the Company’s common stock outstanding on the last day of the immediately preceding fiscal year, or an amount as determined by the Company’s Board of Directors.

Under the ESPP, the Company initially reserved 483,031 shares of common stock for issuance as of its effective date of October 19, 2019.

On the first day of each calendar year, the number of shares reserved increases by the least of 966,062 shares, 1.5 % of the shares of the Company’s common stock outstanding on the last day of the immediately preceding fiscal year, or an amount as determined by the Company’s Board of Directors.

The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15 % of their eligible compensation, subject to any plan limitations.

47 unchanged sentences

The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the closing price of the Company’s common stock.

During the years ended December 31, 2019, and 2018, the Company granted options with a weighted-average grant date fair value of $ 38.29 and $ 32.38 per share, respectively.

The Company did no t grant any options during the year ended December 31, 2020.

During the year ended December 31, 2019, the Company granted options with a weighted-average grant date fair value of $ 38.29 per share.

The Company did no t grant any options during the year ended December 31, 2020 or during the year ended December 31, 2021 .

The aggregate intrinsic value of options exercised was $ 10.9 million, $ 109.2 million and $ 36.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.

15 unchanged sentences

The fair value of employee and director stock options was estimated at the date of grant using the Black-Scholes option pricing model with the weighted average assumptions below.

Year Ended Year ended December 31,

Expected term (in years) 6.1

2 unchanged sentences

Dividend yield — %

The Company did not grant stock options during the year ended December 31, 2020.

The Company did not grant stock options during the years ended December 31, 2021 and December 31, 2020.

Market-based RSU Valuation

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As the Company has very limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock-option grants the Company has elected to use the “simplified method” as prescribed by authoritative guidance to compute expected term.

Expected Volatility —Since the Company does not have sufficient trading history for its common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded companies over a period equal to the

expected term of the stock option grants.

When selecting comparable publicly traded companies in a similar industry on which it has based its expected stock price volatility, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards.

14 unchanged sentences

Total stock-based compensation expense $ 54,527 $ 41,515 $ 26,241

As of December 31, 2020, there was total unamortized compensation costs of $ 3.9 million, net of estimated forfeitures, related to unvested stock options, which the Company expects to recognize over a period of approximately 1.1 years $ 61.4 million, net of estimated forfeitures, related to unrecognized RSU expense, which the Company expects to recognize over a period of 2.2 years, and $ 1.9 million unrecognized ESPP expense, which the Company will recognize over 0.9 years.

As of December 31, 2021, there was total unamortized compensation costs of $ 0.8 million, net of estimated forfeitures, related to unvested stock options, which the Company expects to recognize over a period of approximately 0.4 years and $ 113.5 million, net of estimated forfeitures, related to unrecognized RSU expense, which the Company expects to recognize over a period of 2.4 years, and $ 3.1 million unrecognized ESPP expense, which the Company will recognize over 0.9 years.

Performance based RSUs (“PRSU”) and Market-based RSUs

4 unchanged sentences

PRSU expense of $ 4.8 million recognized in fiscal year 2019 related to the 2019 awards was reversed in the first quarter of fiscal year 2020.

On June 19, 2020, the Company modified the terms of the 2019 awards to vest based on the Company’s average stock price.

On June 19, 2020, the Company modified the terms of the 2019 awards to vest based on the Company’s average stock price for the 60 days preceding January 1, 2021.

The modification impacted all active recipients of the 2019 awards, a total of ten recipients.

The total incremental compensation cost resulting from the modification of $ 13.6 million will be recognized ratably through March of 2021.

The total incremental compensation cost resulting from the modification of $ 13.6 million was recognized ratably through March 31, 2021.

The Company recognized $ 2.2 million of compensation cost for the year ended December 31, 2021 in connection with the 2019 awards.

3 unchanged sentences

The 2020 awards also include a service-based component.

Compensation cost in connection with the probable number of shares that will vest will be recognized ratably through March of 2021.

Compensation cost in connection with the probable number of shares that vested was recognized ratably through March 31, 2021.

During the year ended December 31, 2021, the Company determined that it was probable that the February 2020 Awards would vest and recognized $ 0.8 million of compensation cost in connection with the February 2020 awards.

January 2021 Awards

In January 2021, the Company granted PRSUs (“January 2021 awards”) for fiscal year 2021's annual consolidated revenue compared to fiscal year 2020's annual consolidated revenue, measuring a performance threshold of 10.0 % to earn 100 % of target.

A total of 53,862 PRSU shares were granted with a grant date fair value of $ 13.9 million.

The January 2021 awards also include a service-based component.

Compensation cost in connection with the probable number of shares that will vest will be recognized ratably through March 31, 2022.

During the year ended December 31, 2021, the Company determined that it was probable that the January 2021 Awards would vest and recognized $ 9.9 million of compensation cost in connection with the January 2021 awards.

February 2021 Awards

In February 2021, the Company granted PRSU's (“February 2021 awards”) for fiscal year 2023's annual unit volume Compound Annual Growth Rate (“CAGR”) compared to fiscal year 2020's annual unit volume CAGR, measuring a minimum performance threshold of 19.7 % to earn 50 % of target, and a maximum threshold of 29 % achieved to earn 200 % of target.

A total of 112,872 PRSU shares were granted with grant date fair value of $ 17.3 million.

The February 2021 awards also include a service-based component.

Compensation cost in connection with the probable number of shares that will vest will be recognized ratably through March 31, 2024.

During the year ended December 31, 2021, the Company determined that it was probable that the February 2021 Awards would vest and recognized $ 2.4 million of compensation cost in connection with the February 2021 awards.

Non employee Stock-Based Compensation

1 unchanged sentence

Pursuant to the original terms of the awards, the CFO will continue to vest in outstanding awards as long as services are provided to the Company under the CPSA as a non-employee consultant.

In accordance with ASC 718, the Company recognized expense related to all awards expected to vest over the duration of the CPSA in the current period as an equity- based severance cost as the consulting services are not substantive.

In accordance with ASC 718, the Company recognized expense related to all awards expected to vest over the duration of the CPSA in 2020 as an equity-based severance cost as the consulting services are not substantive.

Total expense related to non-employee stock-based compensation recognized for the year ended December 31, 2020, was $ 1.8 million.

The Company did no t recognize any non-employee stock-based compensation expense for the years ended December 31, 2019 and 2018.

On January 12, 2021, the Company's Chief Executive Officer (“CEO”) resigned and entered into a CPSA with the Company.

Pursuant to the original terms of the awards, the CEO will continue to vest in outstanding awards as long as services are provided to the Company under the CPSA as a non-employee consultant or a member of the Company's Board of Directors.

In accordance with ASC 718, the Company recognized expense related to all awards expected to vest over the duration of the CPSA in the three months ended March 31, 2021, as an equity-based severance cost as the consulting services are not substantive.

Total expense related to non-employee stock-based compensation recognized for the year ended December 31, 2021 was $ 5.4 million.

Net Loss Per Common Share

11 unchanged sentences

RSUs issued and unvested 1,649,561 1,114,159 886,030

Warrants to purchase common stock — — 4,857

Total 2,153,667 1,724,040 2,389,277

Selected Quarterly Financial Data (unaudited)

The following table presents selected unaudited financial data for each of the eight quarters in the two-year period ended December 31, 2020, which have been updated to reflect the revisions discussed in Note 14.

Revision of Prior Period Financial Statements and Note 1.

Organization and Description of Business.

The Company believes this information reflects all recurring adjustments necessary to fairly state this information when read in conjunction with the Company's financial statements and the related notes.

Net loss per common share, basic and diluted, for the four quarters of each fiscal year may not sum to the total for the fiscal year because of the different number of shares outstanding during each period.

The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period (in thousands of dollars, except for share and per share data):

Quarter Ended March 31 June 30 September 30 December 31

Total revenues $ 63,535 $ 50,878 $ 71,944 $ 78,809

Gross profit 47,472 35,394 53,712 58,311

Net loss ( 9,065 ) ( 20,437 ) ( 4,677 ) ( 9,651 )

Net loss per common share, basic and diluted $ ( 0.34 ) $ ( 0.75 ) $ ( 0.17 ) $ ( 0.33 )

Total revenues $ 48,334 $ 52,441 $ 54,673 $ 59,104

Gross profit 36,561 39,429 40,888 45,189

Net loss ( 8,250 ) ( 10,725 ) ( 18,293 ) ( 17,300 )

Net loss per common share, basic and diluted $ ( 0.34 ) $ ( 0.43 ) $ ( 0.72 ) $ ( 0.65 )

The impact of the revision on the unaudited quarterly financial data is as follows:

Quarter Ended June 30, 2019

As Reported Adjustment As Revised

Total revenues $ 53,331 $ ( 890 ) $ 52,441

Gross profit 40,506 ( 1,077 ) 39,429

Net loss ( 11,467 ) 742 ( 10,725 )

Net loss per common share, basic and diluted $ ( 0.46 ) $ 0.03 $ ( 0.43 )

Quarter Ended March 31, 2019

As Reported Adjustment As Revised

Total revenues $ 47,214 $ 1,120 $ 48,334

Gross profit 35,484 1,077 36,561

Net loss ( 8,019 ) ( 231 ) ( 8,250 )

Net loss per common share, basic and diluted $ ( 0.33 ) $ ( 0.01 ) $ ( 0.34 )

Revision of Prior Period Financial Statements

As discussed in Note 1, the Company has revised its prior period financial statements to correct for immaterial errors in its accounting for revenues, contractual allowances, allowance for doubtful accounts and certain other items, the impact of which is presented below (in thousands, except share data):

Revised Consolidated Balance Sheets

As of December 31, 2018

As Reported Adjustment As Revised

Accounts receivable, net $ 21,977 $ ( 2,187 ) $ 19,790

Total current assets 106,482 ( 2,187 ) 104,295

Total assets 119,710 ( 2,187 ) 117,523

Liabilities and Stockholders’ Equity

Accrued liabilities 26,570 118 26,688

Deferred revenue 1,243 ( 20 ) 1,223

Total current liabilities 30,236 98 30,334

Total liabilities 65,288 98 65,386

Accumulated other comprehensive loss ( 41 ) 25 ( 16 )

Accumulated deficit ( 203,515 ) ( 2,310 ) ( 205,825 )

Total stockholders’ equity 54,422 ( 2,285 ) 52,137

Total liabilities and stockholders’ equity 119,710 ( 2,187 ) 117,523

Revised Consolidated Statements of Operations

Year ended December 31, 2018

As Reported Adjustment As Revised

Revenue $ 147,293 $ ( 16 ) $ 147,277

Cost of revenue 38,579 216 38,795

Gross profit 108,714 ( 232 ) 108,482

Research and development 20,750 110 20,860

Selling, general and administrative 131,582 1,731 133,313

Total operating expenses 152,332 1,841 154,173

Loss from operations ( 43,618 ) ( 2,073 ) ( 45,691 )

Other income, net 1,526 ( 25 ) 1,501

Loss before income taxes ( 48,236 ) ( 2,098 ) ( 50,334 )

Net loss ( 48,280 ) ( 2,098 ) ( 50,378 )

Net loss per common share, basic and diluted ( 2.02 ) ( 0.09 ) ( 2.11 )

Revised Consolidated Statements of Comprehensive Loss

Year ended December 31, 2018

As Reported Adjustment As Revised

Net loss $ ( 48,280 ) $ ( 2,098 ) $ ( 50,378 )

Net change in unrealized gains on available-for-sale securities 24 25 49

Comprehensive loss ( 48,256 ) ( 2,073 ) ( 50,329 )

Revised Consolidated Statements of Cash Flows

Year ended December 31, 2018

As Reported Adjustment As Revised

Cash flows from operating activities

Net loss $ ( 48,280 ) $ ( 2,098 ) $ ( 50,378 )

Adjustments to reconcile net loss to net cash used in operating activities:

Provision for bad debt and contractual allowances 15,218 1,230 16,448

Changes in operating assets and liabilities:

Accounts receivable ( 22,885 ) 1,138 ( 21,747 )

Accrued liabilities 10,776 ( 275 ) 10,501

Deferred revenue 5 ( 20 ) ( 15 )

Net cash used in operating activities ( 29,068 ) ( 25 ) ( 29,093 )

Cash flows from investing activities

Purchases of available-for-sale investments ( 93,158 ) 25 ( 93,133 )

Net cash provided by investing activities 34,117 25 34,142

Revised Consolidated Statements of Shareholder's Equity

Year Ended December 31, 2018

As Reported Adjustment As Revised

Unrealized loss on investments $ 24 $ 25 $ 49

Accumulated other comprehensive loss ending balance ( 41 ) 25 ( 16 )

Accumulated deficit beginning balance ( 156,589 ) ( 212 ) ( 156,801 )

Net loss ( 48,280 ) ( 2,098 ) ( 50,378 )

Accumulated deficit ending balance ( 203,515 ) ( 2,310 ) ( 205,825 )

Total stockholders' equity 54,422 ( 2,285 ) 52,137

Subsequent Events

Novitas Announcement

In December 2020, CMS published its Calendar Year 2021 Medicare Physician Fee Schedule Final Rule (the “Final Rule”).

In November 2021, CMS published its Calendar Year 2022 Medicare Physician Fee Schedule Final Rule (the “Final Rule”).

In the Final Rule, CMS did not finalize national pricing for the extended external ECG patch, medical magnetic tape recorder (SD339) supply, and ruled to contractor pricing for CPT codes 93241, 93243, 93245 and 93247.

The Company has been working with Medicare Administrative Contractors (MACs”) to establish pricing for these codes.

On January 29, 2021, Novitas Solutions, the MAC which covers the region where the Company's Independent Diagnostic Testing Facility in Houston, Texas where almost all Medicare services for Zio XT are processed, published rates for 2021 that were significantly below historical Medicare rates for Zio XT.

The Company is in the process of negotiating with Novitas to establish higher pricing for the Category I CPT Codes but can offer no assurances as to the timing or outcome of those discussions.

In the event that Novitas does not publish new higher rates or that new rates are not backdated to a January 1st effective date, The company will recognize medicare revenue starting January 1, 2021 at the Novitas rates published January 29th.

Employee Bonus

In April 2020, the Company's Compensation Committee of the Board of Directors ("Compensation Committee") approved bonus metrics for the employee bonus program and confirmed that the bonus would be paid to employees in RSUs in an effort to preserve cash while assessing the impact of COVID-19.

The Company accrued employee bonus under ASC 718 for the year ended December 31, 2020.

In February 2021, the Compensation Committee approved the achievement of the bonus metrics and confirmed that the employee bonus would be paid out in cash given the company's current liquidity.

The Company will apply this change prospectively under ASC 480 in the first quarter of 2021.

On January 10, 2022, Novitas Solutions, the MAC which covers the region where the Company's Independent Diagnostic Testing Facility in Houston, Texas where almost all Medicare services for Zio XT are processed, published reimbursement rates for CPT codes 93243 and 93247 for the Houston jurisdiction to $ 223 and $ 233 , respectively.

These updated rates are retroactive to January 1, 2022.

In December 2021, the Company entered into a lease for 44,616 rentable square feet in Deerfield Illinois ( “ Deerfield Lease”).

The Deerfield lease commenced in January 2022, the Company will recognize a related right of use asset and obligation in its Consolidated Financial Statements for the quarter ending March 31, 2022.

The amount of such asset and obligation has not yet been determined.

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

The Company plans to consolidate operations and will begin marketing the excess space for sublease by the end of the first quarter of 2022.

Depending on the outcome of marketing the sublease, the Company believes these decisions could result in an impairment of the right of use asset for the San Francisco office lease and is assessing the impact to its Consolidated Financial Statements for the quarter ending March 31, 2022.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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 8. Financial Statements and Supplementary Data