iRhythm Holdings, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. IRHYTHM TECHNOLOGIES, INC. Index to Financial Statements Report of Independent Registered Public Accounting Firm 81 Financial Statements Consolidated Balance Sheets 83 Consolidated Statements of Operations 84 Consolidated Statements of Comprehensive Loss 85 Consolidated Statements of Stockholders’ Equity 86 Consolidated Statements of Cash Flows 87 Notes to the Consolidated Financial Statements 88 80 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of iRhythm Technologies, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of iRhythm Technologies, Inc. and its subsidiary (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive loss, of stockholders' equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date related to an ineffective control environment commensurate with the Company's financial reporting requirements, due to an insufficient number of professionals with an appropriate level of accounting and internal control knowledge, training and experience. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. 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. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management's report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. 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 81 Table of Contents 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. 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 – 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 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 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 San Jose, California February 28, 2022 We have served as the Company’s auditor since 2009. 82 Table of Contents IRHYTHM TECHNOLOGIES, INC. Consolidated Balance Sheets (In thousands, except par value and share data) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 127,562 $ 88,628 Short-term investments 111,569 246,589 Accounts receivable, net 46,430 29,932 Inventory 10,268 5,313 Prepaid expenses and other current assets 9,693 7,363 Total current assets 305,522 377,825 Property and equipment, net 55,944 34,247 Operating lease right-of-use assets 84,587 84,714 Goodwill 862 862 Other assets 16,052 14,091 Total assets $ 462,967 $ 511,739 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 10,509 $ 4,365 Accrued liabilities 51,486 40,532 Deferred revenue 3,049 930 Debt, current portion 11,667 11,667 Operating lease liabilities, current portion 11,142 8,171 Total current liabilities 87,853 65,665 Debt, noncurrent portion 9,690 21,339 Other noncurrent liabilities 697 1,830 Operating lease liabilities, noncurrent portion 85,212 81,293 Total liabilities 183,452 170,127 Commitments and contingencies (Note 6) Stockholders’ equity: Preferred stock, $ 0.001 par value – 5,000,000 shares authorized at December 31, 2021 and 2020; and none issued and outstanding at December 31, 2021 and 2020, respectively — — Common stock, $ 0.001 par value – 100,000,000 shares authorized at December 31, 2021 and 2020; 29,493,726 and 29,019,350 shares issued and outstanding at December 31, 2021 and 2020, respectively 27 27 Additional paid-in capital 685,594 646,258 Accumulated other comprehensive income (loss) ( 61 ) 11 Accumulated deficit ( 406,045 ) ( 304,684 ) Total stockholders’ equity 279,515 341,612 Total liabilities and stockholders’ equity $ 462,967 $ 511,739 The accompanying notes are an integral part of these consolidated financial statements. 83 Table of Contents IRHYTHM TECHNOLOGIES, INC. Consolidated Statements of Operations (In thousands, except share and per share data) Year Ended December 31, 2021 2020 2019 Revenue $ 322,825 $ 265,166 $ 214,552 Cost of revenue 109,258 70,277 52,485 Gross profit 213,567 194,889 162,067 Operating expenses: Research and development 38,671 41,329 37,299 Selling, general and administrative 274,839 197,233 179,523 Total operating expenses 313,510 238,562 216,822 Loss from operations ( 99,943 ) ( 43,673 ) ( 54,755 ) Interest expense ( 1,169 ) ( 1,519 ) ( 1,643 ) Other income, net 118 1,591 1,895 Loss before income taxes ( 100,994 ) ( 43,601 ) ( 54,503 ) Income tax provision 367 229 65 Net loss $ ( 101,361 ) $ ( 43,830 ) $ ( 54,568 ) Net loss per common share, basic and diluted $ ( 3.46 ) $ ( 1.58 ) $ ( 2.16 ) Weighted-average shares, basic and diluted 29,331,010 27,754,404 25,265,918 The accompanying notes are an integral part of these consolidated financial statements. 84 Table of Contents IRHYTHM TECHNOLOGIES, INC. Consolidated Statements of Comprehensive Loss (In thousands) Year Ended December 31, 2021 2020 2019 Net loss $ ( 101,361 ) $ ( 43,830 ) $ ( 54,568 ) Other comprehensive income (loss): Net change in unrealized gains (losses) on available-for-sale securities ( 72 ) ( 71 ) 98 Comprehensive loss $ ( 101,433 ) $ ( 43,901 ) $ ( 54,470 ) The accompanying notes are an integral part of these consolidated financial statements. 85 Table of Contents IRHYTHM TECHNOLOGIES, INC. Consolidated Statements of Stockholders’ Equity (In thousands, except share and per share data) Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balances at December 31, 2018 24,368,073 $ 23 $ 257,955 $ ( 205,825 ) -205825000 $ ( 16 ) $ 52,137 Issuance of common stock in connection with employee equity incentive plans, net 734,453 — 9,495 — — 9,495 Warrants exercised 4,852 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 — — ( 5,288 ) — — ( 5,288 ) Stock-based compensation expense — — 26,241 — — 26,241 Net loss — — — ( 54,568 ) — ( 54,568 ) Net change in unrealized loss on investments — — — — 98 98 Balances at December 31, 2019 26,682,720 25 395,695 ( 260,393 ) 82 135,409 Issuance of common stock in connection with employee equity incentive plans 1,079,488 — 20,244 — — 20,244 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 — ( 10,009 ) ( 10,009 ) 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 ) Net change in unrealized loss on investments — — — — ( 71 ) ( 71 ) Balances at December 31, 2020 29,019,350 27 646,258 ( 304,684 ) 11 341,612 Issuance of common stock in connection with employee equity incentive plans 474,376 — 8,943 — — 8,943 Tax withholding upon vesting of restricted stock awards — ( 25,853 ) ( 25,853 ) Stock-based compensation expense — — 56,246 — — 56,246 Net loss — — — ( 101,361 ) — ( 101,361 ) Net change in unrealized loss on investments — — — — ( 72 ) ( 72 ) Balances at December 31, 2021 29,493,726 $ 27 $ 685,594 $ ( 406,045 ) $ ( 61 ) $ 279,515 The accompanying notes are an integral part of these consolidated financial statements. 86 Table of Contents IRHYTHM TECHNOLOGIES, INC. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2021 2020 2019 Cash flows from operating activities Net loss $ ( 101,361 ) $ ( 43,830 ) $ ( 54,568 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 9,842 6,900 3,445 Stock-based compensation 54,527 41,515 26,241 Amortization of debt discount and issuance costs — — 37 Accretion of discounts on investments, net of premium amortization 1,641 430 ( 884 ) Provision for bad debt and contractual allowance 37,074 31,431 24,647 Cost of operating lease right-of-use assets 6,752 6,030 8,953 Changes in operating assets and liabilities: Accounts receivable ( 53,572 ) ( 37,957 ) ( 28,725 ) Inventory ( 4,960 ) ( 1,389 ) ( 1,974 ) Prepaid expenses and other current assets ( 2,329 ) ( 3,027 ) ( 696 ) Other assets ( 1,831 ) ( 6,149 ) ( 4,732 ) Accounts payable 6,135 ( 3,881 ) 5,604 Accrued liabilities 7,946 1,308 6,002 Deferred revenue 2,119 ( 321 ) 28 Operating lease liabilities 264 ( 4,819 ) ( 5,241 ) Net cash used in operating activities ( 37,753 ) ( 13,759 ) ( 21,863 ) Cash flows from investing activities Purchases of property and equipment ( 28,067 ) ( 13,551 ) ( 20,457 ) Purchases of available-for-sale investments ( 122,184 ) ( 277,510 ) ( 165,915 ) Sales of available-for-sale investments — 14,525 1,498 Maturities of available-for-sale investments 255,515 144,145 95,600 Net cash provided by (used in) investing activities 105,264 ( 132,391 ) ( 89,274 ) Cash flows from financing activities Issuance of common stock in connection with follow-on public offering, net — 206,025 107,369 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 ) Repayments of long-term debt ( 11,667 ) ( 1,944 ) — 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 Cash and cash equivalents, beginning of year 88,628 20,462 20,023 Cash and cash equivalents, end of year $ 127,562 $ 88,628 $ 20,462 Supplemental disclosures of cash flow information Interest paid $ 1,194 $ 1,502 $ 1,644 Non-cash investing and financing activities Property and equipment included in accounts payable and accrued liabilities $ 9 $ 3 $ 293 Deferred offering costs included in accounts payable and accrued liabilities $ — $ — $ 77 Right-of-use assets obtained in exchange for new operating lease liabilities $ 6,625 $ 621 $ 88,860 Capitalized stock-based compensation $ 3,593 $ 1,129 $ — The accompanying notes are an integral part of these consolidated financial statements. 87 Table of Contents IRHYTHM TECHNOLOGIES, INC. Notes to Consolidated Financial Statements 1. Organization and Description of Business iRhythm Technologies, Inc. (the “Company”) was incorporated in the state of Delaware in September 2006. The Company is a digital healthcare company redefining the way cardiac arrhythmias are clinically diagnosed by combining wearable biosensing technology with cloud-based data analytics and deep-learning capabilities. The Company began commercial operations in the United States in 2009 following clearance by the U.S. Food and Drug Administration. The Company is headquartered in San Francisco, California, which also serves as a clinical center. The Company has additional clinical centers in Lincolnshire, Illinois and Houston, Texas and a manufacturing facility in Cypress, California. 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 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. The 2019 Shares included the full exercise of the underwriters’ option to purchase an additional 205,479 shares of common stock. Total proceeds received from the offering were $ 107.3 million, after deducting discounts and issuance costs. On August 21, 2020, the Company issued and sold an aggregate of 1,257,142 shares (the "Shares") of common stock, in a public offering at a price of $ 175.00 per share. The Shares included the full exercise of the underwriters’ option to purchase an additional 163,975 shares of common stock. Total proceeds received from the offering were $ 206.8 million, after deducting discounts and issuance costs. 2. Summary of Significant Accounting Policies Basis of Presentation 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. All intercompany accounts and transactions have been eliminated. The financial statements of the Company’s subsidiary use the U.S. dollar as the functional currency. For all non-functional currency balances, the remeasurement of such balances to functional currency results in a foreign exchange transaction gain or loss, which is recorded in the consolidated statements of operations. Risks and Uncertainties COVID-19 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 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 88 Table of Contents 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. 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, 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, 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. The full extent of potential delays or impacts on the business, financial condition, cash flows and results of operations remains unknown. 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. Reimbursement Government payors may change their coverage and reimbursement policies, as well as payment amounts, in a way that would prevent or limit reimbursement for the Zio service, which would significantly harm the Company. Government and other third-party payors require the Company to report the service for which it is seeking reimbursement by using a Current Procedural Terminology (“CPT”), code-set maintained by the American Medical Association (“AMA”). 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 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 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. 89 Table of Contents 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. 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 The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, contractual allowances, allowance for doubtful accounts, the useful lives of property and equipment, the recoverability of long-lived assets including the estimated usage of the printed circuit board assemblies (“PCBAs”), the incremental borrowing rate for operating leases, accounting for income taxes, and various inputs used in estimating stock-based compensation. Certain of these estimates are impacted by uncertainties surrounding COVID-19 such as revenue recognition, contractual allowances for revenue, allowance for doubtful accounts, and stock based compensation. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that management believes are reasonable under the circumstances, including assumptions as to future events. Actual results may differ from those estimates. Fair Value of Financial Instruments The carrying amounts of certain of the Company’s financial instruments, which include cash equivalents, short-term investments, long-term investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short maturities. Cash Equivalents Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the date of purchase. Investments 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. All investments are carried at fair value based upon quoted market prices. The Company periodically assesses its portfolio of debt investments for impairment. For debt securities in an unrealized loss position, this assessment first takes into account the intent to sell, or whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of these criteria are met, the debt security’s amortized cost basis is written down to fair value through interest and other, net. For debt securities in an unrealized loss position that do not meet the aforementioned criteria, the Company assesses whether the decline in fair value has resulted from credit losses or other factors. 90 Table of Contents The Company evaluates expected credit losses by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. Expected credit losses on available-for-sale debt securities are recognized in other income, net in the condensed consolidated statements of operations, and any remaining unrealized losses, net of taxes, are reported as a component of accumulated other comprehensive loss. The Company did not recognize any credit losses on its available-for-sale securities during the year ended December 31, 2021 and there were no impairment charges for unrealized losses in the periods presented. The cost of available-for-sale securities sold is based on the specific-identification method and realized gains and losses are included in earnings. Amortization of premiums and accretion of discounts are reported as a component of other income, net. Accounts Receivable, Allowance for Doubtful Accounts and Contractual Allowances Accounts receivable includes amounts due to the Company from healthcare institutions, third-party payors, and government payors and their related patients, as a result of the Company's normal business activities. Accounts receivable is reported on the consolidated balance sheets net of an estimated allowance for doubtful accounts and contractual allowances. The Company establishes an allowance for doubtful accounts for estimated uncollectible receivables based on its assessment of the collectability of customer accounts and recognizes the provision as a component of selling, general and administrative expenses. The Company records a provision for contractual allowances based on the estimated differences between contracted amounts and expected collection rates. Such provisions are based on the Company's historical experience and are reported as a reduction of revenue. 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): Year ended December 31, 2021 2020 2019 Balance, beginning of year $ 12,711 $ 9,049 $ 7,296 Add: adoption of ASC 326 — 461 — Add: provision for doubtful accounts 9,615 10,515 9,129 Less: write-offs, net of recoveries and other adjustments ( 8,314 ) ( 7,314 ) ( 7,376 ) Balance, end of year $ 14,012 $ 12,711 $ 9,049 91 Table of Contents The following table presents the changes in the contractual allowance (in thousands): Year ended December 31, 2021 2020 2019 Balance, beginning of year $ 21,281 $ 15,433 $ 9,205 Add: allowance for contractual adjustments 27,459 20,916 15,518 Less: contractual adjustments ( 17,466 ) ( 15,068 ) ( 9,290 ) Balance, end of year $ 31,274 $ 21,281 $ 15,433 Concentrations of Risk Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. Cash balances are deposited in financial institutions which, at times, may be in excess of federally insured limits. 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, 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. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company’s customer base and their dispersion across many geographies. The Company does not require collateral. The Company records an allowance for doubtful accounts based on the assessment of the collectability of customer accounts, 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. Centers for Medicare and Medicaid Services (“CMS”), accounted for approximately 14 %, 27 % and 27 % of the Company’s revenue for the years ended December 31, 2021, 2020 and 2019, respectively. 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. Supply Risk 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. These components and materials are critical, and there could be a considerable delay in finding alternative sources of supply. A global semiconductor supply shortage is having wide-ranging effects across multiple industries. The supply shortage has impacted multiple suppliers that provide the printed circuit board assemblies to the Company. 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. 92 Table of Contents Inventory 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. The Company records write-downs of inventory that is obsolete or in excess of anticipated demand. The Company also records market value based write-downs on consideration of product lifecycle stage, technology trends, product development plans and assumptions about future demand and market conditions. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values. Inventory write-downs are charged to cost of revenue and establish a new cost basis for the inventory. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to five years . Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. Internal-Use Software The Company capitalizes costs related to internal-use software during the application development stage. Costs related to planning and post implementation activities are expensed as incurred. Capitalized internal-use software is amortized, and recognized as cost of revenue, on a straight-line basis over the estimated useful life, which is up to five years . The Company evaluates the useful lives of these assets on an annual basis, and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Capitalized internal-use software costs are classified as a component of property and equipment. Goodwill Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in business combinations. Goodwill is tested for impairment on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Such events or circumstances may include significant adverse changes in the general business climate, among other things. The impairment test is performed by determining the enterprise fair value of the Company, which is primarily based on the Company’s market capitalization. If the Company’s carrying value, as a one reporting unit entity, is less than its fair value, then the fair value is allocated to all of its assets and liabilities (including any unrecognized intangible assets) as if the fair value was the purchase price to acquire the Company. The excess of the fair value over the amounts assigned to the Company’s assets and liabilities is the implied fair value of the goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company performs its annual evaluation of goodwill during the fourth quarter of each fiscal year. The Company did not record any charges related to goodwill impairment in any of the periods presented in these consolidated financial statements. Impairment of Long-Lived Assets The Company annually reviews long-lived assets for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. 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. 93 Table of Contents Other Assets 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 PCBAs are used numerous times and have useful lives beyond one year. Each time a PCBA is used in a wearable Zio XT or Zio AT monitor, or a wireless gateway is used with a Zio AT monitor a portion of the cost of the PCBA and/or gateway is recorded as a cost of revenue. The PCBAs are recorded as other assets and were $ 13.9 million and $ 12.6 million as of December 31, 2021 and 2020, respectively. The Company has based its estimates of how many times a PCBA 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. The Company periodically evaluates the use estimate. Comprehensive Loss Comprehensive loss represents all changes in stockholders’ equity during the period from non-owner sources. The Company’s unrealized gains and losses on available-for-sale securities represent the only component of other comprehensive loss that are excluded from the reported net loss and that are presented in the consolidated statements of comprehensive loss. Revenue Recognition The Company’s revenue is generated primarily from the provision of its cardiac rhythm monitoring service, the Zio XT service. The Zio XT is a cardiac rhythm monitoring service that has a patient wear period of up to 14 days and is billable when the monitoring reports are delivered to the healthcare provider, which is also when the service is complete and the Company recognizes revenue. The time from when the patient has the Zio XT device applied to the time the report is posted is generally around 25 days. 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 patients that require more timely action. During the wear period, physicians will receive notifications if there are significant events that meet predetermined arrhythmia detection criteria. The Zio AT service revenue is recognized over the prescription period and delivery of an electronic Zio Report with two performance obligations. The Company recognizes as revenue the amount of consideration to which it expects to be entitled in exchange for performing the service. The consideration the Company is entitled to varies by portfolio, as further defined below, and includes estimates that require significant judgment by management. A unique aspect of healthcare is the involvement of multiple parties to the service transaction. In addition to the patient, often a third-party, for example a commercial or governmental payor or healthcare institution, will pay the Company for some or all of the service on the patient’s behalf. 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 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. Certain of these factors are forms of variable consideration which are only included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved. 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 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. The transaction price used 94 Table of Contents for determining revenue recognition is based on factors including an average of the Company’s historical collection experience for its non-contracted services. This rate is reviewed at least quarterly. • Healthcare institutions – Healthcare institutions are typically hospitals or physician practices in which the Company has negotiated amounts for its monitoring services, including certain governmental agencies such as the Veterans Administration and Department of Defense. The Company is utilizing the portfolio approach practical expedient under ASC 606 for revenue recognition whereby services provided under each of the above payor types form a separate portfolio. The Company accounts for the contracts within each portfolio as a collective group, rather than individual contracts. Based on history with these portfolios and the similar nature and characteristics of the patients within each portfolio, the Company has concluded that the financial statement effects are not materially different than if accounting for revenue on a contract-by-contract basis. For contracted and CMS portfolios, the Company recognizes revenue, net of contractual allowances, and recognizes an allowance for doubtful accounts for uncollectible patient accounts receivable. The transaction price is determined based on negotiated rates, and the Company has historical experience of collecting substantially all of these contracted rates. These contracts also 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 accounts for denied claims as a form of variable consideration that is included as a reduction to the transaction price recognized as revenue. The Company estimates the denied claims which require management judgment. The estimated denied claims are based on historical information and judgement includes the historical period utilized. 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. Contracted payors may require that we bill patient co-payments and deductibles and from time to time we may not be able to collect such amounts due to credit risk. The Company provides for estimates of uncollectible patient accounts receivable, based upon historical experience where judgment includes the historical period utilized, at the time revenue is recognized, with such provisions presented as bad debt expense within the selling, general and administrative line item of the consolidated statement of operations. 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. 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, 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. All subsequent adjustments to the transaction price are recorded as an adjustment to revenue. For healthcare institutions, the transaction price is determined based on negotiated rates, and the Company has historical experience collecting substantially all of these contracted rates. Historical cash collection indicates that it is probable that substantially all of the transaction price will be received. As such, the Company is not providing an implicit price concession but, rather, has chosen to accept the risk of default, and any subsequent uncollected amounts are recorded as bad debt expense. 95 Table of Contents Disaggregation of Revenue The Company disaggregates revenue from contracts with customers by payor type. The Company believes these categories aggregate the payor types by nature, amount, timing and uncertainty of its revenue streams. Disaggregated revenue by payor type and major service line for the years ended December 31, 2021 and December 31, 2020 were as follows (in thousands): Year Ended December 31, 2021 2020 2019 Contracted third-party payors $ 193,871 $ 135,939 $ 101,845 Non-contracted third-party payors 26,929 15,295 10,770 Centers for Medicare & Medicaid 44,529 72,536 58,918 Healthcare institutions 57,496 41,396 43,019 Total $ 322,825 $ 265,166 $ 214,552 Contract Liabilities ASC 606 requires an entity to present a revenue contract as a contract liability when the Company has an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer, or an amount of consideration from the customer is due and unconditional (whichever is earlier). Certain of the Company’s customers pay the Company directly for the Zio XT service upon shipment of devices. Such advance payments are contract liabilities and are recorded as deferred revenue on the Consolidated Balance Sheets and revenue is recognized when reports are delivered to the healthcare provider. 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 Under ASC 340, the incremental costs of obtaining a contract with a customer are recognized as an asset. Incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company’s current commission programs are considered incremental. However, as a practical expedient, ASC 340 permits the Company to immediately expense contract acquisition costs, as the asset that would have resulted from capitalizing these costs will be amortized in one year or less. Cost of Revenue Cost of revenue includes direct labor, material costs, overhead, data analysis, customer care, equipment and infrastructure expenses, amortization of internal-use software, and shipping and handling. Direct labor includes payroll and personnel-related costs involved in manufacturing. Material costs include both the disposable costs of the device and amortization of the PCBAs. Each time the PCBA is used in a wearable Zio XT monitor, a portion of the cost of the PCBA is recorded as a cost of revenue. Research and Development The Company’s research and development costs are expensed as incurred. Research and development costs include, but are not limited to, payroll and personnel-related expenses, laboratory supplies, consulting costs and overhead charges. 96 Table of Contents Income Taxes The Company uses the asset and liability method to account for income taxes in accordance with the authoritative guidance for income taxes. Under this method, deferred tax assets and liabilities are determined based on future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits in income tax expense. To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits. The Company recognize taxes on Global Intangible Low-Taxed Income as a current period expense when incurred. Stock-based Compensation The Company measures its stock-based awards made to employees based on the estimated fair values of the awards as of the grant date. The fair value of market condition awards is determined using the Monte-Carlo option pricing model and the fair value of stock options is determined using the Black-Scholes option pricing model. Stock-based compensation expense is recognized over the requisite service period using the straight-line method and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, the Company’s stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. 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 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. The grant date fair value is expensed on a straight-line basis over the offering period. Net Loss per Common Share Basic net loss per common share is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding during the period, without consideration of potentially dilutive securities. Diluted net loss per common share is the same as basic net loss per common share for all periods presented, since the effect of potentially dilutive securities are anti-dilutive. Leases Identifying a lease The Company determines whether a contract contains a lease at the inception of a contract. If the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration, the Company considers the contract to contain a lease. The Company determines whether a contract conveys the right to control the use of an identified asset for a period of time if the contract contains both of the following terms: • The right to obtain substantially all of the economic benefits from use of the identified asset; and • The right to direct the use of the identified asset. Discount rate for leases 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. 97 Table of Contents Lease term The lease term is generally the minimum noncancellable period of each lease. The Company does not include option periods in determining the right-of-use asset and operating lease liability at inception unless it is reasonably certain that the Company will exercise the option at inception or when a triggering event occurs. As of December 31, 2021, no renewal options were included in the determination of lease terms. Lease Modification The San Francisco Lease is in the same building with the same landlord as the lease for the Company’s prior headquarters in San Francisco (“existing lease”). 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. 3. Cash Equivalents and Investments The fair value of cash equivalents and available-for-sale investments at December 31, 2021 and 2020, were as follows (in thousands): December 31, 2021 Amortized Cost Gross Unrealized Estimated Fair Value Gains Losses Money market funds $ 110,137 $ — $ — $ 110,137 U.S. government securities 50,490 — ( 46 ) 50,444 Corporate notes 31,158 — ( 15 ) 31,143 Commercial paper 29,982 — — 29,982 Total cash equivalents and available-for-sale investments $ 221,767 $ — $ ( 61 ) $ 221,706 Classified as: Cash equivalents $ 110,137 Short-term investments 111,569 Total cash equivalents and available-for-sale investments $ 221,706 December 31, 2020 Amortized Cost Gross Unrealized Estimated Fair Value Gains Losses Money market funds $ 59,823 $ — $ — $ 59,823 U.S. government securities 190,663 16 ( 2 ) 190,677 Corporate notes 26,426 2 ( 5 ) 26,423 Commercial paper 29,489 — — 29,489 Total cash equivalents and available-for-sale investments $ 306,401 $ 18 $ ( 7 ) $ 306,412 Classified as: Cash equivalents $ 59,823 Short-term investments 246,589 Total cash equivalents and available-for-sale investments $ 306,412 98 Table of Contents The following table summarizes the fair value of the Company's cash equivalents, short-term and long-term marketable securities classified by maturity (in thousands): December 31, 2021 2020 Due within one year $ 221,706 $ 306,412 Due after one year through three years — — Total cash equivalents and available-for-sale investments $ 221,706 $ 306,412 The following tables present the Company's available-for-sale securities that were in an unrealized loss position as of December 31, 2021 (in thousands): December 31, 2021 Less than 12 months 12 Months or Greater Total Assets Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss U.S. government securities $ 50,445 $ ( 46 ) $ — $ — $ 50,445 $ ( 46 ) Corporate notes 31,143 ( 15 ) — — 31,143 ( 15 ) Total $ 81,588 $ ( 61 ) $ — $ — $ 81,588 $ ( 61 ) Unrealized losses as of December 31, 2021 were not material. Available-for-sale securities held as of December 31, 2021 had a weighted average maturity of 95 days. 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. 4. Fair Value Measurements The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows: Level 1 —Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 —Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 3 —Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The corporate notes, commercial paper and government securities are classified as Level 2 as they were valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. The fair value of the Company’s outstanding interest-bearing obligations is estimated using the net present value of the future payments, discounted at an interest rate that is consistent with market interest rates, which is a Level 2 input. The carrying amount and the estimated fair value of the Company’s outstanding interest-bearing obligations at December 31, 2021 wer e $ 21.4 million and $ 21.7 million, r espectively. The carrying amount and the estimated fair value of the Company’s outstanding interest-bearing obligations at December 31, 2020 were $ 33.0 million and $ 33.9 million, respectively. The Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value. 99 Table of Contents The following tables present the fair value of the Company’s financial assets determined using the inputs defined above (in thousands). December 31, 2021 Level 1 Level 2 Level 3 Total Assets Money market funds $ 110,137 $ — $ — $ 110,137 U.S. government securities — 50,444 — 50,444 Corporate notes — 31,143 — 31,143 Commercial paper — 29,982 — 29,982 Total $ 110,137 $ 111,569 $ — $ 221,706 December 31, 2020 Level 1 Level 2 Level 3 Total Assets Money market funds $ 59,823 $ — $ — $ 59,823 U.S. government securities — 190,677 — 190,677 Corporate notes — 26,423 — 26,423 Commercial paper — 29,489 — 29,489 Total $ 59,823 $ 246,589 $ — $ 306,412 5. Balance Sheet Components Inventory and Other Assets Inventory consisted of the following (in thousands): December 31, 2021 2020 Raw materials $ 5,101 $ 2,469 Finished goods 5,167 2,844 Total $ 10,268 $ 5,313 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 . Each time a PCBA is used in a wearable Zio XT monitor or Zio AT monitor, a portion of the cost of the PCBA is recorded as a cost of revenue. Each time a wireless gateway is used with a Zio AT monitor, a portion of the gateway is recorded as a cost of revenue. PCBAs which are recorded as other assets were $ 13.9 million a nd $ 12.6 million as of December 31, 2021, and December 31, 2020, respectively. The amortization wa s $ 4.4 million and $ 3.0 million for the years ending December 31, 2021 and 2020 respectively. 100 Table of Contents Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): December 31, 2021 2020 Laboratory and manufacturing equipment $ 5,029 $ 4,667 Computer equipment and software 2,353 2,005 Furniture and fixtures 4,174 3,794 Leasehold improvements 20,431 9,215 Internal-use software 46,661 28,416 Total property and equipment, gross 78,648 48,097 Less: accumulated depreciation and amortization ( 22,704 ) ( 13,850 ) Total property and equipment, net $ 55,944 $ 34,247 Depreciation and amortization expense for the years ended December 31, 2021 and 2020 was $ 9.8 million and $ 6.9 million, respectively. Accrued Liabilities Accrued liabilities consisted of the following (in thousands): December 31, 2021 2020 Accrued vacation $ 7,431 $ 6,007 Accrued payroll and related expenses 34,484 19,709 Accrued ESPP Contributions 1,002 851 Accrued professional services fees 1,724 1,709 Accrued interest 78 121 Claims payable 2,988 4,757 Other 3,779 7,378 Total accrued liabilities $ 51,486 $ 40,532 6. Commitments and Contingencies Lease Arrangements The Company leases office, manufacturing, and clinical centers under non-cancelable operating leases which expire on various dates through 2031. These leases generally contain scheduled rent increases or escalation clauses and renewal options. Operating lease right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease right-of-use assets also include any lease payments made to the lessor at or before the commencement date as well as variable lease payments which are based on a consumer price index. The Company is also subject to variable lease payments related to janitorial services and electricity which are not included in the operating lease right-of-use asset as they are based on actual usage. The Company recognizes operating lease expense on a straight-line basis over the lease period. The total operating lease cost recognized during the year ended December 31, 2021 was $ 13.5 million which primarily consisted of lease payments and common area maintenance costs. Cash paid for operating leases during the year ended December 31, 2021 was $ 12.2 million. 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 term of the San Francisco Lease began on May 13, 2019, and expires on August 31, 2031. The Company is entitled to one option to extend the San Francisco Lease for a five-year term, subject to certain requirements. 101 Table of Contents 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 2023 12,912 2024 13,304 2025 13,696 2026 14,100 Thereafter 69,898 136,527 Less: imputed interest ( 40,173 ) Total lease liabilities $ 96,354 The weighted average remaining lease term of the Company's operating leases as of December 31, 2021 was 9.62 years. 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, 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 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. Devine. 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. 102 Table of Contents Development Agreement On September 3, 2019, the Company entered into a Development Collaboration Agreement (the “Development Agreement”) with Verily Life Sciences LLC (“Verily”). The Development Agreement, which is over a 24 month term, involves joint development and production of intellectual property between the Company and Verily. Each participant has primary responsibility for certain aspects of development and approval, with all processes to be performed at each respective party’s own cost. Costs incurred by the Company in connection with the Development Agreement will be expensed as research and development expense in accordance with ASC 730, Research and Development. The Company and Verily will develop certain next-generation atrial fibrillation (“AF”) screening, detection, or monitoring products pursuant to the Development Agreement, which products will involve combining Verily and the Company's technology platforms and capabilities. 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. 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. Ownership of developed intellectual property will be allocated to the Company or Verily depending on the subject matter of the underlying developed intellectual property, and, for certain subject matter, shall be jointly owned. 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 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. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by applicable law. The Company currently has directors’ and officers’ insurance. 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. 7. Debt Bank Debt 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”). This Agreement amends and restates the Second Amended and Restated Loan and Security Agreement between the Company and SVB dated December 4, 2015, as amended by the First Loan Modification Agreement between the Company and SVB dated August 22, 2016. Pursuant to the Third Amended and Restated SVB Loan Agreement, the Company obtained a term loan (“SVB Term Loan”) for $ 35.0 million. 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. 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 %. The weighted average interest rate was 4.25 % and 4.25 % for the years ended December 31, 2021 and 2020, respectively. 103 Table of Contents Under the Third Amended and Restated SVB Loan Agreement, the Company may borrow, repay, and reborrow under a revolving credit line, but not in excess of the maximum loan amount of $ 25.0 million, which includes an $ 11.0 million standby letter of credit sublimit availability. In October 2018, a $ 6.9 million standby letter of credit was obtained in connection with a lease for the Company’s San Francisco headquarters. Any principal amount outstanding under the Third Amended and Restated SVB Loan Agreement revolving credit line shall bear interest at an amount that is the greater of (a) a floating rate per annum equal to the rate published by The Wall Street Journal as the “Prime Rate” or (b) 5.00 %. The Company may borrow up to 75 % of eligible accounts receivable, up to the maximum of $ 25.0 million. 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. In addition, the SVB Loan Agreement contains customary affirmative and negative covenants and events of default. The Company was in compliance with loan covenants as of December 31, 2021. The obligations under the Third Amended and Restated Loan Agreement are collateralized by substantially all assets of the Company. Future minimum payments Future minimum payments under the Third Amended and Restated Loan and Security Agreement with Silicon Valley Bank at December 31, 2021 are as follows (in thousands): Year Ending December 31, 2022 $ 12,357 2023 9,914 Total 22,271 Less: Amount representing interest ( 883 ) Less: Debt Issuance Costs ( 31 ) Total Carrying Value $ 21,357 Reported as: Short-term debt $ 11,667 Long-term debt 9,690 Total $ 21,357 104 Table of Contents 8. Income Taxes The following table presents components of the Company’s provision for income taxes as for the period presented (in thousands): December 31, 2021 2020 2019 Current expense (benefit): Federal $ — $ — $ — State 223 181 — Foreign 150 59 68 Total current tax expense (benefit) 373 240 68 Deferred expense (benefit): Federal — — — State — — — Foreign ( 6 ) ( 11 ) ( 3 ) Total deferred tax expense (benefit) ( 6 ) ( 11 ) ( 3 ) Total Tax Expense (benefit) $ 367 $ 229 $ 65 The following table presents a reconciliation of the tax expense computed at the statutory federal rate and the Company’s tax expense for the period presented (in thousands): December 31, 2021 2020 2019 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 Section 162(m) limitation - officers compensation 4,856 544 — Other ( 347 ) 89 614 Tax credits ( 381 ) ( 1,426 ) ( 1,128 ) Foreign Rate Differential ( 30 ) ( 9 ) — Change in valuation allowance 24,111 30,607 17,176 Provision for income taxes $ 367 $ 229 $ 65 Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 105 Table of Contents Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands): December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 114,856 $ 91,034 Tax credit carryforwards 9,174 7,110 Share-based compensation 9,812 8,831 Allowances and other 20,988 14,996 Lease obligation 23,868 22,624 Total deferred tax assets 178,698 144,595 Valuation allowance ( 154,734 ) ( 123,803 ) Net deferred tax assets 23,964 20,792 Deferred Tax Liabilities: Depreciation and Amortization ( 3,212 ) ( 108 ) Right of use asset ( 20,696 ) ( 20,634 ) Total deferred tax liability ( 23,908 ) ( 20,742 ) Total deferred tax assets $ 56 $ 50 Due to the uncertainties surrounding the realization of deferred tax assets through future taxable income, the Company has provided a full valuation allowance against its U.S. deferred tax assets, and, therefore, no benefit has been recognized for the net operating loss carryforwards and other deferred tax assets. The U.S. valuation allowance increased by $ 30.9 million and $ 35.4 million for the years ended December 31, 2021 and December 31, 2020, respectively. The current year change in the U.S. valuation allowance is primarily related to the increase in net operating loss carryforwards generated during the year. The Company recorded an immaterial deferred tax asset related to the Company’s foreign operations in the United Kingdom. The valuation allowance for deferred tax assets consisted of the following activity for the years ended December 31, 2021, 2020 and 2019 (in thousands): Balance at beginning of year Additions Deductions Balance at end of year Year Ended December 31, 2021 $ 123,803 $ 30,931 $ — $ 154,734 Year Ended December 31, 2020 $ 88,433 $ 35,370 $ — $ 123,803 Year Ended December 31, 2019 $ 66,435 $ 21,998 $ — $ 88,433 As of December 31, 2021, the Company had approximately $ 464.3 million of federal and $ 279.1 million of state net operating loss carryforwards available to offset future taxable income which expires in varying amounts beginning in 2027 and 2020 respectively. As of December 31, 2021, the Company had research tax credit carryforwards of approximately $ 7.4 million, and $ 6.1 million available to reduce future taxable income, if any, for both federal and state purposes, respectively. The federal tax credit carryforwards expire beginning in 2028 and the state tax credits can be carried forward indefinitely. Section 382 of the Internal Revenue Code, and similar state provisions, limits the use of net operating loss and tax credit carryforwards in certain situations where equity transactions result in a change of ownership as defined by Internal Revenue Code Section 382. In the event the Company should experience an ownership change, as defined, utilization of its net operating loss carryforwards and tax credits could be limited. 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. 106 Table of Contents A reconciliation of the Company’s unrecognized tax benefit amount is as follows (in thousands): Year Ended December 31, 2021 2020 2019 Balance at beginning of year $ 2,302 $ 1,842 $ 1,459 Additions for tax positions taken in current year 772 488 383 Increases in balance related to prior year tax positions 236 — — Decreases in balance related to prior year tax positions — ( 28 ) — Balance at end of year $ 3,310 $ 2,302 $ 1,842 The total amount of gross unrecognized tax benefits was $ 3.3 million, $ 2.3 million, and $ 1.8 million as of December 31, 2021, 2020, and 2019 respectively. None of the Company’s unrecognized tax benefits that, if recognized, would affect its effective tax rate. The Company does not anticipate the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes. Management determined that no accrual for interest or penalties was required as of December 31, 2021, 2020 and 2019. The Company files income tax returns in the U.S. and UK jurisdictions. All of the Company's tax years are open to examination by the US federal and state tax authorities. The UK is open to examination for tax years starting 2017 and forward. The Company currently has no federal, state or foreign tax examinations in progress, nor has it had any federal or state examinations since inception. 9. Stockholders’ Equity Common stock The Company’s amended and restated certificate of incorporation dated October 25, 2016, as amended, authorizes the Company to issue 100,000,000 shares of common stock with a par value of $ 0.001 per share and 5,000,000 shares of preferred stock with a par value of $ 0.001 per share. The holders of common stock are entitled to receive dividends whenever funds and assets are legally available and when declared by the board of directors, subject to the prior rights of holders of all series of convertible preferred stock outstanding. No dividends were declared through December 31, 2021. The Company had reserved shares of common stock for issuance as follows: December 31, 2021 2020 Options issued and outstanding 504,106 609,881 Unvested restricted stock units 1,649,561 1,114,159 Shares available for grant under future stock plans 9,011,213 8,016,517 Shares available for future issuance 11,164,880 9,740,557 10. Stock Incentive Plans 2006 Plan In October 2006, the Company adopted the 2006 Equity Incentive Plan, as amended, (the “2006 Plan”). The Plan provided for the granting of stock options to employees and non-employees of the Company. Options granted under the Plan were either incentive stock options or nonqualified stock options. Incentive stock options (“ISO”) were granted only to employees (including officers and directors who are also employees). Nonqualified stock options (“NSO”) may be granted to employees and non-employees. The board of directors had the authority to determine to whom options will be granted, the number of options, the term and the exercise price. Options under the Plan were granted for periods of up to ten years and at the fair value of the shares on the date of grant as determined by the board of directors. In general, options become exercisable at a rate of 25 % after the first anniversary of the grant and then monthly vesting for an additional three years from date of grant. The term for options is no longer than five years for ISOs for which the grantee owns greater than 10 % of the voting power of all classes of stock and no longer than ten years for all other options. The Company issues new shares upon the exercise of options. 107 Table of Contents 2016 Plan In October 2016, the Company adopted the 2016 Equity Incentive Plan, (the “2016 Plan”). The 2016 Plan was subsequently approved by the Company’s stockholders and became effective on October 19, 2016, immediately before the effective date of the IPO. Following the effectiveness of the 2016 Plan, no additional options will be granted under the 2006 Plan. In addition, to the extent that any awards outstanding or subject to vesting restrictions under the 2006 Plan are subsequently forfeited or terminated for any reason before being exercised or settled, the shares of common stock reserved for issuance pursuant to such awards as of the closing of the IPO will become available for issuance under the 2016 Plan. The remaining shares available for grant under the 2006 Plan became available for issuance under the 2016 Plan upon the closing of the IPO. On the first day of each year, the 2016 Plan authorizes an annual increase of the least of 3,865,000 shares, 5 % of outstanding shares on the last day of the immediately preceding fiscal year or an amount as determined by the Company's Board of Directors. As of December 31, 2021, the Company has reserved 7,159,947 shares of common stock for issuance under the 2016 Plan. Pursuant to the 2016 Plan, stock options, restricted shares, stock units, including restricted stock units and stock appreciation rights may be granted to employees, consultants, and outside directors of the Company. Options granted may be either ISOs or NSOs. Stock options are governed by stock option agreements between the Company and recipients of stock options. ISOs and NSOs may be granted under the 2016 Plan at an exercise price of not less than 100 % of the fair market value of the common stock on the date of grant, determined by the Compensation Committee of the Board of Directors. 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 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. 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. The ESPP provides for 12 month offering periods that each contain two 6 month purchase periods. At the end of each purchase period, employees are able to purchase shares at 85 % of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the purchase period. As of December 31, 2021, 515,231 shares of common stock have been issued to employees participating in the ESPP and 1,851,538 shares were available for issuance under the ESPP. The Company used the following assumptions to estimate the fair value of the ESPP offered for the year ended December 31, 2021: expected term of 0.5 – 1 year, volatility of 93.99 % - 106.96 %, risk-free interest rate of 0.04 % - 0.18 % and expected dividend yield of zero . The Company used the following assumptions to estimate the fair value of the ESPP offered for the year ended December 31, 2020: expected term of 0.5 – 1 year, volatility of 68.72 % - 75.78 %, risk-free interest rate of 0.11 % - 0.18 % and expected dividend yield of zero . The Company used the following assumptions to estimate the fair value of the ESPP offered for the year ended December 31, 2019: expected term of 0.5 – 1 year, volatility of 43.61 % - 48.05 %, risk-free interest rate of 1.60 % - 2.35 % and expected dividend yield of zero . 108 Table of Contents Equity Incentive Plan Activity A summary of share-based awards available for grant under the 2016 Equity Incentive Plan is as follows: Shares Available for Grant Balance at December 31, 2018 4,717,292 Additional options authorized 1,218,402 Awards granted ( 649,911 ) Awards forfeited 181,513 Awards withheld for tax purposes 60,836 Balance at December 31, 2019 5,528,132 Additional awards authorized 1,333,928 Awards granted ( 595,915 ) Awards forfeited 156,623 Awards withheld for tax purposes 82,622 Balance at December 31, 2020 6,505,390 Additional awards authorized 1,450,967 Awards granted ( 1,289,567 ) Awards forfeited 356,999 Awards withheld for tax purposes 135,886 Balance at December 31, 2021 7,159,675 During the year ended December 31, 2021, 1,009,457 restricted stock units ("RSUs") were granted, 285,331 RSUs vested, and 200,019 RSUs were forfeited. The following table summarizes stock option activity under the 2006 and 2016 Equity Incentive Plans: Options Outstanding Options Outstanding Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Balance at December 31, 2018 2,094,137 $ 23.20 7.02 $ 97,976 Options granted 20,010 $ 82.77 Options exercised ( 540,307 ) $ 9.59 Options forfeited ( 70,593 ) $ 54.54 Balance at December 31, 2019 1,503,247 $ 27.40 6.43 $ 62,401 Options granted — $ — Options exercised ( 868,614 ) $ 17.31 Options forfeited ( 24,752 ) $ 66.89 Balance at December 31, 2020 609,881 $ 40.18 6.24 120,163 Options granted — $ — Options exercised ( 90,939 ) $ 31.15 Options forfeited ( 14,836 ) $ 68.81 Balance at December 31, 2021 504,106 $ 40.97 5.20 38,675 Options exercisable – December 31, 2021 483,548 $ 39.61 5.15 37,756 Options vested and expected to vest – December 31, 2021 503,884 $ 40.95 5.20 38,667 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 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 . 109 Table of Contents 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. The total estimated grant date fair value of options vested during the period was $ 2.8 million, $ 4.9 million and $ 7.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. The fair value of non-vested restricted stock units (“RSUs”) is based on the Company’s closing stock price on the date of grant. A summary for the year ended December 31, 2021, is as follows: Shares Underlying RSUs Weighted Average Grant Date Fair Value Weighted Remaining Vesting Period (in years) Aggregate Intrinsic Value (in thousands) Non-vested as of December 31, 2019 886,030 $ 77.92 1.39 $ 60,330 Granted 595,915 $ 104.09 Vested ( 235,915 ) $ 69.01 Forfeited ( 131,871 ) $ 59.85 Non-vested as of December 31, 2020 1,114,159 $ 94.25 1.38 $ 264,290 Granted 1,289,567 $ 98.80 Vested ( 412,002 ) $ 104.94 Forfeited ( 342,163 ) $ 113.95 Non-vested as of December 31, 2021 1,649,561 $ 91.01 1.64 $ 194,137 11. Stock-Based Compensation Employee Options Valuation 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 December 31, 2019 Expected term (in years) 6.1 Expected volatility 45.0 % Risk-free interest rate 2.39 % Dividend yield — % The Company did not grant stock options during the years ended December 31, 2021 and December 31, 2020. Market-based RSU Valuation The fair value of market based RSUs was estimated at the date of grant using the Monte-Carlo option pricing model with the assumptions below. Additional details on the Company's market based RSUs are included below. Year Ended December 31, 2020 Expected term (in years) 0.74 Expected volatility 63.0 % Risk-free interest rate 0.17 % Dividend yield — % Fair Value of Common Stock — The Company’s Board of Directors determined the fair value of each share of underlying common stock based on the closing price of the Company’s common stock as reported on the date of grant. 110 Table of Contents Expected Term —The expected term represents the period that the share-based awards are expected to be outstanding. 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. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available. Risk-Free Interest Rate —The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant for zero coupon U.S. Treasury notes with maturities approximately equal to expected term of the option award. Expected Dividend Yield —The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero . In addition to the assumptions used in the Black-Scholes option-pricing model, the Company also estimates a forfeiture rate to calculate the stock-based compensation for the Company’s equity awards. The Company will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for the Company’s stock-based compensation calculations on a prospective basis. The following table summarizes the total stock-based compensation expense included in the statements of operations and comprehensive loss for all periods presented (in thousands): Year Ended December 31 2021 2020 2019 Cost of revenue $ 1,896 $ 27 $ 658 Research and development 5,565 7,727 4,462 Selling, general and administrative 47,066 33,761 21,121 Total stock-based compensation expense $ 54,527 $ 41,515 $ 26,241 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 The Company grants PRSUs to key executives of the Company. PRSUs can be earned in accordance with the performance equity program for each respective grant 2019 Awards In February 2019, the company granted PRSU's (“2019 awards”) to be earned based on the compound annual growth rate (“CAGR”) of fiscal year 2020's revenue compared to fiscal year 2018's revenue. Due to the impact of the COVID-19 pandemic, management determined that the Company’s achievement of its performance targets described above, was not probable in the first quarter of fiscal year 2020. 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 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 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. 111 Table of Contents February 2020 Awards In February 2020, the company granted PRSU's (“February 2020 awards”) for fiscal year 2022's annual unit volume CAGR compared to fiscal year 2019'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 133,834 PRSU shares were granted with grant date fair value of $ 11.0 million. The 2020 awards also include a service-based component. 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 On July 3, 2020, the Company’s Chief Financial Officer (“CFO”) resigned and entered into a Consulting and Professional Services Agreement (“CPSA”) with the Company to provide consulting services through July 2, 2021. 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 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. 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. 112 Table of Contents 12. Net Loss Per Common Share As the Company had net losses for the years ended December 31, 2021, 2020 and 2019, all potential common shares were determined to be anti-dilutive. The following table sets forth the computation of the basic and diluted net loss per share during the years ended December 31, 2021, 2020 and 2019 (in thousands, except share and per share data): Year Ended December 31, 2021 2020 2019 Numerator: Net loss $ ( 101,361 ) $ ( 43,830 ) $ ( 54,568 ) Denominator: Weighted-average shares used to compute net loss per common share, basic and diluted 29,331,010 27,754,404 25,265,918 Net loss per common share, basic and diluted $ ( 3.46 ) $ ( 1.58 ) $ ( 2.16 ) The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per common share for the years ended December 31, 2021, 2020 and 2019 because their inclusion would be anti-dilutive: Year Ended December 31, 2021 2020 2019 Options to purchase common stock 504,106 609,881 1,503,247 RSUs issued and unvested 1,649,561 1,114,159 886,030 Total 2,153,667 1,724,040 2,389,277 13. Subsequent Events Novitas Announcement 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 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. Leases 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 113 Table of Contents