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 75 Consolidated Balance Sheets 77 Consolidated Statements of Operations 78 Consolidated Statements of Comprehensive Loss 79 Consolidated Statements of Stockholders’ Equity 80 Consolidated Statements of Cash Flows 81 Notes to the Consolidated Financial Statements 82 74 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 subsidiaries (the “Company”) as of December 31, 2023 and 2022, 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, 2023, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. 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 Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. 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 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. 75 Table of Contents 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 Company recognizes revenue from contracted third-party payors, net of contractual allowances. As of December 31, 2023, the Company’s contractual allowance balance was $53 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 (i) the significant judgment by management when developing the estimate of the contractual allowance; and (ii) 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 management’s estimate of the contractual allowance for contracted third party payors. 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; and (iv) evaluating the reasonableness of adjustments made by management to contractual allowances. /s/ PricewaterhouseCoopers LLP San Jose, California February 22, 2024 We have served as the Company’s auditor since 2009. 76 Table of Contents IRHYTHM TECHNOLOGIES, INC. Consolidated Balance Sheets (In thousands, except par value) December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 36,173 $ 78,832 Marketable securities 97,591 134,312 Accounts receivable, net 61,484 49,918 Inventory 13,973 15,155 Prepaid expenses and other current assets 21,591 10,555 Total current assets 230,812 288,772 Property and equipment, net 104,114 75,670 Operating lease right-of-use assets 49,317 60,666 Goodwill 862 862 Other assets 48,039 22,252 Total assets $ 433,144 $ 448,222 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 5,543 $ 7,517 Accrued liabilities 83,362 65,497 Deferred revenue 3,306 3,051 Operating lease liabilities, current portion 15,159 13,031 Total current liabilities 107,370 89,096 Debt, noncurrent portion 34,950 34,935 Other noncurrent liabilities 1,012 1,307 Operating lease liabilities, noncurrent portion 79,715 83,072 Total liabilities 223,047 208,410 Commitments and contingencies (Note 8) Stockholders’ equity: Preferred stock, $ 0.001 par value – 5,000 shares authorized; none issued and outstanding at December 31, 2023 and 2022 — — Common stock, $ 0.001 par value – 100,000 shares authorized; 30,954 and 30,193 shares issued and outstanding at December 31, 2023 and 2022, respectively 31 28 Additional paid-in capital 855,784 762,380 Accumulated other comprehensive loss ( 112 ) ( 396 ) Accumulated deficit ( 645,606 ) ( 522,200 ) Total stockholders’ equity 210,097 239,812 Total liabilities and stockholders’ equity $ 433,144 $ 448,222 The accompanying notes are an integral part of these consolidated financial statements. 77 Table of Contents IRHYTHM TECHNOLOGIES, INC. Consolidated Statements of Operations (In thousands, except per share data) Year Ended December 31, 2023 2022 2021 Revenue, net $ 492,681 $ 410,921 $ 322,825 Cost of revenue 160,875 129,289 109,258 Gross profit 331,806 281,632 213,567 Operating expenses: Research and development 60,244 46,610 38,671 Selling, general and administrative 385,645 322,198 274,839 Impairment and restructuring charges 11,078 26,608 — Total operating expenses 456,967 395,416 313,510 Loss from operations ( 125,161 ) ( 113,784 ) ( 99,943 ) Interest expense ( 3,650 ) ( 4,138 ) ( 1,169 ) Interest and other income, net 6,155 2,036 118 Loss before income taxes ( 122,656 ) ( 115,886 ) ( 100,994 ) Income tax provision 750 269 367 Net loss $ ( 123,406 ) $ ( 116,155 ) $ ( 101,361 ) Net loss per common share, basic and diluted $ ( 4.04 ) $ ( 3.88 ) $ ( 3.46 ) Weighted-average shares, basic and diluted 30,528 29,916 29,331 The accompanying notes are an integral part of these consolidated financial statements. 78 Table of Contents IRHYTHM TECHNOLOGIES, INC. Consolidated Statements of Comprehensive Loss (In thousands) Year Ended December 31, 2023 2022 2021 Net loss $ ( 123,406 ) $ ( 116,155 ) $ ( 101,361 ) Other comprehensive income (loss): Net change in unrealized gains (losses) from marketable securities 453 ( 335 ) ( 72 ) Cumulative translation adjustment ( 169 ) — — Comprehensive loss $ ( 123,122 ) $ ( 116,490 ) $ ( 101,433 ) The accompanying notes are an integral part of these consolidated financial statements. 79 Table of Contents IRHYTHM TECHNOLOGIES, INC. Consolidated Statements of Stockholders’ Equity (In thousands) Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balances at December 31, 2020 29,019 27 646,258 ( 304,684 ) 11 341,612 Issuance of common stock in connection with employee equity incentive plans, net 475 — 8,943 — — 8,943 Tax withholding upon vesting of restricted stock awards — — ( 25,853 ) — — ( 25,853 ) Stock-based compensation — — 56,246 — — 56,246 Net loss — — — ( 101,361 ) — ( 101,361 ) Net change in unrealized loss on marketable securities — — — — ( 72 ) ( 72 ) Balances at December 31, 2021 29,494 27 685,594 ( 406,045 ) ( 61 ) 279,515 Issuance of common stock in connection with employee equity incentive plans, net 699 1 13,182 — — 13,183 Stock-based compensation — — 63,604 — — 63,604 Net loss — — — ( 116,155 ) — ( 116,155 ) Net change in unrealized loss on marketable securities — — — — ( 335 ) ( 335 ) Balances at December 31, 2022 30,193 28 762,380 ( 522,200 ) ( 396 ) 239,812 Issuance of common stock in connection with employee equity incentive plans, net 761 3 8,817 — — 8,820 Stock-based compensation — — 84,587 — — 84,587 Net loss — — — ( 123,406 ) — ( 123,406 ) Net change in unrealized gain on marketable securities — — — — 453 453 Cumulative translation adjustment — — — — ( 169 ) ( 169 ) Balances at December 31, 2023 30,954 31 855,784 ( 645,606 ) ( 112 ) 210,097 The accompanying notes are an integral part of these consolidated financial statements. 80 Table of Contents IRHYTHM TECHNOLOGIES, INC. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2023 2022 2021 Cash flows from operating activities Net loss $ ( 123,406 ) $ ( 116,155 ) $ ( 101,361 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 16,348 13,405 9,842 Stock-based compensation 77,204 57,740 54,527 Amortization of premium and accretion of discounts, net ( 5,040 ) ( 474 ) 1,641 Provision for doubtful accounts and contractual allowances 69,628 58,349 37,074 Amortization of operating lease right-of-use assets 5,796 6,204 6,752 Impairment charges 11,078 23,164 — Other 337 264 — Changes in operating assets and liabilities: Accounts receivable ( 81,193 ) ( 61,837 ) ( 53,572 ) Inventory 979 ( 5,108 ) ( 4,960 ) Prepaid expenses and other current assets ( 11,036 ) ( 862 ) ( 2,329 ) Other assets ( 22,787 ) ( 6,200 ) ( 1,831 ) Accounts payable ( 1,973 ) ( 2,993 ) 6,135 Accrued liabilities 19,298 14,473 7,946 Deferred revenue 255 2 2,119 Operating lease liabilities ( 5,589 ) ( 2,984 ) 264 Net cash used in operating activities ( 50,101 ) ( 23,012 ) ( 37,753 ) Cash flows from investing activities Purchases of property and equipment ( 40,424 ) ( 29,830 ) ( 28,067 ) Purchases of marketable securities ( 164,285 ) ( 188,569 ) ( 122,184 ) Sales of marketable securities — 34,965 — Maturities of marketable securities 206,500 131,000 255,515 Purchase of strategic investment ( 3,000 ) — — Net cash (used in) provided by investing activities ( 1,209 ) ( 52,434 ) 105,264 Cash flows from financing activities Payment of loans — ( 21,389 ) ( 11,667 ) Proceeds from term loans — 35,000 — Proceeds from issuance of common stock in connection with employee equity incentive plans 8,820 13,182 8,943 Tax withholding upon vesting of restricted stock awards — — ( 25,853 ) Payment of issuance costs for long-term debt — ( 77 ) — Net cash provided by (used in) financing activities 8,820 26,716 ( 28,577 ) Effect of exchange rate changes ( 169 ) — — Net (decrease) increase in cash and cash equivalents ( 42,659 ) ( 48,730 ) 38,934 Cash and cash equivalents, beginning of year 78,832 127,562 88,628 Cash and cash equivalents, end of year $ 36,173 $ 78,832 $ 127,562 Supplemental disclosures of cash flow information: Interest paid $ 2,960 $ 3,317 $ 1,194 Cash taxes paid $ 1,130 $ 287 $ — Cash received from tenant improvement allowances $ 1,603 $ 3,279 $ 3,263 Non-cash investing and financing activities: Property and equipment costs included in accounts payable and accrued liabilities $ 1,888 $ 160 $ 9 Right-of-use assets obtained in exchange for operating lease liabilities $ 4,403 $ 7,686 $ 6,625 Capitalized stock-based compensation in property and equipment $ 7,383 $ 5,863 $ 3,593 The accompanying notes are an integral part of these consolidated financial statements. 81 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 leading digital healthcare company that creates trusted solutions that detect, predict, and prevent disease. The Company's principal business is the design, development, and commercialization of device-based technology to provide remote cardiac monitoring services that it believes allow clinicians to diagnose certain arrhythmias quicker and with greater efficiency than other services that rely on traditional technology. Since first receiving clearance from the U.S. Food and Drug Administration (“FDA”) for the Company's technology in 2009, the Company has supported physician and patient use of its technology and provided remote cardiac monitoring services from its Medicare-enrolled independent diagnostic testing facilities (“IDTFs”) and its qualified technicians. The Company has provided the Zio remote cardiac monitoring services, including extended Holter, traditional Holter, and mobile cardiac telemetry (“MCT”) monitoring services (“Zio Services”), using the Zio Systems. The Company is headquartered in San Francisco, California, which also serves as a clinical center. The Company has additional clinical centers in Deerfield, Illinois and Houston, Texas and a manufacturing facility in Cypress, California. The Company formed wholly owned subsidiaries in the UK in March 2016, in Singapore in June 2021, in Japan in June 2022, and in the Philippines in February 2023. 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 the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Risks and Uncertainties Macroeconomic Factors and Supply Chain Constraints The Company’s operations and performance may vary based on worldwide economic and political conditions, which have been adversely impacted by continued global economic uncertainty, political instability, and military hostilities in multiple geographies including ongoing geopolitical conflicts, such as the war in Ukraine and conflict in the Middle East, domestic and global inflationary trends, interest rate volatility, uncertainty with respect to the federal budget and debt ceiling and potential government shutdowns related thereto, potential instability in the global banking system, global supply shortages, and a tightening labor market. A severe or prolonged economic downturn or period of global political instability could drive hospitals and other healthcare professionals to tighten budgets and curtail spending, which could in turn negatively impact rates at which physicians prescribe the Company’s Zio Services. In addition, higher unemployment rates or reductions in employer-provided benefits plans could result in fewer commercially insured patients, resulting in a reduction in the Company’s margins and impairing the ability of uninsured patients to make timely payments. A weak or declining economy could also strain the Company’s suppliers, possibly resulting in supply delays and disruptions. There is also a risk that one or more of the Company’s current service providers, suppliers, or other partners may not survive such difficult economic times, which could directly affect the Company’s ability to attain its goals on schedule and on budget. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. The Company cannot predict the timing, strength, or duration of an economic downturn, instability, or recovery, whether worldwide, in the United States, or within its industry. The Company’s hybrid work arrangements and decision to pursue a sublease for its leased San Francisco headquarters resulted in an impairment of its right-of-use (“ROU”) asset and related leasehold improvements and furniture and fixtures during the year ended December 31, 2022. In the fourth quarter of 2023, the Company recorded an additional impairment of its ROU asset and related leasehold improvements and furniture and fixtures related to its leased San Francisco headquarters, due to a continued soft real estate rental market within the city proper San Francisco, California. As the Company continues to evaluate its global real estate footprint, the Company may incur additional impairment charges related to real property lease agreements. 82 Table of Contents The Company is continuously reviewing its liquidity and anticipated capital requirements. The Company believes it has adequate liquidity over the next 12 months to operate its business and to meet its cash requirements. As of December 31, 2023, the Company is in compliance with its debt covenants. Reimbursement The Company receives revenue for the Zio Services primarily from third-party payors, which include commercial payors and government agencies, such as the Centers for Medicare & Medicaid Services (“CMS”). Third-party payors require the Company to identify the service for which it is seeking reimbursement by using a Current Procedural Terminology (“CPT”) code set maintained by the American Medical Association. These CPT codes are subject to periodic change and update, which will impact the reimbursement rates for the Company’s Zio Services. CMS updates the reimbursement rates for diagnostic tests performed by IDTFs annually via the Medicare Physician Fee Schedule, and effective January 1, 2023, CMS established national payment rates for the CPT codes the Company uses to report the long-term Holter monitoring services it performs with its Zio XT System: CPT codes 93247 (for wear-time of greater than 7 days and up to 15 days) and 93243 (for wear-time of greater than 48 hours and up to 7 days). Based on the relative value units CMS assigned to CPT codes 93247 and 93243, the national reimbursement rates for these services in 2023 are $ 243.65 and $ 231.79 , respectively, and range from $ 247.59 to $ 334.46 and $ 235.54 to $ 318.17 for the Company’s Medicare-enrolled IDTF locations in Deerfield, Illinois, Houston, Texas, and San Francisco, California, when considering the geographic practice cost index for these locations. On average, the 2024 national payment rates are approximately 5 % lower than 2023 rates for services, when excluding impacts for the geographic practice cost index for the Company’s IDTF locations as noted above. Because remote cardiac monitoring technology, including the Zio System, is rapidly evolving, there is a continuing risk that relative value units assigned, and reimbursement rates set, by CMS may not adequately reflect the value and expense of this technology and associated monitoring services, and CMS may reduce these rates in the future, which would adversely affect the Company’s financial results. Use of Estimates The preparation of the consolidated financial statements in conformity with 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 years presented. 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, impairment of ROU assets, and various inputs used in estimating stock-based compensation. Actual results may differ from those estimates. For further details on estimates used to calculate the impairment on ROU assets, see Note 7, Restructuring and Impairment Charges, included in the notes to the consolidated financial statements . Reportable Segment Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by the chief operating decision maker, which the Company has identified as being the chief executive officer, in deciding how to allocate resources and assessing performance. The Company operates as one operating segment. The Company's chief operating decision maker allocates resources and assesses performance at the consolidated level. Fair Value of Financial Instruments The carrying amounts of certain of the Company’s financial instruments, which include cash equivalents, marketable securities, accounts receivable, accounts payable, accrued liabilities, and debt, 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. 83 Table of Contents Marketable Securities The Company's marketable securities consist primarily of commercial paper, corporate bonds, U.S. agency obligations and U.S. treasury securities. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The Company's policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. The Company classifies investments as available-for-sale at the time of purchase and re-evaluates such classification as of each balance sheet date. Available-for-sale debt securities with an amortized cost basis in excess of the estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Allowance for credit losses on available-for-debt securities are recognized as a charge in other income (expense), net on the Company's consolidated statements of operations and any remaining unrealized gains or losses, net of taxes, are included in accumulated other comprehensive loss in accumulated deficit on the consolidated balance sheets. There were no impairment charges for any unrealized losses during the years ended December 31, 2023, 2022, and 2021. 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 for services performed. 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 following table presents the changes in the allowance for doubtful accounts (in thousands): Year Ended December 31, 2023 2022 2021 Balance, beginning of year $ 18,475 $ 14,012 $ 12,711 Provision for doubtful accounts 17,105 17,191 9,615 Write-offs, net of recoveries and other adjustments ( 15,291 ) ( 12,728 ) ( 8,314 ) Balance, end of year $ 20,289 $ 18,475 $ 14,012 The following table presents the changes in the contractual allowance (in thousands): Year Ended December 31, 2023 2022 2021 Balance, beginning of year $ 41,389 $ 31,274 $ 21,281 Add: provision for contractual adjustments 52,523 41,158 27,459 Less: contractual adjustments ( 41,223 ) ( 31,043 ) ( 17,466 ) Balance, end of year $ 52,689 $ 41,389 $ 31,274 84 Table of Contents 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. CMS accounted for approximately 25 %, 25 % and 14 % of the Company’s revenue for the years ended December 31, 2023, 2022, and 2021, respectively. CMS accounted for 25 % and 22 % of accounts receivable as of December 31, 2023, and 2022, 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 freight costs, the cost of the components for the Company’s Zio Services, overhead costs relating to maintenance of the Company’s facilities, 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 its business, financial condition, and results of operations or cause the Company to need to obtain additional capital earlier than anticipated in the future. 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 patches and the adhesive that binds the Zio patch 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 PCBAs to the Company. The semiconductor supply shortage may have an impact on the Company until global supply is sufficient for global demand. 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 in 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 betterment are capitalized. The Company classifies internal-use software in property and equipment. Internal-use software costs are capitalized during the application development stage. Costs related to planning and post implementation activities are expensed as incurred. 85 Table of Contents Capitalized internal-use software is amortized, and recognized as cost of revenue or selling, general and administrative expenses, on a straight-line basis over the estimated useful life of three years . PCBAs The Company reuses PCBAs in each wearable Zio Monitor patch, Zio XT patch, and Zio AT patch, as well as the wireless gateway used in conjunction with the Zio AT patch. As PCBAs are used in a wearable Zio Monitor patch, Zio XT patch, or Zio AT patch, a portion of the cost of the PCBA is recorded as a cost of revenue. The PCBAs are charged over a period beyond one year. The Company bases the length of time estimates for charging a portion of the PCBAs cost by evaluating how many times a PCBA can be used in testing in research and development, device 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 and updates these estimates. PCBAs are included in Other Assets in the Company’s consolidated balance sheets. Implementation Costs in Cloud-Computing Arrangements The Company capitalizes qualified implementation costs incurred in a hosting arrangement that is a service contract for which it is the customer in accordance with the requirements for cloud computing arrangements ("CCA") to the extent it is incurred in the course of developing internal-use software. These capitalized implementation costs are generally amortized over the fixed, non-cancellable term of the associated hosting arrangement on a straight-line basis are recorded in prepaid expenses and other current assets or in other noncurrent assets. The Company amortizes capitalized implementation costs in a CCA on a straight-line basis over the terms of the associated hosting arrangement. The Company recorded an immaterial amount of amortization expense during the years ended December 31, 2023, 2022, and 2021. Goodwill Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill amounts are not amortized, but rather tested for impairment at least annually, and more frequently when changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates its business as one reporting unit and the Company completes its annual impairment test in the fourth quarter. In the event that the Company determines that the fair value of the reporting unit is less than the reporting unit's carrying value, goodwill impairment charge will be incurred for the amount of the difference during the quarter in which the determination is made. The Company did not record any goodwill impairment charges in the years ended December 31, 2023, 2022, and 2021. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net cash flows that 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. Any impairments to ROU assets, leasehold improvements, or other assets as a result of a sublease or other similar action are initially recognized when a decision to take such action is made and recorded as an operating expense. Similar to other long-lived assets, management tests ROU assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. For ROU assets, such circumstances may include subleases that do not fully recover the costs of the associated leases or commitments to sublease a property. For the years ended December 31, 2023 and 2022, the Company recorded $ 11.1 million and $ 23.2 million, respectively, of long-lived asset impairment charges in the consolidated statement of operations. In addition, see Note 7, Restructuring and Impairment Charges , included in the notes to the consolidated financial statements . Comprehensive Loss Comprehensive loss represents all changes in stockholders’ equity during the year from non-owner sources. The Company’s unrealized gains and losses on marketable 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. 86 Table of Contents Revenue Recognition The Company has developed a proprietary system that combines an FDA-cleared and CE-marked wire-free, patch-based, 14-day wearable biosensor that continuously records ECG data, with a proprietary cloud-based data analytic platform to help physicians monitor patients and diagnose arrhythmias. In addition, the Company has received CE-mark and UKCA certification for Zio XT System and ZEUS algorithm. The Company currently offers three Zio System options—the Zio Monitor System, the Zio XT System, and the Zio AT System. The Zio Monitor System is a prescription-only, remote ECG monitoring system that consists of the Zio Monitor patch that records the electric signal from the heart continuously for up to 14 days and the ZEUS algorithm, which supports the capture and analysis of ECG data recorded by the Zio Monitor patch at the end of the wear period, including specific arrhythmia events detected by the ZEUS System. The final step in the Zio Services is the delivery of an electronic Zio report to the prescribing physician with a summary of findings. The Company’s Zio Monitor services are generally billable when the Zio report is issued to the physician. The Zio XT System is the previous generation of the Zio Monitor System and is a prescription-only, remote ECG monitoring system that consists of the Zio XT patch that records the electric signal from the heart continuously for up to 14 days and the ZEUS System, which supports the capture and analysis of ECG data recorded by the Zio XT patch at the end of the wear period, including specific arrhythmia events detected by the ZEUS algorithm. The Company’s Zio XT services are generally billable when the Zio report is issued to the physician. The Zio AT System is a prescription-only, remote ECG monitoring system that similarly consists of the Zio AT patch that records the electric signal from the heart continuously for up to 14 days and the ZEUS System, but which also incorporates the Zio AT wireless gateway that provides connectivity between the Zio AT patch and the ZEUS System during the patient wear period. The wireless gateway, slightly larger than a smart phone, is provided to the patient at the time of Zio AT patch application and collects and transmits data from the Zio AT patch to the cloud via a long- term evolution protocol. The Zio AT service revenue is recognized under two performance obligations — the patient wear period and delivery of electronic Zio reports. 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 payor portfolio, as further described 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 payor, 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 IDTF 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. • 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 U.S. Department of Defense. 87 Table of Contents • 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 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. The Company is utilizing the portfolio approach practical expedient under Accounting Standard Codification ("ASC") 606, Revenue from Contracts with Customers , 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 makes estimates around the amount of denied claims within a reporting period, a process that requires 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 the Company misses the payors’ filing deadlines, which 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 the Company bills patient co-payments and deductibles and from time to time the Company 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 statements of operations. Adjustments to these estimates for actual experience are also recorded as an adjustment to bad debt expense. 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 collections indicate 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 to selling, general and administrative expense in the consolidated statements of operations. For non-contracted portfolios, the Company provides an implicit price concession due to the lack of a contracted rate with the underlying payor. As a result, the Company estimates the transaction price based on historical cash collections utilizing the expected value method. All subsequent changes to the transaction price are recorded as adjustments to revenue. Leases The Company determines if an arrangement is a lease at inception. The Company's lease agreements generally contain lease and non-lease components. Payments under its lease arrangements are primarily fixed. Non-lease components primarily include payments for maintenance and utilities. The Company combines fixed payments for non-lease components with lease payments and accounts for them together as a single lease component which increases the amount of the Company’s ROU assets and lease liabilities. Certain lease agreements contain variable payments, which are expensed as incurred and not included in the ROU assets and lease liabilities. 88 Table of Contents ROU assets and lease liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company's incremental borrowing rate, because the interest rate implicit in its leases is not readily determinable. The Company's incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. The Company's lease terms include periods under options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The Company generally uses the base, non-cancelable, lease term when determining the ROU assets and lease liabilities. ROU assets are adjusted for any prepaid lease payments and lease incentives. Cost of Revenue Cost of revenue includes direct labor, material costs, equipment and infrastructure expenses, amortization of internal use software, allocated overhead, and shipping and handling. Direct labor includes payroll-related costs including stock-based compensation involved in manufacturing, clinical data curation, and customer service. Material costs include both the disposable materials costs of the Zio patches and amortization of the re-usable PCBAs. Each Zio XT patch and Zio Monitor patch includes a PCBA, and each Zio AT patch includes a PCBA and gateway board. As PCBAs and gateway boards are used, a portion of the costs is charged to 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 personnel costs, laboratory supplies, consulting costs and overhead charges. In addition, the Company expenses milestone payments, when probable, for its development agreement with Verily as further discussed below. Selling, General and Administrative Expenses The Company's sales and marketing expenses consist of personnel costs, including stock-based compensation, and sales commissions. Other significant costs include travel expenses, consulting, public relations costs, direct marketing, tradeshow and promotional expenses and allocated facility overhead costs. The Company incurred an immaterial amount of advertising expense during each of the years ended December 31, 2023, 2022, and 2021, which is included in selling, general and administrative expenses. The Company’s general and administrative expenses consist primarily of personnel costs for executive, finance, legal, and administrative personnel, including stock-based compensation. Other significant expenses include professional fees for legal and accounting services, consulting fees, recruiting fees, bad debt expense, third-party patient claims processing fees, and travel expenses. In addition, the Company incurred transformation costs to scale its organization during the year and expects to incur additional transformation costs through mid-2024. Upon completion, the Company expects to achieve operational efficiencies in its administrative expenses. Income Taxes The Company uses the asset and liability method to account 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. 89 Table of Contents 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. Stock-Based Compensation The Company measures the estimated fair values of its restricted stock units (“RSUs”) based on the closing price of the Company's stock on the grant date. For performance-based restricted stock units (“PRSUs”), the Company estimates the fair value based on the closing price of its stock on the grant date and, if the award includes a market condition, a Monte Carlo simulation model. In addition, for PRSUs, the Company applies a probability assessment to determine the probable achievement of the performance-based metrics. 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 is recognized as compensation expense on a straight-line basis over the requisite service period. The Company recognizes compensation expense related to its 2016 Employee Stock Purchase Plan (“ESPP”) based on the fair value at each enrollment date of the offering period using the Black-Scholes-Merton option-pricing model value. The stock-based compensation is reduced by the estimated forfeiture and 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. Recent Accounting Pronouncements In November 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which updates reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The amendments are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating this ASU to determine its impact on the Company's consolidated financial statements and related disclosures. In December 2023, the FASB issued ASU No. 2023-09 (“ASU 2023-09”), Income Taxes (Topic 740): Improvement to Income Tax Disclosures to enhance the transparency and decision usefulness of income tax disclosures. Two primary enhancements related to this ASU include disaggregating existing income tax disclosures relating to the effective tax rate reconciliation and income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on the Company's consolidated financial statements and related disclosures. 90 Table of Contents 3. REVENUE 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, 2023, 2022, and 2021 were as follows (in thousands, except percentages): Year Ended December 31, 2023 2022 2021 Amount % of Revenue Amount % of Revenue Amount % of Revenue Contracted third-party payors $ 267,195 54 % $ 223,984 55 % $ 193,871 60 % Centers for Medicare and Medicaid 122,414 25 % 103,032 25 % 44,529 14 % Healthcare institutions 71,001 14 % 59,772 14 % 57,496 18 % Non-contracted third-party payors 32,071 7 % 24,133 6 % 26,929 8 % Total $ 492,681 $ 410,921 $ 322,825 Revenue generated from the United States comprised substantially all of the Company's revenue. No other country comprised 10% or greater of the Company's revenue during each of the years ended December 31, 2023, 2022, and 2021. Contract Liabilities ASC 606, Revenue from Contracts with Customers, 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 revenue when Zio reports are delivered to the healthcare provider. During the years ended December 31, 2023 and 2022, $ 3.0 million related to the contract liability balance at the beginning of 2023 and 2022, was recognized as revenue. The advance payments liability was $ 3.3 million and $ 3.1 million as of December 31, 2023 and 2022, respectively. Contract Costs Under ASC 340, Other Assets and Deferred Costs ("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, because the asset that would have resulted from capitalizing these costs will be amortized in one year or less. 91 Table of Contents 4. CASH EQUIVALENTS AND MARKETABLE SECURITIES The fair value of cash equivalents and marketable securities at December 31, 2023 and 2022, were as follows (in thousands): December 31, 2023 Amortized Cost Gross Unrealized Fair Value Gains Losses Money market funds $ 12,594 $ — $ — $ 12,594 U.S. government securities 97,534 59 ( 2 ) 97,591 Total cash equivalents and marketable securities $ 110,128 $ 59 $ ( 2 ) $ 110,185 Classified as: Cash equivalents $ 12,594 Marketable securities 97,591 Total cash equivalents and marketable securities $ 110,185 December 31, 2022 Amortized Cost Gross Unrealized Fair Value Gains Losses Money market funds $ 24,263 $ — $ — $ 24,263 U.S. government securities 134,709 12 ( 409 ) 134,312 Total cash equivalents and marketable securities $ 158,972 $ 12 $ ( 409 ) $ 158,575 Classified as: Cash equivalents $ 24,263 Marketable securities 134,312 Total cash equivalents and marketable securities $ 158,575 Unrealized gains (losses) during the years ended December 31, 2023, 2022, and 2021 were not material. As of December 31, 2023, the weighted average maturity for the Company's marketable securities were 80 days. 5. 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. 92 Table of Contents 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 U.S. 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 Company's debt obligation is classified as Level 2 input. As of December 31, 2023 and 2022, the fair value of the Company’s outstanding interest-bearing obligation approximated the carrying value of $ 35.0 million and $ 34.9 million, respectively. The Company holds a strategic investment that it does not measure at fair value on a recurring basis. The carrying value of this investment is $ 3.0 million as of December 31, 2023. The Company includes this investment in other assets in its consolidated balance sheets. The Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value. The following tables present the fair value of the Company’s financial assets determined using the inputs defined above (in thousands): December 31, 2023 Level 1 Level 2 Level 3 Total Assets Money market funds $ 12,594 $ — $ — $ 12,594 U.S. government securities — 97,591 — 97,591 Total $ 12,594 $ 97,591 $ — $ 110,185 December 31, 2022 Level 1 Level 2 Level 3 Total Assets Money market funds $ 24,263 $ — $ — $ 24,263 U.S. government securities — 134,312 — 134,312 Total $ 24,263 $ 134,312 $ — $ 158,575 6. BALANCE SHEET COMPONENTS Inventory Inventory consisted of the following (in thousands): December 31, 2023 2022 Raw materials and work-in-progress $ 6,299 $ 9,338 Finished goods 7,674 5,817 Total $ 13,973 $ 15,155 93 Table of Contents Other Assets Other assets consisted of the following (in thousands): December 31, 2023 2022 PCBAs $ 38,987 $ 18,599 Cloud computing arrangements 4,959 2,523 Strategic investment 3,000 — Other 1,093 1,130 Total $ 48,039 $ 22,252 The Company reuses PCBAs in each wearable Zio Monitor patch, Zio XT patch, and Zio AT patch, as well as the wireless gateway used in conjunction with the Zio AT patch. As PCBAs are used in a wearable Zio Monitor patch, Zio XT patch, or Zio AT patch, a portion of the cost of the PCBA is recorded as a cost of revenue. The PCBAs are charged over a period beyond one year . Charges to cost of revenue were $ 39.0 million, $ 18.6 million, and $ 13.9 million as of December 31, 2023, 2022, and 2021, respectively. During the year ended December 31, 2023, PCBAs increased by $ 20.4 million primarily related to the expanded launch of the Zio Monitor System, as well as additional needs for the Zio XT patches and Zio AT patches. Property and Equipment Property and equipment, net consisted of the following (in thousands): December 31, 2023 2022 Laboratory and manufacturing equipment $ 6,007 $ 4,911 Computer equipment and software 3,905 2,315 Furniture and fixtures 4,020 4,119 Leasehold improvements 24,885 23,144 Internal-use software 61,980 44,877 Internal-use software in development 43,701 28,069 Construction in progress 10,119 3,451 Total property and equipment, gross 154,617 110,886 Less: accumulated depreciation and amortization ( 50,503 ) ( 35,216 ) Total property and equipment, net $ 104,114 $ 75,670 Depreciation and amortization expense for the years ended December 31, 2023, 2022 and 2021 was $ 16.3 million, $ 13.4 million and $ 9.8 million, respectively, of which amortization related to internal-use software, was $ 12.2 million, $ 9.8 million, and $ 6.6 million, for the years ended December 31, 2023, 2022 and 2021, respectively. During the year ended December 31, 2023, internal-use software, both in service and in development, increased by $ 32.7 million compared to the year ended December 31, 2022. This increase related to enhancements in the Company’s core technology, products and services and artificial intelligence, as well as investment in future technology, such as the Zio Monitor System, the Company's new biosensor technology. 94 Table of Contents Accrued Liabilities Accrued liabilities consisted of the following (in thousands): December 31, 2023 2022 Accrued payroll and related expenses $ 47,656 $ 34,752 Accrued vacation 8,608 8,608 Accrued professional services fees 3,715 7,234 Accrued expenses 14,891 7,006 Claims payable 4,578 4,464 Accrued state and foreign income and sales taxes 2,877 2,388 Accrued employee share purchase plan contributions 1,037 1,045 Total accrued liabilities $ 83,362 $ 65,497 During the years ended December 31, 2023 and 2022, the Company has incurred expenses in connection with efforts to further globalize its operational footprint. Included above in accrued payroll and related expenses as of December 31, 2023 were $ 2.4 million of costs related to globalization. 7. IMPAIRMENT AND RESTRUCTURING CHARGES The Company's restructuring and impairment charges consisted of the following (in thousands): Year Ended December 31, 2023 2022 Restructuring charges $ — $ 3,444 Impairment charges 11,078 23,164 Total $ 11,078 $ 26,608 Restructuring In February 2022, the Company's board of directors (the “Board”) approved a restructuring plan ("2022 Restructuring Plan") to allow it to effectively and efficiently scale its business, which resulted in severance and other employment related costs of $ 3.4 million during the year ended December 31, 2022. The following table provides a summary of changes in the liability associated with the 2022 Restructuring Plan (in thousands): Employee Severance Balance as of December 31, 2021 $ — Charges 3,444 Cash Payments ( 3,050 ) Balance as of December 31, 2022 394 Charges — Cash Payments ( 394 ) Balance as of December 31, 2023 $ — 95 Table of Contents Impairment In February 2022, the Board approved a plan to reduce the Company’s leased space for its headquarters in San Francisco, California. The Company initiated an effort to pursue a sublease of one floor (approximately 50 %) of its San Francisco, California facility. As a result, the Company recorded an impairment charge of $ 23.2 million, consisting of its ROU asset and property and equipment (inclusive of leasehold improvements and furniture and fixtures) of $ 20.5 million and $ 2.7 million, respectively. The impairment was recorded to Restructuring and impairment charges within the consolidated statements of operations for the year ended December 31, 2022. At December 31, 2023, the Company recorded an additional impairment of its ROU asset and related property and equipment (inclusive of leasehold improvements and furniture and fixtures) for its headquarters in San Francisco, California. Due to continued declining real estate rental market conditions within San Francisco, California, the Company evaluated projected future cash flows related to the Company’s headquarters as compared to the remaining carrying value of the associated ROU asset and property and equipment. As a result, the Company recorded an additional impairment charge of $ 11.1 million, consisting of its ROU asset and property and equipment (inclusive of leasehold improvements and furniture and fixtures) of $ 9.9 million and $ 1.2 million, respectively. The impairment was recorded to Restructuring and impairment charges within the consolidated statements of operations for the year ended December 31, 2023. Significant judgment and estimates are required in assessing impairment of ROU assets, including identifying whether events or changes in circumstances require an impairment assessment, estimating future cash flows, and determining appropriate discount rates. The Company has engaged a leasing broker and has formalized a marketing plan for the San Francisco office market since the first quarter of 2022. The sublease market for commercial office space is currently very challenging in the San Francisco area due to lower demand for leased office space as most companies have adjusted to allowing their employees to work from home during and after the COVID-19 pandemic. The Company believes that it is likely to be able to sublease a portion of its existing office space, but at a rate below the amount that it is currently paying. The Company estimated undiscounted future cash flows from its vacant office lease based on the Company’s intent and ability to sub-lease the vacant office space, based on the facts and circumstances discussed below, which it had ceased using and estimated future sub-lease income considering the local real estate market conditions. The Company also factored into its estimate the amount of time to identify a tenant, sublease rental market transactions within San Francisco business districts, entering into a sublease agreement, and expected rent concessions offered to future tenants. The Company estimated the fair value of the ROU asset related to the vacant office lease by discounting the estimated undiscounted future cash flows using the average lease capitalization rate, plus average inflation rate, for other lease transactions in the local area during the year. The Company's impairment charges consisted of the following (in thousands): December 31, 2023 2022 ROU asset $ 9,912 $ 20,451 Leasehold improvements 1,067 2,211 Furniture and fixtures 99 502 Total $ 11,078 $ 23,164 For further details on the Company's leases, refer to Note 8 . Commitments and Contingencies . 8. COMMITMENTS AND CONTINGENCIES Purchase Commitments As of January 1, 2024, the Company's purchase commitments totaled $ 40.5 million, primarily related to inventory and PCBAs. 96 Table of Contents Leases The Company leases office, manufacturing, and clinical centers under non-cancelable operating leases which expire on various dates through 2033. These leases generally contain scheduled rent increases or escalation clauses and renewal options. Operating lease ROU 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 ROU 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 ROU asset as they are based on actual usage. The Company recognizes operating lease expenses, generally on a straight-line basis over the lease period. In July 2023, the Company entered into an approximately seven-year facility lease in San Diego, California, as corporate office space. The lease provides an option to extend the term of the lease for one five-year period beyond the initial term, which the Company is not reasonably certain to exercise and therefore was not considered in determining the ROU assets and lease liabilities balance. Total lease payments approximate $ 4.6 million as of the lease commencement date. In August 2023, the Company entered into a five-year facility lease in Manila, Philippines, in order to further globalize the Company's operational footprint as a business service center. The lease provides an option to extend the term of the lease for two periods of five years beyond the initial term, which the Company is not reasonably certain to exercise and therefore was not considered in determining the ROU assets and lease liabilities balance. Total lease payments approximate $ 2.1 million as of the lease commencement date. Contractual obligations under operating lease liabilities were as follows (in thousands): Year Ended December 31: 2024 $ 14,407 2025 15,634 2026 16,096 2027 16,493 2028 16,384 Thereafter 47,032 Total lease payments 126,046 Less: imputed interest ( 31,172 ) Total lease liabilities $ 94,874 Other information related to the operating leases were as follows: Year Ended December 31, 2023 2022 2021 Operating lease expense (in thousands) $ 12,861 $ 13,524 $ 13,500 Weighted average remaining lease term (years) 7.8 8.8 9.6 Weighted average discount rate (percentage) 7.3 % 7.3 % 7.3 % 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 the Company's reputation, business, and financial condition and divert the attention of its management from the operation of the Company's business. These matters are subject to many uncertainties and outcomes that are not predictable. 97 Table of Contents On February 1, 2021, a putative class action lawsuit was filed in the United States District Court for the Northern District of California (the “Court”) 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, its former Chief Executive Officer, Michael J. Coyle, and former Chief Financial Officer and former Chief Operating 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, which the Court granted on March 31, 2022, entering judgment in favor of the Company and the other defendants. On April 29, 2022, the original named plaintiff appealed to the Ninth Circuit Court of Appeals. On October 11, 2023, after briefing by the parties and oral argument, the Ninth Circuit dismissed the appeal for lack of jurisdiction. The appellant filed a petition for rehearing en banc, which was denied on December 6, 2023. On February 6, 2024, a second putative class action lawsuit was filed in the Court alleging that the Company's current Chief Executive Officer, Quentin Blackford, the Company's current Chief Financial Officer, Brice Bobzien, and Mr. Devine violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder, and seeks unspecified damages purportedly sustained by the class. The Company believes the above securities class action lawsuits to be without merit and plans to continue to defend itself vigorously. On March 25, 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 FDA and the Company's products and services. On September 13, 2021, the Company received a second subpoena requesting additional information. On April 4, 2023, the Company received a Subpoena Duces Tecum from the Consumer Protection Branch, Civil Division of the U.S. Department of Justice, requesting production of various documents regarding the Company’s products and services. The Company is cooperating fully on these matters. On February 20, 2024, Welch Allyn, a subsidiary of Hill-Rom Holdings, Inc. which was acquired by Baxter International, Inc., filed a lawsuit against the Company in the United States District Court for the District of Delaware, alleging that the Company's Zio patches infringe certain of its patents. Welch Allyn seeks money damages and attorneys’ fees. The Company believes this lawsuit is without merit and plans to defend itself vigorously. Development Agreement On September 3, 2019, the Company entered into a Development Collaboration Agreement with Verily Life Sciences LLC, an Alphabet company (“VLS”) and Verily Ireland Limited (“VIL” and together with VLS, “Verily”) (such Development Collaboration Agreement, as amended by Amendment No. 1 dated April 26, 2021 and Amendment No.2 dated January 24, 2022, the “Development Agreement”). The Development Agreement 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 (“Afib”) screening, detection, or monitoring products pursuant to the Development Agreement, which products will involve combining Verily's 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 agreed to make additional milestone payments to Verily up to an aggregate of $ 12.75 million upon achievement of various development and regulatory milestones over the term of the Development Agreement. We have achieved milestones tied to payments totaling $ 11.0 million to date and expect to make additional payments over the term of the Development Agreement of $ 1.75 million, subject to the achievement of specified milestones. The Development Agreement provides each party with licenses to use certain intellectual property of the other party for development activities in the field of Afib 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. 98 Table of Contents 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. 9. DEBT In October 2018, the Company entered into the Third Amended and Restated Loan and Security Agreement ("SVB Loan Agreement") with Silicon Valley Bank (“SVB”). Under the SVB Loan Agreement, the Company had borrowed $ 35.0 million and had made repayments through March 2022, at which time the outstanding balance was $ 18.5 million. On March 28, 2022, the Company entered into a Second Amendment (“2022 Amendment”) to its SVB Loan Agreement which provided for a term loans facility in the aggregate principal amount of up to $ 75.0 million (the “2022 Term Loans”), of which $ 35.0 million was borrowed at closing and a portion of the proceeds was used to pay in full the outstanding balance of $ 18.5 million under the SVB Loan Agreement. The remaining $ 40.0 million of 2022 Term Loans may be borrowed from time to time at the Company’s option, in increments of at least $ 10.0 million, through December 31, 2023. The Company will pay interest only on the 2022 Term Loans until April 1, 2025, when it will commence repaying the 2022 Term Loans in 24 equal consecutive monthly installments, with all obligations under the 2022 Term Loans maturing on March 1, 2027. Interest charged on the 2022 Term Loans will accrue at a floating per annum rate equal to the greater of: (A) the Prime Rate plus 0.25 %; and (B) 3.5 %. The Company is also required to pay fees on any prepayment of the 2022 Term Loans, ranging from 1.0 % to 3.0 % depending on the date of prepayment, and a final payment equal to 5.0 % of the principal amount of the 2022 Term Loans drawn. Once repaid or prepaid, the 2022 Term Loans may not be reborrowed. The Company accounted for the refinancing as an extinguishment of the original loans and paid a fee of $ 1.8 million, which was included in interest expense on the Consolidated Statement of Operations and recorded the 2022 Term Loans, net of issuance costs. The issuance costs on the new loans are amortized over the term of the loan. The 2022 Amendment also amended the terms of the revolving credit line under the SVB Loan Agreement, which provided for an aggregate principal amount of $ 25.0 million, to: (i) extend the maturity date from August 1, 2023 to March 1, 2027, (ii) increase the letters of credit sublimit to $ 15.0 million and (iii) increase the cash management services sublimit to $ 15.0 million. Interest charged on the principal amount outstanding under the revolving credit line accrues at a floating per annum rate equal to the greater of (A) the Prime Rate plus 0.25 % and (B) 3.5 %. The Company is required to pay an annual fee equal to 0.15 % of the revolving credit line. As of December 31, 2023, no loans were outstanding under the revolving credit line and the Company had used $ 8.4 million in letters of credit. The 2022 Amendment also amended the SVB Loan Agreement to require the Company to comply, as of the last day of each fiscal quarter, with a quick ratio of at least 1.0 to 1.15 or minimum adjusted EBITDA trailing 6 months of at least $ 15.0 million. As of March 27, 2023, in connection with the closure of SVB by the California Department of Financial Protection and Innovation and the Federal Deposit Insurance Corporation, First-Citizens Bank & Trust Company assumed all of SVB’s deposits and loans. The Company continued to have access to the revolving credit line and letters of credit available pursuant to the SVB Loan Agreement and was in compliance with its loan covenants, as of December 31, 2023. Interest expense recognized during the years ended December 31, 2023, 2022, and 2021 which included amortization of debt issuance costs, was $ 3.4 million, $ 2.1 million, and $ 1.2 million during the years ended December 31, 2023, 2022, and 2021, respectively. 99 Table of Contents Future minimum payments Contractual obligations as of December 31, 2023 for the 2022 Term Loans comprise of principal and interest payments as follows (in thousands): Year Ended December 31, 2024 $ 3,114 2025 15,841 2026 18,728 2027 4,440 Total 42,123 Less: Amount representing interest ( 7,123 ) Less: Debt issuance costs ( 50 ) Principal payments $ 34,950 On January 3, 2024, the Company entered into a Credit, Security and Guaranty Agreement (the “Braidwell Credit Agreement”) with Braidwell Transaction Holdings LLC – Series 5 (“Braidwell”). In conjunction with the transaction, the Company repaid and terminated the 2022 Term Loans and the revolving credit line. As of the date of the termination, the Company continued to maintain the $ 8.4 million in letters of credit with SVB, securing them with cash on deposit. See Note 16, Subsequent Events to the Consolidated Financial Statements for more information regarding the Braidwell Credit Agreement and SVB repayment and termination. 10. INCOME TAXES The components of income (loss) before provision for income taxes are as follows (in thousands): Year Ended December 31, 2023 2022 2021 United States $ ( 122,974 ) $ ( 116,600 ) $ ( 101,459 ) Foreign 318 714 465 Income (Loss) before provision for income taxes $ ( 122,656 ) $ ( 115,886 ) $ ( 100,994 ) The provision for (benefit from) income taxes consists of the following (in thousands): Year Ended December 31, 2023 2022 2021 Current expense: Federal $ — $ — $ — State 401 160 223 Foreign 349 111 150 Total current tax expense 750 271 373 Deferred tax benefit: Federal — — — State — — — Foreign — ( 2 ) ( 6 ) Total deferred tax benefit — ( 2 ) ( 6 ) Total tax expense $ 750 $ 269 $ 367 100 Table of Contents Income tax expense differs from the amount computed by applying the statutory federal income tax rate as follows: (in thousands): Year Ended December 31, 2023 2022 2021 Tax at statutory federal rate $ ( 25,758 ) $ ( 24,323 ) $ ( 21,198 ) State income taxes, net of federal benefit 371 160 223 Stock-based compensation ( 820 ) ( 3,492 ) ( 7,049 ) Meals and entertainment 361 348 182 Section 162(m) limitation - officers compensation 5,217 2,498 4,856 Other 823 526 ( 347 ) Tax credits ( 2,160 ) ( 2,695 ) ( 381 ) Foreign rate differential 37 ( 40 ) ( 30 ) Change in valuation allowance 22,679 27,287 24,111 Provision for income taxes $ 750 $ 269 $ 367 The components of the net deferred tax assets are as follows (in thousands): December 31, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 127,503 $ 111,236 Tax credit carryforwards 16,401 29,455 Stock-based compensation 10,801 11,942 Capital research expenditures 18,849 15,997 Allowances and other 31,952 19,399 Lease obligation 23,817 24,232 Depreciation and amortization 519 — Total deferred tax assets 229,842 212,261 Less: Valuation allowance ( 217,779 ) ( 188,070 ) Net deferred tax assets 12,063 24,191 Deferred tax liabilities: Depreciation and amortization $ — $ ( 9,402 ) ROU assets ( 12,005 ) ( 14,731 ) Total deferred tax liabilities ( 12,005 ) ( 24,133 ) Total deferred tax assets $ 58 $ 58 The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. The Company establishes a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. The Company weighs all available positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. 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 $ 29.7 million, $ 33.3 million and $ 30.9 million for the years ended December 31, 2023, 2022, and 2021, respectively. The current year change in the U.S. valuation allowance is primarily related to the increase in reserves and research and development not currently deductible. The Company recorded an immaterial deferred tax asset related to the Company’s foreign operations in the UK. 101 Table of Contents The valuation allowance for deferred tax assets consisted of the following activity for the years ended December 31, 2023, 2022, and 2021 (in thousands): Balance at Beginning of Year Additions Deductions Balance at End of Year Year Ended December 31, 2023 $ 188,070 $ 29,709 $ — $ 217,779 Year Ended December 31, 2022 154,734 33,336 — 188,070 Year Ended December 31, 2021 123,803 30,931 — 154,734 As of December 31, 2023, the Company had approximately $ 506.2 million of federal and $ 338.8 million of state net operating loss carryforwards available to offset future taxable income which expires in varying amounts beginning in 2030 and 2023, respectively. Federal losses incurred from 2019 can be carried forward indefinitely. As of December 31, 2023, the Company had research tax credit carryforwards of approximately $ 13.4 million, and $ 10.3 million available to reduce future taxable income, if any, for both federal and state purposes, respectively. The federal tax credit carryforwards expire beginning in 2027 and the California tax credits can be carried forward indefinitely. Federal and state tax laws impose restrictions on the utilization of net operating loss carryforwards in the event of a change in our ownership as defined by the Internal Revenue Code (the "Code"), Section 382. Under Section 382 of the Code, substantial changes in our ownership and the ownership of acquired companies may limit the amount of net operating loss carryforwards that are available to offset taxable income. The annual limitation would not automatically result in the loss of net operating loss carryforwards but may limit the amount available in any given future period. A reconciliation of the beginning and ending unrecognized tax benefit amount is as follows (in thousands): Year Ended December 31, 2023 2022 2021 Balance at beginning of year $ 4,732 $ 3,310 $ 2,302 Additions for tax positions taken in current year 1,080 996 772 Increases in balance related to prior year tax positions — 426 236 Decreases in balance related to prior year tax positions ( 38 ) — — Balance at end of year $ 5,774 $ 4,732 $ 3,310 The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes. The Company determined that no accrual for interest or penalties was required as of December 31, 2023, 2022, and 2021. 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 U.S. 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. 11. 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, subject to the prior rights of holders of all series of convertible preferred stock outstanding. No dividends were declared through December 31, 2023. 102 Table of Contents The Company had reserved shares of common stock for issuance as follows (in thousands): December 31, 2023 2022 Options issued and outstanding 307 328 Unvested restricted stock units and performance-based restricted stock units 1 2,438 2,026 Shares available for grant under future stock plans 6,765 7,823 Shares available for future issuance 9,510 10,177 1 PRSUs are based on the maximum number of PRSUs in the key executive grant agreements. The actual number of PRSUs granted will be based on company performance criteria and relative Total Shareholder Return ("TSR"), as discussed in Note 13, Equity Incentive Plans 12. EMPLOYEE BENEFIT PLANS 401(k) Plan The Company has a defined contribution 401(k) retirement plan (the "401(k) Plan") covering substantially all employees in the United States. Employees who participate in the 401(k) Plan may contribute up to 90 % of eligible compensation each year, subject to Internal Revenue Service limitations and the terms and conditions of the plan. Under the terms of the 401(k) Plan, the Company may elect to match a discretionary percentage of contributions. The Company matches contributions up to 50 % and a maximum of $ 5,000 per year. Total matching contributions were $ 5.6 million, $ 5.1 million, and $ 3.3 million for the years ended December 31, 2023, 2022, and 2021, respectively. 13. EQUITY INCENTIVE PLANS 2016 Plan In October 2016, the Company adopted the 2016 Equity Incentive Plan, (the “2016 Plan”). The 2016 Plan was approved by the Company’s stockholders and became effective on October 19, 2016. On the first day of each fiscal year starting from the 2017 fiscal year, the 2016 Plan authorizes an annual increase in the number of shares available for issuance equal to the least of (i) 3,865,000 shares, (ii) 5 % of the shares of the Company’s common stock outstanding on the last day of the immediately preceding fiscal year or (iii) such number of shares determined by the Board. As of December 31, 2023, the Company has reserved 6,764,972 shares of common stock for issuance under the 2016 Plan. A summary of awards available for grant under the Company's 2016 Equity Incentive Plan is as follows (in thousands): Shares Available for Grant Balance as of December 31, 2021 7,160 Additional awards authorized 1,476 Awards granted 1 ( 1,036 ) Awards forfeited 1 223 Balance as of December 31, 2022 7,823 Awards granted 1 ( 1,373 ) Awards forfeited 1 315 Balance as of December 31, 2023 6,765 1 Awards granted and forfeited include PRSUs, which are based on the maximum number of PRSUs in the key executive grant agreements. The actual number of PRSUs granted will be based on company performance criteria and relative TSR, as described below. Pursuant to the 2016 Plan, stock options, restricted stock, RSUs, performance units, performance shares, and stock appreciation rights may be granted to employees, consultants and directors of the Company. Stock options were not granted during the years ended December 31, 2023, 2022 and 2021. 103 Table of Contents Employee Stock Purchase Plan In October 2016, the Board and stockholders approved the 2016 Employee Stock Purchase Plan (“ESPP”) which provides eligible employees of the Company with an opportunity to purchase shares of the Company's common stock at a discounted price through accumulated contributions not exceeding $ 25,000 in a given calendar year. On the first day of each fiscal year, the number of shares reserved for the ESPP increases by the least of (i) 966,062 shares, (ii) 1.5 % of the shares of the Company’s common stock outstanding on the last day of the immediately preceding fiscal year, or (iii) such number of shares determined by the Board. 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 six-month purchase periods. At the end of each purchase period, employees 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. If the stock price of the Company's common stock on any purchase date in an offering period is lower than the stock price on the first trading date of that offering period, the offering period will immediately reset after the purchase of shares on such purchase date and automatically roll into a new offering period. Restricted Stock Units and Performance-Based Restricted Stock Units The fair value of RSUs and PRSUs are based on the Company’s closing stock price on the date of grant. The fair value of market based PRSUs were estimated at the date of grant using the Monte-Carlo option pricing model. A summary is as follows (in thousands, except weighted average grant date fair value): Restricted Stock Units Performance Based Restricted Stock Units and Market-Based Units Shares Underlying RSUs Weighted Average Grant Date Fair Value Shares Underlying PRSUs 1 Weighted Average Grant Date Fair Value Balance as of December 31, 2021 1,360 $ 84.99 288 $ 119.21 Granted 691 147.94 345 138.99 Vested ( 390 ) 85.55 ( 47 ) 257.61 Forfeited ( 196 ) 110.22 ( 25 ) 109.82 Balance as of December 31, 2022 1,465 111.16 561 120.22 Granted 903 114.84 470 124.17 Vested ( 622 ) 96.54 ( 24 ) 107.05 Forfeited ( 204 ) 121.08 ( 111 ) 127.07 Balance as of December 31, 2023 1,542 $ 117.90 896 $ 121.80 1 Based on the maximum number of performance based restricted stock units in the key executive grant agreements, the actual number of units granted will be based on the annual unit volume compound annual growth rate ("CAGR") as described below. As of December 31, 2023, there was total unamortized compensation costs of $ 127.5 million, net of estimated forfeitures, related to RSUs, which the Company expects to recognize over a weighted average period of 1.8 years. Aggregate intrinsic value of the RSUs was $ 165.1 million, $ 137.2 million, and $ 160.1 million as of December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, 1.4 million shares of RSUs were expected to vest with an aggregate intrinsic value of $ 153.9 million. Total grant date fair value of vested RSUs was $ 60.0 million, $ 33.4 million, and $ 22.3 million during the years ended December 31, 2023, 2022, and 2021, respectively. 104 Table of Contents As of December 31, 2023, there was total unamortized compensation costs of $ 41.3 million, net of estimated forfeitures, related to PRSUs, which the Company expects to recognize over a weighted average period of 2.1 years. Aggregate intrinsic value of the PRSUs was $ 95.9 million, $ 52.6 million, and $ 33.9 million as of December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, 0.9 million shares of PRSUs were expected to vest with an aggregate intrinsic value of $ 92.0 million. Total grant date fair value of vested PRSUs was $ 2.6 million, $ 12.1 million, and $ 20.9 million during the years ended December 31, 2023, 2022, and 2021, respectively. PRSUs and Market-based RSUs The Company grants PRSUs to its key executives. PRSUs can be earned in accordance with the performance equity program for each respective grant. In February 2023, the Company granted PRSUs (“February 2023 awards”) to be earned based on the CAGR calculated between fiscal year 2025's and fiscal year 2022's annual unit volume and measuring a minimum performance threshold of 15 % to earn 50.0 % of target, and a maximum threshold of 25 % achieved to earn 200.0 % of target. These February 2023 awards are subject to the recipient's continued employment through the vesting date of March 15, 2026. In addition, in February 2023, the Company granted market-based PRSUs to senior executive officers. These PRSUs to be earned will be based on the CAGR calculated between fiscal year 2025's and fiscal year 2022's annual unit volume and measuring performance thresholds mentioned above, as well as a comparison of the S&P Healthcare Index to the Company's TSR. The grant date fair value of the TSR was based on the expected term of 2.9 years, interest risk free rate of 4.5 %, implied volatility of 83.8 % and no dividend yield. These February 2023 awards are subject to the respective senior executive officer's continued employment through the vesting date of March 15, 2026. In August 2023, the Company granted market-based retention PRSUs ("August 2023 awards") to its Chief Executive Officer, other senior executive officers, and other members of the Company’s management team. The purpose of the performance-based awards was tied to several important long-term operational objectives, including to: (i) create stability among the leadership team, (ii) retain other critical talent and (iii) drive achievement of strategic objectives while the Company transforms and scales its business model. The performance period of the August 2023 awards will be measured between July 1, 2023 and June 30, 2026, with Company results subject to adjustment by the Company’s TSR as compared to the TSR of the S&P Healthcare Index. The grant date fair value of the TSR was based on the expected term of 2.9 years, interest risk free rate of 4.4 %, implied volatility of 80.1 % and no dividend yield. The August 2023 awards are subject to the respective continued employment of the recipients through the vesting date of August 7, 2026. 105 Table of Contents Options The following table summarizes stock option activity: Options Outstanding Options Outstanding (in thousands) Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Balance at December 31, 2021 504 $ 40.97 5.20 $ 38,675 Options exercised ( 175 ) 36.82 Options forfeited ( 1 ) 83.15 Balance at December 31, 2022 328 43.00 4.43 16,635 Options exercised ( 21 ) 52.56 Options forfeited — — Balance at December 31, 2023 307 42.34 3.29 19,859 Options exercisable – December 31, 2023 307 42.34 3.29 19,859 Options vested and expected to vest – December 31, 2023 307 $ 42.34 3.29 $ 19,859 There have been no options granted since December 31, 2019. As of December 31, 2023, the options were fully vested. The total estimated grant date fair value of options vested during the period was $ 0.1 million, $ 2.4 million, and $ 2.8 million for the years ended December 31, 2023, 2022, and 2021, respectively. Employee Stock Purchase Plan The Company issued approximately 94,000 , 88,000 , and 95,000 shares of common stock under the ESPP during the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023, approximately 2.1 million shares of the Company's common stock remained available for issuance under the ESPP. The ESPP provides for 12 -month offering periods that contain two six-month purchase periods. The Company determined the fair value of the stock purchase rights under the ESPP using the Black-Scholes option pricing model with the following assumptions for the specified periods. Year Ended December 31, 2023 2022 2021 Expected Term (years) 0.5 - 1 0.5 - 1 0.5 - 1 Expected Volatility 48.8 % - 59.2 % 68.1 % - 96.3 % 93.9 % - 106.9 % Dividend Yield — % — % — % Risk-Free Interest Rate 5.1 % - 5.4 % 1.6 % - 4.7 % 0.0 % - 0.2 % As of December 31, 2023, the Company had $ 3.9 million of unrecognized compensation expense that will be recognized over a weighted average period of 0.7 years. 106 Table of Contents 14. STOCK-BASED COMPENSATION 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, 2023 2022 2021 Cost of revenue $ 3,603 $ 2,153 $ 1,896 Research and development 11,391 6,976 5,565 Selling, general and administrative 62,210 48,611 47,066 Total stock-based compensation expense $ 77,204 $ 57,740 $ 54,527 Non-Employee Stock-Based Compensation On January 12, 2021, the Company’s Chief Executive Officer (the “former CEO”) resigned and entered into a Consulting and Professional Services Agreement (“CPSA”) with the Company. Pursuant to the original terms of the awards, the former CEO continued 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 Board. 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. The total expense related to the former CEO’s non-employee stock-based compensation recognized for the year ended December 31, 2021 was $ 5.4 million. In March 2022, the former CEO retired from the Board and as a non-employee consultant. Vesting for all outstanding awards was accelerated upon his retirement. The Company recognized expense of $ 0.9 million related to the retirement of the former CEO during the year ended December 31, 2022. On June 3, 2022, the Company’s former Chief Clinical Officer (the “former CCO”) retired and entered into a Consulting Agreement (“CA”) with the Company. Pursuant to the original terms of the awards, the former CCO will continue to vest in her outstanding awards as long as services are provided to the Company under the CA 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 CA in the current period as an equity-based severance cost because the consulting services are not substantive. The total expense related to the former CCO’s non-employee stock-based compensation recognized $ 0.4 million for the year ended December 31, 2022. On July 25, 2022, the Company’s former Executive Vice President, Chief Commercial Officer (the “former EVP”) resigned and entered into a CA with the Company. Pursuant to the original terms of the agreement, the former EVP continues to vest in outstanding awards during the period of his CA services. In accordance with ASC 718, Compensation - Stock Compensation , the Company will continue to record stock-based compensation expense related to the awards expected to vest over the duration of the CA, because the consulting services are substantive. The total expense related to the former EVP’s non-employee stock-based compensation recognized for each of the years ended December 31, 2023 and 2022 was $ 0.1 million. On March 10, 2023, the Company’s former Chief Operating Officer (the “former COO”) resigned and entered into a CA with the Company through July 2024. Pursuant to the terms of the CA, the former COO continues to vest in outstanding awards as long as services are provided to the Company under the CA as a non-employee consultant. In accordance with ASC 718, Compensation – Stock Compensation , the Company recognized expense related to all awards expected to vest over the duration of the CA in 2023 as an equity-severance cost because the consulting services are not substantive. The total expense related to the former COO’s non-employee stock-based compensation recognized for the year ended December 31, 2023 was $ 1.1 million. 107 Table of Contents 15. NET LOSS PER COMMON SHARE As the Company had net losses for the years ended December 31, 2023, 2022, and 2021, 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, 2023, 2022, and 2021 (in thousands, except per share data): Year Ended December 31, 2023 2022 2021 Numerator: Net loss $ ( 123,406 ) $ ( 116,155 ) $ ( 101,361 ) Denominator: Weighted-average shares used to compute net loss per common share, basic and diluted 30,528 29,916 29,331 Net loss per common share, basic and diluted $ ( 4.04 ) $ ( 3.88 ) $ ( 3.46 ) The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per common share for the years ended December 31, 2023, 2022, and 2021 because their inclusion would be anti-dilutive (in thousands): Year Ended December 31, 2023 2022 2021 Options to purchase common stock 307 328 504 RSUs and PRSUs 1 unvested 2,438 2,026 1,650 Total 2,745 2,354 2,154 1 PRSUs are based on the maximum number of PRSUs in the key executive grant agreements. The actual number of PRSUs granted will be based on company performance criteria and relative TSR, as discussed in Note 13, Equity Incentive Plan and Stock-Based Compensation. 16. SUBSEQUENT EVENT On January 3, 2024 (the “Closing Date”), the Company entered into the Braidwell Credit Agreement with Braidwell, which provides for a senior secured delayed draw term loan facility in an aggregate principal amount of up to $ 150.0 million (the “Braidwell Term Loan Facility”). An initial tranche of $ 75.0 million (“Initial Loan”) was funded on the Closing Date. In addition to the Initial Loan, the Braidwell Term Loan Facility includes an additional tranche of $ 75.0 million (the “Delayed Draw Loan,” and together with the Initial Loan, the “Term Loans”), which will be accessible by the Company through the one year anniversary of the Closing Date, so long as it satisfies certain customary conditions precedent, including compliance with financial covenants and continued accuracy of the representations and warranties provided by the Company in the Credit Agreement. The Braidwell Term Loan Facility has a maturity date of January 3, 2029 (the “Maturity Date”) and provides, at the Company’s election, for payment of a portion of interest in kind during the term of the loan with principal and accrued interest due at the Maturity Date. Upon repayment of the Term Loans (whether at the Maturity Date or upon earlier prepayment), the Company is required to pay an exit fee equal to 2.75 % of the principal amount being repaid. The Braidwell Term Loan Facility will accrue interest at an annual rate equal to the sum of (a) the SOFR Rate and (b)(i) an applicable margin of 6.50 % if paid in cash, or (ii) an applicable margin of 6.95 %, if, at the Company’s election, if a portion of interest is paid in kind. Accrued interest on the Term Loans is payable quarterly in arrears. The Company is also required to pay fees on any prepayment of the Term Loans, ranging from zero to 2.0 % depending on the date of prepayment. In connection with the entry into the Braidwell Credit Agreement, the Company’s SVB Loan Agreement was terminated, effective as of the Closing Date, and SVB’s security interest in the Company’s assets and property was released. The Company’s net proceeds from the Initial Loan were approximately $ 35 million, after deducting estimated debt issuance costs, fees and expenses, and repayment of the Company’s existing term loan from SVB. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None 108 Table of Contents