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Item 7. Management’s Discussion and Analysis

2025-02-20 compared with 2024-02-22 · 154 added, 97 removed, 196 unchanged (56% of the section changed)

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Our principal business is the design, development, and commercialization of device-based technology to provide remote cardiac monitoring services that we believe allow clinicians to diagnose certain arrhythmias quicker and with greater efficiency than other services that rely on traditional technology.

Each Zio System combines an FDA-cleared and CE-marked, wire-free, patch-based,14-day wearable biosensor that continuously records ECG data with a proprietary, FDA-cleared, CE-marked cloud-based data analytic software to help physicians monitor patients and diagnose arrhythmias.

Since receiving FDA clearance, we have provided the Zio Services to over six million patients and have collected over 1.8 billion hours of curated heartbeat data.

Each Zio System combines an FDA-cleared, CE-marked and Japan PMDA-approved wire-free, patch-based, 14-day wearable biosensor that continuously records ECG data with a proprietary, FDA-cleared, CE-marked cloud-based data analytic software to help physicians monitor patients and diagnose arrhythmias.

Since receiving FDA clearance, we have provided the Zio Services to over eight million patients and have collected over 2 billion hours of curated heartbeat data.

Since first receiving clearance from FDA for our technology in 2009, we have supported physician and patient use of our technology and provided ambulatory cardiac monitoring services from our Medicare-enrolled IDTFs and with our qualified technicians.

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In addition, this measure is frequently used by analysts, investors, and other interested parties to evaluate and assess performance.

We define Adjusted EBITDA for a particular period as net loss before income tax provision, depreciation and amortization, interest expense, and interest income and as further adjusted for stock-based compensation expense, impairment and restructuring charges, and business transformation costs.

Business transformation costs include professional services and employee termination costs to augment and restructure the organization, inclusive of both outsourced and offshore resources.

We define Adjusted EBITDA for a particular period as net loss before income tax provision, depreciation and amortization, interest expense, interest income and as further adjusted for stock-based compensation expense, changes in fair value of strategic investments, impairment and restructuring charges, business transformation costs, and loss on extinguishment of debt.

Business transformation costs include costs associated with professional services, employee termination and relocation, third-party merger and acquisition, integration, and other costs to augment and restructure the organization, inclusive of both outsourced and offshore resources.

Adjusted EBITDA is a non-GAAP financial measure and is presented for supplemental informational purposes only and should not be considered as an alternative or substitute to financial information presented in accordance with GAAP.

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2024 2023 2022

Net loss $ (123,406) $ (116,155) $ (101,361)

$ (113,289) $ (123,406) $ (116,155)

Interest expense 12,821 3,650 4,138

Interest income (21,938) (6,353) (2,350)

Changes in fair value of strategic investments

Income tax provision 565 750 269

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Business transformation costs 11,072 15,866 5,082

Loss on extinguishment of debt

Adjusted EBITDA $ (7,748) $ (4,863) $ (11,263)

1 Net loss for the year ended December 31, 2024 includes $32.4 million of acquired in-process research and development expense.

Macroeconomic Factors

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Hospitals are experiencing staffing shortages and supply chain issues that could affect their ability to provide patient care.

Additionally, hospitals are facing significant financial pressure as supply chain constraints and inflation drive up operating costs, rising interest rates make access to credit more expensive, unrealized losses decrease available cash reserves, and fiscal stimulus programs enacted during the COVID-19 pandemic continue to wind down.

Additionally, hospitals are facing significant financial pressure as supply chain constraints and inflation drive up operating costs, interest rate volatility make access to credit more expensive, and unrealized losses decrease available cash reserves.

As a consequence of the financial pressures and decreased profitability, some hospitals have indicated that they are lowering their capital investment plans and tightening their operational budgets.

Climate-related events, including the increasing frequency of extreme weather events, natural disasters, or other catastrophic events may cause damage or disruption to our domestic or global customers or our operations, which could have an adverse effect on our business, operating results, and financial condition.

We have adapted our Zio Services to meet the immediate needs of physicians, customers, and patients and significantly increased the utilization of our home enrollment service, which allows patients to receive and wear the single-use Zio patch without going to a healthcare facility.

Our hybrid work arrangements and decision to pursue a sublease for our leased San Francisco headquarters resulted in an impairment of our 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, we recorded an additional impairment of our ROU asset and related leasehold improvements and furniture and fixtures on our leased San Francisco headquarters, due to a continued soft real estate rental market within the city proper San Francisco, California.

As we continue to evaluate our global real estate footprint, we may incur additional impairment charges related to real property lease agreements.

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A small percentage of our revenue is from non-contracted third-party payors.

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

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

These estimates require significant judgment by management.

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We believe this is the result of physicians and patients taking vacations and patients electing to delay our monitoring services during the summer months or holidays.

Revenue may be impacted by the outcome of adjudications with contracted and non- contracted payors, as well as changes in CMS reimbursement rates like we experienced with final, lower rates being established for our Zio Services as of January 1, 2024.

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

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

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.

Cost of revenue includes direct labor, material costs, equipment and infrastructure expenses, amortization of internal-use software, allocated overhead, royalties, 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 printed circuit board assemblies (“PCBAs”).

Each Zio XT patch and Zio Monitor patch includes a PCBA, and each Zio AT patch includes a PCBA and gateway board, the cost of which is amortized over the anticipated number of uses of the board.

Each Zio XT patch and Zio Monitor patch includes a PCBA, and each Zio AT patch includes a PCBA and gateway board, the cost of which is amortized over the expected useful life of the board.

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

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

We expect increases to the cost of revenues due to increases to materials and electronics components pricing, labor rates, shipping rates, amortization of capitalized internal-use software, and increases in the general level of inflation, partially offset by reduced costs from obtaining volume purchase discounts for our material costs, implementing scan-time algorithms and process improvements, automating manufacturing assembly and packaging, and through software-driven and other workflow enhancements to reduce labor costs.

We expect increases to the cost of revenues due to increases to materials and electronics components pricing, labor rates, shipping rates, amortization of capitalized internal-use software, along with increases in the general level of inflation and potential tariffs on imports (which may complicate and increase costs associated with our supply chain).

We expect to partially offset these increases by reduced costs from obtaining volume purchase discounts for our material costs, implementing scan-time algorithms and process improvements, automating manufacturing assembly and packaging, and through software-driven and other workflow enhancements to reduce labor costs.

We experienced an improvement in gross margin from 2023 to 2024, and continue to focus on improving gross margins in the future, while navigating through the macroeconomic and supply chain headwinds discussed above that we expect to face.

Research and Development Expenses

We expense research and development costs as they are incurred.

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

In addition, we expense milestone payments, when probable, for the Development Agreement with Verily.

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

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

Acquired In-Process Research and Development Expenses

Our in-process research and development acquired in an asset acquisition for use in research and development activities with no alternative future use is expensed in the consolidated statements of operations.

Selling, General and Administrative Expenses

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

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

In addition, we incurred business transformation costs to scale our organization during 2022 and 2023, which are intended to achieve operational efficiencies in our administrative expenses over the long-term.

Interest Income

Interest income consists of interest income received on our cash and cash equivalents and marketable securities.

Interest Expense

Interest expense is attributable to borrowings under our loan agreements.

Interest expense is attributable to borrowings under our loan agreements and 2029 Notes.

See Note 9, Debt, in the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K (the “Consolidated Financial Statements”) for further information on our loan agreements.

Interest and Other Income, Net

Interest and other income, net consists primarily of interest income which consists of interest received on our cash and cash equivalents and marketable securities as well as realized and unrealized foreign currency exchange gains or losses.

Other Income (Expense), Net

Other income (expense), net consists primarily of changes in fair value of our strategic loan and equity investments, as well as realized and unrealized foreign currency exchange gains or losses.

Loss on Extinguishment of Debt

Loss on extinguishment of debt reflects the losses incurred in the early repayment of debt.

See Note 9, Debt, in the notes to our Consolidated Financial Statements for further information on our loss on extinguishment of debt.

Results of Operations

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Year Ended December 31,

2023 % Revenue 2022 % Revenue $ Change

2024 % Revenue 2023 % Revenue $ Change % Change

(dollars in thousands, except percentages)*

Revenue $ 492,681 100 % $ 410,921 100 % $ 81,760 20 %

$ 591,839 100 % $ 492,681 100 % $ 99,158 20 %

Cost of revenue 184,308 31 % 160,875 33 % 23,433 15 %

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Research and development 71,459 12 % 60,244 12 % 11,215 19 %

Acquired in-process research and development

32,371 5 % — — % 32,371 N/M

Selling, general and administrative 418,565 71 % 385,645 78 % 32,920 9 %

3 unchanged sentences

Loss from operations (115,505) (20) % (125,161) (25) % 9,656 (8) %

Interest and other income (expense), net:

Interest income

21,938 4 % 6,353 1 % 15,585 245 %

Interest expense

Interest and other income, net

(12,821) (2) % (3,650) (1) % (9,171) 251 %

Loss on extinguishment of debt

(7,589) (1) % — — % (7,589) N/M

Other income (expense), net

1,253 — % (198) — % 1,451 (733) %

Total interest and other income (expense), net

2,781 — % 2,505 1 % 276 11 %

Loss before income taxes (112,724) (19) % (122,656) (25) % 9,932 (8) %

1 unchanged sentence

Net loss $ (113,289) (19) % $ (123,406) (25) % $ 10,117 (8) %

Revenue increased $81.8 million, or 20%, to $492.7 million during the year ended December 31, 2023, as compared to $410.9 million during the year ended December 31, 2022.

The increase in revenue was primarily attributable to increases in the volume of Zio Services resulting from increased demand, partially offset by a slight decline in average selling price.

N/M - Not meaningful

* Certain numbers expressed may not sum due to rounding.

Revenue increased by $99.2 million, or 20%, to $591.8 million during the year ended December 31, 2024, as compared to $492.7 million during the year ended December 31, 2023.

The increase in revenue was primarily attributable to increases in the volume of Zio Services resulting from increased demand.

Average selling price remained relatively stable period over period.

Cost of Revenue

Cost of revenue increased $31.6 million, or 24%, to $160.9 million during the year ended December 31, 2023, as compared to $129.3 million during the year ended December 31, 2022.

The increase in cost of revenue was primarily due to increases in headcount-related costs associated with the increase in volume of Zio Services, as well as an increase of approximately $3.1 million for excess Zio XT PCBA components, and an increase of approximately $2.7 million in amortization of Zio XT PCBAs in conjunction with the commercial launch of Zio Monitor.

Cost of revenue increased by $23.4 million, or 15%, to $184.3 million during the year ended December 31, 2024, as compared to $160.9 million during the year ended December 31, 2023.

The increase in cost of revenue was primarily due to increases in headcount-related costs associated with the increase in volume of Zio Services.

For the twelve months ended December 31, 2024, additional impacts to cost of revenue include an increase of approximately $4.0 million in amortization charges for Zio XT and Zio Monitor PCBAs in conjunction with the ongoing commercial launch of Zio Monitor, an increase of $3.4 million for freight-related charges in connection with our increased volume of Zio Services, and an increase of approximately $2.7 million in amortization charges for capitalized internal use software which support our revenue generation.

Research and Development Expenses

Research and development expenses increased $13.6 million, or 29%, to $60.2 million during the year ended December 31, 2023, as compared to $46.6 million during the year ended December 31, 2022.

Our research and development expenses remained proportionately inline relative to revenue between 2023 and 2022.

The increase in research and development expenses was primarily due to higher headcount-related costs (including stock-based compensation) and further development, enhancement, and functionality of our current and future product offerings.

Research and development expenses increased by $11.2 million, or 19%, to $71.5 million during the year ended December 31, 2024, as compared to $60.2 million during the year ended December 31, 2023.

The increase in research and development expenses during the twelve months ended December 31, 2024 was primarily due to higher headcount-related costs (including stock-based compensation), consulting costs to support regulatory affairs, product development, and legal matters, and further development, enhancement and functionality of our current and future product offerings.

Acquired In-Process Research and Development

Acquired IPR&D expense was $32.4 million during the year ended December 31, 2024.

The expense was related to the Technology License Agreement (the “License Agreement”) we entered into with BioIntelliSense, Inc.

(“BioIS”) during the third quarter of 2024.

See Note 8, Commitments and Contingencies, in the notes to our Consolidated Financial Statements for further details.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $63.4 million, or 20%, to $385.6 million during the year ended December 31, 2023, as compared to $322.2 million during the year ended December 31, 2022.

Our selling, general and administrative expenses remained proportionately inline relative to revenue between 2023 and 2022.

The increase in selling, general and administrative expenses was primarily attributable to an increase in headcount-related costs (including stock-based compensation) to support growth in our operations, as well as for incremental headcount, including executive hires, to the organization.

Additionally, business transformation costs within our selling, general and administrative expenses increased approximately $10.8 million primarily associated with global expansion to scale the organization.

In 2023, we also experienced increases in legal and consulting costs to support regulatory and legal matters, as well as increases in software and hardware costs to support the growth in our infrastructure.

Selling, general and administrative expenses increased by $32.9 million, or 9%, to $418.6 million during the year ended December 31, 2024, as compared to $385.6 million during the year ended December 31, 2023.

The increase in selling, general, and administrative expenses was primarily attributable to third-party patient claims processing fees and legal fees, offset by reductions in stock-based compensation and professional fees to support scaling the organization.

During the twelve months ended December 31, 2024, we incurred $11.1 million of business transformation costs primarily related to severance, professional fees, and third-party merger and acquisition fees.

During the twelve months ended December 31, 2023, we incurred $15.9 million of business transformation costs primarily related to severance and professional fees, to drive efficiencies and streamline our global operations.

Impairment and Restructuring Charges

Impairment and restructuring expenses decreased $15.5 million, or 58%, to $11.1 million during the year ended December 31, 2023, as compared to $26.6 million during the year ended December 31, 2022.

In the first quarter of 2022, our Board of Directors ("Board") approved a plan to reduce our leased space for our headquarters in San Francisco, California.

We initiated an effort to pursue a sublease of one floor (approximately 50%) of our San Francisco, California facility.

As a result, we recorded an impairment charge associated with our right of use ("ROU") leased asset and property and equipment of $23.2 million for the year ended December 31, 2022.

Additionally, in the first quarter of 2022, our Board approved a restructuring plan, which resulted in severance and other employment related costs of $3.4 million for the year ended December 31, 2022.

During the fourth quarter of 2023, we recorded an additional impairment of our ROU asset and related property and equipment for our headquarters in San Francisco, California, due to real estate rental market conditions within San Francisco, California, of $11.1 million for the year ended December 31, 2023.

Impairment and restructuring expenses decreased by $10.4 million, or 94%, to $0.6 million during the year ended December 31, 2024, as compared to $11.1 million during the year ended December 31, 2023.

During the year ended December 31, 2024, we recorded an impairment charge of $0.6 million related to internal-use software in development not expected to be completed.

During the fourth quarter of 2023, we recorded an impairment of our ROU asset and related property and equipment for our headquarters in San Francisco, California, due to real estate rental market conditions within San Francisco, California, of $11.1 million for the year ended December 31, 2023.

Interest Income

Interest income increased by $15.6 million to $21.9 million during the year ended December 31, 2024, as compared to $6.4 million during the year ended December 31, 2023.

The increase was attributable to higher market interest rates earned from our cash, cash equivalents and marketable securities, as well as an increase in the average invested balances during the year ended December 31, 2024 as compared to the year ended December 31, 2023, primarily as a result of the borrowing under the 2029 Notes in March 2024.

Interest Expense

Interest expense decreased by $0.5 million to $3.7 million during the year ended December 31, 2023, as compared to $4.1 million during the year ended December 31, 2022.

During the year ended December 31, 2022, we incurred financing fees of $1.75 million associated with the second amendment to the SVB Loan Agreement (as defined below).

Offsetting this reduction resulted in an increase in interest expense of $1.3 million due to higher interest rates period over period.

Interest and other income, net

Interest and other income, net increased by $4.1 million to $6.2 million for the year ended December 31, 2023, as compared to $2.0 million for the year ended December 31, 2022.

The increase is primarily due to higher interest earned from our cash and cash equivalents and marketable securities during the year ended December 31, 2023.

Liquidity and Capital Expenditures

Interest expense increased by $9.2 million to $12.8 million during the year ended December 31, 2024, as compared to $3.7 million during the year ended December 31, 2023.

The increase in interest expense was primarily attributable to the $75.0 million Braidwell Term Loan Facility (as defined below) borrowed and repaid during the first quarter of 2024, as well as the $661.3 million 2029 Notes borrowed in March 2024.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was $7.6 million during the year ended December 31, 2024.

The increase was related to the early extinguishment of both the SVB Loan Agreement and the Braidwell Term Loan Facility during the first quarter of 2024.

See Note 9, Debt, to our Consolidated Financial Statements for more information.

Other Income (Expense), Net

Other income (expense), net increased by $1.5 million to $1.3 million during the year ended December 31, 2024, as compared to other income (expense), net $(0.2) million during the year ended December 31, 2023.

The increase was primarily attributable to the changes in the fair value of our strategic debt and equity investments recognized during the year ended December 31, 2024.

Liquidity and Capital Resources

As of December 31, 2024, we had cash and cash equivalents of $419.6 million, marketable securities of $116.0 million, and accounts receivable of $79.9 million.

In addition, we had $16.6 million available under a revolving credit line.

We continuously review our liquidity and anticipated capital requirements in light of the significant uncertainty created by the current macroeconomic environment, including inflation, interest rate volatility, uncertainty with respect to the federal budget and debt ceiling and potential government shutdowns related thereto, and potential instability in the global banking system.

We intend to continue to make investments to support our business, which may require us to engage in equity or debt financings to secure additional funds.

We believe that our current cash, cash equivalents, marketable securities balances, and term loans facility (discussed below), together with income to be derived from the sales of our Zio Services, will be sufficient to meet our liquidity requirements for at least the next 12 months.

During the first quarter of 2024, we experienced a temporary delay in the billing of our contracted and non-contracted payer customers, performed by our third-party claims processing vendor.

The delay was due to a cybersecurity incident experienced by Change Healthcare, a division of UnitedHealth Group, which our third-party vendor engages for services relating to billing and collections.

While we substantially cleared the billing backlog as of the end of the first quarter of 2024, the delay in billing resulted in a temporary delay in our cash collections.

As of December 31, 2024, we have received a significant portion of our cash collections from the delayed billings.

We believe that our current cash, cash equivalents, and marketable securities balances, together with income to be derived from the sales of our Zio Services, will be sufficient to meet our liquidity requirements for at least the next 12 months.

On September 3, 2019, we 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, the “Development Agreement”).

Under the terms of the Development Agreement, we agreed to make milestone payments to Verily up to an aggregate of $12.75 million upon achievement of various development and regulatory milestones.

We have achieved milestones tied to payments totaling $11.0 million through December 31, 2023, and anticipate making additional milestone payments of $1.75 million, subject to the achievement of specified milestones.

We have achieved milestones tied to payments totaling $11.0 million through December 31, 2024, and we are obligated to make additional milestone payments of $1.75 million, subject to the achievement of specified milestones.

On August 30, 2024, we entered into a License Agreement with BioIS, pursuant to which (i) we will receive a perpetual fully paid up license to certain of BioIS’ intellectual property, technology and products for research, development and commercialization of potential next generation products and services in certain fields of use, including an exclusive license to develop and commercialize pulse oximetry, accelerometry, and trending non-invasive blood pressure technologies for use within our ambulatory cardiac monitoring products and services, and (ii) the parties agreed to negotiate in good faith a supply agreement for pulse oximetry hardware.

Under the terms of the License Agreement, during the third quarter of 2024 we paid BioIS an upfront fee of $15.0 million in cash consideration in acceptance of the initial transfer of certain licensed technologies and data following the execution of the License Agreement.

In connection with the License Agreement, we also purchased an aggregate of $40.0 million of convertible promissory notes from BioIS of which $20.0 million of the convertible promissory notes (“Milestone Notes”) were designated for satisfaction of our regulatory milestone payment obligations.

The Milestone Notes, plus accrued and unpaid interest, if any, shall be cancelled, if outstanding, upon the achievement of the regulatory milestones up through December 31, 2026.

The following table summarizes our cash flows for the years indicated (in thousands):

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2024 2023 $ Change

Net cash used in operating activities

Net cash provided by (used in) operating activities

$ 3,390 $ (50,101) $ 53,491

Net cash (used in) provided by investing activities

Net cash used in investing activities

(122,983) (1,209) (121,774)

Net cash provided by (used in) financing activities

Net cash provided by financing activities

511,381 8,820 502,561

Operating Activities

During the year ended December 31, 2023, cash used in operating activities was $50.1 million, an increase of $27.1 million, as compared to $23.0 million during the year ended December 31, 2022.

The increase was primarily attributable to the timing of collections and payments associated with our accounts receivable, inventory, prepaid expenses and other current assets, other assets, and operating leases.

During 2023, we purchased additional PCBAs for use with Zio XT and in anticipation of the Zio Monitor commercial launch, resulting in a $20.4 million increase year over year and recorded within other assets on our consolidated balance sheets.

During the year ended December 31, 2024, cash provided by operating activities was $3.4 million, as compared to $50.1 million cash used in operating activities during the year ended December 31, 2023.

Cash provided by operating activities increased by $53.5 million primarily attributable to a reduction in our loss from operations, favorable impacts from decreases in prepaid and other current assets, and favorable impacts from a reduction in other long-term assets, primarily from lower levels of purchases of PCBAs.

Investing Activities

During the year ended December 31, 2023, cash used in investing activities was $1.2 million, a decrease of $51.2 million as compared to cash used in investing activities of $52.4 million during the year ended December 31, 2022.

The decrease was primarily attributable to a net increase in proceeds from marketable securities of $64.8 million, partially offset by increases in purchases of property and equipment of $10.6 million and the purchase of a strategic investment of $3.0 million.

During the year ended December 31, 2024, cash used in investing activities was $123.0 million, an increase of $121.8 million as compared to cash used in investing activities of $1.2 million during the year ended December 31, 2023.

The increase in cash used in investing activities was primarily attributable to a net decrease in the change in marketable securities of $59.3 million, an increase of $54.0 million related to the purchase of strategic loan investments, and the acquisition of in-process research and development from BioIS of $15.0 million.

Offsetting these increases in uses of cash was a decrease in property and equipment expenditures of $6.5 million.

Financing Activities

During the year ended December 31, 2023, cash provided by financing activities was $8.8 million, a decrease of $17.9 million, as compared to $26.7 million during the year ended December 31, 2022.

The decrease was primarily attributed to net proceeds during the first half of 2022 of $13.6 million, associated with a $35.0 million term loan offset by a $21.4 million debt repayment.

Additionally, there was a decrease of $4.4 million in proceeds from the issuance of common stock in connection with our employee equity incentive plan.

During the year ended December 31, 2024, cash provided by financing activities was $511.4 million, an increase of $502.6 million, as compared to $8.8 million provided by financing activities during the year ended December 31, 2023.

The increase was primarily attributed to $661.3 million in proceeds received from the issuance of our 2029 Notes.

The increase was offset by $37.8 million associated with the payment of the SVB Loan Agreement and related termination costs, payment of $5.6 million associated with the Braidwell Term Loan Facility debt issuance and termination costs, payment of $17.4 million associated with debt issuance costs for our 2029 Notes, payment of $72.4 million for the purchase of the 2029 Capped Calls, and payment of $25.0 million for the repurchase of shares of our common stock.

1.50% Senior Convertible Notes due 2029

On March 7, 2024, we completed an offering of $661.3 million aggregate principal amount of unsecured senior convertible notes with a stated interest rate of 1.50% and a maturity date of September 1, 2029.

The proceeds include the full exercise of the option granted by us to the initial purchasers of the 2029 Notes to purchase up to an additional $86.3 million aggregate principal amount of notes.

Interest on the 2029 Notes is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2024.

The net proceeds from the offering, after deducting initial purchasers’ discounts and costs directly related to the offering, were approximately $643.8 million.

The initial conversion rate of the 2029 Notes is 6.7927 shares per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $147.22 per share, subject to adjustments.

The 2029 Notes may be settled in cash, stock, or a combination thereof, solely at our discretion.

We used approximately $72.4 million of the net proceeds from the offering to pay the cost of the 2029 Capped Calls, as described below.

In addition, we used approximately $80.2 million of the net proceeds from the offering for the repayment in full of the indebtedness outstanding from the Initial Loan of the Braidwell Term Loan Facility (as each such term is defined below).

We also used approximately $25.0 million of the net proceeds from the offering to repurchase 229,252 shares of our common stock at a purchase price of $109.05 per share in privately negotiated transactions effected through one of the initial purchasers or its affiliate.

These repurchases could increase (or reduce the size of any decrease in) the market price of our common stock, and could result in a higher effective conversion price for the 2029 Notes.

We intend to use the remainder of the net proceeds from the offering for general corporate purposes.

No principal payments are due on the 2029 Notes prior to maturity.

Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the indenture relating to the 2029 Notes includes customary terms and covenants, including certain events of default after which the 2029 Notes may be due and payable immediately.

In connection with the offering of the 2029 Notes, we entered into the privately negotiated capped call transactions (the “2029 Capped Calls”) with certain financial institutions.

The 2029 Capped Calls will cover, subject to anti-dilution adjustments substantially similar to those applicable to the 2029 Notes, the number of shares of our common stock that will initially underlie the 2029 Notes.

The 2029 Capped Calls are expected generally to reduce potential dilution to our common stock upon conversion of the 2029 Notes and/or offset any cash payments that we could be required to make in excess of the principal amount of converted 2029 Notes, as the case may be, with such reduction and/or offset subject to a cap.

The 2029 Capped Calls have an initial cap price of $218.10 per share, subject to adjustments, which represents a premium of 100% over the closing price of our common stock of $109.05 per share on the Nasdaq Global Select Market on March 4, 2024.

We completed the purchase of the 2029 Capped Calls on March 7, 2024, for the amount of $72.4 million.

Braidwell Debt

On January 3, 2024 (the “Closing Date”), we entered into the Credit, Security and Guaranty Agreement (the “Braidwell Credit Agreement”) with Braidwell Transactions Holdings LLC – Series 5 (“Braidwell”), which provided for a senior secured term loan 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.

An additional tranche of $75.0 million was accessible through the one-year anniversary of the Closing Date, so long as we satisfied certain customary conditions.

Our net proceeds from the Initial Loan were approximately $35.0 million, after deducting costs, fees and expenses, and repayment of our existing term loan from Silicon Valley Bank, as discussed below.

On March 7, 2024, in conjunction with the issuance of the 2029 Notes, we used approximately $80.2 million of the net proceeds for the repayment in full of the $75.0 million outstanding Initial Loan and $5.2 million for interest, fees and expenses associated with terminating the Braidwell Credit Agreement.

SVB Term Loan

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

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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.

As of December 31, 2023, no loans were outstanding under the revolving credit line and we had used $8.4 million in letters of credit.

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.

We continue to have access to the revolving credit line and letters of credit available pursuant to the SVB Loan Agreement and we were in compliance with our loan covenants as of December 31, 2023.

On January 3, 2024, we 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, we repaid and terminated the 2022 Term Loans and the revolving credit line.

As of the date of this filing, we continue to hold $8.4 million in letters of credit with SVB, securing them with cash on deposit.

Braidwell Debt

On January 3, 2024, we 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.

An additional tranche of $75.0 million will be accessible through the one year anniversary of the Closing Date, so long as we satisfy certain customary conditions.

The Braidwell Term Loan Facility has a maturity date of January 3, 2029 and provides, at our 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), we are 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 Secured Overnight Financing Rate (“SOFR”) and (b)(i) an applicable margin of 6.50% if paid in cash, or (ii) an applicable margin of 6.95%, if, at our election, if a portion of interest is paid in kind.

Accrued interest on the Braidwell Term Loan Facility is payable quarterly in arrears.

We are also required to pay fees on any prepayment of the Braidwell Term Loan Facility, ranging from zero to 2.0% depending on the date of prepayment.

Our net proceeds from the Initial Loan were approximately $35 million, after deducting estimated debt issuance costs, fees and expenses, and repayment of our existing term loan from Silicon Valley Bank.

For additional information, see the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 8, 2024.

On January 3, 2024, in connection with the entry into the Braidwell Credit Agreement, we used approximately $37.8 million of the net proceeds for the repayment in full of the $35.0 million outstanding principal balance as well as interest, fees and expenses associated with terminating the agreement.

Upon termination of the SVB Loan Agreement, SVB’s security interest in our assets and property was released.

We continue to hold $8.4 million in letters of credit with SVB, securing them with cash on deposit.

Critical Accounting Policies and Estimates

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• Revenue recognition;

• Assessment of collectability of accounts receivable which results in uncollectible allowance for doubtful accounts and contractual allowances;

• How many times a PCBA can be used for testing in research and development, loss rates, product obsolescence, and the amount of time it takes the device to go through the manufacturing, shipping, customer shelf, and patient wear time and upload process;

• Provision for credit losses and contractual allowances;

• PCBA valuation;

• Stock-based compensation;

• Lease impairment;

• Contingent consideration.

Revenue Recognition

We have 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, we have received CE-mark and UKCA certification for Zio XT System and ZEUS algorithm.

We have developed proprietary systems that combine a 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.

We currently offer 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 System, 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 algorithm.

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 final step in the Zio Services is the delivery of an electronic Zio report to the prescribing physician with a summary of preliminary findings.

Our Zio Monitor services are generally billable when the Zio report is issued to the physician.

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Our 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 patch and the ZEUS System during the patient wear period.

the Zio AT wireless gateway that provides connectivity between the 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 LTE protocol.

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Based on history with these portfolios and the similar nature and characteristics of the patients within each portfolio, we have 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, we recognize revenue, net of contractual allowances, and recognize an allowance for doubtful accounts for uncollectible patient accounts receivable.

For contracted and CMS portfolios, we recognize revenue, net of contractual allowances, and recognize a provision for credit losses for uncollectible patient accounts receivable.

The transaction price is determined based on negotiated rates, and our historical experience of collecting substantially all of these contracted rates.

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All subsequent changes to the transaction price are recorded as adjustments to revenue.

Accounts Receivable, Allowance for Doubtful Accounts, and Contractual Allowances

Accounts receivable include amounts due to us from healthcare institutions, third-party payors, and government payors and our related patients as a result of our normal business activities.

Accounts receivable is reported on the consolidated balance sheets net of an estimated allowance for doubtful accounts and contractual allowances.

We establish an allowance for doubtful accounts for estimated uncollectible receivables based on our assessment of the collectability of customer accounts and recognize the provision as a component of selling, general and administrative expenses.

Provision for Credit Losses and Contractual Allowances

Accounts receivable include amounts due to us from healthcare institutions, third-party payors, government payors and our related patients as a result of our normal business activities.

Accounts receivable is reported on the consolidated balance sheets net of an estimated provision for credit losses and contractual allowances.

We establish a provision for credit losses for estimated uncollectible receivables based on our assessment of the collectability of customer accounts and recognize the provision as a component of selling, general and administrative expenses.

We record a provision for contractual allowances based on the estimated differences between contracted amounts and expected collection rates.

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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.

We base our 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.

We base our length of time estimates for charging a portion of the PCBAs cost through several considerations, including evaluation during product development, device loss rates, product launches and obsolescence, and the amount of time it takes the device to go through the manufacturing, shipping, customer shelf, and patient wear time and upload process.

We periodically evaluate and update these estimates.

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We 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.

Contingent Consideration

Certain agreements we entered into involve payments that are contingent upon the achievement of milestones.

Contingent consideration obligations incurred in connection with acquired in-process research and development assets are recorded at fair value, with changes in fair value recorded to acquired in-process research and development expenses in the consolidated statements of operations.

As of December 31, 2024, we held $17.4 million of contingent consideration liabilities related to development milestones from the acquisition of licensed technologies from BioIS.

The expected probability of achievement of those milestones has been estimated at 75% - 90% as of December 31, 2024.

If the milestones are achieved by their due dates, we estimate an additional $4.8 million of additional contingent consideration.

However, if the milestones are not achieved by their due dates, no contingent consideration may be due.

Material Cash Requirements

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• Purchase commitments - From time to time in the ordinary course of business, we enter into a variety of purchase arrangements including but not limited to, purchase arrangements related to components used in manufacturing our products.

See Note 8, Commitments and Contingencies, to our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for more information.

See Note 8, Commitments and Contingencies, to our Consolidated Financial Statements for more information.

• Operating leases - We lease our facilities under non-cancelable operating leases.

See Note 8, Commitments and Contingencies, to our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for more information.

See Note 8, Commitments and Contingencies, to our Consolidated Financial Statements for more information.

• Debt interest and principal payments - On March 28, 2022, we entered into the 2022 Amendment to our SVB Loan Agreement which provided for a term loans facility in the aggregate principal amount of up to $75.0 million, of which $35.0 million was borrowed at closing.

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The Braidwell Term Loan Facility provides for an aggregate principal borrowing amount of up to $150.0 million, of which $75.0 million was borrowed at closing.

See Note 9, Debt, and Note 16, Subsequent Events to our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for more information.

On March 7, 2024, we repaid our outstanding indebtedness to Braidwell, and completed an offering of $661.3 million aggregate principal amount of our 2029 Notes.

See Note 9, Debt, to our Consolidated Financial Statements for more information.

Recent Accounting Guidance

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis