IRHYTHM TECHNOLOGIES, INC. You should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and related notes included elsewhere in Item 8 of Part II of this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this Annual Report on Form 10-K entitled "Risk Factors."
Overview
The objectives of our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are to provide users of our consolidated financial statements with the following
•a narrative explanation of the financial statements from the perspective of management that includes our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results; and
•a discussion on matters that are reasonably likely to have a material impact on future operations.
We are a digital healthcare company redefining the way cardiac arrhythmias are
clinically diagnosed by combining our wearable biosensing technology with
cloud-based data analytics and deep-learning capabilities. Our goal is to be the
leading provider of ambulatory electrocardiogram ("ECG") monitoring for patients
at risk for arrhythmias. We have created a full portfolio of ambulatory cardiac
monitoring services on a unique platform, called the Zio service, which combines
an easy-to-wear and unobtrusive biosensor that can be worn for up to 14
consecutive days with powerful proprietary algorithms that distill data from
millions of heartbeats into clinically actionable information. The Zio service
consists of:
•wearable patch-based biosensors, Zio XT and Zio AT monitors, which continuously
record and store ECG data from every patient heartbeat for up to 14 consecutive
days; Zio AT offers the option of timely, detection based transmission of data
during the prescribed wear period;
•cloud-based analysis of the recorded cardiac rhythms using our proprietary, deep-learned algorithms;
•a final quality assessment review of the data by our certified cardiographic technicians; and
•an easy-to-read Zio report, a curated summary of findings that includes high quality and clinically-actionable information which is sent directly to a patient's physician through ZioSuite and can be integrated into a patient's electronic health record.
We receive revenue for the Zio service primarily from third-party payors, which include commercial payors and government agencies, such as CMS,Veterans Administration , and the military. In addition, a small percentage of institutions, which are typically hospitals or private physician practices, purchase the Zio service from us directly. Our revenue in the third-party commercial payor category is primarily contracted, which means we have entered into pricing contracts with these payors. Third-party contracted payors accounted for approximately 60%, 51% and 47% of our revenue for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Approximately 14%, 27% and 27% of our total revenue for the years endedDecember 31, 2021 , 2020 and 2019, respectively, is received fromCenters for Medicare and Medicaid Services ("CMS"), which is under established reimbursement codes. Healthcare institutions, which are typically hospitals or private physician practices accounted for approximately 18%, 16% and 20% of our revenue for the years endedDecember 31, 2021 , 2020, and 2019 respectively. Non-contracted third-party payors and self-pay accounted for 8%, 6%, and 5% of our total revenue for the years endedDecember 31, 2021 , 2020, and 2019, respectively. We rely on a third-party billing partner,XIFIN, Inc. , to submit patient claims and collect from commercial payors, certain government agencies, and patients. Since our Zio service was cleared by theU.S. Food and Drug Administration ("FDA"), we have provided the Zio service to over four million patients and have collected over one billion hours of curated heartbeat data. We believe the Zio service is well-positioned to penetrate an already-established$1.8 billion U.S. ambulatory cardiac monitoring market by offering a user-friendly device to patients, actionable information to physicians and value to payors. We market our ambulatory cardiac monitoring solution inthe United States through a direct sales organization comprised of sales management, field billing specialists, quota-carrying sales representatives, and a customer service team. Our sales representatives focus on initial introduction into new customers, penetration across a sales region, driving adoption within existing accounts and conveying our message of clinical and economic value to service line managers and hospital 67
--------------------------------------------------------------------------------
Table of Contents
administrators and other clinical departments. In addition, we will continue exploring sales and marketing expansion opportunities in international geographies.
COVID-19 Impact
Beginning in
•a reduction in physician prescriptions for our Zio service due to: •a reduction in diagnostic testing outside of those tests related to severe respiratory distress; •reduction in the hours of most physicians' offices; •physicians and hospitals prioritizing the treatment of critically ill patients; and •patient reluctance to visit physicians or hospitals for fear of contracting COVID-19;
•cancellation and reduction of physician attendance at professional medical society meetings and trade shows and our decision not to attend them;
•travel restrictions and changing hospital policies that have limited access of our sales professionals to hospitals where the Zio services are prescribed and where patients have historically been enrolled; •delays in receiving Zio XT back from patients with some patients not returning the device at all; and patients who have lost jobs, been furloughed, have reduced work hours or are worried about the continuation of medical insurance being unable to afford the Zio service. Government mandates related to the COVID-19 pandemic have impacted, and are expected to continue to impact, our personnel and personnel at third-party manufacturing facilities inthe United States and other countries, and the availability or cost of materials, which could disrupt our supply chain and reduce margins. For instance, on or aboutMarch 16, 2020 , the Health Officers for the counties ofSan Francisco (where our headquarters are located),Santa Clara ,San Mateo ,Marin ,Contra Costa andAlameda , where many employees are located, issued mandatory shelter-in-place orders and all employees transitioned to a remote work environment. We are also subject to orders inSouthern California that temporarily shut down its manufacturing and distribution facilities inCypress, California . For a limited number of employees who continue to support essential operations, including those at our manufacturing facilities, the we have instituted protective equipment policies and, to the degree practical, social distancing measures to protect the safety of its employees. While we have continued to deliver the Zio service by operating with remote employees and essential employees on site, an extended implementation of these government mandates could further impact the Company's ability to effectively provide its Zio service, and could impede progress of all ongoing initiatives. Appropriate social distancing techniques and other measures at our facilities have been implemented for the limited number of employees who have returned to work to support essential operations, and will not return until the risk to employee health has meaningfully diminished. While hospital systems and healthcare facilities shift their focus and resources to treating COVID-19 patients and combating the spread of the coronavirus, we have adapted our service to meet the immediate needs of physicians, customers, and patients and significantly increased the utilization of its home enrollment service which allows patients to receive and wear the single-use Zio device without going to a healthcare facility.
Government mandates related to the COVID-19 pandemic have impacted, and are expected to continue to impact, payor processing times of our claims and appeals. This increase in response times may be due, in part, to staffing shortages at the payors.
During the second half of fiscal year 2020, we saw recovery of patient registrations for the Zio service to pre-COVID levels of the first quarter of 2020. During the six months endedJune 30, 2021 , we experienced an increase in the level of Zio service patient registration. This increase may be due in part to re-opening of certain regions withinthe United States and increases in the vaccination status of patients and providers. During the six months endedDecember 31, 2021 , we experienced a decrease in the level of Zio service patient registrations. This decrease may be due, in part, to staffing shortages at providers in certain regions ofthe United States . The status of provider capacity and resource prioritization, vaccination levels and other pandemic-related effects could materially impact the volume of our patient registrations in future periods. 68
--------------------------------------------------------------------------------
Table of Contents
We are taking a variety of measures to promote the safety and security of our employees and customers. Our response to COVID-19 is focused on:
•Protecting and supporting the health and well-being of our employees, our communities and our customers by limiting the transmission of COVID-19. Following recommendations from federal and local government and healthcare agencies, we transitioned employees to a remote work environment beginning in earlyMarch 2020 . For a small number of our employees who continue to support essential operations at our facilities, we have instituted social distancing and other measures to ensure the safety of our employees. We rapidly implemented business continuity protocols and have been able to transition to a remote operating environment while continuing to deliver our Zio service. We will continue to follow local and national guidelines to determine the appropriate time to resume in-office functions. •Delivering uninterrupted patient care for both Zio XT and Zio AT and supporting efforts to monitor COVID-19 patients. While hospital systems and healthcare facilities shift their focus and resources to treating COVID-19 patients and combating the spread of COVID-19, we have adapted our service to meet the immediate needs of our physician customers and patients. Our digital service platform enables physician ordering, results reporting, data curation and patient support independent of location, across virtual or in-office care models. As an example, we have significantly increased the utilization of our "Home Enrollment" service. This service allows patients to receive and wear the single-use Zio monitor without going to a healthcare facility. Physicians can prescribe the Zio service for their patients, either in-office or through a virtual care setting, and we ship the Zio monitor directly to the patient's residence. We pay for the costs of shipping the Zio monitor, which represents additional expense for us. We also guide patients through the patch application process and inform them of instructions for wear. Home enrollment also eliminates clinical staff exposure to patients, as well as application, cleaning or reusing traditional Holter and event monitors that may have been exposed to viruses or other pathogens. •Adjusting our operating plan as appropriate to ensure continued financial strength. We continue to maintain a strong cash position and have taken initiatives to adjust our operating plan to ensure we maintain appropriate liquidity during these uncertain times. In addition, we raised$206.8 million in proceeds from a follow-on public offering inAugust 2020 to fund growth initiatives and for working capital and other general corporate purposes.
Components of Results of Operations
Revenue
The majority of our revenue is derived from provision of our Zio service to customers inthe United States . We earn revenue from the provision of our Zio service primarily from contracted third-party payors, CMS and healthcare institutions. In addition, a small percentage of institutions, which are typically hospitals or private physician practices, purchase the Zio service from us directly, and a very small percentage of commercial non-contracted 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. These estimates require significant judgment by management. In determining the amount to accrue for a delivered report, and Zio service provided, we consider factors such as claim payment history from both payors and patient out-of-pocket costs, payor coverage, whether there is a contract between the payor or healthcare institution and the Company, historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments. We are subject to seasonality similar to other companies in our field, as vacations by physicians and patients tend to affect enrollment in the Zio service more during the summer months and during the end of calendar year holidays compared to other times of the year. Revenue may be impacted by the outcome of adjudications with contracted and non-contracted payors, as well as changes in the CMS reimbursement rates. Clinical capacity limitations may also restrict our ability to complete the performance obligations to achieve revenue recognition.
Cost of Revenue and Gross Margin
Cost of revenue includes direct labor, material costs, equipment and
infrastructure expenses, device scrap and loss, amortization of internal-use
software, allocated overhead, and shipping and handling. Direct labor includes
payroll and personnel-related costs including stock-based compensation involved
in manufacturing, clinical data curation, and customer
69
--------------------------------------------------------------------------------
Table of Contents
service. Material costs include both the disposable materials costs of the Zio
monitors and amortization of the re-usable printed circuit board assemblies
("PCBAs"). Each Zio XT monitor includes a PCBA, and each Zio AT monitor includes
a PCBA and gateway board, the cost of which is amortized over the anticipated
number of uses of the board. We expect cost of revenue to increase in absolute
dollars as our revenue increases due to increased direct labor, direct
materials, and variable spending, partially offset by economies of scale in
relation to fixed costs such as overhead, depreciation and amortization, and
facilities costs.
We calculate gross margin as gross profit divided by revenue. Our gross margin
has been and will continue to be affected by a variety of factors, including
increased contracting with third-party payors and institutional providers. We
have in the past been able to increase our pricing as third-party payors become
more familiar with the benefits of the Zio service and move to contracted
pricing arrangements. We expect to continue to decrease the cost of revenue per
device by obtaining volume purchase discounts for our material costs,
implementing scan-time algorithm and process improvements, automating
manufacturing assembly and packaging, and software-driven and other workflow
enhancements to reduce labor costs. These decreases may be offset by increases
to materials and electronics components pricing, labor rates, shipping rates,
depreciation and amortization of investments, and increases in the general level
of inflation.
Gross margin for the year ended December 31, 2021 was negatively impacted due to
the decrease in reimbursement rates from Novitas Solutions , increased costs
associated with capacity constraints, and COVID-related labor costs, offset by
volume benefits, with limited impact of higher Zio AT volumes, and improved
payor adjudications.
Although a large majority of our commercial customers have renewed their
contracts for the Zio XT service since the establishment of the Category I codes
on January 1, 2021 matching to pre-existing rates, if we are unsuccessful in
improving the Medicare rates, we believe that commercial rates may begin to be
more negatively impacted, which would have a negative impact on our gross
margins.
Research and Development Expenses
We expense research and development costs as they are incurred. Research and development expenses include payroll and personnel-related costs, including stock-based compensation, consulting services, clinical studies, laboratory supplies and allocated facility overhead costs. We expect our research and development costs to increase in absolute dollars as we hire additional personnel to develop new product and service offerings, product enhancements and clinical evidence.
Selling, General and Administrative Expenses
Our sales and marketing expenses consist of payroll and personnel-related costs, including stock-based compensation, sales commissions, travel expenses, consulting, public relations costs, direct marketing, tradeshow and promotional expenses and allocated facility overhead costs. Our general and administrative expenses consist primarily of payroll and personnel-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. Interest Expense
Interest expense is attributable to borrowings under our loan agreements. See Note 7. Debt, for further information on our loan agreements.
Other Income, Net
Other income, net consists primarily of interest income which consists of interest received on our cash equivalents and investments.
70--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Comparison of the Years Ended
Years Ended December 31,
2021 2020 $ Change % Change
(dollars in thousands)
Revenue $ 322,825 $ 265,166 $ 57,659 22 %
Cost of revenue 109,258 70,277 38,981 55 %
Gross profit 213,567 194,889 18,678 10 %
Gross margin 66 % 73 %
Operating expenses:
Research and development 38,671 41,329 (2,658) 6 %Selling, general and administrative 274,839 197,233
77,606 39 % Total operating expenses 313,510 238,562 74,948 31 % Loss from operations (99,943) (43,673) (56,270) 129 % Interest expense (1,169) (1,519) 350 23 % Other income, net 118 1,591 (1,473) 93 % Loss before income taxes (100,994) (43,601) (57,393) 132 % Income tax provision 367 229 138 60 % Net loss$ (101,361) $ (43,830) $ (57,531) 131 % Revenue Revenue increased$57.7 million , or 22%, to$322.8 million during the year endedDecember 31, 2021 from$265.2 million during the year endedDecember 31, 2020 . The increase in revenue was primarily attributable to the increase in volume of the Zio services as a result of increased demand from our customers, partially offset by a decrease in revenue recognized from CMS, based on the updated 2021 published rates.
Cost of Revenue and Gross Margin
Cost of revenue increased$39.0 million , or 55%, to$109.3 million during the year endedDecember 31, 2021 from$70.3 million during the year endedDecember 31, 2020 . The increase in cost of revenue was primarily due to increased Zio service volume, increase in costs resulting from capacity limitations associated with clinical operations, as well as costs incurred to support a larger cost structure in 2021. Gross margin for the year endedDecember 31, 2021 decreased to 66%, compared to 73% for the year endedDecember 31, 2020 . The decrease in gross margin is primarily due to the updated reimbursement rates announced byNovitas Solutions inApril 2021 with an effective date ofJanuary 1, 2021 , increased costs associated with capacity constraints, with limited impact of higher Zio AT volumes and COVID-related labor costs, offset by volume benefits.
Research and Development Expenses
Research and development expenses decreased$2.7 million , or 6%, to$38.7 million during the year endedDecember 31, 2021 from$41.3 million during the year endedDecember 31, 2020 . The decrease was primarily attributable to a$4.0 million decrease of Verily milestone expense offset by a$1.7 million increase in payroll and employee stock-based compensation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$77.6 million , or 39%, to$274.8 million during the year endedDecember 31, 2021 from$197.2 million during the year endedDecember 31, 2020 . The increase was primarily attributable to a$64.6 million increase in payroll and employee stock-based compensation as a result of increased headcount and executive hires to support the growth in our operations, a$5.1 million increase in facilities and rent due to increased facility maintenance costs, and an increase of$4.5 million in professional services fees. 71 -------------------------------------------------------------------------------- Table of Contents InFebruary 2022 , the our Board of Directors approved a decision to pursue reducing our leased space for our headquarters inSan Francisco, California . We expect these decisions will result in an impairment of the right of use asset lease and we are assessing the impact to our Consolidated Financial Statements for the quarter endingMarch 31, 2022 .
Interest Expense
Interest expense decreased$0.4 million to$1.2 million during the year endedDecember 31, 2021 from$1.5 million during the year endedDecember 31, 2020 due to principal re-payments on the SVB Loan starting inNovember 2020 .
Other Income, Net
Other income, decreased$1.5 million to$0.1 million for the year endedDecember 31, 2021 , compared to$1.6 million for year endedDecember 31, 2020 . The decrease in other income is primarily due to a decrease in interest income and value added tax reclaims.
Comparison of the Year Ended
Years Ended December 31,
2020 2019 $ Change % Change
(dollars in thousands)
Revenue $ 265,166 $ 214,552 $ 50,614 24 %
Cost of revenue 70,277 52,485 17,792 34 %
Gross profit 194,889 162,067 32,822 20 %
Gross margin 73 % 76 %
Operating expenses:
Research and development 41,329 37,299 4,030 11 %Selling, general and administrative 197,233 179,523
17,710 10 % Total operating expenses 238,562 216,822 21,740 10 % Loss from operations (43,673) (54,755) 11,082 20 % Interest expense (1,519) (1,643) 124 8 % Other income, net 1,591 1,895 (304) 16 % Loss before income taxes (43,601) (54,503) 10,902 20 % Income tax provision 229 65 164 252 % Net loss$ (43,830) $ (54,568) $ 10,738 20 % Revenue Revenue increased$50.6 million , or 24%, to$265.2 million during the year endedDecember 31, 2020 from$214.6 million during the year endedDecember 31, 2019 . The increase in revenue was primarily attributable to the increase in volume of the Zio services as a result of increased in demand from our customers.
Cost of Revenue and Gross Margin
Cost of revenue increased$17.8 million , or 34%, to$70.3 million during the year endedDecember 31, 2020 from$52.5 million during the year endedDecember 31, 2019 . The increase in cost of revenue was primarily due to increased Zio service volume and costs incurred to support a larger cost structure in 2020.
Gross margin for the year ended
Research and Development Expenses
Research and development expenses increased
72--------------------------------------------------------------------------------
Table of Contents
million increase in payroll and employee stock-based compensation as a result of increased headcount and an increase of$1.0 million in Verily milestone expense. This was partially offset by$4.7 million increase in capitalization of internal use software.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$17.7 million , or 10%, to$197.2 million during the year endedDecember 31, 2020 from$179.5 million during the year endedDecember 31, 2019 . The increase was primarily attributable to a$29.5 million increase in payroll and employee stock-based compensation as a result of increased headcount to support the growth in our operations, a$2.9 million increase in facilities and rent due to expansion of theSan Francisco headquarters and increased facility related costs, partially offset by decrease of$8.9 million in travel, entertainment and office meals as a result of the COVID-19 pandemic and a decrease of$4.4 million in professional services fees. A significant amount of selling, general, and administrative incremental spend can be directly attributed to our continued focus on salesforce expansion and its support infrastructure to support our growth strategy.
Interest Expense
Interest expense decreased$0.1 million to$1.5 million during the year endedDecember 31, 2020 from$1.6 million during the year endedDecember 31, 2019 due to principal payments on the SVB Loan starting inNovember 2020 and a decrease in the interest rate in 2020. Other Income, Net Other income, decreased$0.3 million to$1.6 million for the year endedDecember 31, 2020 , compared to$1.9 million for year endedDecember 31, 2019 . The decrease in other income is primarily due to a decrease in amortization of investments, partially offset by an increase in interest income, and prior year value added tax reclaims.
Liquidity and Capital Expenditures
Overview
We are continuously reviewing our liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 global pandemic. We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements. As ofDecember 31, 2021 , we had cash and cash equivalents of$127.6 million , short-term investments of$111.6 million , and an accumulated deficit of$406.0 million . Our expected future capital requirements may depend on many factors including expanding our customer base, the expansion of our salesforce, and the timing and extent of spending on the development of our technology to increase our product offerings. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. 73
--------------------------------------------------------------------------------
Table of Contents
Cash Flows
The following table summarizes our cash flows for the periods indicated (in
thousands):
Year Ended December 31,
2021 2020 2019
Net cash (used in) provided by:
Operating activities $ (37,753) $ (13,759) $ (21,863)
Investing activities 105,264 (132,391) (89,274)
Financing activities (28,577) 214,316 111,576Net increase in cash, cash equivalents, and restricted cash
$ 38,934
Cash Used in Operating Activities During the year endedDecember 31, 2021 , cash used in operating activities was$37.8 million which consisted of a net loss of$101.4 million , adjusted by non-cash charges of$109.8 million and a net change of$46.2 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of stock-based compensation expense of$54.5 million , as well as depreciation and amortization expense of$9.8 million and a change in allowance for doubtful accounts and contractual allowance of$37.1 million and amortization of right of use assets of$6.8 million . The change in our net operating assets and liabilities compared toDecember 31, 2020 was primarily due to an increase of$53.6 million in the change in accounts receivable as a result of the CPT code changes that took effectJanuary 1, 2021 . The number of claims from the first half of 2021 which contained differences between the submitted price and reimbursement and overall denials increased significantly compared to our historical experience as a result of CPT code transition issues with the payors. We continue to work with the payors to collect on these claims and the collection cycle for these claims is significantly longer than usual. While we believe we have properly estimated the impact to our contractual allowances and allowance for doubtful accounts, the inherent uncertainty caused by longer collection cycle and claims adjudication process could result in additional provisions for contractual allowances and doubtful accounts which would negatively impact our results of operations in future periods. We believe we have adequate balance sheet liquidity to manage through these delays. Accrued liabilities increased$7.9 million primarily due to increased compensation and benefit accruals as a result of increased head count, and an increase in accounts payable of$6.1 million , primarily due to milestone achievements on our collaboration with Verily, partially offset by an increase of$5.0 million in inventory. During the year endedDecember 31, 2020 , cash used in operating activities was$13.8 million which consisted of a net loss of$43.8 million , adjusted by non-cash charges of$86.3 million and a net change of$56.2 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of stock-based compensation expense of$41.5 million , as well as depreciation and amortization expense of$6.9 million and a change in allowance for doubtful accounts and contractual allowance of$31.4 million and amortization of right of use assets of$6.0 million . The change in our net operating assets and liabilities compared toDecember 31, 2019 was primarily due to an increase of$38.0 million in the change in accounts receivable as a result of the increase in our revenue, an increase of$6.1 million in other assets, primarily related to an increase in PCBA boards due to increased sales, a decrease of$4.8 million in operating lease liability and a decrease of$3.9 million in accounts payable. During the year endedDecember 31, 2019 cash used in operating activities was$21.9 million , which consisted of a net loss of$54.6 million , adjusted by non-cash charges of$62.4 million and a net change of$29.7 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of stock-based compensation expense of$26.2 million , as well as depreciation and amortization expense of$3.4 million and a change in allowance for doubtful accounts and contractual allowance of$24.6 million . The change in our net operating assets and liabilities compared toDecember 31, 2018 was primarily due to an increase of$28.7 million in the change in accounts receivable as a result of the increase in our revenue, and an increase of$6.0 million in accrued liabilities, primarily related to increased accrued payroll and related compensation accruals.
Cash From Investing Activities
Cash provided by investing activities during the year endedDecember 31, 2021 was$105.3 million , which consisted primarily of$122.2 million in purchases of available for sale investments partially offset by$28.1 million of capital expenditures to purchase property and equipment and$255.5 million in cash received from the maturities of available for sale investments. 74
--------------------------------------------------------------------------------
Table of Contents
Cash used in investing activities during the year endedDecember 31, 2020 was$132.4 million , which consisted primarily of$277.5 million in purchases of available for sale investments,$13.6 million of capital expenditures to purchase property and equipment, partially offset by$144.1 million cash received from the maturities of available for sale investments and$14.5 million in cash received from sales of available for sale investments. Cash used in investing activities during the year endedDecember 31, 2019 was$89.3 million , which consisted primarily of$165.9 million in purchases of available for sale investments and$20.5 million of capital expenditures to purchase property and equipment, partially offset by$95.6 million in cash received from the maturities of available for sale investments and$1.5 million in cash received from sales of available for sale investments.
Cash From Financing Activities
During the year endedDecember 31, 2021 , cash used in financing activities was$28.6 million , primarily due to$25.9 million in tax withholding upon the vesting of RSUs and$11.7 million in repayment of long term debt. This was partially offset by$8.9 million in proceeds from the issuance of common stock in connection with employee option exercises and our Employee Stock Purchase Plan. During the year endedDecember 31, 2020 , cash provided by financing activities was$214.3 million , primarily due to$206.0 million from the issuance of common stock in a public offering, net of discounts and issuance costs and$20.2 million in proceeds from the issuance of common stock in connection with employee option exercises and our Employee Stock Purchase Plan. This amount was partially offset by$10.0 million in tax withholding upon the vesting of RSUs and$1.9 million in re-payment of long term debt. During the year endedDecember 31, 2019 , cash provided by financing activities was$111.6 million , primarily due to$107.4 million from the issuance of common stock in a public offering, net of discounts and issuance costs and$9.5 million in proceeds from the issuance of common stock in connection with employee option exercises and our Employee Stock Purchase Plan. This was partially offset by$5.3 million in tax withholding upon the vesting of RSUs.
Indebtedness
Bank Debt
InOctober 2018 , we entered into the Third Amended and Restated Loan and Security Agreement with SVB ("Third Amended and Restated SVB Loan Agreement"). This Agreement amends and restates the Second Amended and Restated Loan and Security Agreement between the Company and SVB datedDecember 4, 2015 , as amended by the First Loan Modification Agreement between the Company and SVB datedAugust 22, 2016 . Pursuant to the Third Amended and Restated SVB Loan Agreement, we obtained a term loan ("SVB Term Loan") for$35.0 million . Total proceeds from the SVB Term Loan were used to pay off the loan agreement withBiopharma Secured Investments III Holdings Cayman LP ("Pharmakon"), totaling$35.8 million . We made interest-only payments throughOctober 31, 2020 , followed by 36 monthly payments of principal plus interest on the SVB Term Loan. Interest charged on the SVB Term Loan will be the greater of (a) a floating rate based on the "Prime Rate" published by The Wall Street Journal minus 0.75%, or (b) 4.25%. Under the Third Amended and Restated SVB Loan Agreement, we may borrow, repay, and reborrow under a revolving credit line, but not in excess of the maximum loan amount of$25.0 million , which includes an$11.0 million standby letter of credit sublimit availability. InOctober 2018 , a$6.9 million standby letter of credit was obtained in connection with a lease for ourSan Francisco headquarters. Any principal amount outstanding under the Third Amended and Restated SVB Loan Agreement revolving credit line shall bear interest at an amount that is the greater of (a) a floating rate per annum equal to the rate published by The Wall Street Journal as the "Prime Rate" or (b) 5.00%. We may borrow up to 75% of eligible accounts receivable, up to the maximum of$25.0 million . The Third Amended and Restated Loan Agreement requires us to maintain a minimum consolidated liquidity ratio or minimum adjusted Earnings Before Interest, Tax, Depreciation, and Amortization during the term of the loan facility. In addition, the SVB Loan Agreement contains customary affirmative and negative covenants and events of default. We were in compliance with loan covenants as ofDecember 31, 2021 . The obligations under the Third Amended and Restated Loan Agreement are collateralized by substantially all of our assets. 75
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance withUnited States generally accepted accounting principles ("U.S. GAAP"). The preparation of these financial statements requires our management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. All policies described below have not significantly changed over the last fiscal year. In addition, the policies below are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and it is likely that materially different amounts would be reported under different conditions or using different assumptions.
Revenue Recognition
Our Zio XT monitor, a wearable patch-based biosensor, continuously records and stores ECG data from every patient heartbeat for up to 14 consecutive days. The Zio XT monitor is returned to our monitoring facility and the heartbeat data is curated and analyzed by our proprietary algorithms and reviewed by our certified cardiac technicians. The final step in the Zio service is the delivery of an electronic Zio Report to the prescribing physician with a summary of findings. Our Zio XT service is generally billable when the Zio Report is issued to the physician. Our Zio AT mobile cardiac telemetry monitor, a wearable patch-based biosensor, offers what our Zio XT offers plus the additional capability of transmissions during the wear period to assist physicians in diagnosing and treating the small percentage of the population requiring more timely action. During the wear period, physicians will receive notifications if there are significant events that meet predetermined arrhythmia detection criteria. Our Zio AT service revenue is recognized over the prescription period and delivery of an electronic Zio Report. We account for contract revenue with a customer when there is a legally enforceable contract between us and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Our revenue is measured based on consideration specified in the contract with each customer. A unique aspect of healthcare is the involvement of multiple parties to the service transaction. In addition to the patient, often a third-party, for example a commercial or governmental payor or healthcare institution, like a hospital or clinic, will pay us for some or all of the service on the patient's behalf. Separate contractual arrangements exist between us and many third-party payors that establish amounts the third-party payor will pay on behalf of a patient for covered services rendered and should be considered in determining collectability and the transaction price for services provided to a patient covered by that third-party payor. 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. Revenue recognition is subject to uncertainty because these estimates require significant judgment by management. In determining the amount to accrue for a delivered report, we consider factors such as claim payment history from both payors and patient out-of-pocket costs, payor coverage, whether there is a contract between the payor or healthcare institution and us, historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments.
A summary of the payment arrangements with third-party payors and healthcare institutions is as follows:
•Contracted third-party payors - We have contracts with negotiated prices for services provided for patients with commercial healthcare insurance carriers
•Centers for Medicare and Medicaid Services ("CMS") - We have received independent diagnostic testing facility approval from regional Medicare Administrative Contractors and will receive reimbursement per the relevant Current Procedural Terminology ("CPT") code rate for the services rendered to the patient covered by CMS.
76--------------------------------------------------------------------------------
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 our historical collection experience for our non-contracted services. This rate is reviewed at least quarterly.
•Healthcare institutions - Healthcare institutions are typically hospitals or
physician practices in which we have negotiated amounts for its monitoring
services, including certain governmental agencies such as the Veteran's
Administration and
We are utilizing the portfolio approach practical expedient under ASC 606 for revenue recognition. We account 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, we have concluded that the financial statement effects are not materially different than if accounting for revenue on a contract-by-contract basis. For the healthcare institutions, we have historical experience of collecting substantially all of the negotiated contractual rates and determined at contract inception that these customers, and or their related third-party payor that pays us on their behalf, have the intention and ability to pay the promised consideration. As such, we have not provided an implicit price concession but, rather, have chosen to accept the risk of default, and adjustments to the transaction price are recorded as bad debt expense. For contracted and CMS portfolios, we are providing an implicit price concession because, while we have a contract with the underlying payor, we expect to accept a lower amount of consideration when claims are adjudicated and allowable claims are determined by the commercial payor. The implicit price concession is recorded as variable consideration to the transaction price and recorded as an adjustment to revenue as a contractual allowance. Historical cash collection indicates that it is probable that substantially all of the contracted claim amount will be received. We provide for estimates of uncollectible patient accounts receivable, based upon historical experience, at the time revenue is recognized, with such provisions presented as bad debt expense within the selling, general and administrative line item of the consolidated statement of operations. Adjustments to these estimates for actual experience are also recorded as an adjustment to bad debt expense. For non-contracted portfolios, we are providing an implicit price concession because we do not have a contract with the underlying payor, the result of which requires us to estimate transaction price based on historical cash collections utilizing the expected value method. Subsequent adjustments to the transaction price are recorded as an adjustment to revenue and not as bad debt expense.
Allowance for Doubtful Accounts and Contractual Allowance
Allowance for doubtful accounts and contractual allowance is subject to uncertainty because we establish an allowance for doubtful accounts for estimated uncollectible receivables based on our historical collections, review of specific outstanding claims, consideration of relevant qualitative factors and an established allowance percentage by aging category, all of which are inherently uncertain. We write off outstanding accounts against the allowance for doubtful accounts when they are deemed to be uncollectible. Increases and decreases in the allowance for doubtful accounts are included as a component of general and administrative expenses. We record reductions in revenue for estimated uncollectible amounts as contractual allowances. We review and update our estimates for the allowance for doubtful accounts and the contractual allowance periodically to reflect our experience regarding historical collections. If we were to make different judgments or utilize different estimates in the allowance for doubtful accounts and the contractual allowance, differences in both the amount of reported general and administrative expenses and revenue could result.
Estimated Usage of the
We use a printed circuit board assembly ("PCBA") in each Zio XT and Zio AT
wearable device and a gateway board in Zio AT device. These boards are reused
numerous times in multiple patients. Each time the PCBA and gateway board is
used in a wearable Zio XT and Zio AT monitor, a portion of the cost of the PCBA
and gateway board is recorded as a cost of revenue. Estimated usage of PCBAs is
subject to uncertainty because we base our estimates of how many times a PCBA
and gateway board can be used on testing in research and development, loss
rates, product obsolescence, and the amount of time it takes the device to go
through the manufacturing, shipping, customer shelf and patient wear time and
upload process. These estimates can be subjective, complex, and inherently
uncertain. We periodically evaluate the use estimate.
77--------------------------------------------------------------------------------
Table of Contents
Stock-Based Compensation
We recognize compensation costs related to stock option grants, restricted stock
unit grants ("RSUs"), and shares under the employee stock purchase plan
("ESPP"), and market condition awards based on the estimated fair value of the
awards on the date of grant, net of estimated forfeitures. We estimate the grant
date fair value, and the resulting stock-based compensation expense for options
and shares under the ESPP, using the Black-Scholes option pricing model. We
estimate the grant date fair value, and the resulting stock-based compensation
expense for market condition awards using the Monte-Carlo option pricing model.
The RSU grant date fair value is based on the closing price on the date of the
grant. The grant date fair value of stock-based awards is expensed on a
straight-line basis over the period during which the employee is required to
provide service in exchange for the award (generally the vesting period).
We estimate the fair value of our stock-based awards using the Black-Scholes and
Monte-Carlo option-pricing models, which requires the input of highly subjective
assumptions. Our assumptions are as follows:
•Expected term. The expected term represents the period that the stock-based
awards are expected to be outstanding. We use the simplified method to determine
the expected term, which is calculated as the average of the time to vesting and
the contractual life of the options.
•Expected volatility. The expected volatility is derived from the average
implied volatility of our common stock. As our common stock has been publicly
traded for a limited time, in some cases expected volatility is derived from the
average historical volatilities of publicly traded companies within our industry
that we consider to be comparable to our business over a period approximately
equal to the expected term for employees' options and the remaining contractual
life for nonemployees' options.
•Risk-free interest rate. The risk-free interest rate is based on the
•Dividend yield. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.
In addition to the assumptions used in the Black-Scholes and
We recognize compensation expense related to RSUs based on the grant date fair value on a straight-line basis over the period during which the employee is required to provide service in exchange for the award (generally the vesting period). Where there is a minimum performance condition required to vest in RSUs, we perform a probability assessment to estimate the number of shares that are probable to vest. We recognize compensation expense related to the ESPP based on the estimated fair value on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model for each purchase period. The grant date fair value is expensed on a straight-line basis over the offering period.
Stock-based compensation is subject to uncertainty due to management estimates used in monte-carlo and black scholes valuations, as well as probability assessments performed to estimated numbers of shares probable to vest where awards have minimum performance conditions.
We recorded stock-based compensation expense of$54.5 million ,$41.5 million , and$26.2 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. We expect to continue to grant RSUs and other equity-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase. 78
--------------------------------------------------------------------------------
Table of Contents
Material Cash Requirements
The Company's material cash requirements include the following contractual and other obligations.
•Debt interest and principal payments - InOctober 2018 , we entered into the Third Amended and Restated Loan and Security Agreement withSilicon Valley Bank , Pursuant to which we obtained a term loan ("SVB Term Loan") for$35.0 million . We made interest-only payments throughOctober 31, 2020 , and began making monthly payments of principal plus interest inNovember 2020 . •Operating leases - We lease our facilities under non-cancelable operating leases that have remaining lease terms of up to 9.75 years. As ofDecember 31, 2021 , we had fixed lease payment obligations of$136.5 million , with$12.6 million payable within 12 months. •Purchase obligations - Purchase obligations represent an estimate of open purchase orders and contractual obligations, in the ordinary course of business for which we have not received the goods or services. As ofDecember 31, 2021 , we had$53.5 million of such purchase obligations.
© Edgar Online, source
