iRhythm Holdings, Inc. (IRTC) FY 2023 MD&A

Overview

We are a leading digital healthcare company that creates trusted solutions that detect, predict, and prevent disease. 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.

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. We have provided our Zio Services using our Zio Systems.

We receive revenue for the Zio Services primarily from third-party payors, which include contracted third-party payors and CMS. The remainder of our revenue comes from healthcare institutions, which are typically hospitals or private physician practices, who purchase the Zio Services from us directly. We rely on third-party billing partners to submit patient claims and collect from commercial payors, certain government agencies, and patients.

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The following are Zio Services shown as a percentage of revenue:

Key Business Metric

Non-GAAP Financial Measure

Adjusted EBITDA is a key measure we use to assess our financial performance and it is also used for internal planning and forecasting purposes. We believe Adjusted EBITDA is helpful to investors, analysts, and other interested parties because it can assist in providing a more consistent and comparable overview of our operational performance across our historical financial periods. 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.

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. This measure has certain limitations in that it does not include the impact of certain expenses that are reflected in our consolidated statements of operations that are necessary to run our business. We may identify additional charges and gains to exclude from Adjusted EBITDA that are significant in nature which may impact period to period comparability and do not represent the ongoing results of the business. Other companies, including other companies in our industry, may not use this measure or may calculate this measure differently, limiting its usefulness as a comparative measure.

The following table presents a reconciliation of Net loss, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted EBITDA (in thousands):

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Macroeconomic Factors

Our future results of operations and liquidity could be materially adversely affected by macroeconomic factors contributing to delays in payments of outstanding receivables, supply chain disruptions, including shortages and inflationary pressure, uncertain or reduced demand, and the impact of any initiatives or programs that we may undertake to address financial and operational challenges faced by our customers.

The current macroeconomic environment is impacting our customers, both financially and operationally. 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. 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.

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.

Revenue

The majority of our revenue is derived from provision of our Zio Services to customers in the United States. We earn revenue from the provision of our Zio Services primarily from contracted third-party payors, CMS, and healthcare institutions. 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. These estimates require significant judgment by management. In determining the amount to accrue for the Zio Services (including a delivered report), we consider factors such as claim payment history from both payors and patient, available reimbursement, including whether there is a contract between us and the payor or healthcare institution and historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments.

We typically experience reduced revenue during the third quarter, as well as during the year-end holiday season. 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.

Cost of Revenue

Cost of revenue includes direct labor, material costs, equipment and infrastructure expenses, amortization of internal-use software, allocated overhead, and shipping and handling. Direct labor includes payroll-related costs including stock-based compensation involved in manufacturing, clinical data curation, and customer service. Material costs include both the disposable materials costs of the Zio patches and amortization of the re-usable 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. 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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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 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.

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. 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-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-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 Expense

Interest expense is attributable to borrowings under our loan agreements. 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.

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Results of Operations

Comparison of the Years Ended December 31, 2022, and 2021

For discussion related to the results of operations and changes in financial condition for fiscal 2022 compared to fiscal 2021 refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2022 Annual Report on Form 10-K, which was filed with the SEC on February 23, 2023.

Comparison of the Years Ended December 31, 2023, and 2022

Revenue

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.

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.

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.

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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.

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.

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

Overview

As of December 31, 2023, we had cash and cash equivalents of $36.2 million, marketable securities of $97.6 million, and accounts receivable of $61.5 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.

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.

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

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.

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.

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.

Bank Debt

In October 2018, we entered into the Third Amended and Restated Loan and Security Agreement (“SVB Loan Agreement”) with Silicon Valley Bank (“SVB”). Under the SVB Loan Agreement, we had borrowed $35.0 million and had made repayments through March 2022, at which time the outstanding balance was $18.5 million.

On March 28, 2022, we entered into a Second Amendment (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 (the “2022 Term Loans”), of which $35.0 million was borrowed at closing and a portion of the proceeds was used to pay in full the outstanding balance of $18.5 million under the SVB Loan Agreement. The remaining $40.0 million of 2022 Term Loans was available to be borrowed from time to time at our option, in increments of at least $10.0 million, through December 31, 2023. 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.

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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.

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), which requires us to make judgments, estimates, and assumptions. See Note 2, Summary of Significant Accounting Policies, in the notes to the Consolidated Financial Statements, which describes our significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The methods, estimates, and judgments that we use in applying our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting estimates include:

•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;

•Stock-based compensation; and

•Lease impairment.

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

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The Zio XT System is the previous generation of the Zio Monitor System and is a prescription-only, remote ECG monitoring system that consists of the Zio XT patch that records the electric signal from the heart continuously for up to 14 days and the ZEUS System, which supports the capture and analysis of ECG data recorded by the Zio XT patch at the end of the wear period, including specific arrhythmia events detected by the ZEUS algorithm. 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 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. The Zio AT service revenue is recognized under two performance obligations — the patient wear period and delivery of electronic Zio reports.

We recognize as revenue the amount of consideration to which we expect to be entitled in exchange for performing our service. The consideration we are entitled to varies by payor portfolio, as further described below, and includes estimates that require significant judgment by management. A unique aspect of healthcare is the involvement of multiple parties to the service transaction. In addition to the patient, often a third-party payor, for example a commercial or governmental payor or healthcare institution will pay us for some or all of the service on the patient’s behalf. Separate contractual arrangements exist between us and third-party payors that establish amounts the third-party payor will pay on behalf of a patient for covered services rendered.

A small portion of our transactions are covered by third-party payors with whom there is neither a contractual agreement nor an established amount that the third-party payor will pay. In determining the collectability and transaction price for our service, we consider factors such as insurance claims which are adjudicated as allowable under the applicable policy and payment history from both payors and patient out-of-pocket costs, payor coverage, whether there is a contract between the payor or healthcare institution and us, historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments. Certain of these factors are forms of variable consideration which are only included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

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

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

•CMS - We have received IDTF approval from regional Medicare Administrative Contractors and will receive reimbursement per the relevant CPT code rates for the services rendered to the patient covered by CMS.

•Healthcare institutions – Healthcare institutions are typically hospitals or physician practices in which we have negotiated amounts for our monitoring services, including certain governmental agencies such as the Veterans Administration and U.S. Department of Defense.

•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.

We are utilizing the portfolio approach practical expedient under Accounting Standard Codification (“ASC”) 606, Revenue from Contracts with Customers, whereby services provided under each of the above payor types form a separate portfolio. 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 contracted and CMS portfolios, we recognize revenue, net of contractual allowances, and recognize an allowance for doubtful accounts 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. These contracts also impose a number of obligations regarding billing and other matters, and our noncompliance with a material term of such contracts may result in a denial of the claim. We account for denied claims as a form of variable consideration that is included as a reduction to the transaction price recognized as revenue.

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We make estimates around the amount of denied claims within a reporting period, a process that requires management judgment. The estimated denied claims are based on historical information, and judgement includes the historical period utilized. We monitor the estimated denied claims against the latest available information, and subsequent changes to the estimated denied claims are recorded as an adjustment to revenue in the periods during which such changes occur. Delays in claims submissions could lead to an increase in denials if we miss the payors’ filing deadlines, which could result in a reduction in our receipt of payments. Historical cash collection indicates that it is probable that substantially all of the transaction price, less the estimate of denied claims, will be received. Contracted payors may require that we bill patient co-payments and deductibles and from time to time we may not be able to collect such amounts due to credit risk. We provide for estimates of uncollectible patient accounts receivable, based upon historical experience where judgment includes the historical period utilized, at the time revenue is recognized, with such provisions presented as bad debt expense within the selling, general and administrative line item of the consolidated statements of operations. Adjustments to these estimates for actual experience are also recorded as an adjustment to bad debt expense.

For healthcare institutions, the transaction price is determined based on negotiated rates, and we have historical experience collecting substantially all of these contracted rates. Historical cash collections indicate that it is probable that substantially all of the transaction price will be received. As such, we are not providing an implicit price concession but, rather, has chosen to accept the risk of default, and any subsequent uncollected amounts are recorded as bad debt expense to selling, general and administrative expense in the consolidated statements of operations.

For non-contracted portfolios, we provide an implicit price concession due to the lack of a contracted rate with the underlying payor. As a result, we estimate the transaction price based on historical cash collections utilizing the expected value method. All subsequent changes to the transaction price are recorded as adjustments to revenue.

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. We record a provision for contractual allowances based on the estimated differences between contracted amounts and expected collection rates. Such provisions are based on our historical experience and are reported as a reduction of revenue.

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

PCBA Valuation

We reuse PCBAs in each wearable Zio Monitor patch, Zio XT patch, and Zio AT patch, as well as the wireless gateway used in conjunction with the Zio AT patch. As PCBAs are used in a wearable Zio Monitor patch, Zio XT patch, or Zio AT patch, a portion of the cost of the PCBA is recorded as a cost of revenue. The PCBAs are charged over a period beyond one year. 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 periodically evaluate and update these estimates. PCBAs are included in Other Assets in our consolidated balance sheets.

Stock-Based Compensation

We measure the estimated fair values of our restricted stock units (“RSUs”) based on the closing price of our stock on the grant date. For performance-based restricted stock units (“PRSUs”), we estimate the fair value based on the closing price of our stock on the grant date and, if the award includes a market condition, a Monte Carlo simulation model. In addition, for PRSUs, we apply a probability assessment to determine the probable achievement of the performance-based metrics.

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Stock-based compensation expense is recognized over the requisite service period using the straight-line method and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, our stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For restricted stock, the compensation cost for these awards is based on the closing price of our common stock on the date of grant, and is recognized as compensation expense on a straight-line basis over the requisite service period.

We recognize compensation expense related to our 2016 Employee Stock Purchase Plan (“ESPP”) based on the fair value at each enrollment date of the offering period using the Black-Scholes-Merton option-pricing model value. The stock-based compensation is reduced by the estimated forfeiture and is expensed on a straight-line basis over the offering period.

Lease Impairment

We account for the impairment of long-lived assets in accordance with ASC 360, Impairment or Disposal of Long-Lived Assets. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying value. If an asset is determined to be impaired, the impairment is measured by the amount that the carrying value of the asset exceeds its fair value.

We estimated undiscounted future cash flows from our vacant office lease based on our intent and ability to sub-lease the vacant office space which we had ceased using and estimated future sub-lease income considering the local real estate market conditions. We also factored into the estimate the amount of time to identify a tenant and to enter into an agreement. 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.

Material Cash Requirements

Our material cash requirements include the following contractual and other obligations.

•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.

•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.

•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. On January 3, 2024, we repaid our outstanding indebtedness with SVB, and entered into the Braidwell Term Loan Facility. 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.

Recent Accounting Guidance

For a description of recently issued accounting guidance that is applicable to our financial statements, see Note 2, Significant Accounting Policies, to the Consolidated Financial Statements.