Commitments and Contingencies

9 Months Ended

Sep. 30, 2022

Commitments and Contingencies Disclosure [Abstract]

Lease Arrangements

The Company has entered into leases for office, manufacturing and clinical centers space, under non-cancelable operating leases, which expire on various dates through 2031. The leases generally contain scheduled rent increases or escalation clauses and renewal options. Operating leases classified as right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the term of the lease, net of lease incentives. Operating lease right-of-use assets also include any lease payments made to the lessor at or before the commencement date. The Company is also subject to variable lease payments related to janitorial services and electricity, which are not included in the operating lease right-of-use asset as they are based on actual usage. The Company recognizes operating lease expense, generally on a straight-line basis, over the lease period. The total operating lease cost recognized during the nine months ended September 30, 2022 was $10.3 million, primarily consisting of right-of use asset amortization, net of amortization for lease incentives as well as lease accretion. Cash paid for operating leases during the nine months ended September 30, 2022, was $10.2 million.

On February 15, 2022, the Board agreed to pursue a sublease of the majority of space on one floor (approximately 50%) of the San Francisco Lease. The Company recorded $20.5 million in impairment charges on its ROU asset during the nine months ended September 30, 2022. No impairment charges on its ROU assets were recorded during the three months ended September 30, 2022. See Note 6. Impairment and Restructuring included in the notes to the unaudited condensed consolidated financial statements, for further details.

As of September 30, 2022, maturities of operating lease liabilities were as follows (in thousands):


Year ending December 31:
2022 (remainder of the year)	$	3,449
2023	13,958
2024	14,253
2025	14,645
2026	15,071
Thereafter	71,397
Total lease payments	132,773
Less: imputed interest	(38,372)
Total lease liabilities	$	94,401

The weighted average remaining lease term of the Company's operating leases as of September 30, 2022, was 8.90 years. The weighted average discount rate of the Company's operating leases was 7.28% as of September 30, 2022.

Legal Proceedings

From time to time, the Company is involved in claims and legal proceedings or investigations that arise in the ordinary course of business. Such matters could have an adverse impact on the Company's reputation, business, and financial condition and divert the attention of its management from the operation of its business. These matters are subject to many uncertainties and outcomes that are not predictable.

On February 1, 2021, a putative class action lawsuit was filed in the United States District Court for the Northern District of California alleging that the Company and its former Chief Executive Officer, Kevin M. King, violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder (“Securities Class Action Lawsuit”). On August 2, 2021, the lead plaintiff filed an amended complaint and filed a further amended complaint on September 24, 2021. The amended complaint names as defendants, in addition to the Company and Mr. King, the Company's former Chief Executive Officer, Michael J. Coyle, and former Chief Financial Officer and current Chief Operating Officer, Douglas J. Devine. The purported class in the amended complaint includes all persons who purchased or acquired the Company's common stock between August 4, 2020 and July 13, 2021, and seeks unspecified damages purportedly sustained by the class. On October 27, 2021, the Company filed a motion to dismiss the amended complaint. The motion to dismiss was fully briefed, and the Court held a hearing on the motion on February 4, 2022, after which the Court took the matter under submission. On March 31, 2022, the Court issued an order granting the Company’s motion to dismiss the Securities Class Action Lawsuit, without allowing the plaintiff further leave to amend, and entered judgment in favor of the Company and the other defendants. On April 29, 2022, the plaintiff that filed the initial complaint in the action filed a notice of appeal. On September 7, 2022, the plaintiff-appellant filed its opening brief, and the Company filed a motion to dismiss for lack of standing to appeal and Article III standing on September 27, 2022. On October 17, 2022, the plaintiff filed its response to the Company's motion to dismiss, and the Company filed its reply in support of the motion to dismiss on November 3, 2022. The Company believes the class action to be without merit and plan to defend itself vigorously.

On March 26, 2021, the Company received a grand jury subpoena from the U.S. Attorney’s Office for the Northern District of California requesting information related to communications with the Food and Drug Administration and the Company’s products. On October 14, 2021, the Company received a second subpoena requesting additional information. The Company is cooperating fully and is providing the requested information.

Development Agreement

On September 3, 2019, the Company entered into a Development Collaboration Agreement (the “Development Agreement”) with Verily Life Sciences LLC (“Verily”). The Development Agreement involves joint development and production of intellectual property between the Company and Verily. Each participant has primary responsibility for certain aspects of development and approval, with all processes to be performed at each respective party’s own cost. Costs incurred by the Company in connection with the Development Agreement will be expensed as research and development expense in accordance with ASC 730, Research and Development.

The Company and Verily will develop certain next-generation atrial fibrillation (“Afib”) screening, detection, or monitoring products pursuant to the Development Agreement, which products will involve combining Verily and the Company’s technology platforms and capabilities. Under the terms of the Development Agreement, the Company paid Verily an upfront fee of $5.0 million in 2019. In addition, the Company agreed to make additional cash payments to Verily up to an aggregate of $12.75 million in milestone payments upon achievement of various development and regulatory milestones over the term of the Development Agreement. The Company has achieved milestones tied to payments totaling $11.0 million to date and expect to make additional payments over the term of the Development Agreement of $1.75 million, subject to the achievement of certain development and regulatory milestones including provisioning of the Zio Watch to enable market evaluation scheduled to begin in 2023.

No payment-triggering milestones were achieved during the nine months ended September 30, 2022.

The Development Agreement provides each party with licenses to use certain intellectual property of the other party for development activities in the field of Afib screening, detection, or monitoring. Ownership of developed intellectual property will be allocated to the Company or Verily depending on the subject matter of the underlying developed intellectual property, and, for certain subject matter, shall be jointly owned.

Indemnifications

In the ordinary course of business, the Company enters into agreements pursuant to which it agrees to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including losses arising out of the breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by applicable law. The Company currently has directors’ and officers’ insurance. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions, and believes that the estimated fair value of these indemnification obligations is not material and it has not accrued any amounts for these obligations.