UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒

☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

2023

OR

☐

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-37918

iRhythm Technologies, Inc.

(Exact Name of Registrant as Specified in its Charter)

_______________________________________________________________________

Delaware

20-8149544

Delaware20-8149544
(State or Other Jurisdiction of


Incorporation or Organization)

(I.R.S. Employer


Identification No.)

650 Townsend

699 8th Street Suite 500,

San Francisco, California

600

94103

San Francisco,California94103
(Address of Principal Executive Offices)

(Zip Code)

(415) 632-5700

(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading SymbolName of each exchange on which registered
Common Stock, Par Value $0.001 Per ShareIRTCThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

☑

Accelerated filer

☐

Non-accelerated filer

☒

☐

(Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging growth company

☒

☐

��

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

☑

As of October 31, 2017,23, 2023, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 22,981,467.

30,650,758.




IRHYTHM TECHNOLOGIES, INC.

TABLE OF CONTENTS

Page No.

Page No

1

1

Condensed Consolidated Balance Sheets

1

Condensed Consolidated Statements of Operations

2

Condensed Consolidated Statements of Comprehensive Loss

3

Condensed Consolidated Statements of Cash Flows

4

Condensed Consolidated Statements of Stockholders’ Equity
5
Notes to Condensed Consolidated Financial Statements 

5

7

22

25

30

31

30

32

31

33

31

33

31

33

59

63

59

63

59

63

59

63

59

63

60

64

61

65


i


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS


This Quarterly Report on Form 10-Q contains forward-looking statements concerning our business, operationswithin the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and financial performance and condition,Section 21E of the Securities Exchange Act of 1934, as well asamended (the “Exchange Act”). All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements concerning our plans, objectives and expectations for our business, operations and financial performance and condition. Any statements contained herein thatcondition, are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

•the expected impact of global business, political and macroeconomic conditions, including inflation, interest rate volatility, cybersecurity events, uncertainty with respect to the federal budget, instability in the global banking system and volatile market conditions, and global events, including public health crises, and ongoing geopolitical conflicts, such as the war in Ukraine and conflict in Israel, on our business, operations and financial results;

•the impact of supply chain disruptions on our operations and financial results;

•the impact of inflationary costs on our operations and financial results;
•plans to conduct further clinical studies,

including any clinical trials initiated by third parties;

•our plans to modify our current systems and services, or identify and develop, or acquire, new products or develop new products,services, to address additional indications

indications;

•the expected growth of our business and our organization

organization;

•our expectations regarding government and third partythird-party payor coverage and reimbursement

or other regulatory actions or decisions;
•our compliance with all applicable laws, rules and regulations, including those of the U.S. Food and Drug Administration;

•our expectations regarding the size of our sales organization and expansion of our sales and marketing efforts, including in international geographies

geographies;

•our expectations regarding revenue, cost of revenue, cost of service per device, operating expenses, including research and development expense, sales and marketing expense and general and administrative expenses

expenses;

•our ability to retain and recruit key personnel, including the continued development of a sales and marketing infrastructure

infrastructure;

•our ability to obtain and maintain intellectual property protection for our products

systems and services;

•our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for, or ability to obtain, additional financing

financing;

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act

our ability to identify and develop new and planned products and acquire new products

•our financial performance

performance; and

•developments and projections relating to our competitors or our industry

industry.

We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We assume no obligation to update or revise these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, even if new information becomes available in the future.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.

ii

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the SECSecurities and Exchange Commission (the “SEC”) as exhibits to the Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

ii


iii


PART I. FINANCIALFINANCIAL INFORMATION

ITEM 1.

ITEM 1. FINANCIAL STATEMENTS

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share data)

in thousands)

 

September 30,

2017

 

 

December 31,

2016

 

September 30, 2023December 31, 2022
(unaudited)(unaudited) 

Assets

 

 

 

 

 

 

 

 

Assets

Current assets:

 

 

 

 

 

 

 

 

Current assets:

Cash and cash equivalents

 

$

20,429

 

 

$

51,643

 

Cash and cash equivalents$47,478 $78,832 

Investments, short-term

 

 

87,017

 

 

 

54,407

 

Marketable securitiesMarketable securities110,995 134,312 

Accounts receivable, net

 

 

12,039

 

 

 

9,406

 

Accounts receivable, net50,067 49,918 

Inventory

 

 

1,314

 

 

 

1,390

 

Inventory13,648 15,155 

Prepaid expenses and other current assets

 

 

1,989

 

 

 

1,671

 

Prepaid expenses and other current assets12,104 10,555 

Restricted cash

 

 

—

 

 

 

91

 

Total current assets

 

 

122,788

 

 

 

118,608

 

Total current assets234,292 288,772 

Investments, long-term

 

 

—

 

 

 

10,981

 

Property and equipment, net

 

 

6,207

 

 

 

4,653

 

Property and equipment, net96,668 75,670 
Operating lease right-of-use assetsOperating lease right-of-use assets60,899 60,666 

Goodwill

 

 

862

 

 

 

862

 

Goodwill862 862 

Other assets

 

 

3,798

 

 

 

3,052

 

Other assets47,048 22,252 

Total assets

 

$

133,655

 

 

$

138,156

 

Total assets$439,769 $448,222 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

Current liabilities:

 

 

 

 

 

 

 

 

Current liabilities:

Accounts payable

 

$

2,076

 

 

$

2,103

 

Accounts payable$7,212 $7,517 

Accrued liabilities

 

 

11,436

 

 

 

10,165

 

Accrued liabilities76,631 65,497 

Deferred revenue

 

 

904

 

 

 

947

 

Deferred revenue3,383 3,051 

Accrued interest, current portion

 

 

149

 

 

 

—

 

Debt, current portion

 

 

1,479

 

 

 

—

 

Operating lease liabilities, current portionOperating lease liabilities, current portion15,065 13,031 

Total current liabilities

 

 

16,044

 

 

 

13,215

 

Total current liabilities102,291 89,096 

Debt

 

 

32,053

 

 

 

32,227

 

Deferred rent, noncurrent portion

 

 

169

 

 

 

26

 

Accrued interest, net of current portion

 

 

—

 

 

 

126

 

Debt, noncurrent portionDebt, noncurrent portion34,946 34,935 
Other noncurrent liabilitiesOther noncurrent liabilities1,013 1,307 
Operating lease liabilities, noncurrent portionOperating lease liabilities, noncurrent portion81,724 83,072 

Total liabilities

 

 

48,266

 

 

 

45,594

 

Total liabilities219,974 208,410 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)Commitments and contingencies (Note 8)

Stockholders’ equity:

 

 

 

 

 

 

 

 

Stockholders’ equity:

Preferred stock, $0.001 par value – 5,000,000 authorized at September 30, 2017 and

December 31, 2016, respectively; and none issued and outstanding at September 30,

2017 and December 31, 2016, respectively

 

 

—

 

 

 

—

 

Common stock, $0.001 par value – 100,000,000 shares authorized at September 30,

2017 and December 31, 2016, respectively; 22,978,954 and 22,139,346 shares

issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

28

 

 

 

22

 

Preferred stock, $0.001 par value - 5,000 shares authorized; none issued and outstanding at September 30, 2023 and December 31, 2022 Preferred stock, $0.001 par value - 5,000 shares authorized; none issued and outstanding at September 30, 2023 and December 31, 2022— — 
Common stock, $0.001 par value - 100,000 shares authorized; 30,633 shares at September 30, 2023 and 30,193 at December 31, 2022 issued and outstanding Common stock, $0.001 par value - 100,000 shares authorized; 30,633 shares at September 30, 2023 and 30,193 at December 31, 2022 issued and outstanding31 28 

Additional paid-in capital

 

 

230,831

 

 

 

219,718

 

Additional paid-in capital826,686 762,380 

Accumulated other comprehensive loss

 

 

(30

)

 

 

(9

)

Accumulated other comprehensive loss(15)(396)

Accumulated deficit

 

 

(145,440

)

 

 

(127,169

)

Accumulated deficit(606,907)(522,200)

Total stockholders’ equity

 

 

85,389

 

 

 

92,562

 

Total stockholders’ equity219,795 239,812 

Total liabilities and stockholders’ equity

 

$

133,655

 

 

$

138,156

 

Total liabilities and stockholders’ equity$439,769 $448,222 


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1


IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(Inin thousands, except share and per share data)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

$

25,035

 

 

$

16,780

 

 

$

70,327

 

 

$

45,368

 

Cost of revenue

 

 

6,920

 

 

 

5,282

 

 

 

20,002

 

 

 

15,097

 

Gross profit

 

 

18,115

 

 

 

11,498

 

 

 

50,325

 

 

 

30,271

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,790

 

 

 

1,635

 

 

 

9,187

 

 

 

4,847

 

Selling, general and administrative

 

 

20,308

 

 

 

12,529

 

 

 

57,787

 

 

 

36,658

 

Total operating expenses

 

 

24,098

 

 

 

14,164

 

 

 

66,974

 

 

 

41,505

 

Loss from operations

 

 

(5,983

)

 

 

(2,666

)

 

 

(16,649

)

 

 

(11,234

)

Interest expense

 

 

(862

)

 

 

(807

)

 

 

(2,522

)

 

 

(2,388

)

Other income (expense), net

 

 

321

 

 

 

(602

)

 

 

900

 

 

 

(1,015

)

Net loss

 

$

(6,524

)

 

$

(4,075

)

 

$

(18,271

)

 

$

(14,637

)

Net loss per common share, basic and diluted

 

$

(0.29

)

 

$

(2.80

)

 

$

(0.81

)

 

$

(10.20

)

Weighted-average shares used to compute net loss per common

   share, basic and diluted

 

 

22,811,907

 

 

 

1,454,307

 

 

 

22,446,399

 

 

 

1,434,583

 



Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(unaudited)
Revenue, net$124,604 $103,875 $360,170 $298,304 
Cost of revenue42,130 32,954 115,790 95,379 
Gross profit82,474 70,921 244,380 202,925 
Operating expenses:
Research and development16,309 11,448 44,828 33,935 
Selling, general and administrative93,768 80,559 285,531 235,468 
Impairment and restructuring charges— — — 26,608 
Total operating expenses110,077 92,007 330,359 296,011 
Loss from operations(27,603)(21,086)(85,979)(93,086)
Interest expense(927)(614)(2,709)(3,125)
Interest and other income, net1,609 365 4,476 450 
Loss before income taxes(26,921)(21,335)(84,212)(95,761)
Income tax provision195 116 495 196 
Net loss$(27,116)$(21,451)$(84,707)$(95,957)
Net loss per common share, basic and diluted$(0.89)$(0.71)$(2.78)$(3.22)
Weighted-average shares, basic and diluted30,607 30,055 30,470 29,837 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(Inin thousands)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net Loss

 

$

(6,524

)

 

$

(4,075

)

 

$

(18,271

)

 

$

(14,637

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on available-for-sale securities

 

 

21

 

 

 

—

 

 

 

(19

)

 

 

—

 

Comprehensive loss

 

$

(6,503

)

 

$

(4,075

)

 

$

(18,290

)

 

$

(14,637

)




Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(unaudited)
Net loss$(27,116)$(21,451)$(84,707)$(95,957)
Other comprehensive income (loss):
Net change in unrealized gains (losses) from marketable securities63 (98)351 (620)
     Cumulative translation adjustment74 — 30 — 
Comprehensive loss$(26,979)$(21,549)$(84,326)$(96,577)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Inin thousands)

Nine Months Ended September 30,
20232022
(unaudited)
Cash flows from operating activities
Net loss$(84,707)$(95,957)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization11,434 9,930 
Stock-based compensation53,358 41,946 
Amortization of premium and accretion of discounts, net(3,627)216 
Provision for doubtful accounts and contractual allowances51,655 43,778 
Amortization of operating lease right-of-use assets4,243 4,865 
Impairment charges— 23,164 
Other(366)230 
Changes in operating assets and liabilities:
Accounts receivable(51,804)(57,882)
Inventory1,885 (4,375)
Prepaid expenses and other current assets(1,549)2,367 
Other assets(21,796)(4,099)
Accounts payable(305)(3,105)
Accrued liabilities10,910 8,072 
Deferred revenue332 (46)
Operating lease liabilities(3,792)(4,692)
Net cash used in operating activities(34,129)(35,588)
Cash flows from investing activities
Purchases of property and equipment(26,907)(22,737)
Purchases of marketable securities(109,202)(137,548)
Sales of marketable securities— 34,965 
Maturities of marketable securities136,500 81,000 
Purchase of strategic investment(3,000)— 
Net cash used in investing activities(2,609)(44,320)
Cash flows from financing activities
Payment of loans— (21,389)
Proceeds from term loan— 35,000 
Proceeds from issuance of common stock in connection with employee equity incentive plans5,352 10,034 
Payments of issuance costs for long-term debt— (77)
Net cash provided by financing activities5,352 23,568 
Effect of exchange rate changes32 — 
Net decrease in cash and cash equivalents(31,354)(56,340)
Cash and cash equivalents, beginning of period78,832 127,562 
Cash and cash equivalents, end of period$47,478 $71,222 
Supplemental disclosures of cash flow information:
Interest paid$2,186 $2,676 
Cash taxes paid$794 $— 
Cash received from tenant improvement allowances$1,603 $— 
Non-cash investing and financing activities:
Property and equipment included in accounts payable and accrued liabilities$89 $1,179 
Right-of-use assets obtained in exchange for operating lease liabilities$4,520 $7,666 
Capitalized stock-based compensation in property and equipment$5,596 $4,306 

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(18,271

)

 

$

(14,637

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,103

 

 

 

646

 

Stock-based compensation

 

 

7,024

 

 

 

1,251

 

Amortization of debt discount and issuance costs

 

 

197

 

 

 

284

 

Amortization of premiums (accretion of discounts) on investments, net

 

 

(207

)

 

 

—

 

Non-cash interest expense

 

 

1,152

 

 

 

1,099

 

Provision for bad debt and contractual allowance

 

 

5,927

 

 

 

3,384

 

Change in fair value of preferred stock warrant liabilities

 

 

—

 

 

 

996

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(8,560

)

 

 

(7,115

)

Inventory

 

 

76

 

 

 

(527

)

Prepaid expenses and other current assets

 

 

(197

)

 

 

(301

)

Other assets

 

 

(793

)

 

 

(842

)

Accounts payable

 

 

(33

)

 

 

69

 

Accrued liabilities

 

 

1,294

 

 

 

(363

)

Deferred revenue

 

 

(43

)

 

 

344

 

Deferred rent

 

 

143

 

 

 

(1

)

Net cash used in operating activities

 

 

(11,188

)

 

 

(15,713

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Change in restricted cash

 

91

 

 

 

—

 

Purchases of property and equipment

 

 

(2,651

)

 

 

(1,821

)

Purchases of available-for-sale investments

 

 

(90,243

)

 

 

—

 

Maturities of available-for-sale investments

 

 

68,682

 

 

 

—

 

Net cash used in investing activities

 

 

(24,121

)

 

 

(1,821

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net proceeds from employee stock transactions

 

 

4,095

 

 

 

82

 

Payments of deferred issuance costs

 

 

—

 

 

 

(1,995

)

Net cash provided by (used in) financing activities

 

 

4,095

 

 

 

(1,913

)

Net decrease in cash and cash equivalents

 

 

(31,214

)

 

 

(19,447

)

Cash and cash equivalents, beginning of period

 

 

51,643

 

 

 

25,208

 

Cash and cash equivalents, end of period

 

$

20,429

 

 

$

5,761

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

1,152

 

 

$

1,213

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Deferred offering costs included in accounts payable and accrued liabilities

 

$

—

 

 

$

637

 

Property, plant and equipment costs included in accounts payable

 

$

6

 

 

$

152

 


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4



IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statement of Stockholders’ Equity
(in thousands)

Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
SharesAmount
(unaudited)
Balance at December 31, 202129,494$27 $685,594 $(406,045)$(61)$279,515 
Issuance of common stock in connection with employee equity incentive plans, net275 — 1,076 — — 1,076 
Stock-based compensation— — 15,152 — — 15,152 
Net loss— — — (50,609)— (50,609)
Net change in unrealized loss on marketable securities— — — — (292)(292)
Balance at March 31, 202229,769 $27 $701,822 $(456,654)$(353)$244,842 
Issuance of common stock in connection with employee equity incentive plans, net195 1 7,295 — — 7,296 
Stock-based compensation— — 16,631 — — 16,631 
Net loss— — — (23,897)— (23,897)
Net change in unrealized loss on marketable securities— — — — (230)(230)
Balance at June 30, 202229,964 $28 $725,748 $(480,551)$(583)$244,642 
Issuance of common stock in connection with employee equity incentive plans, net131— 1,662 — — 1,662 
Stock-based compensation— — 14,469 — — 14,469 
Net loss— — — (21,451)— (21,451)
Net change in unrealized loss on marketable securities— — — — (98)(98)
Balance at September 30, 202230,094 $28 $741,879 $(502,002)$(681)$239,224 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.















5

IRHYTHM TECHNOLOGIES, INC.
Condensed Consolidated Statement of Stockholders’ Equity
(in thousands)

Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
SharesAmount
(unaudited)
Balance at December 31, 202230,193 $28 $762,380 $(522,200)$(396)$239,812 
Issuance of common stock in connection with employee equity incentive plans, net270 2 903 — — 905 
Stock-based compensation— — 19,899 — — 19,899 
Net loss— — — (39,109)— (39,109)
Net change in unrealized gain on marketable securities— — — — 327 327 
Balance at March 31. 202330,463 $30 $783,182 $(561,309)$(69)$221,834 
Issuance of common stock in connection with employee equity incentive plans, net87 — 4,383 — — 4,383 
Stock-based compensation— — 16,227 — — 16,227 
Net loss— — — (18,482)— (18,482)
Net change in unrealized loss on marketable securities— — — — (39)(39)
Cumulative translation adjustment— — — — (44)(44)
Balance at June 30. 202330,550 $30 $803,792 $(579,791)$(152)$223,879 
Issuance of common stock in connection with employee equity incentive plans, net83 1 66 — — 67 
Stock-based compensation— — 22,828 — — 22,828 
Net loss— — — (27,116)— (27,116)
Net change in unrealized gain on marketable securities— — — — 63 63 
Cumulative translation adjustment— — — — 74 74 
Balance at September 30, 202330,633 $31 $826,686 $(606,907)$(15)$219,795 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements



1. Organization and Description of Business

ORGANIZATION AND DESCRIPTION OF BUSINESS

iRhythm Technologies, Inc. (the “Company”) was incorporated in the state of Delaware in September 2006. The Company is a leading digital healthcare company redefiningthat creates trusted solutions that detect, predict, and prevent disease. The Company's principal business is the waydesign, development, and commercialization of device-based technology to provide remote cardiac monitoring services that it believes allow clinicians to diagnose certain arrhythmias are clinically diagnosed by combining wearable biosensing technologyquicker and with cloud-based data analytics and machine-learning capabilities. The Company commenced commercial introduction of its products in the United States in 2009 followinggreater efficiency than other services that rely on traditional technology.
Since first receiving clearance byfrom the U.S. Food and Drug Administration.

Administration (“FDA”) for the Company's technology in 2009, the Company has supported physician and patient use of its technology and provided remote cardiac monitoring services from its Medicare-enrolled independent diagnostic testing facilities (“IDTFs”) and its qualified technicians. The Company’s headquarters are basedCompany has provided the Zio remote cardiac monitoring services, including extended Holter, traditional Holter, and mobile cardiac telemetry (“MCT”) monitoring services (“Zio Services”), using the Zio Systems.

The Company is headquartered in San Francisco, California, and thewhich also serves as a clinical center. The Company has manufacturing facilities in Cypress, California, andadditional clinical centers in Lincolnshire,Deerfield, Illinois and Houston, Texas. In March 2016, theTexas and a manufacturing facility in Cypress, California. The Company formed a wholly-owned subsidiarywholly owned subsidiaries in the United Kingdom. The Company manages its operations as a single operating segment. Substantially all of the Company’s assets are maintainedKingdom in March 2016, in Singapore in June 2021, in Japan in June 2022 and in the United States. The Company derives substantially all of its revenue from sales to customersPhilippines in the United States, based upon the billing address of the customer.

February 2023.


2. Summary of Significant Accounting Policies

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America or U.S. GAAP,(“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission or SEC,(the “SEC”) regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2016 hasSeptember 30, 2023, and related disclosures, have been derived from the audited consolidated financial statements at that date but doesdo not include all of the information required by GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair statement of the Company’s unaudited condensed consolidated financial information. The results of operations for the three and nine months ended September 30, 20172023, are not necessarily indicative of the results to be expected for the year ending December 31, 20172023, or for any other interim period or for any other future year.

The accompanying interim unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 20162022, included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 31, 2017.

PrinciplesFebruary 23, 2023.


7
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Risks and Uncertainties
Macroeconomic Factors and Supply Chain Constraints
The Company’s operations and performance may vary based on worldwide economic and political conditions, which have been adversely impacted by continued global economic uncertainty, political instability, and military hostilities in multiple geographies including ongoing geopolitical conflicts, such as the war in Ukraine and conflict in Israel, domestic and global inflationary trends, interest rate volatility, uncertainty with respect to the federal budget, instability in the global banking system, global supply shortages, and a tightening labor market. A severe or prolonged economic downturn or period of Consolidation

global political instability could drive hospitals and other healthcare professionals to tighten budgets and curtail spending, which could in turn negatively impact rates at which physicians prescribe the Company’s Zio Services. In addition, higher unemployment rates or reductions in employer-provided benefits plans could result in fewer commercially insured patients, resulting in a reduction in the Company’s margins and impairing the ability of uninsured patients to make timely payments. A weak or declining economy could also strain the Company’s suppliers, possibly resulting in supply delays and disruptions. There is also a risk that one or more of the Company’s current service providers, suppliers, or other partners may not survive such difficult economic times, which could directly affect the Company’s ability to attain its goals on schedule and on budget. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. The accompanying interim unaudited condensed consolidated financial statements are consolidatedCompany cannot predict the timing, strength, or duration of an economic downturn, instability, or recovery, whether worldwide, in the United States, or within its industry.

The Company’s remote work arrangements and decision to pursue a sublease for its San Francisco headquarters resulted in an impairment of its right-of-use ("ROU") asset and related leasehold improvements and furniture and fixtures during the nine months ended September 30, 20172022. As the Company continues to evaluate its real estate footprint, the Company may incur additional impairment charges related to real property lease agreements.
The Company is continuously reviewing its liquidity and 2016anticipated capital requirements. The Company believes it will have adequate liquidity over the next 12 months to operate its business and to meet its cash requirements. As of September 30, 2023, the Company is in compliance with its debt covenants.
Reimbursement
The Company receives revenue for the Zio Services primarily from third-party payors, which include the accounts of iRhythm Technologies, Inc.commercial payors and its wholly-owned subsidiary, iRhythm Technologies Ltd., established in March 2016. The financial statements of iRhythm Technologies Ltd. use the U.S. dollargovernment agencies, such as the functional currencyCenters for Medicare & Medicaid Services (“CMS”). For all non-functional currency balances,Third-party payors require the remeasurementCompany to identify the service for which it is seeking reimbursement by using a Current Procedural Terminology (“CPT”) code set maintained by the American Medical Association. These CPT codes are subject to periodic change and update, which will impact the reimbursement rates for the Company’s Zio Services.
CMS updates the reimbursement rates for diagnostic tests performed by IDTFs annually via the Medicare Physician Fee Schedule, and effective January 1, 2023, CMS established national payment rates for the CPT codes the Company uses to report the long-term Holter monitoring services it performs with its Zio XT System: CPT codes 93247 (for wear-time of such balancesgreater than 7 days and up to functional currency results15 days) and 93243 (for wear-time of greater than 48 hours and up to 7 days). Based on the relative value units CMS assigned to CPT codes 93247 and 93243, the national reimbursement rates for these services in 2023 are $243.65 and $231.79, respectively, and range from $247.59 to $334.46 and $235.54 to $318.17 for the Company’s Medicare-enrolled IDTF locations in Deerfield, Illinois, Houston, Texas, and San Francisco, California, when considering the geographic practice cost index for these locations. On August 7, 2023, CMS published the calendar year 2024 Medicare Physician Fee Schedule proposed rule, which includes rates for the CPT codes the Company uses to seek reimbursement for its services. Based on the proposed rule, the Company believes the 2024 proposed national payment rates may be, on average, approximately 5% lower than the 2023 rates for services, when excluding impacts from the geographic practice cost index for the Company’s IDTF locations noted above. As of November 1, 2023, the final Medicare Physician Fee Schedule has not been released by CMS for calendar year 2024. Because remote cardiac monitoring technology, including the Zio System, are rapidly evolving, there is a foreign exchange transaction gain or loss, which is recordedcontinuing risk that relative value units assigned, and reimbursement rates set, by CMS may not adequately reflect the value and expense of this technology and related monitoring services, and the Company cannot provide certainty that CMS will not reduce these rates in the consolidated statements of operations.

future, which would adversely affect the Company’s financial results.

8
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.periods presented. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, contractual allowances, for revenue, allowance for doubtful accounts, the useful lives of property and equipment, the recoverability of long-lived assets, including the estimated usage of the printed circuit board assemblies (“PCBAs”), the valuationincremental borrowing rate for operating leases, accounting for income taxes, impairment of deferred taxROU assets, the fair value of the Company’s preferred and common stock and stock-based compensation. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events.inputs used in estimating stock-based compensation. Actual results may differ from those estimates.

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, which include cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short maturities.

5

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Cash Equivalents

Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the date of purchase.

Investments

Short-term investments consist of debt securities classified as available-for-sale and have maturities greater than 90 days, but less than 365 days from the date of acquisition. Long-term investments have maturities greater than 365 days as of the balance sheet date. All investments are carried at fair value based upon quoted market prices. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reported as a component of accumulated other comprehensive loss. The cost of available-for-sale securities sold is based on the specific-identification method. Realized gains and losses are included in earnings, and are derived for specific-identification method for determining the costs of investments sold.

Restricted Cash

Restricted cash consists of certificates of deposit held with a financial institution as security deposits for building leases and is included in short-term assets on the Company's condensed consolidated balance sheets.

Accounts Receivable, Allowance for Doubtful Accounts and Contractual Allowance

Allowances

Accounts receivable consists ofincludes amounts due to the Company from healthcare institutions, third-party payors, and government payors and third-party commercial payorstheir related patients, as a result of the Company's normal business activities. Accounts receivable is reported on the unaudited condensed consolidated balance sheets net of an estimated allowance for doubtful accounts and contractual allowance.

allowances.

The Company establishes an allowance for doubtful accounts for estimated uncollectible receivables based on its historical experience,assessment of the collectability of customer accounts and recognizes the provision as a component of selling, general and administrative expenses. The Company establishesrecords a provision for contractual allowance, which isallowances based on the estimated differences between contracted amounts and expected collection rates for services performed. Such provisions are based on the Company's historical experience and are reported as a reduction in revenue, for estimated uncollectible amounts from Centers for Medicare & Medicaid Services (“CMS”)of revenue.
The Company regularly reviews the allowances by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and contracted third-party commercial payors.

current economic conditions that may affect a customer’s ability to pay.

The following table presents the changes in the allowance for doubtful accounts:

accounts (in thousands):

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Nine Months Ended September 30, 2023Year Ended December 31, 2022Nine Months Ended September 30, 2022

Balance, beginning of period

 

$

1,792

 

 

$

1,125

 

Balance, beginning of period$18,475 $14,012 $14,012 

Add: provision for doubtful accounts

 

 

1,855

 

 

 

1,960

 

Less: write-offs, net of recoveries and other adjustments

 

 

(852

)

 

 

(1,293

)

Provision for doubtful accountsProvision for doubtful accounts12,595 17,191 12,244 
Write-offs, net of recoveries and other adjustmentsWrite-offs, net of recoveries and other adjustments(11,659)(12,728)17 

Balance, end of period

 

$

2,795

 

 

$

1,792

 

Balance, end of period$19,411 $18,475 $26,273 

The following table presents the changes in the contractual allowance:

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Balance, beginning of period

 

$

2,340

 

 

$

338

 

Add: contractual allowances

 

 

4,072

 

 

 

2,726

 

Less: write-offs, net of recoveries and other adjustments

 

 

(678

)

 

 

(724

)

Balance, end of period

 

$

5,734

 

 

$

2,340

 

Management reviews and updates its estimates for the allowances for doubtful accounts and contractual allowance periodically to reflect its experience regarding historical collections. If management were to make different judgments or utilize different estimates in the allowances for doubtful accounts and contractual allowance, differences in the amount of reported selling, general and administrative expenses and revenue could result, respectively.

6

(in thousands):
Nine Months Ended September 30, 2023Year Ended December 31, 2022Nine Months Ended September 30, 2022
Balance, beginning of period$41,389 $31,274 $31,274 
Add: provision for contractual adjustments39,060 41,158 31,534 
Less: contractual adjustments(32,072)(31,043)(259)
Balance, end of period$48,377 $41,389 $62,549 
9

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Concentrations of Risk

Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. Cash cash equivalents, and investmentsbalances are deposited in financial institutions which, at times, may be in excess of federally insured limits. Cash equivalents are invested in highly rated money market funds. The Company invests in a variety of financial instruments, such as, but not limited to, United States GovernmentU.S. government securities, corporate notes, commercial paper and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. The Company has not experienced any material losses on its deposits of cash and cash equivalents or investments.

Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company’s customer base and their dispersion across many geographies. The Company does not require collateral. The Company records an allowance for doubtful accounts when it becomes probablebased on the assessment of the collectability of customer accounts, considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a receivable will not be collected. Government agencies, including customer’s ability to pay. CMS and the Veterans Administration, accounted for approximately 39%, 38%, 38% and 40%25% of the Company’sCompany's revenue for the three and nine months ended September 30, 20172023, and 201626% and 24% of the Company's revenue for the three and nine months ended September 30, 2022, respectively. Accounts receivable related to government agenciesCMS accounted for 26% and 27%22% of accounts receivable at September 30, 20172023 and December 31, 2016, respectively.

Supply2022.

Inflationary Risk

While

The Company continuously monitors the effects of inflationary factors, such as increases in cost of goods sold and selling and operating expenses, which may adversely affect its results of operations. Specifically, the Company has not experienced manufacturing supply disruptionsmay experience inflationary pressure affecting freight costs, the cost of the components for the Company’s Zio Services, overhead costs relating to date,maintenance of the Company’s facilities, and in the wages paid to its employees due to challenging labor market conditions. Competitive and regulatory conditions may restrict the Company’s ability to fully recover these costs through price increases. As a result, it may be difficult to fully offset the impact of persistent inflation. The Company’s inability or failure to do so could have a material adverse effect on its business, financial condition and results of operations or cause the Company to need to obtain additional capital earlier than anticipated in the future.
Supply Risk
The Company relies on single-source vendors for theto supply some of its disposable housings, instruments and other materials used to manufacture the ZIO PatchZio patches and the adhesive that binds the ZIO PatchZio patch to a patient’s body. These components and materials are critical, and there could be a considerable delay in finding alternative sources of supply.

Inventory

Inventory

A global semiconductor supply shortage is statedhaving wide-ranging effects across multiple industries. The supply shortage has impacted multiple suppliers that provide the PCBAs to the Company. The semiconductor supply shortage may have an impact on the Company until global supply is sufficient for global demand.
Revenue Recognition
The Company has developed a proprietary system that combines an FDA-cleared wire-free, patch-based, 14-day wearable biosensor that continuously records ECG data, with a proprietary cloud-based data analytic platform to help physicians monitor patients and diagnose arrhythmias.In addition, the Company has received CE-mark and UKCA certification for Zio XT System and ZEUS algorithm. The Company currently offers three Zio System options—the Zio XT System, the Zio AT System, and the Zio Monitor System.
The Zio XT System 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 lower of cost or net realizable value, cost being determined on a standard cost basis for material costs and on actual cost basis for labor and overhead, which approximates actual cost on a first in, first out  (“FIFO)” basis, and market being determined as the lower of cost or net realizable value. The Company records write-downs of inventory that is obsolete or in excess of anticipated demand or market value based on consideration of product lifecycle stage, technology trends, product development plans and assumptions about future demand and market conditions. Actual demand may differ from forecasted demand and such differences may have a material effect on recorded inventory values. Inventory write-downs are charged to cost of revenue and establish a new cost basis for the inventory.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful livesend of the assets, ranging from threewear 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 five years. Leasehold improvementsthe prescribing physician with a summary of findings. The Company’s Zio XT services are amortized overgenerally billable when the shorterZio report is issued to the physician.

The Zio Monitor System is the next generation of the lease term or the estimated useful livesZio XT System, and is a prescription-only, remote ECG monitoring system that consists of the assets. Maintenance and repairs are charged to expense as incurred and improvements and betterments are capitalized.

Internal-Use Software

The Company capitalizes costs related to internal-use software duringZio Monitor patch that records the application development stage. Costs related to planning and post implementation activities are expensed as incurred. Capitalized internal-use software is amortized, and recognized as cost of revenue, on a straight-line basis overelectric signal from the estimated useful life, which isheart continuously for up to five years.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 Company evaluatesCompany’s Zio Monitor services are generally billable when the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impactZio report is issued to the recoverability of these assets. Capitalized internal-use software costs are classified as a component of property and equipment.

7

physician.

10

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Goodwill

Goodwill represents the excess

The Zio AT System is a prescription-only, remote ECG monitoring system that similarly consists of the purchase price paid overZio AT patch that records the fair value of tangible and identifiable intangible net assets acquired in business combinations. Goodwill is tested for impairment on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Such events or circumstances may include significant adverse changes in the general business climate, among other things. The impairment test is performed by determining the enterprise fair value of the Company, which is primarily based on the Company’s market capitalization. If the Company’s carrying value, as a one reporting unit entity, is less than its fair value, then the fair value is allocated to all of its assets and liabilities (including any unrecognized intangible assets) as if the fair value was the purchase price to acquire the Company. The excess of the fair value over the amounts assigned to the Company’s assets and liabilities is the implied fair value of the goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company performs its annual evaluation of goodwill during the fourth quarter of each fiscal year. The Company did not record any charges related to goodwill impairment in any of the periods presented in these condensed consolidated financial statements.

Impairment of Long-Lived Assets

The Company annually reviews long-lived assets for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arisingelectric signal from the asset. To date there have been no such impairments of long-lived assets.

Other Assets

Included in the other assets are PCBAs totaling $3.5 million and $2.8 million as of September 30, 2017 and December 31, 2016, respectively. The Company uses a PCBA in each wearable device and it is used numerous times and has a useful life beyond one year. Each time the PCBA is used in a wearable device, a portion of the cost of the PCBA is recorded as a cost of revenue. The Company has based its estimates of how many times a PCBA 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. The Company periodically evaluates the use estimate.

Comprehensive Loss

Comprehensive loss represents all changes in stockholders' equity except those resulting from and distributions to stockholders. The Company’s unrealized gains and losses on available-for-sale securities represent the only component of other comprehensive loss that are excluded from the reported net loss and that are presented in the condensed consolidated statements of comprehensive loss.

Revenue Recognition

The Company’s devices, cardiac rhythm monitors, have a wear periodheart 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.

The Company recognizes as revenue the amount of consideration to which it expects to be entitled in exchange for performing the service. The consideration the Company is entitled to varies by payor portfolio, as further defined below, and includes estimates that require significant judgment by management. A unique aspect of healthcare is the involvement of multiple parties to the service transaction. In addition to the patient, often a third-party payor, for example a commercial or governmental payor or healthcare institution, will pay the Company for some or all of the service on the patient’s behalf. Separate contractual arrangements exist between the Company and third-party payors that establish amounts the third-party payor will pay on behalf of a patient for covered services rendered.
A small portion of the Company’s transactions are covered by third-party payors with whom there is neither a contractual agreement nor an established amount that the third-party payor will pay. In determining the collectability and transaction price for its service, the Company considers factors such as insurance claims which are adjudicated as allowable under the applicable policy and payment history from both payors and patient out-of-pocket costs, payor coverage, whether there is a contract between the payor or healthcare institution and the Company, historical amount received for the ZIO Serviceservice, and any current developments or 30 dayschanges that could impact reimbursement and healthcare institution payments. Certain of these factors are forms of variable consideration which are only included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
A summary of the payment arrangements with third-party payors and healthcare institutions is as follows:
•Contracted third-party payors – The Company has contracts with negotiated prices for services provided to patients with commercial healthcare insurance coverage.
•CMS – The Company has received IDTF approval from regional Medicare Administrative Contractors and will receive reimbursement per the relevant CPT code rates for the ZIO Event Card.services rendered to the patient covered by CMS.
•Healthcare institutions – Healthcare institutions are typically hospitals or physician practices in which the Company has negotiated amounts for its monitoring services, including certain governmental agencies such as the Veterans Administration and 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 Company's services, consistingtransaction price used for determining revenue recognition is based on factors including an average of the delivery of reports containing analysis of data captured byCompany’s historical collection experience for its non-contracted services. This rate is reviewed at least quarterly.
The Company is utilizing the physical device to the prescribing physician, are generally billable at the startportfolio approach practical expedient under Accounting Standard Codification ("ASC") 606, Revenue from Contracts with Customers, whereby services provided under each of the wear period or when reportsabove payor types form a separate portfolio. The Company accounts for the contracts within each portfolio as a collective group, rather than individual contracts. Based on history with these portfolios and the similar nature and characteristics of the patients within each portfolio, the Company has concluded that the financial statement effects are issued to physicians, dependingnot materially different than if accounting for revenue on the service provided. a contract-by-contract basis.
For the ZIO Event Card,contracted and CMS portfolios, the Company recognizes revenue, net of contractual allowances, and recognizes an allowance for doubtful accounts for uncollectible patient accounts receivable. The transaction price is determined based on a straight-line basis over the applicable wear period, as the event monitoring results are delivered to physicians. For the ZIO Service,negotiated rates, and the Company recognizeshas historical experience of collecting substantially all of these contracted rates. These contracts also impose a number of obligations regarding billing and other matters, and the revenue atCompany’s noncompliance with a material term of such contracts may result in a denial of the timeclaim. The Company accounts for denied claims as a form of variable consideration that is included as a report is deliveredreduction to a physician. For all services performed, the Company considers whether or not the following revenue recognition criteria are met: persuasive evidence of an arrangement exists and delivery has occurred or services have been rendered. For services performed for customers the Company invoices directly, additional revenue recognition criteria include that thetransaction price is fixed and determinable and collectability is reasonably assured; for customers in which the Company submits claims to third-party commercial and governmental payors for reimbursement, it recognizes revenue only when a reasonable estimate of reimbursement can be made.

8

recognized as revenue.

11

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

The assessmentCompany makes estimates around the amount of whetherdenied claims within a reasonablereporting period, a process that requires management judgment. The estimated denied claims are based on historical information, and judgement includes the historical period utilized. The Company monitors the estimated denied claims against the latest available information, and subsequent changes to the estimated denied claims are recorded as an adjustment to revenue in the periods during which such changes occur. Delays in claims submissions could lead to an increase in denials if the Company misses the payors’ filing deadlines, which could result in a reduction in the Company’s receipt of payments. Historical cash collection indicates that it is probable that substantially all of the transaction price, less the estimate of reimbursement candenied claims, will be made requires significantreceived. Contracted payors may require that the Company bills patient co-payments and deductibles and from time to time the Company may not be able to collect such amounts due to credit risk. The Company provides for estimates of uncollectible patient accounts receivable, based upon historical experience where judgment by management. Where management's judgment indicates a reasonable estimate of reimbursement can be made,includes the historical period utilized, at the time revenue is recognized, upon deliverywith such provisions presented as bad debt expense within the selling, general and administrative line item of the patient reportconsolidated statements of operations. Adjustments to these estimates for actual experience are also recorded as an adjustment to bad debt expense.
For healthcare institutions, the ZIO Service and straight-line for the ZIO Event Card. Some patients have out-of-pocket costs for amounts not covered by their insurance carrier,transaction price is determined based on negotiated rates, and the Company may bill the patient directly forhas historical experience collecting substantially all of these amounts in the form of co-payments and co-insurance in accordance with their insurance carrier and health plans. Some payors may not cover the Company's service as ordered by the prescribing physician under their reimbursement policies. In the absence of an agreement with the patient or other clearly enforceable legal right to demand payment from the patient, the related revenuecontracted rates. Historical cash collections indicate that it is recognized upon the earlier of notificationprobable that substantially all of the payor benefits allowed or when payment is received, untiltransaction price will be received. As such, the Company is not providing an implicit price concession but, rather, has chosen to accept the ability to make a reasonable estimate.  Once a reasonable estimate can be made, revenue is recognized upon deliveryrisk of the service. During 2017, the Company recognized revenue from certain non-contracted payors as a reasonable estimate was able to be made, primarily based on the consistency of historical payments.

The Company recognizes revenue related to billings for CMSdefault, and commercial payors on an accrual basis, net of contractual allowances, when a reasonable estimate of reimbursement can be made. These contractual allowances represent the difference between the list price (the billing rate) and the reimbursement rate for each payor. Upon ultimate collection from CMS and commercial payors, the amount is compared to the previous estimates and the contractual allowance is adjusted accordingly. Until a contract has been negotiated with a commercial payor, the Company’s services may or may not be covered by these entities' existing reimbursement policies. In addition, patients do not enter into direct agreements with the Company that commit them to pay any portion of the cost of the service in the event that their insurance declines to reimburse the Company. In the absence of an agreement with the patient or other clearly enforceable legal right to demand payment from the patient, the related revenue is recognized upon the earlier of notification of the payor benefits allowed or when payment is received, until the Company has the ability to make a reasonable estimate. Contracted revenue recognized on an accrual basis was $22.5 million, $13.3 million, $62.1 million and $37.6 million for the three and nine months ended September 30, 2017 and 2016, respectively. Revenue related to non-contracted claims was $2.5 million, $3.5 million, $8.2 million and $7.8 million for the three and nine months ended September 30, 2017 and 2016, respectively.

Certain of the Company’s customers pay the Company directly for the ZIO Service upon shipment of devices. Such advance paymentssubsequent uncollected amounts are recorded as deferred revenuebad debt expense to selling, general and administrative expense in the consolidated statements of operations.

For non-contracted portfolios, the Company provides an implicit price concession due to the lack of a contracted rate with the underlying payor. As a result, the Company estimates the transaction price based on historical cash collections utilizing the condensed consolidated balance sheets and revenue is recognized when reportsexpected value method. All subsequent changes to the transaction price are delivered to physicians.

Cost of Revenue

Cost of revenue is expensed as incurred and includes direct labor, material costs, equipment and infrastructure expenses, amortization of internal-use software, allocated overhead, and shipping and handling. Material costs include both the disposable costs of the device and amortization of the PCBAs. Each time the PCBA is used in a wearable device, a portion of the cost of the PCBA is recorded as a cost ofadjustments to revenue.

Research and Development

The Company’s research and development costs are expensed as incurred. Research and development costs include, but are not limited to, payroll and personnel-related expenses, laboratory supplies, consulting costs and overhead charges.

Income Taxes

The Company uses the asset and liability method to account for income taxes in accordance with the authoritative guidance for income taxes. Under this method, deferred tax assets and liabilities are determined based on future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits in income tax expense. To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits.

9

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Stock-based

Stock-Based Compensation

The Company measures its stock-based awards made to employees based on the estimated fair values of its restricted stock units (“RSUs”) based on the awards asclosing price of the Company's stock on the grant date. TheFor performance-based restricted stock units (“PRSUs”), the Company estimates the fair value based on the closing price of its stock options are determined usingon the Black-Scholes option pricinggrant date and, if the award includes a market condition, a Monte Carlo simulation model. In addition, for PRSUs, the Company applies a probability assessment to determine the probable achievement of the performance-based metrics.
Stock-based compensation expense is recognized over the requisite service period using the straight-line method and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, the Company’sCompany's stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For restricted stock, the compensation cost for these awards is based on the closing price of the Company’s common stock on the date of grant, and is recognized as compensation expense on a straight-line basis over the requisite service period.

The Company recognizes compensation expense related to theits 2016 Employee Stock Purchase ProgramPlan (“ESPP”) based on the estimated fair value at each enrollment date of the options onoffering period using the date of grant, net of estimated forfeitures.Black-Scholes-Merton option-pricing model value. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, usingis reduced by the Black-Scholes option pricing model for each purchase period. The grant date fair valueestimated forfeiture and is expensed on a straight-line basis over the offering period.

Net Loss per Common Share

Basic net loss per common share is calculated

12
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
3. REVENUE
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers by dividingpayor type. The Company believes these categories aggregate the net losspayor types by nature, amount, timing and uncertainty of its revenue streams. Disaggregated revenue by payor type and major service line for the weighted average numberthree and nine months ended September 30, 2023 and 2022 were as follows (in thousands, except percentages):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Amount% of RevenueAmount% of RevenueAmount% of RevenueAmount% of Revenue
Contracted third-party payors$67,336 54%$56,016 54%$196,566 55%$163,218 55%
Centers for Medicare and Medicaid31,006 25%27,253 26%88,369 25%72,074 24%
Healthcare institutions18,065 14%14,883 14%52,060 14%45,632 15%
Non-contracted third-party payors8,197 7%5,723 6%23,175 6%17,380 6%
Total$124,604 $103,875 $360,170 $298,304 
Revenue generated from the United States comprised substantially all of sharesthe Company's revenue. No other country comprised 10% or greater of common stock outstandingthe Company's revenue during each of the period, without consideration of potentially dilutive securities. Diluted net loss per common share is the same as basic net loss per common share for all periods presented since the effect of potentially dilutive securities are anti-dilutive.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the Company’s results of operations, net loss or cash flows.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) No. 2014-09, three and nine months ended September 30, 2023 and 2022.

Contract Liabilities
ASC 606, Revenue from Contracts with Customers, (Topic 606). Areas of requires an entity to present a revenue recognition that will be affected include, but are not limitedcontract as a contract liability when the Company has an obligation to transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers ina customer for which the Company has received consideration from the customer, or an amount that reflectsof consideration from the consideration thatcustomer is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principledue and in doing so, itunconditional (whichever is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. In addition, Topic 606 requires more detailed disclosures to enable usersearlier).
Certain of financial statements to understand the nature, timing and uncertainty of revenue and cash flows arising from a review of historical accounting policies and practices to identify potential differences in applying Topic 606.

The Company plans to adopt this standard on January 1, 2018 and will use the modified retrospective approach recognizing the cumulative effect of adopting this guidance as an adjustment to its opening accumulated deficit balance, which will have no effect on the Company’s consolidated statements of operations or cash flowscustomers pay the Company directly for the quarter or year ended December 31, 2017.  Prior periods will not be retrospectively adjusted.  While the evaluationZio XT service upon shipment of the new standard is ongoing, the Company believes the adoption will result in a change to netdevices. Such advance payments are contract liabilities and are recorded as revenue primarily duewhen Zio reports are delivered to the recognition of bad debt expense related to the patient responsibility of both contracted and non-contracted claims, which was $1.7 million forhealthcare provider. During the nine months ended September 30, 2017,2023, $3.0 million relating to the contract liability balance at the beginning of 2023 was recognized as revenue. During the nine months ended September 30, 2022, $3.0 million relating to the contract liability balance at the beginning of 2022 was recognized as revenue. The advance payments liability was $3.4 million as of September 30, 2023.

Contract Costs
Under ASC 340, Other Assets and Deferred Costs ("ASC 340"), the incremental costs of obtaining a contract with a customer are recognized as an asset. Incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained.
The Company’s current commission programs are considered incremental. However, as a reduction of gross revenue rather than as a component of selling, general and administrative and,practical expedient, ASC 340 permits the Company to a lesser extent, due to timing differencesimmediately expense contract acquisition costs, because the asset that would have resulted from capitalizing these costs will be amortized in its recognition of revenue related to non-contracted third-party payor claims as a result of changing from recognition based on the earlier of notification of the payor benefits allowedone year or when payment is received to the accrual basis based on historical experience.

10

less.

13

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718). This ASU was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. This standard covers accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. As a result of adopting ASU No. 2016‑09 on January 1, 2017, the Company has made an accounting policy election to continue to estimate forfeitures. The adoption of ASU No. 2016‑09 also requires excess tax benefits and tax deficiencies be recorded in the income statement as opposed to additional paid‑in capital when the awards vest or are settled, and has been applied on a prospective basis with no impact on the condensed consolidated financial statements as of and for the three months ended September 30, 2017. As a result of the adoption, the Company increased its total NOLs by $0.1 million on January 1, 2017 related to deferred tax assets that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting purposes. This amount is fully offset by the valuation allowance.

On May 10, 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. This ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of this new guidance.

3. Cash Equivalents and Investments

4. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The fair value of cash equivalents and marketable securities not including cash atas of September 30, 20172023 and December 31, 2016,2022, were as follows (in thousands):

 

 

September 30, 2017

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Estimated

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Money market funds

 

$

5,722

 

 

$

—

 

 

$

—

 

 

$

5,722

 

U.S. government securities

 

 

35,942

 

 

 

1

 

 

 

(26

)

 

 

35,917

 

Corporate notes

 

 

15,669

 

 

 

1

 

 

 

(4

)

 

 

15,666

 

Commercial paper

 

 

48,130

 

 

 

—

 

 

 

—

 

 

 

48,130

 

Total available-for-sale securities

 

$

105,463

 

 

$

2

 

 

$

(30

)

 

$

105,435

 

Classified as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

18,418

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

87,017

 

Total cash equivalents and investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

105,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Estimated

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Money market funds

 

$

45,937

 

 

$

—

 

 

$

—

 

 

$

45,937

 

U.S. government securities

 

 

16,479

 

 

 

11

 

 

 

—

 

 

 

16,490

 

Corporate notes

 

 

23,947

 

 

 

—

 

 

 

(20

)

 

 

23,927

 

Commercial paper

 

 

24,971

 

 

 

—

 

 

 

—

 

 

 

24,971

 

Total available-for-sale securities

 

$

111,334

 

 

$

11

 

 

$

(20

)

 

$

111,325

 

Classified as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

45,937

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54,407

 

Long-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,981

 

Total cash equivalents and investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

111,325

 

September 30, 2023
Amortized
Cost		Gross UnrealizedFair Value
GainsLosses
Money market funds$17,440 $— $— $17,440 
U.S. government securities111,038 3 (46)110,995 
Total cash equivalents and marketable securities$128,478 $3 $(46)$128,435 
Classified as:
Cash equivalents$17,440 
Marketable securities110,995 
Total cash equivalents and marketable securities$128,435 
December 31, 2022
Amortized
Cost		Gross UnrealizedFair Value
GainsLosses
Money market funds$24,263 $— $— $24,263 
U.S. government securities134,709 12 (409)134,312 
Total cash equivalents and marketable securities$158,972 $12 $(409)$158,575 
Classified as:
Cash equivalents$24,263 
Marketable securities134,312 
Total cash equivalents and marketable securities$158,575 

Available-for-sale securities held as of September 30, 2017 had a weighted average days to maturity of 122 days. There have been no material realized gains or realized losses on available-for-sale securities for the periods presented.

11

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

As the carrying value approximates the fair value for the Company’s cash equivalents, short-term and long-term investments shown in the tables above, the following table summarizes the fair value of the Company’s cash equivalents, short-term and long-term investments classified by maturity (in thousands):

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Due within one year

 

$

105,435

 

 

$

100,344

 

Due after one year through three years

 

 

—

 

 

 

10,981

 

Total available-for-sale marketable debt

   securities

 

$

105,435

 

 

$

111,325

 


4. Fair Value Measurements

5. FAIR VALUE MEASUREMENTS
The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:

Level 1 - —Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 - —Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 - —Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The corporate notes, commercial paper andU.S. government bondssecurities are classified as Level 2 as they were valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.

Based on Level 2 inputs and the borrowing rates currently available

14
IRHYTHM TECHNOLOGIES, INC.
Notes to the Company for loans with similar terms and maturities,Unaudited Condensed Consolidated Financial Statements (Continued)
The Company's interest-bearing obligation is classified as Level 2. As of September 30, 2023 the fair value of the Company’s outstanding interest-bearing obligation approximated the carrying value of $34.9 million. As of December 31, 2022, the fair value of the Company’s debt approximatesoutstanding interest-bearing obligation approximated the carrying value of $34.9 million.
The Company holds a strategic investment that it does not measure at fair value on a recurring basis. The carrying value of this investment is $3.0 million as of September 30, 2023. The Company includes this investment in other assets in its unaudited condensed consolidated balance sheets.
The Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value.

The following table presentstables present the fair value of the Company’s financial assets and liabilities determined using the inputs defined above (amounts(in thousands):
September 30, 2023
Level 1Level 2Level 3Total
Assets
Money market funds$17,440 $— $— $17,440 
U.S. government securities— 110,995 — 110,995 
Total$17,440 $110,995 $— $128,435 

December 31, 2022
Level 1Level 2Level 3Total
Assets
Money market funds$24,263 $— $— $24,263 
U.S. government securities— 134,312 — 134,312 
Total$24,263 $134,312 $— $158,575 

6. BALANCE SHEET DETAILS
Inventory
Inventory consisted of the following (in thousands):
September 30, 2023December 31, 2022
Raw materials and work-in-process$5,962 $9,338 
Finished goods7,686 5,817 
Total$13,648 $15,155 

Other Assets
Other assets consisted of the following (in thousands):
September 30, 2023December 31, 2022
PCBAs$37,980 $18,599 
Cloud computing arrangements5,223 2,523 
Strategic investment3,000 — 
Other845 1,130 
Total$47,048 $22,252 
The Company reuses PCBAs in thousands).

each wearable Zio XT patch, Zio AT patch, and Zio Monitor patch, as well as the wireless gateway used in conjunction with the Zio AT patch. As PCBAs are used in a wearable Zio XT patch, Zio AT patch, or Zio Monitor patch, a portion of the cost of the PCBA is recorded as a cost of revenue. The PCBAs are charged over a period beyond one year. Charges to cost of revenue were $2.4 million and $5.4 million for the three and nine months ended September 30, 2023, respectively, and $1.3 million and $3.8 million for the three and nine months ended September 30, 2022, respectively.

 

 

September 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

5,722

 

 

$

—

 

 

$

—

 

 

$

5,722

 

U.S. government securities

 

 

—

 

 

 

35,917

 

 

 

—

 

 

 

35,917

 

Corporate notes

 

 

—

 

 

 

15,666

 

 

 

—

 

 

 

15,666

 

Commercial paper

 

 

—

 

 

 

48,130

 

 

 

—

 

 

 

48,130

 

Total

 

$

5,722

 

 

$

99,713

 

 

$

—

 

 

$

105,435

 

15

12

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

45,937

 

 

$

—

 

 

$

—

 

 

$

45,937

 

U.S. government securities

 

 

—

 

 

 

16,490

 

 

 

—

 

 

 

16,490

 

Corporate notes

 

 

—

 

 

 

23,927

 

 

 

—

 

 

 

23,927

 

Commercial paper

 

 

—

 

 

 

24,971

 

 

 

—

 

 

 

24,971

 

Total

 

$

45,937

 

 

$

65,388

 

 

$

—

 

 

$

111,325

 

The following table sets forth a summaryDuring the nine months ended September 30, 2023, PCBAs increased by $19.4 million primarily related to the expanded launch of the changes inZio Monitor System, as well as additional needs for the fair value of the preferred stock warrants which is classified as Level 3 in the fair value hierarchy. There were no transfers into or out of Level 3 during the periods (in thousands):

 

 

Nine Months Ended

September 30,

2017

 

 

Nine Months Ended

September 30,

2016

 

Beginning balance

 

$

—

 

 

$

2,949

 

Total change in fair value recorded as other expense, net

 

 

—

 

 

 

996

 

Ending balance

 

$

—

 

 

$

3,945

 

The valuation of the preferred stock warrant liabilities is discussed in Note 11.

5. Balance Sheet Components

InventoryZio XT and PCBAs

Inventory and PCBAs consisted of the following (in thousands):

Zio AT patches.

 

 

September 30,

2017

 

 

December 31,

2016

 

Raw materials

 

$

737

 

 

$

839

 

Finished goods

 

 

4,119

 

 

 

3,324

 

Total

 

$

4,856

 

 

$

4,163

 

Reported on the consolidated balance sheet as:

 

 

 

 

 

 

 

 

Inventory

 

$

1,314

 

 

$

1,390

 

Other assets

 

 

3,542

 

 

 

2,773

 

Total

 

$

4,856

 

 

$

4,163

 

Amounts reported as other assets are comprised of the PCBA costs that are included in both raw materials and finished goods totals above.

13

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

September 30, 2023December 31, 2022

Laboratory and manufacturing equipment

 

$

2,028

 

 

$

1,509

 

Laboratory and manufacturing equipment$5,729 $4,911 

Computer equipment and software

 

 

916

 

 

 

736

 

Computer equipment and software2,448 2,315 

Furniture and fixtures

 

 

928

 

 

 

657

 

Furniture and fixtures4,198 4,119 

Leasehold improvements

 

 

703

 

 

 

502

 

Leasehold improvements23,533 23,144 

Internal-use software

 

 

4,387

 

 

 

2,900

 

Internal-use software60,001 44,877 
Internal-use software in developmentInternal-use software in development37,482 28,069 
Construction in progressConstruction in progress9,655 3,451 

Total property and equipment, gross

 

 

8,962

 

 

 

6,304

 

Total property and equipment, gross143,046 110,886 

Less: accumulated depreciation and amortization

 

 

(2,755

)

 

 

(1,651

)

Less: accumulated depreciation and amortization(46,378)(35,216)

Total property and equipment, net

 

$

6,207

 

 

$

4,653

 

Total property and equipment, net$96,668 $75,670 

Depreciation and amortization expense was $4.1 million and $11.4 million for the three and nine months ended September 30, 20172023, respectively, and 2016 was $0.5 million, $0.2 million, $1.1$3.4 million and $0.6$9.9 million for the three and nine September 30, 2022, respectively, of which amortization related to internal-use software, was $3.1 million and $8.6 million, for the three and nine months ended September 30, 2023, respectively,and $2.5 million and $7.2 million for the three and nine months ended September 30, 2022, respectively.

During the three and nine months ended September 30, 2023, internal-use software, both in service and in development, increased by $7.8 million and $24.5 million, respectively. This increase related to enhancements in the Company’s core technology, products and services and artificial intelligence, as well as investment in future technology, such as the Zio Monitor System, the Company's new biosensor technology platform, and the clinically-integrated ZEUS System for the Zio Watch.
Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

September 30, 2023December 31, 2022
Accrued payroll and related expensesAccrued payroll and related expenses$38,458 $34,752 

Accrued vacation

 

$

1,923

 

 

$

1,642

 

Accrued vacation10,050 8,608 

Accrued payroll and related expenses

 

 

5,627

 

 

 

6,179

 

Accrued ESPP contributions

 

 

1,029

 

 

 

417

 

Accrued expensesAccrued expenses13,811 7,006 
Claims payableClaims payable5,295 4,464 
Accrued employee share purchase plan contributionsAccrued employee share purchase plan contributions2,863 1,045 
Accrued income and sales taxesAccrued income and sales taxes3,071 2,388 

Accrued professional services fees

 

 

555

 

 

 

636

 

Accrued professional services fees3,083 7,234 

Other

 

 

2,302

 

 

 

1,291

 

Total accrued liabilities

 

$

11,436

 

 

$

10,165

 

Total accrued liabilities$76,631 $65,497 

6. Related-Party Transactions

Kaiser Permanente (“Kaiser”) is a common stockholder of

During the year ended December 31, 2022 and the nine months ended September 30, 2023, the Company representing 6.1% ownership of the total outstanding shares of the Companyhas incurred expenses in connection with efforts to further globalize its operational footprint and expects to continue to incur such expenses through mid-2024. Included above in accrued payroll and related expenses as of December 31, 2016. ForSeptember 30, 2023, were $4.0 million of costs related to globalization.
16
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
7. IMPAIRMENT AND RESTRUCTURING CHARGES
During the three and nine months ended September 30, 20172023, there were no impairment and 2016,restructuring charges.
In February 2022, the Company recognized revenueCompany's board of $1.0directors (the “Board”) approved a restructuring plan ("Restructuring Plan") to allow it to effectively and efficiently scale its business, which resulted in severance and other employment related costs $3.4 million $0.4 million, $2.8 million and $1.8 million, respectively, for transactions with Kaiser. The amounts receivable from transactions with Kaiser were $0.7 million and $0.4 million as of September 30, 2017 and December 31, 2016, respectively. Kaiser performs services related to clinical trials andduring the Company utilizes Kaiser for employee healthcare and the total expense recorded was $0.3 million, $0.1 million, $0.5 million, and $0.5 million as of the three and nine months ended September 30, 20172022. Also in February 2022, the Board approved reducing the Company's leased space for its headquarters in San Francisco, California, by a total amount of leased square footage of approximately 50%. As a result, the Company recognized an impairment of its ROU asset and 2016, respectively.related leasehold improvements and furniture and fixtures in the amount of $23.2 million during the nine months ended September 30, 2022. The amounts outstandingCompany's restructuring and impairment charges are described below (in thousands):
Nine Months Ended
September 30, 2022
Restructuring charges$3,444 
Impairment charges23,164 
Total$26,608 
The Company did not record any impairment charges during the nine months ended September 30, 2023.
For further details, please refer to Note 7, Impairment and Restructuring, included in accounts payablethe financial statements accompanying the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Restructuring
The following table provides a summary of changes in the restructuring liabilities associated with the Restructuring Plan (in thousands):
December 31, 2022ChargesCash PaymentsSeptember 30, 2023
Employee severance$394  $—  $(394) $— 
Total$394 $— $(394)$— 


8. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The Company is party to various purchase arrangements related to its manufacturing and accrued liabilities were $0.3 millionresearch and $0.2 million as ofdevelopment activities. During the nine months ended September 30, 2017,2023, there were no material changes to purchase commitments from those disclosed in Note 8, Commitments and Contingencies, included in the financial statements accompanying the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 respectively.

7. Commitments and Contingencies

Lease Arrangements

2022.

Leases
The Company leases office, manufacturing, and manufacturing spaceclinical centers under non-cancelable operating leases which expire on various dates through 2027. 2033. These leases generally contain scheduled rent increases or escalation clauses and renewal options. Operating lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease ROU assets also include any lease payments made to the lessor at or before the commencement date as well as variable lease payments which are based on a consumer price index. The Company is also subject to variable lease payments related to janitorial services and electricity which are not included in the operating lease ROU asset as they are based on actual usage. The Company recognizes rent expenseoperating lease expenses, generally on a straight-line basis over the lease period.

In May 2017,

In July 2023, the Company entered into an approximately seven-year facility lease in San Diego, California, as corporate office space. The Company leased approximately 8,300 square feet. The lease provides an option to extend the term of the lease for one five-year period beyond the initial term, which the Company is not reasonably certain to exercise and therefore was not considered in determining the ROU assets and lease liabilities balance. Total lease payments approximate $4.6 million as of the lease commencement date.

17
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
In August 2023, the Company entered into a commercial buildingfive-year facility lease agreementin Manila, Philippines, in order to further globalize the Company's operational footprint as a business service center. The Company leased approximately 24,000 square feet. The lease provides an option to extend the term of the lease for its clinical centertwo periods of five years beyond the initial term, which the Company is not reasonably certain to exercise and therefore was not considered in Houston, Texas which expires in September 2027.

14

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The following table summarizesdetermining the Company’s future minimumROU assets and lease liabilities balance. Total lease payments approximate $2.1 million as of September 30, 2017the lease commencement date.

Contractual obligations under operating lease liabilities were as follows (in thousands):

Period Ending December 31:

 

 

 

 

2017 (remainder of year)

 

$

1,263

 

2018

 

 

5,089

 

2019

 

 

5,108

 

2020

 

 

1,178

 

2021

 

 

406

 

Thereafter

 

 

2,541

 

Total

 

$

15,585

 

Year Ending December 31:
2023 (remainder of the year)$5,497 
202421,803 
202521,577 
202621,304 
202720,873 
Thereafter38,658 
Total lease payments129,712 
Less: imputed interest(32,923)
Total lease liabilities$96,789 

The Company’s rent expense was $1.3 million, $0.6 million, $3.8 million and $1.6 million for the three and nine months ended September 30, 2017 and 2016, respectively.

Legal Proceedings

From time to time, the Company may becomeis involved in claims and legal proceedings arising fromor investigations, that arise in the ordinary course of its business. Management is currently not aware of anySuch matters that could have a materialan adverse effectimpact on the Company's reputation, business, and financial position, resultscondition and divert the attention of operations or cash flowsits management from the operation of the Company.

Company's 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 (the "Court") alleging that the Company and its former Chief Executive Officer, Kevin M. King, violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder ("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, its former Chief Executive Officer, Michael J. Coyle, and former Chief Financial Officer and former Chief Operating Officer, Douglas J. Devine. The purported class in the amended complaint includes all persons who purchased or acquired the Company's common stock between August 4, 2020 and July 13, 2021, and seeks unspecified damages purportedly sustained by the class. On October 27, 2021, the Company filed a motion to dismiss, which the Court granted on March 31, 2022, entering judgment in favor of the Company and the other defendants. On April 29, 2022, the original named plaintiff appealed to the Ninth Circuit Court of Appeals. On October 11, 2023, after briefing by the parties and oral argument, the Ninth Circuit dismissed the appeal for lack of jurisdiction. The appellant has stated that he intends to file a petition for rehearing en banc. The Company believes the above securities class action lawsuit to be without merit and plans to continue 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 FDA and the Company's products and services. On September 14, 2021, the Company received a second subpoena requesting additional information. On April 4, 2023, the Company received a Subpoena Duces Tecum from the Consumer Protection Branch, Civil Division of the U.S. Department of Justice, requesting production of various documentsregarding the Company’s products and services. The Company is cooperating fully on these matters.
18
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Development Agreement
On September 3, 2019, the Company entered into a Development Collaboration Agreement with Verily Life Sciences LLC, an Alphabet company (“VLS”) and Verily Ireland Limited (“VIL” and together with VLS, “Verily”) (such Development Collaboration Agreement, as amended by Amendment No. 1 dated April 26, 2021 and Amendment No.2 dated January 24, 2022, the “Development Agreement”). The Development Agreement involves joint development and production of intellectual property between the Company and Verily. Each participant has primary responsibility for certain aspects of development and approval, with all processes to be performed at each respective party’s own cost. Costs incurred by the Company in connection with the Development Agreement will be expensed as research and development expense in accordance with ASC 730, Research and Development.
The Company and Verily will develop certain next-generation atrial fibrillation (“Afib”) screening, detection, or monitoring products pursuant to the Development Agreement, which products will involve combining Verily's and the Company’s technology platforms and capabilities. Under the terms of the Development Agreement, the Company paid Verily an upfront fee of $5.0 million in 2019. In addition, the Company agreed to make additional 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 through September 30, 2023, and, subject to achievement of specified milestones, anticipate making additional milestone payments of $1.75 million into 2024.
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 that may include indemnification provisions.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 California corporateapplicable 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.

8. Debt

Pharmakon Loan Agreement


19
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
9. DEBT
In December 2015,October 2018, the Company entered into the Loan Agreement with Biopharma Secured Investments III Holdings Cayman LP, or Pharmakon (the “Pharmakon Loan Agreement”). The Pharmakon Loan Agreement provides for up to $55.0 million in term loans split into two tranches as follows: (i) the Tranche A Loans are $30.0 million in term loans, and (ii) the Tranche B Loans are up to $25.0 million in term loans. The Tranche A Loans were drawn on December 4, 2015. The Tranche B Loans were available to be drawn prior to December 4, 2016. No additional draw was made.

During the first full eight quarters, payments are interest only and for the first two years, 50% of the interest will be “paid-in-kind.” The Company is subject to a financial covenant related to minimum trailing revenue targets that begins in June 2017, and is tested on a semi-annual basis. The minimum net revenue covenant ranges from $44.7 million for the period ended June 30, 2017 to $102.6 million for the period ended December 31, 2021. To date all minimum revenue targets have been achieved. The minimum net revenues financial covenant has a 45-day equity cure period following required delivery date of the financial statements. Pursuant to this equity cure provision, the Company may cure a revenue covenant default by raising additional funds from the sale of equity. The Company was in compliance with loan covenants as of September 30, 2017. The loan matures December 2021.

The Tranche A Loans bear interest at a fixed rate equal to 9.50% per annum that is due and payable quarterly in arrears. During the first eight calendar quarters, 50% of the interest due and payable shall be added to the then outstanding principal.

15

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The Pharmakon Loan Agreement requires the Company to maintain a minimum consolidated liquidity and minimum net revenue during the term of the loan facility and contains customary affirmative and negative covenants and event of default provisions that could result in the acceleration of the repayment obligations under the loan facility. Upon a change in control of the Company, Pharmakon has the option to demand payment in full of the outstanding loans together with any prepayment premium.

The obligations under the Pharmakon Loan Agreement are secured by a security interest in substantially all of the Company’s assets pursuant to the Pharmakon Guaranty and Security Agreement and this security interest is governed by an intercreditor agreement between Pharmakon and Silicon Valley Bank (“SVB”).

In December 2015, the Company used the proceeds from the Pharmakon Loan Agreement to repay $4.9 million of bank debt to SVB. The issuance costs and debt discount have been netted against the borrowed funds on the balance sheet. The debt balance as of September 30, 2017 and December 31, 2016 was $32.1 million and $30.8 million, respectively.

Bank Debt

In June 2014, the Company refinanced its debt with SVB by entering into the Second Amendment to the Amended and Restated Loan Security Agreement (“Second Amendment”). Under this amendment, the Company borrowed $4.9 million with an additional advance of $5.0 million available. All the borrowings under the Second Amended Loan Agreement were collateralized by all of the Company’s assets, excluding intellectual property. In connection with entering into the Amended Loan Agreement, the Company issued warrants to purchase 20,136 shares of Series D at $7.31 per share that expire in June 2024 (See Note 11).

In December 2015, the Company used the proceeds from the Pharmakon Loan Agreement to repay $4.9 million of bank debt to SVB and entered into a SecondThird Amended and Restated Loan and Security Agreement with SVB, or the (“SVB Loan Agreement.Agreement”) with Silicon Valley Bank (“SVB”). Under the SVB Loan Agreement, the Company had borrowed $35.0 million and had made repayments through March 2022, at which time the outstanding balance was $18.5 million.

On March 28, 2022, the Company entered into a Second Amendment (“2022 Amendment”) to its SVB Loan Agreement which provided for a term loans facility in the aggregate principal amount of up to $75.0 million (the “2022 Term Loans”), of which $35.0 million was borrowed at closing and a portion of the proceeds was used to pay in full the outstanding balance of $18.5 million under the SVB Loan Agreement. The remaining $40.0 million of 2022 Term Loans may borrow, repaybe borrowed from time to time at the Company’s option, in increments of at least $10.0 million, through December 31, 2023. The Company will pay interest only on the 2022 Term Loans until April 1, 2025, when it will commence repaying the 2022 Term Loans in 24 equal consecutive monthly installments, with all obligations under the 2022 Term Loans maturing on March 1, 2027. Interest charged on the 2022 Term Loans will accrue at a floating per annum rate equal to the greater of: (A) the Prime Rate plus 0.25%; and reborrow under(B) 3.5%. The Company is also required to pay fees on any prepayment of the 2022 Term Loans, ranging from 1.0% to 3.0% depending on the date of prepayment, and a final payment equal to 5.0% of the principal amount of the 2022 Term Loans drawn. Once repaid or prepaid, the 2022 Term Loans may not be reborrowed. The Company accounted for the refinancing as an extinguishment of the original loans and paid a fee of $1.8 million, which was included in interest expense on the unaudited condensed consolidated statement of operations and recorded the 2022 Term Loans, net of issuance costs. The issuance costs on the new loans are amortized over the term of the loan.
The 2022 Amendment also amended the terms of the revolving credit line but not in excess ofunder the maximum loanSVB Loan Agreement, which provided for an aggregate principal amount of $25.0 million, to: (i) extend the maturity date from August 1, 2023 to March 1, 2027, (ii) increase the letters of credit sublimit to $15.0 million until December 4, 2018, when all outstanding principal and accrued interest becomes due and payable. Any(iii) increase the cash management services sublimit to $15.0 million. Interest charged on the principal amount outstanding under the SVB revolving credit line shall bear interestaccrues at a floating rate per annum rate equal to the rate publishedgreater of (A) the Prime Rate plus 0.25% and (B) 3.5%. The Company is required to pay an annual fee equal to 0.15% of the revolving credit line. As of September 30, 2023, no loans were outstanding under the revolving credit line and the Company had used $8.4 million in letters of credit.
The 2022 Amendment also amended the SVB Loan Agreement to require the Company to comply, as of the last day of each fiscal quarter, with a quick ratio of at least 1.0 to 1.15 or minimum adjusted EBITDA trailing 6 months of at least $15.0 million.
As of March 27, 2023, in connection with the closure of SVB by the California Department of Financial Protection and Innovation and the Federal Deposit Insurance Corporation, First-Citizens Bank & Trust Company assumed all of SVB’s deposits and loans. The Wall Street Journal as the “Prime Rate” plus 0.25%, are tiedCompany continues to have access to the Company’s trailing six-month revenuerevolving credit line and subject to certain revenue targets. The Company may borrow up to 80%letters of its eligible accounts receivable, up to the maximum of $15.0 million.

In August 2016, the Company obtained a $3.1 million standby letter of credit available pursuant to the SVB revolving credit facility in connection with a lease for the San Francisco office. As of September 30, 2017 and December 31, 2016, the Company was eligible to borrow up to $7.7 million and $2.5 million, respectively, under the SVB revolving credit line.

The SVB Loan Agreement requires the Company to maintain a minimum consolidated liquidity and minimum net sales during the term of the loan facility. In addition, the SVB Loan Agreement contains customary affirmative and negative covenants and events of default. The Company was in compliance with its loan covenants as of September 30, 2017. The2023.

Future minimum payments
Contractual obligations under the SVB Loan Agreement are collaterialized by substantially all assets of the Company and this security interest is governed by an intercreditor agreement between Pharmakon and SVB.

California HealthCare Foundation Note

In November 2012, the Company entered into a Note Purchase Agreement and Promissory Note with the California HealthCare Foundation, or the CHCF Note, through which the Company borrowed $1.5 million. The CHCF Note accrues simple interest of 2.0%. The accrued interest and the principal was to mature in November 2016. In partial consideration for the issuance of the CHCF Note, the Company issued warrants to purchase 22,807 shares of the Company’s Series D convertible preferred stock.

In June 2015, the Company amended the CHCF Note to extend the maturity date to May 2018. In partial consideration for the amendment, the Company issued 8,552 warrants at $6.58 exercise price per share of the Company’s Series D convertible preferred stock. The CHCF note is subordinate to other debt. The debt balance, net of debt discount,2022 Term Loans comprise principal and interest payments as of September 30, 2017 and December 31, 2016 was $1.6 million and $1.5 million, respectively.

16

follows (in thousands):
Year Ending December 31,
2023 (remainder of the year)$774 
20243,114 
202515,841 
202618,728 
20274,440 
Total42,897 
Less: Amount representing interest(7,897)
Less: Debt issuance costs(54)
Principal payments$34,946 

20

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

9. Income Taxes

10. INCOME TAXES
The Company did not recordrecorded a tax provision or benefit for incomerelated to its U.S. state taxes and the U.K. subsidiary during the three and nine months ended September 30, 20172023 and 2016, respectively, as it reported losses in each period which are not more likely than not to be realized.2022. Due to the uncertainties surrounding the realization of the U.S. deferred tax assets through future taxable income, the Company has provided a full valuation allowance and, therefore, no benefit has been recognized for the net operating loss carryforwards and other deferred tax assets.

At December 31, 2016, the Company had $0.6 million of unrecognized tax benefit, none of which, if recognized, would affect the effective tax rate as most of the unrecognized tax benefit is deferred tax assets currently offset by a valuation allowance.

A number of years may elapse before an uncertain tax position is audited and finally resolved.  While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most likely outcome.  The Company adjusts these reserves in light of changing facts and circumstances.  Settlement of any particular position could require the use of cash.  As of September 30, 2017, changes to the Company’s uncertain tax positions in the next twelve months that are reasonably probable are not expected to have a material impact on the Company’s financial position or results of operations.

10. Stockholders’ Equity


11. STOCKHOLDERS' EQUITY
Common stock

As of September 30, 2017, theStock

The Company’s amended and restated certificate of incorporation dated October 25, 2016, authorizedas amended, authorizes the Company to issue 100,000,000 shares of common stock with a par value of $0.001 per share and 5,000,000 shares of preferred stock with a par value of $0.001 per share. The holders of common stock are entitled to receive dividends whenever funds and assets are legally available and when declared by the boardBoard, subject to the prior rights of directors.holders of all series of convertible preferred stock outstanding. No dividends were declared through September 30, 2017.

2023.

The Company had reserved shares of common stock for issuance as follows:

follows (in thousands):

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Options issued and outstanding

 

 

2,765,902

 

 

 

2,977,218

 

Unvested restricted stock units

 

 

453,063

 

 

 

105,529

 

Common stock warrants issued and outstanding

 

 

127,918

 

 

 

217,245

 

Shares available for grant under future stock plans

 

 

4,774,565

 

 

 

4,226,068

 

 

 

 

8,121,448

 

 

 

7,526,060

 


11. Preferred

September 30, 2023December 31, 2022
Options issued and outstanding307 328 
Unvested RSUs and PRSUs 1
2,747 2,026 
Shares available for grant under future stock plans6,728 7,823 
Shares available for future issuance9,782 10,177 
1PRSUs are based on the maximum number of PRSUs in the key executive grant agreements. The actual number of PRSUs granted will be based on company performance criteria and relative Total Shareholder Return, as discussed in Note 12, Equity Incentive Plan and Stock-Based Compensation.

12. EQUITY INCENTIVE PLAN AND STOCK-BASED COMPENSATION
A summary of awards available for grant under the Company’s 2016 Equity Incentive Plan is as follows (in thousands):
Shares Available for Grant
Balance as of December 31, 20227,823 
Awards granted 1
(1,317)
Awards forfeited 1
222 
Balance as of September 30, 20236,728 
1 Awards granted and forfeited include PRSUs, which are based on the maximum number of PRSUs in the key executive grant agreements. The actual number of PRSUs granted will be based on company performance criteria and relative Total Shareholder Return, as discussed in Note 12, Equity Incentive Plan and Stock-Based Compensation.
21
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Restricted Stock Warrant Liabilities

In November 2012,Units and Performance-Based Restricted Stock Units

The fair value of RSUs and PRSUs are based on the Company’s closing stock price on the date of grant. The fair value of market based PRSUs were estimated at the date of grant using the Monte-Carlo option pricing model. A summary is as follows (in thousands, except weighted average grant date fair value):
Restricted Stock UnitsPerformance Based Restricted Stock Units and Market-Based Units
Shares Underlying RSUsWeighted Average Grant Date Fair Value
Shares Underlying PRSUs 1
Weighted Average Grant Date Fair Value
Balance as of December 31, 20221,465 $111.16 561 $120.22 
Granted853 116.49 464 124.56 
Vested(349)118.30 (24)107.05 
Forfeited(129)119.60 (93)127.04 
Balance as of September 30, 20231,839 $111.69 908 $122.09 
1Based on the maximum number of PRSUs in connection with borrowings under a convertible note,the key executive grant agreements. The actual number of PRSUs granted will be based on company performance criteria and relative Total Shareholder Return, as discussed in Note 12, Equity Incentive Plan and Stock-Based Compensation.
As of September 30, 2023, there was total unamortized compensation costs of $142.3 million, net of estimated forfeitures, related to unrecognized RSU expense, which the Company issued warrantsexpects to purchase sharesrecognize over a weighted average remaining period of Series C or New Preferred. The warrants were only exercisable if1.9 years. Aggregate intrinsic value of the Convertible Notes were converted into Series C or New Preferred. The warrants’ exercise price is $0.001 per share and they have a seven year term. On March 27, 2013RSUs was $173.4 million as of September 30, 2023.
As of September 30, 2023, there was total unamortized compensation costs of $41.9 million, net of estimated forfeitures, related to unrecognized PRSU expense, which the Company closedexpects to recognize over a weighted average remaining period of 2.3 years. Aggregate intrinsic value of the Series D financing. The warrants were converted into warrants to purchase 207,177 sharesPRSUs was $85.6 million as of Series D convertible preferred stock. September 30, 2023.
PRSUs and Market-based RSUs
The Company recognizedgrants PRSUs to its key executives. PRSUs can be earned in accordance with the performance equity program for each respective grant.
For further details on PRSUs granted in 2022 and prior years, please refer to Note 13, Equity Incentive Plans, in the financial statements accompanying the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
In February 2023, the Company granted PRSUs (“February 2023 awards”) to be earned based on the CAGR calculated between fiscal year 2025's and fiscal year 2022's annual unit volume and measuring a chargeminimum performance threshold of $0.5 million15% to earn 50.0% of target, and $0.7 million relateda maximum threshold of 25% achieved to earn 200.0% of target. These February 2023 awards are subject to the changerecipient's continued employment through the vesting date of March 15, 2026.
In addition, in February 2023, the Company granted market-based PRSUs to senior executive officers. These PRSUs to be earned will be based on the CAGR calculated between fiscal year 2025 and fiscal year 2022 annual unit volume and measuring performance thresholds mentioned above, as well as a comparison of the S&P Healthcare Index to the Company's Total Shareholder Return (“TSR”). The grant date fair value of the warrants forTSR was based on the threeexpected term of 2.9 years, interest risk free rate of 4.5%, implied volatility of 83.8% and no dividend yield. These February 2023 awards are subject to the senior executive officers continued employment through the vesting date of March 15, 2026.
In August 2023, the Company granted market-based retention PRSUs ("August 2023 awards") to its Chief Executive Officer, other senior executive officers, and other members of the Company’s management team. The purpose of the performance-based awards was tied to several important long-term operational objectives, including to: (i) create stability among the leadership team, (ii) retain other critical talent and (iii) drive achievement of strategic objectives while the Company transforms and scales its business model. The performance period of the August 2023 awards will be measured between July 1, 2023 and June 30, 2026, with Company results subject to adjustment by the Company’s TSR as compared to the TSR of the S&P Healthcare Index. The grant date fair value of the TSR was based on the expected term of 2.9 years, interest risk free rate of 4.4%, implied volatility of 80.1% and no dividend yield. The August 2023 awards are subject to the continued employment of the recipients through the vesting date of August 7, 2026.

22
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Options
The following table summarizes stock option activity during the nine months ended September 30, 2016. Upon the IPO, the Series D preferred stock warrants converted into common stock warrants2023 (in thousands, except weighted average exercise price per share and were reclassified to additional paid-in-capital in the Company's balance sheet. As a result, the warrants areyears):
Options Outstanding
Options
Outstanding		Weighted-
Average
Exercise
Price Per
Share		Weighted-
Average
Remaining
Contractual
Life (years)		Aggregate
Intrinsic Value
Balance as of December 31, 2022328 $43.00 4.43$16,635 
Options exercised(21)53.03 
Balance as of September 30, 2023307 42.32 3.6615,964 
Options exercisable – September 30, 2023307 $42.32 3.66$15,964 
There have been no longer subject to fair value remeasurement.options granted since December 31, 2019. As of September 30, 2017, 127,918 warrants were outstanding.

17

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

In June 2014, in connection with borrowings under2023, the Second Amendment (Note 8), the Company issued warrants to purchase 20,136 shares of Series D Preferred Stock at $7.31 per share that expire June 2024. The fair value of the warrants was determined by using an option pricing model prepared by a third-party based on an allocation of the Company’s aggregate value to the outstanding equity instruments, applying a 30% discount to the warrant value for lack of marketability. The fair value of the warrant, $0.1 million, was recorded as a debt discount and is being amortized over the loan repayment period to interest expense. The Company recognized a charge of $15,000 and income of $41,000 related to change in the fair value of the warrants for the three and nine months ended September 30, 2016. The warrants were converted into warrants to purchase common stock upon the completion of the IPO in 2016, and were reclassified to additional paid-in-capital in the Company's balance sheet. One of the warrants for 10,068 shares was exercised through a cashless exercise on October 26, 2016 resulting in the issuance of a net 7,310 shares of the Company's common stock, and the other warrant for 10,068 was exercised through a cashless exercise on May 2, 2017 resulting in the issuance of a net 8,077 shares.

12. Stock Incentive Plans

2006 Plan

In October 2006, the Company adopted the 2006 Equity Incentive Plan, as amended, (the “2006 Plan”). The Plan provided for the granting of stock options to employees and non-employees of the Company. Options granted under the Plan were either incentive stock options or nonqualified stock options. Incentive stock options (“ISO”) were granted only to employees (including officers and directors who are also employees). Nonqualified stock options (“NSO”) were granted to employees and non-employees. The board of directors had the authority to determine to whom options will be granted, the number of options, the term and the exercise price.

Options under the Plan were granted for periods of up to ten years and at the fair value of the shares on the date of grant as determined by the board of directors. In general, options were exercisable at a rate of 25% after the first anniversary of the grant and then monthly vesting for an additional three years from date of grant. The term for options is no longer than five years for ISOs for which the grantee owns greater than 10% of the voting power of all classes of stock and no longer than ten years for all other options. The Company issues new shares upon the exercise of options.

2016fully vested.

Employee Stock Purchase Plan

In October 2016, the Company adopted the 2016 Equity Incentive Plan, (the “2016 Plan”). The 2016 Plan was subsequently approved by the Company’s stockholders and became effective on October 19, 2016, immediately before the effective date of the IPO. Following the effectiveness of the 2016 Plan, no additional options were granted under the 2006 Plan. In addition, to the extent that any awards outstanding or subject to vesting restrictions under the 2006 Plan are subsequently forfeited or terminated for any reason before being exercised or settled, the shares of common stock reserved for issuance pursuant to such awards as of the closing of the IPO will become available for issuance under the 2016 Plan. The remaining shares available for grant under the 2006 Plan became available for issuance under the 2016 Plan upon the closing of the IPO. On the first day of each year beginning with 2017, the 2016 Plan authorizes an annual increase of the least of 3,865,000 shares, 5% of outstanding common stock on the last day of the immediately preceding fiscal year or an amount as determined by the Company's Board of Directors. As of September 30, 2017, the Company has reserved 4,971,966 shares of common stock for issuance under the 2016 Stock Incentive Plan.

Pursuant to the 2016 Plan, stock options, restricted shares, stock units, including restricted stock units and stock appreciation rights, may be granted to employees, consultants, and outside directors of the Company. Options granted may be either ISOs or NSOs.

Stock options are governed by stock option agreements between the Company and recipients of stock options. ISOs and NSOs may be granted under the 2016 Plan at an exercise price of not less than 100% of the fair market value of the common stock on the date of grant, determined by the Compensation Committee of the Board of Directors. Options become exercisable and expire as determined by the Compensation Committee, provided that the term of ISOs may not exceed ten years from the date of grant.

18

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Employee Stock Purchase Program (“ESPP”)

In October 2016, the Company’s Board of Directors and stockholders approved the Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, the Company initially reserved 483,031 shares of common stock for issuance as of its effective date of October 19, 2016. On the first day of each calendar year, beginning in 2017, the number of shares in the reserve will increase by the lesser of 966,062 shares, 1.5% of the shares of the Company’s common stock outstanding on the last day of the immediately preceding fiscal year, or an amount as determined by the Company’s Board of Directors.ESPP. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP provides for twelve-month12 month offering periods that each contain two six-month purchase periods. At the end of each purchase period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the purchase period.

As of During the nine months ended September 30, 2017, 105,1282023, approximately 46 thousand shares of the Company's common stock have beenwere issued to employees participating in the ESPP and 709,993 shares wereapproximately 2.2 million shares of the Company’s common stock remained available for issuance under the ESPP.

Equity Incentive Plan Activity

A summary

For the offering period which started on June 1, 2023, the assumptions included the expected term ranging from 0.5 year to 1.0 year, expected volatility ranging from 48.8% to 59.2%, risk-free interest rate ranging from 5.1% to 5.4% and dividend yield of share-based awards available for grant under the 2016 Plan is as follows:

0.0%.

Options

Available for

Grant

Balance at December 31, 2015

331,938

Additional options authorized

3,865,000

Options granted

(466,914

)

Options forfeited

13,013

Balance at December 31, 2016

3,743,037

Additional options authorized

1,106,966

Options granted

(800,846

)

Options forfeited

15,415

Balance at September 30, 2017

4,064,572

The following table summarizes stock option activity under the 2006 and 2016 Plans, including grants to non-employees:

 

 

 

 

 

 

Options Outstanding

 

 

 

Options

Outstanding

 

 

Weighted-

Average

Exercise

Price Per

Share

 

 

Weighted-

Average

Remaining

Contractual

Life (years)

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Balances at December 31, 2015

 

 

2,685,913

 

 

$

4.81

 

 

 

7.63

 

 

$

11,589

 

Options granted

 

 

361,385

 

 

 

15.65

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(57,067

)

 

 

2.33

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(13,013

)

 

 

6.92

 

 

 

 

 

 

 

 

 

Balances at December 31, 2016

 

 

2,977,218

 

 

 

6.16

 

 

 

6.93

 

 

$

70,979

 

Options granted

 

 

449,556

 

 

 

36.24

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(649,213

)

 

 

3.97

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(11,659

)

 

 

15.72

 

 

 

 

 

 

 

 

 

Balances at September 30, 2017

 

 

2,765,902

 

 

$

11.52

 

 

 

7.29

 

 

$

111,634

 

Options exercisable – September 30, 2017

 

 

1,656,418

 

 

$

5.43

 

 

 

6.36

 

 

$

76,940

 

Options vested and expected to vest – September 30, 2017

 

 

2,698,510

 

 

$

11.21

 

 

 

7.25

 

 

$

109,750

 

The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the closing price of the Company’s common stock.

19

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

During the nine months ended September 30, 2017 and 2016,2023 there were no material changes to the estimated weighted-average grant-date fair valueESPP from those described in Note 13, Equity Incentive Plans, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

As of common stock underlying options granted was $18.50 and $5.78 per share, respectively.

13. Stock-Based Compensation

Employee Stock Options Valuation

The fair valueSeptember 30, 2023, the Company had $3.2 million of employee and director stock options was estimated at the date of grant usingunrecognized compensation expense related to ESPP subscriptions that will be recognized over a Black-Scholes option valuation model with the weighted average assumptions below.

period of 0.5 years.

 

 

Three Months Ended

September 30

 

 

Nine Months Ended

September 30

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Expected term (in years)

 

 

6.1

 

 

 

6.1

 

 

 

6.1

 

 

 

6.1

 

Expected volatility

 

 

46.9

%

 

 

60.0

%

 

 

52.1

%

 

 

60.0

%

Risk-free interest rate

 

 

1.94

%

 

 

1.28

%

 

 

2.07

%

 

 

1.45

%

Dividend yield

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

Stock-Based Compensation

Expense

The following table summarizes the total stock-based compensation expense included in the unaudited condensed consolidated statements of operations and comprehensive loss for all periods presented (in thousands):

 

 

Three Months Ended

September 30

 

 

Nine Months Ended

September 30

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cost of revenue

 

$

36

 

 

$

3

 

 

$

112

 

 

$

8

 

Research and development

 

 

446

 

 

 

34

 

 

 

1,198

 

 

 

103

 

Selling, general and administrative

 

 

2,249

 

 

 

364

 

 

 

5,714

 

 

 

1,140

 

Total stock-based compensation expense

 

$

2,731

 

 

$

401

 

 

$

7,024

 

 

$

1,251

 

As September 30, 2017, there was total unamortized compensation costs of $10.1 million, net of estimated forfeitures, related to unvested stock options which the Company expects to recognize over a period of approximately 2.5 years, $12.4 million, net of estimated forfeitures, related to unrecognized restricted stock unit (“RSU”) expense, which the Company expects to recognize over a period of 2.7 years, and $0.4 million unrecognized ESPP expense, which the Company will recognize over 0.7 years.

Non-Employee Stock-Based Compensation

Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options are earned. The measurement of stock-based compensation for non-employees is subject to periodic adjustment as the underlying equity instruments vest, and the related compensation expense is based on the estimated fair value of the equity instruments using the Black-Scholes option pricing model. The Company believes that the estimated fair value of the stock options is more readily measurable than the fair value of the services received. Such expense was not material for the three and nine months ended September 30, 20172023 and 2016.

20

2022 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Cost of revenue$1,236 $618 $2,584 $1,540 
Research and development3,370 1,717 7,912 4,841 
Selling, general and administrative16,402 10,610 42,862 35,565 
Total stock-based compensation expense$21,008 $12,945 $53,358 $41,946 
23

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

14. Net Loss Per Common Share


13. NET LOSS PER SHARE
As the Company had net losses for the three and nine months ended September 30, 20172023 and 2016,2022, all potential common shares were determined to be anti-dilutive. The following table sets forth the computation of the basic and diluted net loss per share attributable to common stockholdersduring the three and nine months ended September 30, 2023 and 2022 (in thousands, except share and per share data):

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

Three Months Ended September 30,Nine Months Ended September 30,

 

2017

 

 

2016

 

 

2017

 

 

2016

 

2023202220232022

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

Net loss

 

$

(6,524

)

 

$

(4,075

)

 

$

(18,271

)

 

$

(14,637

)

Net loss$(27,116)$(21,451)$(84,707)$(95,957)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

Weighted-average shares used to compute net loss per

common share, basic and diluted

 

 

22,811,907

 

 

 

1,454,307

 

 

 

22,446,399

 

 

 

1,434,583

 

Weighted-average shares used to compute net loss per common share, basic and diluted30,607 30,055 30,470 29,837 

Net loss per common share, basic and diluted

 

$

(0.29

)

 

$

(2.80

)

 

$

(0.81

)

 

$

(10.20

)

Net loss per common share, basic and diluted$(0.89)$(0.71)$(2.78)$(3.22)

The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per common share for the three and nine months ended September 30, 20172023 and 2016,2022 because their inclusion would be anti-dilutive:  

anti-dilutive (in thousands):

 

 

As of September 30,

 

 

 

2017

 

 

2016

 

Convertible preferred stock on an as-if converted basis

 

 

—

 

 

 

13,343,981

 

Options to purchase common stock

 

 

2,765,902

 

 

 

2,732,538

 

RSUs issued and unvested

 

 

453,063

 

 

 

—

 

Warrants to purchase convertible preferred stock on an

   as-if converted basis

 

 

—

 

 

 

328,114

 

Warrants to purchase common stock

 

 

127,918

 

 

 

—

 

Total

 

 

3,346,883

 

 

 

16,404,633

 

21

Three and Nine Months Ended September 30,
20232022
Options to purchase common stock307 330 
RSUs and PRSUs1 unvested
2,747 2,077 
Total3,054 2,407 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

1PRSUs are based on the maximum number of PRSUs in the key executive grant agreements. The actual number of PRSUs granted will be based on company performance criteria and relative Total Shareholder Return, as discussed in Note 12, Equity Incentive Plan and Stock-Based Compensation.

24


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited financial statements and related notes included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q entitled “Risk Factors.”

"

Overview

We are a leading digital healthcare company redefiningthat creates trusted solutions that detect, predict, and prevent disease. Our principal business is the waydesign, development, and commercialization of device-based technology to provide remote cardiac monitoring services that we believe allow clinicians to diagnose certain arrhythmias are clinically diagnosed by combining ourquicker and with greater efficiency than other services that rely on traditional technology.
Each Zio System combines a wire-free, patch-based, 14-day wearable biosensing technologybiosensor that continuously records ECG data with a proprietary cloud-based data analyticsanalytic software to help physicians monitor patients and machine-learning capabilities. Our goal isdiagnose arrhythmias. Since receiving FDA clearance, we have provided the Zio Services to be the leading providerover six million patients and have collected over one billion hours of first-line ambulatory electrocardiogram, or ECG,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 remote cardiac monitoring for patients at risk for arrhythmias. services from our Medicare-enrolled IDTFs and our qualified technicians.We have created a unique platform, called the ZIO Service, which combines an easy-to-wear and unobtrusive biosensor that can be worn for up to 14 days, called the ZIO Patch, with powerful proprietary algorithms which distill data from millions of heartbeats into clinically actionable information. The ZIO Service consists of:

the wearable ZIO Patch biosensor, which continuously records and stores ECG data from every patient heartbeat for up to 14 days

a cloud-based analysis of the recorded cardiac rhythmsprovided our Zio Services using our proprietary machine-learned algorithms

Zio Systems.

a final quality assessment review of the data by our certified cardiac technicians

the 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 and can be integrated into a patient’s electronic health record

We receive revenue for the ZIO ServiceZio Services primarily from two sources:third-party payors, which include contracted third-party payors and institutions. Third-party payors, which accounted for approximately 81% and 73%CMS. The remainder of our revenue for the nine months ended September 30, 2017 and 2016, respectively, consist of commercial payors and government agencies, such as the Centers for Medicare & Medicaid Services, or CMS, and the Veterans Administration, or the VA. A significant portion of our revenue in the third-party commercial payor category is contracted, which means we have entered into pricing contracts with these payors. Approximately 38% and 40% of our total revenue for the nine months ended September 30, 2017 and 2016, respectively, is receivedcomes from federal government agencies under established reimbursement codes. A small portion of this revenue is received from patients in accordance with their insurance co-payments and deductibles. Institutions,healthcare institutions, which are typically hospitals clinics, or private physician practices, accounted for approximately 19% and 26% of our revenue forwho purchase the nine months ended September 30, 2017 and 2016, respectively. We bill these organizations directly for our services and they are responsible for paying those invoices and seeking reimbursementZio Services from third-party payors where applicable. In addition, a small percentage of patients whose physicians prescribe the ZIO Service pay us directly. Typically, we bill institutional customers andWe rely on a third-party billing partner, XIFIN, Inc.,partners to submit patient claims and collect from commercial andpayors, certain government agencies.

Sinceagencies, and patients.

The following are Zio Services shown as a percentage of revenue:
Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Contracted third-party payors54%54%55%55%
Centers for Medicare and Medicaid25%26%25%24%
Healthcare institutions14%14%14%15%
Non-contracted third-party payors7%6%6%6%
Key Business Metric
Non-GAAP Financial Measure
Adjusted EBITDA is a key measure we use to assess our ZIO Service was clearedfinancial 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 U.S. Foodorganization to use both outsourced and Drug Administration,offshore resources.



25

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 FDA,substitute to financial information presented in 2009,accordance with GAAP. This measure has certain limitations in that it does not include the impact of certain expenses that are reflected in our unaudited condensed 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 than as presented in this Quarterly Report on Form 10-Q, 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):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net loss$(27,116)$(21,451)$(84,707)$(95,957)
Interest expense927 614 2,709 3,125 
Interest income(1,717)(599)(4,619)(927)
Income tax provision195 116 495 196 
Depreciation and amortization4,067 3,436 11,434 9,930 
Stock-based compensation21,008 12,945 53,358 41,946 
Impairment and restructuring charges— — — 26,608 
Business transformation costs2,999 2,315 14,094 2,748 
Adjusted EBITDA$363 $(2,624)$(7,236)$(12,331)
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.
In connection with the COVID-19 pandemic, we previously experienced business disruptions affecting the availability and cost of materials, which impacted our supply chain and reduced margins. In addition, during the COVID-19 pandemic, we continued to deliver our Zio Services by operating with remote employees and essential employees on site.
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 wind down. As a consequence of the financial pressures and decreased profitability, some hospitals have providedindicated that they are lowering their capital investment plans and tightening their operational budgets.
We have adapted our Zio Services to meet the ZIO Service to over 700,000immediate needs of physicians, customers, and patients and have collected over 200 million hours of curated heartbeat data. We believesignificantly increased the ZIO Service is well-positioned to disrupt an already-established $1.4 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 ZIO Service in the United States to physicians, hospitals and clinics through a direct sales organization comprised of sales management, field billing specialists and quota-carrying sales representatives. 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 administrators and departments. We expect to continue to increase the size of our U.S. sales organization to expand the current customer account base and increase utilization of our monitoring solution. In addition,home enrollment service, which allows patients to receive and wear the single-use Zio patch without going to a healthcare facility.

Our remote work arrangements and decision to pursue a sublease for our San Francisco headquarters resulted in an impairment of our ROU asset and related leasehold improvements and furniture and fixtures during the nine months ended September 30, 2022. As we will continue to explore new opportunitiesevaluate our real estate footprint, we may incur additional impairment charges related to expand our sales and marketing efforts in international geographies using both direct and distribution channels.

22

Components of Results of Operations

real property lease agreements.

Revenue

Substantially all

The majority of our revenue is derived from salesprovision of our ZIO ServiceZio Services to customers in the United States. We earn revenue from the provision of our ZIO ServiceZio Services primarily from two sources,contracted third-party payors, CMS and institutions; however, ahealthcare institutions. A small percentage of our revenue is derived directly from patient payments. For the nine months ended September 30, 2017 and 2016, we recognized approximately 88% and 83%, respectively, of ournon-contracted third-party payors.

26

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 instances wherepayment 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 have a predictableconsider factors such as claim payment history of collections, contractedfrom both payors and institutions. We recognize revenue based on the billing rate less contractual and other adjustments to arrive at the amount we expect to collect from third-party payors with an established billing rate. We determine the amount we expect to collect based on a per-payor or agreement basis, after analyzing payment history. When we do not havepatient, available reimbursement, including whether there is a contract or agreement, or have an insufficient or unpredictable history of collections, we recognize revenue only upon the earlier of notification ofbetween us and the payor benefits allowed or when paymenthealthcare 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 received. We expect our revenue to increase as we increase the numberresult of covered and contracted lives for our ZIO Service, expand our sales and marketing infrastructure, increase awareness of our product offerings, expand the range of indications for our ZIO Service and develop new products and services. We are subject to seasonality similar to other companies in our field, as vacations by physicians and patients tendtaking vacations and patients electing to affect enrollment in the ZIO Service moredelay our monitoring services during the summer months and during the end of year holidays compared to other times of the year. To date, the effect of these seasonal fluctuations on our quarterly results has been obscuredor holidays. Revenue may be impacted by the growthoutcome of adjudications with contracted and non-contracted payors, as well as changes in CMS reimbursement rates like we experienced with final rates being established for our business.

Zio Services as of January 1, 2023. On August 7, 2023, CMS published the calendar year 2024 Medicare Physician Fee Schedule proposed rule, which includes rates for the CPT codes we use to seek reimbursement for our services. Based on the proposed rule, we believe the 2024 proposed national payment rates may be, on average, approximately 5% lower than the 2023 rates for services, when excluding impacts from the geographic practice cost index for our IDTF locations. As of November 1, 2023, the final Medicare Physician Fee Schedule has not been released by CMS for calendar year 2024. 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 is expensed as incurred and includes direct labor, material costs, equipment and infrastructure expenses, amortization of internal-use software, allocated overhead, and shipping and handling. Direct labor includes personnelpayroll-related costs including stock-based compensation involved in manufacturing, clinical data curation, and data analysis.customer service. Material costs include both the disposable materials costs of the ZIO PatchZio patches and amortization of the re-usable printed circuit board assemblies, or PCBAs. Each ZIO PatchZio XT patches and Zio Monitor 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 to the extentas our revenue grows.

We calculate gross marginincreases due to increased direct labor, direct materials, and variable spending as gross profit dividedwell as amortization of internal-use software, partially offset by revenue. economies of scale in relation to fixed costs such as overhead and facilities costs.

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. Historically, we have increased our average selling price by entering into contracts with third-party commercial payors at rates that were higher than amounts typically collected from payors without contracts or from institutional customers. We have in the past been able to increase our pricing as third-party payors become more familiar with the benefits of the ZIO ServiceZio Services and move to contracted pricing arrangements. We believe we will be ableexpect increases to continue to achieve pricing increases as more payors contract with us due to the benefits the ZIO Service provides compared to other available products. We expect to continue to decrease the cost of service per devicerevenues 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 implementing scan time algorithmprocess improvements, automating manufacturing assembly and packaging, and through software-driven and other workflow enhancements to reduce labor costs. We expect further decreases in the cost of service as we spread the fixed portion of our manufacturing overhead costs over a larger number of units produced, which will result in a decrease in our per unit manufacturing costs.

Research and Development Expenses

We expense research and development costs as they are incurred. Research and development expenses include payroll and personnel-relatedpayroll-related costs, including stock-based compensation, consulting services, clinical studies, laboratory supplies and an allocation ofallocated 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 product enhancements.

clinical evidence.

Selling, General and Administrative Expenses

Our sales and marketing expenses consist of payroll and personnel-relatedpayroll-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. We expect our sales and marketing expenses to increase in absolute dollars as we hire additional sales personnel and increase our sales support infrastructure in order to further penetrate the U.S. market and expand into international markets.

Our general and administrative expenses consist primarily of compensationpayroll-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.

23

We In addition, we incurred business transformation costs to scale our organization during 2022 and expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliancebusiness transformation costs throughout 2023 with the rules and regulations of the Securities and Exchange Commission, or SEC, the Sarbanes-Oxley Act, and those of any national securities exchange on whichrestructuring activities to be substantially complete by mid-2024. Upon completion, we expect to achieve operational efficiencies in our securities are traded, additional insurance expenses, investor relations activities and other administrative and professional services.

expenses.

Interest Expense

Interest expense consists of cash and non-cash components. The cash component of interest expense is attributable to borrowings under our loan agreements and amounts owed underagreements. See Note 9, Debt, in the promissory note issuedNotes to California HealthCare Foundation. The non-cash component consistsour unaudited condensed consolidated financial statements in Part I, Item 1 of interest expense recognized from the amortization of debt discounts derived from the issuance of warrants and debt issuance costs capitalizedthis Quarterly Report on Form 10-Q for further information on our balance sheets,loan agreements.
27

Interest and “paid-in-kind” interest when debt payments are interest onlyOther Income, Net
Interest and are added back to the debt balance.

Other Expense, Net

Other expense,other income, net consists primarily of the change in fair value of our convertible preferred stock warrant liabilities and interest income. Our convertible preferred stock warrants were exercisable for shares that were contingently redeemable and as such, were classified as a liability on our balance sheets at their estimated fair value. Upon completion of our IPO, all convertible preferred stock warrants converted into warrants to purchase common stock. Interest income which consists primarily of interest received on our cash and cash equivalents and investments balances.

marketable securities as well as realized and unrealized foreign currency exchange gains or losses.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 20172023 and 2016

2022.
Three Months Ended September 30,  Nine Months Ended September 30,
20232022$ Change*% Change20232022$ Change*% Change

 

Three Months

Ended September 30,

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

(dollars in thousands, except percentages)

Revenue

 

$

25,035

 

 

$

16,780

 

 

$

8,255

 

 

 

49%

 

Revenue$124,604 $103,875 $20,729 20%$360,170 $298,304 $61,866 21%

Cost of revenue

 

 

6,920

 

 

 

5,282

 

 

 

1,638

 

 

 

31%

 

Cost of revenue42,130 32,954 9,176 28%115,790 95,379 20,411 21%

Gross profit

 

 

18,115

 

 

 

11,498

 

 

 

6,617

 

 

 

58%

 

Gross profit82,474 70,921 11,553 16%244,380 202,925 41,455 20%

Gross margin

 

 

72

%

 

 

69

%

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:    

Research and development

 

 

3,790

 

 

 

1,635

 

 

 

2,155

 

 

 

132%

 

Research and development16,309 11,448 4,861 42%44,828 33,935 10,893 32%

Selling, general and

administrative

 

 

20,308

 

 

 

12,529

 

 

 

7,779

 

 

 

62%

 

Selling, general and administrative93,768 80,559 13,209 16%285,531 235,468 50,063 21%
Impairment and restructuring chargesImpairment and restructuring charges— — — —%— 26,608 (26,608)(100)%

Total operating expenses

 

 

24,098

 

 

 

14,164

 

 

 

9,934

 

 

 

70%

 

Total operating expenses110,077 92,007 18,070 20%330,359 296,011 34,348 12%

Loss from operations

 

 

(5,983

)

 

 

(2,666

)

 

 

(3,317

)

 

 

124%

 

Loss from operations(27,603)(21,086)(6,517)31%(85,979)(93,086)7,107 (8)%

Interest expense

 

 

(862

)

 

 

(807

)

 

 

(55

)

 

 

7%

 

Interest expense(927)(614)(313)51%(2,709)(3,125)416 (13)%

Other income (expense), net

 

 

321

 

 

 

(602

)

 

 

923

 

 

 

153%

 

Net loss and comprehensive loss

 

$

(6,524

)

 

$

(4,075

)

 

$

(2,449

)

 

 

60%

 

Interest and other income, netInterest and other income, net1,609 365 1,244 341%4,476 450 4,026 895%
Loss before income taxesLoss before income taxes(26,921)(21,335)(5,586)26%(84,212)(95,761)11,549 (12)%
Income tax provisionIncome tax provision195 116 79 68%495 196 299 153%
Net lossNet loss$(27,116)$(21,451)$(5,665)26%$(84,707)$(95,957)$11,250 (12)%

* Certain numbers expressed in millions may not sum due to rounding.
Revenue

Revenue increased $8.3by $20.7 million, or 49%20%, to $25.0 $124.6 million during the three months ended September 30, 2017 from $16.8 2023, as compared to $103.9 million during the three months ended September 30, 2016.2022. Revenue increased by $61.9 million, or 21%, to $360.2 million during the nine months ended September 30, 2023, as compared to $298.3 million during the nine months ended September 30, 2022. For the three and nine months ended September 30, 2023, the increases in revenue were primarily attributable to increases in the period primarily benefittedvolume of Zio Services resulting from volume increases of the ZIO Service performed, as well as an improvementincreasing demand, partially offset by a slight decline in the average contracted rate.

selling price.

Cost of Revenue and Gross Margin

Cost of revenue increased $1.6 by $9.2 million, or 31%28%, to $6.9 $42.1 million during the three months ended September 30, 2017 from $5.3 2023, as compared to $33.0 million during the three months ended September 30, 2016. The increase in cost2022. Cost of revenue was primarily dueincreased by $20.4 million, or 21%, to increased ZIO Service volume. This increase was partially offset by$115.8 million during the reduction in costsnine months ended September 30, 2023, as compared to provide$95.4 million during the ZIO Service, which was achieved primarily through manufacturing efficiencies in the production of our device and material cost reductions, and to a lesser extent by fixed costs absorption and reduced labor costs per device of our service through our algorithm improvements and software-driven workflow enhancements.

24

Gross margin fornine months ended September 30, 2022. For the three months ended September 30, 2017 increased2023, the increases in cost of revenue were primarily due to 72%, comparedincreases in the volume of Zio Services provided due to 69%higher demand, as well as an increase of $3.1 million for excess Zio XT PCBA components. For the threenine months ended September 30, 2016. The increase was2023, the increases in cost of revenue were primarily due to the revenue mix shift driven by the success of our contracting efforts, secondarily by the reductionincreases in the costvolume of the ZIO ServiceZio Services provided due to our continued efforts to lower manufacturing costs, and to a lesser extent by fixed costs absorption and reduced labor costs per device of our service through our algorithm improvements and software-driven workflow enhancements.

higher demand.

Research and Development Expenses

Research and development expenses increased $2.2by $4.9 million, or 132%42%, to $3.8$16.3 million during the three months ended September 30, 2017 from $1.62023, as compared to $11.4 million during the three months ended September 30, 2016.2022. Research and development expenses increased by $10.9 million, or 32%, to $44.8 million during the nine months ended September 30, 2023, as compared to $33.9 million during the nine months ended September 30, 2022. The increase wasincreases in research and development expenses for the three and nine months ended September 30, 2023 were primarily attributabledue to a $1.5 million increase in payrollhigher headcount-related costs and personnel-related expenses as a resultfurther development, enhancement, and functionality of increased headcount, $0.4 million increase in allocated facility-related expenses,our current and $0.2 million for clinical trials and other expenses.

future product offerings.

28

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $7.8by $13.2 million, or 62%16%, to $20.3 $93.8 million during the three months ended September 30, 2017 from $12.52023, as compared to $80.6 million during the three months ended September 30, 2016.2022. Selling, general and administrative expenses increased by $50.1 million, or 21%, to $285.5 million during the nine months ended September 30, 2023, as compared to $235.5 million during the nine months ended September 30, 2022. The increase wasincreases were primarily attributable to a $4.0 millionan increase in payrollheadcount related costs (including stock-based compensation) for incremental headcount and personnel-related expenses, including $1.9 million for non-cash stock-based compensation, as a result of increased headcountexecutive hires supporting growth in our operations, an increase in business transformation costs to scale the organization, an increase in legal and consulting costs to support regulatory and legal matters, and an increase in software and hardware costs to support the growth in our operations, $1.6 million increaseinfrastructure.
Impairment and Restructuring Charges
There were no impairment and restructuring charges during the nine months ended in professional services expenses, primarily asSeptember 30, 2023.In February 2022, our board of directors (the “Board”) approved reducing our leased space for our headquarters in San Francisco, California. As a result, we recognized an impairment of an increaseour ROU asset and related leasehold improvements and furniture and fixtures in accountingthe amount of $23.2 million during the nine months ended September 30, 2022. Also in February 2022, the Board approved a restructuring plan to allow us to effectively and financeefficiently scale our business, which resulted in severance and other employment related costs $1.0of $3.4 million increase in commissions due to sales team expansion, a $0.5 million increase in allocated facility-related expenses and $0.5 million increase related to travel expenses.

during the nine months ended September 30, 2022.

Interest Expense

expense

Interest expense increased $0.1by $0.3 million, or 7%, to $0.9 million during the three months ended September 30, 2017 from $0.82023, as compared to $0.6 million during the three months ended September 30, 2016 and is2022. The increase in interest expense was attributable to increases in interest rates period over period.
Interest expense decreased by $0.4 million to $2.7 million during the nine months ended September 30, 2023, as compared to $3.1 million during the nine months ended September 30, 2022. During the nine months ended September 30, 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 was an increase in interest expense of $0.9 million due to our debt financing entered into in December 2015.

Other Income (Expense), Net

Otherhigher interest rates period over period.

Interest and other income, (expense),net
Interest and other income, net increased $0.9by $1.2 million or 153%, to income of $0.3$1.6 million during the three months ended September 30, 2017 from expense of $0.62023, as compared to $0.4 million during the three months ended September 30, 2016. The increase was primarily related2022. Interest and other income, net increased by $4.0 million to $0.6 million of expense related to the revaluation of warrants in 2016 and an increase of $0.3 million increase of interest income from our investments in 2017.

Comparison of the Nine Months Ended September 30, 2017 and 2016

 

 

Nine Months

Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

Revenue

 

$

70,327

 

 

$

45,368

 

 

$

24,959

 

 

 

55%

 

Cost of revenue

 

 

20,002

 

 

 

15,097

 

 

 

4,905

 

 

 

32%

 

Gross profit

 

 

50,325

 

 

 

30,271

 

 

 

20,054

 

 

 

66%

 

Gross margin

 

 

72

%

 

 

67

%

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,187

 

 

 

4,847

 

 

 

4,340

 

 

 

90%

 

Selling, general and

   administrative

 

 

57,787

 

 

 

36,658

 

 

 

21,129

 

 

 

58%

 

Total operating expenses

 

 

66,974

 

 

 

41,505

 

 

 

25,469

 

 

 

61%

 

Loss from operations

 

 

(16,649

)

 

 

(11,234

)

 

 

(5,415

)

 

 

48%

 

Interest expense

 

 

(2,522

)

 

 

(2,388

)

 

 

(134

)

 

 

6%

 

Other income (expense), net

 

 

900

 

 

 

(1,015

)

 

 

1,915

 

 

 

-189%

 

Net loss and comprehensive loss

 

$

(18,271

)

 

$

(14,637

)

 

$

(3,634

)

 

 

25%

 

25

Revenue

Revenue increased $25.0 million, or 55%, to $70.3$4.5 million during the nine months ended September 30, 2017 from $45.42023, as compared to $0.5 million during the nine months ended September 30, 2016. Revenue in the period primarily benefitted from volume increases of the ZIO Service performed, as well as improvements in the overall contracted rate.

Cost of Revenue and Gross Margin

Cost of revenue increased $4.9 million, or 32%, to $20.0 million during the nine months ended September 30, 2017 from $15.1 million during the nine months ended September 30, 2016. The increase in cost of revenue was primarily due to increased ZIO Service volume. This increase was partially offset by the reduction in costs to provide the ZIO Service, which was achieved primarily through manufacturing efficiencies in the production of our device and material cost reductions, and to a lesser extent by fixed costs absorption and reduced labor costs per device through our algorithm improvements and software-driven workflow enhancements.

Gross margin for the nine months ended September 30, 2017 increased to 72%, compared to 67% for the nine months ended September 30, 2016.2022. The increase was primarily due to the revenue mix shift driven by the success ofhigher interest earned from our contracting efforts, secondarily by the reduction in the cost of the ZIO Service due to our continued efforts to lower manufacturing costs,cash and to a lesser extent by fixed costs absorptioncash equivalents and reduced labor costs per device of our service through our algorithm improvements and software-driven workflow enhancements.

Research and Development Expenses

Research and development expenses increased $4.3 million, or 90%, to $9.2 millionmarketable securities during the three and nine months ended September 30, 2017 from $4.8 million during the nine months ended September 30, 2016. The increase was primarily attributable to a $2.8 million increase in payroll and personnel-related expenses as a result of increased headcount and a $1.2 million increase in allocated facility-related expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $21.1 million, or 58%, to $57.8 million during the nine months ended September 30, 2017 from $36.7 million during the nine months ended September 30, 2016. The increase was primarily attributable to a $10.2 million increase in payroll and personnel-related expenses, including $4.6 million for non-cash stock-based compensation, as a result of increased headcount to support the growth in our operations, a $4.9 million increase in professional services expenses, primarily as a result of an increase in consulting, accounting, legal, claims processing and recruiting services expenses, a $1.9 million increase in allocated facility and other-related expenses, a $1.4 million increase related to travel expenses, $1.2 million increase in commissions due to sales team expansion, $0.5 million increase in insurance and a $0.4 million increase in bad debt expense.

Interest Expense

Interest expense increased $0.1 million, or 6%, to $2.5 million during the nine months ended September 30, 20172023, as compared to the nine months ended September 30, 2016 due to the increased principal balance of our December 2015 debt financing as a result of paid-in-kind interest.

Other Income (Expense), Net

Other income (expense), net increased $1.9 million to income of $0.9 million during the nine months ended September 30, 2017 from expense of $1.0 million during the nine months ended September 30, 2016. The change was primarily related to an increase of $0.8 million of interest income from our investments and $1.0 million decrease from the fair value re-measurement of preferred warrant liabilities at each balance sheet date, which concluded upon the conversion to common warrants upon the IPOsame periods in October 2016.

2022.

Liquidity and Capital Expenditures

Overview

As of September 30, 2017,2023, we had cash and cash equivalents of $20.4$47.5 million, marketable securities of $111.0 million, and short-term investmentsaccounts receivable of $87.0 million and an accumulated deficit of $145.4$50.1 million. In connectionaddition, we have $40.0 million available under a term loans facility and $16.6 million available under a revolving credit line. We are continuously reviewing 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 our IPO that closed in October 2016, we received net cash proceeds of $110.7 million, net of underwriters’ discounts and commissions and expenses paid by us. Priorrespect to the IPO, we financedfederal budget and instability in the global banking system. We intend to continue to make investments to support our operations primarily throughbusiness, 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, together with income to be derived from the sales of our private securities, salesZio Services, will be sufficient to meet our liquidity requirements for at least the next 12 months.
Under the terms of our productsthe Development Agreement, we agreed to make cash payments to Verily up to an aggregate of $12.75 million in milestone payments upon achievement of various development and servicesregulatory milestones. We have achieved milestones tied to payments totaling $11.0 million through September 30, 2023, and, debt financings.

26

Our expected future capital requirements may depend on many factors including expanding our customer base, the expansionsubject to achievement of our salesforce, and the timing and extentspecified milestones, anticipate making additional milestone payments 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$1.75 million 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.

Cash Flows

2024.

29

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

 

Nine Months Ended September 30,

 

(in thousands)

 

2017

 

 

2016

 

Nine Months Ended September 30,
20232022

Net cash (used in) provided by:

 

 

 

 

 

 

 

 

Net cash (used in) provided by:  

Operating activities

 

$

(11,188

)

 

$

(15,617

)

Operating activities$(34,129)$(35,588)

Investing activities

 

 

(24,121

)

 

 

(1,821

)

Investing activities(2,609)(44,320)

Financing activities

 

 

4,095

 

 

 

(2,009

)

Financing activities5,352 23,568 

Net decrease in cash and cash equivalents

 

$

(31,214

)

 

$

(19,447

)

Net decrease in cash and cash equivalents$(31,386)$(56,340)

Cash Used in

Operating Activities

During the nine months ended September 30, 2017,2023, cash used in operating activities was $11.2$34.1 million, which consisted of a net loss of $18.3 million, adjusted by non-cash charges of $15.2 million and a net change of $8.1 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of a change in stock based-based compensation of $7.0 million, in allowance for doubtful accounts and contractual allowance of $5.9 million, non-cash interest expense of $1.2 million and depreciation and amortization of $1.1 million. The change in our net operating assets and liabilities was primarily due to a decrease of $8.6$1.5 million, inas compared to $35.6 million during the nine months ended September 30, 2022. The reduction was primarily attributable to favorable impacts of $16.1 million from the timing of collections and payments associated with our accounts receivable, as a resultinventory, operating leases, and accounts payable, partially offset by an increase in payments for other assets of increased revenues.

$17.7 million, primarily for the purchase of PCBAs.

Investing Activities
During the nine months ended September 30, 2016,2023, cash used in operatinginvesting activities was $15.6$2.6 million, which consisted of a net loss of $14.6 million, adjusted by non-cash charges of $7.7 million and a net change of $8.7 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of a change in allowance for doubtful accounts and contractual allowance of $3.4 million, change in value of warrant liability of $1.0 million, stock based-based compensation of $1.3 million and depreciation and amortization of $0.6 million. The change in our net operating assets and liabilities was primarily due to an increase of $7.1 million in accounts receivable as a result of an increase in revenue and a decrease of $0.4$41.7 million in accrued liabilities, primarily relatedas compared to payments made on accrued payroll and related compensation accruals. This change was partially offset by a $0.1 million increase in accounts payable due to timing of vendor payments, a $0.5 million increase in inventory to support the growth in our business and a $0.8 million increase in other assets primarily related to the purchase of ZIO Patch PCBAs to support the growth in volume of ZIO Service performed.

Cash Used in Investing Activities

Cashcash used in investing activities of $44.3 million during the nine months ended September 30, 20172022. The decrease was $24.1primarily attributable to a net increase in proceeds from marketable securities of $48.9 million, which consisted primarily of $90.2 millionpartially offset by increases in purchases of investments, $2.7 million of capital expenditures to purchase property and equipment which were partially offsetof $4.2 million and the purchase of a strategic investment of $3.0 million.

Financing Activities
During the nine months ended September 30, 2023, cash provided by $68.7financing activities was $5.4 million, a decrease of maturities of investments.

Cash used in investing activities$18.2 million as compared to $23.6 million during the nine months ended September 30, 20162022. The decrease was $1.8primarily attributed to net proceeds during the first half of 2022 of $13.6 million, which consistedassociated with a $35.0 million term loan offset by a $21.4 million debt repayment. Additionally, there was a decrease of capital expenditures to purchase property and equipment

Cash Provided by Financing Activities

During the nine months ended September 30, 2017, cash provided by financing activities was $4.1$4.7 million in proceeds from the proceedsissuance of common stock in connection with our employee option exercises and ESPP stock purchases.

During the nine months ended September 30, 2016, cash used in financing activities was $2.0 million, primarily consisting of payments of deferred issuance costs related to the IPO.

27

Indebtedness

Pharmakon Loan Agreement

equity incentive plan.

Bank Debt
In December 2015,October 2018, we entered into the SVB Loan Agreement with Pharmakon. The Pharmakon Loan Agreement provides for up to $55.0 million in term loans split into two tranches as follows: (i) Tranche A Loans of $30.0 million in term loans, and (ii) Tranche B Loans are up to $25.0 million in term loans. The Tranche A Loans were drawn on December 4, 2015. The Tranche B Loans were available to be drawn prior to December 4, 2016. No additional draw was taken.

During the first four years, payments are interest only, and for the first two years, 50% of the interest will be “paid-in-kind.” We are subject to a financial covenant related to minimum trailing revenue targets that begins in June 2017, and is tested on a semi-annual basis. The minimum net revenue covenant ranges from $44.7 million for the period ended June 30, 2017 to $102.6 million for the period ended December 31, 2021, which was achieved as of June 30, 2017. The minimum net revenue financial covenant has a 45-day equity cure period following required delivery date of the financial statements. Pursuant to this equity cure provision, we may cure a revenue covenant default by raising additional funds from the sale of equity. The loan matures in December 2021. As of September 30, 2017, $32.7 million in principal and interest was outstanding under the Pharmakon Loan Agreement.

The Tranche A Loans bear interest at a fixed rate equal to 9.50% per annum, which is due and payable quarterly in arrears. During the first eight calendar quarters, 50% of the interest due and payable shall be added to the then-outstanding principal.

The Pharmakon Loan Agreement requires us to maintain a minimum liquidity and minimum net sales during the term of the loan facility and contains customary affirmative and negative covenants and event of default provisions that could result in the acceleration of the repayment obligations under the loan facility. Upon a change in control of the company, Pharmakon has the option to demand payment in full of the outstanding loans together with the prepayment premium. The obligations under the Pharmakon Loan Agreement are secured by a security interest in substantially all of our assets pursuant to the Pharmakon Guaranty and Security Agreement, and this security interest is governed by an intercreditor agreement between Pharmakon and Silicon Valley Bank, or SVB.

SVB Loan and Security Agreement

In June 2014, we refinanced our debt with SVB by entering into a Second Amendment to the Amended and Restated Loan Security Agreement, or Second Amendment. Under the Second Amendment, we borrowed $4.9 million.

In December 2015, we used the proceeds from the Pharmakon Loan Agreement to repay $4.9 million of bank debt to SVB and entered into a Second Amended and Restated Loan and Security Agreement with SVB, or the SVB Loan Agreement. 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 the 2022 Amendment to our SVB Loan Agreement which provided for the 2022 Term Loans in the aggregate principal amount of up to $75.0 million, of which $35.0 million was borrowed at closing and a portion of the proceeds was used to pay in full the outstanding balance of $18.5 million under the SVB Loan Agreement. The remaining $40.0 million of 2022 Term Loans may borrow, repaybe borrowed from time to time at our option, in increments of at least $10.0 million, through December 31, 2023. We will pay interest only on the 2022 Term Loans until April 1, 2025, when we will commence repaying the 2022 Term Loans in 24 equal consecutive monthly installments, with all obligations under the 2022 Term Loans maturing on March 1, 2027. Interest charged on the 2022 Term Loans will accrue at a floating per annum rate equal to the greater of: (A) the Prime Rate plus 0.25%; and reborrow under(B) 3.5%. We are also required to pay fees on any prepayment of the 2022 Term Loans, ranging from 1.0% to 3.0% depending on the date of prepayment, and a final payment equal to 5.0% of the principal amount of the 2022 Term Loans drawn. Once repaid or prepaid, the 2022 Term Loans may not be reborrowed.
The 2022 Amendment also amended the terms of the revolving credit line but not in excess ofunder the maximum loanSVB Loan Agreement, which provided for an aggregate principal amount of $25.0 million, to: (i) extend the maturity date from August 1, 2023 to March 1, 2027, (ii) increase the letters of credit sublimit to $15.0 million until December 4, 2018, when all outstanding principal and accrued interest becomes due and payable. Any(iii) increase the cash management services sublimit to $15.0 million. Interest charged on the principal amount outstanding under the SVB revolving credit line bears interestwill accrue at a floating rate per annum rate equal to the rate published by The Wall Street Journal  asgreater of (A) the “Prime Rate”Prime Rate plus 0.25% and (B) 3.5%. TheWe are required to pay an annual fee equal to 0.15% of the revolving credit line. As of September 30, 2023, no loans were outstanding under the revolving credit line is subjectand we had used $8.4 million in letters of credit.
The 2022 Amendment also amended the SVB Loan Agreement to financial covenants tiedrequire us to ourcomply, as of the last day of each fiscal quarter, with a quick ratio of at least 1.0 to 1.15 or minimum adjusted EBITDA trailing twelve-month net sales.six months of at least $15.0 million.

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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 may borrow upcontinue to 80% of our eligible accounts receivable, uphave access to the maximumrevolving credit line and letters of $15.0 million. In August 2016, we obtained a $3.1 million letter of credit available pursuant to the SVB revolving credit facilityLoan Agreement and we were in connectioncompliance with a new lease. Asour loan covenants as of September 30, 2017, we were eligible to borrow up to approximately $7.7 million and no amount was outstanding under the SVB revolving credit line.

The SVB Loan Agreement requires us to maintain a minimum consolidated liquidity and minimum net sales during the term of the loan facility. In addition, the SVB Loan Agreement contains customary affirmative and negative covenants and events of default. The obligations under the SVB Loan Agreement are secured by a security interest in substantially all of our assets, and this security interest is governed by an intercreditor agreement between Pharmakon and SVB.

CHCF Note

In November 2012, we entered into a Note Purchase Agreement and Promissory Note with the California HealthCare Foundation, or the CHCF Note, through which we borrowed $1.5 million. The CHCF Note accrues simple interest of 2.0%. The accrued interest and the principal was set to mature in November 2016. In June 2015, we amended the CHCF Note to extend the maturity date to May 2018. The CHCF Note is subordinate to other debt.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

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2023.

Contractual Obligations

Our contractual obligations as of December 31, 20162022, are presented in our Annual Report on Form 10-K filed with the SEC on March 31, 2017. WithFebruary 23, 2023. See Note 8, Commitments and Contingencies to the exceptionunaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for our lease obligations. See Note 9, Debt to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for refinancing of our debt agreement. As of September 30, 2023, there were no material changes outside the ordinary course of business in our outstanding contractual obligations.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the following, there have been no material changes:

consolidated financial statements as well as the reported revenue and expenses during the reporting periods. On May 1, 2017,an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the Company entered into a commercial building lease agreement. The lease will expirecircumstances, 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 estimates under different assumptions or conditions.

Our significant accounting policies are described in September 2027 and providesNote 2, Significant Accounting Policies, to the consolidated financial statements included in our Annual Report on Form 10-K for the lease of 20,276 square feet of office space in Houston, Texas. With the exception of the first four months, which are at a discount, the base annual rent is approximately $31,000 per month and escalates 2.5% per year. The total base rent payable over the lease period is approximately $4.3 million.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Areas of revenue recognition that will be affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. In addition, Topic 606 requires more detailed disclosures to enable users of financial statements to understand the nature, timing and uncertainty of revenue and cash flows arising from a review of historical accounting policies and practices to identify potential differences in applying Topic 606.

The Company plans to adopt this standard on January 1, 2018 and will use the modified retrospective approach recognizing the cumulative effect of adopting this guidance as an adjustment to its opening accumulated deficit balance, which will have no effect on the Company’s consolidated statements of operations or cash flows for the quarter orfiscal year ended December 31, 2017.  Prior periods will not be retrospectively adjusted.  While the2022. The critical accounting estimates that are most critical to a full understanding and evaluation of our reported financial results are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the new standard is ongoing, the Company believes the adoption will result in a changefiscal year ended December 31, 2022. There were no material changes to net revenue primarily due to the recognition of bad debt expense related to the patient responsibility of both contracted and non-contracted claims, which was $1.7 million forour critical accounting estimates during the nine months ended September 30, 2017, as a reduction of gross revenue rather than as a component of selling, general and administrative and, to a lesser extent, due to timing differences in its recognition of revenue related to non-contracted third-party payor claims as a result of changing from recognition based on the earlier of notification of the payor benefits allowed or when payment is received to the accrual basis based on historical experience.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718). This ASU was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. This standard covers accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. As a result of adopting ASU No. 2016‑09 on January 1, 2017, the Company has made an accounting policy election to continue to estimate forfeitures. The adoption of ASU No. 2016‑09 also requires excess tax benefits and tax deficiencies be recorded in the income statement as opposed to additional paid‑in capital when the awards vest or are settled, and has been applied on a prospective basis with no impact on the condensed consolidated financial statements as of and for the three months ended September 30, 2017. As a result of the adoption, the Company increased its total NOLs by $0.1 million on January 1, 2017 related to deferred tax assets that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting purposes. This amount is fully offset by the valuation allowance.

On May 10, 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. This ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of this new guidance.

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2023.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. These risks primarily include risk related to interest rate sensitivities and foreign currency exchange rate sensitivity.

Interest Rate Sensitivity

We had cash, cash equivalents and investmentsmarketable securities of $107.4$158.5 million and $213.1 million as of September 30, 2017,2023, and December 31, 2022, respectively; which consisted of bank deposits, money market funds and U.S. government securities, corporate notes, and commercial paper.securities. Such interest-earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant.

risk.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. Based upon our overall interest rate exposure as of September 30, 2023, a change of 10 percent in interest rates, assuming the amount of our investment portfolio and overall economic environment remains constant, would not have a material effect on interest income.
As of September 30, 2023 and December 31, 2022, we had total outstanding debt of $34.9 million for each period, net of debt issuance costs. The SVB Loan Agreement carries a variable interest rate based on the “Prime Rate” published by The Wall Street Journal. A hypothetical 10% change in interest rates during anyeach of the periods presentedthree and nine months ended September 30, 2023 and 2022 would not have had a materialresulted in an immaterial impact on our unaudited condensed consolidated financial statements.

We had total outstanding debt of $33.5 million, which is net of debt discount and debt issuance costs, as of September 30, 2017. The interest rates on our outstanding debt carry fixed interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our condensed consolidated financial statements.

Foreign Currency Exchange Rate Sensitivity

We face foreign exchange risk as a result of entering into transactions denominated in currencies other than U.S. dollars, particularly in British Pound Sterling.Sterling and in Philippine Pesos. As of September 30, 2023 and December 31, 2022, we do not consider this risk to be material. We do not utilize any forward foreign exchange contracts.contracts, although we may choose to do so in the future. All foreign transactions settle on the applicable spot exchange basis at the time such payments are made.

The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. In the event our foreign currency denominated assets, liabilities, sales, or expenses increase, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business.
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ITEM 4.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our President and Chief Executive Officer and our Chief Financial Officer, have evaluated our

We maintain disclosure controls and procedures (as definedthat are designed to provide reasonable assurance that information required to be disclosed by us in Rules 13a-15(e) and 15d-15(e)reports that we file or submit under the Securities Exchange Act of 1934, as amended) prioris recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the filing of this quarterly report. Based on that evaluation, our President andmanagement, including our Chief Executive Officer (“CEO”) (principal executive officer) and our Chief Financial Officer have concluded that,(“CFO”) (principal financial officer), as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that materially affected, or are reasonably likelyappropriate to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controlsobjectives, and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefitscost-benefit relationship of possible controls and procedures.

As required by Rule 13a under the Exchange Act, our management, including our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures relative(as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and our CFO have concluded that our disclosure controls and procedures are effective at the reasonable assurance level as of September 30, 2023.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to their costs.

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materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override of the controls. Projections of any evaluation of controls effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with policies or procedures.

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PART II – OTHERII. OTHER INFORMATION

ITEM 1

ITEM 1. LEGAL PROCEEDINGS

Legal Proceedings

We are not currently a party to any material legal proceedings.

From time to time, we may beare involved in claims and legal proceedings or investigations, by governmental agencies. For example, we could become involvedthat arise in litigation related to advertising, unfair competition or intellectual property litigation with our competitors. The defensethe ordinary course of these and otherbusiness. Such matters can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand and cause us to incur significant expenses or make substantial payments to satisfy judgments or settle claims, all of which could have an adverse impact on our resultsreputation, business, and financial condition and divert the attention of operations, financial positionour management from the operation of our 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 we and our former Chief Executive Officer, Kevin M. King, violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder. On August 2, 2021, the lead plaintiff filed an amended complaint, and filed a further amended complaint on September 24, 2021. The amended complaint names as defendants, in addition to us and Mr. King, our former Chief Executive Officer, Michael J. Coyle, and former Chief Financial Officer and former Chief Operating Officer, Douglas J. Devine. The purported class in the amended complaint includes all persons who purchased or cash flows.

ITEM 1A

RISK FACTORS

Investing inacquired our common stock involvesbetween August 4, 2020 and July 13, 2021, and seeks unspecified damages purportedly sustained by the class. On October 27, 2021, we filed a high degreemotion to dismiss, which the Court granted on March 31, 2022, entering judgment in favor of risk. Youus and the other defendants. On April 29, 2022, the original named plaintiff appealed to the Ninth Circuit Court of Appeals. On October 11, 2023, after briefing by the parties and oral argument, the Ninth Circuit dismissed the appeal for lack of jurisdiction. The appellant has stated that he intends to file a petition for rehearing en banc. We believe the above securities class action lawsuit to be without merit and plan to continue to defend ourselves vigorously.

On March 26, 2021, we 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 our products and services. On September 14, 2021, we received a second subpoena requesting additional information. On April 4, 2023, we received a Subpoena Duces Tecum from the Consumer Protection Branch, Civil Division of the U.S. Department of Justice, requesting production of various documents regarding our products and services. We are cooperating fully on these matters.
At this time, we are unable to predict the eventual scope, duration or outcome of the aforementioned proceedings. See also Part II, Item 1A “Risk Factors — Risks Related to Other Legal and Regulatory Matters” for more information on these matters.
ITEM 1A. RISK FACTORS
Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. Before making a decision to invest in, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, together with all ofin addition to the other information contained in or incorporated by reference into this Quarterly Report on Form 10-Q, including our financial statements andas well as the related notes thereto, before making a decision to invest in our common stock. The realization ofother information we file with the SEC. If any of the following risks could materially and adversely affectare realized, our business, financial condition, operating results of operations and prospects.prospects could be materially and adversely affected. In that event,case, the pricevalue of our common stock could decline and youstockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could lose part or all of your investment.

Risks Related to Our Business

We have a history of net losses, which we expect to continue, and we may not be able to achieve or sustain profitability in the future

We have incurred net losses since our inception in September 2006. For the nine months ended September 30, 2017 and 2016, we had a net loss of $18.3 million and $14.6 million, respectively, and we expect to continue to incur additional losses. As of September 30, 2017, we had an accumulated deficit of $145.4 million. The losses and accumulated deficit were primarily due to the substantial investments we made to develop and improve our technology and products and improvematerial adverse effect on our business, financial condition and results of operations. Refer to our disclaimer regarding forward-looking statements at the ZIO Service through researchbeginning of "Management’s Discussion and development effortsAnalysis of Financial Condition and infrastructure improvements. Over the next several years, we expect to continue to devote substantially allResults of our resources to increase adoptionOperations" in Part I, Item 2 of and reimbursement for our ZIO Service and to develop additional arrhythmic detection and management products and services. These efforts may prove more expensive than we currently anticipate and we may not succeed in increasing our revenue sufficiently to offset these higher expenses or at all. In addition, as a public company, we will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. Accordingly, we cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability. Our failure to achieve and sustain profitability in the future could cause the market pricethis Quarterly Report.



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Summary of our common stock to decline.

Risk Factors

Our business is dependent upon physicians adoptingsubject to numerous risks and uncertainties, including those risks more fully described below. These risks include, among others, the following, which we consider our ZIO Servicemost material risks:
•Reimbursement by Medicare is highly regulated and if we failsubject to obtain broad adoption,change, and our failure to comply with applicable regulations, including regulations not designed for diagnostic tests like our Zio Services, could prevent us from receiving reimbursement under the Medicare program and some commercial payors, subject us to penalties, and adversely affect our reputation, business and results of operations.
•If reimbursement or other payment for our Zio Services is reduced or modified in the United States, including through cost containment measures or changes to policies with respect to coding, coverage and pricing, our business would be adversely affected.

Our success will depend on our abilitycould suffer.

•If we are unable to educate physicians regardingexpand the benefits of our ZIO Service over existing products and services, such as Holter monitors and event monitors, and to persuade them to prescribe the ZIO Service as a first-line diagnostic product for their patients. We do not know if the ZIO Service will be successful over the long term and market acceptance may be hindered if physicians are not presented with compelling data demonstrating the efficacy of our service compared to alternative technologies. Any studies we, or third parties which we sponsor, may conduct comparing our ZIO Service with alternative technologies will be expensive, time consuming and may not yield positive results. Additionally, adoption will be directly influenced by a number of financial factors, including the ability of providers to obtain sufficient reimbursement from third-party commercial payors and the Centerswith which we contract or expand coverage for Medicare & Medicaid Services, or CMS, for the professional services they provide in applying the ZIO Patch and analyzing the ZIO Report. The efficacy, safety, performance and cost-effectiveness ofexisting third-party commercial payors, our ZIO Service, on a stand-alone basis and relative to competing services, will determine the availability and level of reimbursement received by us and providers. Some payors do not have pricing contracts with us setting forth the ZIO Service reimbursement rates for us and providers. Physicians maycommercial success could be reluctant to prescribe the ZIO Service to patients covered by such non-contracted insurance policies because of the uncertainty surrounding reimbursement rates and the administrative burden of interfacing with patients to answer their questions and support their efforts to obtain adequate reimbursement for the ZIO Service. If physicians do not adopt and prescribe our ZIO Service, our revenue will not increase and our financial condition will suffer as a result.

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impacted.

•Our revenue relies substantially on the ZIO Service,our Zio Services, which isare currently our only product offering.offerings. If the ZIO Serviceour Zio Services or future productservice offerings fail to gain, or lose, market acceptance, our business will suffer.

•The market for remote cardiac monitoring solutions is highly competitive. If our competitors are able to develop or market monitoring devices and services that are more effective, or gain greater acceptance in the marketplace, than any services and related devices we develop, our commercial opportunities will be reduced or eliminated.
•Billing for our Zio Services is complex, and we must dedicate substantial time and resources to the billing process.
•Audits or denials of our claims by government agencies or payors could expose us to recoupment, regulatory scrutiny, and penalties.
•We are currently undertaking a transformation of our revenue cycle management function and we may fail to realize the anticipated benefits of these efforts.
•Although our current Zio Systems are comprised of medical devices that have received FDA marketing authorization (510(k) clearance) as well as regulatory certifications in the EU and the UK, we may regularly engage in product enhancements and in iterative changes to existing products, as well as seeking to develop new technology or use of technology for new indications for use. These medical device developments may trigger further regulatory reviews and the results of those reviews are unpredictable.
•We are subject to extensive compliance requirements for the quality, design, safety, performance and post-market surveillance of the medical device we manufacture for use in our Zio Services, and for vigilance on complaint-handling, escalation, assessment, and reporting of adverse events and malfunctions. A wide range of quality, risk, regulatory, or safety matters could trigger the need for a recall, a hold on the distribution of the marketed product, or other corrective actions to marketed products.
•Because of the patient populations for which our services are provided and the complexity of the healthcare environment in which we operate, a high degree of medical and clinical input may be necessary to evaluate complaints and adverse events, and in some cases, there may be disagreement over whether our services or the medical devices used in our service may have caused or contributed to an event.
•If we are unable to keep up with demand for our Zio Services, our revenue could be impaired, market acceptance for our Zio Services could be harmed, and physicians may instead order our competitors’ services.
•We depend on third-party vendors for the supply and manufacture of certain components of our Zio Systems, as well as for other aspects of our operations.
•Our ability to compete depends on our ability to innovate successfully.
•We have entered into a development agreement with a third-party that may not result in the development of commercially viable devices or the generation of significant future revenues.
•International expansion of our business exposes us to market, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.
•Our success depends on our ability to attract and retain senior management and key personnel.
•Failure to receive the Zio System patches used for the provision of the Zio Services we provide may result in a loss of capital as well as revenue where the receipt of returned devices and processing of data retrieved from returned devices is required to provide our Zio Services.
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•Our plans include a high degree of focus on the mSToPs criteria for Afib screening. There are risks that the clinical or payor community will not fully accept these criteria as a basis for selection of patients suitable for screening.
•We may face risks associated with acquisitions of companies, products, and technologies and our business could be harmed if we are unable to address these risks.
•Our use of third-party service providers or company resources located outside the United States to support certain customer care, clinical and other operations of our independent diagnostic testing facilities ("IDTFs") may present challenges, and if we are ineffective in limiting work performed by these service providers or company resources consistent with applicable regulations or our contractual agreements with commercial payors, we may be subject to penalties or experience loss of revenue.
•If we fail to comply with medical device, healthcare and other governmental regulations, we could face substantial penalties and our business, results of operations, and financial condition could be adversely affected.
•Changes in applicable laws or regulations or the interpretation or enforcement policies of regulators governing our IDTFs and Zio Services may constrain or require us to restructure our operations or adapt certain business strategies, which may harm our revenue and operating results.
•Our business relies on orders from licensed healthcare providers, and the continuing clinical acceptance and adoption of our Zio Services depends upon strong working relationships with healthcare providers, including physicians. These relationships, interactions, and arrangements are subject to a high degree of scrutiny by government regulators and enforcement bodies.
•Our communications with healthcare stakeholders – physicians and other healthcare professionals, payors and similar entities, as well as patients and lay caregivers – are subject to a high degree of scrutiny for compliance with a wide range of laws and regulations. Continuing or increasing our sales and marketing and other external communication efforts may expose us to additional risk of being alleged or deemed to be non-compliant by regulatory, enforcement authorities, or competitors.
•While most of our revenue results from claims submitted to payors for diagnostic medical procedures, we offer, and are looking to expand, alternative payment and service delivery models. Piloting, evaluating, and implementing these alternative payment and service delivery models requires interactions with commercial payors, physicians, and patients; these interactions are subject to laws and regulations aimed at preventing healthcare fraud and abuse. If these models are unsuccessful, or if we are unable to fully comply with such laws as we pursue these strategies, our commercial success could be compromised and we could face substantial penalties.
•In the future we may identify additional material weaknesses or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
•Our financial results may fluctuate significantly from quarter-to-quarter and may not fully reflect the underlying performance of our business.
•We are subject to legal proceedings and government investigations that could adversely affect our business, financial condition, and results of operations.
•We are subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from shipping affected devices, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief.
•We are subject to complex and evolving U.S. and foreign laws and regulations and other requirements regarding privacy, data protection, security, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.
•If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
•Our stock price is highly volatile and investing in our stock involves a high degree of risk, which could result in substantial losses for investors.
•Increasing our financial leverage could affect our operations and profitability.
•We may be impacted by domestic and global economic and political conditions, as well as natural disasters, pandemics, and other catastrophic events, which could adversely affect our business, financial condition or results of operations.
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Risks Related to Our Industry, Business and Operations
Reimbursement by Medicare is highly regulated and subject to change, and our failure to comply with applicable regulations, including regulations not designed for diagnostic tests like our Zio Services, could prevent us from receiving reimbursement under the Medicare program and some commercial payors, subject us to penalties, and adversely affect our reputation, business and results of operations.
During each of the three and nine months ended September 30, 2023, we received approximately 25% of our total revenue from the Medicare program (inclusive of Medicare Advantage). The Medicare program is administered by CMS, which imposes extensive and detailed requirements on diagnostic services providers, including IDTFs. These requirements include, but are not limited to, rules that govern how we structure our relationships with physicians, how we operate our IDTFs and market our Zio Services, when we may perform diagnostic tests, and how and when we submit reimbursement claims. Our failure to comply with the applicable Medicare rules and requirements could result in discontinuation of our reimbursement under the Medicare payment program, a requirement to return funds already paid to us, civil monetary penalties, criminal penalties, and/or exclusion from the Medicare program, which would have a material adverse impact on our reputation, business and results of operations.
Notably, CMS has acknowledged that the IDTF regulations were designed for “traditional” IDTFs that administer tests to patients in-person, at a single point in time, and from a single location, and only recently has CMS initiated changes to the regulations to address IDTFs like iRhythm that furnish “indirect tests” that do not require in-person interaction and involve technicians performing computer analyses offsite or at another location. The changes, however, do not address all gaps identified by CMS relating to IDTF operations and the Medicare billing requirements. Our failure to comply with the applicable Medicare regulations, or regulators’ disagreement with our interpretation of the regulations as applied to indirect tests, such as the Zio Services, could result in the discontinuation of our reimbursement under the Medicare program, a requirement to return funds already paid to us, civil monetary penalties, criminal penalties, and/or exclusion from the Medicare program.
In addition, many commercial payors require our IDTFs to maintain enrollment with the Medicare program as well as accreditation and certification with the Joint Commission. If we fail to obtain and maintain IDTF enrollment or accreditation and certification, our Zio Services may no longer be reimbursed by those commercial payors, which could have a material adverse impact on our reputation, business and results of operations.
If reimbursement or other payment for our Zio Services is reduced or modified in the United States, including through cost containment measures or changes to policies with respect to coding, coverage and pricing, our business could suffer.
We receive a substantial portion of our revenue from Medicare and third party commercial payors with which we contract, and we cannot predict whether and to what extent existing reimbursement rates will continue to be available. If CMS or any of our key commercial payors reduce reimbursement rates for our Zio Services, our business, operating results, and prospects would be adversely affected.
CMS updates the reimbursement rates for diagnostic tests performed by IDTFs annually via the Medicare Physician Fee Schedule. Effective January 1, 2023, CMS established national payment rates for the CPT codes we use to report the long-term continuous monitoring services we perform with our Zio XT System and our Zio Monitor System: CPT codes 93247 (for wear-time of greater than 7 days and up to 15 days) and 93243 (for wear-time of greater than 48 hours and up to 7 days). Based on the relative value units CMS assigned to CPT codes 93247 and 93243, the national reimbursement rates for these services in 2023 are $243.65 and $231.79, respectively, and range from $247.59 to $334.46 and $235.54 to $318.17 for our Medicare-enrolled IDTF locations in Deerfield, Illinois, Houston, Texas, and San Francisco, California, when considering the geographic practice cost index for these locations. On August 7, 2023, CMS published the calendar year 2024 Medicare Physician Fee Schedule proposed rule, which includes rates for the CPT codes we use to seek reimbursement for our services. Based on the proposed rule, we believe the 2024 proposed national payment rates may be, on average, approximately 5% lower than the 2023 rates for services, when excluding impacts from the geographic practice cost index for our IDTF locations noted above. As of November 1, 2023, the final Medicare Physician Fee Schedule has not been released by CMS for calendar year 2024. Because remote cardiac monitoring technology, including the Zio System, are rapidly evolving, there is a continuing risk that relative value units assigned, and reimbursement rates set, by CMS may not adequately reflect the value and expense of this technology and associated monitoring services, and CMS may reduce these rates in the future, which would adversely affect our financial results.
Additionally, commercial payors with which we contract may seek to reduce our reimbursement rate through further contract negotiations. For example, the recent actions taken by CMS to finalize national reimbursement rates for CPT Codes 93247 and 93243 reduced the Medicare reimbursement rates for these services performed at our Deerfield, Illinois location. Accordingly, we may observe certain commercial payors in this region seeking to adjust their reimbursement rates for these services as well.

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In addition, our agreements with commercial payors typically allow either party to terminate the contract at any time by providing prior written notice, in accordance with the agreement, to the other party, which means our commercial payors may elect to terminate their contracts with us for any reason. A commercial payor who terminates or does not renew their contract with us may, or may not, alter their coverage for the type of services we provide. In the event any of our key commercial payors terminate their agreements with us, elect not to renew or enter into new agreements with us upon expiration of their current agreements, or do not renew or establish new agreements on terms as favorable as are currently contracted, our business, operating results, and prospects would be adversely affected.
If we are unable to expand the number of third-party commercial payors with which we contract or expand coverage for existing third-party commercial payors, our commercial success could be impacted.
There is significant uncertainty concerning third-party reimbursement of any new service until a contracted rate is established for that service with the commercial payor. Reimbursement by a commercial payor may depend on several factors, including, but not limited to, a payor’s determination that the ordered service is not experimental or investigational, medically necessary and appropriate for the specific patient, cost effective, supported by peer-reviewed publications, and accepted and used by physicians and other clinicians within their provider network.
Since each payor decides whether to establish a policy concerning reimbursement or to contract with us to set the price of reimbursement, seeking reimbursement on a payor-by-payor basis is a time-consuming and costly process to which we dedicate substantial resources. If we do not dedicate sufficient resources to establishing contracts with commercial payors and supporting payors’ reimbursement determinations by demonstrating the clinical value of our Zio Services through studies and physician adoption, we may encounter several adverse consequences that could compromise the commercial success of our business. Such adverse consequences may include an inability to secure additional contracts with commercial payors, reluctance by physicians to order our Zio Services due to concerns that patients may face significant out-of-pocket expenses associated with an out-of-network IDTF, a decline in the amount that we are reimbursed for our services, less predictable revenue, and an increase in the efforts and resources necessary to obtain reimbursement for our services on a claim-by-claim basis.
Additionally, for our out-of-network or cash pay patients, we may be subject to state and federal surprise billing laws that impose limits on amounts that can be charged to such patients and/or the amount we can receive for out-of-network services from commercial payors. One such law, the federal No Surprises Act, requires covered providers to provide “good faith estimates” to patients and establishes a detailed and potentially costly independent dispute resolution process governing fee disputes with those patients. These laws and regulations may change, and additional implementation regulations are expected for the No Surprises Act, and we anticipate these requirements may apply to our business in the future.
We report to third party payors the technical components of the remote cardiac monitoring services that are performed with our Zio XT, Zio AT, and Zio Monitor Systems using CPT codes established by the American Medical Association. These CPT codes are manufacturer- and technology-agnostic but describe general technical features required to support the diagnostic medical procedures represented by these billing codes. Given the nature of CPT codes, there is always some degree of risk for an entity that bills for its services that regulators or other third parties could assert that the CPT codes utilized were not appropriate, and recent events have the potential to increase the risk of questions or inquiry regarding our use of a specific CPT code.
The CPT codes used to report remote cardiac monitoring services, including those used to report our Zio Services, were drafted by the American Medical Association (“AMA”) in a manufacturer- and specific technology-agnostic manner. Regulators or other third parties could assert that our technology does not support certain diagnostic procedures described by the CPT codes that we currently use to report our Zio Services. For example, a regulator or other third party could assert that the Zio AT System cannot support MCT services, which could jeopardize our ability to submit claims for reimbursement for services utilizing our Zio AT System and may require us to evaluate whether we have received any overpayments that must be reported and returned to third party payors. Certain language in the warning letter could increase the risk of inquiries regarding our historical or current use of CPT code 93229. Consistent with the AMA’s definition of MCT, the Zio AT System’s indications for use under our 510(k) clearance include uninterrupted ECG recording during normal day-to-day activities to capture, analyze and report diagnostic information regarding asymptomatic arrhythmias as well as other transient, non-critical symptoms (e.g., palpitations, pre-syncope, syncope, shortness of breath or dizziness) for review by our IDTFs and escalation to the patient’s treating healthcare professional, consistent with the healthcare professional’s prescribed notification criteria, during the monitoring period.

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Our revenue relies on our Zio Services, which are currently our only offerings. If our Zio Services or future service offerings fail to gain, or lose, market acceptance, our business will suffer.
Our current revenue is dependent on prescriptions of the ZIO Service,orders for our Zio Services, and we expect that sales of the ZIO Servicereimbursement for our Zio Services will account for substantially all of our revenue through at least 2017.for the foreseeable future. We are in various stages of research and development for other diagnostic screening solutions and new indications for our technology and the ZIO Service;our Zio Services; however, there can be no assurance that we will be able to successfully develop and commercialize any new products or services.services and related devices. Any new productsservices may not be accepted by physicians or may merely replace revenue generated by our ZIO ServiceZio Services and not generate additional revenue. If we have difficulty launching new products,services, our reputation may be harmed and our financial results adversely affected. In order to substantially increase our revenue, we will need to target physicians other than cardiologists, such as emergency room doctors, primary care physicians, and other physicians with whom we have had little contact and who may require a different type of sellingmarketing effort. If we are unable to increase prescriptions of the ZIO Service,orders for our Zio Services, expand reimbursement for the ZIO Service,our Zio Services, or successfully develop and commercialize new productsservices and services,related devices, our revenue and our ability to achieve and sustain profitability would be impaired.

Our limited operating history makes it difficult

The market for remote cardiac monitoring solutions is highly competitive. If our competitors are able to evaluate our current businessdevelop or market monitoring devices and future prospects

We first commercialized the ZIO Serviceservices that are more effective, or gain greater acceptance in the first quartermarketplace, than any services and related devices we develop, our commercial opportunities will be reduced or eliminated.

The market for remote cardiac monitoring products and services is competitive, characterized by rapid change resulting from technological advances, scientific discoveries, and other market activities of 2011industry participants. Our Zio Services compete with a variety of products and do notservices that provide alternatives for remote cardiac monitoring, including traditional, short-term Holter monitors and event monitors. Our industry is highly fragmented and characterized by a small number of large manufacturers and a large number of smaller regional service providers. These third parties compete with us in marketing to payors and ordering physicians, recruiting and retaining qualified personnel, acquiring technology, and developing products and services that compete with our Zio Services and related devices. Our ability to compete effectively depends on our ability to distinguish our company and our Zio Services from our competitors and their products, and includes such factors as safety and effectiveness; acute and long-term outcomes; ease of use; price; physician, hospital, and clinic acceptance; and third-party reimbursement.
Our industry is subject to rapid change and is significantly affected by new product introductions, results of clinical research, corporate combinations, and other factors. Large competitors in the remote cardiac market include companies that sell standard Holter monitors including GE Healthcare, Philips Healthcare, Mortara Instrument, Inc., Spacelabs Healthcare Inc. and Welch Allyn Holdings, Inc. (acquired by Hill-Rom Holdings, Inc.). Additional competitors, such as BioTelemetry, Inc. (acquired by Royal Philips), Preventice Solutions, Inc. (acquired by Boston Scientific, Inc.), and Bardy Diagnostics, Inc. (acquired by Hill-Rom Holdings, Inc. which was acquired by Baxter International, Inc.) manufacture remote cardiac monitoring devices and also offer monitoring services. These companies have also developed other patch-based cardiac monitors that have received FDA and foreign regulatory clearances. There are also several small start-up companies trying to compete in the patch-based cardiac monitoring space, as well as several entering the patch-based cardiac monitoring market.
We have also seen a long history operating as a commercial company. As a result,trend in the market for large medical device companies to acquire, invest in, or form alliances with these smaller companies in order to diversify their product offerings and participate in the digital health space. Future competition could come from makers of wearable fitness products or large information technology companies focused on improving healthcare. For example, Apple Inc., Fitbit and Samsung, among others, have added capabilities on their platforms to measure non-continuous ECG and to alert users to the potential presence of irregular heartbeats suggestive of asymptomatic Afib. These competitors and potential competitors may introduce new products and services that more directly compete with our operating results are not predictable. Since 2011,Zio Services and related devices.
Billing for our revenue has been derived,Zio Services is complex, and we expect itmust dedicate substantial time and resources to continue to be derived, substantially from salesthe billing process.
Billing for diagnostic services is complex, time-consuming, and expensive. Depending on the billing arrangement and applicable law, we bill several types of the ZIO Serviceentities and its predecessor products. Becausepayors, including federal healthcare programs, third-party commercial payors, healthcare providers, and healthcare institutions, which may have different billing requirements, coverage criteria, procedures, or expectations. We also bill insured patients for co-payments, co-insurance, and deductible amounts, as well as bill self-pay patients directly.
We also face risk in our collection efforts, including potential write-offs of its recent commercial introduction, the ZIO Service has limited productdoubtful accounts and brand recognition. In addition, demand for our services may decline or may not increase as quickly as we expect. Failure of the ZIO Service to significantly penetrate current or new markets would harmlong collection cycles, which could adversely affect our business, financial condition, and results of operations.

Our quarterly


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Several factors make the billing and annual results may fluctuate significantlycollection process uncertain, including differences between the submitted claim price for our Zio Services and may not fully reflect the underlying performancereimbursement rates of our business.

Our quarterlypayors; compliance with complex federal and annual resultsstate regulations related to billing the Medicare and Medicaid programs; the effect of operations, including our revenue, profitabilitypatient co-payments, co-insurance, and cash flow,deductible amounts, which may vary significantlydepending on the timing of the claim relative to the insured’s annual policy year; differences in coverage policies, criteria, and billing requirements among payors; and incorrect or missing patient history, indications, or billing information and delays in verifying and resolving the futuresame.

Additionally, our billing activities require us to implement compliance procedures and period-to-period comparisonsoversight, train and monitor our employees, subcontractors, and agents, and undertake internal review procedures to evaluate compliance with applicable laws, regulations, and internal policies. These activities require a tremendous dedication of our operating results may not be meaningful. Accordingly, the results of any one quarter or period should not be relied upon as an indication of future performance. Our quarterly and annual financial results may fluctuate as a result of a variety of factors, many of which are outside our controlresources and, as a result, may not fully reflect the underlying performancewe have engaged third-party vendors, such as XIFIN, Inc. (“XIFIN”), to undertake certain components of our business. Fluctuationbilling and collections operations. The complexities we face related to billing for our Zio Services, and the related uncertainty in quarterlyobtaining payment for our Zio Services, could negatively affect our revenue and annual results may decrease the value of our common stock. Factors that may cause fluctuations in our quarterly and annual results include, without limitation:

market acceptance of the ZIO Service

cash flow, our ability to get payors under contract at acceptable reimbursement rates

the availability of reimbursement for the ZIO Service through government programs

our ability to attract new customers and improve our business with existing customers

results of our clinical trials and publication of studies by us, competitors or third parties

the timing and success of new product introductions by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners

our revenue recognition policy, which generally provides that we recognize revenue only upon the earlier of notification of the payor benefits allowed or when payment is received

the amount and timing of costs and expenses related to the maintenance and expansion of our business and operations

changes in our pricing policies or those of our competitors

general economic, industry and market conditions

the regulatory environment

expenses associated with unforeseen product quality issues

timing of physician prescriptions and demand for our ZIO Service

the hiring, training and retention of key employees, including our ability to expand our sales team

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•

litigation or other claims filed against us or by us for intellectual property infringement or otherwise

our ability to obtain additional financing as necessary

advances and trends in new technologies and industry standards

Because our quarterly results may fluctuate, period-to-period comparisons may not be the best indication of the underlying results of our business and should only be relied upon as one factor in determining how our business is performing.

We have noticed seasonality in the use of our ZIO Service which, along with other factors such as severe weather, may cause quarterly fluctuations in our revenue.

During the summer monthsachieve profitability, and the holiday season, we have observed that the useconsistency and comparability of our ZIO Service decreases, which reduces our revenue during those periods. We believe that the decrease in demand may result from physicians or their patients taking vacation. Severe weather conditions or natural disasters also may hamper or otherwise restrict when patients seeking diagnostic services such as the ZIO Service visit prescribing physicians. Similarly, we generally experience some effects of seasonality due to the renewal of insurance deductibles at the beginning of the calendar year. These factors may cause our results of operations to vary from quarter to quarter

Reimbursementoperations.

Audits or denials of our claims by CMS is highly regulated and subject to change; our failure to comply with applicable regulationsgovernment agencies or payors could result in decreased revenue and may subjectexpose us to penalties or haverecoupment, regulatory scrutiny, and penalties.
As an adverse impact on our business.

For the nine months ended September 30, 2017, we received approximately 28% of our revenue from reimbursement for our ZIO Service by CMS. CMS imposes extensive and detailed requirements on manufacturers of medical devices and providers of medical services, including but not limited to, rules that govern how we structure our relationships with physicians, how and whenIDTF, we submit claims directly to, and receive reimbursement claims, how we operate our monitoring facilities and how and where we provide our monitoring solutions. Our failure to comply with applicable CMS rules could result in a discontinuation of our reimbursement under the CMS paymentfrom, federal healthcare programs, our being required to return funds already paid to us, civil monetary penalties, criminal penalties and/or exclusion from the CMS programs. In addition, regionalincluding Medicare, Administrative Contractors, or MACs, change from time to time, which may result in changes to our reimbursement rates, increased administrative burden and reimbursement delay.

Changes in public health insurance coverage and CMS reimbursement rates for the ZIO Service could affect the adoption of the ZIO Service and our future revenue.

Government payors may change their coverage and reimbursement policies, as well as payment amounts, in a way that would prevent or limit reimbursement for our ZIO Service, which would significantly harm our business. For example, government and other third-party commercial payors. These programs and payors, require usincluding contractors on their behalf, may conduct pre- and post-payment audits and reviews of claims submitted for reimbursement. Further, the federal healthcare programs may impose suspensions on both payment and participation in response to identify the service for which we are seeking reimbursement by using a Current Procedural Terminology,allegations of fraud or CPT, code set maintained by the American Medical Association. We have secured CPT codes specific to our category of diagnostic monitoring through 2022, but these codes are not exclusive to the ZIO Service and our competitors’ products and services may also qualify for reimbursement under these codes.  To the extent one of our competitors or a future competitor produces a product or service at a less expensive price, it may cause the reimbursement under these CPT codes to decrease. In addition, third-party payors often reimburse based on CMS reimbursement rates. To the extent CMS reduces its reimbursement rates for the ZIO Service, third-party payors may reduce the rates at which they reimburse the ZIO Service, which could adversely affect our revenue.

Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through a national coverage determination, or an NCD, by CMS, or at the local level through a local coverage determination, or an LCD, by one or more of the regional Medicare Administrative Contractors, or MACs, which are private contractors that process and pay claims on behalf of CMS for different regions. In the absence of an NCD, as is the case with the ZIO Service, the MAC with jurisdiction over a specific geographic region will have the discretion to make an LCD and determine the fee schedule and reimbursement rate within the region, and regional LCDs may not always be consistent in their determinations. We have in the past been, and in the future may be, required to respond to potential changes in reimbursement rates for our products. Reductions in reimbursement rates, if enacted, could have a material adverse effect on our business. Further, a reduction in coverage by Medicare could cause some commercial third-party payers to implement similar reductions in their coverage or level of reimbursement of the ZIO Service. Given the evolving nature of the healthcare industry and on-going healthcare cost reforms, we are and will continue to be subject to changes in the level of Medicare coverage for our products, and unfavorable coverage determinations at the national or local level could adversely affect our business and results of operations.

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Controlsother noncompliance.

Other controls imposed by CMS and commercial third-party payors designed to reduce costs, commonly referred to as “utilization review”,review,” may also affect our operations. Federal law contains numerous provisions designed to ensure that services rendered to CMS patients meet professionally recognized standards and are medicallymedically necessary, appropriate for the specific patient, and cost-effective.cost-effective. These provisions include a requirement that a quality improvement organization review a sampling of CMS patients must be reviewed by quality improvement organizations, which review the appropriateness of product prescriptions,claims for Medicare beneficiaries to assess the quality of care provided, and the appropriateness of reimbursement costs. Qualitythe services provided. These quality improvement organizations may deny payment for services or assess fines and also have the authority to recommend to the U.S. Department of Health and Human Services, or DHHS,CMS that a provider which is in substantial noncompliance with theapplicable Medicare requirements and quality standards of the quality improvement organization be excluded from participation in the Medicare program. The Patient Protection and Affordable Care Act as amended by the Health Care and Education Affordability Reconciliation Act, or Affordable Care Act, potentiallyalso expands the use of prepayment review by Medicare contractorsAdministrative Contractors by eliminating statutory restrictions on their use and, as a result, we except efforts to impose more stringent cost controls are expected to continue. Utilization review is alsoAs a requirement of most non-governmental managed care organizationsprovider enrolled in federal healthcare programs, we expect to be subject to such audits and claims reviews in the future, which may result in suspensions or other third-party payors. To date these controls have not had a significant effectrestrictions on our ability to submit claims for our services, payment delays, overpayment recoupments, and claims denials, which would negatively impact our business, financial condition, and results of operations, butand may jeopardize our participation in these federal healthcare programs.
We are currently undertaking a transformation of our revenue cycle management function and we may fail to realize the anticipated benefits of these efforts. These activities involve significant limits on the scope of services reimbursedtime and on reimbursement ratesresources, and feesour failure to execute these activities efficiently and effectively may cause our revenue and accounts receivable to be delayed or reduced and could have a material,an adverse effect on our business financial position and resultscause reputational harm.
We are undertaking a transformation of our revenue cycle management function, which plan contemplates the engagement of service providers to support certain activities. The success of this plan depends on our ability to integrate these service providers in a timely manner to scale our operations to facilitates growth opportunities, without adversely affecting current revenues and accounts receivable. If we are not able to successfully achieve these objectives, the anticipated benefits of this transformation may not be realized fully or at all or may take longer to realize than expected. In addition, there is a significant degree of difficulty and management distraction inherent in the future.

Also, healthcare reform legislation or regulationprocess of integrating with service providers. These difficulties include challenges supporting certain operations and activities with more than one service providers, integrating technologies (including IT systems and processes, procedures, policies and operations, and retaining key personnel). These activities may be proposedcomplex and time consuming and involve delays or enactedadditional and unforeseen expenses. The process of transitioning to these service providers, the integration process and other disruptions may also disrupt our ongoing businesses or cause inconsistencies in the futurestandards, controls, procedures and policies that maycould adversely affect such policiesour relationships with payors, patients, employees and amounts. Changes in the healthcare industry directed at controlling healthcare costs or perceived over-utilization of ambulatory cardiac monitoring productsothers. Any failure to execute these activities effectively and services could reduce the volume of ZIO Services prescribed by physicians. If more healthcare cost controls are broadly instituted throughout the healthcare industry, the volume of cardiac monitoring solutions prescribed could decrease, resulting in pricing pressureefficiently may cause our revenue and declining demand for our ZIO Service. We cannot predict whether and to what extent existing coverage and reimbursement will continueaccount receivable to be available. If physicians, hospitalsdelayed or reduced and clinics are unable to obtain adequate coverage and government reimbursement of the ZIO Service, they are significantly less likely to use the ZIO Service and our business and operating results would be harmed.

The current presidential administration and Congress are expected to attempt to make sweeping changes to the current health care laws.  It is uncertain how modification or repeal of any of the provisions of the Affordable Care Act, including as a result of current and future executive orders and legislative actions, will impact us and the medical device industry as a whole.  Any changes to, or repeal of, the Affordable Care Act maycould have a materialan adverse effect on our business and cause reputational harm.


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Although our current Zio Systems are comprised of medical devices that have received FDA marketing authorization (510(k) clearance) as well as regulatory certifications in the EU and the UK, we may regularly engage in product enhancements and in iterative changes to existing products, as well as seeking to develop new technology or use of technology for new indications for use. These medical device developments may trigger further regulatory reviews and the results of operations.  We cannot predict what other health care programs and regulations will ultimatelythose reviews are unpredictable.
Before a new medical device or a new intended use for a medical device can be implemented at the federal or state level or the effect of any future legislation or regulationmarketed in the United States, a company must first submit an application and receive either 510(k) clearance, De Novo marketing rights or premarket approval from FDA, unless an exemption applies. All of these processes can be expensive, lengthy and unpredictable. We may have onnot be able to obtain the clearances or approvals we seek or may be unduly delayed in doing so, which could harm our business.

If third-party commercial payors do not provide any or adequate reimbursement, rescind or modify their reimbursement policies or delay payments for our products, including the ZIO Service, or Even if we are unablegranted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the product, which may limit the market for the product. Although we have obtained 510(k) clearances to successfully negotiate reimbursement contracts,market our Zio System, our clearances can be revoked if safety, efficacy, or significant regulatory compliance problems develop. Even planned changes and improvements to devices and their uses can trigger the need for a new submission. FDA requirements dictate that we must evaluate potential changes and document our decision-making regarding the need for additional submissions and clearances or approvals. Unless effectively planned for in advance, our desired commercial success couldtimeline may be compromised.

We receive a substantial portionimpacted.


Significant changes or modifications in design, components, method of manufacture or the intended use or technological characteristics of our revenueZio System may require new or modified FDA marketing authorization, CE Mark certification (European Union) or UKCA Mark certification (United Kingdom). In some instances, we have identified a need for, and sought and obtained new, 510(k) clearances from FDA for these changes or modifications.
As permitted by applicable law, FDA allows device manufacturers to internally analyze and document a decision that a new clearance or approval is viewed by the manufacturer as unnecessary. Accordingly, we have made certain changes and modifications to our Zio Systems in the past that we believe did not require additional clearances or approvals by FDA. Such internal decisions are, however, subject to review by FDA. For example, FDA has raised questions in the warning letter issued on May 25, 2023 regarding certain changes and modifications to the Zio AT System for which we did not make 510(k) submissions, and rather documented our analysis in letters to file. We are in the process of discussing such matters with FDA.
In such instances where FDA or an EU/UK Notified/Approved Body disagrees with our internal analysis and decision that a new or additional approval or marketing authorization or certification is not needed for any such modifications, we may be required to recall and/or stop the distribution of the impacted Zio System and/or correct the labeling for such Zio System. We may be required to submit a new marketing application or certification, which could require additional testing or other supporting data, a redesign of a product or otherwise impact the provision of services. In these circumstances, the process may require engagement with regulators to resolve concerns and reach a resolution for a product, and we may be subject to significant enforcement actions.
We may not be able to obtain additional marketing authorizations in a timely fashion, or at all, which could harm our ability to introduce new or enhanced products in a timely manner and to meet market expectations for the provision of the services, which in turn could harm our future growth.
We are subject to extensive compliance requirements for the quality, design, safety, performance and post-market surveillance of the medical device we manufacture for use in our Zio Services, and for vigilance on complaint-handling, escalation, assessment, and reporting of adverse events and malfunctions. A wide range of quality, risk, regulatory, or safety matters could trigger the need for a recall, a hold on the distribution of the marketed product, or other corrective actions to marketed products.
Our design and manufacturing facilities and processes and those of certain third-party private commercial payors, such assuppliers are subject to unannounced FDA, state, and Notified/Approved Body regulatory inspections for compliance with various medical insurance companies. These commercial payors may reimburse our products,device regulations and standards, including the ZIO Service, at inadequate rates, suspend or discontinue reimbursement at any time or require or increase co-payments from patients. Any such actions could haveQuality System Regulation (“QSR”), also known as 21 CFR Part 820, European Union Medical Device Directive (“EU MDD”), New European Union Medical Device Regulations (“EU MDR”), and UK Medical Device Regulations (“UK MDR”) requirements. Developing and maintaining a negative effect on our revenue and the revenue of providers prescribing our products. Physicians may not prescribe our products unless payors reimburse a substantial portion of the submitted costs, including the physician’s, hospital’s or clinic’s charges related to the application of certain products, including the ZIO Patch and the interpretation of results which may inform a diagnosis. Additionally, certain payors may require that physicians prescribe a Holter monitor as the first-line monitoring option. Therecompliant quality system is significant uncertainty concerning third-party reimbursement of any new product or service until a contracted rate is established. Reimbursement by a commercial payor may depend on a number of factors, including a payor’s determination that the prescribed service is:

not experimental or investigational

appropriate for the specific patient

cost effective

supported by peer-reviewed publications

advocated by key opinion leaders

Since each payor makes its own decision as to whether to establish a policy concerning reimbursement or enter into a contract with us to set the price of reimbursement, seeking reimbursement on a payor-by-payor basis is a time consuming and costly process to which we dedicate substantial resources. If we do not dedicate sufficient resources to establishing contracts with third-party commercial payors, the amount that we are reimbursed for our productsinvestment intensive. Requirements and standards may decline, our revenue may become less predictable,change and evolve over time, and we will need to expend more effortsadapt. Failure to maintain compliance with, or not fully complying with the requirements of FDA and state regulators could result in enforcement actions, which could include the issuance of warning letters, adverse publicity, seizures, prohibitions on a claim-by-claim basisproduct sales, recalls, and civil and criminal penalties, any one of which could significantly impact our manufacturing supply and provision of services and impair our financial results. Failure to obtain reimbursement formaintain full compliance with the requirements of EU MDD, EU MDR, and UK MDR could result in similar disruptions in these markets.



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We are required to file various reports with FDA, and EU or UK regulators, including reports required by each jurisdiction's adverse event, certain malfunctions, and field action reporting regulations. These reports are often required if our products.

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A substantial portion of our revenue is derived from third-party commercial payors whoZio System may have pricing contracts with us, which means that the payor has agreedcaused or contributed to a defined reimbursement ratedeath or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. They may also be reasonable, necessary or prudent for our products. These contracts provide a high degreerange of certainty to us, physicians and hospitals and clinics with respectother reasons relating to the rate at which our products will be reimbursed. These contracts also impose a numberimportance of obligations regarding billing and other matters, and our noncompliance with a material term of such contracts may result in termination of the contract and loss of any associated revenue. A portion of our revenue is derived from third-party commercial payors without such contracts in place. Without a contracted rate, reimbursement claims for our products are often denied upon submission, and we or our billing partner, XIFIN, Inc., or XIFIN, must appeal the denial. The appeals process is time-consuming and expensive, and may not result in full or any payment. In cases where there is no contracted rate for reimbursement, it may be more difficult for us to acquire new accounts with physicians, hospitals and clinics. In addition,gathering information in the absencepost marketing setting and managing risk throughout the product lifecycle, or to address requests from regulators to increase or expand the scope of a contracted rate, there is typically a greater out-of-network, co-insurance or co-payment requirement which may result in payment delays or decreased likelihood of full collection. In some cases involving non-contracted insurance companies, we may not be able to collect any amount or only a portion of the invoiced amount for our products.

We expect to continue to dedicate significant resources to establishing pricing contracts with non-contracted insurance companies; however, we can provide no assurance that we will be successful in obtaining such pricing contracts or that such pricing contracts will contain reimbursement for our products at rates that are favorable to us. If we fail to establish these contracts, we will be able to recognize revenue only upon the earlier of notification of payor benefits allowed or when payment is received. In addition, XIFIN may need to expend significant resources obtaining reimbursement on a claim-by-claim basis and in adjudicating claims which are denied altogether or not reimbursed at acceptable rates. We currently pay XIFIN a percentage of the amounts it collects on our behalf and this percentage mayreporting. An increase in the future if it needsreporting of events associated with the use of our products and services from us or others and any delays to expend more resourcesthe filing of reports may increase regulator and public scrutiny. Regulators may impose sanctions and we may be subject to product liability or regulatory enforcement actions, all of which could harm our business. These reports are typically publicly available information in adjudicating such claims. We sometimes informally engage physicians, hospitals and clinicsmost jurisdictions, including the United States. If we initiate a field action (whether a “correction” made relative to help establish contracts with third-party payors who insure their patients. We cannot provide any assurancea device that such physicians, hospitals and clinics will continue to help us establish contractsremains in the future. Iffield, which could be through a labeling or software update, or “removal” or “recall” and return of that device to us, or field advisory notices) to reduce a risk to health posed by our Zio System, we failwould be required to establish contracts with more third-party payors it may adversely affect our abilityreport the Correction or Removal to increase our revenue. In addition,FDA and, in many cases, similar reports to other regulatory agencies.

For example, on September 28, 2022, we initiated a failureCustomer Advisory Notice to enter into contracts could affectZio AT customers regarding a physician’s willingness to prescribe our products because ofZio AT labeling correction; the administrative work involved in interacting with patients to answer their questionslabeling changes involve additions and help them obtain reimbursement for our products. If physicians are unwilling to prescribe our products duemodifications to the lack of certaintyZio AT labeling precautions relating to the device’s maximum transmission limits during wear, and administrative work involved with patients covered by non-contracted insurance companies, or patients covered by non-contracted insurance companies are unwilling to risk that their insurance may charge additional out-of-pocket fees, our revenue could decline or fail to increase.

Our continued rapid growth could strain our personnel resources and infrastructure, and if we are unable to manage the anticipated growth of our business, our future revenue and operating results may be harmed.

We have experienced rapid growth in our headcount and in our operations. Any growth that we experience in the future will provide challenges to our organization, requiring us to expand our sales personnel and manufacturing operations and general and administrative infrastructure. In additionalso to the need for healthcare providers to scalecomplete registration to initiate monitoring services. We reported this Customer Advisory Notice and related information to FDA under 21 C.F.R., Part 806 and FDA classified this field action as a Class II Recall following our clinical operations capacity, future growth will impose significant added responsibilities on management, includinginitial 806 report. We have completed the need to identify, recruit, train and integrate additional employees. Rapid expansion in personnel could mean that less experienced people manufacture our ZIO Patch, market and sell our ZIO Service and analyzedistribution of the data to produce ZIO Reports, which could result in inefficiencies and unanticipated costs, reduced quality in our ZIO Reports and disruptionsAdvisory Notice to our operations. Asidentified impacted customers; and although the status remains open in FDA recall database, we seekrequested the closure of this field action on March 31, 2023. This labeling correction followed our assessment of topics raised in the August 2022 FDA inspection focused on Zio AT. We were in dialogue with FDA in relation to gain greater efficiency, we may expand the automated portioninspection process, and in connection with our Customer Advisory Notice and 806 report. Our communications to FDA continued through our monthly updates, following our 483 responses submitted in September of 2022. FDA observation responses, field action or corrections and the 806 process can be unpredictable and can present regulatory and commercial risks and uncertainties relating to matters including product labeling, the scope and approach of the correction, and/or customer and patient perception of our ZIO Servicetechnologies and require productivity improvementsservices.

Additionally, on May 25, 2023, we received a warning letter from our certified cardiac technicians. Such improvements could compromise the quality of our ZIO Reports. In addition, rapid and significant growth may strain our administrative and operational infrastructure. Our abilityFDA, which alleged non-conformities to manage our business and growth will require us to continue to improve our operational, financial and management controls,regulations for medical devices, including medical device reporting systems and procedures. We recently installed a new Enterprise Resource Planning, or ERP, platform, which is criticalrequirements, relating to our ability to track our claims processingZio AT System and the delivery of our ZIO Reports to physicians, as well as to support our financial reporting systems. The time and resources required to optimize these systems are uncertain, and failure to complete optimization inmedical device quality system requirements. We submitted a timely response to FDA on June 16, 2023 and efficient manner could adversely affectare continuing to work with the agency to address the issues outlined in the warning letter. Although our operations. If we are unablebelief based on the dialogue with FDA to managedate following our growth effectively, it may be difficult for us to execute our business strategy and our business could be harmed.

If we are unable to support demand for the ZIO Service or any of our future products or services, our business could suffer.

As demand for the ZIO Service or any of our future products or services increases, we will need to continue to scale our manufacturing capacity and algorithm processing technology, expand customer service, billing and systems processes and enhance our internal quality assurance program. We will also need additional certified cardiac technicians and other personnel to process higher volumes of data. We cannot assure you that any increases in scale, related improvements and quality assurance will be successfully implemented or that appropriate personnel will be available to facilitate growth of our business. Failure to implement necessary procedures, transition to new processes or hire the necessary personnel could result in higher costs of processing data or inability to meet increased demand. There can be no assurancewarning letter response is that we will be able to performwork through FDA’s matters of concern relating to our Zio AT System, we cannot give any assurances that FDA will be satisfied with our response, the actions taken to resolve the concerns raised in the warning letter, or the expected date for the resolution of such matters. Until the issues identified in the warning letter are resolved to FDA’s satisfaction, additional legal or regulatory action may be taken with or without further notice. The warning letter is publicly available on FDA website and has been the subject of a high degree of media and industry attention, which subjects us to additional scrutiny, even as we are in ongoing dialogue with FDA.

Depending on the reason for the correction or removal and the potential severity of the impact to patient safety or the effectiveness of the device, FDA may require differing degrees of communication to alert those who may be in possession of an impacted device. We would generally be subject to similar requirements in jurisdictions outside the United States where the Zio products are used. Furthermore, even if we adhere to regulatory standards and expectations in our corrective actions, the public nature of such actions can result in broader negative publicity and perceptions, which could harm our reputation.
If we assess a potential quality issue or complaint or product enhancement as not requiring either field action or notification, respectively, regulators may review documentation of that decision during a subsequent audit. If regulators disagree with our decision, or take issue with either our investigation process or the resulting documentation or course of action, we may be subject to a range of potential regulatory enforcement actions or required to take corrective actions, which depending on their nature and scope could harm our business.






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Because of the patient populations for which our services are provided and the complexity of the healthcare environment in which we operate, a high degree of medical and clinical input may be necessary to evaluate complaints and adverse events, and in some cases, there may be disagreement over whether our services or the medical devices used in our service may have caused or contributed to an event.
Our Zio System and Zio Services are not intended to be prescribed or ordered for use as an emergency system. They are not intended for critical care patients or patients suspected of life-threatening arrhythmias who require inpatient or emergency ECG monitoring. Given the nature of arrhythmias and the patient population for which our Zio Services are ordered by physicians, in which there may be several health conditions present, there are instances in which a patient may experience a medical event during the wear period of our Zio System. In some cases, it may be medically and logistically challenging to obtain information sufficient to definitively determine all contributing factors to an event. In some instances, we may receive initial reports of complaints from the certified cardiographic technicians ("CCTs") or through our customer service representatives. The initial reports of these non-physicians are likely to contain information that requires verification and further investigation.
In addition, even though our services and their associated devices are not intended to recognize, detect, or initiate response to terminal end-of-life events (for example, cardiac arrest), a patient may nevertheless be wearing a Zio device when they experience such an event (for example, as was the case with the patients involved in COMP-2021-6388 and COMP-2021-6385 which were referenced by FDA in the May 25, 2023 warning letter). Given the functionality of our technology and our services, we may become aware of data analysis onreflecting a timely basis at a level consistentnon-survivable, end-of-life cardiac event. We (going forward and in light of recent feedback from FDA regarding its reporting expectations) or others (such as healthcare professionals, patients, or family members) may report such events even where it does not appear to us that our device caused or could have prevented an end-of-life event. Given the structure of such reporting to FDA the full medical context is not generally available to the public, which may cause additional scrutiny, questions or concerns regarding our products and services.
We are subject to FDA requirements to investigate complaints about our Zio System. If we do not effectively manage and monitor our complaint-handling procedures, we may be subject to regulatory enforcement action, litigation risks, and risk of negative publicity.
If we are unable to keep up with demand quality standards and physician expectations. If we encounter difficulty meetingfor our Zio Services, our revenue could be impaired, market demand, quality standards or physician expectations,acceptance for our reputationZio Services could be harmed, and physicians may instead order our future prospects and business could suffer.

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We plan to introduce new products and services and our business will be harmed if we are not successful in selling these new products and services to our existing customers and new customers

We recently received FDA clearancecompetitors’ services.

As demand for our ZIO AT ECG Monitoring System, which is designed to provide timely transmission of data during the wear period. We refer to both the ZIO AT ECG Monitoring System, or ZIO AT Patch, and ZIO XT Patch as the ZIO Patch in this Quarterly Report on 10-Q, unless otherwise specified. We do not yet know whether the ZIO AT ECG Monitoring System or any other new products and services will be well received and broadly adopted by physicians and their patients or whether sales will be sufficient for us to offset the costs of development, implementation, support, operation, sales and marketing. Although we have performed extensive testing of our new products and services, their broad-based implementation may require more support than we anticipate, which would further increase our expenses. Additionally, new products and services may subject us to additional risks of product performance, customer complaints and litigation. If sales of our new products and services are lower than we expect, or if we expend additional resources to fix unforeseen problems and develop modifications, our operating margins are likely to decrease.

We have limited experience manufacturing the ZIO Patch in commercial quantities and providing services on a broad scale, which could harm our business.

Because we have only limited experience in manufacturing the ZIO Patch in commercial quantities and providing services on a broad scale,Zio Services increases, we may encounter production or service delays or shortfalls. Such production or service delays or shortfalls may be caused by many factors, including the following:

•while we intend to continue to expand our manufacturing capacity, and our production processes may have to change to accommodate this growth,

potentially involving significant capital expenditures;
•we may experience technical challenges to increasing manufacturing capacity, including in connection with equipment design, automation, validation and installation, contractor issues and delays, licensing and permitting delays or rejections, materials procurement, manufacturing site expansion, problems with production yields and quality control and assurance;

•key components of the ZIO Patchour Zio Systems are provided by a sole or single supplier or limited number of suppliers, and we do not maintain large inventory levels of these components; if we experience a shortage or quality issues in any of these components, we would need to identify and qualify new supply sources, which could increase our expenses and result in manufacturing delays

delays;
•global demand and supply factors concerning commodity components common to all electronic circuits, including Zio Systems, could result in shortages that manifest as extended lead times for circuit boards, which could limit our ability to sustain and/or grow our business;

•we may experience a delay in completing validation and verification testing for new controlled environment roomsproduction processes and/or equipment at our manufacturing facilities

facilities;

we are subject to state and federal regulations, including the FDA’s Quality System Regulation, or the QSR, and the European Union’s, or EU’s, Medical Device Directive, or MDD, for both the manufacture of the ZIO Patch and the provision of the ZIO Service, noncompliance with which could cause an interruption in our manufacturing, distribution and services

•to increase our manufacturing output significantly and scale our services, we will have to attract and retain qualified employees for our operations; and

•in response to unexpectedly rapid growth of our business, clinical operations

capacity may not meet demand while new resources are being recruited and trained, which could negatively impact our volume capacity for our Zio Services.

If we arewere unable to keep up with demand for the ZIO Service, our revenue could be impaired, market acceptance for the ZIO Service could be harmed and physicians may instead prescribe our competitors’ products and services. Our inability to successfully manufacture the ZIO Patchour Zio Systems in sufficient quantities, or to maintain sufficient capacity to provide the ZIO Service in a timely manner, wouldour Zio Services, it could materially harm our business.

Our manufacturing facilities and processes and those of our third-party suppliers are subject to unannounced FDA, state , and Notified Body regulatory inspections for compliance with the QSR and MDD requirements. Developing and maintaining a compliant quality system is time consuming and expensive. Failure to maintain compliance with, or not fully complying with the requirements of the FDA and state regulators could result in enforcement actions against us or our third-party suppliers, which could include the issuance of warning letters, adverse publicity, seizures, prohibitions on product sales, recalls and civil and criminal penalties, any one of which could significantly impact our manufacturing supply and provision of services and impair our financial results.

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We depend on third-party vendors tofor the supply and manufacture someof certain components of our components, which could make us vulnerable to supply shortages and price fluctuations that could harmZio Systems, as well as for other aspects of our business.

operations.

We rely on third-party vendors for components and sub-assemblies used in our ZIO Patch.Zio Systems and in connection with certain logistical aspects of our Zio Services. Our reliance on third-party vendors subjects us to a number of risks, including:

•inability to obtain adequate supply in a timely manner or on commercially reasonable terms,

including due to our reliance on a single supplier for certain critical components and materials for which, in some cases, there are relatively few alternative sources of supply;

interruption of supply resulting from •modifications to, or discontinuation of, a supplier’svendor’s operations

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•

production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications

due to natural disasters, labor disruptions, human error, infrastructure failure, pandemics, military conflicts, or political or economic disruption, which may adversely impact our operations or otherwise lead to interruption of or shortage or delays in supply, including shortages impacting our printed circuit board assembly;
•production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications;

•inability of the manufacturer or supplier to comply with our quality criteria and specifications and, where applicable, the QSR, MDD and state regulatory authorities,

and, in some cases, the Notified Body audits;
•miscommunication of design specifications due to errors/omissions by either the vendor or our company, resulting in delayed delivery of acceptable materials or components for incorporation into our devices or recall of finished products;

•delays in productdevice shipments resulting from uncorrectedquality issues or defects, reliability issues, or a supplier’s failure to consistently produce quality components

components;

•price fluctuations due to a lack of long-term supply arrangements with our suppliers for key components

components;

•inability to control the quality of products manufactured by third parties

parties;

•delays in delivery by our suppliers due to changes in demand from us or their other customers

customers; and

Any significant delay or interruption

•delays in obtaining required materials and components that are in short supply within the supply of components or sub-assemblies, or our inability to obtain substitute components, sub-assemblies or materials from alternate sources at acceptable prices and in a timely manner could impair our ability to meet the demand for our ZIO Service and harm our business.

We rely on single suppliers for some of the materials used in our products, and if any of those suppliers are unable or unwilling to produce these materials or supply them in the quantities that we need at the qualitytime frames we require, we may not be able to find replacementsat an affordable cost, or transition to alternative suppliers before our business is materially impacted.

Weat all.

Further, we rely on single suppliers for the supply of components related to our adhesive substrate,sub-assembly, disposable plastic housings, instruments and other materials that we use to manufacture and label our ZIO Patch. These components and materials are critical and there are relatively few alternative sources of supply.Zio patches. We have not qualified additional suppliers for some of these components and materials and we do not carry a significant inventory of these items. While we believe that alternative sources of supply may be available, we cannot be certain whether they will be available if and when we need them and that any alternative suppliers would be able to provide the quantity and quality of components and materials that we would need to manufacture our ZIO PatchZio patches if our existing suppliers were unable to satisfy our supply requirements. To utilize other
Any significant delay or interruption in the supply of components or sub-assemblies, such as those that we have experienced during the COVID-19 pandemic, or our inability to obtain substitute components, sub-assemblies or materials from alternate sources we would need to identifyat acceptable prices and qualify new suppliers to our quality standards, whichin a timely manner could result in manufacturing delays and increase our expenses. Any supply interruption could limitimpair our ability to manufacturemeet the demand for our products and could therefore harm our business, financial condition and results of operations. If our current suppliers and any alternative suppliers do not provide us with the materials we need to manufacture our products or perform our services, if the materials do not meet our quality specifications, or if we cannot obtain acceptable substitute materials, an interruption in our ZIO Service could occur. Any such interruption mayZio Services, significantly affect our future revenue and harm our relations and reputation with physicians, hospitals, clinics, and patients.

If

We also rely on certain third-party vendors in connection with the analysis we perform to create diagnostic reports for our manufacturing facility becomes damaged or inoperable, or ifZio Services, which is dependent upon a recording made by each Zio System. For long-term continuous monitoring utilizing our Zio XT System, for example, requires the physical return of the Zio XT patch to one of our clinical centers and we are requiredpredominantly rely on the U.S. Postal Service (“USPS”) to vacate a facility, weperform this delivery service. Delivery of the Zio XT patch to one of our clinical centers may be unablesubject to manufacturedisruption to the ZIO Patch orUSPS delivery infrastructure. Further, for the MCT monitoring services utilizing our Zio AT System, we may experience delays in production or an increase in costs which could adversely affect our resultsrely on the provision of operations.

We currently manufacturecellular communication services for the timely transmission of patient information and assemblereportable events. The reliability of the ZIO Patch in only one location. Our productselectronic communication and cloud services required for these operations are comprised of components sourced from a variety of contract manufacturers, with final assembly completed at our facility in Cypress, California. Our facilitysubject to natural disasters, labor disruptions, human error, and equipment, or those of our suppliers, could be harmed or rendered inoperable by natural or man-made disasters, including fire, earthquake, terrorism, flooding and power outages.infrastructure failure. Any of these disruptions may render it difficult or temporarily impossible for us to manufacture productsprovide some or all our Zio Services and bill for some period of time. Ifthose services, adversely affecting our Cypress facility is inoperableoperating results, causing significant distraction for even a short period of time, the inability to manufacture the ZIO Patch,management, and the interruption in research and development of any future products, may result in harm to our reputation, increased costs, the loss of orders and lower revenue. Furthermore, it could be costly and time consuming to repair or replace our facilities and the equipment we use to perform our research and development work and manufacture our products.

If we fail to increase our sales and marketing capabilities and develop broad brand awareness in a cost effective manner, our growth will be impeded andnegatively impacting our business may suffer.

We plan to continue to expand and optimize our sales and marketing infrastructure in order to increase our prescribing physician base and our business. Identifying and recruiting qualified personnel and training them in the application of the ZIO Service, on applicable federal and state laws and regulations and on our internal policies and procedures requires significant time, expense and attention. It often takes several months or more before a sales representative is fully trained and productive. Our business may be harmed if our efforts to expand and train our sales force do not generate a corresponding increase in revenue. In particular, if we are unable to hire, develop and retain talented sales personnel or if new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenue.

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Our ability to increase our customer base and achieve broader market acceptance of our products will depend to a significant extent on our ability to expand our marketing efforts. We plan to dedicate significant resources to our marketing programs. Our business may be harmed if our marketing efforts and expenditures do not generate a corresponding increase in revenue.

In addition, we believe that developing and maintaining broad awareness of our brand in a cost effective manner is critical to achieving broad acceptance of the ZIO Service and penetrating new accounts. Brand promotion activities may not generate patient or physician awareness or increase revenue, and even if they do, any increase in revenue may not offset the costs and expenses we incur in building our brand. If we fail to successfully promote, maintain and protect our brand, we may fail to attract or retain the physician acceptance necessary to realize a sufficient return on our brand building efforts, or to achieve the level of brand awareness that is critical for broad adoption of the ZIO Service.

Billing for our ZIO Service is complex, and we must dedicate substantial time and resources to the billing process.

Billing for independent diagnostic testing facility, or IDTF, services is complex, time consuming and expensive. Depending on the billing arrangement and applicable law, we bill several types of payors, including CMS, third-party commercial payors, institutions and patients, which may have different billing requirements procedures or expectations.reputation. We also must bill patient co-payments, co-insurance and deductibles. We face risk inexpect that our collection efforts, including potential write-offs of doubtful accounts and long collection cycles, which could adversely affectreliance on third-party vendors will increase as our business financial condition and results of operations.

Several factors make the billing and collection process uncertain, including:

differences between the submitted price for our ZIO Service and the reimbursement rates of payors

compliance with complex federal and state regulations related to billing CMS

differences in coverage among payors and the effect of patient co-payments, co-insurance and deductibles

differences in information and billing requirements among payors

incorrect or missing patient history, indications or billing information

Additionally, our billing activities requiregrows, exposing us to implement compliance procedures and oversight, train and monitor our employees and undertake internal review procedures to evaluate compliance with applicable laws, regulations and internal policies. Payors also conduct audits to evaluate claims, which may add further cost and uncertainty to the billing process. These billing complexities, and the related uncertainty in obtaining payment for our ZIO Service, could negatively affect our revenue and cash flow, our ability to achieve profitability, and the consistency and comparability of our results of operations.

The operation of our call centers and monitoring facilities is subject to rules and regulations governing IDTFs; failure to comply with these rules could prevent us from receiving reimbursement from CMS and some commercial payors.

In order to get reimbursed by CMS, we must establish an IDTF. IDTFs are defined by CMS as entities independent of a hospital or physician’s office in which diagnostic tests are performed by licensed or certified nonphysician personnel under appropriate physician supervision. Our IDTFs are staffed by certified cardiac technicians, who are overseen by a medical director who reviews the accuracy of the data we curate and from which we prepare reports. The existence of an IDTF allows us to bill a government payor for the ZIO Service through one or more MACs,increased harm if such as Novitas Solutions, Noridian Healthcare Solutions and Palmetto GBA. MACs are companies that operate on behalf of the federal government to process claims for reimbursement and allow us to obtain reimbursement for our ZIO Service at CMS defined rates. Certification as an IDTF requires that we follow strict regulations governing how the center operates, such as requirements regarding the experience and certifications of the certified cardiac technicians. In addition, many commercial payors require our IDTFs to maintain accreditation and certification with the Joint Commission of American Hospitals. To do so we must demonstrate a specified quality standard and are subject to routine inspection and audits. These rules and regulations vary from location to location and are subject to change. If they change, we may have to change the operating procedures at our IDTFs, which could increase our costs significantly. If we fail to obtain and maintain IDTF certification, our ZIO Service may no longer be reimbursed by CMS and some commercial payors, which would have a material adverse impact on our business.

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In 2017, we have recognized approximately twelve percent of our revenue from non-contracted third-party payors, and as a result, our quarterly operating results are difficult to predict.

If we do not have a contracted rate with a payor, or have an insufficient or unpredictable history of collections, we recognize revenue only upon the earlier of notification of the payor benefits allowed or when payment is received. We have limited visibility as to when we will receive payment for our ZIO Service with non-contracted payors and we or XIFIN must appeal any negative payment decisions, which often delay collections further. Additionally, a portion of the revenue from non-contracted payors is received from patient co-pays, which we may not receive for several months following delivery of service or at all. There is currently no predictable payment history for direct-billed non-contracted payors, and thus because a reasonable estimate of reimbursement cannot be made, we recognize revenue from such accounts only when we are notified of payment or it is received. Fluctuations in revenue may make it difficult for us, research analysts and investors to accurately forecast our revenue and operating results or to assess our actual performance. When management’s judgement indicates a reasonable estimate of reimbursement can be made we will begin recognizing the revenue on an accrual basis upon delivery. If our revenue or operating results fall below expectations, the price of our common stock would likely decline.

We rely on a third-party billing company, XIFIN, to transmit and pursue claims with payors. A delay in transmitting or pursuing claims could have an adverse effect on our revenue.

While we manage the overall processing of claims, we rely on XIFIN, Inc. to transmit substantially all of our claims to payors, and pursue most claim denials. If claims for our ZIO Service are not submitted to payors on a timely basis, not properly adjudicated upon a denial, or if we are required to switch to a different claims processor, we may experience delays in our ability to process receipt of payments from payors, which would have an adverse effect on our revenue and our business.

The market for ambulatory cardiac monitoring solutions is highly competitive. If our competitors are able to develop or market monitoring products and services that are more effective, or gain greater acceptance in the marketplace, than any products and services we develop, our commercial opportunities will be reduced or eliminated.

The market for ambulatory cardiac monitoring products and services is evolving rapidly and becoming increasingly competitive. Our ZIO Service competes with a variety of products and services that provide alternatives for ambulatory cardiac monitoring, including Holter monitors and mobile cardiac telemetry monitors. Our industry is highly fragmented and characterized by a small number of large manufacturers and a large number of smaller regional service providers. These third parties compete with us in marketing to payors and prescribing physicians, recruiting and retaining qualified personnel, acquiring technology and developing products and services that compete with the ZIO Service. Our ability to compete effectively depends on our ability to distinguish our company and the ZIO Service from our competitors and their products, and includes such factors as:

disruptions occur.


safety and efficacy

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acute and long term outcomes

ease of use

price

physician, hospital and clinic acceptance

third-party reimbursement

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Large competitors in the ambulatory cardiac market include companies that sell standard Holter monitor equipment such as GE Healthcare, Philips Healthcare, Mortara Instrument, Inc., Spacelabs Healthcare, Inc. and Welch Allyn Holdings, Inc., which was acquired by Hill-Rom Holdings, Inc. Additional competitors who offer Holter and event monitors, and also function as service providers, include BioTelemetry, Inc. and Medtronic plc. These companies have also developed other patch-based mobile cardiac monitors that have recently received FDA and foreign regulatory clearances. For example, LifeWatch AG, which was subsequently acquired by BioTelemetry in July 2017, received FDA clearance and CE mark for its mobile cardiac telemetry monitoring patch in January 2016 and December 2015, respectively. In addition, in July 2016, BioTelemetry, Inc. announced FDA clearance for its own patch-based mobile cardiac telemetry monitor. There are also several small start-up companies trying to compete in the patch-based cardiac monitoring space. We have seen a trend in the market for large medical device companies to acquire, invest in or form alliances with these smaller companies in order to diversify their product offerings and participate in the digital health space. Two examples of this are Medtronic plc’s 2014 acquisition of Corventis, Inc. and Boston Scientific Corporation’s 2015 equity investment and sales cooperation agreement with Preventice Solutions, Inc., which was formerly named eCardio Diagnostics, LLC. Future competition could come from makers of wearable fitness products or large information technology companies focused on improving healthcare. These competitors and potential competitors may introduce new products that compete with our ZIO Service. Many of our competitors and potential competitors have significantly greater financial and other resources than we do and have well-established reputations, broader product offerings, and worldwide distribution channels that are significantly larger and more effective than ours. If our competitors and potential competitors are better able to develop new ambulatory cardiac monitoring solutions than us, or develop more effective or less expensive cardiac monitoring solutions, they may render our current ZIO Service obsolete or non-competitive. Competitors may also be able to deploy larger or more effective sales and marketing resources than we currently have. Competition with these companies could result in price cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations.

Our ability to compete depends on our ability to innovate successfully.

The market for medical devices, including the ambulatoryremote cardiac monitoring segment, is competitive, dynamic, and marked by rapid and substantial technological development and product innovation. ThereWhile there are few barriers that would preventchallenge new entrants or existing competitors from developing products that compete directly with ours.the devices used in our Zio Services, these barriers can be overcome. Demand for the ZIO Serviceour Zio Services and future related productsdevices or services could be diminished by equivalent or superior products and technologies offered by competitors. If we are unable to innovate successfully, our productsservices and servicesrelated devices could become obsolete and our revenue would decline as our customers prescribe or purchase our competitors’ products and services.

In order to remain competitive, we must continue to develop new product offerings and enhancements to the ZIO Service.our Zio Services. We can provide no assurance that we will be successful in monetizingfully recognizing the strategic value of our electrocardiogram, or ECG database, expanding the indications for our ZIO Service,Zio Services, developing new productsservices and related devices, or commercializing them in ways that achieve market acceptance. In addition, if we develop new products,services, sales of those productsservices may reduce revenue generated from our existing products.services. Maintaining adequate research and development personnel and resources to meet the demands of the market is essential. If we are unable to develop new products,services and related devices, applications, or features, or improve our algorithms due to constraints, such as insufficient cash resources, high employee turnover, inability to hire personnel with sufficient technical skills, inability or delay to obtain FDA marketing authorization or regulatory clearances in the EU and the UK, or a lack of other research and development resources, we may not be able to maintain our competitive position compared to other companies. Furthermore, many of our competitors devote a considerably greater amount of funds to their research and development programs than we do, and those that do not may be acquired by larger companies that would allocate greater resources to research and development programs. Our failure or inability to devote adequate research and development resources or compete effectively with the research and development programs of our competitors could harm our business.

The continuing clinical acceptance

We have entered into a development agreement with a third-party that may not result in the development of commercially viable devices or the generation of significant future revenues. We may explore or enter into other development or collaboration agreements with other third parties, and these similarly may not result in development of commercially viable devices or services or the generation of significant future revenues.
We have entered into the Development Agreement with Verily to develop certain next-generation Afib screening, detection, or monitoring devices to enhance our Zio Services, which involves combining our technology platforms and capabilities with those of Verily. As part of the ZIO Service depends upon maintaining strong working relationships with physicians.

The development, marketing,Development Agreement, we paid Verily an up-front fee of $5.0 million in cash, and salethrough December 31, 2022 and September 30, 2023, we have achieved milestones and additional related payment obligations totaling $11.0 million. We have agreed to make additional payments over the term of the ZIO Service depends uponDevelopment Agreement up to an aggregate of $1.75 million, subject to achievement of certain specified milestones. The success of our abilitycollaboration with Verily is highly dependent on the efforts provided to maintain strong working relationshipsthe collaboration by Verily and us and the skill sets of our respective employees. Support of these efforts requires significant resources, including research and development, manufacturing, quality assurance, and clinical and regulatory personnel. Even with physicians and other key opinion leaders. We rely on these professionals’ knowledge and experienceFDA’s clearance of our clinically-integrated ZEUS System for the development, marketingZio Watch, continued product testing, market research, and salerelated activities may result in a delay to device launch and additional expense associated with any commercialization efforts. Even if and when launched, the developed devices may also not be accepted in the marketplace, and there is no assurance that adequate coverage or reimbursement would be available, or that an alternative payment model can be developed.

After the initial term and scope of our products. Among other things, physicians assist usthe Development Agreement, and in clinical trials and product development matters and provide public presentationsorder to commercialize any services in connection with the developed devices with Verily, we will need to enter into a commercialization agreement. There is no guarantee that we will be able to enter into such an agreement on commercially reasonable terms or at trade conferences regarding the ZIO Service.all. If we are unable to reach agreement with Verily on terms, the up-front fee and regulatory and development milestone payments and our internal development costs would not be recovered and the licenses to use Verily’s technology will expire.
This collaboration may not result in the development of devices, and ultimately services, that achieve commercial success and could be terminated prior to developing any devices. In the event of any termination or expiration of the Development Agreement, we may be required to devote additional resources to device development and we may face increased competition, including from Verily. Verily may use the experience and insights it develops in the course of the collaboration with us to initiate or accelerate their development of products that compete with our devices and services, which may create competitive disadvantages for us. Accordingly, we cannot maintainprovide assurance that our strong working relationshipscollaboration with these professionalsVerily or any other third party will result in the successful development of commercially viable devices and services or result in significant additional future revenues for our company.

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We generally intend to continue assessing the potential pathways for expanding indications and use cases for our Zio Services, and developing potential new products and services, for patient populations with unmet needs in the remote cardiac monitoring market and adjacent markets. We intend to continue to receive their adviceinvest in research and input,development efforts to further differentiate our biosensor, data analytics and reporting, information system and digital platform and we may explore or enter into development or collaboration agreements with third parties to further these efforts. We cannot predict whether such efforts will be viable from a regulatory and commercial standpoint, and development or collaboration agreements may not result in the development and marketing of commercially viable products or services or the ZIO Service could suffer, which could harm our business, financial condition and resultsgeneration of operations.

The medical device industry’s relationship with physicians is under increasing scrutiny bysignificant future revenues. For example, enforcement action such as that conveyed through the Health and Human Services Office of the Inspector General, or OIG, the Department of Justice, or DOJ, state attorneys general, and other foreign and domestic government agencies. Our failure to comply with laws, rules and regulations governing our relationships with physicians, or an investigation into our compliance by the OIG, DOJ, state attorneys general or other government agencies, could significantly harm our business.

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We have a significant amount of debt, which may affect our ability to operate our business and secure additional financing in the future.

As of September 30, 2017,May 25, 2023 warning letter we had $34.4 million in principal and interest outstanding under our credit facilities consisting of our loan agreements with Pharmakon and SVB and a promissory note issued to California HealthCare Foundation. We must make significant annual debt payments under the loan agreements and the promissory note, which will divert resources from other activities. Our debt with Pharmakon and SVB is collateralized by substantially all of our assets and contains customary financial and operating covenants limiting our ability to, among other things, dispose of assets, undergo a change in control, merge or consolidate, enter into certain transactions with affiliates, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions. The covenants in these loan agreements, the promissory note and the note purchase agreement pursuant to which the promissory note was issued,received, as well as in any future financing agreements into which weother digital health industry regulatory developments may enter, may restrict our ability to finance our operations and engage in, expandalso impact the availability or otherwise pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control and future breachesviability of any of these covenants could result in a default under the loan agreements, the promissory note and the note purchase agreement. If not waived, future defaults could cause all of the outstanding indebtedness under the loan agreements and the promissory note to become immediately due and payable and terminate commitments to extend further credit. If we do not have or are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either upon maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our ability to operate and continue our business as a going concern.

We depend on our senior management team and the loss of one or more key employees or an inability to attract and retain highly skilled employees could harm our business.

Our success depends largely on the continued services of key members of our executive management team and others in key management positions. For example, the services of Kevin M. King, our Chief Executive Officer, and Matthew C. Garrett, our Chief Financial Officer, are essential to formulating and executing on corporate strategy and to ensuring the continued operations and integrity of financial reporting within our company. In addition, the services provided by David A. Vort, our Executive Vice President of Sales, are critical to the growth that we have experienced in the sales of our ZIO Service. Our employees may terminate their employment with us at any time. If we lose one or more key employees, we may experience difficulties in competing effectively, developing our technologies and implementing our business strategy. We do not currently maintain key person life insurance policies on these or any of our employees.

In addition, our research and development programs and clinical operations depend on our ability to attract and retain highly skilled engineers and certified cardiac technicians. We may not be able to attract or retain qualified engineers and certified cardiac technicians in the future due to the competition for qualified personnel. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than us. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached legal obligations, resulting in a diversion of our time and resources and, potentially, damages. In addition, job candidates and existing employees, particularly in the San Francisco Bay Area, often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock awards declines, either because we are a public company or otherwise, it may harm our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects would be harmed.

We added two new directors to our board of directors in July 2017, which may lead to changes in our operations.

Two new directors were elected to our board of directors on July 17, 2017. One of these directors, Bruce G. Bodaken, served as Chairman and Chief Executive Officer of a payor, and the other director, Dr. Ralph Snyderman, served as founding Chief Executive Officer and President of a provider. Another of our directors has served on our board of directors for less than 18 months. Because of these recent additions, our board of directors has not worked together as a group for an extended period of time. This change in the composition of our board of directors from directors affiliated with financial investors to directors with industry experience may lead to changes in our operations as these new directors analyze our business and contribute to the formulation of business strategies and objectives. If our board of directors does not align on the business strategies and objectives of our company, our operating results could be adversely affected.

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potential opportunities.

International expansion of our business exposes us to market, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.

While we currently derive substantially all of our revenue and maintain substantially all of our assets in the United States, we intend to continue to pursue growth opportunities outside of the United States, especially in the Philippines, the EU and the United Kingdom, and we may increase our use of administrative and support functions from locations outside the United States, which could expose us to risks associated with international sales and operations. Additionally, our international expansion efforts may not be successful, we may experience difficulties in scaling these functions from locations outside the United States, and we may not experience the expected cost efficiencies.
Our business strategy includes international expansion. Doing business internationally involvesoperations are, and will continue to be, subject to a number of risks, including:

•multiple, conflicting and changing laws and regulations such as tax laws, privacy laws, export and import restrictions, employment laws, regulatory requirements, and other governmental approvals, permits, and licenses

licenses;

•obtaining and sustaining regulatory approvals, certifications, and regulatory compliance where required for the sale of our products and servicesZio Services in various countries

countries;

•requirements to maintain data and the processing of that data on servers located within such countries,

which requirements that may be subject to change;

•complexities associated with managing multiple payor reimbursement regimes, government payors, or patient self-pay systems

systems;

•logistics and regulations associated with shipping and returning ZIO Patchesour Zio patches following use

use;

•limits on our ability to penetrate international markets if we are required to process the ZIO Service locally

our Zio Services locally;

•financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the effect of local and regional financial pressures on demand and payment for our productsservices, fluctuations in trade policy and servicestariff regulations, changes in international tax regulations applicable to our business, and exposure to foreign currency exchange rate fluctuations,

which may reduce the reported value of our foreign currency denominated revenues, expenses, and cash flows;

natural disasters, political and economic instability, including wars, terrorism, political unrest, outbreak of disease, boycotts, curtailment of trade and other market restrictions

regulatory and compliance risks that relate to maintaining accurate information and control over activities subject to regulation under•decreased emphasis or enforcement or intellectual property protections in some countries outside the United States Foreign Corrupt Practices Act of 1977, or FCPA, U.K. Bribery Act of 2010 and comparable laws and regulations in other countries

Any of these factors could significantly harm our future international expansion and operations and, consequently, our revenue and results of operations.

Our relationships with business partnerscomparison to that in new international markets may subject us to an the United States;

•increased risk of litigation.

As we expand our business internationally, if we cannot successfully manage the unique challenges presented by international markets andlitigation or administrative proceedings in connection with our relationships with newinternational business partners, within those markets, our expansion activities may be adversely affected and we may become subject to an increased risk of litigation.

We may become involved in disputes relating to our products, contracts and business relationships. Such disputes includeincluding litigation against persons whom we believe have infringed on our intellectual property, infringement litigation filed against us, litigation against a competitor, or litigation filed against us by distributors or service providers resulting from a breach of contract or other claim. Anyclaim, as well as disputes regarding government and public tenders, any of these disputeswhich may result in substantial costs to us, adverse judgments, settlements, and diversion of our management’s attention, which could adversely affect our business, financial condition or operating results. There is also a riskattention;

•natural disasters, political and economic instability, including wars, terrorism, political unrest, outbreak of adverse judgments, asdisease, boycotts, curtailment of trade, and other market restrictions;
•regulatory and compliance risks that relate to maintaining accurate information and control over activities subject to regulation under the outcome of litigation in foreign jurisdictions can be inherently uncertain.

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act or FCPA,of 1977, as amended (the “FCPA”), UK Bribery Act of 2010, and similar worldwide anti-bribery laws and the ongoing investigation, and outcome of the investigation, by government agencies of possible violations by us of the FCPA could have a material adverse effect on our business.

The FCPA and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from corruptly providing any benefits to government officials for the purpose of obtaining or retaining business. We are in the process of designing and implementing policies and procedures intended to help ensure compliance with these laws. In the future, we may operate in parts of the world that have experienced governmental corruption to some degree. We cannot assure you that our internal control policies and procedures will protect us from improper acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and have a material adverse effect on our business and operations.

In addition, the DOJ or other governmental agencies could impose a broad range of civil and criminal sanctions under the FCPA and othercomparable laws and regulations including, but not limitedin other countries;

•compliance risks associated with the General Data Protection Regulation (the “GDPR”) (including as it applies in the United Kingdom by virtue of the Data Protection Act 2018), enacted to injunctive relief, disgorgement, fines, penalties, modifications to business practices includingprotect the termination or modificationprivacy of existing business relationships,all individuals in the imposition of compliance programsEuropean Union and the retentionUnited Kingdom, and which places certain restrictions on the export of a monitor to oversee personally identifiable data outside of the European Union or the United Kingdom, as applicable;
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•compliance risks associated with the FCPA. The impositionrevised regulations in the EU MDR that outline the requirements for medical device CE marking;
•compliance risks associated with the UK MDR, which replaces the CE marking requirements for medical devices marketed and sold in the United Kingdom with a UKCA mark following the United Kingdom’s withdrawal from the European Union;
•compliance risks associated with changing our EU Notified Body from (National Standards Authority of anyIreland (NSAI) to British Standards Institution (BSI) to better support our international expansion initiatives and emerging regulations in the United Kingdom; and
•compliance risks associated with new or upcoming regulations associated with artificial intelligence applicable to Software as a Medical Device.
Any of these sanctions or remedial measuresfactors may require significant resources to address and could have a material adverse effect onsignificantly harm our businessfuture international expansion and operations and, consequently, our revenue and results of operations.

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Exposure to United Kingdom political developments, including the outcome of its withdrawal from membership in the European Union, could be costly and difficult to comply with and could seriously harm our business.
Our proprietary data analytics engine may not operate properly, which could damage our reputation, give rise to claims against us or divert applicationoperations in the United Kingdom account for approximately 1% of our resourcesrevenue for the three and nine months ended September 30, 2023 and we intend to continue to pursue growth opportunities in the United Kingdom. There are still a number of areas of uncertainty in connection with the future of the United Kingdom and its relationship with the European Union following the United Kingdom’s exit from other purposes, anythe European Union in 2020 (commonly referred to as “Brexit”), including the application and interpretation of the UK-EU trade agreement (the “Trade and Cooperation Agreement”), which went into force in May 2021. For example, because a significant proportion of the regulatory framework in the United Kingdom is currently derived from EU directives and regulations, Brexit could harm our business and operating results.

The ECG data that is gathered throughresult in material changes to the ZIO Patch is curated by algorithms that are partregulatory regime applicable to many of our ZIO Servicecurrent operations. The UK government and a ZIO Report is deliveredthe MHRA began undertaking public consultations on the future regulation of medical devices in 2022 and plan to introduce the prescribing physician for diagnosis. The continuous development, maintenancenew regulatory system from July 2025 onwards. Although the Trade and operationCooperation Agreement offers UK and EU companies preferential access to each other’s markets, ensuring imported goods will be free of tariffs and quotas, economic relations between the United Kingdom and the European Union are on more restricted terms than existed previously. Therefore, at this time, we cannot predict the impact that the Trade and Cooperation Agreement and any future agreements contemplated under the terms of the Trade and Cooperation Agreement will have on our machine-learned backend data analytics engine is expensivefuture business efforts to commercialize our Zio Services in the United Kingdom and complex, and may involve unforeseen difficulties including material performance problems, undetected defects or errors. We may encounter technical obstacles, andthe European Union. Accordingly, it is possible that wethe Trade and Cooperation Agreement may discover additional problems that prevent our proprietary algorithms from operating properly. If our data analytics platform does not function reliably or fails to meet physician or payor expectations in terms of performance, physicians may stop prescribing the ZIO Service and payors could attempt to cancel their contracts with us.

Any unforeseen difficulties we encounter in our existing or new software, cloud-based applications and analytics services, and any failure by us to identify and address them could result in loss of revenue or market share, diversion of development resources, injury to our reputation and increased service and maintenance costs. Correction of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects or errors may be substantial and could adversely affect our operating results.

Provision of the ZIO Service is dependent upon third-party vendors who are subject to disruptions, which could directly or indirectly harm our business and operating results.

The analysis we perform to create the diagnostic report for the ZIO XT Service and the final report for the ZIO AT Service is dependent upon a recording made by each device, which requires the physical return of the ZIO Patch to one of our clinical centers. We predominantly rely on the U.S. Postal Service, or USPS, to perform this delivery service. Delivery of the ZIO Patch to one of our clinical centers may be subject to disruption by natural disasters such as earthquake or flooding, labor disagreements or errors on behalf of USPS staff, or other disruption to the USPS delivery infrastructure. Further, for the ZIO AT Service, we rely on the provision of cellular communication services for the timely transmission of patient information and reportable events. These communication services are also subject to natural disasters, labor disruptions, and infrastructure failure.

Any of these disruptions may render it difficult or temporarily impossible for us to provide the ZIO Service, adversely affecting our operating results, causing significant distraction for management, and negatively impacting our business reputation.

Security breaches, loss of data and other disruptions could compromise sensitive information related to our business or patients, or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.

In the ordinary course of our business, we and our third-party billing and collections provider, XIFIN, collect and store sensitive data, including legally-protected personally identifiable health information about patients in the United States and the United Kingdom. We also process and store, and use additional third parties to process and store, sensitive intellectual property and other proprietary business information, including that of our customers, payors and collaborative partners. Our patient information is encrypted but not de-identified. We manage and maintain our applications and data utilizing a combination of on-site systems, managed data center systems and cloud-based computing center systems. These applications and data encompass a wide variety of business critical information, including research and development information, commercial information and businessoperations and financial information.

We are highly dependentresults.

Our success depends on information technology networks and systems, including the internet and services hosted by Amazon Web Services, to securely process, transmit and store this critical information. Security breaches of this infrastructure, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns, or unauthorized disclosure or modifications of confidential information involving patient health information to become publicly available. The secure processing, storage, maintenance and transmission of this critical information are vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure, and that of XIFIN, may be vulnerable to attacks by hackers or viruses or breaches due to employee error, malfeasance or other disruptions. While we have implemented data privacy and security measures that we believe are compliant with applicable privacy laws and regulations, some confidential and protected health information, or PHI, is transmitted to us by third parties, who may not implement adequate security and privacy measures.

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A security breach or privacy violation that leads to disclosure or modification of, or prevents access to, patient information, including protected health information, could harm our reputation, compel us to comply with disparate state breach notification laws, require us to verify the correctness of database contents and otherwise subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. If we are unable to prevent such security breaches or privacy violations or implement satisfactory remedial measures, our operations could be disrupted, we may be unable to provide the ZIO Service and we may suffer loss of reputation, financial loss and other regulatory penalties because of lost or misappropriated information, including sensitive patient data. In addition, these breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm.

Any such breach or interruption of our systems, or those of XIFIN or any of our third-party information technology partners, could compromise our networks or data security processes and sensitive information could be inaccessible or could be accessed by unauthorized parties, publicly disclosed, lost or stolen. Any such interruption in access, improper access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of patient information, such as the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the European Union Data Protection Directive, and regulatory penalties. Unauthorized access, loss or dissemination could also disrupt our operations, including our ability to perform our services, bill payors or patients, process claimsattract and appeals, provide customer assistance services, conduct research and development activities, collect, process and prepare company financial information, provide information about our current and future solutions and engage in other patient and clinician education and outreach efforts. Any such breach could also result in the compromise of our trade secrets and other proprietary information, which could adversely affect our business and competitive position.

In addition, the interpretation and application of consumer, health-related and data protection laws, rules and regulations in the United States, Europe and elsewhere are often uncertain, contradictory and in flux. It is possible that these laws, rules and regulations may be interpreted and applied in a manner that is inconsistent with our practices or those of our distributors and partners. If we or these third parties are found to have violated such laws, rules or regulations, it could result in government-imposed fines, orders requiring that we or these third parties change our or their practices, or criminal charges, which could adversely affect our business. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business.

The use, misuse or off-label use of the ZIO Service may result in injuries that lead to product liability suits, which could be costly to our business.

The use, misuse or off-label use of the ZIO Service may in the future result in outcomes and complications potentially leading to product liability claims. For example, we are aware that physicians have prescribed the ZIO Patch off-label for pediatric patients. We have also received and may in the future receive product liability or other claims with respect to the ZIO Service, including claims related to skin irritation and alleged burns. In addition, if the ZIO Patch is defectively designed, manufactured or labeled, contains defective components or is misused, we may become subject to costly litigation initiated by physicians, or the hospitals and clinics where physicians prescribing our ZIO Service work, or their patients. Product liability claims are especially prevalent in the medical device industry and could harm our reputation, divert management’s attention from our core business, be expensive to defend and may result in sizable damage awards against us.

Although we maintain product liability insurance, we may not have sufficient insurance coverage for future product liability claims. We may not be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, harm our reputation, significantly increase our expenses, and reduce product sales. Product liability claims in excess of our insurance coverage would be paid out of cash reserves, harming our financial condition and operating results.

Our forecasts of market growth may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, our business may not increase at similar rates, if at all.

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Our forecasts relating to, among other things, the expected growth in the ambulatory cardiac monitoring solutions market may prove to be inaccurate.

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Our growth is subject to many factors, including whether the market for first-line ambulatory cardiac monitoring solutions continues to improve, the rate of market acceptance of the ZIO Service as compared to the products of our competitors and our success in implementing our business strategies, each of which is subject to many risks and uncertainties. If our ZIO Service works as anticipated to provide a correct first-line diagnosis, it may lead to a decrease in the amount of ambulatory cardiac monitoring prescriptions each year in the United States. This outcome would result if our ZIO Service is proven to produce the right diagnosis the first time, thereby reducing the need for additional testing. Accordingly, our forecasts of market opportunity should not be taken as indicative of our future growth.

We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and harm our operating results.

We may in the future seek to acquire or invest in businesses, applications or technologies that we believe could complement or expand our ambulatory cardiac monitoring solutions portfolio, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention ofretain senior management and cause us to incur various costs and expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. We may not be able to identify desirable acquisition targets or be successful in entering into an agreement with any particular target or obtain the expected benefits of any acquisition or investment.

To date, the growth ofkey personnel.

Our success depends on our operations has been largely organic, and we have limited experience in acquiring other businesses or technologies. We may not be able to successfully integrate acquired personnel, operations and technologies, or effectively manage the combined business following an acquisition. Acquisitions could also result in dilutive issuances of equity securities, the use of our available cash, or the incurrence of debt, which could harm our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer.

Consolidation of commercial payors could result in payors eliminating coverage or reducing reimbursement rates for our ZIO Service.

When payors combine their operations, the combined company may elect to reimburse our ZIO Service at the lowest rate paid by any of the participants in the consolidation or use its increased size to negotiate reduced rates. If one of the payors participating in the consolidation does not reimburse for the ZIO Service at all, the combined company may elect not to reimburse for the ZIO Service, which would adversely impact our operating results. While recent attempts by Aetna Inc. to acquire Humana Inc. and Anthem Inc. to acquire Cigna Corp. have been largely abandoned due to antitrust challenges by the DOJ, it is possible that these or other payor consolidations may occur in the future.

Our ability to utilizeretain our net operating loss carryovers may be limited.

As of December 31, 2016, we had federalsenior management and state net operating loss carryforwards, or NOLs, of $104.6 millionto attract and $58.6 million, respectively, which if not utilized will begin to expire in 2027 for federal purposes and 2017 for state purposes. We may use these NOLs to offset against taxable income for U.S. federal and state income tax purposes. However, Section 382 of the Internal Revenue Code of 1986, as amended, may limit the NOLs we may use in any year for U.S. federal income tax purposes in the event of certain changes in ownership of our company. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of a company’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three year period. Similar rules may apply under state tax laws. Future issuances or sales of our stock, including certain transactions involving our stock that are outside of our control, could cause an “ownership change.” If an “ownership change” has occurred in the past or occurs in the future, Section 382 would impose an annual limit on the amount of pre-ownership change NOLs and other tax attributes we can use to reduce our taxable income, potentially increasing and accelerating our liability for income taxes, and also potentially causing those tax attributes to expire unused. Any limitation on using NOLs could, depending on the extent of such limitation and the NOLs previously used, result in our retaining less cash after payment of U.S. federal and state income taxes during any year in which we have taxable income, rather than losses, than we would be entitled to retain if such NOLs were available as an offset against such income for U.S. federal and state income tax reporting purposes, which could adversely impact our operating results.

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If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decrease.

The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal controls over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. Section 404 of the Sarbanes-Oxley Act, or Section 404, requires us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm potentially to attest to, the effectiveness of our internal control over financial reporting. As an “emerging growth company,” we avail ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404. We will no longer be able to take advantage of this exemption beginning on December 31, 2017, when we will be deemed a large accelerated filer and, as a result, cease to be an “emerging growth company.” When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements.

Section 404 also requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our annual report for the year ending December 31, 2017, provide a management report on our internal control over financial reporting along with auditor attestation. If we have material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are implementing the process and documentation necessary to perform the evaluation needed to comply with Section 404, but we may not be able to complete our evaluation, testing and any required remediation in a timely fashion.

During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, our management will be unable to conclude that our internal control over financial reporting is effective. Moreover, when we are no longer an emerging growth company, our independent registered public accounting firm will be required to issue an attestation report on the effectiveness of our internal control over financial reporting. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed.

If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to conclude that our internal control over financial reporting is effective, or when we are no longer an emerging growth company if our auditors were to express an adverse opinion on the effectiveness of our internal control over financial reporting because we had one or more material weaknesses, investors could lose confidence in the accuracy and completeness of our financial disclosures, which could cause the price of our common stock to decline. Internal control deficiencies could also result in a restatement of our financial resultsqualified personnel in the future. We could also become subject to stockholder or other third-party litigationCompetition for senior management personnel, as well as investigations by the stock exchange on which our securities are listed, the Securitiessalespersons, scientists, clinicians, and Exchange Commission, or other regulatory authorities, which could require additional financial and management resources and could result in fines, trading suspensions or other remedies.

Risks Related to Our Intellectual Property

We may become a party to intellectual property litigation or administrative proceedings that could be costly and could interfere with our ability to provide the ZIO Service.

The medical device industry has been characterized by extensive litigation regarding patents, trademarks, trade secrets, and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. Itengineers, is possible that U.S. and foreign patents and pending patent applications or trademarks controlled by third parties, especially those held by our competitors, may be alleged to cover our products or services, or that we may be accused of misappropriating third parties’ trade secrets. Additionally, our products include hardware and software components that we purchase from vendors, and may include design components that are outside of our direct control. Our competitors, many of which have substantially greater resources and have made substantial investments in patent portfolios, trade secrets, trademarks, and competing technologies, may have applied for or obtained, or may in the future apply for or obtain, patents or trademarks that will prevent, limit or otherwise interfere with our ability to make, use, sell and/or export our products and services or to use product names. Moreover, in recent years, individuals and groups that are non-practicing entities, commonly referred to as “patent trolls,” have purchased patents and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements. From time to time, we may receive threatening letters, notices or “invitations to license,” or may be the subject of claims that our products and business operations infringe or violate the intellectual property rights of others. The defense of these matters can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand and cause us to incur significant expenses or make substantial payments to satisfy judgments or settle claims. Vendors from whom we purchase hardware or software may not indemnify us in the event that such hardware or software is accused of infringing a third-party’s patent or trademark or of misappropriating a third-party’s trade secret.

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Further, if such patents, trademarks, or trade secrets are successfully asserted against us, this may harm our business and result in injunctions preventing us from selling our products, license fees, damages and the payment of attorney fees and court costs. In addition, if we are found to willfully infringe third-party patents or trademarks or to have misappropriated trade secrets, we could be required to pay treble damages in addition to other penalties. Although patent, trademark, trade secret, and other intellectual property disputes in the medical device and services area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. We may be unable to obtain necessary licenses on satisfactory terms, if at all. If we do not obtain necessary licenses, we may not be able to redesign our ZIO Patch or our ZIO Service to avoid infringement and our product development efforts may be negatively affected as a result.

Similarly, interference or derivation proceedings provoked by third parties or brought by the U.S. Patent and Trademark Office, or USPTO, may be necessary to determine priority with respect to our patents, patent applications, trademarks or trademark applications. We may also become involved in other proceedings, such as reexamination, inter partes review, derivation or opposition proceedings before the USPTO or other jurisdictional body relating to our intellectual property rights or the intellectual property rights of others. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing the ZIO Patch and selling the ZIO Service or using product names, which would have a significant adverse impact on our business.

Additionally, we may need to commence proceedings against others to enforce our patents or trademarks, to protect our trade secrets or know how, or to determine the enforceability, scope and validity of the proprietary rights of others. These proceedings would result in substantial expense to us and significant diversion of effort by our technical and management personnel. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. We may not be able to stop a competitor from marketing and selling products that are the same or similar to our products and services or from using product or service names that are the same or similar to ours, and our business may be harmed as a result.

We use certain open source software in the ZIO Service. We may face claims from companies that incorporate open source software into their products or from open source licensors, claiming ownership of, or demanding release of, the source code, the open source software or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to cease offering the ZIO Service unless and until we can re-engineer it to avoid infringement. This re-engineering process could require significant additional research and development resources,intense and we may not be able to complete it successfully. These risks could be difficult to eliminate or manage, and, if not addressed, could harmretain our business, financial condition and operating results.

Intellectual property rights may not provide adequate protection, which may permit third parties to compete against us more effectively.

In order to remain competitive, we must develop and maintain protectionpersonnel. The loss of the proprietary aspectskey personnel, including key members of our technologies. We rely onsenior management team or members of our board of directors, as well as certain of our key finance, legal, regulatory, research and development, and clinical personnel, could disrupt our operations and have a combination of patents, copyrights, trademarks, trade secret lawsmaterial and confidentiality and invention assignment agreements with employees and third parties to protect our intellectual property rights. As of September 30, 2017, we owned, or retained exclusive license to, nine issued U.S. patents, the earliest of which will expire in 2028. As of September 30, 2017, we also owned, or retained an exclusive license to, three issued patents in Japan, two in each of Canada and Australia, and one in each of the European Union and Korea. The earliest expiration date of these international patents is 2027. As of September 30, 2017, we had twenty pending patent applications globally, including four in the United States, one in Australia, two in Canada, one in China, five in the European Union, one in India, four in Japan, and two in Korea. Our patents and patent applications include claims covering key aspects of the design, manufacture and use of the ZIO Patch and the ZIO Service.

We rely, in part,adverse effect on our ability to obtaingrow our business. Each of our officers may terminate their employment at any time without notice and maintain patent protection forwithout cause or good reason. The loss of a member of our proprietary productssenior management team or our professional staff would require the remaining executive officers to divert immediate and processes. The processsubstantial attention to seeking a replacement.

We have recently experienced significant changes in our executive leadership, including the appointment of applying forQuentin S. Blackford as our President and obtaining a patent is expensive, time consumingChief Executive Officer in October 2021 following the resignation of our prior President and complex,Chief Executive Officer, Kevin King, in January 2021. Douglas Devine, our former Chief Operating Officer, and Michael Coyle served as Chief Executive Officer from June 2021 to October 2021 and January 2021 to June 2021, respectively, before Mr. Blackford’s appointment. We have had additional executive officer positions changes recently (including the March 2023 resignation of Douglas Devine as Chief Operating Officer) and may experience further changes in executive leadership in the future.
Changes to strategic or operating goals, which can often times occur with the appointment of new executives, can create uncertainty, may negatively impact our ability to execute quickly and effectively, and may ultimately be unsuccessful. If we do not integrate new executives successfully, we may not be ableunable to file, prosecute, maintain, enforce or license all necessary or desirable patent applications atmanage and grow our business, and our financial condition and profitability may suffer as a reasonable cost, in a timely manner, or in all jurisdictions where protection may be commercially advantageous, or we may not be able to protect our proprietary rights at all. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as proprietary.result. In addition, to the issuance ofextent we experience additional management turnover, competition for top management is high and it may take months to find a patent does not ensurecandidate that it is valid or enforceable, so even if we obtain patents, they may not be valid or enforceable against third parties. Our patent applications may not result in issued patents andmeets our patents may not be sufficiently broad to protect our technology. Furthermore, the issuance of a patent does not give us the right to practice the patented invention. Third parties may have blocking patents that could prevent us from marketing our own products and practicing our own technology. Alternatively, third parties may seek approval to market their own products similar to or otherwise competitive with our products. In these circumstances, we may need to defend and/or assert our patents, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or agency with jurisdiction may find our patents invalid or unenforceable; competitors may then be able to market products and use manufacturing and analytical processes that are substantially similar to ours. Even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.

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requirements. If we are unable to protect the confidentialityattract and retain qualified management personnel, our business could suffer.

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Further, we may undertake reorganizations of our trade secretsworkforce from time to time, which may result in a temporary reduction in the number of employees in certain locations. We would undertake a reorganization to reduce operating expenses or achieve other business objectives, though we cannot guarantee any specific amount of long-term cost savings. Further, the turnover in our employee base could result in operational and administrative inefficiencies, which could adversely impact the results of our operations, stock price, and customer relationships, could complicate our efforts to retain other valuable employees, and could make recruiting for future management and other proprietary information,positions more difficult.
Our continued rapid growth could strain our personnel resources and infrastructure, and if we are unable to manage the anticipated growth of our business, our future revenue and operating results may be harmed.
We have experienced rapid growth in our headcount and in our operations. Any growth that we experience in the future will provide challenges to our organization, requiring us to expand our sales personnel, manufacturing, clinical, customer care, and billing operations and general and administrative infrastructure. In addition to the need to scale our operational and service capacity, future growth will impose significant added responsibilities on management, including the need to identify, recruit, train, and integrate additional employees. Rapid expansion in personnel could impact our capacity to manufacture our Zio patches, market, sell and support our Zio Services, and analyze the data to produce Zio reports, which could result in inefficiencies and unanticipated costs, impacts to our Zio Services, including our Zio patches, and disruptions to our service operations. Additionally, rapid expansion could require us to rely on overtime to increase capacity that could, in turn, result in greater employee attrition and/or a loss in productivity during the process of recruiting and training additional resources and add to our operating expenses. Further, a move toward automation to address, for example, staffing or scalability needs, could result in unintended consequences, such as increased scrap rate negatively impacting profitability.
As we seek to gain greater efficiency, we may look for ways to expand the automated portion of our Zio Services and require productivity improvements from our CCTs, within the framework of our wide-ranging regulatory obligations. Such improvements could impact the content of our Zio reports. In addition, rapid and significant growth may strain our administrative and operational infrastructure. Our ability to manage our business and competitive positiongrowth will require us to continue to improve our operational, financial, and management controls, reporting systems, and procedures. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our business could be harmed.

We rely heavily on trade secrets

Failure to receive the Zio System patches used for the provision of the Zio Services we provide may result in a loss of capital as well as invention assignmentrevenue where the receipt of returned devices and confidentiality provisionsprocessing of data retrieved from returned devices is required to provide our Zio Services.
Our Zio System patches and gateways are provided to patients either (1) during in-office visits with a healthcare provider or (2) remotely via at-home hookup. We have also seen hybrid situation where accounts, in response to staffing shortages, provide in-clinic Zio device packages to patients for application at home. Although in all three scenarios there is the potential that a patient will not return the device(s) at the conclusion of the wear period, home hookups result in a higher likelihood that the patient will fail to return his or her device, which negatively impacts our financial condition when we have in contracts with our employees, consultants, collaboratorsare unable to provide the Zio Services. For example, when the patient returns the Zio XT patch to us at the end of the patient wear period, we provide the Zio XT Services, which include the end of service report based on the data stored on the Zio XT patch, after which we submit a claim to the relevant payor or to the patient for the services rendered. If a patient fails to return a device, we experience financial losses, which include the cost of the device as well as the loss of potential revenue for the service that is contingent on the returned device for the submission of the associated claim.
Our plans include a high degree of focus on the mSToPs criteria for Afib screening. There are risks that the clinical or payor community will not fully accept these criteria as a basis for selection of patients suitable for screening.
In January 2022, the U.S. Preventive Services Task Force ("USPSTF") published a recommendation statement on the screening criteria for Afib screening, stating that the current evidence (including the mSToPs study) is insufficient to assess the balance of benefits and othersharm of Afib screening, and thus found that it could neither recommend for or against screening of adults 50 years or older without a diagnosis or symptoms of Afib and without a history of transient ischemic attack or stroke. In its recommendation, the USPSTF also identified research needs and gaps, including for example assurance that future research involves randomized trials of diverse patient populations and conducting research to protect our algorithmsoptimize the accuracy of screening for Afib. This USPTSF recommendation statement may deter some clinicians or payors from accepting the mSToPs study inclusion and exclusion criteria as a standard for selecting patients for screening for Afib. We cannot predict whether or when the USPSTF’s recommendation on Afib screening will change or be modified based on findings from additional randomized trials, other aspectsresearch or through the continued use of our ZIO Service.products and services or other similarly situated products and services designed for remote cardiac monitoring.

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We may face risks associated with acquisitions of companies, products, and technologies and our business could be harmed if we are unable to address these risks.
If we are presented with appropriate opportunities, we could acquire or make other investments in complementary companies, products, or technologies. We may not realize the anticipated benefit of our acquisitions, or the realization of the anticipated benefits may require greater expenditures than anticipated by us. We will likely face risks, uncertainties, and disruptions associated with the integration process, including difficulties in the integration of the operations and services of any acquired company, integration of acquired technology with our Zio Services, including our Zio Systems, diversion of our management’s attention from other business concerns, the potential loss of key employees or suppliers of the acquired businesses, and impairment charges if future acquisitions are not as successful as we originally anticipated. If we fail to successfully integrate other companies, products or technologies that we acquire, our business could be ableharmed. Furthermore, we may have to preventincur debt or issue equity or equity-linked securities to pay for any future acquisitions or investments, the unauthorized disclosureissuance of which could be dilutive to our existing stockholders. In addition, our operating results may suffer because of acquisition-related costs, amortization expenses, investment required to address risks associated with the acquisition, or charges relating to acquired intangible assets.
Risks Related to Healthcare Regulatory Matters
Our use of our technical knowledgethird-party service providers or other trade secrets by consultants, vendors or former or current employees, despitecompany resources located outside the existence generally of these confidentiality agreementsUnited States to support certain customer care, clinical and other contractual restrictions. These agreementsoperations of our IDTFs may not provide meaningful protection forpresent challenges, and if we are ineffective in limiting work performed by these service providers or company resources consistent with applicable regulations or our trade secrets, know-how, or other proprietary information in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other proprietary information. There can be no assurance that employees, consultants, vendors and clients have executed such agreements or have not breached or will not breach theircontractual agreements with us, thatcommercial payors, we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by competitors. Despite the protections we do place on our intellectual property, monitoring unauthorized use and disclosure of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be adequate. In addition, the laws of many foreign countries will not protect our intellectual property rights to the same extent as the laws of the United States. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could affect our ability to expand to international markets or require costly efforts to protect our technology.

We may also employ individuals who were previously or are concurrently employed at research institutions or other medical device companies, including our competitors or potential competitors. We may be subject to claims that these employees,penalties or experience loss of revenue.

Beginning in the third quarter of 2022, we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former or concurrent employers, or that patentsengaged Sutherland Healthcare Solutions, Inc. and applications we have filedTechindia Infoway Private Limited, to protect inventions of these employees, even those related to one or moresupport certain customer care and clinical operations of our products, are rightfully ownedIDTFs. We have developed operational and technical controls to limit the work performed by their former or concurrent employer. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

To the extentvendors consistent with our intellectual property protection is incomplete, we are exposed to a greater risk of direct competition. A third party could, without authorization, copy or otherwise obtain and use our products or technology, or develop similar technology. Our competitors could purchase our products and attempt to replicate some or allinterpretation of the competitive advantages we derive from our development efforts or design around our protected technology. Our failure to secure, protect and enforce our intellectual property rights could substantially harm the valueMedicare coverage exclusion for items of our ZIO Service, brand and business. The theft or unauthorized use or publication of our trade secrets and other confidential business information could reduce the differentiation of our products and harm our business, the value of our investment in development or business acquisitions could be reduced and third parties might make claims against us related to losses of their confidential or proprietary information. Any of the foregoing could materially and adversely affect our business.

Further, it is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our trade secret rights and related confidentiality and nondisclosure provisions. If we fail to obtain or maintain trade secret protection, or if our competitors obtain our trade secrets or independently develop technology similar to ours or competing technologies, our competitive market position could be materially and adversely affected. In addition, some courts inside andservices furnished outside the United States, are less willingother applicable laws and regulations, and any requirements imposed pursuant to our contracts with commercial payors. If these controls do not work as intended, or unwillingif regulators or commercial payors disagree with our interpretation of these requirements and their application to protect trade secrets and agreement terms that address non-competition are difficult to enforce in many jurisdictions and might not be enforceable in certain cases.

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If our trademarks and tradenames are not adequately protected, then we may not be able to build name recognition in our markets and our business may be adversely affected.

We rely on trademarks, service marks, tradenames and brand names, such as our registered trademark “ZIO,” to distinguish our products from the products of our competitors, and have registered or applied to register these trademarks. We cannot assure you that our trademark applications will be approved. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections,operations, we may be unablesubject to overcome such rejections. In addition, in proceedings before the USPTO and in proceedings before comparable agencies in many foreign jurisdictions, third parties are given an opportunitya requirement to oppose pending trademark applications andreturn funds already paid to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filedus, civil monetary penalties, other government enforcement, as highlighted by a recent enforcement action against our trademarks, and our trademarks may not survive such proceedings. Incompetitor, BioTelemetry, Inc., with respect to the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in losssupport of brand recognition and could require us to devote resources towards advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks. Additionally, we do not own any registered trademarks for the mark “IRHYTHM” and we are aware of at least one third-party that has registered the “IRHYTHM” mark in the United States, the European Union and Taiwan in connection with computer software for controlling and managing patient medical information, heart rate monitors, and heart rate monitors to be worn during moderate exercise, among other uses. We and the third party are involved in adversary proceedings before the Trademark Offices incertain clinical operations by vendors performing work outside the United States, and termination of contracts with commercial payors, as well as the European Union, andloss of revenue associated with those proceedings could impact our ability to register the “IRHYTHM” mark in those jurisdictions. It is possiblecontracts.

In addition, we are currently engaging with other third-party service providers that the third-party could bring suit against us claiming infringement of the “IRHYTHM” mark, and if it did so and if there were a court determination against us, we might then be obligated to pay monetary damages, enter into a license agreement, or cease use of the “IRHYTHM” name and mark, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future products.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. In 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and also may affect patent litigation. These also include provisions that switchedresources located outside the United States, from a “first-to-invent” systemand we are establishing company resources in the Philippines to a “first-to-file” system, allow third-party submissionprovide services in support our IDTFs. We intend for these services to include benefits verification, billing, collections, and customer service, which will require complex oversight and monitoring for appropriate capture and escalation of prior artcomplaint information that may be relevant to the USPTO during patent prosecutionquality, performance, and set forth additional procedures to attack the validity of a patent by the USPTO administered post grant proceedings. Under a first-to-file system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The USPTO recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective in 2013. Under the new post grant provisions of the Leahy-Smith Act, the USPTO introduced procedures that provide additional administrative pathways for third parties to challenge issued patents. Inter partes review, or IPR, is one of these procedures. The number of IPR challenges filed is increasing, and in many cases, the USPTO is canceling or significantly narrowing issued patent claims. Accordingly, even if a patent is granted by the USPTO, there is risk that it may not withstand an IPR challenge. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operationsafety of our business. The Leahy-Smith Act and its implementation could increasemedical devices or the uncertainties and costs surrounding the prosecutionquality of our patent applicationsclinical services. If we are unable to effectively manage this oversight and themonitoring, we may be subject to regulatory enforcement action or defense of our issued patents, all ofinquiries which could have a material adverse effect on our business, financial condition, results of operationsmay be expensive and prospects.

time consuming to resolve. In addition, patent reform legislation may pass in the future that could leadcertain contracts with commercial payors include restrictions related to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws ofaccessing patient data outside the United States are interpreted. Recent case law has increased uncertainty regarding the availability of patent protection for certain technologies and the costs associated with obtaining patent protection for those technologies. For example, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In particular, the 2014 decisionwe have implemented technical controls intended to prohibit access to patient data by the U.S. Supreme Court in Alice Corp. v. CLS Bank International has increased the difficultly of obtaining new software patents and enforcing existing software patents.  Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future.

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Risks Related to Government Regulation

Changes in the regulatory environment may constrain or require us to restructure our operations, which may harm our revenue and operating results.

Healthcare laws and regulations change frequently and may change significantly in the future. We may not be able to adapt our operations to address every new regulation, and new regulations may adversely affect our business. We cannot assure you that a review of our business by courts or regulatory authorities would not result in a determination that adversely affects our revenue and operating results, or that the healthcare regulatory environment will not change in a way that restricts our operations. In addition, there is risk that the U.S. Congress may implement changes in laws and regulations governing healthcare service providers including measures to control costs,and company resources located outside the United States for these commercial payors, as appropriate. If these controls do not work as intended, or reductions in reimbursement levels, whichif the payor information we receive from ordering healthcare providers is delayed or inaccurate, we may adversely affect our business and resultsencounter the suspension or termination of operations.

Governmentcontracts with commercial payors, such as CMS, as well as insurers,any contractual remedies such payors might pursue. The suspension or loss of any of our key commercial payor agreements would have increased their efforts to control the cost, utilization and delivery of healthcare services. From time to time, the U.S. Congress has considered and implemented changes in the CMS fee schedules in conjunction with budgetary legislation. Further reductions of reimbursement by CMS for services or changes in policy regarding coverage of tests or other requirements for payment, such as prior authorization or a physician or qualified practitioner’s signature on test requisitions, may be implemented from time to time. Reductions in the reimbursement rates and changes in payment policies of other third-party payors may occur as well. Similar changes in the past have resulted in reduced payments as well as added costs and have added more complex regulatory and administrative requirements. Further changes in federal, state, local and third-party payor regulations or policies may have a materialan adverse impact on our business. Actions by agencies regulating insurance or changes in other laws, regulations, or policies may also have a material adverse effect onrevenue and our business.

results of operations.

If we fail to comply with medical device, healthcare and other governmental regulations, we could face substantial penalties and our business, results of operations, and financial condition could be adversely affected.

The productsservices and servicesrelated devices we offer are highly regulated, and there can be no assurance that the regulatory environment in which we operate will notmay change significantly and adversely in the future. Our arrangements with physicians, hospitals, clinics, and clinicsother stakeholders in the healthcare industry may expose us to broadly applicable medical device laws and healthcare fraud and abuse and other laws and regulations that may restrict the financial arrangements and relationships through which we market, sell, distribute, and distributeprovide our productsservices and services.related devices. Our employees, consultants, and commercial partners and collaborators may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements. Federal and state healthcare laws and regulations that may affect our ability to conduct business, include, without limitation:

•federal and state laws and regulations regarding billing and claims payment applicable to our ZIO Service and regulatory agencies enforcing those laws and regulations

payment;

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•the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the CMS programs

Medicare and Medicaid programs;

•the federal False Claims Act (the "FCA"), which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government

government;

•federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters

matters;

•the FCPA, the U.K.UK Bribery Act of 2010, and other local anti-corruption laws that apply to our international activities

activities;

•the federal Physician Payment Sunshine Act, or Open Payments, created under the Affordable Care Act, and its implementing regulations, which requires manufacturers of drugs, medical devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Programus to report annually to the DHHS, information related to payments or other transfers of value made to licensed physicians and certain mid-level health practitioners and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members

members;

HIPAA,•Health Insurance Portability and Accountability Act ("HIPAA"), as amended by the Health Information Technology for Economic and Clinical Health Act, and its implementing regulations, which impose certain requirements relating to the privacy, security, and transmission of individually identifiable health information; HIPAA also created criminal liability for knowingly and willfully falsifying or concealing a material fact or making a materially false statement in connection with the delivery of or payment for healthcare benefits, items or services

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•

the federal physician self-referral prohibition, commonly known as the Stark Law

services;
•the GDPR and the UK Data Protection Act 2018, which each provide legal requirements for the handling and disclosure (including across borders) of personal data collected in the European Union and the United Kingdom, respectively;

•the FDA’s Code of Federal Regulations, including but not limited to, 21 CFR Parts 820, 803, 806, and 801, that outlines requirements for medical device design, testing, marketing authorization, manufacturing, labeling, distribution, and post-market surveillance requirements;

•the EU MDD and EU MDR that outline requirements for medical device CE marking;
•the UK MDR, which, post the United Kingdom’s withdrawal from the European Union, replaces the CE marking requirement for medical devices sold in the United Kingdom with a UKCA mark; and
•state law equivalents of each of the above U.S. federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state and foreign laws governing the privacy and security of healthindividually identifiable information in certain circumstances (e.g., the Telephone Consumer Protection Act, the CAN-SPAM Act, and state privacy, consumer protection, and breach notification laws), many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts

efforts.

The Affordable Care Act was enacted

These laws are broad in 2010. The Affordable Care Act, among other things, amends the intent requirement of the federal Anti-Kickback Statutescope and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

Because of the breadth of these lawsavailable exceptions and the narrowness of available statutory and regulatory exemptions are narrow; it is possible that some of our activities could be subject to challenge under one or more of such laws. Any action brought against us for violations of these laws or regulations, even successfully defended, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. We may be subject to private “qui tam” actions brought by individual whistleblowers on behalf of the federal or state governments, with potential liability under the federal False Claims ActFCA including mandatory treble damages and significant per-claim penalties, currently set at $10,957which were increased from $13,508 to $21,916$27,018 per false claim.

claim for violations assessed after January 30, 2023. For example, our industry has experienced recent FCA enforcement, which highlights the importance of compliance with the rules and regulations governing claims submitted to federal healthcare programs.


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Although we have adopted policies and procedures designed to comply with these laws and regulations and conduct internal reviews of our compliance with these laws, our compliance is also subject to governmental review. The growth of our business and sales organization and our expansion outside of the United States may increase the potential of violating these laws or our internal policies and procedures. The risk of our being found in violation of these or other laws and regulations is further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of the federal, state, andor foreign laws described above or any other current or future fraud and abuse or other healthcare laws and regulations that apply to us, we may be subject to penalties, including significant criminal, civil, and administrative penalties, damages, fines, imprisonment for individuals, exclusion from participation in government programs, such as Medicare, and Medicaid, and we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business and our financial results.

If we fail

Changes in applicable laws or regulations or the interpretation or enforcement policies of regulators governing our IDTFs and Zio Services may constrain or require us to obtainrestructure our operations or adapt certain business strategies which may harm our revenue and maintain necessary regulatory clearances or approvals foroperating results.
Healthcare laws and regulations, and interpretations of the ZIO Patchsame, change frequently and ZIO Service, or if clearances or approvals for future products and indications are delayed or not issued, our commercial operations would be harmed.

The ZIO Patch and ZIO Service are subject to extensive regulation by the FDAmay change significantly in the United States and by our Notified Body in the EU. Government regulations specific to medical devices are wide ranging and govern, among other things:

product design, development and manufacture

laboratory, preclinical and clinical testing, labeling, packaging, storage and distribution

premarketing clearance or approval

record keeping

product marketing, promotion and advertising, sales and distribution

post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals

Before a new medical device or service, or a new intended use for an existing product or service, can be marketed in the United States, a company must first submit and receive either 510(k) clearance or premarketing approval from the FDA, unless an exemption applies. Either process can be expensive, lengthy and unpredictable.future. We may not be able to obtain the necessary clearancesadapt our operations to address every new regulation or approvalsinterpretation, and new regulations or interpretations may be unduly delayed in doing so, which could harmadversely affect our business. Furthermore, even ifWe also cannot assure that a review of our business by courts or regulatory authorities would not result in a determination that adversely affects our revenue and operating results.

Our business relies on orders from licensed healthcare providers, and the continuing clinical acceptance and adoption of our Zio Services depends upon strong working relationships with healthcare providers, including physicians. These relationships, interactions, and arrangements are subject to a high degree of scrutiny by government regulators and enforcement bodies.
As a CMS-enrolled IDTF, we are granted regulatory clearances or approvals, they may include significant limitationsonly provide our Zio Services upon receipt of a valid order from a licensed healthcare provider for use in the diagnosis and treatment of a patient’s medical condition. Accordingly, our revenue and the success of our business rely on the indicated uses for the product, which may limit the market for the product. Although we have obtained 510(k) clearance to market the ZIO Patchcontinued clinical acceptance and ZIO Service,adoption of our clearance can be revoked if safety or efficacy problems develop.

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Zio Services by healthcare providers whose patients require remote cardiac monitoring services. In addition to continuing to demonstrate the clinical value of our Zio Services, we also must support widespread clinical acceptance and adoption of our Zio Services by maintaining strong working relationships with these healthcare providers, including physicians. However, as we work to establish and maintain these relationships, we face significant scrutiny of these relationships, interactions, and arrangements by government regulators and enforcement agencies. Failure to maintain these relationships, interactions, and arrangements in compliance with applicable laws and regulations, including those targeted at fraud and abuse like the federal Anti-Kickback Statute and the FCA, could expose us to significant legal and financial repercussions, including government civil and criminal investigations, civil monetary penalties, criminal penalties, and/or exclusion from federal healthcare programs.

Our communications with healthcare stakeholders – physicians and other healthcare professionals, payors and similar entities, as well as patients and lay caregivers – are required to file various reports with the FDA, including reports required by the medical device reporting regulations, or MDRs, that require that we report to the regulatory authorities if our ZIO Service may have caused or contributedsubject to a deathhigh degree of scrutiny for compliance with a wide range of laws and regulations. Continuing or serious injuryincreasing our sales and marketing and other external communication efforts may expose us to additional risk of being alleged or malfunctioned in a way that would likely cause or contributedeemed to a death or serious injury if the malfunction were to recur. If these reports are not filed in a timely manner, regulators may impose sanctions and we may be subject to product liability ornon-compliant by regulatory, enforcement actions, all of which could harm our business.

If we initiate a correctionauthorities, or removal for our ZIO Servicecompetitors.

Our sales and marketing efforts and initiatives may subject us to reduce a risk to health posed by the ZIO Service, we would be required to submit a publicly available Correction and Removal report to the FDA and, in many cases, similar reports to other regulatory agencies. This report could be classified by the FDA as a device recall which could lead to increasedadditional scrutiny by the FDA, other international regulatory agencies and our customers regarding the quality and safety of our ZIO Service. Furthermore,practices of effective communication of risk information, benefits, or claims under the submissionoversight of these reports could be used by competitors against us and cause physicians to delay or cancel prescriptions, which could harm our reputation.

The FDA and the Federal Trade Commission or FTC, also regulate the(“FTC”). For example, FDA applies a heightened level of scrutiny to comparative claims when applying its statutory standards for advertising and promotion, including with regard to its requirement that promotional labeling be truthful and not misleading. There is potential for differing interpretations of our products and services to ensure that the claims we makewhether certain communications are consistent with a product’s FDA-required labeling, and FDA will evaluate communications on a fact-specific basis. The FTC also recently released updated guidance on health claims, with a high expectation for clinical data to support these claims.

In addition, making comparative claims may draw scrutiny from our competitors. Where a company makes a claim in advertising or promotion that its product is superior to the product of a competitor (or that the competitor’s product is inferior), this creates a risk of a lawsuit by the competitor under federal and state false advertising or unfair and deceptive trade practices law, and possibly also state libel law. Such a suit may seek injunctive relief against further advertising, a court order directing corrective advertising, and compensatory and punitive damages where permitted by law. If our compliance program and training and monitoring do not effectively keep pace with our sales and marketing growth, we may encounter increased risk in execution of activities by our personnel, potential enforcement and other exposure.
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We may also seek to communicate certain information with physicians and scientists or with payors and similar entities, and may rely on a range of laws, regulations, regulatory clearances,guidance governing topics including scientific exchange and communication of healthcare economic information and product information under the Preapproval Information Exchange Act.
Changes in laws and regulations governing our communications with patients or the interpretation or enforcement policies of regulators could subject us to regulatory scrutiny, damage awards, or fines.
As a Medicare-enrolled IDTF, we are prohibited from directly soliciting patients for diagnostic medical procedures. While we can engage in general marketing initiatives, consistent with applicable law, we cannot make telephone, computer, and in-person contacts for the purpose of soliciting business for our IDTF.
Regarding patients for whom we have received a valid order for our Zio Services, we may send or make text messages, emails, phone calls and other communications for various informational, business purposes, including to confirm accurate demographic and payor information or to assist a patient via a home hookup. Communication-related laws require consent prior to certain communications and provide a specified monetary damage award or fine for each violation could result in particularly significant damage awards or fines. For example, under the Telephone Consumer Protection Act (“TCPA”), plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may treble the damage award for willful or knowing violations. In the wake of a 2021 decision by the U.S. Supreme Court that limited the applicability of the TCPA, several states have enacted or introduced legislation that would regulate text messages and certain telephone calls to individuals. We may be subject to lawsuits (including class-action lawsuits) containing allegations that our business violated the TCPA or other communications laws. These lawsuits may seek damages (including statutory damages) and injunctive relief, among other remedies. A determination that there is adequate and reasonable datahave been violations of the TCPA or other statutes regulating communications with patients could expose us to substantiatesignificant damage awards that could, individually or in the claims and thataggregate, materially harm our promotional labeling and advertising is neither false nor misleading. If the FDA or FTC determines that anybusiness.
While most of our advertisingrevenue results from claims submitted to payors for diagnostic medical procedures, we offer, and are looking to expand, alternative payment and service delivery models. Piloting, evaluating, and implementing these alternative payment and service delivery models requires interactions with commercial payors, physicians, and patients; these interactions are subject to laws and regulations aimed at preventing healthcare fraud and abuse. If these models are unsuccessful, or promotionalif we are unable to fully comply with such laws as we pursue these strategies, our commercial success could be compromised and we could face substantial penalties.
Our operations may be directly or indirectly affected by various broad state and federal healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, the FCA, the Anti-Mark Up Rule, and the Medicare Beneficiary Inducement Statute. For some of our services, we directly bill physicians or other healthcare entities, that, in turn, bill payors, and the amounts we bill may include a risk-based pricing component. We are also developing alternative service delivery models that include using our Zio XT System to screen at-risk patient populations as part of a value-added service offered by managed care organizations, including Medicare Advantage Organizations, to qualifying participants. Although we believe these billing and service models and our program development efforts are properly designed to comply with laws and regulations, these types of initiatives may draw a high degree of scrutiny and may subject us to assertions of non-compliance. If our past, present, or future operations are found to be in violation of fraud and abuse laws, we or our officers may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment and exclusion from Medicare program participation. Furthermore, if we knowingly file, or “cause” the filing of, false claims are misleading, not substantiated or not permissible,for reimbursement with government programs such as Medicare, we may be subject to enforcement actions,substantial civil penalties, including warning letters,treble damages.















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Risks Related to Financial and Accounting Matters
In the future we may be required to revise our promotional claims and make other correctionsidentify additional material weaknesses or restitutions.

The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:

adverse publicity, warning letters, fines, injunctions, consent decrees and civil penalties

repair, replacement, refunds, recall or seizure of our products

operating restrictions, partial suspension or total shutdown of production

denial of our requests for 510(k) clearance or premarket approval of new products or services, new intended uses or modifications to existing products or services

withdrawal of 510(k) clearance or premarket approvals that have already been granted

criminal prosecution

If any of these events were to occur, our business and financial condition could be harmed.

Material modifications to the ZIO Patch, labelling of the ZIO Patch, or ZIO Service may require new 510(k) clearances, CE Marks or other premarket approvals or may require us to recall or cease marketing our products and services until clearances are obtained.

Material modifications to the intended use or technological characteristics of the ZIO Patch or ZIO Service will require new 510(k) clearances, premarket approvals or CE Mark grants, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. Based on FDA published guidelines, the FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance; however, the FDA can review a manufacturer’s decision. Any modification to an FDA cleared device or service that would significantly affect its safety or efficacy or that would constitute a major change in its intended use would require a new 510(k) clearance or possibly a premarket approval. We may not be able to obtain additional 510(k) clearances or premarket approvals for new products or for modifications to, or additional indications for, the ZIO Patch or ZIO Service in a timely fashion, or at all. Delays in obtaining required future clearances would harm our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. We have made modifications to the ZIO Patch and ZIO Service in the past that we believe do not require additional clearances or approvals, and we may make additional modifications in the future. If the FDA or an EU Notified Body disagrees and requires new clearances or approvals for any of these modifications, we may be required to recall and to stop selling or marketing the ZIO Patch and ZIO Service as modified, which could harm our operating results and require us to redesign our products or services. In these circumstances, we may be subject to significant enforcement actions.

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If we or our suppliersotherwise fail to comply with the FDA’s QSR or the European Union’s Medical Device Directive, our manufacturing or distribution operations could be delayed or shut down and our revenue could suffer.

Our manufacturing and design processes and thosemaintain an effective system of our third-party suppliers are required to comply with the FDA’s Quality System Regulation, or QSR and the EU’s Medical Device Directive, or MDD, both of which cover procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of ZIO Patches. We are also subject to similar state requirements and licenses, and to ongoing ISO 13485 compliance in all operations, including design, manufacturing, and service, to maintain our CE Mark. In addition, we must engage in extensive recordkeeping and reporting and must make available our facilities and records for periodic unannounced inspections by governmental agencies, including the FDA, state authorities, EU Notified Bodies and comparable agencies in other countries. If we fail a regulatory inspection, our operations could be disrupted and our manufacturing interrupted. Failure to take adequate corrective action in response to an adverse regulatory inspection could result in, among other things, a shutdown of our manufacturing or product distribution operations, significant fines, suspension of marketing clearances and approvals, seizures or recalls of our device, operating restrictions and criminal prosecutions, any of which would cause our business to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements,internal controls, which may result in manufacturing delaysmaterial misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.

We previously identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. As previously disclosed, in preparing our consolidated financial statements as of and for the years ended December 31, 2021 and 2020, our productmanagement concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to a failure to maintain a sufficient number of professionals with an appropriate level of accounting and internal control knowledge, training, and experience to timely and accurately analyze, record, and disclose accounting matters. This material weakness contributed to additional material weaknesses, which have been previously disclosed and remediated. In aggregate, these material weaknesses (including the previously remediated material weaknesses) contributed to the misstatement of our revenues, revenue reserves, bad debt expense, property and equipment, research and development expense, and related financial disclosures, and in the revision of our consolidated financial statements for the years ended December 31, 2017, December 31, 2018, and each interim period therein as well as the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019. Additionally, this material weakness could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
To address this material weakness, we took actions designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weakness, including hiring additional accounting and finance personnel with an appropriate level of expertise, providing for additional management oversight over financial reporting including through the establishment of a SOX Steering Committee within our internal audit function, and implementing new controls and processes. As of the year ended December 31, 2022, we concluded that our remediation efforts have been successful and that the previously identified material weakness in internal control over financial reporting has been remediated. However, while the material weakness has been remediated, we continue to seek improvements to enhance our control environment and to strengthen our internal controls to provide reasonable assurance that our financial statements continue to be fairly stated in all material respects.
If we discover additional weaknesses in our system of internal financial and accounting controls and procedures, our consolidated financial statements may contain material misstatements, and we could be required to restate our financial results. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
Any failure to implement and maintain effective internal control over financial reporting could cause investors to lose confidence in our reported financial and other information, adversely impact our stock price, cause us to incur increased costs to remediate any deficiencies, and attract regulatory scrutiny or lawsuits that could be costly to resolve and distract management’s attention, limit our ability to access the capital markets or cause our revenuestock to decline.

We are registered withbe delisted from The Nasdaq Global Select Market or any other securities exchange on which it is then listed. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the FDA as a medical device specifications developercapital markets.

Our financial results may fluctuate significantly from quarter-to-quarter and manufacturer. The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections bymay not fully reflect the FDA and the Food and Drug Branch of the California Department of Public Health, or CDPH, to determine our compliance with the QSR and other regulations at both our design and manufacturing facilities, and these inspections may include the manufacturing facilitiesunderlying performance of our suppliers. business.
Our design facilities in San Francisco, California were most recently audited by the FDA in June 2016revenue and no formal observations resulted. For our manufacturing facility in Cypress, California, the most recent FDA audit occurred in August 2017 and no formal observations resulted. We believe that we are in substantial compliance with the QSR.

We are also registered with the EU as a medical device developer, manufacturer and service operator through the National Standard Authority of Ireland, or NSAI, our European Notified Body. Most recently, the NSAI conducted an ISO 13485 recertification audit of our design, manufacturing and service operations in March, April and June 2017.

We can provide no assurance that we will continueoperating results may fluctuate significantly from quarter to remain in compliance with the QSR or MDD. If the FDA, CDPH or NSAI inspect any of our facilities and discover compliance problems, we may have to cease manufacturing and product distribution until we can take the appropriate remedial steps to correct the audit findings. Taking corrective action may be expensive, time consuming and a distraction for management and if we experience a delay at our manufacturing facility we may be unable to produce ZIO Patches, which would harm our business.

ZIO Patches may in the future be subject to product recalls that could harm our reputation.

The FDA and similar governmental authorities in other countries have the authority to require the recall of commercialized products in the event of material regulatory deficiencies or defects in design or manufacture. A government mandated or voluntary recall by us could occurquarter as a result of component failures, manufacturing errors or design or labeling defects. Recallsa variety of ZIO Patches would divert managerial attention, be expensive, harm our reputation with customers and harm our financial condition and results of operations. A recall announcement would also negatively affect our stock price.

Healthcare reform measures could hinder or prevent the ZIO Service’s commercial success.

In the United States, there have been, and we expect there will continue to be,factors, a number of legislativewhich are outside our control, and regulatory changesmay therefore not fully reflect the underlying performance of our business. Such factors may include, for example, seasonal variations in prescription rates. 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 healthcare systemsummer months and holidays. We believe that could harmperiod-to-period comparisons of our operating results may not be meaningful and should not be relied on as an indication of our future revenue and profitability. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes toperformance. If quarterly revenues or operating results fall below the healthcare system, someexpectations of which are intended to containinvestors or reducepublic market analysts, the costs of medical products and services. For example, the Affordable Care Act contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. The Affordable Care Act, among other things, imposes an excise tax of 2.3% on the sale of most medical devices, including ours. Although this excise tax has temporarily been suspended for two years beginning on January 1, 2016, any failure to pay this amount if it becomes due in the future could result in an injunction on the saletrading price of our products, fines and penalties.

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We cannot assure youcommon stock could decline substantially. Factors that the Affordable Care Act, as currently enacted or as amended, repealed or replacedmight cause quarterly fluctuations in the future, will not harm our business and financialoperating results and we cannot predict how future federal or state legislative or administrative changes relatinginclude:

•our inability to healthcare reform will affectmanufacture an adequate supply of our business. There likely will continueZio Systems to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future or their full impact. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may harm:

our ability to set a price that we believe is fairsupport demand for our ZIO Service

Zio Services at appropriate quality levels and acceptable costs;
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•possible delays in our ability to generate revenue and achieve or maintain profitability

the availability of capital

Compliance with environmental laws and regulations could be expensive, and failure to comply with these laws and regulations could subject us to significant liability.

Our research and development and manufacturing operations involveprograms or in the usecompletion of hazardous substances and are subject to a variety of federal, state, local and foreign environmental laws and regulationsany third-party clinical trials relating to our Zio Services;

•a lack of acceptance of our Zio Services, including our Zio Systems, by physicians and potential patients;
•the storage, use, discharge, disposal, remediationinability of patients to receive reimbursements from third-party payors;
•the purchasing patterns of physicians and human exposure to, hazardous substances and the sale, labeling, collection, recycling, treatment and disposal of products containing hazardous substances. Liability under environmental laws and regulations can be joint and several and without regard to fault or negligence. Compliance with environmental laws and regulations may be expensive and noncompliance could result in substantial liabilities, fines and penalties, personal injury and third-party property damage claims and substantial investigation and remediation costs. Environmental laws and regulations could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We cannot assure you that violations of these laws and regulations will not occur in the future or have not occurred in the pastpatients, including as a result of human error, accidents, equipmentseasonality;
•failures to comply with regulatory requirements, which could lead to withdrawal of our Zio Services, including our Zio Systems, from the market;
•our failure to continue the commercialization of our Zio Services;
•competition;
•inadequate financial and other resources; and
•global business, political and economic conditions, including inflation, increasing interest rates, cybersecurity events, uncertainty with respect to the federal budget, instability in the global banking system, political instability, and military hostilities, including ongoing geopolitical conflicts, such as the war in Ukraine and conflict in Israel.
Further, we recognize a portion of our revenue from non-contracted third-party commercial payors. For example, during the year ended December 31, 2022 and nine months ended September 30, 2023, revenue from non-contracted third-party commercial payors accounted for approximately six percent of our total revenue. We have limited visibility as to when we will receive payment for our Zio Services with non-contracted payors and we or other causes. The expense associated with environmental regulationXIFIN must appeal any negative payment decisions, which often delays collections further. Additionally, a portion of the revenue from non-contracted payors is received from patient co-pays, which we may not receive for several months following delivery of service or may not receive at all. For revenue related to non-contracted payors, we estimate an average collection rate based on factors including historical cash collections. Subsequent adjustments, if applicable, are recorded as an adjustment to revenue. Fluctuations in revenue may make it difficult for us, research analysts, and remediation could harminvestors to accurately forecast our financial conditionrevenue and operating results.

Risks Relatedresults or to Our Common Stock

Our common stock has only recently become publicly traded, and we expect thatassess our actual performance. If our revenue or operating results fall below expectations, the price of our common stock will fluctuate substantially.

Our common stock has only recently become publicly traded,would likely decline.

We have a history of operating losses and may not achieve or sustain profitability in the future.
We have incurred net losses since our inception in September 2006. We generated net losses of $27.1 million and $21.5 million during the three months ended September 30, 2023 and 2022, respectively, $84.7 million and $96.0 million during the nine months ended September 30, 2023 and 2022, respectively, and $116.2 million and $101.4 million during fiscal 2022 and 2021, respectively. As of September 30, 2023, we cannot be certain thathad an active trading marketaccumulated deficit of $606.9 million. We have financed our operations to date primarily through private and public offerings of equity securities and revenue generated by prescriptions of our Zio Services. We have and expect to continue to incur significant research and development, sales and marketing, regulatory, and other expenses as we expand our marketing efforts to increase the prescription of our Zio Services, expand existing relationships with physicians, obtain regulatory clearances or approvals for our common stockcurrent or future services and related devices, conduct clinical trials on our existing and future services, and develop new services or add new features to our existing Zio Services. We also expect that our general and administrative expenses will be sustained. The lack ofcontinue to increase due, among other things, to the operational and regulatory burdens applicable to medical service providers that are public companies. As a result, we expect to continue to incur operating losses in the future. These losses, among other things, may have an active market may impairadverse effect on our stockholders’ equity and the value of our common stock,stock.
We may require additional capital to support the growth of our business, and this capital might not be available on acceptable terms, if at all.
Our operations have consumed substantial amounts of cash since inception. We intend to continue to make investments to support our business, which may require us to engage in equity or your abilitydebt financings to sell your shares at the time you wishsecure additional funds. Additional financing may not be available on a timely basis on terms acceptable to sell themus, or at all. Any additional financing may be dilutive to stockholders or may require us to grant a price that you consider reasonable. An inactive marketlender a security interest in our assets. The amount of funding we may also impair need will depend on many factors, including:
•the revenue generated by our Zio Services;
•the costs, timing, and risks of delay of additional regulatory approvals;
•the expenses we incur in manufacturing, developing, selling, and marketing our Zio Services;
•our ability to raise capitalscale our manufacturing operations to continuemeet demand for the Zio Systems used in our current and any future Zio Services or other offerings;
•the costs of filing, prosecuting, defending, and enforcing any patent claims and other intellectual property rights;
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•the rate of progress and cost of our clinical trials and other development activities;
•the success of our research and development efforts;
•the emergence of competing or complementary technologies;
•the terms and timing of any collaborative, licensing, and other arrangements that we may establish;
•the cost of ongoing compliance with legal and regulatory requirements, and third-party payors’ policies;
•the cost of obtaining and maintaining regulatory or payor clearance or approval for our current or future offerings including those integrated with other companies’ products; and
•the acquisition of business, products, and technologies.
If adequate funds are not available, we may not be able to fund operations by selling common stockcommercialize our Zio Services at the rate we desire and/or we may have to delay the development or commercialization of our Zio Services or license to third parties the rights to commercialize services or technologies that we would otherwise seek to commercialize. We also may have to reduce sales, marketing, customer support, or other resources devoted to our Zio Services. Any of these factors could harm our business and financial condition.
Our ability to use our net operating losses to offset future taxable income may impairbe subject to certain limitations which could subject our business to higher tax liability.
Our ability to use our net operating losses (“NOLs”) to offset future taxable income may be subject to certain limitations which could subject our business to higher tax liability. We may be limited in the portion of NOL carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes, and federal tax credits to offset federal tax liabilities. Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state law provisions, limit the use of NOLs and tax credits after a cumulative change in corporate ownership of more than 50% occurs within a three-year period. The statutes place a formula limit on how much NOLs and tax credits a corporation can use in a tax year after a change in ownership. Avoiding an ownership change is generally beyond our control. We could experience an ownership change that might limit our use of NOLs and tax credits in the future. In addition, realization of deferred tax assets, including NOL carryforwards, depends upon our future earnings in applicable tax jurisdictions. If we have insufficient future taxable income in the applicable tax jurisdiction for any reason, including any future corporate reorganization or restructuring activities, we may be limited in our ability to acquire other companiesutilize some or products by usingall of our common stocknet operating losses to offset such income and reduce our tax liability in that jurisdiction. See Note 10, Income Taxes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information.
There is also a risk that due to regulatory changes or changes to federal or state law, such as consideration. Although our common stock is listedsuspensions on the NASDAQ Global Market, if we failuse of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable either in whole or in part to satisfyoffset future income tax liabilities. For example, under the continued listing standardsCoronavirus Aid, Relief, and Economic Security Act of 2020, which amended certain provisions of the NASDAQ Global Market,Tax Cuts and Jobs Act (“TCJA”), NOLs arising in taxable years beginning after December 31, 2017 may offset no more than 80% of current taxable income annually for taxable years beginning after December 31, 2020. Therefore, we may be required to pay U.S. federal income taxes in future years despite the NOL carryforwards we have accumulated.
Risks Related to Other Legal and Regulatory Matters
We are subject to legal proceedings and government investigations that could be de-listed, which would negatively impactadversely affect our business, financial condition, and results of operations.
We are involved in legal proceedings related to securities litigation and other matters may become involved in other legal proceedings that arise from time to time in the price offuture. For example, as discussed further in Note 8, Commitments and Contingencies, to our common stock.

The market price of our common stock is likely to be highly volatile and may fluctuate substantially in response to, among other things, the risk factors describedcondensed consolidated financial statements included in this Quarterly Report on Form 10-Q, a putative securities class action lawsuit has been filed against the company and certain current officers or former officers of the Company alleging violations of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder.

Any claims against us, whether meritorious or not, can be time-consuming, result in costly litigation, be harmful to our reputation, require significant management attention, and divert significant resources. In addition, the expense of litigation and the timing of this expense from period to period are difficult to estimate and subject to change. Litigation and other factors, manyclaims are subject to inherent uncertainties and management’s view of whichthese matters may change in the future. Given the uncertain nature of legal proceedings generally, we are beyondnot able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome. We could incur judgments or enter into settlements of claims that could have a material adverse effect on our control, including:

changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ estimates

quarterly variations in our or our competitors’ results of operations

in any particular period.
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periodic fluctuationsIn addition, healthcare companies are subject to numerous investigations and inquiries by various governmental agencies. For example, as discussed further in Note 8, Commitments and Contingencies, to our revenue, duecondensed consolidated financial statements included in partthis Quarterly Report on Form 10-Q, in March 2021, we received a grand jury subpoena from the U.S. Attorney’s Office for the Northern District of California requesting information related to communications with FDA and our Zio Systems, and, in October 2021, received a subpoena requesting additional information. More recently, on April 4, 2023, we received a Subpoena Duces Tecum from the wayConsumer Protection Branch, Civil Division of the U.S. Department of Justice, requesting production of various documents regarding our products and services. In addition, on May 25, 2023, we received a warning letter from FDA, which resulted from the inspection of our facility located in which we recognize revenue

the financial projections we may provideCypress, California that concluded in August 2022. The warning letter alleges non-conformities to the public, any changesregulations for medical devices, including medical device reporting requirements, relating to our Zio AT System and medical device quality system requirements We are cooperating fully in connection with these projectionsmatters. Any future investigations of our executives, our managers, or our failurecompany could result in significant liabilities or penalties to meet these projections

general market conditionsus, as well as adverse publicity. Even if we are found to have complied with applicable law, the investigation or litigation may pose a considerable expense and other factors unrelated towould divert management’s attention, and have a potentially negative impact on the public’s perception of us, all of which could negatively impact our operating performance or the operating performance of our competitors

market valuations (for example, valuations based upon multiples of revenuefinancial position and earnings before interest, taxes, depreciation and amortization) of
comparable companies and changes in market valuations

decreases in our market valuations on an absolute basis or relative to comparable companies

changes in reimbursement by current or potential payors

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•

changes in operating performance and stock market valuations of other technology companies generally, or those in the medical device industry in particular

actual or anticipated changes in regulatory oversight of our products

the results of our clinical trials

operations. Further, should we be found out of compliance with any of these laws, regulations, or programs, depending on the loss of key personnel, including changes in our board of directors and management

legislation or regulation of our market

lawsuits threatened or filed against us

the announcement of new products or product enhancements by us or our competitors

announced or completed acquisitions of businesses or technologies by us or our competitors

announcements related to patents issued to us or our competitors and to litigation

developments in our industry

In addition, the market pricesnature of the stock of many new issuers in the medical device industry and of other companies with smaller market capitalizations like us have been volatile and from time to time have experienced significant share price and trading volume changes unrelated or disproportionate to the operating performance of those companies. Fluctuations in our stock price, volume of shares traded, and changes in our market valuations may make our stock less attractive to certain investors. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management fromfindings, our business, our financial position, and adversely affect our business, results of operations financial condition, reputation and cash flows. These factors may materially and adversely affect the market price of our common stock.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our business, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

Sales of a substantial number of shares of our common stock in the public market, including by our existing stockholders, could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that these sales and others may have on the prevailing market price of our common stock.

In addition, certain of our stockholders can require us to register shares of our capital stock owned by them for public sale in the United States. We have also filed a registration statement to register shares of our common stock reserved for future issuance under our equity compensation plans. Subject to the satisfaction of applicable exercise periods and applicable volume and restrictions that apply to affiliates, the shares of our common stock issued upon exercise of outstanding options will become available for immediate resale in the public market upon issuance.

Future sales of our common stock may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the market price of our common stock to decline and make it more difficult for you to sell shares of our common stock.

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Thebe negatively impacted.

Compliance with requirements of being a public company matters and reporting may strain our resources and divert management’s attention and affect our ability to attract and retain executive management and qualified board members.

attention.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd Frank Act, the listing requirements of The NASDAQ Stock Marketlaws and other applicable securities laws, rules and regulations. Compliance with these laws, rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time consuming or costly and increase demand on our systems and resources, particularly after we no longer qualify as an “emerging growth company,” under the JOBS Act. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, our management and other personnel divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we will incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404, which has increased now that we will no longer be an emerging growth company under the JOBS Act starting with our next fiscal year. We continue to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. We cannot predict or estimate the amount of additional costs we will incur in order to remain compliant with our public company reporting requirements or the timing of such costs. Additional compensation costs and any future equity awards will increase our compensation expense, which will increase our general and administrative expense and could adversely affect our profitability.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, are creating uncertainty for public companies, increasingincluding the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the rules and regulations implemented by the SEC, and The Nasdaq Stock Market listing rules. Compliance with these laws and regulations, including new laws and regulations or revisions to existing laws and regulations, has required and will continue to require substantial management time and oversight and the incurrence of significant accounting and legal and financial compliance costs and making some activities more time consuming.costs. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to continue to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue generatingrevenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

adversely affected.

We could be subject to changes in our tax rates, new U.S. or international tax legislation, or additional tax liabilities.
We are subject to taxes in the United States and numerous foreign jurisdictions, where certain of our subsidiaries are organized. The tax laws in the United States and in other countries in which we and our subsidiaries do business could change on a prospective or retroactive basis, and any such changes could adversely affect our business and financial condition. Our effective tax rates could be affected by numerous factors, including changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws or their interpretation, both in and outside the United States.
For example, in 2017, the U.S. government enacted the TCJA, which made significant changes to the taxation of business entities including the requirement to capitalize research and development expenditures and amortize such expenditures over five years for domestic expenditures and fifteen years for foreign expenditures. While it is possible that Congress may modify or repeal this provision, we have no assurance that this provision will be modified or repealed and even if Congress makes any such decision, it may not be retroactive, and could still therefore result in an impact on cash from operating activities and on the balance of our deferred taxes. In addition, we have a significant presence in the United Kingdom, as well as significant sales in the United Kingdom, such that any changes in tax laws in the United Kingdom will impact our business. The overall impact of these changes is uncertain, and our business and financial condition could be adversely affected.
Our tax returns and other tax matters also are subject to examination by the U.S. Internal Revenue Service and other tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes. We cannot guarantee the outcome of these examinations. If our effective tax rates were to increase, particularly in the United States, or in other jurisdictions implementing legislation to reform existing tax legislation, including the United Kingdom, or if the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, our financial condition, operating results, and cash flows could be adversely affected.
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We may be liable for contamination or other harm caused by materials that we handle, and changes in environmental regulations could cause us to incur additional compensationexpense.
Our research and development and manufacturing operations may involve the use or handling of hazardous materials. We are subject to a variety of federal, state, local, and international laws, rules, and regulations governing the use, handling, storage, disposal and remediation of hazardous and biological materials, as well as the sale, labeling, collection, recycling, treatment, and disposal of products containing such hazardous substances, and we incur expenses relating to compliance with these laws and regulations. If we violate environmental, health and safety laws, including as a result of human error, equipment failure, or other cases, we could face substantial liabilities, fines, and penalties, personal injury and third-party property damage claims, and substantial investigation and remediation costs. These expenses or this liability could have a significant negative impact on our financial condition. Environmental laws could become more stringent over time, imposing greater compliance costs inand increasing risks and penalties associated with violations. We are subject to potentially conflicting and changing regulatory agendas of political, business, and environmental groups. Changes to or restrictions on the event that we decideprocedures for hazardous or biological material storage or handling might require unplanned capital investment or relocation of our facilities. Failure to pay our executive officers cash compensation closer to thatcomply, or the cost of executive officers of other public medical device companies, which would increase our general and administrative expense andcomplying, with new or existing laws or regulations could harm our profitability. Any future equity awards will also increase our compensation expense. business, financial condition, and results of operations.
Risks Related to Intellectual Property
We also expect that being a public company and compliance with applicable rules and regulations will make it more expensive forare subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from shipping affected devices, require us to obtain directorlicenses from third parties or to develop non-infringing alternatives, and officer liability insurance,subject us to substantial monetary damages and injunctive relief.
We rely on a combination of patents, copyrights, trademarks, trade secret laws, and confidentiality and invention assignment agreements with employees and third parties to protect our intellectual property rights. Our patents and patent applications are directed to covering key aspects of the design, manufacture and use of our Zio Services, including our Zio Systems.
Third parties may assert infringement or misappropriation claims against us with respect to our current or future Zio Services, including our Zio Systems. We are aware of numerous patents issued to third parties that may relate to aspects of our business, including the design and manufacture of the Zio Systems used in connection with our Zio Services. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual property rights of such third parties or others. Our competitors may assert that our Zio Systems or the methods we employ to deliver our Zio Services are covered by U.S. or foreign patents held by them and we may be required to accept reduced coveragesettle such allegations in the future. This risk is exacerbated by the fact that there are numerous issued patents and pending patent applications relating to remote cardiac monitoring services and the associated devices. There may be existing patents or patent applications now pending of which we are unaware that may later result in issued patents that our Zio Services, including our Zio Systems, inadvertently infringe. As the number of competitors in the remote cardiac monitoring market grows, the possibility of patent infringement by us or a patent infringement claim against us increases. If we are unable to successfully defend any such claims as they may arise or enter into or extend settlement and license agreements on acceptable terms or at all, our business operations may be harmed.
Any infringement or misappropriation claim could cause us to incur substantially highersignificant costs, place significant strain on our financial resources, divert management’s attention from our business, and harm our reputation. In addition, if the relevant patents are upheld as valid and enforceable and we are found to infringe such patents, we could be prohibited from using any portion of our Zio Services, including our Zio Systems, that is found to infringe such patent unless we could obtain licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain coverage. These factorsa license on terms acceptable to us, if at all, and we may not be able to redesign our Zio Services, including our Zio Systems, to avoid infringement. We may be unable to maintain or renew licenses on terms acceptable to us, if at all, and we may be prohibited from selling any portion of our Zio Services, including our Zio Systems, that required the technology covered by the relevant licensed patents. Although patent and intellectual property disputes in the healthcare and medical devices area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and would likely include ongoing royalties. Even if we are able to redesign our Zio Services, including our Zio Systems, to avoid an infringement claim, we may not receive FDA approval for such changes in a timely manner or at all.

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Further, if we are found to infringe third-party patents, a court could also make it more difficult fororder us to attractpay damages to compensate the patent owner for the infringement, such as a reasonable royalty amount and/or profits lost by the patent owners, along with prejudgment and/or post-judgment interest. Furthermore, if we are found to willfully infringe third-party patents, we could, in addition to other penalties, be required to pay treble damages; and retain qualified executive officersif the court finds the case to be exceptional, we may be required to pay attorneys’ fees for the prevailing party. If we are found to infringe third-party copyrights or trademarks or misappropriate third-party trade secrets, based on the intellectual property at issue, a court could order us to pay statutory damages, actual damages, or profits, such as reasonable royalty or lost profits of the owners, unjust enrichment, disgorgement of profits, and/or a reasonable royalty, and membersthe court could potentially award attorneys’ fees or exemplary or enhanced damages. If litigation were to be initiated by intellectual property owners, there could significant legal fees and costs incurred in defending litigation (which may include filing administrative actions to attack the intellectual property) as well as a potential monetary settlement payment to the owners, even if the matter is resolved before going to trial. Moreover, the owners may take an overly aggressive approach and/or include multiple allegations in a single litigation.
Our inability to adequately protect our intellectual property could allow our competitors and others to produce devices and offer services based on our technology, which could substantially impair our ability to compete.
Our success and our ability to compete depend, in part, upon our ability to maintain the proprietary nature of our boardtechnologies. We rely on a combination of directors, particularlypatent, copyright, and trademark law, and trade secrets and nondisclosure agreements to serveprotect our intellectual property. However, such methods may not be adequate to protect us or permit us to gain or maintain a competitive advantage.
For example, our patent applications may not issue as patents in a form that will be advantageous to us, or at all. Our issued patents, and those that may issue in the future, may be challenged, invalidated, or circumvented, which could limit our ability to stop competitors from marketing related devices and services. In addition, there are numerous recent changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office ("USPTO"), which may have a significant impact on our audit committeeability to protect our technology and compensation committee.

enforce our intellectual property rights. We also may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors or former or current employees, despite the existence generally of invention assignment and confidentiality agreements and other contractual restrictions we include in contracts with such parties. These agreements may not provide meaningful protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other proprietary information. There can be no assurance that employees, consultants, vendors, and clients have executed such agreements or have not breached or will not breach their agreements with us, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by competitors. In addition, we rely on trademarks, service marks, trade names and brand names, such as our registered trademark “ZIO,” to distinguish our products from the products of our competitors, and have registered or applied to register these trademarks. We cannot assure you that our trademark applications will be approved. Further, during trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in proceedings before the USPTO and in proceedings before comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. Additionally, we are aware of at least one third party that has registered the “IRHYTHM” mark in the European Union in connection with computer software for controlling and managing patient medical information, heart rate monitors, and heart rate monitors to be worn during moderate exercise, among other uses. We and the third party are involved in adversary proceedings before the Trademark Office in the European Union, and those proceedings could impact our ability to obtain a European Union trade mark registration for the “IRHYTHM” mark, although we already own many national registrations for IRHYTHM in Europe.

To protect our proprietary rights, we may in the future need to assert claims of infringement against third parties. The outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets, or trademarks is highly unpredictable, could result in substantial costs and diversion of resources, and could have a material adverse effect on our business, financial condition, and results of operations regardless of the final outcome of such litigation. In the event of an adverse judgment, a court could hold that some or all of our asserted intellectual property rights are not infringed, or are invalid or unenforceable, and could award attorneys’ fees.
Despite our efforts to safeguard our unpatented and unregistered intellectual property rights, we may not succeed in doing so or the steps taken by us in this regard may not be adequate to detect or deter misappropriation of our technology or to prevent an unauthorized third party from copying or otherwise obtaining and using our devices, technology or other information that we regard as proprietary. In addition, third parties may be able to design around our patents. Furthermore, the laws of foreign countries may not protect our proprietary rights to the same extent as the laws of the United States.

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Risks Related to Privacy and Security
Cybersecurity risks, including those involving network security breaches, services interruptions and other incidents affecting the confidentiality, integrity or availability of our data and systems, could result in the compromise of confidential data or critical data systems and give rise to potential harm to our patients, remediation and other expenses, expose us to liability under HIPAA, breach notification laws, consumer protection laws, or other common law theories, subject us to litigation and federal and state governmental inquiries, damage our reputation, and otherwise be disruptive to our business and operations.
Cybersecurity threats can come from a variety of sources, ranging in sophistication from an individual hacker to malfeasance by employees, consultants or other service providers to criminal or other unauthorized threat actors, including state-sponsored attacks. Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff. Cyber threats may be generic, or they may be custom-crafted against our information systems. Cyber incidents can result from deliberate attacks or unintentional events. Over the past several years, cyber-attacks and other cyber incidents have become more prevalent and much harder to detect and defend against. These cyber attacks and other incidents include unauthorized access to our network, information technology and data, and that our of contractors; compromise of employee credentials and accounts; transmission of computer viruses and other malware; phishing and spamming attacks; ransomware attacks and other acts of cyber extortion; and malicious actions by persons inside our organization and other insider threats. The increasing use of mobile devices for remote access to our systems and data also increases these vulnerabilities and risks.Our internal technology systems and infrastructure, and those of our contractors, are also vulnerable to damage from natural disasters, acts of terrorism, war and other acts of foreign governments and failures of telecommunication, electrical and other critical systems. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security or other problems that unexpectedly could interfere with our business operations. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these incidents or techniques, timely discover them, or implement adequate preventative measures.
We have in the past been subject to cyber-attacks and data breaches and expect that we will be subject to additional cyber-attacks in the future and may experience future data breaches. Such incidents may impact the integrity, availability or confidentiality of the sensitive data we maintain or disrupt our information systems, devices or business, including our ability to deliver our services. As a result, cybersecurity, physical security and the continued development and enhancement of disclosure ofour controls, processes and practices designed to protect our enterprise, information in this filingsystems and in other filingsdata from attack, damage or unauthorized access remain a priority for us. As cyber threats continue to evolve, we may be required of a public company,to expend significant additional resources to continue to modify or enhance our businessprotective measures or to investigate and financial condition is more visible, which could be advantageousremediate any cybersecurity vulnerabilities.
We are subject to our competitorscomplex and evolving U.S. and foreign laws and regulations and other third partiesrequirements regarding privacy, data protection, security, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in threatenedclaims, changes to our business practices, monetary penalties, increased cost of operations, or actual litigation. Ifdeclines in user growth or engagement, or otherwise harm our business.
In the ordinary course of our business, we collect, use and store, and transmit sensitive data, such claimsas our proprietary business information and that of our suppliers, contractors, customers, vendors and others, as well as personal information, including health information, of these parties and of our patients. As a result, we are successful,subject to several foreign, federal and state laws and regulations protecting the use, disclosure and confidentiality of certain personal information, namely individually identifiable information (e.g., names, social security numbers, addresses, birth dates), and restricting the use and disclosure of that information. These laws include foreign, federal and state healthcare privacy laws, telehealth laws, breach notification laws and consumer protection laws. These frameworks impose stringent privacy and security standards and potentially significant non-compliance penalties and liability. Foreign data protection, privacy, and related laws and regulations can be more restrictive than those in the United States. For example, data localization laws in some countries generally mandate that certain types of data collected in a particular country be stored and/or processed solely within that country. In addition, both foreign and U.S. legislators and regulators may make legal and regulatory changes, or interpret and apply existing laws, in ways that require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices. These changes or increased costs could negatively impact our business and operating results of operations in material ways.

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The secure maintenance, processing and transmission of this sensitive information is critical to our business operations and we are dependent on sophisticated information technology systems to operate our business. System failures or outages, including any potential disruptions due to significantly increased global demand on certain cloud-based systems or failures to adequately scale our data platforms and architectures support patient care could compromise our ability to perform these functions in a timely manner, which could harm our ability to conduct business or delay our financial reporting. We have implemented multiple layers of security measures and monitoring to protect the confidentiality, integrity and availability of this data and the systems and devices that store and transmit such data. Despite our security measures and business controls, which undergo routine testing internally and by external parties, our information technology and infrastructure may be vulnerable to attacks by criminals and criminal enterprises, foreign governments and other state-sponsored actors and terrorists and lone wolves; breaches due to employee, contractor or vendor error; or malfeasance or other disruptions or subject to the inadvertent or intentional unauthorized release of information. Any such occurrence could compromise our data centers and networks and the information stored thereon could be harmed,inappropriately accessed, publicly disclosed, lost or stolen. Further, any such access, disclosure or other loss of information could result in legal claims or proceedings, and even ifliability under laws that protect the claims are resolvedprivacy of personal information and regulatory penalties, increase in operating expenses, incurrence of expenses, including notification, mitigation and remediation costs, disrupt our favor, these claims,operations and the timeservices we provide to our clients or damage our reputation, any of which could adversely affect our profitability, revenue and resources necessarycompetitive position.
Cyber-attacks aimed at accessing our devices and services, or related devices and services, and modifying or using them in a way inconsistent with our FDA marketing authorizations and regulatory certifications in the EU and the UK, could create risks to resolveusers.
Medical devices are increasingly connected to the Internet, hospital networks, and other medical devices to provide features that improve healthcare and increase the ability of healthcare providers to treat patients and of patients to manage their conditions. As such, cyber-attacks aimed at accessing our devices and services, or related devices and services, and modifying or using them could divertin a way inconsistent with our FDA marketing authorizations and regulatory certifications in the resources ofEU and the UK, may create risks to users and potential exposure to our management and harmcompany.
Risks Related to Our Common Stock
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and operating results.

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We currently qualify as an “emerging growth company” under the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of certain exemptions from reporting requirements that are applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive to the extent we rely on available exemptions. If some investors do find our common stock less attractive, there may be a less activetrading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over the analysts, or the content and opinions included in their reports. If any of the analysts who cover us issues an adverse or misleading opinion regarding us, our business model, our intellectual property, or our stock performance, or if any third-party preclinical studies and clinical trials involving our Zio Services or our results of operations fail to meet the expectations of analysts, our stock price maywould likely decline. If one or more of such analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause a decline in our stock price or trading volume.
Our stock price is highly volatile and investing in our stock involves a high degree of risk, which could result in substantial losses for investors.
Historically, the market price of our common stock, like the securities of many other medical service providers that are public companies, has fluctuated. It is likely that our stock price will continue to be more volatile or may decline.

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Based on our market capitalization as of June 30, 2017, our status as an emerging growth company will cease on December 31, 2017 and we will be required to comply with, among other requirements,in the auditor attestation requirements of Section 404future. In addition, the trading prices for our next annual report.

common stock and the common stocks of other medical service providers been highly volatile as a result of macroeconomic conditions, including inflation, rising interest rates and ongoing geopolitical conflicts, such as the war in Ukraine and conflict in Israel.

The market price of our common stock is influenced by many factors that are beyond our control, including the following:
•securities analyst coverage or lack of coverage of our common stock or changes in their estimates of our financial performance;
•variations in quarterly operating results;
•future sales of our common stock by our stockholders;
•investor perception of us and our industry;
•announcements by us or our competitors of significant agreements, acquisitions, or capital commitments or service or product launches or discontinuations;
•changes in market valuation or earnings of our competitors;
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•negative business or financial announcements regarding our partners;
•regulatory actions;
•legislation and political conditions;
•cybersecurity events;
•global health pandemics, such as the COVID-19 pandemic;
•terrorist acts, acts of war, or periods of widespread civil unrest, including ongoing geopolitical conflicts, such as the war in Ukraine and conflict in Israel and actions taken by third parties in response to such conflict; and
•general economic, industry, and market conditions, including inflation, interest rate volatility, uncertainty with respect to the federal budget, instability in the global banking system and foreign currency exchange rates.
Please also refer to the factors described elsewhere in this “Risk Factors” section. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated and disproportionate to the operating performance of companies in our industry. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.
Securities class action litigation has often been brought against public companies that experience periods of volatility in the market prices of their securities. Securities class action litigation could result in substantial costs and a diversion of our management’s attention and resources.
Anti-takeover effects of our charter documents and Delaware law could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our common stock.
There are provisions in our amended and restated certificate of incorporation and amended and restated bylaws, andas well as provisions in the Delaware law, couldGeneral Corporation Law (“DGCL”), that may discourage, delay, or prevent a change inof control of our company that might otherwise be beneficial to stockholders. These provisions could also make it difficult for stockholders to elect directors who are not nominated by current members of our board of directors or a changetake other corporate actions, including effecting changes in our management.

Our amended and restated certificate of incorporation and bylaws contain provisions that might enable For example:

•our management to resist a takeover. These provisions include:

a classified board of directors

advance notice requirements applicable to stockholders for matters to be brought before a meeting of stockholders and requirements as to the form and content of a stockholders’ notice

a supermajority stockholder vote requirement for amending certain provisions of our amended and restated certificate of incorporation and bylaws

the right to issue preferred stock may, without stockholder approval, which couldissue shares of preferred stock with special voting or economic rights;

•our stockholders do not have cumulative voting rights and, therefore, each of our directors can only be used to dilute the stock ownership of a potential hostile acquirer

allowing stockholders to remove directors only for cause

a requirement that the authorized number of directors may be changed onlyelected by resolution of the board of directors

allowing all vacancies, including newly created directorships, to be filled by the affirmative voteholders of a majority of directors then in office, even if less than our outstanding common stock;

•a quorum, except as otherwise required by law

a requirement that ourspecial meeting of stockholders may only take action at annual or special meetings of our stockholders and notbe called by written consent

limiting the forum to Delaware for certain litigation against us

limiting the persons that can call special meetings of our stockholders to our board of directors, the chairpersona majority of our board of directors, the chairman of our board of directors, our chief executive officer, or theour president (in the absence of a chief executive officer)

;
•our stockholders may not take action by written consent; and

These provisions might

•we require advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
Moreover, Section 203 of the DGCL may discourage, delay, or prevent a change inof control of our company or a change in our management. The existence of these provisions could adversely affect the voting power ofcompany. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of common stock and limit the price that investors might be willing to pay in the future for shares15% or more of our common stock. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the sole and

The exclusive forum for substantially all disputes between us andprovision in our stockholders, which could limit our stockholders’ abilities to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation provides that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or to our stockholders, (iii) any action asserting a claim arising pursuant to the Delaware General Corporation Law or our amended and restated certificate of incorporation or bylaws, (iv) any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or bylaws or (v) any action asserting a claim governed by the internal affairs doctrine. The choice of forum provisionorganizational documents may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, or the underwriters of any offering giving rise to such claim, which may discourage lawsuits with respect to such claims.

Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware is the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a claim of breach of fiduciary duty owed by any director, officer, or other employee or agent of the company to us or our stockholders; any action asserting a claim against us arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation, or our amended and restated bylaws; any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation, or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. This exclusive forum provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act.

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Notwithstanding the foregoing, our stockholders will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder. Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and consented to our exclusive forum provisions. The exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits with respect to such lawsuits against us and our directors, officers and other employees.claims. Alternatively, if a court were to find the choice of forum provisionprovisions contained in our amended and restated certificate of incorporation or amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results, and financial condition.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends on our capital stock in the foreseeable future. As a result, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
Risks Related to Our Debt
Increasing our financial leverage could affect our operations and profitability.
We are party to the SVB Loan Agreement, dated as of October 23, 2018, with SVB, as amended by the Second Amendment to Third Amended and Restated Loan and Security Agreement, dated as of March 28, 2022, which provides for a (i) a revolving line of credit in the aggregate principal amount of up to $25.0 million and (ii) a term loans facility in the aggregate principal amount of up to $75.0 million. As of September 30, 2023, we had nothing outstanding under the revolving credit line and $35.0 million outstanding under the term loans.
Our leverage ratio, combined with our other financial obligations and contractual commitments, may affect our ability to obtain additional capital resources as well as our operations in several ways, including:
•the possible lack of availability of additional credit;
•the terms on which credit may be available to us could be less attractive, both in the economic terms of the credit and the legal covenants;
•the potential for higher levels of interest expense to service or maintain our outstanding debt;
•the possibility that we are required to incur additional debt in the future to repay our existing indebtedness when it comes due;
•the possibility that our level of indebtedness make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry, and competitive conditions and adverse changes in government regulation;
•limiting our ability to borrow additional amounts to fund acquisitions, for working capital, and for other general corporate purposes;
•the possible diversion of capital resources from other uses; and
•making an acquisition of our company less attractive or more difficult.
Any of these factors could harm our business, results of operations, and financial condition. While we believe we will have the ability to service our obligations under the SVB Loan Agreement and obtain additional financing in the future if and when needed, that will depend upon our results of operations and financial position at the time, the then-current state of the credit and financial markets, and other factors that may be beyond our control. Therefore, we cannot give assurances that sufficient credit will be available on terms that we consider attractive, or at all, if and when necessary or beneficial to us.
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Failure to comply with covenants in the SVB Loan Agreement could result in our inability to borrow additional funds and adversely impact our business.
The SVB Loan Agreement imposes numerous financial and other restrictive covenants on our operations, including financial covenants. As of September 30, 2023, we were in material compliance with the covenants imposed by the SVB Loan Agreement. If we violate these or any other covenants under the SVB Loan Agreement or fail to make payments in connection therewith, Silicon Valley Bank could declare an event of default, which would give it the right to terminate its commitment to provide additional loans and declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, Silicon Valley Bank would have the right to proceed against the assets we provided as collateral pursuant to the loan. Any of the foregoing may limit our ability to borrow additional funds and pursue other business opportunities or strategies that we would otherwise consider to be in our best interests.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including the SVB Loan Agreement, depends on our future financial condition and operating results.

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performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to satisfy our obligations under the SVB Loan Agreement and any future indebtedness we may incur and to make necessary capital expenditures.

If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing, or obtaining additional equity capital on terms that may be onerous or highly dilutive. These alternative measures may not be successful and may not permit us to meet our scheduled debt servicing obligations. Further, we may need to refinance all or a portion of our debt on or before maturity, and our ability to refinance the SVB Loan Agreement or any future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities on commercially reasonable terms or at all, which could result in a default under the SVB Loan Agreement or any future indebtedness.
General Risk Factors
We may be impacted by domestic and global economic and political conditions, as well as natural disasters, pandemics, and other catastrophic events, which could adversely affect our business, financial condition or results of operations.
Our operations and performance may vary based on worldwide economic and political conditions, which have been adversely impacted by continued global economic uncertainty, political instability, and military hostilities in multiple geographies, including ongoing geopolitical conflicts such as the war in Ukraine and conflict in Israel, domestic and global inflationary trends, interest rate volatility, uncertainty with respect to the federal budget, instability in the global banking system, global supply shortages and a tightening labor market. A severe or prolonged economic downturn or period of global political instability could drive hospitals and other healthcare professionals to tighten budgets and curtail spending, which could in turn negatively impact rates at which physicians prescribe our Zio Services. In addition, higher unemployment rates or reductions in employer-provided benefits plans could result in fewer commercially insured patients, resulting in a reduction in our margins and impairing the ability of uninsured patients to make timely payments. A weak or declining economy could also strain our suppliers, possibly resulting in supply delays and disruptions. There is also a risk that one or more of our current service providers, suppliers, or other partners may not paid dividendssurvive such difficult economic times, which could directly affect our ability to attain our goals on schedule and on budget. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. We cannot predict the timing, strength, or duration of an economic downturn, instability, or recovery, whether worldwide, in the United States, or within our industry.
In addition, climate-related events, including the increasing frequency of extreme weather events, natural disasters, or other catastrophic events may cause damage or disruption to our operations, international commerce, and the global economy, and could have an adverse effect on our business, operating results, and financial condition. In the event of a natural disaster, including a major earthquake, blizzard, or hurricane, or a catastrophic event such as a fire, power loss, cyberattack, or telecommunications failure, we may be unable to continue our operations and may endure system and service interruptions, reputational harm, delays in development of our Zio Systems and Zio Services, breaches of data security, and loss of critical data, all of which could cause us to experience higher attrition, losses, and additional costs to maintain or resume operations, or otherwise have an adverse effect on our business and operating results. Further, we do not maintain insurance sufficient to compensate us for the potentially significant losses that could result from disruptions to our services. Additionally, all the aforementioned risks may be further increased if our or our partners’ disaster recovery plans are inadequate.
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Environmental, social, and corporate governance (“ESG”) regulations, policies, and provisions may make our supply chain more complex and may adversely affect our relationships with customers.
There is an increasing focus from certain investors, physicians, patients, employees, and other stakeholders concerning corporate citizenship and sustainability matters and the governance of environmental and social risks. An increasing number of participants in the medical services industry are joining voluntary ESG groups or organizations, such as the Responsible Business Alliance. These ESG provisions and initiatives are subject to change, can be unpredictable, and may be difficult and expensive for us to comply with, given our reliance on our supply chain and the outsourced manufacturing of certain components and sub-assemblies of the Zio Systems used with our Zio Services.
Further, we have in the past and do not expectmay continue to pay dividendscommunicate certain initiatives, including goals, regarding environmental matters, responsible sourcing and social investments. We could fail, or be perceived to fail, in the future,our achievement of such initiatives or goals, or we could fail in fully and as a result, any returnaccurately reporting our progress on investment may be limited to the value of our stock.

We have never paid cash dividendssuch initiatives and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends will depend on our earnings, capital requirements, financial condition, prospects and other factors our board of directors may deem relevant.goals. In addition, our loan agreements limit our ability to, among other things, pay dividendswe could be criticized for the scope of such initiatives or make other distributionsgoals or payments on account of our common stock,perceived as not acting responsibly in each case subject to certain exceptions. connection with these matters.

If we doare not pay dividends,effective in addressing ESG matters affecting our stockbusiness, or setting and meeting relevant ESG goals, our reputation and financial results may be less valuable because a return on your investment will only occur if you sell our common stock after our stock price appreciates.

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suffer.

ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sales of Unregistered SalesSecurities
None.
Use of Proceeds
None.
Issuer Purchases of Equity Securities

None.

Use of Proceeds

Our initial public offering of 7,238,235 shares of common stock was effected through a registration statement on Form S-1 (Registration Nos. 333-213773 and 333-214179), which was declared effective on October 19, 2016. Our initial public offering closed on October 25, 2016 and resulted in net proceeds of approximately $110.9 million, after deducting underwriting discounts and commissions of approximately $8.6 million and other expenses of approximately $3.5 million. No payments for such expenses were made directly or indirectly to any of our officers or directors.

J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, Canaccord Genuity Inc. and BTIG, LLC acted as the underwriters. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on October 20, 2016.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES
Not applicable.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.    OTHER INFORMATION
None.
ITEM 6.    EXHIBITS
The exhibits listed in the accompanying exhibit index are filed as part of, and incorporated by reference into, this Quarterly Report on Form 10-Q.
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EXHIBIT INDEX

ITEM 5.

Incorporated by Reference
Exhibit
Number		DescriptionFormDateNumberFiled Herewith
31.1X
31.2X
32.1*X
101.INSInline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL documentX
101.SCHInline XBRL Taxonomy Extension Schema DocumentX
101.CALInline XBRL Taxonomy Extension Calculation Linkbase DocumentX
101.DEFInline XBRL Taxonomy Extension Definition Linkbase DocumentX
101.LABInline XBRL Taxonomy Extension Label Linkbase DocumentX
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentX
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)X

Not applicable.


* The certifications filed as Exhibits 32.1 are not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall they be deemed and are not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended or the Exchange Act, whether made before or after the date hereof irrespective of any general incorporation by reference language contained in any such filing, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
iRhythm Technologies, Inc.
Date: November 2, 2023By:/s/ Quentin S. Blackford
Quentin S. Blackford
President and Chief Executive Officer
 
(Principal Executive Officer)
Date: November 2, 2023By:/s/ Brice A. Bobzien
Brice A. Bobzien
Chief Financial Officer
 
(Principal Financial Officer)


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ITEM 6.

EXHIBITS

The exhibits listed in the accompanying exhibit index are filed as part of, and incorporated by reference into, this Quarterly Report on Form 10-Q.

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EXHIBIT INDEX

Exhibit

Number

Description

  10.29

Form of Change of Control and Severance Agreement.

  31.1

Certification of Principal Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  31.2

Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  32.1*

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

* The certifications filed as Exhibits 32.1 are not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the Company under the Securities Exchange Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof irrespective of any general incorporation by reference language contained in any such filing, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

iRhythm Technologies, Inc.

Date: November 14, 2017

By:

/s/ Kevin M. King                 

Kevin M. King

President and Chief Executive Officer

(Principal Executive Officer)

Date:  November 14, 2017

By:

/s/ Matthew C. Garrett           

Matthew C. Garrett

Chief Financial Officer

(Principal Financial Officer and Chief Accounting Officer)

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