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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, 2022
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)
_______________________________________________________________________
Delaware20-8149544
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
699 8th Street Suite 600
San Francisco,California94103
(Address of Principal Executive Offices)(Zip Code)
(415) 632-5700
(Registrant’s Telephone Number, Including Area Code)
_______________________________________________________________________
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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller 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 25, 2022, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 30,110,878.
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




IRHYTHM TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No
  
  
  
  
  

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition. Any statements contained herein that 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 impact of the COVID-19 pandemic and macroeconomic factors on our 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;
our plans to modify our current products, or develop new products, to address additional indications;
the expected growth of our business and our organization;
our expectations regarding government and third-party payor coverage and reimbursement or other regulatory actions or decisions ;
our expectations regarding the size of our sales organization and expansion of our sales and marketing efforts in international 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;
our ability to retain and recruit key personnel, including the continued development of a sales and marketing infrastructure;
our ability to obtain and maintain intellectual property protection for our products;
our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for, or ability to obtain, additional financing;
our ability to identify and develop new and planned products and acquire new products;
our ability to remediate our material weaknesses over financial reporting;
our financial performance; and
developments and projections relating to our competitors or our 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, 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 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.
iii


PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
IRHYTHM TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share data)
September 30,
2022
December 31,
2021
Assets
Current assets:
Cash and cash equivalents $71,222 $127,562 
Short-term investments132,316 111,569 
Accounts receivable, net 60,534 46,430 
Inventory14,452 10,268 
Prepaid expenses and other current assets7,326 9,693 
Total current assets285,850 305,522 
Property and equipment, net71,515 55,944 
Operating lease right-of-use assets62,010 84,587 
Goodwill862 862 
Other assets20,153 16,052 
Total assets$440,390 $462,967 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$7,404 $10,509 
Accrued liabilities60,264 51,486 
Deferred revenue3,003 3,049 
Debt, current portion 11,667 
Operating lease liabilities, current portion12,920 11,142 
Total current liabilities83,591 87,853 
Debt, noncurrent portion34,931 9,690 
Other noncurrent liabilities1,163 697 
Operating lease liabilities, noncurrent portion81,481 85,212 
Total liabilities201,166 183,452 
Commitments and contingencies (Note 7)
Stockholders’ equity:
    Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding at September 30, 2022 and December 31, 2021
  
Common stock, $0.001 par value; 100,000,000 shares authorized; 30,094,205 shares at September 30, 2022 and 29,493,726 at December 31, 2021 issued and outstanding
28 27 
Additional paid-in capital741,879 685,594 
Accumulated other comprehensive loss(681)(61)
Accumulated deficit(502,002)(406,045)
Total stockholders’ equity239,224 279,515 
Total liabilities and stockholders’ equity$440,390 $462,967 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1


IRHYTHM TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)



Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Revenue, net$103,875 $85,432 $298,304 $241,021 
Cost of revenue32,954 29,284 95,379 78,737 
Gross profit70,921 56,148 202,925 162,284 
Operating expenses:
Research and development11,448 8,685 33,935 26,801 
Selling, general and administrative80,559 70,745 235,468 203,227 
Impairment and restructuring charges  26,608  
Total operating expenses92,007 79,430 296,011 230,028 
Loss from operations(21,086)(23,282)(93,086)(67,744)
Interest expense(614)(279)(3,125)(921)
Other income (expense), net365 (76)450 103 
Loss before income taxes(21,335)(23,637)(95,761)(68,562)
Income tax provision116 94 196 308 
Net loss$(21,451)$(23,731)$(95,957)$(68,870)
Net loss per common share, basic and diluted$(0.71)$(0.81)$(3.22)$(2.35)
Weighted-average shares, basic and diluted30,055,166 29,397,845 29,836,601 29,294,559 
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)
(In thousands)



Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Net loss
$(21,451)$(23,731)$(95,957)$(68,870)
Other comprehensive loss:
Net change in unrealized loss on short-term investments(98)(13)(620)(17)
Comprehensive loss
$(21,549)$(23,744)$(96,577)$(68,887)

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)
(In thousands)
Nine Months Ended
September 30,
20222021
Cash flows from operating activities
Net loss
$(95,957)$(68,870)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
9,930 6,738 
Stock-based compensation
41,946 42,651 
Accretion of discounts on investments, net 216 1,348 
Provision for doubtful accounts and contractual allowances
43,778 23,935 
Amortization of operating lease right-of-use assets
4,865 5,041 
Impairment charges23,164  
Other230  
Changes in operating assets and liabilities:
Accounts receivable
(57,882)(46,823)
Inventory
(4,375)(4,643)
Prepaid expenses and other current assets
2,367 1,722 
Other assets
(4,099)(473)
Accounts payable
(3,105)492 
Accrued liabilities
8,072 11,338 
Deferred revenue
(46)1,444 
Operating lease liabilities
(4,692)(959)
Reimbursement of tenant improvement allowance 2,351 
Net cash used in operating activities
(35,588)(24,708)
Cash flows from investing activities
Purchases of property and equipment
(22,737)(23,442)
Purchases of short-term investments(137,548)(66,676)
Sales of short-term investments34,965  
Maturities of short-term investments81,000 222,515 
Net cash provided by (used in) investing activities
(44,320)132,397 
Cash flows from financing activities
Payment of long-term debt(21,389)(8,750)
Proceeds from term loan35,000  
Proceeds from issuance of common stock in connection with employee equity incentive plans
10,034 5,657 
Tax withholding upon vesting of restricted stock awards
 (25,853)
Payments of issuance costs for long term debt(77) 
Net cash provided by (used in) financing activities23,568 (28,946)
Net (decrease) increase in cash and cash equivalents(56,340)78,743 
Cash and cash equivalents beginning of period
127,562 88,628 
Cash and cash equivalents end of period
$71,222 $167,371 
Supplemental disclosures of cash flow information
Interest paid
$2,676 $943 
Non-cash investing and financing activities
Property and equipment costs included in accounts payable and accrued liabilities
$1,179 $36 
Right-of-use assets obtained in exchange for operating lease liabilities$7,666 $6,443 
Capitalized stock-based compensation$4,306 $2,534 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4


IRHYTHM TECHNOLOGIES, INC.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(In thousands, except share data)


Common Stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive income (loss)Total stockholders' equity
Balances at June 30, 2022
29,963,627 $28 $725,748 $(480,551)$(583)$244,642 
Issuance of common stock in connection with employee equity incentive plans, net130,578 — 1,662 — — 1,662 
Stock-based compensation—  14,469 — — 14,469 
Net loss—  — (21,451)— (21,451)
Net change in unrealized loss on short-term investments—  — — (98)(98)
Balances at September 30, 2022
30,094,205 $28 $741,879 $(502,002)$(681)$239,224 

Common Stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive income (loss)Total stockholders' equity
Balances at June 30, 202129,386,146 $27 $656,231 $(349,823)$7 $306,442 
Issuance of common stock in connection with employee equity incentive plans, net35,195  80 — — 80 
Tax withholding upon vesting of restricted stock awards—  (1)— — (1)
Stock-based compensation—  13,063 — — 13,063 
Net loss—  — (23,731)— (23,731)
Net change in unrealized loss on short-term investments—  — — (13)(13)
Balances at September 30, 202129,421,341 $27 $669,373 $(373,554)$(6)$295,840 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5



IRHYTHM TECHNOLOGIES, INC.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(In thousands, except share data)


Common Stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive income (loss)Total stockholders' equity
Balances at December 31, 2021
29,493,726 $27 $685,594 $(406,045)$(61)$279,515 
Issuance of common stock in connection with employee equity incentive plans, net600,479 1 10,033 — — 10,034 
Stock-based compensation—  46,252 — — 46,252 
Net loss—  — (95,957)— (95,957)
Net change in unrealized loss on short-term investments—  — — (620)(620)
Balances at September 30, 2022
30,094,205 $28 $741,879 $(502,002)$(681)$239,224 
Common Stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive income (loss)Total stockholders' equity
Balances at December 31, 202029,019,350 $27 $646,258 $(304,684)$11 $341,612 
Issuance of common stock in connection with employee equity incentive plans, net401,991  5,657 — — 5,657 
Tax withholding upon vesting of restricted stock awards—  (25,853)— — (25,853)
Stock-based compensation—  43,311 — — 43,311 
Net loss—  — (68,870)— (68,870)
Net change in unrealized loss on short-term investments—  — — (17)(17)
Balances at September 30, 202129,421,341 $27 $669,373 $(373,554)$(6)$295,840 


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
iRhythm Technologies, Inc. (the “Company”) was incorporated in the state of Delaware in September 2006. The Company is a digital healthcare company redefining the way physicians diagnose cardiac arrhythmias by combining wearable biosensing technology with cloud-based data analytics and deep-learning capabilities. The Company began commercial operations in the United States in 2008 following initial 510(k) clearance of its technology by the U.S. Food and Drug Administration.

The Company is headquartered in San Francisco, California, which also serves as a clinical center. The Company has additional clinical centers in Deerfield, Illinois and Houston, Texas and a manufacturing facility in Cypress, California. The Company has wholly-owned subsidiaries in the United Kingdom, Singapore and Japan. The Company manages its operations as a single operating segment. The Company derives substantially all of its revenue and maintains substantially all of its assets in the United States. The Company provides ambulatory cardiac rhythm monitoring services that are regulated by the Centers for Medicare and Medicaid Services (“CMS”) utilizing the Company's medical device technology at its clinical centers, supporting the physicians who diagnose and treat cardiac arrhythmias.
2. 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 (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (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, 2021, and related disclosures, have been derived from the audited consolidated financial statements at that date but do 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 condensed consolidated financial information. The results of operations for the three and nine months ended September 30, 2022, are not necessarily indicative of the results to be expected for the year ending December 31, 2022, 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, 2021, included in the Company’s annual report on Form 10-K, filed with the SEC on February 28, 2022.

Risks and Uncertainties

Macroeconomic Factors and the Effects of the COVID-19 Pandemic

As a result of the COVID-19 pandemic and macroeconomic factors, the Company has experienced business disruptions affecting the availability and cost of materials, which has impacted its supply chain and reduced margins. While the Company has continued to deliver its Zio service by operating with remote employees and essential employees on site, any government mandates could further impact the Company's ability to provide its Zio service effectively, and could impede the progress of all ongoing initiatives. Appropriate social distancing techniques and other measures at the Company's facilities have been implemented for employees who are required by job scope or who have chosen to return to the Company’s facilities.

The Company's remote work arrangements resulting from the COVID-19 pandemic and subsequent decision to pursue a sublease for its San Francisco headquarters resulted in an impairment of its right of use asset and related leasehold improvements and furniture, and the Company may incur additional impairment charges related to real property lease agreements.

The Company is continuously reviewing its liquidity and anticipated 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, 2022, the Company is in compliance with its debt covenants.

7

IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Macroeconomic factors have contributed 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 the Company has undertaken to address financial and operational challenges faced by the Company's customers. This impact is having a material, adverse impact on liquidity, capital resources, supply chain, operations and business and those of the third parties on which the Company relies, and could worsen over time. In addition, the extent to which the COVID-19 pandemic impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions to contain the COVID-19 pandemic or treat its impact, among others. The full extent of potential delays or impacts on the business, financial condition, cash flows and results of operations remains unknown.

Reimbursement

Government payors may change their coverage and reimbursement policies, as well as payment amounts, in a way that would prevent or limit reimbursement for the Company’s Zio service, which would significantly harm the Company’s business. Government and other third-party payors require the Company to report the service for which it is seeking reimbursement by using a Current Procedural Terminology ("CPT") code-set maintained by the American Medical Association (“AMA”). For Zio XT, the Company had historically utilized temporary CPT codes (or Category III CPT codes), used for newly introduced technologies specific to its category of diagnostic monitoring. The process to convert temporary Category III CPT codes to permanent Category I CPT codes is governed by the AMA and CMS.

Determinations of which products or services will be eligible for reimbursement by Medicare can be developed at the national level through a national coverage determination (“NCD”) issued by CMS or at the local level through a local coverage determination (“LCD”), issued by one or more of the regional Medicare Administrative Contractors (“MACs”), who are private contractors that process and pay claims on behalf of CMS for different geographic regions. In the absence of a specific NCD, as has historically been the case with the Zio XT service, the MAC with jurisdiction over a specific geographic region will have the discretion to issue an LCD. The Company’s Zio service may be eligible for reimbursement at the rates set by the regional MACs until CMS establishes national payment rates for the CPT codes that the Company uses to seek reimbursement for the Zio XT service.

On October 25, 2019, the AMA’s CPT Editorial Panel established eight new Category I CPT codes that are applicable to the Zio XT service and took effect on January 1, 2021. Category I CPT codes 93241 through 93248 are split between two sets of four codes with rates tied to those codes for (i) wear-time of greater than 48 hours and up to 7 days, and (ii) greater than 7 days and up to 15 days. The Company primarily relies on CPT codes 93243 (for wear-time of greater than 48 hours and up to 7 days) and 93247 (for wear-time of greater than 7 days and up to 15 days) to seek reimbursement for its Zio XT service. In November 2021, CMS published the Calendar Year 2022 Medicare Physician Fee Schedule Final Rule (the “2022 Final Rule”). In the 2022 Final Rule, CMS did not establish national pricing for Calendar Year 2022 for Category I CPT codes 93241, 93243, 93245 and 93247, which include the two CPT codes upon which the Company primarily relies for its Zio XT service. Instead, CMS designated these for contractor pricing in Calendar Year 2022, which meant that prices would be set regionally by each MAC.

In January 2022, Novitas Solutions, the MAC which covers the region where the Company’s independent diagnostic testing facility ("IDTF") in Houston, Texas is located, updated reimbursement rates for CPT codes 93243 and 93247 for its jurisdiction to $223 and $233, respectively. These updated rates were retroactive to January 1, 2022. These rates were higher than the rates posted by Novitas in 2021, but continue to be significantly below historical Medicare rates for the Company’s Zio XT service. In April 2022, National Government Services ("NGS"), the MAC which covers the region where the Company’s IDTF in Deerfield, Illinois is located, updated reimbursement rates for CPT codes 93243 and 93247 for its jurisdiction to $335 and $347, respectively. These updated rates were retroactive to January 1, 2022. These rates are higher than the historical Medicare rates for the Company’s Zio XT service.

On November 2, 2022, CMS released its Calendar Year 2023 Medicare Physician Fee Schedule (“MPFS”) final rule (the “2023 Final Rule”) for publication in the Federal Register on November 18, 2022. The 2023 Final Rule updates payment policies, payment rates, and other provisions for services furnished on or after January 1, 2023, including rates related to the Category I CPT codes for long-term electrocardiogram (“ECG”) monitoring and recording that the Company uses to seek reimbursement for its Zio XT service.

8

IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Specifically, CMS finalized relative value units for CPT codes 93247 (for wear-time greater than 7 days and up to 15 days) and 93243 (for wear-time greater than 48 hours up to 7 days). CMS also established a Calendar Year 2023 “Conversion Factor” that, collectively with the Medicare payment reduction (sequestration) and the sequestration under the Statutory Pay-As-You-Go Act of 2010, the Company interprets as reflecting national reimbursement rates of $224 and $213 for CPT codes 93247 and 93243 codes, respectively. Based on the Calendar Year 2023 Geographic Practice Cost Index modifiers in the 2023 Final Rule that are applicable to the locations of the Company’s Medicare-enrolled IDTFs in Deerfield, Illinois, Houston, Texas, and San Francisco, California, the Company estimates the applicable reimbursement rates could range from $227 to $307 for CPT code 93247 and $216 to $292 for CPT code 93243. The Company remains engaged with CMS and the Medicare Administrative Contractors (“MACs”) to advocate for national rates that reflect the full value of long-term ECG monitoring to enable appropriate access and the availability of quality healthcare services for the benefit of the Company's patients. The Company cannot provide certainty at this time on the potential outcome of further discussions with CMS or the MACs or on the timing of any additional action to be taken.

Given the evolving nature of the healthcare industry and ongoing healthcare cost reforms, the Company is, and will continue to be, subject to changes to the level of Medicare coverage and reimbursement for its Zio service, and unfavorable coverage determinations at the national or local level could adversely affect its business and results of operations.

Further, the establishment of national Medicare rates could cause some commercial third-party payors to reduce their reimbursement rates for the Zio XT service to be consistent with the Medicare rates. Although a large majority of commercial customers have re-contracted the Zio XT service at pre-existing rates since the establishment of the Category I long-term ECG monitoring codes on January 1, 2021, the Company believes commercial customers may apply downward pressure on their rates to align with the Medicare rates.

As a result of the CPT code changes that took effect January 1, 2021, the number of claims from the first half of 2021, which contained differences between the submitted price and reimbursement rate and overall denials, increased significantly compared to the Company’s historical experience as a result of CPT code transition issues with the payors. The Company continues to work with the payors to collect on these claims, however, the collection cycle for these claims is significantly longer than usual and may lead to higher write-offs of doubtful accounts for those periods and negatively impact the Company’s results of operations.

If the Company is unable to achieve a level of revenues adequate to support its cost structure, or is unable to reduce its overall cost structure, this would raise substantial doubts about its ability to continue as a going concern.

Supply Chain Constraints

Economies worldwide have also seen indirect COVID-19 pandemic related disruptions, including supply chain impacts, material inflation, and labor constraints in certain markets and geographies. Such economic disruption has had an adverse effect on the Company's business environment as increased lead times and component shortages have resulted in higher inventory costs. While the Company has increased inventory safety stock levels to help mitigate the delays and disruptions in supply, the Company cannot be certain that any prolonged, intensified, or worsened effect from the COVID-19 pandemic would not further impact its supply chain.

Use of Estimates

The preparation of the 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. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, contractual allowances, 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 incremental borrowing rate for operating leases, accounting for income taxes, impairment of right-of-use assets ("ROU assets"), and various inputs used in estimating stock-based compensation. Certain of these estimates are impacted by uncertainties surrounding COVID-19, such as revenue recognition, contractual allowances for revenue, allowance for doubtful accounts, and stock-based compensation. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that management believes are reasonable under the circumstances, including assumptions as to future events. Actual results may differ from those estimates.

9

IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
For further details on estimates used to calculate the impairment on ROU assets, see Note 6. Impairment and Restructuring Charges included in the notes to the unaudited condensed consolidated financial statements.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net cash flows that 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 arising from the asset.

Any impairments to right of use assets, leasehold improvements, or other assets as a result of a sublease or other similar action are initially recognized when a decision to take such action is made and recorded as an operating expense. Similar to other long-lived assets, management tests ROU assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. For ROU assets, such circumstances may include subleases that do not fully recover the costs of the associated leases or commitments to sublease a property. For the three months ended September 30, 2022, the Company has not recorded any long-lived asset impairment charges. For the nine months ended September 30, 2022, the Company recorded $23.2 million of long-lived asset impairment charges in the unaudited condensed consolidated statement of operations. See Note 6. Impairment and Restructuring Charges included in the notes to the unaudited condensed consolidated financial statements.

Accounts Receivable, Allowance for Doubtful Accounts and Contractual Allowances

Accounts receivable include amounts due to the Company from healthcare institutions, third-party payors, and government payors and their related patients, due to the Company's normal business activities. Accounts receivable is reported on the consolidated balance sheets net of an estimated allowance for doubtful accounts and contractual allowances.

The Company establishes an allowance for doubtful accounts for estimated uncollectible receivables based on its assessment of the collectability of customer accounts and recognizes the provision as a component of selling, general and administrative expenses in the condensed consolidated statements of operations. The Company records a provision as a contractual allowance based on the estimated differences between contracted amounts and expected collection rates. Such provisions are based on the Company's historical experience and are reported as a reduction 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 current economic conditions that may affect a customer’s ability to pay.

The Company submitted the majority of Zio XT claims from the first and second quarter of 2021 on a delayed basis due to the transition from Category III CPT codes to Category I CPT codes and uncertainty over reimbursement rates. Claims were being held due to a combination of negotiations with payors and administrative delays in processing payments. Most of the held claims were released and submitted by the end of the second quarter of 2021. For the contracted portfolio, once submitted, the number of claims from the first half of 2021 which contained differences between the submitted price and reimbursement rate and overall denials increased significantly compared to its historical experience as a result of CPT code transition issues with the payors. The Company continues to work with the payors to collect on these claims, and the collection cycle for these claims is significantly longer than usual. This makes the timing of the Company's collections more difficult to predict. While the Company believes it has properly estimated the impact to its contractual allowances and allowance for doubtful accounts, inherent uncertainty caused by the longer-collection cycle and claims adjudication process could result in additional provisions for contractual allowances and doubtful accounts which would negatively impact the Company's results of operations in future periods. As of September 30, 2022, uncollected claims as a result of the CPT code transition were $11.5 million, net of contractual allowances.






10

IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
The following table presents the changes in the allowance for doubtful accounts (in thousands):
Nine Months Ended
September 30, 2022
Year Ended
December 31, 2021
Nine Months Ended
September 30, 2021
Balance, beginning of period$14,012 $12,711 $12,711 
Add: provision for doubtful accounts12,244 9,615 5,884 
Add (less): write-offs, net of recoveries and other adjustments17 (8,314)(6,484)
Balance, end of period$26,273 $14,012 $12,111 
The following table presents the changes in the contractual allowance (in thousands):
Nine Months Ended
September 30, 2022
Year Ended
December 31, 2021
Nine Months Ended
September 30, 2021
Balance, beginning of period$31,274 $21,281 $21,281 
Add: provision for contractual allowances31,534 27,459 18,051 
Less: realized contractual adjustments(259)(17,466)(11,524)
Balance, end of period$62,549 $31,274 $27,808 
Concentrations of 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 balances 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, U.S. government securities, corporate notes and 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 based 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 customer’s ability to pay. CMS accounted for approximately 26% and 24% of the Company's revenue for the three and nine months ended September 30, 2022, respectively, and 15% and 14% of the Company's revenue for each of the three and nine months ended September 30, 2021, respectively. CMS accounted for 20% and 8% of accounts receivable at September 30, 2022 and December 31, 2021, respectively.
Revenue
Revenue Recognition

The Company’s revenue is generated primarily from the provision of its ambulatory cardiac rhythm monitoring service, the Zio XT service. The Zio XT service is an ambulatory cardiac rhythm monitoring service that has a patient wear period of up to 14 days and is billable when the monitoring reports are delivered to the healthcare provider, which is also when the service is complete, and the Company recognizes revenue. The time from when the patient has the Zio XT device applied to the time the report is posted is generally around 25 days. The Company has concluded that the Zio XT service is a single performance obligation on the basis that the customer cannot benefit from each component of the service on its own or together with other resources that are readily available to the customer.

11

IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
The Zio AT service is an ambulatory cardiac rhythm monitoring service that is provided during the patient wear period. During the patient wear period, the Zio AT monitoring system is intended to capture, analyze and report symptomatic and asymptomatic cardiac events and continuous ECG information. While continuously recording patient ECG data, both patient-triggered and automatically detected arrhythmia events are transmitted to a monitoring center for review and reporting according to physician-selected notification criteria. After wear, a final report is generated based on beat-to-beat information from the entire ECG recording. The Zio AT service revenue is recognized over the patient wear period and delivery of electronic Zio reports with two performance obligations.

The Company recognizes as revenue the amount of consideration to which it expects to be entitled in exchange for performing the Zio service. The consideration to which the Company is entitled varies by portfolio, as further defined below, and includes estimates that require significant judgment by management. A unique aspect of the healthcare industry is multiple parties' involvement in the service transaction. In addition to any payment made by the patient, often a third-party, such as 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: (i) payment history from both payors and patient out-of-pocket costs; (ii) payor coverage; (iii) whether there is a contract between the payor or healthcare institution and the Company; (iv) historical amount received for the service; and (v) any current developments or changes that could impact reimbursement and healthcare institution payments. Certain of these factors are forms of variable consideration which are only included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
A summary of the payment arrangements with third-party payors and healthcare institutions is as follows:
Contracted third-party payors – The Company has contracts with negotiated prices for services provided to patients with commercial healthcare insurance coverage.
CMS – The Company has enrolled as an independent diagnostic testing facility with regional Medicare Administrative Contractors and will receive reimbursement per the relevant national or contractor-priced CPT code rates for the CMS-covered services rendered to the patient.
Non-contracted third-party payors – Non-contracted commercial and government payors often reimburse out-of-network rates provided under the relevant CPT codes on a case-by-case basis. The transaction price used for determining revenue recognition is based on factors including an average of the Company’s historical collection experience for its non-contracted services. This rate is reviewed at least quarterly.
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.
The Company is utilizing the portfolio approach practical expedient under Accounting Standard Codification ("ASC") 606, Revenue from Contracts with Customers, for revenue recognition whereby services provided under each of the above 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 not materially different than if accounting for revenue on a contract-by-contract basis.

12

IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
For 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 negotiated rates, and the Company has 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 Company’s noncompliance with a material term of such contracts may result in a denial of the claim. The Company accounts for denied claims as a form of variable consideration that is included as a reduction to the transaction price recognized as revenue. The Company estimates the denied claims, which require management judgment. The estimated denied claims are based on historical information, and judgment 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 and 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 denied claims, will be received. Contracted payors may require that the Company bill 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 includes the historical period utilized, at the time revenue is recognized, with such provisions presented as bad debt expense within the selling, general and administrative line item of the consolidated statement of operations. Adjustments to these estimates for actual experience are also recorded as an adjustment to bad debt expense.
As discussed in the Accounts Receivable, Allowance for Doubtful Accounts and Contractual Allowances section above, the inherent uncertainty caused by longer-collection cycle and claims adjudication process related to delays in submission because of the CPT code transition in 2021 could result in additional provisions for contractual allowances and doubtful accounts which would negatively impact the Company's results of operations in future periods.    
For non-contracted portfolios, the Company is providing an implicit price concession due to the lack of a contracted rate with the underlying payor, the result of which requires the Company to estimate the transaction price based on historical cash collections utilizing the expected value method. All subsequent adjustments to the transaction price are recorded as an adjustment to revenue.
For healthcare institutions, the transaction price is determined based on negotiated rates, and the Company has historical experience collecting substantially all of these contracted rates. Historical cash collection indicates that it is probable that substantially all of the transaction price will be received. As such, the Company is not providing an implicit price concession but, rather, has chosen to accept the risk of default, and any subsequent uncollected amounts are recorded as bad debt expense.

Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers by payor type. The Company believes these categories aggregate the payor types by nature, amount, timing and uncertainty of its revenue streams. Disaggregated revenue by payor type and major service line for three and nine months ended September 30, 2022 and September 30, 2021 were as follows (in thousands):
Three Months Ended
 September 30,
Nine Months Ended
 September 30,
2022202120222021
Contracted third-party payors $56,016 $49,944 $163,218 $146,169 
Non-contracted third-party payors5,723 7,350 17,380 19,175 
Centers for Medicare and Medicaid Services27,253 12,411 72,074 33,577 
Healthcare institutions14,883 15,727 45,632 42,100 
Total$103,875 $85,432 $298,304 $241,021 
Revenue generated from the United States comprised substantially all of the Company's revenue. No other country comprised 10% or greater of the Company's revenue during each of the three and nine months ended September 30, 2022 and 2021.

13

IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Contract Liabilities
ASC 606, Revenue from Contracts with Customers, requires an entity to present a revenue contract as a contract liability when the Company has an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer, or an amount of consideration from the customer is due and unconditional (whichever is earlier).
Certain of the Company’s customers pay the Company directly for the Zio XT service upon shipment of devices. Such advance payments are contract liabilities and are recorded as deferred revenue on the unaudited condensed consolidated balance sheets and revenue is recognized when reports are delivered to the healthcare provider. 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. During the nine months ended September 30, 2021, $0.9 million included in the contract liability balance at the beginning of 2021 was recognized as revenue.

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 practical expedient, ASC 340, permits the Company to immediately expense contract acquisition costs, as the asset that would have resulted from capitalizing these costs will be amortized in one year or less.

Stock-based Compensation

The Company measures its stock-based awards made to employees based on the estimated fair values of the awards as of the grant date. The fair value of market condition awards is determined using the Monte-Carlo option pricing model and the fair value of stock options is determined using the Black-Scholes option pricing model. 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’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 recognized as compensation expense on a straight-line basis over the requisite service period.

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


14

IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
3. Cash Equivalents and Investments
The fair value of cash equivalents and short-term investments at September 30, 2022 and December 31, 2021, were as follows (in thousands):
September 30, 2022
Amortized
Cost
Gross UnrealizedEstimated
Fair Value
GainsLosses
Money market funds$24,716 $ $ $24,716 
U.S. government securities132,997 3 (684)132,316 
Total cash equivalents and short-term investments$157,713 $3 $(684)$157,032 
Classified as:
Cash equivalents$24,716 
Short-term investments132,316 
Total cash equivalents and short-term investments$157,032 
December 31, 2021
Amortized
Cost
Gross UnrealizedEstimated
Fair Value
GainsLosses
Money market funds$110,137 $ $ $110,137 
U.S. government securities50,490  (46)50,444 
Corporate notes31,158  (15)31,143 
Commercial paper29,982   29,982 
Total cash equivalents and short-term investments$221,767 $ $(61)$221,706 
Classified as:
Cash equivalents$110,137 
Short-term investments111,569 
Total cash equivalents and short-term investments$221,706 
The Company's cash equivalents and short-term investments are due within one year.
There were no short-term investments that were in an unrealized loss position for more than twelve months as of September 30, 2022. Unrealized losses recognized in other comprehensive loss and amounts reclassified to net loss from short-term investments were not material for the three and nine months ended September 30, 2022 and September 30, 2021. Short-term investments held as of September 30, 2022, had a weighted average maturity of 115 days. As of September 30, 2022, the short-term investments in an unrealized loss position are primarily U.S. Treasury Bills of varying maturities, which are sensitive to changes in the yield curve and other market conditions. As of September 30, 2022, the Company does not intend to sell, and it is not more likely than not that it will be required to sell, the securities in a loss position before the market values recover or the underlying cash flows have been received, and there is no indication of default on interest or principal payments for any of the Company's debt securities.
4. 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.
15

IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
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 and government securities 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.
The Company's interest-bearing obligation is classified as a Level 1 input. As of September 30, 2022 the fair value of the Company’s outstanding interest-bearing obligation approximated the carrying value of each $34.9 million. As of December 31, 2021 the fair value of the Company’s outstanding interest-bearing obligation approximated the carrying value of each $21.4 million.
The Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value.
The following tables present the fair value of the Company’s financial assets determined using the inputs defined above (in thousands).
September 30, 2022
Level 1Level 2Level 3Total
Assets
Money market funds$24,716 $ $ $24,716 
U.S. government securities 132,316  132,316 
Total$24,716 $132,316 $ $157,032 

December 31, 2021
Level 1Level 2Level 3Total
Assets
Money market funds$110,137 $ $ $110,137 
U.S. government securities 50,444  50,444 
Corporate notes 31,143  31,143 
Commercial paper 29,982  29,982 
Total$110,137 $111,569 $ $221,706 

16

IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
5. Balance Sheet Components
Inventory and Other Assets
Inventory consisted of the following (in thousands):
September 30,
2022
December 31,
2021
Raw materials$8,195 $5,101 
Finished goods6,257 5,167 
Total$14,452 $10,268 
    
The Company uses PCBAs in each wearable Zio XT and Zio AT monitor as well as in the wireless gateway used in conjunction with the Zio AT monitor. The PCBAs are used numerous times and have useful lives beyond one year. Each time a PCBA is used in a wearable Zio XT monitor or a PCBA and wireless gateway are used with Zio AT monitor, a portion of the cost of the PCBA and gateway are recorded as a cost of revenue in the unaudited condensed consolidated statements of operations. PCBAs, which are recorded as other assets in the unaudited condensed consolidated balance sheets, were $17.4 million and $13.9 million as of September 30, 2022, and December 31, 2021, respectively.

Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
September 30,
2022
December 31,
2021
Laboratory and manufacturing equipment$7,445 $5,029 
Computer equipment and software2,540 2,353 
Furniture and fixtures4,109 4,174 
Leasehold improvements23,340 20,431 
Internal-use software66,086 46,661 
Total property and equipment, gross103,520 78,648 
Less: accumulated depreciation and amortization(32,005)(22,704)
Total property and equipment, net$71,515 $55,944 

During the nine months ended September 30, 2022, internal-use-software increased by $19.4 million. This increase relates to the enhancements to the Company’s core technology, products and services and AI, as well as investment in future technology, such as the Zio Monitor, the Company's new biosensor technology platform, and the clinically-integrated ZEUS System for the Zio Watch.
Depreciation and amortization expense was $3.4 million and $9.9 million for the three and nine months ended September 30, 2022, and $2.5 million and $6.7 million for the three and nine months ended September 30, 2021, respectively. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. During the nine months ended September 30, 2022, the Company recorded $2.2 million and $0.5 million in impairment charges to leasehold improvements and furniture and fixtures disclosed above, respectively, in connection with its decision to sublease its San Francisco headquarters. See Note 6. Impairment and Restructuring included in the notes to the unaudited condensed consolidated financial statements.
The Company did not record any impairment charges during the three months ended September 30, 2022.
17

IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
September 30,
2022
December 31,
2021
Accrued payroll and related expenses$32,463 $34,484 
Accrued vacation7,997 7,431 
Accrued professional services fees6,251 1,724 
Claims payable3,779 2,988 
Accrued ESPP contributions2,612 1,002 
Other7,162 3,857 
Total accrued liabilities$60,264 $51,486 

Restructuring liability of $0.4 million as of September 30, 2022 is included in other accrued liabilities above. For further information, refer to Note 6. Impairment and Restructuring included in the notes to the unaudited condensed consolidated financial statements.
6. Impairment and Restructuring Charges
In February 2022, the Company's board of directors (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 of $3.4 million during the nine months ended September 30, 2022. 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 right of use asset and related leasehold improvements and furniture and fixtures in the amount of $23.2 million during the nine months ended September 30, 2022. The Company'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 

Restructuring

The following table provides a summary of changes in the restructuring liabilities associated with the Restructuring Plan (in thousands):


December 31,
2021
ChargesCash PaymentsSeptember 30,
2022
Employee severance
$  $3,444  $(3,050) $394 
Total $ $3,444 $(3,050)$394 


The Company did not incur restructuring charges during the three months ended September 30, 2022.


18

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

The following table presents impairment charges recorded during the nine months ended September 30, 2022:

Nine Months Ended
September 30, 2022
ROU asset$20,451 
Leasehold improvements2,211 
Furniture and fixtures502 
Total$23,164 
There was no impairment during the three months ended September 30, 2022.

The Company has engaged a leasing broker and has formalized a marketing plan for the San Francisco office market. The sublease market for commercial office space is currently very challenging in the San Francisco area due to lower demand for leased office space as most companies have adjusted to allowing their employees to work from home during and after the COVID-19 pandemic that has persisted throughout 2020 and 2021. The Company expects that it will only be able to sublease a portion of its existing office space at a rate below the amount that it is currently paying.

Significant judgment and estimates are required in assessing impairment of ROU assets, including identifying whether events or changes in circumstances require an impairment assessment, estimating future cash flows, and determining appropriate discount rates.

For further details on the Company's leases, refer to Note 7. Commitments and Contingencies included in the notes to the unaudited condensed consolidated financial statements.
7. Commitments and Contingencies
Lease Arrangements

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

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












19

IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
As of September 30, 2022, maturities of operating lease liabilities were as follows (in thousands):
Year ending December 31:
2022 (remainder of the year)$3,449 
202313,958 
202414,253 
202514,645 
202615,071 
Thereafter71,397 
Total lease payments132,773 
Less: imputed interest(38,372)
Total lease liabilities$94,401 
The weighted average remaining lease term of the Company's operating leases as of September 30, 2022, was 8.90 years. The weighted average discount rate of the Company's operating leases was 7.28% as of September 30, 2022.
Legal Proceedings
From time to time, the Company is involved in claims and legal proceedings or investigations that arise in the ordinary course of business. Such matters could have an adverse impact on the Company's reputation, business, and financial condition and divert the attention of its management from the operation of its business. These matters are subject to many uncertainties and outcomes that are not predictable.
On February 1, 2021, a putative class action lawsuit was filed in the United States District Court for the Northern District of California alleging that the Company and its former Chief Executive Officer, Kevin M. King, violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder (“Securities Class Action Lawsuit”). On August 2, 2021, the lead plaintiff filed an amended complaint and filed a further amended complaint on September 24, 2021. The amended complaint names as defendants, in addition to the Company and Mr. King, the Company's former Chief Executive Officer, Michael J. Coyle, and former Chief Financial Officer and current Chief Operating Officer, Douglas J. Devine. The purported class in the amended complaint includes all persons who purchased or acquired the Company's common stock between August 4, 2020 and July 13, 2021, and seeks unspecified damages purportedly sustained by the class. On October 27, 2021, the Company filed a motion to dismiss the amended complaint. The motion to dismiss was fully briefed, and the Court held a hearing on the motion on February 4, 2022, after which the Court took the matter under submission. On March 31, 2022, the Court issued an order granting the Company’s motion to dismiss the Securities Class Action Lawsuit, without allowing the plaintiff further leave to amend, and entered judgment in favor of the Company and the other defendants. On April 29, 2022, the plaintiff that filed the initial complaint in the action filed a notice of appeal. On September 7, 2022, the plaintiff-appellant filed its opening brief, and the Company filed a motion to dismiss for lack of standing to appeal and Article III standing on September 27, 2022. On October 17, 2022, the plaintiff filed its response to the Company's motion to dismiss, and the Company filed its reply in support of the motion to dismiss on November 3, 2022. The Company believes the class action to be without merit and plan to defend itself vigorously.

On March 26, 2021, the Company received a grand jury subpoena from the U.S. Attorney’s Office for the Northern District of California requesting information related to communications with the Food and Drug Administration and the Company’s products. On October 14, 2021, the Company received a second subpoena requesting additional information. The Company is cooperating fully and is providing the requested information.
Development Agreement
On September 3, 2019, the Company entered into a Development Collaboration Agreement (the “Development Agreement”) with Verily Life Sciences LLC (“Verily”). The Development Agreement involves joint development and production of intellectual property between the Company and Verily. Each participant has primary responsibility for certain aspects of development and approval, with all processes to be performed at each respective party’s own cost. Costs incurred by the Company in connection with the Development Agreement will be expensed as research and development expense in accordance with ASC 730, Research and Development.

20

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

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

The Development Agreement provides each party with licenses to use certain intellectual property of the other party for development activities in the field of Afib screening, detection, or monitoring. Ownership of developed intellectual property will be allocated to the Company or Verily depending on the subject matter of the underlying developed intellectual property, and, for certain subject matter, shall be jointly owned.
Indemnifications
In the ordinary course of business, the Company enters into agreements pursuant to which it agrees to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including losses arising out of the breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by applicable law. The Company currently has directors’ and officers’ insurance. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions, and believes that the estimated fair value of these indemnification obligations is not material and it has not accrued any amounts for these obligations.
8. Debt
Bank Debt
In October 2018, the Company entered into the Third Amended and Restated Loan and Security Agreement with SVB (“SVB Loan Agreement”). 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 loan 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 be borrowed from time to time at the Company’s option, in increments of at least $10.0 million, through December 31, 2023. The Company shall pay interest only on the 2022 Term Loans until April 1, 2025, when it shall 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 shall accrue at a floating per annum rate equal to the greater of: (A) the Prime Rate plus 0.25%; and (B) 3.50%. The Company is also required to pay fees on any prepayment of the 2022 Term Loans, ranging from 3.0% to 1.0% 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.

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IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
The 2022 Amendment also amended the terms of the revolving credit line under the SVB Loan Agreement, which provided for an aggregate principal amount of $25.0 million, 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 and (iii) increase the cash management services sublimit to $15.0 million. Interest charged on the principal amount outstanding under the revolving credit line shall accrue at a floating per annum rate equal to the greater of (A) the Prime Rate plus 0.25% and (B) 3.50%. The Company is required to pay an annual fee equal to 0.15% of the revolving credit line. As of September 30, 2022, no loans were outstanding under the revolving credit line.

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 1.15 to 1.0 or minimum adjusted EBITDA of at least $15.0 million. The Company was in compliance with its loan covenants as of September 30, 2022.

Future minimum payments

Future minimum payments under the Amendment to the SVB Loan Agreement as of September 30, 2022, are as follows (in thousands):

Year Ending December 31,
2022 (remainder of the year)$560 
20232,307 
20242,313 
202515,142 
202618,412 
Thereafter4,423 
Total43,157 
Less: Amount representing interest(8,157)
Less: Debt issuance costs(69)
Total carrying value$34,931 
Reported as:
Debt, noncurrent portion$34,931 

9. Income Taxes

The Company recorded a tax provision related to its U.S. state taxes and the U.K. subsidiary during the three and nine months ended September 30, 2022, and September 30, 2021. 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,