iRhythm Technologies, Inc. [IRTC] Filings

10-Q 1 irtc-20230930.htm 10-Q irtc-20230930

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, 2023


☐			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

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

699 8th Street Suite 600

San Francisco,

California

94103

(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 class	Trading Symbol	Name of each exchange on which registered
Common Stock, Par Value $0.001 Per Share	IRTC	The 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 every Interactive Data File required to be submitted 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 filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

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 23, 2023, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 30,650,758.

IRHYTHM TECHNOLOGIES, INC.

TABLE OF CONTENTS


			Page No
PART I. FINANCIAL INFORMATION			1

Item 1. Financial Statements (Unaudited):			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			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			32

PART II. OTHER INFORMATION			33

Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			63
Item 3. Defaults Upon Senior Securities			63
Item 4. Mine Safety Disclosures			63
Item 5. Other Information			63
Item 6. Exhibits			63

Exhibit Index			64

Signatures			65

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (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, are 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 services, 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 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;

•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 systems and services;

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

•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 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.

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 Securities 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.

iii

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Balance Sheets

(in thousands)


	September 30, 2023		December 31, 2022
(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	47,478	$	78,832
Marketable securities	110,995		134,312
Accounts receivable, net	50,067		49,918
Inventory	13,648		15,155
Prepaid expenses and other current assets	12,104		10,555
Total current assets	234,292		288,772
Property and equipment, net	96,668		75,670
Operating lease right-of-use assets	60,899		60,666
Goodwill	862		862
Other assets	47,048		22,252
Total assets	$	439,769	$	448,222
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	7,212	$	7,517
Accrued liabilities	76,631		65,497
Deferred revenue	3,383		3,051
Operating lease liabilities, current portion	15,065		13,031
Total current liabilities	102,291		89,096
Debt, noncurrent portion	34,946		34,935
Other noncurrent liabilities	1,013		1,307
Operating lease liabilities, noncurrent portion	81,724		83,072
Total liabilities	219,974		208,410
Commitments and contingencies (Note 8)
Stockholders’ equity:
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	31		28
Additional paid-in capital	826,686		762,380
Accumulated other comprehensive loss	(15)		(396)
Accumulated deficit	(606,907)		(522,200)
Total stockholders’ equity	219,795		239,812
Total liabilities and stockholders’ equity	$	439,769	$	448,222

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

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
(unaudited)
Revenue, net	$	124,604	$	103,875	$	360,170	$	298,304
Cost of revenue	42,130		32,954		115,790		95,379
Gross profit	82,474		70,921		244,380		202,925
Operating expenses:
Research and development	16,309		11,448		44,828		33,935
Selling, general and administrative	93,768		80,559		285,531		235,468
Impairment and restructuring charges	—		—		—		26,608
Total operating expenses	110,077		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, net	1,609		365		4,476		450
Loss before income taxes	(26,921)		(21,335)		(84,212)		(95,761)
Income tax provision	195		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 diluted	30,607		30,055		30,470		29,837

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

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
(unaudited)
Net loss	$	(27,116)	$	(21,451)	$	(84,707)	$	(95,957)
Other comprehensive income (loss):
Net change in unrealized gains (losses) from marketable securities	63		(98)		351		(620)
Cumulative translation adjustment	74		—		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.

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)


	Nine Months Ended September 30,
	2023		2022
(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 amortization	11,434		9,930
Stock-based compensation	53,358		41,946
Amortization of premium and accretion of discounts, net	(3,627)		216
Provision for doubtful accounts and contractual allowances	51,655		43,778
Amortization of operating lease right-of-use assets	4,243		4,865
Impairment charges	—		23,164
Other	(366)		230
Changes in operating assets and liabilities:
Accounts receivable	(51,804)		(57,882)
Inventory	1,885		(4,375)
Prepaid expenses and other current assets	(1,549)		2,367
Other assets	(21,796)		(4,099)
Accounts payable	(305)		(3,105)
Accrued liabilities	10,910		8,072
Deferred revenue	332		(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 securities	136,500		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 plans	5,352		10,034
Payments of issuance costs for long-term debt	—		(77)
Net cash provided by financing activities	5,352		23,568
Effect of exchange rate changes	32		—
Net decrease in cash and cash equivalents	(31,354)		(56,340)
Cash and cash equivalents, beginning of period	78,832		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

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

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	Shares	Amount
(unaudited)
Balance at December 31, 2021	29,494	$	27	$	685,594	$	(406,045)	$	(61)	$	279,515
Issuance of common stock in connection with employee equity incentive plans, net	275	—		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, 2022	29,769	$	27	$	701,822	$	(456,654)	$	(353)	$	244,842
Issuance of common stock in connection with employee equity incentive plans, net	195	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, 2022	29,964	$	28	$	725,748	$	(480,551)	$	(583)	$	244,642
Issuance of common stock in connection with employee equity incentive plans, net	131	—		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, 2022	30,094	$	28	$	741,879	$	(502,002)	$	(681)	$	239,224

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

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	Shares	Amount
(unaudited)
Balance at December 31, 2022	30,193	$	28	$	762,380	$	(522,200)	$	(396)	$	239,812
Issuance of common stock in connection with employee equity incentive plans, net	270	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. 2023	30,463	$	30	$	783,182	$	(561,309)	$	(69)	$	221,834
Issuance of common stock in connection with employee equity incentive plans, net	87	—		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. 2023	30,550	$	30	$	803,792	$	(579,791)	$	(152)	$	223,879
Issuance of common stock in connection with employee equity incentive plans, net	83	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, 2023	30,633	$	31	$	826,686	$	(606,907)	$	(15)	$	219,795

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

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 leading digital healthcare company that creates trusted solutions that detect, predict, and prevent disease. The Company's principal business is the design, development, and commercialization of device-based technology to provide remote cardiac monitoring services that it believes allow clinicians to diagnose certain arrhythmias quicker and with greater efficiency than other services that rely on traditional technology.

Since first receiving clearance from the U.S. Food and Drug 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 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, 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 formed wholly owned subsidiaries in the United Kingdom in March 2016, in Singapore in June 2021, in Japan in June 2022 and in the Philippines in February 2023.

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 (“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 September 30, 2023, 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 unaudited condensed consolidated financial information. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for the year ending December 31, 2023, or for any other interim period or for any other future year.

The accompanying 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, 2022, included in the Company’s Annual Report on Form 10-K, filed with the SEC on February 23, 2023.

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 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 Company 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, 2022. 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 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, 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 commercial payors and government agencies, such as the Centers for Medicare & Medicaid Services (“CMS”). Third-party payors require the Company 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 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 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 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 related monitoring services, and the Company cannot provide certainty that CMS will not reduce these rates in the future, which would adversely affect the Company’s financial results.

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 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 periods presented. 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 ROU assets, and various inputs used in estimating stock-based compensation. Actual results may differ from those estimates.

Accounts Receivable, Allowance for Doubtful Accounts and Contractual Allowances

Accounts receivable includes amounts due to the Company from healthcare institutions, third-party payors, and government payors and their 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 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. The Company records a provision for contractual allowances 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 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 following table presents the changes in the allowance for doubtful accounts (in thousands):


	Nine Months Ended September 30, 2023		Year Ended December 31, 2022		Nine Months Ended September 30, 2022
Balance, beginning of period	$	18,475	$	14,012	$	14,012
Provision for doubtful accounts	12,595		17,191		12,244
Write-offs, net of recoveries and other adjustments	(11,659)		(12,728)		17
Balance, end of period	$	19,411	$	18,475	$	26,273

The following table presents the changes in the contractual allowance (in thousands):


	Nine Months Ended September 30, 2023		Year Ended December 31, 2022		Nine Months Ended September 30, 2022
Balance, beginning of period	$	41,389	$	31,274	$	31,274
Add: provision for contractual adjustments	39,060		41,158		31,534
Less: contractual adjustments	(32,072)		(31,043)		(259)
Balance, end of period	$	48,377	$	41,389	$	62,549

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 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, 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 25% of the Company's revenue for the three and nine months ended September 30, 2023, and 26% and 24% of the Company's revenue for the three and nine months ended September 30, 2022, respectively. CMS accounted for 22% of accounts receivable at September 30, 2023 and December 31, 2022.

Inflationary Risk

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 may experience inflationary pressure affecting freight costs, the cost of the components for the Company’s Zio Services, overhead costs relating to 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 to supply some of its disposable housings, instruments and other materials used to manufacture the Zio patches and the adhesive that binds the Zio 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.

A global semiconductor supply shortage is having 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 end of the wear period, including specific arrhythmia events detected by the ZEUS algorithm. The final step in the Zio Services is the delivery of an electronic Zio report to the prescribing physician with a summary of findings. The Company’s Zio XT services are generally billable when the Zio report is issued to the physician.

The Zio Monitor System is the next generation of the Zio XT System, and is a prescription-only, remote ECG monitoring system that consists of the Zio Monitor patch that records the electric signal from the heart continuously for up to 14 days and the ZEUS System, which supports the capture and analysis of ECG data recorded by the Zio Monitor patch at the end of the wear period, including specific arrhythmia events detected by the ZEUS algorithm. The Company’s Zio Monitor services are generally billable when the Zio report is issued to the physician.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

The Zio AT System is a prescription-only, remote ECG monitoring system that similarly consists of the Zio AT patch that records the electric signal from the heart continuously for up to 14 days and the ZEUS System, but which also incorporates the Zio AT wireless gateway that provides connectivity between the patch and the ZEUS System during the patient wear period. The wireless gateway, slightly larger than a smart phone, is provided to the patient at the time of Zio AT patch application and collects and transmits data from the Zio AT patch to the cloud via a LTE protocol. The Zio AT service revenue is recognized under two performance obligations — the patient wear period and delivery of electronic Zio reports.

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 service, and any current developments or changes that could impact reimbursement and healthcare institution payments. Certain of these factors are forms of variable consideration which are only included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

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

•Contracted third-party payors – 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 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 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.

The Company is utilizing the portfolio approach practical expedient under Accounting Standard Codification ("ASC") 606, Revenue from Contracts with Customers, whereby services provided under each of the above payor types form a separate portfolio. 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.

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.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

The Company makes estimates around the amount of denied claims within a reporting period, a process that requires management judgment. The estimated denied claims are based on historical information, and judgement includes the historical period utilized. 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 denied claims, will be received. 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 includes the historical period utilized, at the time revenue is recognized, with such provisions presented as bad debt expense within the selling, general and administrative line item of the consolidated statements of operations. Adjustments to these estimates for actual experience are also recorded as an adjustment to bad debt expense.

For healthcare institutions, the transaction price is determined based on negotiated rates, and the Company has historical experience collecting substantially all of these contracted rates. Historical cash collections indicate that it is probable that substantially all of the transaction price will be received. As such, 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 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 expected value method. All subsequent changes to the transaction price are recorded as adjustments to revenue.

Stock-Based Compensation

The Company measures the estimated fair values of its restricted stock units (“RSUs”) based on the closing price of the Company's stock on the grant date. For performance-based restricted stock units (“PRSUs”), the Company estimates the fair value based on the closing price of its stock on the grant 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'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 its 2016 Employee Stock Purchase Plan (“ESPP”) based on the fair value at each enrollment date of the offering period using the Black-Scholes-Merton option-pricing model value. The stock-based compensation is reduced by the estimated forfeiture and is expensed on a straight-line basis over the offering period.

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 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 the three 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,
	2023			2022			2023			2022
	Amount		% of Revenue	Amount		% of Revenue	Amount		% of Revenue	Amount		% of Revenue
Contracted third-party payors	$	67,336	54%	$	56,016	54%	$	196,566	55%	$	163,218	55%
Centers for Medicare and Medicaid	31,006		25%	27,253		26%	88,369		25%	72,074		24%
Healthcare institutions	18,065		14%	14,883		14%	52,060		14%	45,632		15%
Non-contracted third-party payors	8,197		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 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, 2023 and 2022.

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 revenue when Zio reports are delivered to the healthcare provider. During the nine months ended September 30, 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 practical expedient, ASC 340 permits the Company to immediately expense contract acquisition costs, because the asset that would have resulted from capitalizing these costs will be amortized in one year or less.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

4. CASH EQUIVALENTS AND MARKETABLE SECURITIES

The fair value of cash equivalents and marketable securities as of September 30, 2023 and December 31, 2022, were as follows (in thousands):


	September 30, 2023
	Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses
Money market funds	$	17,440	$	—	$	—	$	17,440
U.S. government securities	111,038		3		(46)		110,995
Total cash equivalents and marketable securities	$	128,478	$	3	$	(46)	$	128,435
Classified as:
Cash equivalents							$	17,440
Marketable securities							110,995
Total cash equivalents and marketable securities							$	128,435

	December 31, 2022
	Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses
Money market funds	$	24,263	$	—	$	—	$	24,263
U.S. government securities	134,709		12		(409)		134,312
Total cash equivalents and marketable securities	$	158,972	$	12	$	(409)	$	158,575
Classified as:
Cash equivalents							$	24,263
Marketable securities							134,312
Total cash equivalents and marketable securities							$	158,575

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 U.S. 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.

IRHYTHM TECHNOLOGIES, INC.

Notes to the 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 outstanding 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 tables present the fair value of the Company’s financial assets determined using the inputs defined above (in thousands):


	September 30, 2023
	Level 1		Level 2		Level 3		Total
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 1		Level 2		Level 3		Total
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, 2023		December 31, 2022
Raw materials and work-in-process	$	5,962	$	9,338
Finished goods	7,686		5,817
Total	$	13,648	$	15,155

Other Assets

Other assets consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
PCBAs	$	37,980	$	18,599
Cloud computing arrangements	5,223		2,523
Strategic investment	3,000		—
Other	845		1,130
Total	$	47,048	$	22,252

The Company reuses PCBAs in 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.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

During the nine months ended September 30, 2023, PCBAs increased by $19.4 million primarily related to the expanded launch of the Zio Monitor System, as well as additional needs for the Zio XT and Zio AT patches.

Property and Equipment, Net

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


	September 30, 2023		December 31, 2022
Laboratory and manufacturing equipment	$	5,729	$	4,911
Computer equipment and software	2,448		2,315
Furniture and fixtures	4,198		4,119
Leasehold improvements	23,533		23,144
Internal-use software	60,001		44,877
Internal-use software in development	37,482		28,069
Construction in progress	9,655		3,451
Total property and equipment, gross	143,046		110,886
Less: accumulated depreciation and amortization	(46,378)		(35,216)
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, 2023, respectively, and $3.4 million and $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, 2023		December 31, 2022
Accrued payroll and related expenses	$	38,458	$	34,752
Accrued vacation	10,050		8,608
Accrued expenses	13,811		7,006
Claims payable	5,295		4,464
Accrued employee share purchase plan contributions	2,863		1,045
Accrued income and sales taxes	3,071		2,388
Accrued professional services fees	3,083		7,234
Total accrued liabilities	$	76,631	$	65,497

During the year ended December 31, 2022 and the nine months ended September 30, 2023, the Company has 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 September 30, 2023, were $4.0 million of costs related to globalization.

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, 2023, there were no 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 $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 ROU 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 charges	23,164
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 the 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, 2022		Charges		Cash Payments		September 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 research and development activities. During the nine months ended September 30, 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, 2022.

Leases

The Company leases office, manufacturing, and clinical centers under non-cancelable operating leases which expire on various dates through 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 operating lease expenses, generally on a straight-line basis over the lease period.

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.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

In August 2023, the Company entered into a five-year facility lease in 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 two periods of five years 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 $2.1 million as of the lease commencement date.

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


Year Ending December 31:
2023 (remainder of the year)	$	5,497
2024	21,803
2025	21,577
2026	21,304
2027	20,873
Thereafter	38,658
Total lease payments	129,712
Less: imputed interest	(32,923)
Total lease liabilities	$	96,789

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 the 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 documents regarding the Company’s products and services. The Company is cooperating fully on these matters.

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 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.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

9. DEBT

In October 2018, the Company entered into the Third Amended and Restated Loan and Security Agreement (“SVB Loan 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 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 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 (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 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 accrues at a floating per annum rate equal to the greater 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 Company continues to have access to the revolving credit line and letters of credit available pursuant to the SVB Loan Agreement and was in compliance with its loan covenants as of September 30, 2023.

Future minimum payments

Contractual obligations for the 2022 Term Loans comprise principal and interest payments as follows (in thousands):


Year Ending December 31,
2023 (remainder of the year)	$	774
2024	3,114
2025	15,841
2026	18,728
2027	4,440
Total	42,897
Less: Amount representing interest	(7,897)
Less: Debt issuance costs	(54)
Principal payments	$	34,946

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

10. 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, 2023 and 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.

11. STOCKHOLDERS' EQUITY

Common Stock

The Company’s amended and restated certificate of incorporation dated October 25, 2016, as 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 Board, subject to the prior rights of holders of all series of convertible preferred stock outstanding. No dividends were declared through September 30, 2023.

The Company had reserved shares of common stock for issuance as follows (in thousands):


	September 30, 2023	December 31, 2022
Options issued and outstanding	307	328
Unvested RSUs and PRSUs 1	2,747	2,026
Shares available for grant under future stock plans	6,728	7,823
Shares available for future issuance	9,782	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, 2022			7,823
Awards granted 1			(1,317)
Awards forfeited 1			222
Balance as of September 30, 2023			6,728

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.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Restricted Stock 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 Units			Performance Based Restricted Stock Units and Market-Based Units
	Shares Underlying RSUs	Weighted Average Grant Date Fair Value		Shares Underlying PRSUs 1	Weighted Average Grant Date Fair Value
Balance as of December 31, 2022	1,465	$	111.16	561	$	120.22
Granted	853	116.49		464	124.56
Vested	(349)	118.30		(24)	107.05
Forfeited	(129)	119.60		(93)	127.04
Balance as of September 30, 2023	1,839	$	111.69	908	$	122.09

1Based 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.

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 expects to recognize over a weighted average remaining period of 1.9 years. Aggregate intrinsic value of the RSUs 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 expects to recognize over a weighted average remaining period of 2.3 years. Aggregate intrinsic value of the PRSUs was $85.6 million as of September 30, 2023.

PRSUs and Market-based RSUs

The Company grants 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 minimum performance threshold of 15% to earn 50.0% of target, and a maximum threshold of 25% achieved to earn 200.0% of target. These February 2023 awards are subject to the recipient'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 TSR was based on the expected 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.

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, 2023 (in thousands, except weighted average exercise price per share and years):


		Options Outstanding
	Options Outstanding	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (years)	Aggregate Intrinsic Value
Balance as of December 31, 2022	328	$	43.00	4.43	$	16,635
Options exercised	(21)	53.03
Balance as of September 30, 2023	307	42.32		3.66	15,964
Options exercisable – September 30, 2023	307	$	42.32	3.66	$	15,964

There have been no options granted since December 31, 2019. As of September 30, 2023, the options were fully vested.

Employee Stock Purchase Plan

In October 2016, the Board and stockholders approved the 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 12 month offering periods that contain two six-month purchase periods. At the end of each purchase period, employees 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. During the nine months ended September 30, 2023, approximately 46 thousand shares of the Company's common stock were issued to employees participating in the ESPP and approximately 2.2 million shares of the Company’s common stock remained available for issuance under the ESPP.

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 0.0%.

During the nine months ended September 30, 2023 there were no material changes to the ESPP 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 September 30, 2023, the Company had $3.2 million of unrecognized compensation expense related to ESPP subscriptions that will be recognized over a weighted average period of 0.5 years.

Stock-Based Compensation Expense

The following table summarizes the total stock-based compensation expense included in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Cost of revenue	$	1,236	$	618	$	2,584	$	1,540
Research and development	3,370		1,717		7,912		4,841
Selling, general and administrative	16,402		10,610		42,862		35,565
Total stock-based compensation expense	$	21,008	$	12,945	$	53,358	$	41,946

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

13. NET LOSS PER SHARE

As the Company had net losses for the three and nine months ended September 30, 2023 and 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 during the three and nine months ended September 30, 2023 and 2022 (in thousands, except per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator:
Net loss	$	(27,116)	$	(21,451)	$	(84,707)	$	(95,957)
Denominator:
Weighted-average shares used to compute net loss per common share, basic and diluted	30,607		30,055		30,470		29,837
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, 2023 and 2022 because their inclusion would be anti-dilutive (in thousands):


	Three and Nine Months Ended September 30,
	2023	2022
Options to purchase common stock	307	330
RSUs and PRSUs1 unvested	2,747	2,077
Total	3,054	2,407

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 that creates trusted solutions that detect, predict, and prevent disease. Our principal business is the design, development, and commercialization of device-based technology to provide remote cardiac monitoring services that we believe allow clinicians to diagnose certain arrhythmias quicker and with greater efficiency than other services that rely on traditional technology.

Each Zio System combines a wire-free, patch-based, 14-day wearable biosensor that continuously records ECG data with a proprietary cloud-based data analytic software to help physicians monitor patients and diagnose arrhythmias. Since receiving FDA clearance, we have provided the Zio Services to over six million patients and have collected over one billion hours of curated heartbeat data.

Since first receiving clearance from FDA for our technology in 2009, we have supported physician and patient use of our technology and provided remote cardiac monitoring services from our Medicare-enrolled IDTFs and our qualified technicians. We have provided our Zio Services using our Zio Systems.

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

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


	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
Contracted third-party payors	54%	54%	55%	55%
Centers for Medicare and Medicaid	25%	26%	25%	24%
Healthcare institutions	14%	14%	14%	15%
Non-contracted third-party payors	7%	6%	6%	6%

Key Business Metric

Non-GAAP Financial Measure

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

We define Adjusted EBITDA for a particular period as net loss before income tax provision, depreciation and amortization, interest expense and interest income and as further adjusted for stock-based compensation expense, impairment and restructuring charges, and business transformation costs. Business transformation costs include professional services and employee termination costs to augment and restructure the organization to use both outsourced and offshore resources.

Adjusted EBITDA is a non-GAAP financial measure and is presented for supplemental informational purposes only and should not be considered as an alternative or substitute to financial information presented in accordance with GAAP. This measure has certain limitations in that it does not include the impact of certain expenses that are reflected in our 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,
	2023		2022		2023		2022
Net loss	$	(27,116)	$	(21,451)	$	(84,707)	$	(95,957)
Interest expense	927		614		2,709		3,125
Interest income	(1,717)		(599)		(4,619)		(927)
Income tax provision	195		116		495		196
Depreciation and amortization	4,067		3,436		11,434		9,930
Stock-based compensation	21,008		12,945		53,358		41,946
Impairment and restructuring charges	—		—		—		26,608
Business transformation costs	2,999		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 indicated that they are lowering their capital investment plans and tightening their operational budgets.

We have adapted our Zio Services to meet the immediate needs of physicians, customers, and patients and significantly increased the utilization of our home enrollment service, which allows patients to receive and wear the single-use Zio patch without going to a healthcare facility.

Our 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 continue to evaluate our real estate footprint, we may incur additional impairment charges related to real property lease agreements.

Revenue

The majority of our revenue is derived from provision of our Zio Services to customers in the United States. We earn revenue from the provision of our Zio Services primarily from contracted third-party payors, CMS and healthcare institutions. A small percentage of our revenue is from non-contracted third-party payors.

We recognize revenue on an accrual basis based on estimates of the amount that will ultimately be realized, which is the difference between the amount submitted for payment and the amount received. These estimates require significant judgment by management. In determining the amount to accrue for the Zio Services (including a delivered report), we consider factors such as claim payment history from both payors and patient, available reimbursement, including whether there is a contract between us and the payor or healthcare institution and historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments.

We typically experience reduced revenue during the third quarter, as well as during the year-end holiday season. We believe this is the result of physicians and patients taking vacations and patients electing to delay our monitoring services during the summer months or holidays. Revenue may be impacted by the outcome of adjudications with contracted and non-contracted payors, as well as changes in CMS reimbursement rates like we experienced with final rates being established for our 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

Cost of revenue includes direct labor, material costs, equipment and infrastructure expenses, amortization of internal-use software, allocated overhead, and shipping and handling. Direct labor includes payroll-related costs including stock-based compensation involved in manufacturing, clinical data curation, and customer service. Material costs include both the disposable materials costs of the Zio patches and amortization of the re-usable PCBAs. Each Zio 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 as our revenue increases due to increased direct labor, direct materials, and variable spending as well as amortization of internal-use software, partially offset by economies of scale in relation to fixed costs such as overhead and facilities costs.

Our gross margin has been and will continue to be affected by a variety of factors, including increased contracting with third-party payors and institutional providers. We have in the past been able to increase our pricing as third-party payors become more familiar with the benefits of the Zio Services and move to contracted pricing arrangements. We expect increases to the cost of revenues due to increases to materials and electronics components pricing, labor rates, shipping rates, amortization of capitalized internal-use software, and increases in the general level of inflation, partially offset by reduced costs from obtaining volume purchase discounts for our material costs, implementing scan-time algorithms and process improvements, automating manufacturing assembly and packaging, and through software-driven and other workflow enhancements to reduce labor costs.

Research and Development Expenses

We expense research and development costs as they are incurred. Research and development expenses include payroll-related costs, including stock-based compensation, consulting services, clinical studies, laboratory supplies and allocated facility overhead costs. In addition, we expense milestone payments, when probable, for the Development Agreement with Verily. We expect our research and development costs to increase in absolute dollars as we hire additional personnel to develop new product and service offerings, product enhancements, and clinical evidence.

Selling, General and Administrative Expenses

Our sales and marketing expenses consist of payroll-related costs, including stock-based compensation, sales commissions, travel expenses, consulting, public relations costs, direct marketing, tradeshow and promotional expenses, and allocated facility overhead costs.

Our general and administrative expenses consist primarily of payroll-related costs for executive, finance, legal and administrative personnel, including stock-based compensation. Other significant expenses include professional fees for legal and accounting services, consulting fees, recruiting fees, bad debt expense, third-party patient claims processing fees, and travel expenses. In addition, we incurred business transformation costs to scale our organization during 2022 and expect to incur additional business transformation costs throughout 2023 with the restructuring activities to be substantially complete by mid-2024. Upon completion, we expect to achieve operational efficiencies in our administrative expenses.

Interest Expense

Interest expense is attributable to borrowings under our loan agreements. See Note 9, Debt, in the Notes to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our loan agreements.

Interest and Other Income, Net

Interest and other income, net consists primarily of interest income which consists of interest received on our cash and cash equivalents and marketable securities as well as realized and unrealized foreign currency exchange gains or losses.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2023 and 2022.


	Three Months Ended September 30,							Nine Months Ended September 30,
	2023		2022		$ Change*		% Change	2023		2022		$ Change*		% Change

	(dollars in thousands, except percentages)
Revenue	$	124,604	$	103,875	$	20,729	20%	$	360,170	$	298,304	$	61,866	21%
Cost of revenue	42,130		32,954		9,176		28%	115,790		95,379		20,411		21%
Gross profit	82,474		70,921		11,553		16%	244,380		202,925		41,455		20%
Operating expenses:
Research and development	16,309		11,448		4,861		42%	44,828		33,935		10,893		32%
Selling, general and administrative	93,768		80,559		13,209		16%	285,531		235,468		50,063		21%
Impairment and restructuring charges	—		—		—		—%	—		26,608		(26,608)		(100)%
Total operating expenses	110,077		92,007		18,070		20%	330,359		296,011		34,348		12%
Loss from operations	(27,603)		(21,086)		(6,517)		31%	(85,979)		(93,086)		7,107		(8)%
Interest expense	(927)		(614)		(313)		51%	(2,709)		(3,125)		416		(13)%
Interest and other income, net	1,609		365		1,244		341%	4,476		450		4,026		895%
Loss before income taxes	(26,921)		(21,335)		(5,586)		26%	(84,212)		(95,761)		11,549		(12)%
Income tax provision	195		116		79		68%	495		196		299		153%
Net loss	$	(27,116)	$	(21,451)	$	(5,665)	26%	$	(84,707)	$	(95,957)	$	11,250	(12)%

iRhythm Technologies, Inc. [IRTC] Filings
10-Q	[2023-11-02]
10-Q	[2023-08-04]
10-Q	[2023-05-04]
10-K	[2023-02-23]
10-Q	[2022-11-04]
10-Q	[2022-08-05]
10-Q	[2022-05-06]
10-K	[2022-02-28]
10-Q	[2021-11-05]
10-Q	[2021-08-09]
10-Q	[2021-05-10]
10-K	[2021-02-26]
10-Q	[2020-11-06]
S-1	[2020-08-11]
10-Q	[2020-08-07]
10-Q	[2020-05-08]
10-K	[2020-03-02]
10-Q	[2019-12-23]
10-Q	[2019-08-06]
10-Q	[2019-05-10]
10-K	[2019-03-04]
10-Q	[2018-10-30]
10-Q	[2018-08-03]
10-Q	[2018-05-10]
10-K	[2018-03-01]
10-Q	[2017-11-14]
10-Q	[2017-08-07]
10-Q	[2017-05-12]
10-K	[2017-03-31]
10-Q	[2016-12-05]
S-1	[2016-09-23]