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 March 31, 2022

OR

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

Commission file number: 001-37918

_______________________________________________________________________

iRhythm Technologies, Inc.

(Exact Name of Registrant as Specified in its Charter)

_______________________________________________________________________

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)

_______________________________________________________________________

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

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

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

Large accelerated 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 April 29, 2022, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 29,790,161.

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 $.001 Per Share	IRTC	The Nasdaq Stock Market

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	6
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	34
Item 1. Legal Proceedings	34
Item 1A. Risk Factors	34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3. Defaults Upon Senior Securities	69
Item 4. Mine Safety Disclosures	69
Item 5. Other Information	69
Item 6. Exhibits	69
Exhibit Index	70
Signatures	71

i

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

•the impact of the COVID-19 pandemic on our operations and financial results;

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

•the impact of inflationary costs on our operations and financial results;

•plans to conduct further clinical studies;

•our plans to modify our current products, or develop new products, to address additional indications;

•the expected growth of our business and our organization;

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

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

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

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

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

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

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

•our ability to remediate our material weaknesses over financial reporting;

•our financial performance; and

•developments and projections relating to our competitors or our industry.

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

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

ii

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

iii

PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share data)

	March 31, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	94,786	$	127,562
Short-term investments	113,998		111,569
Accounts receivable, net	55,286		46,430
Inventory	12,446		10,268
Prepaid expenses and other current assets	9,838		9,693
Total current assets	286,354		305,522
Property and equipment, net	57,135		55,944
Operating lease right-of-use assets	65,256		84,587
Goodwill	862		862
Other assets	19,110		16,052
Total assets	$	428,717	$	462,967
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	5,413	$	10,509
Accrued liabilities	41,935		51,486
Deferred revenue	2,933		3,049
Debt, current portion	—		11,667
Operating lease liabilities, current portion	11,501		11,142
Total current liabilities	61,782		87,853
Debt, noncurrent portion	34,917		9,690
Other noncurrent liabilities	832		697
Operating lease liabilities, noncurrent portion	86,344		85,212
Total liabilities	183,875		183,452
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding at March 31, 2022 and December 31, 2021	—		—
Common stock, $0.001 par value; 100,000,000 shares authorized; 29,768,718 shares at March 31, 2022 and 29,493,726 at December 31, 2021 issued and outstanding	27		27
Additional paid-in capital	701,822		685,594
Accumulated other comprehensive income	(353)		(61)
Accumulated deficit	(456,654)		(406,045)
Total stockholders’ equity	244,842		279,515
Total liabilities and stockholders’ equity	$	428,717	$	462,967

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

1

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended March 31,
	2022		2021
Revenue, net	$	92,378	$	74,311
Cost of revenue	30,619		23,458
Gross profit	61,759		50,853
Operating expenses:
Research and development	10,542		8,510
Selling, general and administrative	73,158		69,813
Impairment and restructuring charges	26,608		—
Total operating expenses	110,308		78,323
Loss from operations	(48,549)		(27,470)
Interest expense	(2,029)		(335)
Other income, net	16		124
Loss before income taxes	(50,562)		(27,681)
Income tax provision	47		98
Net loss	$	(50,609)	$	(27,779)
Net loss per common share, basic and diluted	$	(1.71)	$	(0.95)
Weighted-average shares, basic and diluted	29,596,325		29,164,430

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

2

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2022		2021
Net loss	$	(50,609)	$	(27,779)
Other comprehensive income:
Net change in unrealized gains on available-for-sale securities	(292)		1
Comprehensive loss	$	(50,901)	$	(27,778)

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

3

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities
Net loss	$	(50,609)	$	(27,779)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	3,143		2,036
Stock-based compensation	13,903		20,230
Accretion of discounts on investments, net and other	432		498
Provision for doubtful accounts and contractual allowances	14,022		9,768
Amortization of operating lease right-of-use assets	6,547		1,555
Impairment charges	23,164		—
Changes in operating assets and liabilities:
Accounts receivable	(22,878)		(39,818)
Inventory	(2,377)		(1,608)
Prepaid expenses and other current assets	(146)		387
Other assets	(3,058)		(775)
Accounts payable	(5,308)		673
Accrued liabilities	(9,429)		(6,140)
Deferred revenue	(116)		495
Operating lease liabilities	(6,175)		(1,364)
Net cash used in operating activities	(38,885)		(41,842)
Cash flows from investing activities
Purchases of property and equipment	(5,572)		(4,211)
Purchases of available-for-sale investments	(45,974)		(30,054)
Sales of available-for-sale investments	15,019		—
Maturities of available-for-sale investments	28,000		151,300
Net cash provided by (used in) investing activities	(8,527)		117,035
Cash flows from financing activities
Payment of long-term debt	(21,389)		(2,917)
Proceeds from term loan	35,000		—
Proceeds from issuance of common stock in connection with employee equity incentive plans	1,076		1,576
Tax withholding upon vesting of restricted stock awards	—		(25,105)
Payments of issuance costs for long term debt	(51)		—
Net cash provided by (used in) financing activities	14,636		(26,446)
Net (decrease) increase in cash and cash equivalents	(32,776)		48,747
Cash and cash equivalents beginning of period	127,562		88,628
Cash and cash equivalents end of period	$	94,786	$	137,375
Supplemental disclosures of cash flow information
Interest paid	$	1,967	$	331
Non-cash investing and financing activities
Property and equipment costs included in accounts payable and accrued liabilities	$	225	$	115
Right-of-use assets obtained in exchange for operating lease liabilities	$	7,666	$	5,757
Capitalized stock-based compensation	$	1,250	$	911

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

4

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands, except share data)

	Common Stock							Accumulated Other		Total
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit		Comprehensive Income		Stockholders' Equity
Balances at December 31, 2020	29,019,350	$	27	$	646,258	$	(304,684)	$	11	$	341,612
Issuance of common stock in connection with employee equity incentive plans, net	268,399	—		1,576		—		—		1,576
Tax withholding upon vesting of restricted stock awards	—	—		(25,105)		—		—		(25,105)
Stock-based compensation expense	—	—		19,267		—		—		19,267
Net loss	—	—		—		(27,779)		—		(27,779)
Net change in unrealized gain on investments	—	—		—		—		1		1
Balances at March 31, 2021	29,287,749	$	27	$	641,996	$	(332,463)	$	12	$	309,572

	Common Stock							Accumulated Other		Total
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit		Comprehensive Income		Stockholders' Equity
Balances at December 31, 2021	29,493,726	$	27	$	685,594	$	(406,045)	$	(61)	$	279,515
Issuance of common stock in connection with employee equity incentive plans, net	274,982	—		1,076		—		—		1,076
Tax withholding upon vesting of restricted stock awards	—	—		—		—		—		—
Stock-based compensation expense	—	—		15,152		—		—		15,152
Net loss	—	—		—		(50,609)		—		(50,609)
Net change in unrealized gain on investments	—	—		—		—		(292)		(292)
Balances at March 31, 2022	29,768,708	$	27	$	701,822	$	(456,654)	$	(353)	$	244,842

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

5

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

1. Organization and Description of Business

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

    The Company is headquartered in San Francisco, California, which also serves as a clinical center. The Company has additional clinical centers in Lincolnshire, Illinois and Houston, Texas and a manufacturing facility in Cypress, California. In March 2016, the Company formed a wholly-owned subsidiary in the United Kingdom. Additionally, in June 2021, the Company formed a wholly-owned subsidiary in Singapore. The Company manages its operations as a single operating segment. Substantially all of the Company’s assets are maintained in the United States. The Company derives substantially all of its revenue from the provision of services to customers in the United States.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the "SEC") regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2021, and related disclosures, have been derived from the audited consolidated financial statements at that date but do not include all of the information required by GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair statement of the Company’s condensed consolidated financial information. The results of operations for the three months ended March 31, 2022, are not necessarily indicative of the results to be expected for the year ending December 31, 2022, or for any other interim period or for any other future year.

The accompanying interim unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2021, included in the Company’s annual report on Form 10-K, filed with the SEC on February 28, 2022.

Risks and Uncertainties

COVID-19

As a result of the COVID-19 pandemic, the Company has experienced significant business disruptions, restrictions on its ability to travel, reduction in access to customers due to diverted resources at hospitals, slower response times from payors who are also facing business interruptions, and shortened business hours as governments instituted prolonged shelter-in-place and/or self-quarantine mandates.

Government mandates related to the COVID-19 pandemic have impacted, and are expected to continue to impact, Company personnel and personnel at third-party manufacturing facilities in the United States and other countries, and the availability or cost of materials, which could disrupt our supply chain and reduce margins. While the Company has continued to deliver its Zio service by operating with remote employees and essential employees on site, an extended implementation of these government mandates could further impact the Company's ability to provide its Zio service effectively, and could impede the progress of all ongoing initiatives. Appropriate social distancing techniques and other measures at the Company's facilities have been implemented for employees who are required by job scope or who have chosen to return to the Company’s facilities.

Government mandates related to the COVID-19 pandemic have impacted our claims and appeals and are expected to continue to impact payor processing times. This increase in response times may be due, in part, to staffing shortages at the payors.

The Company's remote work arrangements resulting from the COVID-19 pandemic and subsequent decision to pursue a sublease for its San Francisco headquarters resulted in an impairment of its right of use asset and related leasehold

6

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

improvements and furniture, and the Company expects additional impairment charges related to real property lease agreements may be incurred.

The Company is continuously reviewing its liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 pandemic. 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 March 31, 2022, the Company is in compliance with its debt covenants.

The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. This impact is having a material, adverse impact on liquidity, capital resources, supply chain, operations and business and those of the third parties on which the Company relies, and could worsen over time. The extent to which the COVID-19 pandemic impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions to contain the COVID-19 pandemic or treat its impact, among others. The full extent of potential delays or impacts on the business, financial condition, cash flows and results of operations remains unknown.

Reimbursement

Government payors may change their coverage and reimbursement policies, and payment amounts, in a way that would prevent or limit reimbursement for the Zio service, which would significantly harm the Company. Government and other third-party payors require the Company to report the service for which it is seeking reimbursement by using a Current Procedural Terminology (“CPT”), a code-set maintained by the American Medical Association (“AMA”). For Zio XT, the Company had historically utilized temporary CPT codes (or Category III CPT codes) used for newly introduced technologies and specific to our category of diagnostic monitoring. The process to convert Category III CPT codes to Category I CPT codes is governed by the AMA and Centers for Medicare and Medicaid (“CMS”). On October 25, 2019, the AMA’s CPT Editorial Panel established two new Category I CPT codes that are applicable to the Zio service and took effect on January 1, 2021. In November 2021, CMS published the Calendar Year 2022 Medicare Physician Fee Schedule Final Rule (the “2022 Final Rule”). In the Final Rule, CMS did not issue national pricing and continued carrier pricing for the calendar year 2022 on Category I CPT codes 93241, 93243, 93245 and 93247 for extended external ECG monitoring, the relevant codes for the Company’s Zio XT service. CMS designated these codes for contractor pricing in calendar 2022, which means that prices will be determined regionally by each Medicare Administrative Contractor (“MAC” or “MACs”).

Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through a national coverage determination (“NCD”) by CMS or at the local level through a local coverage determination (“LCD”), by one or more of the regional Medicare Administrative Contractors (“MACs”) who are private contractors that process and pay claims on behalf of CMS for different regions. In the absence of a specific NCD, as is the case with Zio XT historically and for Calendar Year 2022 following the Final Rule, the MAC with jurisdiction over a specific geographic region will have the discretion to make an LCD. The Company is seeking to establish LCD pricing with one or more MACs for 2022 and will be subject to LCD pricing until CMS establishes a NCD.

In January 2022, Novitas Solutions, the MAC which covers the region where our Independent Diagnostic Testing Facility (“IDTF”) in Houston, Texas is located, updated reimbursement rates for CPT codes 93243 and 93247 for the Houston jurisdiction to $223 and $233, respectively. These updated rates are retroactive to January 1, 2022. These rates were higher than the rates posted by Novitas in 2021 but continue to be significantly below our historical Medicare rates for our Zio XT service. In April 2022, National Government Services ("NGS"), the MAC which covers the region where our IDTF in Lincolnshire, Illinois is located, updated reimbursement rates for CPT codes 93243 and 93247 for the Suburban Chicago jurisdiction to $334 and $347, respectively. These updated rates are retroactive to April 1, 2022 and are higher than our historical Medicare rates for our Zio XT service. We are continuing to negotiate with MACs to establish higher pricing for the Category I CPT Codes but can offer no assurances as to the timing or outcome of those discussions.

Further, a reduction in coverage by Medicare could cause some commercial third-party payors to implement similar reductions in their coverage or level of reimbursement of the Zio service. Given the evolving nature of the healthcare industry and on-going healthcare cost reforms, the Company will continue to be subject to changes in the level of Medicare coverage for its products, and unfavorable coverage determinations at the national or local level could adversely affect its results of operations. Although a large majority of commercial customers have re-contracted the Zio XT service since the establishment of the Category I codes on January 1, 2021, matching pre-existing rates, if the Company is unsuccessful in improving the Medicare rates, the Company believes that commercial rates may begin to be more negatively impacted next year.

7

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

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

Supply Chain Constraints

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

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, contractual allowances, allowance for doubtful accounts, the useful lives of property and equipment, the recoverability of long-lived assets including the estimated usage of the printed circuit board assemblies (“PCBAs”), the incremental borrowing rate for operating leases, accounting for income taxes, impairment of right-of-use assets ("ROU assets"), and various inputs used in estimating stock-based compensation. Certain of these estimates are impacted by uncertainties surrounding COVID-19 such as revenue recognition, contractual allowances for revenue, allowance for doubtful accounts, and stock-based compensation. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that management believes are reasonable under the circumstances, including assumptions as to future events. Actual results may differ from those estimates.

For further details on estimates used to calculate the impairment on ROU assets, see Note 6. Impairment and Restructuring Charges.

Impairment of Long-Lived Assets

The Company annually reviews long-lived assets for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset.

Any impairments to right of use assets, leasehold improvements, or other assets as a result of a sublease or other similar action are initially recognized when a decision to take such action is made and recorded as an operating expense. Similar to other long-lived assets, management tests ROU assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. For ROU assets, such circumstances may include subleases that do not fully recover the costs of the associated leases or commitments to sublease a property. For the three months ended March 31, 2022, the Company recorded $23.2 million of long-lived asset impairment charges in the consolidated statement of operations. See Note 6. Impairment and Restructuring Charges.

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, due to the Company's normal business activities. Accounts receivable is reported on the consolidated balance sheets net of an estimated allowance for doubtful accounts and contractual allowances.

The Company establishes an allowance for doubtful accounts for estimated uncollectible receivables based on its assessment of the collectability of customer accounts and recognizes the provision as a component of selling, general and administrative expenses. The Company records a provision for contractual allowances based on the estimated differences between contracted amounts and expected collection rates. Such provisions are based on the Company's historical experience and are reported as a reduction of revenue.

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

8

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

The Company submitted the majority of Zio XT claims from the first and second quarter of 2021 on a delayed basis due to the CPT code transition and uncertainty over reimbursement rates. Claims were being held due to a combination of negotiations with payors and administrative delays in processing payments. Most of the held claims were released and submitted by the end of the second quarter of 2021. As of March 31, 2022, uncollected claims as a result of the CPT code transition were $12.9 million. For the contracted portfolio, once submitted, the number of claims from the first half of 2021 which contained differences between the submitted price and reimbursement rate and overall denials increased significantly compared to our historical experience as a result of CPT code transition issues with the payors. The Company continues to work with the payors to collect on these claims, and the collection cycle for these claims is significantly longer than usual. This makes the timing of the Company's collections more difficult to predict. While the Company believes it has properly estimated the impact to our contractual allowances and allowance for doubtful accounts, inherent uncertainty caused by the longer-collection cycle and claims adjudication process could result in additional provisions for contractual allowances and doubtful accounts which would negatively impact the Company's results of operations in future periods.

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

	Three Months Ended March 31, 2022		Year Ended December 31, 2021		Three Months Ended March 31, 2021
Balance, beginning of period	$	14,012	$	12,711	$	12,711
Add: provision for doubtful accounts	4,413		9,615		3,095
Less: write-offs, net of recoveries and other adjustments	(60)		(8,314)		(3,046)
Balance, end of period	$	18,365	$	14,012	$	12,760

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

	Three Months Ended March 31, 2022		Year Ended December 31, 2021		Three Months Ended March 31, 2021
Balance, beginning of period	$	31,274	$	21,281	$	21,281
Add: provision for contractual allowances	9,609		27,459		6,673
Less: realized contractual adjustments	(26)		(17,466)		(3,185)
Balance, end of period	$	40,857	$	31,274	$	24,769

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. Centers for Medicare and Medicaid Services (“CMS”), accounted for approximately 22% and 14% of the Company's revenue for the three months ended March 31, 2022 and 2021, respectively. CMS accounted for 16% and 8% of accounts receivable at March 31, 2022 and December 31, 2021, respectively.

9

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Revenue Recognition

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

The Zio AT mobile cardiac telemetry monitor, a wearable patch-based biosensor, offers what the Zio XT offers plus the additional capability of transmissions during the wear period to assist physicians in diagnosing and treating patients that require more timely action. During the wear period, physicians will receive notifications if there are significant events that meet predetermined arrhythmia detection criteria. The Zio AT service revenue is recognized over the prescription period and delivery of an electronic Zio report with two performance obligations.

The Company recognizes as revenue the amount of consideration to which it expects to be entitled in exchange for performing the Zio service. The consideration the Company is entitled to varies by portfolio, as further defined below, and includes estimates that require significant judgment by management. A unique aspect of healthcare is multiple parties' involvement in the service transaction. In addition to the patient, often a third-party, 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 independent diagnostic testing facility 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.

•Non-contracted third-party payors – Non-contracted commercial and government payors often reimburse out-of-network rates provided under the relevant CPT codes on a case-by-case basis. The transaction price used for determining revenue recognition is based on factors including an average of the Company’s historical collection experience for its non-contracted services. This rate is reviewed at least quarterly.

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

The Company is utilizing the portfolio approach practical expedient under ASC 606 for revenue recognition whereby services provided under each of the above payor types form a separate portfolio. The Company accounts for the contracts within each portfolio as a collective group rather than individual contracts. Based on history with these portfolios and the similar nature and characteristics of the patients within each portfolio, the Company has concluded that the financial statement effects are not materially different than if accounting for revenue on a contract-by-contract basis.

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

10

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

negotiated rates, and the Company has historical experience of collecting substantially all of these contracted rates. These contracts also impose a number of obligations regarding billing and other matters, and the Company’s noncompliance with a material term of such contracts may result in a denial of the claim. The Company accounts for denied claims as a form of variable consideration that is included as a reduction to the transaction price recognized as revenue. The Company estimates the denied claims, which require management judgment. The estimated denied claims are based on historical information, and judgment includes the historical period utilized. The Company monitors the estimated denied claims against the latest available information, and subsequent changes to the estimated denied claims are recorded as an adjustment to revenue in the periods during which such changes occur. Delays in claims submissions could lead to an increase in denials if the Company misses the payors’ filing deadlines and could result in a reduction in the Company’s receipt of payments. Historical cash collection indicates that it is probable that substantially all of the transaction price, less the estimate of denied claims, will be received. Contracted payors may require that the Company bill patient co-payments and deductibles and from time to time the Company may not be able to collect such amounts due to credit risk. The Company provides for estimates of uncollectible patient accounts receivable, based upon historical experience where judgment includes the historical period utilized, at the time revenue is recognized, with such provisions presented as bad debt expense within the selling, general and administrative line item of the consolidated statement of operations. Adjustments to these estimates for actual experience are also recorded as an adjustment to bad debt expense.

As discussed in the Accounts Receivable, Allowance for Doubtful Accounts and Contractual Allowances section above, the inherent uncertainty caused by longer-collection cycle and claims adjudication process related to delays in submission because of the CPT code transition in 2021 could result in additional provisions for contractual allowances and doubtful accounts which would negatively impact the Company's results of operations in future periods.    

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

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

Disaggregation of Revenue

The Company disaggregates revenue from contracts with customers by payor type. The Company believes these categories aggregate the payor types by nature, amount, timing and uncertainty of its revenue streams. Disaggregated revenue by payor type and major service line for three months ended March 31, 2022 and March 31, 2021 were as follows (in thousands):

	Three Months Ended March 31,
	2022		2021
Contracted third-party payors	$	51,751	$	46,592
Non-contracted third-party payors	5,487		5,278
Centers for Medicare & Medicaid	20,062		10,177
Healthcare Institutions	15,078		12,264
Total	$	92,378	$	74,311

Contract Liabilities

ASC 606 requires an entity to present a revenue contract as a contract liability when the Company has an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer, or an amount of consideration from the customer is due and unconditional (whichever is earlier).

Certain of the Company’s customers pay the Company directly for the Zio XT service upon shipment of devices. Such advance payments are contract liabilities and are recorded as deferred revenue on the Condensed Balance Sheets and revenue is recognized when reports are delivered to the healthcare provider. During the three months ended March 31, 2022, $2.7 million

11

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

relating to the contract liability balance at the beginning of 2022 was recognized as revenue. During the three months ended March 31, 2021, $0.9 million included in the contract liability balance at the beginning of 2021 was recognized as revenue.

Contract Costs

Under ASC 340, the incremental costs of obtaining a contract with a customer are recognized as an asset. Incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained.

The Company’s current commission programs are considered incremental. However, as a practical expedient, ASC 340 permits the Company to immediately expense contract acquisition costs, as the asset that would have resulted from capitalizing these costs will be amortized in one year or less.

Stock-based Compensation

The Company measures its stock-based awards made to employees based on the estimated fair values of the awards as of the grant date. The fair value of market condition awards is determined using the Monte-Carlo option pricing model and the fair value of stock options is determined using the Black-Scholes option pricing model. Stock-based compensation expense is recognized over the requisite service period using the straight-line method and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, the Company’s stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For restricted stock, the compensation cost for these awards is based on the closing price of the Company’s common stock on the date of grant, and recognized as compensation expense on a straight-line basis over the requisite service period.

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

12

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

3. Cash Equivalents and Investments

The fair value of cash equivalents and available-for-sale investments at March 31, 2022 and December 31, 2021, were as follows (in thousands):

	March 31, 2022
	Amortized Cost		Gross Unrealized				Estimated Fair Value
			Gains		Losses
Money market funds	$	42,589	$	—	$	—	$	42,589
U.S. government securities	88,328		5		(322)		88,011
Corporate notes	13,039		—		(36)		13,003
Commercial paper	12,984		—		—		12,984
Total cash equivalents and available-for-sale investments	$	156,940	$	5	$	(358)	$	156,587
Classified as:
Cash equivalents							$	42,589
Short-term investments							113,998
Total cash equivalents and available-for-sale investments							$	156,587
	December 31, 2021
	Amortized Cost		Gross Unrealized				Estimated Fair Value
			Gains		Losses
Money market funds	$	110,137	$	—	$	—	$	110,137
U.S. government securities	50,490		—		(46)		50,444
Corporate notes	31,158		—		(15)		31,143
Commercial paper	29,982		—		—		29,982
Total cash equivalents and available-for-sale investments	$	221,767	$	—	$	(61)	$	221,706
Classified as:
Cash equivalents							$	110,137
Short-term investments							111,569
Total cash equivalents and available-for-sale investments							$	221,706

The following table summarizes the fair value of the Company’s cash equivalents, short-term and long-term marketable securities classified by maturity (in thousands):

	March 31, 2022		December 31, 2021
Due within one year	$	156,587	$	221,706
Due after one year through three years	—		—
Total cash equivalents and available-for-sale investments	$	156,587	$	221,706

There were no available-for-sale securities that were in an unrealized loss position for more than twelve months as of March 31, 2022. Unrealized losses as of March 31, 2022, and December 31, 2021, were not material. Available-for-sale securities held as of March 31, 2022, had a weighted average maturity of 111 days. At March 31, 2022, eleven investments were in an unrealized loss position and no investments have been in an unrealized loss position for more than one year.

4. Fair Value Measurements

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

13

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

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

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

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

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

The fair value of the Company’s outstanding interest-bearing obligations is estimated using the net present value of the future payments, discounted at an interest rate that is consistent with market interest rates, which is a Level 2 input. The carrying amount and the estimated fair value of the Company’s outstanding interest-bearing obligations at March 31, 2022, were $34.9 million and $36.5 million, respectively. The carrying amount and the estimated fair value of the Company’s outstanding interest-bearing obligations at December 31, 2021, were $21.4 million and $21.7 million, respectively.

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).

	March 31, 2022
	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	42,589	$	—	$	—	$	42,589
U.S. government securities	—		88,011		—		88,011
Corporate notes	—		13,003		—		13,003
Commercial paper	—		12,984		—		12,984
Total	$	42,589	$	113,998	$	—	$	156,587

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

14

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

5. Balance Sheet Components

Inventory and Other Assets

Inventory consisted of the following (in thousands):

	March 31, 2022		December 31, 2021
Raw materials	$	6,946	$	5,101
Finished goods	5,500		5,167
Total	$	12,446	$	10,268

    The Company uses PCBAs in each wearable Zio XT and Zio AT monitor as well as in the wireless gateway used in conjunction with the Zio AT monitor. The PCBAs are used numerous times and have useful lives beyond one year. Each time a PCBA is used in a wearable Zio XT monitor or Zio AT monitor, a portion of the cost of the PCBA is recorded as a cost of revenue. Each time a wireless gateway is used with a Zio AT monitor, a portion of the gateway is recorded as a cost of revenue. PCBAs, which are recorded as other assets, were $16.4 million and $13.9 million as of March 31, 2022, and December 31, 2021, respectively.

Property and Equipment, Net

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

	March 31, 2022		December 31, 2021
Laboratory and manufacturing equipment	$	5,365	$	5,029
Computer equipment and software	2,417		2,353
Furniture and fixtures	3,678		4,174
Leasehold improvements	18,631		20,431
Internal-use software	52,890		46,661
Total property and equipment, gross	82,981		78,648
Less: accumulated depreciation and amortization	(25,846)		(22,704)
Total property and equipment, net	$	57,135	$	55,944

Depreciation and amortization expense was $3.1 million and $2.0 million for the three months ended March 31, 2022, and 2021, respectively. During the three months ended March 31, 2022, the Company recorded $2.2 million and $0.5 million in impairment charges to leasehold improvements and furniture and fixtures disclosed above, respectively in connection with its decision to sublease its San Francisco headquarters. See Note 6. Impairment and Restructuring.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	March 31, 2022		December 31, 2021
Accrued vacation	$	8,371	$	7,431
Accrued payroll and related expenses	18,871		34,484
Accrued ESPP contribution	2,748		1,002
Accrued professional services fees	1,794		1,724
Accrued interest	47		78
Claims payable	2,770		2,988
Restructuring liability	2,902		—
Other	4,432		3,779
Total accrued liabilities	$	41,935	$	51,486

15

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

6. Impairment and Restructuring Charges

Restructuring

On February 15, 2022, the Company's Board of Directors (the “Board”) approved a restructuring plan (“Q1 2022 Restructuring Plan”) to allow the Company to effectively and efficiently scale its business. The Q1 2022 Restructuring Plan resulted in severance and other employment related costs. The Company completed required notifications under the Q1 2022 Restructuring Plan in March 2022 and has recorded $3.4 million of restructuring charges for the three month period ended March 31, 2022.

Restructuring liabilities are reported within accrued liabilities in the Condensed Consolidated Balance Sheets. The following table provides a summary of changes in the restructuring liabilities associated with the Q1 2022 Restructuring Plan (in thousands):

	December 31, 2021		Charges		Cash Payments		March 31, 2022
Employee severance	$	—	$	3,444	$	(542)	$	2,902
Total	$	—	$	3,444	$	(542)	$	2,902

Impairment

On October 4, 2018, the Company entered into a lease arrangement (“San Francisco Lease”) in connection with its headquarters in San Francisco, California. The San Francisco Lease commenced on May 13, 2019, and the Company began using the premises as its corporate headquarters. The San Francisco lease expires in August 2031.

In an effort to reduce the Company's footprint and as a result of remote work arrangements, the Board of Directors (the “Board”) agreed to pursue a sublease for a portion of the Company’s Headquarters in San Francisco, CA in February 2022 in order to reduce the total number of leased square footage by approximately 50%.

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

Significant judgment and estimates are required in assessing impairment of ROU assets, including identifying whether events or changes in circumstances require an impairment assessment, estimating future cash flows, and determining appropriate discount rates. The Company's fair value estimates are based on assumptions management believes to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

The following table presents impairment charges recorded during the three months ended March 31, 2022:

ROU Asset	$	20,451
Furniture and Fixtures	2,211
Leasehold Improvements	502
Total	$	23,164

For further details on the Company's leases, refer to Note. 7. Commitments and Contingencies.

16

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

7. Commitments and Contingencies

Lease Arrangements

The Company leases office, manufacturing, and clinical centers under non-cancelable operating leases which expire on various dates through 2031. These leases generally contain scheduled rent increases or escalation clauses and renewal options. Operating lease right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The operating lease right-of-use 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 right-of-use asset as they are based on actual usage. The Company recognizes operating lease expense on a straight-line basis over the lease period. The total operating lease cost recognized during the three months ended March 31, 2022 was $3.4 million, which primarily consisted of lease payments and common area maintenance costs. Cash paid for operating leases during the three months ended March 31, 2022, was $3.2 million.

On October 4, 2018, the Company entered into the San Francisco Lease to rent approximately 117,560 rentable square feet in San Francisco, California, which became the Company’s new headquarters in October 2019. The term of the San Francisco Lease began on May 13, 2019, and expires on August 31, 2031. The Company is entitled to one option to extend the San Francisco Lease for a five-year term, subject to certain requirements.

On October 29, 2009, the Company entered into a lease for a clinic (“Lincolnshire Lease”) to rent approximately 41,500 rentable square feet in Lincolnshire, Illinois, which became the Company’s clinical operational facilities. The term of the Lincolnshire Lease began on November 1, 2009, and expires on July 31, 2022.

On March 18, 2021, the Company entered into an office/industrial lease (“Cypress Lease”) to rent approximately 68,933 rentable square feet in Cypress, California, which became the Company’s new office and warehouse facilities. The term of the Cypress Lease began on October 25, 2021, and expires on April 30, 2032. The Company is entitled to one option to extend the Cypress Lease for a five-year term, subject to certain requirements.

In December 2021, the Company entered into a lease for 44,616 rentable square feet in Deerfield, Illinois (“Deerfield Lease”). The effective term of the Deerfield Lease began on January 2, 2022 and will expire on June 1, 2033. The Company is entitled to one option to extend the Deerfield Lease for a five-year term, subject to certain requirements.

On February 14, 2022, the Company entered into a lease for 3,238 rentable square feet in Encinitas, California (“Encinitas Lease”). The term of the Encinitas Lease began on March 1, 2022, and expires on February 28, 2024.

On February 15, 2022, the Board agreed to pursue a sublease of the majority of space on one floor (approximately 50%) of the San Francisco Lease. The Company recorded $20.5 million in impairment charges on its ROU asset during the three months ended March 31, 2022. See Note 6. Impairment and Restructuring for further details.

As of March 31, 2022, maturities of operating lease liabilities were as follows (in thousands):

Period Ended March 31:
2022	$	6,550
2023	13,995
2024	14,265
2025	14,681
2026	15,108
Thereafter	75,390
Total lease payments	139,989
Less: imputed interest	(42,144)
Total lease liabilities	$	97,845

The weighted average remaining lease term of the Company's operating leases as of March 31, 2022, was 9.56 years. The weighted average discount rate of the Company's operating leases was 7.28% as of March 31, 2022.

17

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Legal Proceedings

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

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

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

Development Agreement

On September 3, 2019, the Company entered into a Development Collaboration Agreement (the “Development Agreement”) with Verily Life Sciences LLC (“Verily”). The Development Agreement, which is over a 24-month term, 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 (“AF”) screening, detection, or monitoring products pursuant to the Development Agreement, which products will involve combining Verily and the Company’s technology platforms and capabilities. Under the terms of the Development Agreement, the Company paid Verily an upfront fee of $5.0 million in 2019. In addition, the Company has 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 24 months of the Development Agreement.

We have achieved milestones tied to payments totaling $11.0 million to date and we have agreed to make additional payments over the term of the Development Agreement up to an aggregate of $1.75 million, subject to the achievement of certain development and regulatory milestones including provisioning of the Zio Watch and completion of market evaluation scheduled to begin in the first half of 2023.

No payment-triggering milestones were achieved during the three months ended March 31, 2022.

    The Development Agreement provides each party with licenses to use certain intellectual property of the other party for development activities in the field of AF 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

18

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

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

8. Debt

Bank Debt

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

On March 28, 2022, the Company entered into a Second Amendment (“2022 Amendment”) to its SVB Loan Agreement which provided for a term loan facility in the aggregate principal amount of up to $75.0 million (the “2022 Term Loans”), of which $35.0 million aggregate principal amount of 2022 Term Loans were borrowed at closing and a portion of the proceeds of which were used to pay in full the outstanding balance of $18.5 million under the SVB Loan Agreement. The remaining $40.0 million of 2022 Term Loans may be borrowed from time to time at the Company’s option, in increments of at least $10.0 million, through December 31, 2023. The Company shall pay interest only on the 2022 Term Loans until April 1, 2025, when it shall commence repaying the 2022 Term Loans in 24 equal consecutive monthly installments, with all obligations under the 2022 Term Loans maturing on March 1, 2027. Interest charged on the 2022 Term Loans shall accrue at a floating per annum rate equal to the greater of: (A) the Prime Rate plus 0.25%; and (B) 3.50%. The Company is also required to pay fees on any prepayment of the 2022 Term Loans, ranging from 3.0% to 1.0% depending on the date of prepayment, and a final payment equal to 5.0% of the principal amount of the 2022 Term Loans drawn. Once repaid or prepaid, the 2022 Term Loans may not be reborrowed.

The 2022 Amendment also amended the terms of the revolving credit line under the SVB Loan Agreement which provided for an aggregate principal amount of $25.0 million to: (i) extend the maturity date from August 1, 2023 to March 1, 2027, (ii) increase the letters of credit sublimit to $15.0 million and (iii) increase the cash management services sublimit to $15.0 million. Interest charged on the principal amount outstanding under the revolving credit line shall accrue at a floating per annum rate equal to the greater of (A) the Prime Rate plus 0.25% and (B) 3.50%. The Company is required to pay an annual fee equal to 0.15% of the revolving credit line. As of March 31, 2022, no loans were outstanding under the revolving credit line.

The 2022 Amendment also amended the SVB Loan Agreement to require the Company to comply, as of the last day of each fiscal quarter, with a quick ratio of at least 1.15 to 1.0 or minimum adjusted EBITDA of at least $15.0 million. The Company was in compliance with its loan covenants as of March 31, 2022.

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IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Future minimum payments

Future minimum payments under the Amendment to the SVB Loan Agreement at March 31, 2022, are as follows (in thousands):

Year Ending December 31,
2022	$	893
2023	1,331
2024	1,334
2025	14,289
2026	18,026
Thereafter	4,403
Total	40,276
Less: Amount representing interest	(5,276)
Less: Debt Issuance Costs	(83)
Total Carrying Value	$	34,917
Reported as:
Short-term debt	$	—
Long-term debt	34,917
Total	$	34,917

9. Income Taxes

The Company recorded a tax provision related to its U.S. state taxes and the U.K. subsidiary during the three months ended March 31, 2022, and March 31, 2021. Due to the uncertainties surrounding the realization of the U.S. deferred tax assets through future taxable income, the Company has provided a full valuation allowance and, therefore, no benefit has been recognized for the U.S. net operating loss carryforwards and other deferred tax assets.

10. 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 of directors, subject to the prior rights of holders of all series of convertible preferred stock outstanding. No dividends were declared through March 31, 2022.

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

	March 31, 2022	December 31, 2021
Options issued and outstanding	480,764	504,106
Unvested restricted stock units	1,717,220	1,649,561
Shares available for grant under future stock plans	10,607,873	9,011,213
Shares available for future issuance	12,805,857	11,164,880

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IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

11. Equity Incentive Plans

Equity Incentive Plan Activity

A summary of share-based awards available for grant under the 2016 Equity Incentive Plan is as follows:

	Awards Available for Grant
Balance at December 31, 2020	6,505,390
Additional awards authorized	1,450,967
Awards granted	(1,289,567)
Awards forfeited	356,999
Awards withheld for tax purposes	135,886
Balance at December 31, 2021	7,159,675
Additional awards authorized	1,474,686
Awards granted	(377,339)
Awards forfeited	56,908
Awards withheld for tax purposes	—
Balance at March 31, 2022	8,313,930

During the three months ended March 31, 2022, 129 restricted stock units (“RSUs”) were granted, 206,006 RSUs vested, and 55,860 RSUs were forfeited.

The following table summarizes stock option activity under the 2006 and 2016 Equity Incentive Plans:

		Options Outstanding
	Options Outstanding	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)
Balance at December 31, 2020	609,881	$	40.18	6.24	$	120,163
Options exercised	(90,939)	$	31.15
Options forfeited	(14,836)	$	68.81
Balance at December 31, 2021	504,106	$	40.97	5.20	$	38,675
Options exercised	(22,114)	$	48.63
Options forfeited	(1,228)	$	84.54
Balances at March 31, 2022	480,764	$	40.51	4.02	$	56,232
Options exercisable – March 31, 2022	475,910	$	40.06	3.99	$	55,876
Options vested and expected to vest – March 31, 2022	480,687	$	40.50	4.02	$	56,227

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

The Company did not grant any options during the three months ended March 31, 2022, and 2021.

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IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

12. Stock-Based Compensation

Market-based RSU Valuation

The fair value of market based RSUs was estimated at the date of grant using the Monte-Carlo option pricing model with the assumptions below. Additional details on the Company's market based RSUs are included below.

	Three Months Ended March 31,
	2022
Expected term (in years)	2.88
Expected volatility	81.2	%
Risk-free interest rate	1.72	%
Dividend yield	—	%

Stock-Based Compensation

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

	Three Months Ended March 31,
	2022		2021
Cost of revenue	$	386	$	423
Research and development	1,495		1,659
Selling, general and administrative	12,022		18,148
Total stock-based compensation expense	$	13,903	$	20,230

As of March 31, 2022, there was total unamortized compensation costs of $0.3 million, net of estimated forfeitures, related to unvested stock options which the Company expects to recognize over a period of approximately 0.6 years, $139.4 million, net of estimated forfeitures, related to unrecognized RSU expense, which the Company expects to recognize over a period of 2.6 years, and $1.5 million unrecognized ESPP expense, which the Company will recognize over 0.7 years.

Performance-based RSUs (“PRSU”) and Market-based RSUs

The Company grants PRSUs to key executives of the Company. PRSUs can be earned in accordance with the performance equity program for each respective grant.

February 2020 Awards

In February 2020, the company granted PRSUs (“February 2020 awards”) for fiscal year 2022's annual unit volume CAGR compared to fiscal year 2019's annual unit volume CAGR, measuring a minimum performance threshold of 19.7% to earn 50% of target, and a maximum threshold of 29% achieved to earn 200% of target. A total of 133,834 PRSU shares were granted with grant date fair value of $11.0 million. The 2020 awards also include a service-based component.

Compensation cost in connection with the probable number of shares that will vest will be recognized ratably through March 31, 2023. During the three months ended March 31, 2022 and 2021, the Company recognized $0.1 million and $1.4 million of compensation cost, respectively, in connection with the February 2020 awards.

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IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

January 2021 Awards

In January 2021, the Company granted PRSUs (“January 2021 awards”) for fiscal year 2021's annual consolidated revenue compared to fiscal year 2020's annual consolidated revenue, measuring a performance threshold of 10.0% to earn 100% of target. A total of 53,862 PRSU shares were granted with a grant date fair value of $13.9 million. The January 2021 awards also include a service-based component.

Compensation cost in connection with the probable number of shares that will vest will be recognized ratably through March 31, 2022. During the three months ended March 31, 2022 and 2021, the Company determined that it was probable that the January 2021 Awards would vest and recognized $2.2 million of compensation cost for each of the three months ended March 31, 2022, and 2021 in connection with the January 2021 awards.

February 2021 Awards

In February 2021, the Company granted PRSU's (“February 2021 awards”) for fiscal year 2023's annual unit volume CAGR compared to fiscal year 2020's annual unit volume CAGR, measuring a minimum performance threshold of 19.7% to earn 50% of target, and a maximum threshold of 29% achieved to earn 200% of target. A total of 112,872 PRSU shares were granted with grant date fair value of $17.3 million. The February 2021 awards also include a service-based component.

Compensation cost in connection with the probable number of shares that will vest will be recognized ratably through March 31, 2024. During the three months ended March 31, 2022, the Company determined that it was probable that the February 2021 Awards would vest and recognized $0.9 million and $0.4 million of compensation cost for the three months ended March 31, 2022 and 2021, respectively, in connection with the February 2021 awards.

2022 Awards

In February 2022, the Company granted PRSU's (“2022 awards”) for fiscal year 2024's annual unit volume CAGR compared to fiscal year 2021's annual unit volume CAGR, measuring a minimum performance threshold of 13.0% to earn 50% of target, and a maximum threshold of 23.0% achieved to earn 200% of target. A total of 170,997 PRSU shares were granted with grant date fair value of $21.8 million. The 2022 awards also include a service-based component.

Compensation cost in connection with the probable number of shares that will vest will be recognized ratably through March 31, 2025. During the three months ended March 31, 2022, the Company determined that it was probable that the 2022 Awards would vest and recognized $0.7 million of compensation cost for the three months ended March 31, 2022, in connection with the 2022 awards.

The Company's Chief Executive Officer's 2022 awards included a multiplier based on total shareholder return (“TSR”). The number of RSUs that vest, determined in accordance with the performance metrics above, will be adjusted for certain levels of achievement of TSR by the Company, as compared to the TSR achieved by the companies comprising the Index.

Non-employee Stock-Based Compensation

On January 12, 2021, the Company's former Chief Executive Officer (“CEO”) resigned and entered into a Consulting Professional Services Agreement ("CPSA") with the Company. Pursuant to the original terms of the awards, the former CEO will continue to vest in outstanding awards as long as services are provided to the Company under the CPSA as a non-employee consultant or a member of the Company's Board of Directors. In accordance with ASC 718, the Company recognized expense related to all awards expected to vest over the duration of the CPSA in the three months ended March 31, 2021, as an equity-based severance cost as the consulting services are not substantive.

Total expense related to non-employee stock-based compensation recognized for the three months ended March 31, 2021 was $5.0 million.

In March 2022, the former CEO retired from the Board and as a non-employee consultant. Vesting for all outstanding awards was accelerated upon his retirement. The Company recognized expense of $0.9 million related to the retirement of the former CEO during the three months ended March 31, 2022.

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IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

13. Net Loss Per Common Share

As the Company has net losses for the three months ended March 31, 2022, and 2021, all potential common shares were deemed to be anti-dilutive. The following table sets forth the computation of the basic and diluted net loss per share (in thousands, except share and per share data):

	Three Months Ended March 31,
	2022		2021
Numerator:
Net loss	$	(50,609)	$	(27,779)
Denominator:
Weighted-average shares used to compute net loss per common share, basic and diluted	29,596,325		29,164,430
Net loss per common share, basic and diluted	$	(