SEC Filing | iRhythm Technologies

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________________________________

Form 10-Q

_______________________________________________________________________

(Mark One)



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

For the quarterly period ended September 30, 2019



☐	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 December 13, 2019, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 26,624,448.

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 $.0001 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	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3. Quantitative and Qualitative Disclosures About Market Risk	43
Item 4. Controls and Procedures	43

PART II. OTHER INFORMATION	45

Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3. Defaults Upon Senior Securities	56
Item 4. Mine Safety Disclosures	56
Item 5. Other Information	56
Item 6. Exhibits	56

Exhibit Index	74

Signatures	75

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:


•	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 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.

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.

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share data)



	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	34,634		$	20,023
Short-term investments	118,091			58,320
Accounts receivable, net	25,003			19,790
Inventory	3,499			2,062
Prepaid expenses and other current assets	3,653			4,100
Total current assets	184,880			104,295
Long-term investments	9,026			—
Property and equipment, net	17,803			9,158
Operating lease right-of-use assets	91,935			—
Goodwill	862			862
Other assets	5,574			3,208
Total assets	$	310,080		$	117,523
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,187		$	2,284
Accrued liabilities	32,227			26,688
Deferred revenue	889			1,223
Accrued interest	128			139
Operating lease liabilities, current portion	8,036			—
Total current liabilities	45,467			30,334
Debt	34,929			34,899
Deferred rent, noncurrent portion	—			153
Operating lease liabilities, noncurrent portion	87,099			—
Total liabilities	167,495			65,386
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value – 5,000,000 shares authorized at September 30, 2019 and December 31, 2018; and none issued and outstanding at September 30, 2019 and December 31, 2018	—			—
Common stock, $0.001 par value – 100,000,000 shares authorized at September 30, 2019 and December 31, 2018; 26,525,201 and 24,368,073 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	25			23
Additional paid-in capital	385,614			257,955
Accumulated other comprehensive income (loss)	39			(16		)
Accumulated deficit	(243,093		)	(205,825		)
Total stockholders’ equity	142,585			52,137
Total liabilities and stockholders’ equity	$	310,080		$	117,523

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

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue, net	$	54,673		$	38,441		$	155,448		$	105,495
Cost of revenue	13,785			9,953			38,570			27,989
Gross profit	40,888			28,488			116,878			77,506
Operating expenses:
Research and development	13,499			5,086			28,031			13,776
Selling, general and administrative	45,649			32,623			125,876			96,330
Total operating expenses	59,148			37,709			153,907			110,106
Loss from operations	(18,260		)	(9,221		)	(37,029		)	(32,600		)
Interest expense	(409		)	(861		)	(1,258		)	(2,580		)
Other income, net	396			355			1,066			1,072
Loss before income taxes	(18,273		)	(9,727		)	(37,221		)	(34,108		)
Income tax provision	20			—			47			—
Net loss	$	(18,293	)	$	(9,727	)	$	(37,268	)	$	(34,108	)
Net loss per common share, basic and diluted	$	(0.72	)	$	(0.40	)	$	(1.50	)	$	(1.44	)
Weighted-average shares, basic and diluted	25,247,831			24,059,010			24,818,482			23,764,153

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

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net loss	$	(18,293	)	$	(9,727	)	$	(37,268	)	$	(34,108	)
Other comprehensive loss:
Net change in unrealized losses on available-for-sale securities	(21		)	19			55			46
Comprehensive loss	$	(18,314	)	$	(9,708	)	$	(37,213	)	$	(34,062	)

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

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)



	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities
Net loss	$	(37,268	)	$	(34,108	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	2,257			1,673
Stock-based compensation	19,064			11,534
Amortization of debt discount and issuance costs	33			118
Accretion of discounts on investments, net of premium amortization	(616		)	(633		)
Loss on disposal of assets	—			71
Provision for doubtful accounts and contractual allowances	17,581			9,592
Amortization of operating lease right-of-use assets	7,452			—
Changes in operating assets and liabilities:
Accounts receivable	(22,795		)	(15,078		)
Inventory	(1,436		)	(637		)
Prepaid expenses and other current assets	(12		)	(231		)
Other assets	(2,366		)	319
Accounts payable	(119		)	(524		)
Accrued liabilities	5,635			3,210
Deferred rent	—			53
Deferred revenue	(334		)	(79		)
Operating lease liabilities	(4,079		)	—
Net cash used in operating activities	(17,003		)	(24,720		)
Cash flows from investing activities
Purchases of property and equipment	(8,640		)	(3,687		)
Purchases of available-for-sale investments	(146,026		)	(74,070		)
Maturities of available-for-sale investments	77,900			107,605
Net cash (used in) provided by investing activities	(76,766		)	29,848
Cash flows from financing activities
Issuance of common stock in public offering, net	107,082			—
Repayment of debt	—			(1,500		)
Proceeds from issuance of common stock, net	6,409			6,684
Tax withholding upon vesting of restricted stock awards	(5,111		)	(1,638		)
Net cash provided by financing activities	108,380			3,546
Net increase in cash and cash equivalents	14,611			8,674
Cash and cash equivalents beginning of period	20,023			8,671
Cash and cash equivalents end of period	$	34,634		$	17,345
Supplemental disclosures of cash flow information
Interest paid	$	1,246		$	2,552
Non-cash investing and financing activities
Property and equipment costs included in accounts payable and accrued liabilities	$	2,259		$	86
Stock offering costs included in accounts payable and accrued liabilities	$	217		$	—
Right-of-use assets obtained in exchange for new operating lease liabilities	$	89,170		$	—

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

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands, except share data)



	Common Stock
	Shares	Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balances at December 31, 2017	23,377,315	$	23	$	236,184		$	(156,801	)	$	(65	)	$	79,341
Accounting Standards Codification 606 cumulative effect adjustment upon adoption	—	—		—			1,354			—			1,354
Issuance of common stock in connection with employee equity incentive plans, net	214,644	—		877			—			—			877
Tax withholding upon vesting of restricted stock awards	—	—		(1,271		)	—			—			(1,271		)
Stock-based compensation expense	—	—		3,247			—			—			3,247
Net loss	—	—		—			(11,077		)	—			(11,077		)
Net change in unrealized loss on investments	—	—		—			—			(20		)	(20		)
Balances at March 31, 2018	23,591,959	23		239,037			(166,524		)	(85		)	72,451
Issuance of common stock in connection with employee equity incentive plans, net	333,538	—		4,193			—			—			4,193
Tax withholding upon vesting of restricted stock awards	—	—		(267		)	—			—			(267		)
Stock-based compensation expense	—	—		4,076			—			—			4,076
Net loss	—	—		—			(13,304		)	—			(13,304		)
Net change in unrealized gain on investments	—	—		—			—			47			47
Balances at June 30, 2018	23,925,497	23		247,039			(179,828		)	(38		)	67,196
Issuance of common stock in connection with employee equity incentive plans, net	223,317	—		1,614			—			—			1,614
Tax withholding upon vesting of restricted stock awards	—	—		(99		)	—			—			(99		)
Stock-based compensation expense	—	—		4,211			—			—			4,211
Net loss	—	—		—			(9,727		)	—			(9,727		)
Net change in unrealized gain on investments	—	—		—			—			19			19
Balances at September 30, 2018	24,148,814	$	23	$	252,765		$	(189,555	)	$	(19	)	$	63,214

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands, except share data)



	Common Stock
	Shares	Amount			Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
Balances at December 31, 2018	24,368,073	$	23		$	257,955		$	(205,825	)	$	(16	)	$	52,137
Issuance of common stock in connection with employee equity incentive plans, net	260,570	1			2,120			—			—			2,121
Tax withholding upon vesting of restricted stock awards	—	—			(3,259		)	—			—			(3,259		)
Stock-based compensation expense	—	—			4,856			—			—			4,856
Net loss	—	—			—			(8,250		)	—			(8,250		)
Net change in unrealized gain on investments	—				—			—			43			43
Balances at March 31, 2019	24,628,643	24			261,672			(214,075		)	27			47,648
Issuance of common stock in connection with employee equity incentive plans, net	207,528	(1		)	3,288			—			—			3,287
Tax withholding upon vesting of restricted stock awards	—	—			(298		)	—			—			(298		)
Stock-based compensation expense	—	—			6,807			—			—			6,807
Net loss	—	—			—			(10,725		)	—			(10,725		)
Net change in unrealized gain on investments	—	—			—			—			33			33
Balances at June 30, 2019	24,836,171	23			271,469			(224,800		)	60			46,752
Issuance of common stock in connection with employee equity incentive plans, net	110,838	—			1,001			—			—			1,001
Warrants Exercised	2,850	—			—			—			—			—
Issuance of common stock in connection with follow-on public offering, net of discounts and issuance costs	1,575,342	2			107,297			—			—			107,299
Tax withholding upon vesting of restricted stock awards	—	—			(1,554		)	—			—			(1,554		)
Stock-based compensation expense	—	—			7,401			—			—			7,401
Net loss	—	—			—			(18,293		)	—			(18,293		)
Net change in unrealized loss on investments	—	—			—			—			(21		)	(21		)
Balances at September 30, 2019	26,525,201	$	25		$	385,614		$	(243,093	)	$	39		$	142,585

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 2009 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. 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 sales to customers in the United States.

On September 10, 2019, the Company issued and sold an aggregate of 1,575,342 shares (the "Shares") of common stock, in a public offering at a price of $73.00 per share. The Shares included the full exercise of the underwriters’ option to purchase an additional 205,479 shares of common stock. Total proceeds received from the offering were $107.3 million, net of discounts and issuance costs.

Revision of Prior Period Financial Statements

In preparing the condensed consolidated financial statements as of and for the three and nine months periods ended September 30, 2019, the Company identified errors in its historical accounting for revenues, contractual allowances, allowance for doubtful accounts and certain other items. The identified errors impacted the Company's 2017 annual financial statements, 2018 quarterly and annual financial statements and its 2019 quarterly financial statements. In accordance with SEC Staff Accounting Bulletin No. 99, "Materiality," and SEC Staff Accounting Bulletin No. 108,"Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements;" the Company evaluated the errors and has determined that the related impacts were not material to any prior annual or interim period, but that correcting the cumulative impact of such errors would be significant to our results of operations for the three and nine months ended September 30, 2019. Accordingly, the Company has determined that it will revise its previously issued financial statements to correct for such errors. In connection with correcting for these newly identified errors, we have also corrected other immaterial errors which were previously accounted for as out-of-period adjustments in the period of identification. A summary of the revisions to certain previously reported financial information is included in Note 13. Revision of Prior Period Financial Statements. The accompanying notes to these consolidated financial statements have also been adjusted to incorporate the revised amounts, where applicable.

In addition, in connection with the Company’s Form 10-Q for the three and six months ended June 30, 2019, the Company omitted the rollforward of stockholders’ equity for the three months ended June 30, 2019 and June 30, 2018. The accompanying statements of stockholders’ equity present the rollforward of stockholders’ equity for each of the quarters within the nine months ended September 30, 2019 and 2018 and also incorporates the revised amounts discussed above where applicable.

The Company will effect the revision of its annual consolidated financial statements as of and for the year ended December 31, 2018 and for the year ended December 31, 2017 in connection with the prospective issuance of its 2019 Annual Report on Form 10-K and will effect the revision of its unaudited interim financial statements as of and for the three months ended March 31, 2019 and as of and for the three and six-months ended June 30, 2019 in connection with its prospective issuance of its 2020 Form 10-Qs.

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, or U.S. GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or 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, 2018, and related disclosures, have been derived from the audited consolidated financial statements at that date but does not include all

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

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. Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to current period presentation. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, 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, 2018, included in the Company’s annual report on Form 10-K, filed with the SEC on March 4, 2019.

Accounts Receivable, Allowance for Doubtful Accounts and Contractual Allowance

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 condensed consolidated balance sheets net of an estimated allowance for doubtful accounts and a contractual allowance.

The Company establishes an allowance for doubtful accounts for estimated uncollectible receivables based on its historical experience 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 following table presents the changes in the allowance for doubtful accounts (in thousands):



	Nine Months Ended September 30, 2019			Year Ended December 31, 2018
Balance, beginning of period	$	7,296		$	4,486
Add: provision for doubtful accounts	6,473			7,353
Less: write-offs, net of recoveries and other adjustments	(6,439		)	(4,543		)
Balance, end of period	$	7,330		$	7,296

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



	Nine Months Ended September 30, 2019			Year Ended December 31, 2018
Balance, beginning of period	$	9,205		$	6,345
Add: provision for contractual allowances	11,108			9,095
Less: realized contractual adjustments	(7,162		)	(6,235		)
Balance, end of period	$	13,151		$	9,205

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, United States 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. The Company does not require collateral. The Company records an allowance for

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

doubtful accounts when it becomes probable that a receivable will not be collected. Federal government agencies, including Centers for Medicare and Medicaid Services (“CMS”) and the military, accounted for approximately 36% and 33% of the Company’s revenue for the three and nine months ended September 30, 2019, respectively and 38% and 37%, of the Company’s revenue for the three and nine months ended September 30, 2018. Accounts receivable related to federal government agencies accounted for 21% and 17% at September 30, 2019 and December 31, 2018, respectively.

Revenue Recognition

The Company’s revenue is generated primarily from the provision of its cardiac rhythm monitoring service, the Zio XT service. The Zio XT is a 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 20 days. The Company concludes 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 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 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, 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 part of the Company’s transactions are covered by third-party payors with whom there is no contractual agreement or not an established amount the third-party payor will pay. In determining the collectibility 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 for patients with commercial healthcare insurance carriers.


•	CMS – The Company has received independent diagnostic testing facility approval from regional Medicare Administrative Contractors and will receive reimbursement per the relevant Current Procedural Terminology (“CPT”) code rate 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 is based on factors including an average of the Company’s historical collection experience for 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 Veteran’s 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 transaction price is determined based on negotiated rates, and the Company has historical experience collecting substantially all of these contracted rates. These contracts also impose a number of obligations regarding billing and other matters, and our noncompliance with a material term of such contracts may result in a denial of the

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

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 based on historical information. 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. 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 we bill patient co-payments and deductibles and from time to time we 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, at the time revenue is recognized, with such provisions presented as bad debt expense within the selling, general and administrative line item of the condensed consolidated statement of operations. Adjustments to these estimates for actual experience are also recorded as an adjustment to bad debt expense.

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

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

Disaggregation of Revenue

The Company disaggregates revenue from contracts with customers by payor type. The Company believes these categories aggregate the payor types by nature, amount, timing and uncertainty of its revenue streams. Disaggregated revenue by payor type and major service line for three and nine months ended September 30, 2019 and September 30, 2018 were as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Contracted third-party payors	$	25,961	$	14,887	$	72,040	$	38,270
Non-contracted third-party payors	2,686		3,126		9,016		10,302
Centers for Medicare & Medicaid	15,379		10,952		42,573		29,317
Healthcare Institutions	10,647		9,476		31,819		27,606
Total	$	54,673	$	38,441	$	155,448	$	105,495

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 Consolidated Balance Sheets and revenue is recognized when reports are delivered to the healthcare provider. The total revenue recognized during the nine months ended September 30, 2019 and September 30, 2018 that was included in the contract liability balance at the beginning of 2019 and 2018, respectively, was $1.2 million.

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.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Leases

Identifying a lease

The Company determines whether a contract contains a lease at the inception of a contract. If the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration, the Company considers the contract to contain a lease. The Company determines whether a contract conveys the right to control the use of an identified asset for a period of time if the contract contains both of the following terms:


•	The right to obtain substantially all of the economic benefits from use of the identified asset; and


•	The right to direct the use of the identified asset.

Discount rate for leases

On January 1, 2019, the rate implicit in the Company’s leases was not readily determinable. As such, the Company used its incremental borrowing rate to calculate its right-of-use assets and lease liabilities upon the adoption of ASC 842. The Company determined the appropriate incremental borrowing rate by utilizing the interest rate obtained in connection with the Third Amended and Restated Loan and Security Agreement with Silicon Valley Bank (“Third Amended and Restated SVB Loan Agreement”) which was finalized on October 23, 2018.

On October 4, 2018, the Company entered into an office lease (“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 San Francisco Lease commenced on May 13, 2019 and the Company determined that the interest rate associated with the Third Amended and Restated SVB Loan Agreement could not be utilized as the incremental borrowing rate associated with the San Francisco Lease due to the term of the lease, as well as annual rental payments. The Company determined the appropriate incremental borrowing rate by using a synthetic credit rating which was estimated based on an analysis of outstanding debt of companies with similar credit and financial profiles.

Lease term

The lease term is generally the minimum noncancelable period of each lease. The Company does not include option periods in determining the right-of-use asset and operating lease liability at inception unless it is reasonably certain that the Company will exercise the option at inception or when a triggering event occurs. As of September 30, 2019, no renewal options were included in the determination of lease terms.

Lease Modification

The San Francisco Lease is in the same building with the same landlord as the lease for the Company’s prior headquarters in San Francisco (“existing lease”). Upon the commencement of the San Francisco Lease, the existing lease which had an original expiration date of February 2020, was modified to expire in September 2019.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Recently Adopted Accounting Guidance

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-2, Leases (“Topic 842”), which requires lessees to recognize lease liabilities and corresponding right-of-use assets on the consolidated balance sheet for all leases. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset and, for operating leases, the lessee would recognize a straight-line lease expense. As of September 30, 2019, the Company does not have any finance leases. Topic 842 also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The Company has no embedded leases with suppliers. Upon adoption of Topic 842 on January 1, 2019 using the modified retrospective method, the Company recognized right-of-use assets of $10.2 million and lease liabilities of $10.0 million. There was no cumulative-effect adjustment recorded on January 1, 2019. The Company adopted the following practical expedients allowed under Topic 842:


•	The package of three practical expedients, which allows entities to make an election that allows them not to reassess (1) whether existing or expired contracts contain embedded leases under Topic 842, (2) lease classification of existing or expiring leases, and (3) indirect costs for existing or expired leases;


•	Combining lease and non-lease components practical expedient, which allows lessees, as an accounting policy election by class of underlying asset, to choose not to separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component; and


•	Comparative reporting practical expedient, which allows entities to initially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

For further details, refer to Note 6. Commitments and Contingencies.

Recent Accounting Standards or Updates Not Yet Effective

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. ASU No. 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The Company will adopt this standard in the first quarter of fiscal 2020 and is evaluating the impact of adopting this amendment to its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which amended its guidance for costs of implementing a cloud computing service arrangement to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new standard also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This new standard becomes effective for the Company in the first quarter of fiscal year 2020, with early adoption permitted. This new standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact of adopting this amendment to its consolidated financial statements.

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 September 30, 2019 and December 31, 2018, were as follows (in thousands):



	September 30, 2019
	Amortized Cost		Gross Unrealized					Estimated Fair Value
	Amortized Cost		Gains		Losses			Estimated Fair Value
Money market funds	$	24,034	$	—	$	—		$	24,034
U.S. government securities	85,435		34		—			85,469
Corporate notes	15,017		6		(1		)	15,022
Commercial paper	34,592		—		—			34,592
Total cash equivalents and available-for-sale investments	$	159,078	$	40	$	(1	)	$	159,117
Classified as:
Cash equivalents								$	32,000
Short-term investments								118,091
Long-term investments								9,026
Total cash equivalents and available-for-sale investments								$	159,117
	December 31, 2018
	Amortized Cost		Gross Unrealized					Estimated Fair Value
	Amortized Cost		Gains		Losses			Estimated Fair Value
Money market funds	$	10,606	$	—	$	—		$	10,606
U.S. government securities	9,976		—		(1		)	9,975
Corporate notes	16,514		3		(18		)	16,499
Commercial paper	36,331		—		—			36,331
Total cash equivalents and available-for-sale investments	$	73,427	$	3	$	(19	)	$	73,411
Classified as:
Cash equivalents								$	15,091
Short-term investments								58,320
Total cash equivalents and available-for-sale investments								$	73,411

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):



	September 30, 2019		December 31, 2018
Due within one year	$	150,091	$	73,411
Due after one year through three years	9,026		—
Total cash equivalents and available-for-sale investments	$	159,117	$	73,411

The following tables present the Company's available-for-sale securities that were in an unrealized position as of December 31, 2018 (in thousands):



	December 31, 2018
	Less than 12 months					12 Months or Greater					Total
Assets	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. government securities	$	5,977	$	(1	)	$	—	$	—		$	5,977	$	(1	)
Corporate notes	11,521		(10		)	2,993		(8		)	14,514		(18		)
Total	$	17,498	$	(11	)	$	2,993	$	(8	)	$	20,491	$	(19	)

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Unrealized losses as of September 30, 2019 were not material. Available-for-sale securities held as of September 30, 2019 had a weighted average maturity of 161 days. At September 30, 2019, one investment was 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:

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 September 30, 2019 are $34.9 million and $35.2 million, respectively. The carrying amount and the estimated fair value of the Company’s outstanding interest-bearing obligations at December 31, 2018 were $34.9 million and $34.9 million, respectively.

The Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

The following tables present the fair value of the Company’s financial assets determined using the inputs defined above (in thousands).



	September 30, 2019
	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	24,034	$	—	$	—	$	24,034
U.S. government securities	—		85,469		—		85,469
Corporate notes	—		15,022		—		15,022
Commercial paper	—		34,592		—		34,592
Total	$	24,034	$	135,083	$	—	$	159,117



	December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	10,606	$	—	$	—	$	10,606
U.S. government securities	—		9,975		—		9,975
Corporate notes	—		16,499		—		16,499
Commercial paper	—		36,331		—		36,331
Total	$	10,606	$	62,805	$	—	$	73,411

5. Balance Sheet Components

Inventory and Other Assets

Inventory consisted of the following (in thousands):



	September 30, 2019		December 31, 2018
Raw materials	$	1,341	$	676
Finished goods	2,158		1,386
Total	$	3,499	$	2,062

The Company uses Printed Circuit Board Assemblies (“PCBAs”), in each wearable Zio XT monitor which is used numerous times and has a useful life beyond one year. Each time the PCBA is used in a wearable Zio XT monitor, a portion of the cost of the PCBA is recorded as a cost of revenue. PCBAs which are recorded as other assets, were $4.9 million and $2.5 million as of September 30, 2019, and December 31, 2018, respectively.

Property and Equipment, Net

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



	September 30, 2019			December 31, 2018
Laboratory and manufacturing equipment	$	4,050		$	2,750
Computer equipment and software	1,062			1,062
Furniture and fixtures	724			925
Leasehold improvements	4,921			726
Internal-use software	13,761			8,925
Total property and equipment, gross	24,518			14,388
Less: accumulated depreciation and amortization	(6,715		)	(5,230		)
Total property and equipment, net	$	17,803		$	9,158

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Depreciation and amortization expense was $0.9 million and $2.3 million for the three and nine months ended September 30, 2019, respectively, and $0.6 million and $1.7 million for the three and nine months ended September 30, 2018, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):



	September 30, 2019		December 31, 2018
Accrued vacation	$	3,571	$	2,825
Accrued payroll and related expenses	14,107		18,188
Accrued ESPP contribution	1,656		373
Accrued professional services fees	820		1,249
Claims payable	2,991		2,374
Verily collaboration agreement	5,000		—
Other	4,082		1,679
Total accrued liabilities	$	32,227	$	26,688

6. 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 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 nine months ended September 30, 2019 was $8.1 million and cash paid for operating leases during the nine months ended September 30, 2019 was $4.9 million.

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. In addition, the landlord will provide a tenant improvement allowance of up to $2.4 million for leasehold improvements in connection with the cost of construction of the initial alterations within the premises.

The Company has obtained a standby letter of credit in the amount of $6.9 million, which may be drawn down by the landlord to be applied for certain purposes upon the Company’s breach of any provisions under the San Francisco Lease.

As of September 30, 2019, maturities of operating lease liabilities were as follows (in thousands):



Period Ending December 31:
2019 (remainder of year)	$	1,558
2020	11,766
2021	11,680
2022	11,357
2023	11,696
Thereafter	98,818
	146,875
Less: imputed interest	(51,740		)
Total lease liabilities	$	95,135

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Minimum future lease payments previously disclosed in the 2018 10-K and under the previous lease accounting standard, which includes annual rental payments for the San Francisco Lease which commenced May 13, 2019, for the year ended December 31, 2018 are as follows (in thousands):



Period Ending December 31:
2019	$	8,135
2020	10,669
2021	10,828
2022	11,150
2023	11,483
Thereafter	98,209
Total	$	150,474

The weighted average remaining lease term of the Company’s operating leases as of September 30, 2019 was 11.8 years. The weighted average discount rate of the Company’s operating leases was 7.35% as of September 30, 2019.

Legal Proceedings

From time to time, the Company may become involved in legal proceedings arising from the ordinary course of its business. Management is currently not aware of any matters that could have a material adverse effect on the financial position, results of operations or cash flows of the Company.

Collaboration Agreement

On September 3, 2019, the Company entered into a Development Collaboration Agreement (the “Agreement”) with Verily Life Sciences LLC ("Verily"). The 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 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 Collaboration Agreement, which products will involve combining Verily’s technology with the Company’s technology to create an end to end system. Under the terms of the Collaboration Agreement, the Company paid Verily an upfront fee of $5.0 million in cash, which is included in accrued liabilities as of September 30, 2019. In addition, the Company has agreed to make additional 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 Collaboration Agreement, which payments will be made in cash to Verily.

The Collaboration 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.

During the three months ended September 30, 2019, the Company recognized $5.0 million of research and development expense related to the Agreement.

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 us, 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

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

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.

7. Debt

Pharmakon Loan Agreement

In December 2015, the Company entered into a Loan Agreement with Biopharma Secured Investments III Holdings Cayman LP (the “Pharmakon Loan Agreement”). The Pharmakon Loan Agreement provides for up to $55.0 million in term loans split into two tranches as follows: (i) the Tranche A Loans are $30.0 million in term loans, and (ii) the Tranche B Loans are up to $25.0 million in term loans. The Tranche A Loans were drawn on December 4, 2015. The Tranche B Loans were available to be drawn prior to December 4, 2016. No additional draw was taken.

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

In December 2015, the Company used the proceeds from the Pharmakon Loan Agreement to repay $4.9 million of bank debt to Silicon Valley Bank (“SVB”). The issuance costs and debt discount have been netted against the borrowed funds on the balance sheet.

On October 23, 2018, the Company repaid the principal amount of the Tranche A Loan of $30.0 million and related accrued interest of $3.3 million. The Company incurred a $3.0 million loss in connection with the early extinguishment of the Pharmakon Loan Agreement which included a prepayment premium fee of $1.0 million and additional consideration related to the prepayment of $1.5 million.

Bank Debt

In December 2015, the Company entered into a Second Amended and Restated Loan and Security Agreement with SVB, (the “SVB Loan Agreement”). Under the SVB Loan Agreement, the Company may borrow, repay and reborrow under a revolving credit line, but not in excess of the maximum loan amount of $15.0 million, until December 4, 2018, when all outstanding principal and accrued interest becomes due and payable. Any principal amount outstanding under the SVB Loan Agreement shall bear interest at a floating rate per annum equal to the rate published by The Wall Street Journal as the “Prime Rate” plus 0.25%. The Company may borrow up to 80% of its eligible accounts receivable, up to the maximum of $15.0 million.

In August 2016, the Company obtained a $3.1 million standby letter of credit pursuant to the SVB Loan Agreement in connection with a lease for its San Francisco office.

In October 2018, the Company entered into the Third Amended and Restated Loan and Security Agreement with SVB (“Third Amended and Restated SVB Loan Agreement”). This Agreement amends and restates the Second Amended and Restated Loan and Security Agreement between the Company and SVB dated December 4, 2015, as amended by the First Loan Modification Agreement between the Company and SVB dated August 22, 2016.

Pursuant to the Third Amended and Restated SVB Loan Agreement, the Company obtained a term loan (“SVB Term Loan”) for $35.0 million. Total proceeds from the SVB Term Loan were used to pay off the loan agreement with Biopharma Secured Investments III Holdings Cayman LP (“Pharmakon”), totaling $35.8 million. The Company will make interest-only payments through October 31, 2020, followed by 36 monthly payments of principal plus interest on the SVB Term Loan. Interest charged on the SVB Term Loan will be the greater of (a) a floating rate based on the “Prime Rate” published by The Wall Street Journal minus 0.75%, or (b) 4.25%.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Under the Third Amended and Restated SVB Loan Agreement, the Company may borrow, repay, and reborrow under a revolving credit line, but not in excess of the maximum loan amount of $25.0 million, which includes an $11.0 million standby letter of credit sublimit availability. In October 2018, a $6.9 million standby letter of credit was obtained in connection with a lease for the Company’s San Francisco headquarters. Any principal amount outstanding under the Third Amended and Restated SVB Loan Agreement revolving credit line shall bear interest at an amount that is the greater of (a) a floating rate per annum equal to the rate published by The Wall Street Journal as the “Prime Rate” or (b) 5.00%. The Company may borrow up to 75% of eligible accounts receivable, up to the maximum of $25.0 million. As of September 30, 2019, no amount was outstanding under the revolving credit line.

The Third Amended and Restated Loan Agreement requires the Company to maintain a minimum consolidated liquidity ratio or minimum adjusted Earnings Before Interest, Tax, Depreciation, and Amortization during the term of the loan facility. In addition, the SVB Loan Agreement contains customary affirmative and negative covenants and events of default. The Company was in compliance with loan covenants as of September 30, 2019. The obligations under the Third Amended and Restated Loan Agreement are collateralized by substantially all assets of the Company.

California HealthCare Foundation Note

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

In June 2015, the Company amended the CHCF Note to extend the maturity date to May 2018. The CHCF Note was subordinate to other debt. In May 2018, the Company repaid the principal amount of $1.5 million and related $0.2 million in accrued interest on the CHCF Note.

8. Income Taxes

The Company recorded a tax provision related to its U.K. entity during the three and nine months ended September 30, 2019. 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.

9. Stockholders’ Equity

Common stock

The Company’s amended and restated certificate of incorporation dated October 25, 2016, 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 September 30, 2019.

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



	September 30, 2019	December 31, 2018
Options issued and outstanding	1,625,627	2,094,137
Unvested restricted stock units	881,516	547,891
Common stock warrants issued and outstanding	2,006	4,857
Shares available for grant under future stock plans	6,746,886	5,607,014
Shares available for future issuance	9,256,035	8,253,899

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

10. 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, 2017	4,034,152
Additional awards authorized	1,168,865
Awards granted	(666,913	)
Awards forfeited	124,478
Awards withheld for tax purposes	56,710
Balance at December 31, 2018	4,717,292
Additional awards authorized	1,218,402
Awards granted	(620,624	)
Awards forfeited	155,253
Awards withheld for tax purposes	58,341
Balance at September 30, 2019	5,528,664

During the nine months ended September 30, 2019, 600,614 restricted stock units ("RSUs") were granted, 115,260 RSUs vested, and 151,729 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, 2017	2,601,181		$	12.24	7.17	$	113,958
Options granted	366,928		$	68.32
Options exercised	(798,424	)	$	7.19
Options forfeited	(75,548	)	$	34.30
Balance at December 31, 2018	2,094,137		$	23.20	7.02	$	97,976
Options granted	20,010		$	82.77
Options exercised	(426,655	)	$	9.98
Options forfeited	(61,865	)	$	53.96
Balances at September 30, 2019	1,625,627		$	26.23	6.37	$	78,664
Options exercisable – September 30, 2019	1,191,485		$	17.54	5.82	$	67,568
Options vested and expected to vest – September 30, 2019	1,605,077		$	25.82	6.35	$	78,284

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.

During the nine months ended September 30, 2019 and 2018, the Company granted options with a weighted-average grant date fair value of $38.29 and $32.23 per share, respectively.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

11. Stock-Based Compensation

Employee Stock Options Valuation

The fair value of employee and director stock options was estimated at the date of grant using the Black-Scholes option pricing model valuation model with the weighted average assumptions below.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Expected term (in years)	0.0		6.1		6.1		6.1
Expected volatility	—	%	44.7	%	45.0	%	45.8	%
Risk-free interest rate	—	%	2.85	%	2.39	%	2.74	%
Dividend yield	—	%	—	%	—	%	—	%

The Company did not grant stock options during the three months ended September 30, 2019.

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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Cost of revenue	$	—	$	86	$	225	$	224
Research and development	1,242		801		3,366		2,158
Selling, general and administrative	6,159		3,324		15,473		9,152
Total stock-based compensation expense	$	7,401	$	4,211	$	19,064	$	11,534

As of September 30, 2019, there was total unamortized compensation costs of $10.3 million, net of estimated forfeitures, related to unvested stock options which the Company expects to recognize over a period of approximately 1.9 years, $47.9 million, net of estimated forfeitures, related to unrecognized restricted stock unit (“RSU”) expense, which the Company expects to recognize over a period of 2.5 years, and $1.4 million unrecognized ESPP expense, which the Company will recognize over 0.7 years.

Performance based RSUs (“PRSU”)

In February 2019, the Company granted PRSUs to key executives of the Company. The performance equity program has a 2-year performance period measuring target revenue compound annual growth rate (“CAGR”) achievement for fiscal year 2020 compared to fiscal year 2018. There is a minimum performance threshold of 75% to earn 50% of target, and a maximum threshold of 125% achieved to earn 200% of target. The exact number of earned shares will be determined based on linear interpolation using the actual revenue CAGR as it falls between the minimum and maximum thresholds outlined above. The fair value of the PRSUs will be up to $18.5 million, depending on the actual achievement relative to the performance target. Based on management’s assessment at September 30, 2019 of the Company’s achievement of its performance targets, the Company has determined that it is probable that the performance targets will be achieved. As of September 30, 2019, management believes that it will achieve its performance targets at the 134% level, and has recognized cumulative PRSU expense of $3.3 million, for the nine months ended September 30, 2019.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

12. Net Loss Per Common Share

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 September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Numerator:
Net loss	$	(18,293	)	$	(9,727	)	$	(37,268	)	$	(34,108	)
Denominator:
Weighted-average shares used to compute net loss per common share, basic and diluted	25,247,831			24,059,010			24,818,482			23,764,153
Net loss per common share, basic and diluted	$	(0.72	)	$	(0.40	)	$	(1.50	)	$	(1.44	)

The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per common share for the nine months ended September 30, 2019 and 2018, because their inclusion would be anti-dilutive:



	Nine Months Ended, September 30
	2019	2018
Options to purchase common stock	1,625,627	2,205,126
PRSUs and RSUs issued and unvested	881,516	605,985
Warrants to purchase common stock	2,006	4,857
Total	2,509,149	2,815,968

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

13. Revision of Prior Period Financial Statements

As discussed in Note 1, the Company has revised certain prior period financial statements to correct immaterial errors in its accounting for revenues, contractual allowances, allowance for doubtful accounts and certain other items as presented below (in thousands, except share data):

Revised Consolidated Balance Sheets



	As of June 30, 2019
	As Reported			Adjustment			As Revised
Assets
Cash and cash equivalents	$	16,154		$	(170	)	$	15,984
Accounts receivable, net	29,137			(2,444		)	26,693
Prepaid expenses and other current assets	3,669			(141		)	3,528
Total current assets	94,974			(2,755		)	92,219
Property and equipment, net	12,618			826			13,444
Operating lease right-of-use assets	94,326			(83		)	94,243
Other assets	4,515			(18		)	4,497
Total assets	207,295			(2,030		)	205,265
Liabilities and Stockholders’ Equity
Current liabilities:
Accrued liabilities	23,304			58			23,362
Deferred revenue	1,199			(118		)	1,081
Operating lease liabilities, current portion	7,384			(224		)	7,160
Total current liabilities	35,654			(284		)	35,370
Operating lease liabilities, noncurrent portion	88,106			110			88,216
Total liabilities	158,687			(174		)	158,513
Additional paid-in capital	271,551			(82		)	271,469
Accumulated other comprehensive income	35			25			60
Accumulated deficit	(223,001		)	(1,799		)	(224,800		)
Total stockholders’ equity	48,608			(1,856		)	46,752
Total liabilities and stockholders’ equity	207,295			(2,030		)	205,265

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)



	As of March 31, 2019
	As Reported			Adjustment			As Revised
Assets
Cash and cash equivalents	$	28,235		$	(134	)	$	28,101
Accounts receivable, net	28,252			(1,481		)	26,771
Prepaid expenses and other current assets	3,810			(140		)	3,670
Total current assets	93,308			(1,755		)	91,553
Property and equipment, net	10,208			70			10,278
Operating lease right-of-use assets	9,232			(270		)	8,962
Total assets	117,184			(1,955		)	115,229
Liabilities and Stockholders’ Equity
Accrued liabilities	20,099			437			20,536
Deferred revenue	1,309			(47		)	1,262
Operating lease liabilities, current portion	5,052			(211		)	4,841
Total current liabilities	28,549			179			28,728
Operating lease liabilities, noncurrent portion	3,990			(59		)	3,931
Total liabilities	67,461			120			67,581
Additional paid-in capital	261,231			441			261,672
Accumulated other comprehensive income	2			25			27
Accumulated deficit	(211,534		)	(2,541		)	(214,075		)
Total stockholders’ equity	49,723			(2,075		)	47,648
Total liabilities and stockholders’ equity	117,184			(1,955		)	115,229



	As of December 31, 2018
	As Reported			Adjustment			As Revised
Assets
Accounts receivable, net	$	21,977		$	(2,187	)	$	19,790
Total current assets	106,482			(2,187		)	104,295
Total assets	119,710			(2,187		)	117,523
Liabilities and Stockholders’ Equity
Accrued liabilities	26,570			118			26,688
Deferred revenue	1,243			(20		)	1,223
Total current liabilities	30,236			98			30,334
Total liabilities	65,288			98			65,386
Accumulated other comprehensive loss	(41		)	25			(16		)
Accumulated deficit	(203,515		)	(2,310		)	(205,825		)
Total stockholders’ equity	54,422			(2,285		)	52,137
Total liabilities and stockholders’ equity	119,710			(2,187		)	117,523

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)



	As of September 30, 2018
	As Reported			Adjustment			As Revised
Assets
Accounts receivable, net	$	20,465		$	(490	)	$	19,975
Total current assets	106,731			(490		)	106,241
Total assets	118,989			(490		)	118,499
Liabilities and Stockholders’ Equity
Accrued liabilities	19,178			269			19,447
Deferred revenue	1,174			(15		)	1,159
Total current liabilities	22,263			254			22,517
Total liabilities	55,031			254			55,285
Accumulated other comprehensive income	(29		)	10			(19		)
Accumulated deficit	(188,801		)	(754		)	(189,555		)
Total stockholders’ equity	63,958			(744		)	63,214
Total liabilities and stockholders’ equity	118,989			(490		)	118,499



	As of June 30, 2018
	As Reported			Adjustment			As Revised
Assets
Accounts receivable, net	$	19,065		$	(1,064	)	$	18,001
Total current assets	109,656			(1,064		)	108,592
Property and equipment, net	7,560			34			7,594
Total assets	120,918			(1,030		)	119,888
Liabilities and Stockholders’ Equity
Accrued liabilities	16,355			240			16,595
Total current liabilities	19,655			240			19,895
Total liabilities	52,452			240			52,692
Accumulated deficit	(178,558		)	(1,270		)	(179,828		)
Total stockholders’ equity	68,466			(1,270		)	67,196
Total liabilities and stockholders’ equity	120,918			(1,030		)	119,888



	As of March 31, 2018
	As Reported			Adjustment			As Revised
Assets
Accounts receivable, net	$	17,165		$	(25	)	$	17,140
Total current assets	111,542			(25		)	111,517
Total assets	122,321			(25		)	122,296
Liabilities and Stockholders’ Equity
Accrued liabilities	12,658			147			12,805
Total current liabilities	16,938			147			17,085
Total liabilities	49,698			147			49,845
Accumulated deficit	(166,352		)	(172		)	(166,524		)
Total stockholders’ equity	72,623			(172		)	72,451
Total liabilities and stockholders’ equity	122,321			(25		)	122,296

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)



	As of December 31, 2017
	As Reported			Adjustment			As Revised
Assets
Accounts receivable, net	$	12,953		$	181		$	13,134
Total current assets	119,581			181			119,762
Property and equipment, net	6,221			75			6,296
Total assets	133,123			256			133,379
Liabilities and Stockholders’ Equity
Accrued liabilities	15,644			468			16,112
Total current liabilities	20,918			468			21,386
Total liabilities	53,570			468			54,038
Accumulated deficit	(156,589		)	(212		)	(156,801		)
Total stockholders' equity	79,553			(212		)	79,341
Total liabilities and stockholders’ equity	133,123			256			133,379

Revised Consolidated Statements of Operations



	Three months ended June 30, 2019									Six months ended June 30, 2019
	As Reported			Adjustment			As Revised			As Reported			Adjustment			As Revised
Revenue	$	53,331		$	(890	)	$	52,441		$	100,545		$	230		$	100,775
Cost of revenue	12,825			187			13,012			24,555			230			24,785
Gross profit	40,506			(1,077		)	39,429			75,990			—			75,990
Research and development	8,639			(806		)	7,833			15,395			(863		)	14,532
Selling, general and administrative	43,189			(1,028		)	42,161			79,894			333			80,227
Total operating expenses	51,828			(1,834		)	49,994			95,289			(530		)	94,759
Loss from operations	(11,322		)	757			(10,565		)	(19,299		)	530			(18,769		)
Other income, net	310			(15		)	295			689			(19		)	670
Loss before income taxes	(11,452		)	742			(10,710		)	(19,459		)	511			(18,948		)
Net loss	(11,467		)	742			(10,725		)	(19,486		)	511			(18,975		)
Net loss per common share, basic and diluted	(0.46		)	0.03			(0.43		)	(0.79		)	0.02			(0.77		)



	Three months ended March 31, 2019
	As Reported			Adjustment			As Revised
Revenue	$	47,214		$	1,120		$	48,334
Cost of revenue	11,730			43			11,773
Gross profit	35,484			1,077			36,561
Research and development	6,756			(57		)	6,699
Selling, general and administrative	36,705			1,361			38,066
Total operating expenses	43,461			1,304			44,765
Loss from operations	(7,977		)	(227		)	(8,204		)
Other income, net	379			(4		)	375
Loss before income taxes	(8,007		)	(231		)	(8,238		)
Net loss	(8,019		)	(231		)	(8,250		)
Net loss per common share, basic and diluted	(0.33		)	(0.01		)	(0.34		)

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)



	Year ended December 31, 2018
	As Reported			Adjustment			As Revised
Revenue	$	147,293		$	(16	)	$	147,277
Cost of revenue	38,579			216			38,795
Gross profit	108,714			(232		)	108,482
Research and development	20,750			110			20,860
Selling, general and administrative	131,582			1,731			133,313
Total operating expenses	152,332			1,841			154,173
Loss from operations	(43,618		)	(2,073		)	(45,691		)
Other income, net	1,526			(25		)	1,501
Loss before income taxes	(48,236		)	(2,098		)	(50,334		)
Net loss	(48,280		)	(2,098		)	(50,378		)
Net loss per common share, basic and diluted	(2.02		)	(0.09		)	(2.11		)



	Three months ended September 30, 2018									Nine months ended September 30, 2018
	As Reported			Adjustment			As Revised			As Reported			Adjustment			As Revised
Revenue	$	38,104		$	337		$	38,441		$	104,138		$	1,357		$	105,495
Cost of revenue	9,949			4			9,953			28,050			(61		)	27,989
Gross profit	28,155			333			28,488			76,088			1,418			77,506
Research and development	5,164			(78		)	5,086			13,747			29			13,776
Selling, general and administrative	32,739			(116		)	32,623			94,410			1,920			96,330
Total operating expenses	37,903			(194		)	37,709			108,157			1,949			110,106
Loss from operations	(9,748		)	527			(9,221		)	(32,069		)	(531		)	(32,600		)
Other income, net	365			(10		)	355			1,082			(10		)	1,072
Loss before income taxes	(10,244		)	517			(9,727		)	(33,567		)	(541		)	(34,108		)
Net loss	(10,244		)	517			(9,727		)	(33,567		)	(541		)	(34,108		)
Net loss per common share, basic and diluted	(0.43		)	0.03			(0.40		)	(1.41		)	(0.03		)	(1.44		)



	Three months ended June 30, 2018									Six months ended June 30, 2018
	As Reported			Adjustment			As Revised			As Reported			Adjustment			As Revised
Revenue	$	35,469		$	(177	)	$	35,292		$	66,034		$	1,020		$	67,054
Cost of revenue	9,490			(4		)	9,486			18,101			(65		)	18,036
Gross profit	25,979			(173		)	25,806			47,933			1,085			49,018
Research and development	4,564			83			4,647			8,583			107			8,690
Selling, general and administrative	33,094			846			33,940			61,671			2,036			63,707
Total operating expenses	37,658			929			38,587			70,254			2,143			72,397
Loss from operations	(11,679		)	(1,102		)	(12,781		)	(22,321		)	(1,058		)	(23,379		)
Other income, net	334			4			338			717			—			717
Net loss	(12,206		)	(1,098		)	(13,304		)	(23,323		)	(1,058		)	(24,381		)
Net loss per common share, basic and diluted	(0.51		)	(0.05		)	(0.56		)	(0.99		)	(0.04		)	(1.03		)

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)



	Three months ended March 31, 2018
	As Reported			Adjustment			As Revised
Revenue	$	30,565		$	1,197		$	31,762
Cost of revenue	8,611			(61		)	8,550
Gross profit	21,954			1,258			23,212
Research and development	4,019			24			4,043
Selling, general and administrative	28,577			1,190			29,767
Total operating expenses	32,596			1,214			33,810
Loss from operations	(10,642		)	44			(10,598		)
Other income, net	383			(4		)	379
Net loss	(11,117		)	40			(11,077		)



	Year ended December 31, 2017
	As Reported			Adjustment			As Revised
Revenue	$	98,509		$	620		$	99,129
Cost of revenue	27,708			495			28,203
Gross profit	70,801			125			70,926
Research and development	13,335			(70		)	13,265
Selling, general and administrative	84,737			515			85,252
Total operating expenses	98,072			445			98,517
Loss from operations	(27,271		)	(320		)	(27,591		)
Net loss	(29,420		)	(320		)	(29,740		)
Net loss per common share, basic and diluted	(1.30		)	(0.01		)	(1.31		)

Revised Consolidated Statements of Comprehensive Income (Loss)



	Three months ended June 30, 2019								Six months ended June 30, 2019
	As Reported			Adjustment		As Revised			As Reported			Adjustment		As Revised
Net loss	$	(11,467	)	$	742	$	(10,725	)	$	(19,486	)	$	511	$	(18,975	)
Comprehensive loss	(11,434		)	742		(10,692		)	(19,410		)	511		(18,899		)



	Three months ended March 31, 2019
	As Reported			Adjustment			As Revised
Net loss	$	(8,019	)	$	(231	)	$	(8,250	)
Comprehensive loss	(7,976		)	(231		)	(8,207		)



	Year ended December 31, 2018
	As Reported			Adjustment			As Revised
Net loss	$	(48,280	)	$	(2,098	)	$	(50,378	)
Net change in unrealized gains on available-for-sale securities	24			25			49
Comprehensive loss	(48,256		)	(2,073		)	(50,329		)

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)



	Three months ended September 30, 2018								Nine months ended September 30, 2018
	As Reported			Adjustment		As Revised			As Reported			Adjustment			As Revised
Net loss	$	(10,244	)	$	517	$	(9,727	)	$	(33,567	)	$	(541	)	$	(34,108	)
Net change in unrealized losses on available-for-sale securities	19			—		19			(83		)	129			46
Foreign currency translation	(10		)	10		—			(10		)	10			—
Comprehensive loss	(10,235		)	527		(9,708		)	(33,660		)	(402		)	(34,062		)



	Three months ended June 30, 2018									Six months ended June 30, 2018
	As Reported			Adjustment			As Revised			As Reported			Adjustment			As Revised
Net loss	$	(12,206	)	$	(1,098	)	$	(13,304	)	$	(23,323	)	$	(1,058	)	$	(24,381	)
Comprehensive loss	(12,159		)	(1,098		)	(13,257		)	(23,296		)	(1,058		)	(24,354		)



	Three months ended March 31, 2018
	As Reported			Adjustment		As Revised
Net loss	$	(11,117	)	$	40	$	(11,077	)
Comprehensive loss	(11,137		)	40		(11,097		)



	Year ended December 31, 2017
	As Reported			Adjustment			As Revised
Net loss	$	(29,420	)	$	(320	)	$	(29,740	)
Comprehensive loss	(29,476		)	(320		)	(29,796		)

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Revised Consolidated Statements of Cash Flows



	Six months ended June 30, 2019
	As Reported			Adjustment			As Revised
Cash flows from operating activities
Net loss	$	(19,486	)	$	511		$	(18,975	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,292			18			1,310
Stock-based compensation	11,745			(82		)	11,663
Provision for doubtful accounts and contractual allowances	10,683			1,687			12,370
Amortization of operating lease right-of-use assets	5,061			83			5,144
Changes in operating assets and liabilities:
Accounts receivable	(17,844		)	(1,570		)	(19,414		)
Prepaid expenses and other current assets	(27		)	263			236
Other assets	(1,174		)	18			(1,156		)
Accounts payable	1,025			(6		)	1,019
Accrued liabilities	(3,187		)	(70		)	(3,257		)
Deferred revenue	(45		)	(98		)	(143		)
Operating lease liabilities	(3,724		)	(114		)	(3,838		)
Net cash used in operating activities	(16,781		)	639			(16,142		)
Cash flows from investing activities
Purchases of property and equipment	(4,468		)	(809		)	(5,277		)
Net cash provided by investing activities	11,106			(809		)	10,297
Net increase in cash, cash equivalents, and restricted cash	(3,869		)	(170		)	(4,039		)
Cash, cash equivalents and restricted cash end of period	16,154			(170		)	15,984
Supplemental disclosures of cash flow information
Property, plant and equipment costs included in liabilities	284			16			300

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)



	Three months ended March 31, 2019
	As Reported			Adjustment			As Revised
Cash flows from operating activities
Net loss	$	(8,019	)	$	(231	)	$	(8,250	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation	4,415			441			4,856
Provision for doubtful accounts and contractual allowances	4,709			702			5,411
Changes in operating assets and liabilities:
Accounts receivable	(10,984		)	(1,408		)	(12,392		)
Prepaid expenses and other current assets	(169		)	140			(29		)
Accrued liabilities	(6,380		)	319			(6,061		)
Deferred revenue	66			(27		)	39
Net cash used in operating activities	(17,099		)	(64		)	(17,163		)
Cash flows from investing activities
Purchases of property and equipment	(1,635		)	(70		)	(1,705		)
Net cash provided by investing activities	26,449			(70		)	26,379
Net increase in cash, cash equivalents, and restricted cash	8,212			(134		)	8,078
Cash and cash equivalents end of period	28,235			(134		)	28,101



	Year ended December 31, 2018
	As Reported			Adjustment			As Revised
Cash flows from operating activities
Net loss	$	(48,280	)	$	(2,098	)	$	(50,378	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts and contractual allowances	15,218			1,230			16,448
Changes in operating assets and liabilities:
Accounts receivable	(22,885		)	1,138			(21,747		)
Accrued liabilities	10,776			(275		)	10,501
Deferred revenue	5			(20		)	(15		)
Net cash used in operating activities	(29,068		)	(25		)	(29,093		)
Cash flows from investing activities
Purchases of available-for-sale investments	(93,158		)	25			(93,133		)
Net cash provided by investing activities	34,117			25			34,142

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)



	Nine months ended September 30, 2018
	As Reported			Adjustment			As Revised
Cash flows from operating activities
Net loss	$	(33,567	)	$	(541	)	$	(34,108	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts and contractual allowances	8,921			671			9,592
Changes in operating assets and liabilities:
Accounts receivable	(15,088		)	10			(15,078		)
Accrued liabilities	3,335			(125		)	3,210
Deferred revenue	(64		)	(15		)	(79		)



	Six months ended June 30, 2018
	As Reported			Adjustment			As Revised
Cash flows from operating activities
Net loss	$	(23,323	)	$	(1,058	)	$	(24,381	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts and contractual allowances	6,440			1,245			7,685
Changes in operating assets and liabilities:
Accrued liabilities	497			(186		)	311
Supplemental disclosures of cash flow information
Property, plant and equipment costs included in liabilities	218			34			252



	Three months ended March 31, 2018
	As Reported			Adjustment			As Revised
Cash flows from operating activities
Net loss	$	(11,117	)	$	40		$	(11,077	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts and contractual allowances	2,680			206			2,886
Changes in operating assets and liabilities:
Accrued liabilities	(2,977		)	(246		)	(3,223		)

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)



	Year ended December 31, 2017
	As Reported		Adjustment		As Revised
Cash flows from operating activities
Net loss	(29,420	)	(320	)	(29,740	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation	10,123		(371	)	9,752
Provision for doubtful accounts and contractual allowances	9,403		(181	)	9,222
Changes in operating assets and liabilities:
Accounts receivable	(12,950	)	479		(12,471	)
Accrued liabilities	5,364		393		5,757
Supplemental disclosures of cash flow information
Property, plant and equipment costs included in liabilities	35		75		110

Revised Consolidated Statements of Shareholder's Equity



	Six months ended June 30, 2019
	As Reported			Adjustment			As Revised
Stock-based compensation expense	$	11,745		$	(82	)	$	11,663
Additional-paid-in-capital ending balance	271,551			(82		)	271,469
Accumulated other comprehensive loss beginning balance	(41		)	25			(16		)
Accumulated other comprehensive loss ending balance	35			25			60
Accumulated deficit beginning balance	(203,515		)	(2,310		)	(205,825		)
Net loss	(19,486		)	511			(18,975		)
Accumulated deficit ending balance	(223,001		)	(1,799		)	(224,800		)
Total stockholders' equity	48,608			(1,856		)	46,752



	Three months ended March 31, 2019
	As Reported			Adjustment			As Revised
Stock-based compensation expense	$	4,415		$	441		$	4,856
Additional-paid-in-capital ending balance	261,231			441			261,672
Accumulated other comprehensive loss beginning balance	(41		)	25			(16		)
Accumulated other comprehensive loss ending balance	2			25			27
Accumulated deficit beginning balance	(203,515		)	(2,310		)	(205,825		)
Net loss	(8,019		)	(231		)	(8,250		)
Accumulated deficit ending balance	(211,534		)	(2,541		)	(214,075		)
Total stockholders' equity	49,723			(2,075		)	47,648



	Year Ended December 31, 2018
	As Reported			Adjustment			As Revised
Unrealized loss on investments	$	24		$	25		$	49
Accumulated other comprehensive loss ending balance	(41		)	25			(16		)
Accumulated deficit beginning balance	(156,589		)	(212		)	(156,801		)
Net loss	(48,280		)	(2,098		)	(50,378		)
Accumulated deficit ending balance	(203,515		)	(2,310		)	(205,825		)
Total stockholders' equity	54,422			(2,285		)	52,137

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)



	Six Months Ended June 30, 2018
	As Reported			Adjustment			As Revised
Accumulated deficit beginning balance	$	(156,589	)	$	(212	)	$	(156,801	)
Net loss	(23,323		)	(1,058		)	(24,381		)
Accumulated deficit ending balance	(178,558		)	(1,270		)	(179,828		)
Total stockholders' equity	68,466			(1,270		)	67,196



	Three Months Ended March 31, 2018
	As Reported			Adjustment			As Revised
Accumulated deficit beginning balance	$	(156,589	)	$	(212	)	$	(156,801	)
Net loss	(11,117		)	40			(11,077		)
Accumulated deficit ending balance	(166,352		)	(172		)	(166,524		)
Total stockholders' equity	72,623			(172		)	72,451



	Year Ended December 31, 2017
	As Reported			Adjustment			As Revised
Accumulated deficit beginning balance	$	(127,169	)	$	108		$	(127,061	)
Net loss	(29,420		)	(320		)	(29,740		)
Accumulated deficit ending balance	(156,589		)	(212		)	(156,801		)
Total stockholders' equity	79,553			(212		)	79,341

14. Subsequent Events

Agreement with Bristol-Meyers Squibb Company ("BMS")

On November 12, 2019, the Company entered into a Master Services Agreement ("MSA") with Bristol-Meyers Squibb Company ("BMS") to provide services in connection with certain clinical studies BMS is conducting. Under the terms of the first Statement of Work ("SOW") attached to the MSA, the Company is responsible for key deliverables associated with the provision of the Zio XT monitor and customized services including reporting of key data elements. BMS will pay the Company fees up to a maximum of $6.8 million for services performed of the under the terms of the first Statement of Work attached to the MSA.

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 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 digital healthcare company redefining the way cardiac arrhythmias are clinically diagnosed by combining our wearable biosensing technology with cloud-based data analytics and deep-learning capabilities. Our goal is to be the leading provider of ambulatory electrocardiogram (“ECG”) monitoring for patients at risk for arrhythmias. We have created a full portfolio of ambulatory cardiac monitoring services on a unique platform, called the Zio service, which combines an easy-to-wear and unobtrusive biosensor that can be worn for up to 14 consecutive days with powerful proprietary algorithms that distill data from millions of heartbeats into clinically actionable information. The Zio service consists of:


•	wearable patch-based biosensors, Zio XT and Zio AT monitors, which continuously record and store ECG data from every patient heartbeat for up to 14 consecutive days; Zio AT offers the option of timely transmission of data during the prescribed wear period;


•	cloud-based analysis of the recorded cardiac rhythms using our proprietary, deep-learned algorithms;


•	a final quality assessment review of the data by our certified cardiographic technicians; and


•	an easy-to-read Zio report, a curated summary of findings that includes high quality and clinically-actionable information which is sent directly to a patient’s physician and can be integrated into a patient’s electronic health record.

We receive revenue for the Zio service primarily from third-party payors, which include commercial payors and government agencies, such as CMS and the military. In addition, a small percentage of institutions, which are typically hospitals or private physician practices, purchase the Zio service from us directly. Third-party payors accounted for approximately 90%, and 87% of our revenue for the nine months ended September 30, 2019 and 2018, respectively. Our revenue in the third-party commercial payor category is primarily contracted, which means we have entered into pricing contracts with these payors. Approximately 33% and 37% of our total revenue for the nine months ended September, 30, 2019 and 2018, respectively, is received from federal government agencies under established reimbursement codes. Institutions, which are typically hospitals or private physician practices accounted for approximately 10% and 13% of our revenue for the nine months ended September 30, 2019 and 2018, respectively. We rely on a third-party billing partner, XIFIN, Inc., to submit patient claims and collect from commercial payors, certain government agencies, and patients.

Since our Zio service was cleared by the U.S. Food and Drug Administration (“FDA”), we have provided the Zio service to over one million patients and have collected approximately 400 million hours of curated heartbeat data. We believe the Zio service is well-positioned to disrupt an already-established $1.8 billion U.S. ambulatory cardiac monitoring market by offering a user-friendly device to patients, actionable information to physicians and value to payors.

We market our ambulatory cardiac monitoring solution in the United States through a direct sales organization comprised of sales management, field billing specialists, and quota-carrying sales representatives. Our sales representatives focus on initial introduction into new customers, penetration across a sales region, driving adoption within existing accounts and conveying our message of clinical and economic value to service line managers and hospital administrators and other clinical departments. We continue to increase the size of our U.S. sales organization to expand the current customer account base and increase utilization of our Zio service. In addition, we will continue exploring sales and marketing expansion opportunities in international geographies.

As further explained in Note 1. Organization and Description of Business and Note 13. Revision of Prior Period Financial Statements in the notes to the accompanying condensed consolidated financial statements, the Company has revised its previously issued interim financial statements as of and for the three and nine-months ended September 30, 2018. This Management's Discussion and Analysis has been revised to reflect the correction of these prior period errors.

Components of Results of Operations

Revenue

Substantially all of our revenue is derived from sales of our Zio service in the United States. We earn revenue from the provision of our Zio service primarily from third-party payors, which include commercial payors and government agencies, such as CMS and the military. In addition, a small percentage of institutions, which are typically hospitals or private physician practices, purchase the Zio service from us directly.

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 a delivered report, the Company considers factors such as claim 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.

We expect our revenue to increase as we expand our sales and marketing infrastructure, increase awareness of our product offerings, increase the number of covered and contracted lives for our Zio service, expand the range of indications for our Zio service and develop new products and services. We are subject to seasonality similar to other companies in our field, as vacations by physicians and patients tend to affect enrollment in the Zio service more during the summer months and during the end of calendar year holidays compared to other times of the year.

Cost of Revenue and Gross Margin

Cost of revenue is expensed as incurred and includes direct labor, material costs, equipment and infrastructure expenses, amortization of internal-use software, allocated overhead, and shipping and handling. Direct labor includes payroll and personnel-related costs involved in manufacturing, data analysis, and customer service. Material costs include both the disposable materials costs of the Zio monitors and amortization of the re-usable printed circuit board assemblies (“PCBAs”). Each Zio monitor includes a PCBA, the cost of which is amortized over the anticipated number of uses of the board. We expect cost of revenue to increase in absolute dollars to the extent our revenue grows.

We calculate gross margin as gross profit divided by revenue. 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 and changes in the costs associated with providing the Zio service. Historically, we have increased our average selling price by entering into contracts with third-party commercial payors at rates that were higher than amounts typically collected from payors without contracts or from institutional customers. We have in the past been able to increase our pricing as third-party payors become more familiar with the benefits of the Zio XT service and move to contracted pricing arrangements. We believe we will be able to see modest pricing increases as more payors contract with us due to the benefits the Zio XT service and mix shift towards our Zio AT service which has higher contracted rates. We expect to continue to decrease the cost of service per device by obtaining volume purchase discounts for our material costs and implementing scan-time algorithm improvements and software-driven and other workflow enhancements to reduce labor costs. We expect further decreases in the cost of service as we spread the fixed portion of our overhead costs over a larger number of units produced, which will result in a decrease in our per unit manufacturing costs.

Research and Development Expenses

We expense research and development costs as they are incurred. Research and development expenses include payroll and personnel-related costs, including stock-based compensation, consulting services, clinical studies, laboratory supplies and allocated facility overhead costs. We expect our research and development costs to increase in absolute dollars as we hire additional personnel to develop new product and service offerings and product enhancements.

Selling, General and Administrative Expenses

Our sales and marketing expenses consist of payroll and personnel-related costs, including stock-based compensation, sales commissions, travel expenses, consulting, public relations costs, direct marketing, tradeshow and promotional expenses and allocated facility overhead costs. We expect our sales and marketing expenses to increase in absolute dollars as we hire additional sales personnel and increase our sales support infrastructure in order to further penetrate the U.S. market and expand into international markets.

Our general and administrative expenses consist primarily of payroll and personnel-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.

Interest Expense

Interest expense is attributable to borrowings under our loan agreements. Refer to Note 7. Debt, for further information on our loan agreements.

Other Income, Net

Other income, net consists primarily of interest income which consists of interest received on our cash, cash equivalents and investments balances.

Results of Operations

Comparison of the Three Months Ended September 30, 2019 and 2018



	Three Months Ended September 30,
	2019			2018			$ Change			% Change
Revenue	$	54,673		$	38,441		$	16,232		42	%
Cost of revenue	13,785			9,953			3,832			39	%
Gross profit	40,888			28,488			12,400			44	%
Gross margin	75		%	74		%
Operating expenses:
Research and development	13,499			5,086			8,413			165	%
Selling, general and administrative	45,649			32,623			13,026			40	%
Total operating expenses	59,148			37,709			21,439			57	%
Loss from operations	(18,260		)	(9,221		)	(9,039		)	98	%
Interest expense	(409		)	(861		)	452			52	%
Other income, net	396			355			41			12	%
Loss before income taxes	(18,273		)	(9,727		)	(8,546		)	88	%
Income tax provision	20			—			20			—	%
Net loss	$	(18,293	)	$	(9,727	)	$	(8,566	)	88	%

Revenue

Revenue increased $16.2 million, or 42%, to $54.7 million during the three months ended September 30, 2019 from $38.4 million during the three months ended September 30, 2018. The increase in revenue was primarily attributable to the increase in volume of the Zio services performed as a result of the expansion of coverage and the increase in the number of payors.

Cost of Revenue and Gross Margin

Cost of revenue increased $3.8 million, or 39%, to $13.8 million during the three months ended September 30, 2019 from $9.9 million during the three months ended September 30, 2018. The increase in cost of revenue was primarily due to increased Zio service volume in 2019.

Gross margin for the three months ended September 30, 2019 increased to 75%, compared to 74% for the three months ended September 30, 2018. The increase was driven primarily by the reduction in the cost of the Zio service due to our continued efforts to lower manufacturing costs, fixed costs absorption and reduced labor costs per device through our algorithm improvements and software-driven and other workflow enhancements.

Research and Development Expenses

Research and development expenses increased $8.4 million, or 165%, to $13.5 million during the three months ended September 30, 2019 from $5.1 million during the three months ended September 30, 2018. The increase was primarily attributable to a $5.0 million payment to Verily, a $1.5 million increase in allocated facility costs and $1.0 million in increased employee related costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $13.0 million, or 40%, to $45.6 million during the three months ended September 30, 2019 from $32.6 million during the three months ended September 30, 2018. The increase was primarily attributable to $6.9 million in payroll and stock-based compensation for new employees, $3.9 million increase in our bad debt provision and $2.7 million increase in rent expense associated with our new San Francisco headquarters location. The increase in operating expenses was partially offset by lower labor overhead and facility-related allocation of $3.1 million.

Interest Expense

Interest expense decreased to $0.4 million for the three months ended September 30, 2019, compared to $0.9 million for the three months ended September 30, 2018 as a result of the extinguishment of the loan agreement with Biopharma Secured Investments III Holdings Cayman LP in October 2018 as well as repayment of the promissory note to California HealthCare Foundation in May 2018.

Other Income, Net

Other income, net was $0.4 million for the three months ended September 30, 2019, compared to $0.4 million for the three months ended September 30, 2018.

Results of Operations

Comparison of the Nine Months Ended September 30, 2019 and 2018



	Nine Months Ended September 30,
	2019			2018			$ Change			% Change
Revenue	$	155,448		$	105,495		$	49,953		47	%
Cost of revenue	38,570			27,989			10,581			38	%
Gross profit	116,878			77,506			39,372			51	%
Gross margin	75		%	73		%
Operating expenses:
Research and development	28,031			13,776			14,255			103	%
Selling, general and administrative	125,876			96,330			29,546			31	%
Total operating expenses	153,907			110,106			43,801			40	%
Loss from operations	(37,029		)	(32,600		)	(4,429		)	14	%
Interest expense	(1,258		)	(2,580		)	1,322			51	%
Other income, net	1,066			1,072			(6		)	1	%
Loss before income taxes	(37,221		)	(34,108		)	(3,113		)	9	%
Income tax provision	47			—			47			—
Net loss	$	(37,268	)	$	(34,108	)	$	(3,160	)	9	%

Revenue

Revenue increased $50.0 million, or 47%, to $155.4 million during the nine months ended September 30, 2019 from $105.5 million during the nine months ended September 30, 2018. The increase in revenue was primarily attributable to the increase in volume of the Zio services performed as a result of the expansion of coverage and the increase in the number of payors under contract, increasing physician acceptance and expansion of our sales force as we continue to gain market acceptance for our Zio service.

Cost of Revenue and Gross Margin

Cost of revenue increased $10.6 million, or 38%, to $38.6 million during the nine months ended September 30, 2019 from $28.0 million during the nine months ended September 30, 2018. The increase in cost of revenue was primarily due to increased Zio service volume in 2019.

Gross margin for the nine months ended September 30, 2019 increased to 75%, compared to 73% for the nine months ended September 30, 2018. The increase was driven primarily by the reduction in the cost of the Zio service due to our continued efforts to lower manufacturing costs, fixed costs absorption and reduced labor costs per device through our algorithm improvements and software-driven and other workflow enhancements.

Research and Development Expenses

Research and development expenses increased $14.3 million, or 103%, to $28.0 million during the nine months ended September 30, 2019 from $13.8 million during the nine months ended September 30, 2018. The increase was primarily attributable to a $6.4 million increase in payroll and personnel-related expenses as a result of increased headcount related and stock-based compensation related expenses as well as a $5.0 million payment to Verily, and a $1.8 million increase in allocated facility costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $29.5 million, or 31%, to $125.9 million during the nine months ended September 30, 2019 from $96.3 million during the nine months ended September 30, 2018. The increase was primarily attributable to a $22.6 million increase in payroll and personnel-related expenses as a result of increased headcount related and stock-based compensation related expenses, as well as an additional $5.5 million increase in bad debt expense and $3.9 million in rent expense due to the commencement of the San Francisco Lease. The increased operating expenses was offset by lower labor overhead and facility-related allocation of $7.9 million.

A significant amount of selling, general, and administrative incremental spend can be directly attributed to our continued focus on salesforce expansion and its support infrastructure to support our growth strategy.

Interest Expense

Interest expense decreased to $1.3 million for the nine months ended September 30, 2019, compared to $2.6 million for the nine months ended September 30, 2018 as a result of the extinguishment of the loan agreement with Biopharma Secured Investments III Holdings Cayman LP in October 2018 as well as repayment of the promissory note to California HealthCare Foundation in May 2018.

Other Income, Net

Other income, net was $1.1 million for the nine months ended September 30, 2019, compared to $1.1 million for the nine months ended September 30, 2018.

Liquidity and Capital Expenditures

Overview

As of September 30, 2019, we had cash and cash equivalents of $34.6 million and short-term investments of $118.1 million and an accumulated deficit of $243.1 million.

Our expected future capital requirements may depend on many factors including expanding our customer base, the expansion of our salesforce, and the timing and extent of spending on the development of our technology to increase our product offerings.

If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.

Cash Flows

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



	Nine Months Ended September 30,
	2019			2018
Net cash (used in) provided by:
Operating activities	$	(17,003	)	$	(24,720	)
Investing activities	(76,766		)	29,848
Financing activities	108,380			3,546
Net increase in cash and cash equivalents	$	14,611		$	8,674

Cash Used in Operating Activities

During the nine months ended September 30, 2019, cash used in operating activities was $17.0 million, which consisted of a net loss of $37.3 million, adjusted by non-cash charges of $45.8 million and a net change of $25.5 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of stock based-based compensation of $19.1 million and a change in allowance for doubtful accounts and contractual allowance of $17.6 million. The change in our net operating assets and liabilities was primarily due to an increase of $22.8 million in accounts receivable as a result of increased revenues.

During the nine months ended September 30, 2018, cash used in operating activities was $24.7 million, which consisted of a net loss of $34.1 million, adjusted by non-cash charges of $22.4 million and a net change of $13.0 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of a change in stock based-based compensation of $11.5 million, and allowance for doubtful accounts and contractual allowance of $9.6 million. The change in our net operating assets and liabilities was primarily due to an increase of $15.1 million in accounts receivable as a result of increased revenues.

Cash Provided by and Used in Investing Activities

Cash used in investing activities during the nine months ended September 30, 2019 was $76.8 million, which consisted of $146.0 million in purchases of available for sale investments and $8.6 million of capital expenditures associated with leasehold improvements and internal use software. This was partially offset by cash received from the maturities of available for sale investments of $77.9 million.

Cash provided by investing activities during the nine months ended September 30, 2018 was $29.8 million, which consisted primarily of $107.6 million in cash received from the maturities of available for sale investments, partially offset by purchases of available for sale investments of $74.1 million, and $3.7 million of capital expenditures to purchase property and equipment.

Cash Provided by Financing Activities

During the nine months ended September 30, 2019, cash provided by financing activities was $108.4 million, primarily due to $107.1 million from the issuance of common stock in a public offering, net discounts and issuance costs and $6.4 million in proceeds from the issuance of common stock in connection with employee options exercises and our Employee Stock Purchase Program. This was partially offset by $5.1 million in tax withholding upon the vesting of RSUs.

During the nine months ended September 30, 2018, cash provided by financing activities was $3.5 million, primarily due $6.7 million in proceeds from the issuance of common stock, partially offset by $1.6 million in tax withholding upon the vesting of RSUs and $1.5 million in debt repayment.

Indebtedness

In December 2015, we entered into a Loan Agreement with Biopharma Secured Investments III Holdings Cayman LP (the “Pharmakon Loan Agreement”). The Pharmakon Loan Agreement provided for up to $55.0 million in term loans split into two tranches as follows: (i) the Tranche A Loans were $30.0 million in term loans, and (ii) the Tranche B Loans were up to $25.0 million in term loans. The Tranche A Loans were drawn on December 4, 2015. The Tranche B Loans were available to be drawn prior to December 4, 2016. No additional draw was taken.

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

In December 2015, we used the proceeds from the Pharmakon Loan Agreement to repay $4.9 million of bank debt to SVB. The issuance costs and debt discount were netted against the borrowed funds on the balance sheet.

On October 23, 2018, we repaid the principal amount of the Tranche A Loan of $30.0 million and related accrued interest of $3.3 million. We incurred a $3.0 million loss in connection with the early extinguishment of the Pharmakon Loan Agreement which included a prepayment premium fee of $1.0 million and additional consideration related to prepayment of $1.5 million.

Bank Debt

In December 2015, we entered into a Second Amended and Restated Loan and Security Agreement with SVB, (the “SVB Loan Agreement”). Under the SVB Loan Agreement, we could borrow, repay and reborrow under a revolving credit line, but not in excess of the maximum loan amount of $15.0 million, until December 4, 2018, when all outstanding principal and accrued interest became due and payable. Any principal amount outstanding under the SVB Loan Agreement shall bear interest at a floating rate per annum equal to the rate published by The Wall Street Journal as the “Prime Rate” plus 0.25%. We may borrow up to 80% of our eligible accounts receivable, up to the maximum of $15.0 million.

In August 2016, we obtained a $3.1 million standby letter of credit pursuant to the SVB Loan Agreement in connection with a lease for the San Francisco office.

In October 2018, we entered into the Third Amended and Restated Loan and Security Agreement with SVB (“Third Amended and Restated SVB Loan Agreement”). This Agreement amends and restates the Second Amended and Restated Loan and Security Agreement between the Company and SVB dated December 4, 2015, as amended by the First Loan Modification Agreement between the Company and SVB dated August 22, 2016.

Pursuant to the Third Amended and Restated SVB Loan Agreement, we obtained a term loan (“SVB Term Loan”) for $35.0 million. Total proceeds from the SVB Term Loan were used to pay off the loan agreement with Biopharma Secured Investments III Holdings Cayman LP (“Pharmakon”), totaling $35.8 million. We will make interest-only payments through October 31, 2020, followed by 36 monthly payments of principal plus interest on the SVB Term Loan. Interest charged on the SVB Term Loan will be the greater of (a) a floating rate based on the “Prime Rate” published by The Wall Street Journal minus 0.75%, or (b) 4.25%.

Under the Third Amended and Restated SVB Loan Agreement, we may borrow, repay, and reborrow under a revolving credit line, but not in excess of the maximum loan amount of $25.0 million, which includes an $11.0 million standby letter of credit sublimit availability. In October 2018, a $6.9 million standby letter of credit was obtained in connection with a lease for our San Francisco headquarters. Any principal amount outstanding under the Third Amended and Restated SVB Loan Agreement revolving credit line shall bear interest at an amount that is the greater of (a) a floating rate per annum equal to the rate published by The Wall Street Journal as the “Prime Rate” or (b) 5.00%. We may borrow up to 75% of eligible accounts receivable, up to the maximum of $25.0 million. As of September 30, 2019 no amount was outstanding under the revolving credit line.

The Third Amended and Restated Loan Agreement requires us to maintain a minimum consolidated liquidity ratio or minimum adjusted Earnings Before Interest, Tax, Depreciation, and Amortization during the term of the loan facility. In addition, the SVB Loan Agreement contains customary affirmative and negative covenants and events of default. We were in compliance with loan covenants as of December 31, 2018. The obligations under the Third Amended and Restated Loan Agreement are collateralized by substantially all of our assets.

California HealthCare Foundation Note

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

In June 2015, we amended the CHCF Note to extend the maturity date to May 2018.

The CHCF Note was subordinate to other debt. In May 2018, we repaid the principal amount of $1.5 million and related $0.2 million in accrued interest on the CHCF Note.

Off-Balance Sheet Arrangements

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

Contractual Obligations

Our contractual obligations as of December 31, 2018 are presented in our Form 10-K filed with the SEC on March 4, 2019. There have been no material changes.

Critical Accounting Policies and Estimates

For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2018. Refer to Note 2. Summary of Significant Accounting Policies, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, for all significant accounting policies as well as the lease accounting policy updated upon the adoption of ASC 842 as of January 1, 2019.

Recently Adopted Accounting Guidance

In February 2016, the FASB issued ASU No. 2016-02, Leases (“Topic 842”), which requires lessees to recognize lease liabilities and corresponding right-of-use assets on the consolidated balance sheet for all leases. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset and, for operating leases, the lessee would recognize a straight-line lease expense. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The Company has no embedded leases with suppliers. Upon adoption of Topic 842 on January 1, 2019 using the modified retrospective method, the Company recognized right-of-use assets of $10.4 million and lease liabilities of $10.2 million. There was no cumulative-effect adjustment recorded on January 1, 2019. The Company adopted the following practical expedients allowed under Topic 842:


•	The package of three practical expedients, which allows entities to make an election that allows them not to reassess (1) whether existing or expired contracts contain embedded leases under Topic 842, (2) lease classification of existing or expiring leases, and (3) indirect costs for existing or expired leases;


•	Combining lease and non-lease components practical expedient, which allows lessees, as an accounting policy election by class of underlying asset, to choose not to separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component; and


•	Comparative reporting practical expedient, which allows entities to initially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

For further details, refer to Note 6. Commitments and Contingencies of the Form 10-Q.

Recent Accounting Standards or Updates Not Yet Effective

In August 2018, the FASB amended its guidance for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new standard also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This new standard becomes effective for the Company in the first quarter of fiscal year 2020, with early adoption permitted. This new standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact of adopting this amendment to its consolidated financial statements.

permitted. This new standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact of adopting this amendment to its consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks in the ordinary course of our business. These risks primarily include risk related to interest rate sensitivities and foreign currency exchange rate sensitivity.

Interest Rate Sensitivity

We had cash, cash equivalents and investments of $161.8 million as of September 30, 2019, which consisted of bank deposits, money market funds, U.S. government securities, corporate notes, and commercial paper. Such interest-earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our condensed consolidated financial statements.

We had total outstanding debt of $34.9 million, which is net of debt discount and debt issuance costs, as of September 30, 2019. The Third Amended and Restated SVB Loan Agreement Note carries a variable interest rate based on the “Prime Rate” published by The Wall Street Journal. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

Foreign Currency Exchange Rate Sensitivity

We face foreign exchange risk as a result of entering into transactions denominated in currencies other than U.S. dollars, particularly in British Pound Sterling. As of September 30, 2019, we do not consider this risk to be material. We do not utilize any forward foreign exchange contracts. All foreign transactions settle on the applicable spot exchange basis at the time such payments are made.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2019. Based on that evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were not effective as of September 30, 2019 due to the following material weaknesses, which continue to exist as of September 30, 2019:

•

We did not design or maintain an effective control environment commensurate with our financial reporting requirements. Given the rapid growth in the size and complexity of the business, we failed to maintain a sufficient number of professionals with an appropriate level of accounting and internal control knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. This material weakness contributed to the additional material weaknesses below.

•

We did not effectively execute our controls over our financial statement close process, to ensure the prevention or detection of a misstatement that could be material. Specifically, we concluded we did not have an effective business performance review control used to monitor the completeness and accuracy of the financial results and to identify potential failures in lower level controls. This control did not detect errors in a timely manner that could have been material to our interim or annual financial statements. Additionally, we did not have appropriate control over the review of journal entries to ensure that they were properly supported and recorded completely and accurately.


•	We did not maintain effective controls with respect to the review of the accounting for revenue and related accounts receivable, including maintaining effective controls to prevent or detect errors in the assessment of bad debt and revenue

reserves. Specifically, we did not detect errors within the contractual allowance and bad debt expense analyses which resulted in immaterial misstatements to revenue, accounts receivable and bad debt expense.

These material weaknesses resulted in the misstatement of our revenues, revenue reserves, bad debt expense, property and equipment, research and development expense and related financial disclosures, and in the revision of the Company’s consolidated financial statements for the years ended December 31, 2017, December 31, 2018, and each interim period therein as well as the quarters ended March 31, 2019, and June 30, 2019. Additionally, these material weaknesses could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to the annual or interim condensed consolidated financial statements that would not be prevented or detected.

Notwithstanding these material weaknesses, management has concluded that the condensed consolidated financial statements included in this quarterly report on Form 10-Q state fairly, in all material aspects, our financial position at the end of, and the results of operations and cash flows for, the periods stated in conformity with accounting principles generally accepted in the United States. Refer to Note 13. Revision of Prior Period Financial Statements for further details on adjustments made to our interim and annual financial statements.

Changes in Internal Control Over Financial Reporting

Under the supervision and with the participation of our management, including our President and Chief Executive Officer and Chief Financial Officer, we evaluated whether there were any changes in our internal control over financial reporting during the third quarter of fiscal 2019. Other than the hiring of additional accounting personnel and enhancements to the design of controls related to capitalized software and revenue there were no changes in our internal control over financial reporting identified in connection with the above evaluation that occurred during the third quarter of fiscal 2019 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

Plan for Remediation of Material Weaknesses

Management continues to execute its action plan to remediate the underlying causes that gave rise to the material weaknesses at December 31, 2018. This action plan includes strengthening controls over our financial statement close process, enhancing our management review of the accounting for revenue and the related accounts receivable and revenue reserves, and adding additional individuals with the appropriate level of accounting and internal controls knowledge and experience to our finance organization, including an Internal Audit Director who is focused on the development, maintenance and monitoring of our overall control environment. The material weaknesses will not be considered remediated until the remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Legal Proceedings

We are not currently a party to any material legal proceedings. From time to time we may be involved in legal proceedings or investigations by governmental agencies. For example, we could become involved in litigation related to product liability, unfair competition or intellectual property litigation with our competitors. The defense of these and other matters can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand and cause us to incur significant expenses or make substantial payments to satisfy judgments or settle claims, all of which could have an adverse impact on our results of operations, financial position or cash flows.

ITEM 1A. RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report on Form 10-Q, including our financial statements and the related notes thereto, before making a decision to invest in our common stock. The realization of any of the following risks could materially and adversely affect our business, financial condition, operating results and prospects. In that event, the price of our common stock could decline, and you could lose part or all of your investment

Risks Related to Our Business

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

We have incurred net losses since our inception in September 2006. For the three and nine months ended September 30, 2019, we had net losses of $18.3 million and $37.3 million, respectively, and for three and nine months ended September 30, 2018, we had net losses of $9.7 million and $34.1 million, respectively, and expect to continue to incur additional losses. As of September 30, 2019, we had an accumulated deficit of $243.1 million. The losses and accumulated deficit were primarily due to the substantial investments we made to develop and improve our technology and products and improve our business and the Zio service through research and development efforts and infrastructure improvements. Over the next several years, we expect to continue to devote substantially all of our resources to increase adoption of and reimbursement for our Zio service, which includes Zio XT and Zio AT, and to develop additional arrhythmia detection and management products and services. These efforts may prove more expensive than we currently anticipate and we may not succeed in increasing our revenue sufficiently to offset these higher expenses or at all. Accordingly, we cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability. Our failure to achieve and sustain profitability in the future could cause the market price of our common stock to decline.

Our business is dependent upon physicians adopting our Zio service and if we fail to obtain broad adoption, our business would be adversely affected.

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

Our revenue relies substantially on the Zio service, which is currently our only product offering. If the Zio service or future product offerings fail to gain, or lose, market acceptance, our business will suffer.

Our current revenue is dependent on prescriptions of the Zio service, and we expect that sales of the Zio service will account for substantially all of our revenue for the foreseeable future. We are in various stages of research and development for other diagnostic solutions and new indications for our technology and the Zio service; however, there can be no assurance that we will be able to successfully develop and commercialize any new products or services. Any new products may not be accepted by physicians or may merely replace revenue generated by our Zio service and not generate additional revenue. If we have difficulty launching new products, our reputation may be harmed and our financial results adversely affected. In order to substantially increase our revenue, we will need to target physicians other than cardiologists, such as emergency room doctors, primary care physicians and other physicians with whom we have had little contact and may require a different type of selling effort. If we are unable to increase prescriptions of the Zio service, expand reimbursement for the Zio service, or successfully develop and commercialize new products and services, our revenue and our ability to achieve and sustain profitability would be impaired.

Our quarterly and annual results may fluctuate significantly and may not fully reflect the underlying performance of our business.

Our quarterly and annual results of operations, including our revenue, profitability and cash flow, may vary significantly in the future and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one quarter or period should not be relied upon as an indication of future performance. Our quarterly and annual financial results may fluctuate as a result of a variety of factors, many of which are outside our control and, as a result, may not fully reflect the underlying performance of our business. Fluctuation in quarterly and annual results may decrease the value of our common stock. Factors that may cause fluctuations in our quarterly and annual results include, without limitation:


•	market awareness and acceptance of the Zio service;


•	our ability to get payors under contract at acceptable reimbursement rates;


•	the availability of reimbursement for the Zio service through government programs;


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


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


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


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


•	changes in our pricing policies or those of our competitors;


•	general economic, industry and market conditions;


•	the regulatory environment;


•	expenses associated with unforeseen product quality issues;


•	timing of physician prescriptions and demand for our Zio service;


•	seasonality factors, such as patient and physician vacation schedules, severe weather conditions and insurance deductibles, that hamper or otherwise restrict when a patient seeking diagnostic services such as the Zio service visits the prescribing physician;


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


•	litigation or other claims against us for intellectual property infringement or otherwise;


•	our ability to obtain additional financing as necessary; and


•	advances and trends in new technologies and industry standards.

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

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

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

Reimbursement by CMS is highly regulated and subject to change; our failure to comply with applicable regulations could result in decreased revenue and may subject us to penalties or have an adverse impact on our business.

For the nine months ended September 30, 2019, we received approximately 27% of our revenue from reimbursement for our Zio service by CMS. Under CMS guidelines for participation in the Medicare program CMS designates us as an independent diagnostic treatment facility (“IDTF”). CMS imposes extensive and detailed requirements on IDTFs, including but not limited to, rules that govern how we structure our relationships with physicians, how and when we submit reimbursement claims, how we operate our monitoring facilities and how and where we provide our monitoring solutions. Our failure to comply with applicable CMS rules could result in a discontinuation of our reimbursement under the CMS payment programs, our being required to return funds already paid to us, civil monetary penalties, criminal penalties and/or exclusion from the CMS programs.

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

Government payors may change their coverage and reimbursement policies, as well as payment amounts, in a way that would prevent or limit reimbursement for our Zio service, which would significantly harm our business. Government and other third-party payors require us to report the service for which we are seeking reimbursement by using a Current Procedural Terminology, or CPT, code-set maintained by the American Medical Association (“AMA”). For Zio XT, we have secured temporary CPT codes (or Category III CPT codes) used for newly introduced technologies and specific to our category of diagnostic monitoring through 2022. The fees associated with these Category III CPT codes are also temporary and may be modified by CMS. Category III CPT codes may be renewed for another five years or converted to permanent codes (or Category I CPT codes) based on specific requirements, including national use data and published clinical evidence, as established by the AMA and CMS. The process to convert Category III CPT codes to Category I CPT codes is governed by the AMA and CMS. To ensure uninterrupted reimbursement it is incumbent upon us to successfully secure either Category I CPT codes from the AMA by 2023 or seek to renew the existing Category III CPT codes for another five years. On October 25, 2019, the AMA’s CPT Editorial Panel announced that it had voted to establish two new Category I CPT codes which we believe will be applicable to the Zio service. We anticipate that the new codes will be referred to the AMA's Relative Value Scale Update Committee (“RUC”) to determine the appropriate level of reimbursement for the procedure, relative to other physician services, where they will be accepted or modified. Category I CPT codes are valued by CMS and remain mostly unchanged for five years after the values are initially determined. Category I CPT codes can have values and associated pricing that are higher, lower or equal to their associated Category III CPT codes. We can provide no assurance that any Category I CPT code secured for the reimbursement of our Zio service will contain values and pricing that are the same as or greater than the existing Category III CPT codes. In addition, to the extent CMS reduces its reimbursement rates for the Zio service, regardless of the Category of CPT code, third-party payors may reduce the rates at which they reimburse the Zio service, which could adversely affect our revenue.

Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through a national coverage determination (“NCD”) by CMS, or at the local level through a local coverage determination, or an LCD, by one or more of the regional Medicare Administrative Contractors ("MACs") who are private contractors that process and pay claims on behalf of CMS for different regions. In the absence of an NCD, as is the case with Zio XT, the MAC with jurisdiction over a specific geographic region will have the discretion to make an LCD and determine the fee schedule and reimbursement rate associated with Category III CPT codes, and regional LCDs may not always be consistent among all MACs or regions within the United States. We have in the past been, and in the future may be, required to respond to potential changes in reimbursement rates for our products. Reductions in reimbursement rates, if enacted, could have a material adverse effect on our business. Further, a reduction in coverage by Medicare could cause some commercial third-party 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, we are and will continue to be subject to changes in the level of Medicare coverage for our products, and unfavorable coverage determinations at the national or local level could adversely affect our business and results of operations.

Controls imposed by CMS and commercial third-party payors designed to reduce costs, commonly referred to as “utilization review”, may affect our operations. Federal law contains numerous provisions designed to ensure that services rendered to CMS patients meet professionally recognized standards and are medically necessary, appropriate for the specific patient and cost-effective. These provisions include a requirement that a sampling of CMS patients must be reviewed by quality improvement organizations, which review the appropriateness of product prescriptions, the quality of care provided, and the appropriateness of reimbursement costs. Quality improvement organizations may deny payment for services or assess fines and also have the authority to recommend to the U.S. Department of Health and Human Services, that a provider which is in substantial noncompliance with the standards of the quality improvement organization be excluded from participation in the Medicare program. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or Affordable Care Act, potentially expands the use of prepayment review by Medicare contractors by eliminating statutory restrictions on their use, and, as a result, efforts to impose more stringent cost controls are expected to continue. Utilization review is also a requirement of most non-governmental managed care organizations and other third-party payors. To date these controls have not had a significant effect on our operations, but significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material, adverse effect on our business, financial position and results of operations in the future.

Each state’s Medicaid program has its own coverage determinations related to our services, and some state Medicaid programs do not provide their recipients with coverage for our Zio service. Even if our Zio service is covered by a state Medicaid program, we must be recognized as a Medicaid provider by the state in which the Medicaid recipient receiving the services resides in order for us to be reimbursed by a state’s Medicaid program. Even if we are recognized as a provider in a state, Medicare’s rate for our Zio service may be low, and the Medicaid reimbursement amounts are sometimes as low, or lower, than the Medicare reimbursement rate. In addition, and as noted above, each state’s Medicaid program has its own coverage determinations related to our Zio service, and many state Medicaid programs do not provide their recipients with coverage for our Zio service. As a result of all of these factors, our Zio service is not reimbursed or only reimbursed at a very low dollar amount by many state Medicaid programs. In some cases, a state Medicaid program’s reimbursement rate for our Zio service might be zero dollars. Additionally, certain states may require Medicaid recipients to pay for part of the Zio Service, and since the recipients of Medicaid are low income individuals, we are often unable to collect any amounts directly from individual recipients of the Zio service covered by Medicaid. Low or zero dollar Medicaid reimbursement rates for our Zio service would have an adverse effect on our business, gross margins and revenues. Most of the Zio services we provide are reimbursed through Medicare or private third party payors and not Medicaid, but if that were to change in the future, or the percentage of Zio services provided to Medicaid recipients were to increase, our gross margins would be adversely affected as a result.

Also, healthcare reform legislation or regulation may be proposed or enacted in the future that may adversely affect such policies and amounts. Changes in the healthcare industry directed at controlling healthcare costs or perceived over-utilization of ambulatory cardiac monitoring products and services could reduce the volume of Zio services prescribed by physicians. If more healthcare cost controls are broadly instituted throughout the healthcare industry, the volume of cardiac monitoring solutions prescribed could decrease, resulting in pricing pressure and declining demand for our Zio service. We cannot predict whether and to what extent existing coverage and reimbursement will continue to be available. If physicians, hospitals and clinics are unable to obtain adequate coverage and government reimbursement of the Zio service, they are significantly less likely to use the Zio service and our business and operating results would be harmed.

The current presidential administration and Congress may attempt to make sweeping changes to the current healthcare laws and their implementing regulations. It is uncertain how modification or repeal of any of the provisions of the Affordable Care Act or its implementing regulations, including as a result of current and future executive orders and legislative actions, will impact us and the medical device industry as a whole. Any changes to, or repeal of, the Affordable Care Act or its implementing regulations may have a material adverse effect on our results of operations. We cannot predict what other healthcare programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the United States may have on our business.

If third-party commercial payors do not provide any or adequate reimbursement, rescind or modify their reimbursement policies or delay payments for our products, including the Zio service, or if we are unable to successfully negotiate reimbursement contracts, our commercial success could be compromised.

We receive a substantial portion of our revenue from third-party private commercial payors, such as medical insurance companies. These commercial payors may reimburse our products, including the Zio service, at inadequate rates, suspend or discontinue reimbursement at any time or require or increase co-payments from patients. Any such actions could have a negative effect on our revenue and the revenue of providers prescribing our products. Physicians may not prescribe our products unless payors reimburse a substantial portion of the submitted costs, including the physician’s, hospital’s or clinic’s charges related to the application of certain products, including the Zio monitor and the interpretation of results which may inform a diagnosis. Additionally, certain payors may require that physicians prescribe another arrhythmia diagnostic monitoring option prior to prescribing the Zio service. There is significant uncertainty concerning third-party reimbursement of any new product or service until a contracted rate is established. Reimbursement by a commercial payor may depend on a number of factors including but not limited to a payor’s determination that the prescribed service is:


•	not experimental or investigational;


•	appropriate for the specific patient;


•	cost effective;


•	supported by peer-reviewed publications; and


•	accepted and used by physicians within their provider network.

Since each payor makes its own decision as to whether to establish a policy concerning reimbursement or enter into a contract with us to set the price of reimbursement, seeking reimbursement on a payor-by-payor basis is a time consuming and costly process to which we dedicate substantial resources. If we do not dedicate sufficient resources to establishing contracts with third-party commercial payors, or continue to validate the clinical value of Zio services through studies and physician adoption, the amount that we are reimbursed for our products may decline, our revenue may become less predictable, and we will need to expend more efforts on a claim-by-claim basis to obtain reimbursement for our products.

A substantial portion of our revenue is derived from third-party commercial payors who have pricing contracts with us, which means that the payor has agreed to a defined reimbursement rate for our services. These contracts provide a high degree of certainty to us, physicians, clinics and hospitals with respect to the rate at which our services will be reimbursed. These contracts also impose a number of obligations regarding billing and other matters, and our noncompliance with a material term of such contracts may result in termination of the contract and loss of any associated revenue. We expect to continue to dedicate resources to maintaining compliance with these contracted payors, to ensure payors acknowledge and are aware of the clinical and economic value of our services and the interest on the part of physicians, clinics and hospitals who use our services and participate in their provider networks; however, we can provide no assurance that we will retain indefinitely any given contractual payor relationship. A loss of these pricing contracts can increase the uncertainty of reimbursement of claims from third-party payors.

A portion of our revenue is derived from third-party commercial payors without such contracts in place. Without a contracted rate, reimbursement claims for our products are often denied upon submission, and we or our billing partner, XIFIN, Inc. (“XIFIN”), must appeal the denial. The appeals process is time-consuming and expensive, and may not result in full or any payment. In cases where there is no contracted rate for reimbursement it may be more difficult for us to acquire new accounts with physicians, clinics and hospitals. In addition, in the absence of a contracted rate, there is typically a greater out-of-network, co-insurance or co-payment requirement which may result in payment delays or decreased likelihood of full collection. In some cases involving non-contracted insurance companies, we may not be able to collect any amount or only a portion of the invoiced amount for our services.

We expect to continue to dedicate resources to establishing pricing contracts with non-contracted insurance companies; however, we can provide no assurance that we will be successful in obtaining such pricing contracts or that such pricing contracts will contain reimbursement for our services at rates that are favorable to us. If we fail to establish these contracts, we will be able to recognize revenue only based on an estimated average collection rate per historical cash collections. In addition, XIFIN may need to expend significant resources obtaining reimbursement on a claim-by-claim basis and in adjudicating claims which are denied altogether or not reimbursed at acceptable rates. We currently pay XIFIN a percentage of the amounts it collects on our behalf and this percentage may increase in the future if it needs to expend more resources in adjudicating such claims. We sometimes informally engage physicians, hospitals and clinics to help establish contracts with third-party payors who insure their patients. We cannot provide any assurance that such physicians, hospitals and clinics will continue to help us establish contracts in the future. If we fail to establish contracts with more third-party payors it may adversely affect our ability to increase our revenue. In addition, a failure to enter into contracts could affect a physician’s willingness to prescribe our services because of the administrative work

involved in interacting with patients to answer their questions and help them obtain reimbursement for our services. If physicians are unwilling to prescribe our services due to the lack of certainty and administrative work involved with patients covered by non-contracted insurance companies, or patients covered by non-contracted insurance companies are unwilling to risk that their insurance may charge additional out-of-pocket fees, our revenue could decline or fail to increase.

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

We have experienced rapid growth in our headcount and in our operations. Any growth that we experience in the future will provide challenges to our organization, requiring us to expand our sales personnel and manufacturing operations and general and administrative infrastructure. In addition to the need to scale our clinical operations capacity, future growth will impose significant added responsibilities on management, including the need to identify, recruit, train and integrate additional employees. Rapid expansion in personnel could mean that less experienced people manufacture our Zio monitors, market and sell our Zio service and analyze the data to produce Zio reports, which could result in inefficiencies and unanticipated costs, reduced quality in either our Zio reports or manufactured devices, and disruptions to our service operations. As we seek to gain greater efficiency, we may expand the automated portion of our Zio service and require productivity improvements from our certified cardiographic technicians. Such improvements could compromise the quality of our Zio reports. In addition, rapid and significant growth may strain our administrative and operational infrastructure. Our ability to manage our business and growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our business could be harmed.

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

As demand for the Zio service or any of our future products or services increases, we will need to continue to scale our manufacturing capacity and algorithm processing technology, expand customer service, billing and systems processes and enhance our internal quality assurance program. We will also need additional certified cardiographic technicians and other personnel to process higher volumes of data. We cannot assure you that, with any increases in scale, required improvements will be successfully implemented, quality assurance will be maintained, or that appropriate personnel will be available to facilitate growth of our business. Failure to implement necessary procedures, transition to new processes or hire the necessary personnel could result in higher costs of processing data or inability to meet increased demand. There can be no assurance that we will be able to perform our data analysis on a timely basis at a level consistent with demand, quality standards and physician expectations. If we encounter difficulty meeting market demand, quality standards or physician expectations, our reputation could be harmed and our future prospects and business could suffer.

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

We most recently received FDA clearance for our Zio AT ECG Monitoring System, (“Zio AT”), which is designed to provide timely transmission of data during the wear period. We do not yet know whether Zio AT or any other new products and services will be well received and broadly adopted by physicians and their patients or whether sales will be sufficient for us to offset the costs of development, implementation, support, operation, sales and marketing. Although we have performed extensive testing of our new products and services, their broad-based implementation may require more support than we anticipate, which would further increase our expenses. Additionally, new products and services may subject us to additional risks of product performance, customer complaints and litigation. If sales of our new products and services are lower than we expect, or if we expend additional resources to fix unforeseen problems and develop modifications, our operating margins are likely to decrease.

If we are unable to keep up with demand for the Zio service, our revenue could be impaired, market acceptance for the Zio service could be harmed and physicians may instead prescribe our competitors’ products and services.

As demand for the Zio service increases, we may encounter production or service delays or shortfalls. Such production or service delays or shortfalls may be caused by many factors, including the following:


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


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


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


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


•	we are subject to state, federal and international regulations, including the FDA’s Quality System Regulation (“QSR”) and the EU’s Medical Device Directive (“MDD”) for both the manufacture of the Zio monitor and the provision of the Zio service, noncompliance with which could cause an interruption in our manufacturing and services; and


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

Our inability to successfully manufacture our Zio monitors in sufficient quantities, or provide the Zio service in a timely manner, would materially harm our business.

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

We depend on third-party vendors to manufacture some of our components, which could make us vulnerable to supply shortages and price fluctuations that could harm our business.

We rely on third-party vendors for components used in our Zio monitors. Our reliance on third-party vendors subjects us to a number of risks, including:


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


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


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


•	inability of the manufacturer or supplier to comply with the QSR and state regulatory authorities;


•	miscommunication of design specifications due to errors/omissions by either the vendor or our company, resulting delayed delivery of acceptable product;


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


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


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


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

Any significant delay or interruption in the supply of components or sub-assemblies, or our inability to obtain substitute components, sub-assemblies or materials from alternate sources at acceptable prices and in a timely manner could impair our ability to meet the demand for our Zio service and harm our business.

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

We rely on single suppliers for the supply of our adhesive substrate, disposable plastic housings, instruments and other materials that we use to manufacture and label our Zio monitors. These components and materials are critical and there are relatively few alternative sources of supply. We have not qualified additional suppliers for some of these components and materials and we do not carry a significant inventory of these items. While we believe that alternative sources of supply may be available, we cannot

be certain whether they will be available if and when we need them and that any alternative suppliers would be able to provide the quantity and quality of components and materials that we would need to manufacture our Zio monitors if our existing suppliers were unable to satisfy our supply requirements. To utilize other supply sources, we would need to identify and qualify new suppliers to our quality standards, which could result in manufacturing delays and increase our expenses. Any supply interruption could limit our ability to manufacture our products and could therefore harm our business, financial condition and results of operations. If our current suppliers and any alternative suppliers do not provide us with the materials we need to manufacture our products or perform our services, if the materials do not meet our quality specifications, or if we cannot obtain acceptable substitute materials, an interruption in our Zio service could occur. Any such interruption may significantly affect our future revenue and harm our relations and reputation with physicians, hospitals, clinics and patients.

If our manufacturing facility becomes damaged or inoperable, or if we are required to vacate the facility, we may be unable to manufacture our Zio monitors or we may experience delays in production or an increase in costs which could adversely affect our results of operations.

We currently manufacture and assemble the Zio monitors in only one location. Our products are comprised of components sourced from a variety of contract manufacturers, with final assembly completed at our facility in Cypress, California. Our facility and equipment, or those of our suppliers, could be harmed or rendered inoperable by natural or man-made disasters, including fire, earthquake, terrorism, flooding and power outages. Any of these may render it difficult or impossible for us to both manufacture new products and receive returned units for some period of time. If our Cypress facility is inoperable for even a short period of time, the inability to manufacture and receive our Zio monitors, and the interruption in research and development of any future products, may result in harm to our reputation, increased costs, the loss of orders and lower revenue. Furthermore, it could be costly and time consuming to repair or replace our facilities and the equipment we use to perform our research and development work and manufacture our products.

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

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

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

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

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

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

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


•	differences between the submitted price for our Zio service and the reimbursement rates of payors;


•	compliance with complex federal and state regulations related to billing CMS;


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


•	differences in information and billing requirements among payors; and


•	incorrect or missing patient history, indications or billing information.

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

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

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

In the third quarter of 2019, we recognized approximately five percent of our revenue from non-contracted third-party payors, and as a result, our quarterly operating results are difficult to predict.

We have limited visibility as to when we will receive payment for our Zio service with non-contracted payors and we or XIFIN must appeal any negative payment decisions, which often delay collections further. Additionally, a portion of the revenue from non-contracted payors is received from patient co-pays, which we may not receive for several months following delivery of service or at all. For revenue related to non-contracted payors, we estimate an average collection rate based on factors including historical cash collections. Subsequent adjustments, if applicable, are recorded as an adjustment to revenue. Fluctuations in revenue may make it difficult for us, research analysts and investors to accurately forecast our revenue and operating results or to assess our actual performance. If our revenue or operating results fall below expectations, the price of our common stock would likely decline.

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

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

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

The market for ambulatory cardiac monitoring products and services is evolving rapidly and becoming increasingly competitive. Our Zio service competes with a variety of products and services that provide alternatives for ambulatory cardiac monitoring, including Holter monitors and mobile cardiac telemetry monitors. Our industry is highly fragmented and characterized by a small number of large manufacturers and a large number of smaller regional service providers. These third parties compete with us in marketing to payors and prescribing physicians, recruiting and retaining qualified personnel, acquiring technology and developing

products and services that compete with the Zio service. Our ability to compete effectively depends on our ability to distinguish our company and the Zio service from our competitors and their products, and includes such factors as:


•	safety and efficacy;


•	acute and long term outcomes;


•	ease of use;


•	price;


•	physician, hospital and clinic acceptance; and


•	third-party reimbursement.

Large competitors in the ambulatory cardiac market include companies that sell standard Holter monitor equipment such as GE Healthcare, Philips Healthcare, Mortara Instrument, Inc., Spacelabs Healthcare, Inc. and Welch Allyn Holdings, Inc., which was acquired by Hill-Rom Holdings, Inc. Additional competitors, such as BioTelemetry, Inc., offer Holter and event, and mobile telemetry monitors, and also function as service providers. These companies have also developed other patch-based cardiac monitors that have received FDA and foreign regulatory clearances such as ePatch and MCOT Patch. There are also several small start-up companies trying to compete in the patch-based cardiac monitoring space. We have seen a trend in the market for large medical device companies to acquire, invest in or form alliances with these smaller companies in order to diversify their product offerings and participate in the digital health space. Future competition could come from makers of wearable fitness products or large information technology companies focused on improving healthcare. For example, Apple Inc. recently added capabilities on its watch platform to measure non-continuous ECG and to alert users to the potential presence of irregular heartbeats suggestive of asymptomatic atrial fibrillation. These competitors and potential competitors may introduce new products that compete with our Zio service. Many of our competitors and potential competitors have significantly greater financial and other resources than we do and have well-established reputations, broader product offerings, and worldwide distribution channels that are significantly larger and more effective than ours. If our competitors and potential competitors are better able to develop new ambulatory cardiac monitoring solutions than us, or develop more effective or less expensive cardiac monitoring solutions, they may render our current Zio service obsolete or non-competitive. Competitors may also be able to deploy larger or more effective sales and marketing resources than we currently have. Competition with these companies could result in price cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations.

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

The market for medical devices, including the ambulatory cardiac monitoring segment, is competitive, dynamic, and marked by rapid and substantial technological development and product innovation. There are few barriers that would prevent new entrants or existing competitors from developing products that compete directly with ours. Demand for the Zio service and future related products or services could be diminished by equivalent or superior products and technologies offered by competitors. If we are unable to innovate successfully, our products and services could become obsolete and our revenue would decline as our customers purchase our competitors’ products and services.

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

We have entered into a collaboration agreement with a third party that may not result in the development of commercially viable products or the generation of significant future revenues.

We have entered into a collaboration agreement with Verily Life Sciences LLC (an Alphabet Company, referred to as “Verily”) to develop certain next-generation AF screening, detection, or monitoring products, which involve combining Verily’s technology with our technology to create an end to end system (the “Collaboration Agreement”). As part of the Collaboration Agreement, we

paid Verily an up-front fee of $5.0 million in cash and have agreed to make additional payments over the term of the Collaboration Agreement up to an aggregate of $12.75 million, subject to the achievement of certain development and regulatory milestones. The success of our collaboration with Verily is highly dependent on the efforts provided to the collaboration by Verily and us and the skill sets of our respective employees. Support of these development efforts requires significant resources, including research and development, manufacturing, quality assurance, and clinical and regulatory personnel. Even if our development and clinical trial efforts succeed, the FDA may not approve the developed products or may require additional product testing and clinical trials before approving the developed products, which would result in product launch delays and additional expense. If approved by the FDA, the developed products may not be accepted in the marketplace.

After the initial term of the Collaboration Agreement, in order to commercialize any developed products with Verily, we will need to enter into a commercialization agreement. There is no guarantee that we will be able to enter into such an agreement on commercially reasonable terms or at all. If we are unable to reach agreement with Verily on terms, the up-front fee and regulatory and development milestone payments and our internal development costs would not be recovered and the licenses to use Verily’s technology will expire.

This collaboration may not result in the development of products that achieve commercial success and could be terminated prior to developing any products. In the event of any termination or expiration of the Collaboration Agreement, we may be required to devote additional resources to product development and we may face increased competition, including from Verily. Verily may use the experience and insights it develops in the course of the collaboration with us to initiate or accelerate their development of products that compete with our products, which may create competitive disadvantages for us. Accordingly, we cannot provide assurance that our collaboration with Verily or any other third party will result in the successful development of commercially viable products or result in significant additional future revenues for our company.

The continuing clinical acceptance of the Zio service depends upon maintaining strong working relationships with physicians.

The development, marketing, and sale of the Zio service depends upon our ability to maintain strong working relationships with physicians and other key opinion leaders. We rely on these professionals’ knowledge and experience for the development, marketing and sale of our products. Among other things, physicians assist us in clinical trials and product development matters and provide public presentations at trade conferences regarding the Zio service. If we cannot maintain our strong working relationships with these professionals and continue to receive their advice and input, the development and marketing of the Zio service could suffer, which could harm our business, financial condition and results of operations.

The medical device industry’s relationship with physicians is under increasing scrutiny by the Health and Human Services Office of the Inspector General, (“OIG”), the Department of Justice (“DOJ”), state attorneys general, and other foreign and domestic government agencies. Our failure to comply with laws, rules and regulations governing our relationships with physicians, or an investigation into our compliance by the OIG, DOJ, state attorneys general or other government agencies, could significantly harm our business.

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

As of September 30, 2019, we had $34.9 million outstanding under our revolving credit facility provided by of our loan agreement with Silicon Valley Bank (“SVB”). We must make significant annual debt payments under the loan agreement which will divert resources from other activities. Our debt with SVB is collateralized by substantially all of our assets and contains customary financial and operating covenants limiting our ability to, among other things, dispose of assets, undergo a change in control, merge or consolidate, enter into certain transactions with affiliates, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions. The covenants in the loan agreement, as well as in any future financing agreements into which we may enter, may restrict our ability to finance our operations and engage in, expand or otherwise pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control and future breaches of any of these covenants could result in a default under the loan agreement. If not waived, future defaults could cause all of the outstanding indebtedness under the loan agreement to become immediately due and payable and terminate commitments to extend further credit. If we do not have or are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either upon maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our ability to operate and continue our business as a going concern.

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

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

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

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

Our business strategy includes international expansion. Doing business internationally involves a number of risks, including:


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


•	obtaining and sustaining regulatory approvals where required for the sale of our products and services in various countries;


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


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


•	logistics and regulations associated with shipping and returning our Zio monitors following use;


•	limits on our ability to penetrate international markets if we are required to process the Zio service locally;


•	financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the effect of local and regional financial pressures on demand and payment for our products and services and exposure to foreign currency exchange rate fluctuations;


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


•	regulatory and compliance risks that relate to maintaining accurate information and control over activities subject to regulation under the United States Foreign Corrupt Practices Act of 1977 (“FCPA”), U.K. Bribery Act of 2010 and comparable laws and regulations in other countries; and


•	compliance risks associated with General Data Protection Regulation (“GDPR”) enacted to protect the privacy of all individuals in the European Union and addresses export of the data outside of the European Union.

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

Our relationships with business partners in new international markets may subject us to an increased risk of litigation.

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

We may become involved in disputes relating to our products, contracts and business relationships. Such disputes include litigation against persons whom we believe have infringed on our intellectual property, infringement litigation filed against us, litigation against a competitor or litigation filed against us by distributors or service providers resulting from a breach of contract or other claim. Any of these disputes may result in substantial costs to us, judgments, settlements and diversion of our management’s attention, which could adversely affect our business, financial condition or operating results. There is also a risk of adverse judgments, as the outcome of litigation in foreign jurisdictions can be inherently uncertain.

We could be adversely affected by violations of the FCPA, and similar worldwide anti-bribery laws and the ongoing investigation, and outcome of the investigation, by government agencies of possible violations by us of the FCPA could have a material adverse effect on our business.

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

In addition, the DOJ or other governmental agencies could impose a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, modifications to business practices including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA. The imposition of any of these sanctions or remedial measures could have a material adverse effect on our business and results of operations.

Our proprietary data analytics engine may not operate properly, which could damage our reputation, give rise to claims against us or divert application of our resources from other purposes, any of which could harm our business and operating results.

The ECG data that is gathered through our Zio monitors is curated by algorithms that are part of our Zio service and a Zio report is delivered to the prescribing physician for diagnosis. The continuous development, maintenance and operation of our deep-learned backend data analytics engine is expensive and complex, and may involve unforeseen difficulties including material performance problems, undetected defects or errors. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our proprietary algorithms from operating properly. We may also attempt to develop new capabilities and incorporate new technologies, including artificial intelligence, which could impact our data analytics platform’s performance. If our data analytics platform does not function reliably or fails to meet physician or payor expectations in terms of performance, physicians may stop prescribing the Zio service and payors could attempt to cancel their contracts with us.

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

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

The analysis we perform to create the diagnostic report for the Zio service is dependent upon a recording made by each device, which requires the physical return of the Zio monitor to one of our clinical centers. We predominantly rely on the U.S. Postal Service (“USPS”) to perform this delivery service. Delivery of the Zio monitor to one of our clinical centers may be subject to disruption by natural disasters such as earthquake or flooding, labor disagreements or errors on behalf of USPS staff, structural issues timely processing in some geographies, or other disruption to the USPS delivery infrastructure. Further, for the Zio AT monitor, we rely on the provision of cellular communication services for the timely transmission of patient information and reportable events. Once received, all data from both Zio XT and AT monitors is processed, curated and reported on through cloud-

computing resources. The reliability of these communication and cloud services is also subject to natural disasters, labor disruptions, human error, and infrastructure failure.

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

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

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

We are highly dependent on information technology networks and systems, including the internet and services hosted by Amazon Web Services and other third party service providers, to securely process, transmit and store this critical information. Security breaches of this infrastructure, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns, or unauthorized disclosure or modifications of confidential information involving patient health information to become publicly available. The secure processing, storage, maintenance and transmission of this critical information are vital to our operations and business strategy, and we devote significant resources to protecting such information, including executing Business Associates Agreements with applicable vendors. Although we take measures to protect sensitive information from unauthorized access or disclosure, cyber-attacks are becoming more sophisticated and frequent, and our information technology and infrastructure, and that of XIFIN and other third parties we utilize to process or store data, may be vulnerable to viruses and worms, phishing attacks, denial-of-service attacks, physical or electronic break-ins, attacks by hackers, breaches due to employee error, malfeasance, or misuse, or similar disruptions from unauthorized tampering. While we have implemented data privacy and security measures that we believe are compliant with applicable privacy laws and regulations, some confidential and protected health information, is transmitted to us by third parties, who may not implement adequate security and privacy measures. Further, if third party service providers that process or store data on our behalf experience security breaches or violate applicable laws, agreements, or our policies, such events may also put our information at risk and could in turn have an adverse effect on our business.

A security breach or privacy violation that leads to disclosure or modification of, or prevents access to, patient information, including protected health information, could harm our reputation, compel us to comply with disparate state breach notification laws, require us to verify the correctness of database contents and otherwise subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. If we are unable to prevent such security breaches or privacy violations or implement satisfactory remedial measures in a timely manner, the market perception of the effectiveness of our security measures could be harmed, our operations could be disrupted, our brand could be adversely affected, demand for our products and services may decrease, we may be unable to provide the Zio service, we may lose sales and customers, and we may suffer loss of reputation, financial loss and other regulatory penalties because of lost or misappropriated information, including sensitive patient data. We may be required to expend significant capital and financial resources to invest in security measures, protect against such threats or to alleviate problems caused by breaches in security. In addition, these breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm. Although we have invested in our systems and the protection of our data to reduce the risk of an intrusion or interruption, and we monitor our systems on an ongoing basis for any current or potential threats, we can give no assurances that these measures and efforts will prevent all intrusions, interruptions, or breakdowns.

Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched, we may be unable to anticipate these techniques or to implement adequate preventive measures.

In the event that patients or physicians authorize or enable third parties to access their data on our systems, we cannot ensure the complete integrity or security of such data in our systems as we would not control that access. Third parties may also attempt to fraudulently induce our employees, or patients or physicians who use our technology, into disclosing sensitive information such as user names, passwords or other information. Third parties may also otherwise compromise our security measures in order to

gain unauthorized access to the information we store. This could result in significant legal and financial exposure, a loss in confidence in the security of our service, interruptions or malfunctions in our service, and, ultimately, harm to our future business prospects and revenue.

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

Depending on the nature of the information compromised, in the event of a data breach or other unauthorized access to or acquisition of our user data, we may also have obligations to notify users about the incident and we may need to provide some form of remedy for the individuals affected by the incident. A growing number of legislative and regulatory bodies have adopted consumer notification requirements in the event of unauthorized access to or acquisition of certain types of personal data. Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises user data. In addition, the interpretation and application of consumer, health-related and data protection laws, rules and regulations in the United States, Europe and elsewhere are often uncertain, contradictory and in flux. It is possible that these laws, rules and regulations may be interpreted and applied in a manner that is inconsistent with our practices or those of our distributors and partners. If we or these third parties are found to have violated such laws, rules or regulations, it could result in government-imposed fines, orders requiring that we or these third parties change our or their practices, or criminal charges, which could adversely affect our business. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business. In addition, California recently enacted the California Consumer Privacy Act (“CCPA”), which will become effective on January 1, 2020, and will, among other things, require new disclosures to California consumers and afford such consumers new abilities to opt out of certain sales of personal information. It is likely that amendments will be proposed to this legislation in 2019, and it remains unclear what modifications, if any, will be made to the CCPA and how various provisions of the CCPA will be interpreted and enforced. The effects of the CCPA are potentially significant and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply with this legislation.

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

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

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

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

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

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

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

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


•	disruption in our relationships with existing strategic partners or suppliers as a result of such a transaction;


•	unanticipated liabilities related to acquired companies;


•	difficulties integrating acquired personnel, technologies and operations into our existing business;


•	retention of key employees;


•	diversion of management time and focus from operating our business to management of strategic alliances or joint ventures or acquisition integration challenges;


•	increases in our expenses and reductions in our cash available for operations and other uses; and


•	possible write-offs or impairment charges relating to acquired businesses.

To date, the growth of our operations has been largely organic, and we have limited experience in acquiring other businesses or technologies or entering into joint ventures or strategic alliances. Acquisitions, joint ventures or strategic alliances could also result in dilutive issuances of equity securities, the use of our available cash, or the incurrence of debt, which could harm our operating results. In addition, if an acquired business, joint venture or strategic alliance fails to materialize or fails to meet our expectations, our operating results, business and financial condition may suffer.

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

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

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

As of December 31, 2018, we had federal and state net operating loss carryforwards (“NOLs”) of $206.7 million and $107.4 million, respectively, which if not utilized will begin to expire in 2027 for federal purposes and 2019 for state purposes. We may use these NOLs to offset against taxable income for U.S. federal and state income tax purposes. However, Section 382 of the Internal Revenue Code, as amended, may limit the NOLs we may use in any year for U.S. federal income tax purposes in the event of certain changes in ownership of our company. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of a company’s stock increase their ownership by more than 50 percentage points (by value) over their lowest ownership percentage within a rolling three year period. Similar rules may apply under state tax laws. Future issuances or sales of our stock, including certain transactions involving our stock that are outside of our control, could cause an “ownership change.” If an “ownership change” has occurred in the past or occurs in the future, Section 382 would impose an annual limit on the amount of pre-ownership change NOLs and other tax attributes we can use to reduce our taxable income, potentially increasing and accelerating our liability for income taxes, and also potentially causing those tax attributes to expire unused. As of December 31, 2018, a Section 382 study has not been performed. Any limitation on using NOLs could, depending on the extent of such limitation and the NOLs previously used, result in our retaining less cash after payment of U.S. federal and state income taxes during any year in which we have taxable income, rather than losses, than we would be entitled to retain if such NOLs were available as an offset against such income for U.S. federal and state income tax reporting purposes, which could adversely impact our operating results.

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

The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal controls over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. Section 404 of the Sarbanes-Oxley Act (“Section 404”) requires us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. Prior to December 31, 2017, we availed ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404. As of December 31, 2017, we ceased to be an “emerging growth company.” We expect that the cost of our compliance with Section 404 will correspondingly increase as a result of our independent registered public accounting firm being required to undertake an assessment of our internal control over financial reporting. Our compliance with applicable provisions of Section 404 have required and will continue to require that we incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements. Section 404 also requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on our internal control over financial reporting along with an auditor attestation. If we have material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We have implemented the process and documentation necessary to perform the evaluation needed to comply with Section 404, but we may not be able to complete our evaluation, testing and any required remediation in a timely fashion in any given quarterly period.

During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, our management will be unable to conclude that our internal control over financial reporting is effective and our independent registered public accounting firm will be unable to issue an attestation report on the effectiveness of our internal control over financial reporting. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed.

If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to conclude that our internal control over financial reporting is effective, or if our auditors were to express an adverse opinion on the effectiveness of our internal control over financial reporting because we had one or more material weaknesses, investors could lose confidence in the accuracy and completeness of our financial disclosures, which could cause the price of our common stock to decline. Internal control deficiencies could also result in a restatement of our financial results in the future. We could also become subject to stockholder or other third-party litigation as well as investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or other regulatory authorities, which could require additional financial and management resources and could result in fines, trading suspensions or other remedies.

We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.

We are responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act. As disclosed below in Item 9A of our Form 10-K filed with the SEC on March 4, 2019, we identified material weaknesses in our internal control over financial reporting. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of these material weaknesses, we concluded that our internal control over financial reporting was not effective based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control-An Integrated Framework (2013).

To implement remedial measures as disclosed in Item 9A of our Form 10-K filed with the SEC on March 4, 2019, we may need to commit additional resources, hire additional staff, and provide additional management oversight. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements, and we could be required to restate our financial results. In addition, if we are unable to successfully remediate these material weaknesses and if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected.

Risks Related to Our Intellectual Property

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

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

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

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

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

We use certain open source software in the infrastructure supporting the Zio service. Licensees of open source software may be required to make public and use certain source code, to license proprietary software for free or to make certain derivative works available to others. As a result, we may face claims from companies that incorporate open source software into their products or from open source licensors, claiming ownership of, or demanding release of, the source code, the open source software or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to cease offering the Zio service unless and until we can re-engineer it to avoid infringement. This re-engineering process could require significant additional research and development resources, and we may not be able to complete it successfully. While we monitor and control the use of open source software in the Zio service and in any third party software that is incorporated into the Zio service, and we try to ensure that no open source software is used in such a way as to require us to disclose the source code underlying the Zio service, there can be no guarantee that such use could not inadvertently occur. These risks could be difficult to eliminate or manage, and, if not addressed, could harm our business, intellectual property protection, financial condition and operating results.

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

In order to remain competitive, we must develop and maintain protection of the proprietary aspects of our technologies. We rely on a combination of patents, copyrights, trademarks, trade secret laws and confidentiality and invention assignment agreements with employees and third parties to protect our intellectual property rights. As of September 30, 2019, we owned, or retained exclusive license to, sixteen issued U.S. patents, the earliest of which will expire in 2028. As of September 30, 2019, we also owned, or retained an exclusive license to, six issued patents from the Japanese Patent Office, two issued patents from each of the Australian, Canadian and European Patent Offices, and one issued patent from the Korean Patent Office. The earliest expiration date of these international patents is 2027. As of September 30, 2019, we had eighteen pending patent applications globally, including three in the United States, five in the European Patent Office, three in Japan, two in each of Korea and Canada, and one in each of Australia, China and India. Our patents and patent applications are directed to covering key aspects of the design, manufacture and use of the Zio monitor and the Zio service.

We rely, in part, on our ability to obtain and maintain patent protection for our proprietary products and processes. The process of applying for and obtaining a patent is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost, in a timely manner, or in all jurisdictions where protection may be commercially advantageous, or we may not be able to protect our proprietary rights at all. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as proprietary. In addition, the issuance of a patent does not ensure that it is valid or enforceable, so even if we obtain patents, they may not be valid or enforceable against third parties. Our patent applications may not result in issued patents and our patents may not be sufficiently broad to protect our technology. Issued international patents may carry a requirement to “work” a patent in the applicable geography; failure to do so could lead to loss of the patent or the requirement to accept licensing terms, both of which would be favorable to our competitors. Furthermore, the issuance of a patent does not give us the right to practice the patented invention. Third parties may have blocking patents that could prevent us from marketing our own products and practicing our own technology. Alternatively, third parties may seek approval to market their own products similar to or otherwise competitive with our products. In these circumstances, we may need to defend and/or assert our patents, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or agency with jurisdiction may find our patents invalid or unenforceable; competitors may then be able to market products and use manufacturing and analytical processes that are substantially similar to ours. Even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives. Litigation is time-consuming and expensive and would divert Company resources.

If we are unable to protect the confidentiality of our trade secrets and other proprietary information, our business and competitive position may be harmed.

We rely heavily on trade secrets as well as invention assignment and confidentiality provisions that we have in contracts with our employees, consultants, collaborators and others to protect our algorithms and other aspects of our Zio service. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors or

former or current employees, despite the existence generally of these confidentiality agreements and other contractual restrictions. These agreements may not provide meaningful protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other proprietary information. There can be no assurance that employees, consultants, vendors and clients have executed such agreements or have not breached or will not breach their agreements with us, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by competitors. Despite the protections we do place on our intellectual property, monitoring unauthorized use and disclosure of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be adequate. In addition, the laws of many foreign countries will not protect our intellectual property rights to the same extent as the laws of the United States. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could affect our ability to expand to international markets or require costly efforts to protect our technology.

We may also employ individuals who were previously or are concurrently employed at research institutions or other medical device companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former or concurrent employers, or that patents and applications we have filed to protect inventions of these employees, even those related to one or more of our products, are rightfully owned by their former or concurrent employer. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

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

Further, it is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our trade secret rights and related confidentiality and nondisclosure provisions. If we fail to obtain or maintain trade secret protection, or if our competitors obtain our trade secrets or independently develop technology similar to ours or competing technologies, our competitive market position could be materially and adversely affected. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets, and agreement terms that address non-competition are difficult to enforce in many jurisdictions, and might not be enforceable in certain cases.

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

We rely on trademarks, service marks, trade names and brand names, such as our registered trademark “ZIO,” to distinguish our products from the products of our competitors, and have registered or applied to register these trademarks. We cannot assure you that our trademark applications will be approved. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in proceedings before the USPTO and in proceedings before comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources towards advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks. Additionally, we are aware of at least one third party that has registered the “IRHYTHM” mark in the European Union in connection with computer software for controlling and managing patient medical information, heart rate monitors, and heart rate monitors to be worn during moderate exercise, among other uses. We and the third party are involved in adversary proceedings before the Trademark Office in the European Union, and those proceedings could impact our ability to register the “IRHYTHM” mark in those jurisdictions.

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

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. In 2011, the Leahy-Smith America Invents Act (“Leahy-Smith Act”) was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and also may affect patent litigation. These also include provisions that switched the United States from a “first-to-invent” system to a “first-to-file” system, allow third-party submission of prior art to the USPTO during patent prosecution and set forth additional procedures to attack the validity of a patent by the USPTO, administered post grant proceedings. Under a first-to-file system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. Under the new post grant provisions of the Leahy-Smith Act, the USPTO introduced procedures that provide additional administrative pathways for third parties to challenge issued patents. Inter partes review (“IPR”) is one of these procedures. The number of IPR challenges filed is increasing, and in many cases, the USPTO is canceling or significantly narrowing issued patent claims. Accordingly, even if a patent is granted by the USPTO, there is risk that it may not withstand an IPR challenge. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Recent case law has increased uncertainty regarding the availability of patent protection for certain technologies and the costs associated with obtaining patent protection for those technologies. For example, the U.S. Supreme Court has ruled on several

patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In particular, the 2014 decision by the U.S. Supreme Court in Alice Corp. v. CLS Bank International has increased the difficulty of obtaining new software patents and enforcing existing software patents. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future.

Risks Related to Government Regulation

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

Healthcare laws and regulations change frequently and may change significantly in the future. We may not be able to adapt our operations to address every new regulation, and new regulations may adversely affect our business. We cannot assure you that a review of our business by courts or regulatory authorities would not result in a determination that adversely affects our revenue and operating results, or that the healthcare regulatory environment will not change in a way that restricts our operations. In addition, there is risk that the U.S. Congress may implement changes in laws and regulations governing healthcare service providers, including measures to control costs, or reductions in reimbursement levels, which may adversely affect our business and results of operations.

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

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

The products and services we offer are highly regulated, and there can be no assurance that the regulatory environment in which we operate will not change significantly and adversely in the future. Our arrangements with physicians, hospitals and clinics may expose us to broadly applicable fraud and abuse and other laws and regulations that may restrict the financial arrangements and relationships through which we market, sell and distribute our products and services. Our employees, consultants, and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements. Federal and state healthcare laws and regulations that may affect our ability to conduct business, include, without limitation:


•	federal and state laws and regulations regarding billing and claims payment applicable to our Zio service and regulatory agencies enforcing those laws and regulations;

•

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


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


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


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

•

the federal Physician Payment Sunshine Act, or Open Payments, created under the Affordable Care Act, and its implementing regulations, which requires manufacturers of drugs, medical devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to the U.S. Department of Health and Human Services, information related to payments or other transfers of value made to licensed physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;

•

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


•	the GDPR, which replaces the 1995 Data Protection Directive known as Directive 95/46/EC;


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

•

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

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

Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that some of our activities could be subject to challenge under one or more of such laws. Any action brought against us for violations of these laws or regulations, even successfully defended, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. We may be subject to private “qui tam” actions brought by individual whistleblowers on behalf of the federal or state governments, with potential liability under the federal False Claims Act including mandatory treble damages and significant per-claim penalties, which were increased to $11,181 to $22,363 per false claim in 2018.

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

If we fail to obtain and maintain necessary regulatory clearances or approvals for the Zio monitors and Zio service, or if clearances or approvals for future products and indications are delayed or not issued, our commercial operations would be harmed.

The Zio monitors and Zio service are subject to extensive regulation by the FDA in the United States and by our Notified Body in the European Union. Government regulations specific to medical devices are wide ranging and govern, among other things:


•	product design, development, manufacture, and release;


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


•	premarketing clearance or approval;


•	service operations


•	record keeping;


•	product marketing, promotion and advertising, sales and distribution; and


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

Before a new medical device or service, or a new intended use for an existing product or service, can be marketed in the United States, a company must first submit and receive either 510(k) clearance or premarketing approval from the FDA, unless an exemption applies. Either process can be expensive, lengthy and unpredictable. We may not be able to obtain the necessary clearances or approvals or may be unduly delayed in doing so, which could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the product, which may limit the market for the product. Although we have obtained 510(k) clearance to market the Zio monitors and the Zio service, our clearance can be revoked if safety or efficacy problems develop.

In addition, we are required to file various reports with the FDA, and European regulators, including reports required by the medical device reporting regulations (“MDRs”) that require that we report to the regulatory authorities if our Zio service may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. If these reports are not filed in a timely manner, regulators may impose sanctions and we may be subject to product liability or regulatory enforcement actions, all of which could harm our business.

If we initiate a correction or removal for our Zio service to reduce a risk to health posed by the Zio service, we would be required to submit a publicly available Correction and Removal report to the FDA and, in many cases, similar reports to other regulatory agencies. This report could be classified by the FDA as a device recall which could lead to increased scrutiny by the FDA, other international regulatory agencies and our customers regarding the quality and safety of our Zio service. Furthermore, the submission of these reports could be used by competitors against us and cause physicians to delay or cancel prescriptions, which could harm our reputation.

If we assess a potential quality issue or complaint as not requiring either field action or notification, respectively, regulators may review documentation of that decision during a subsequent audit. If regulators disagree with our decision, or take issue with either our investigation process or the resulting documentation, regulatory agencies may impose sanctions and we may be subject to regulatory enforcement actions, including warning letters, all of which could harm our business.

The FDA and the Federal Trade Commission (“FTC”) also regulate the advertising and promotion of our products and services to ensure that the claims we make are consistent with our regulatory clearances, that there is adequate and reasonable data to substantiate the claims and that our promotional labeling and advertising is neither false nor misleading. If the FDA or FTC determines that any of our advertising or promotional claims are misleading, not substantiated or not permissible, we may be subject to enforcement actions, including warning letters, and we may be required to revise our promotional claims and make other corrections or restitutions.

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


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


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


•	operating restrictions, partial suspension or total shutdown of production;


•	denial of our requests for regulatory clearance or premarket approval of new products or services, new intended uses or modifications to existing products or services;


•	withdrawal of regulatory clearance or premarket approvals that have already been granted;


•	criminal prosecution.

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

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

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

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

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

We are registered with the FDA as a medical device specifications developer and manufacturer. The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA and the Food and Drug Branch of the California Department of Public Health (“CDPH”) to determine our compliance with the QSR and other regulations at both our design and manufacturing facilities, and these inspections may include the manufacturing facilities of our suppliers. Our design facilities in San Francisco, California were most recently audited by the FDA in June 2016 and no formal observations resulted. The most recent FDA audit of our manufacturing facility occurred in October 2018 and no formal observations resulted. No additional follow up with the FDA was required and we believe that we are in compliance, in all material respects, with the QSR.

We are also registered with the EU as a medical device developer, manufacturer and service operator through the National Standard Authority of Ireland (“NSAI”) our European Notified Body. Most recently, the NSAI completed an ISO 13485 surveillance audit of our design, manufacturing and service operations in June 2019 and we believe that we are in compliance, in all material respects, with the MDD.

We can provide no assurance that we will continue to remain in compliance with the QSR or MDD, or to the European Union's new MDRs, which will be required to comply with by May 2020. If the FDA, CDPH or NSAI inspect any of our facilities and discover compliance problems, we may have to cease manufacturing and product distribution until we can take the appropriate remedial steps to correct the audit findings. Taking corrective action may be expensive, time consuming and a distraction for management and if we experience a delay at our manufacturing facility we may be unable to produce Zio monitors, which would harm our business.

Zio monitors may in the future be subject to product recalls that could harm our reputation.

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

Healthcare reform measures could hinder or prevent the Zio service’s commercial success.

In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system in ways that could harm our future revenues and profitability and the demand for the Zio service. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. The Affordable Care Act contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. The Affordable Care Act, among other things, imposed an excise tax of 2.3% on the sale of most medical devices, including ours, and any failure to pay this amount could result in the imposition of an injunction on the sale of our products, fines and penalties. Although this tax has been suspended through 2019, it is expected to apply to sales of our products in 2020 and thereafter. The current presidential administration and Congress may continue to pursue significant changes to the current health care laws. We face uncertainties that might result from modifications or repeal of any of the provisions of the Affordable Care Act, including as a result of current and future executive orders and legislative actions. The impact of those changes on us and potential effect on the medical device industry as a whole is currently unknown. Any changes to the Affordable Care Act are likely to have an impact on our results of operations, and may have a material adverse effect on our results of operations. We cannot predict what other health care programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the United States may have on our business.

The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may harm:


•	our ability to set a price that we believe is fair for our Zio service;


•	our ability to generate revenue and achieve or maintain profitability; and


•	the availability of capital.

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

Our research and development and manufacturing operations may involve the use of hazardous substances and are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to the storage, use, discharge, disposal, remediation of, and human exposure to, hazardous substances and the sale, labeling, collection, recycling, treatment and disposal of products containing hazardous substances. Liability under environmental laws and regulations can be joint and several and without regard to fault or negligence. Compliance with environmental laws and regulations may be expensive and noncompliance could result in substantial liabilities, fines and penalties, personal injury and third-party property damage claims and substantial investigation and remediation costs. Environmental laws and regulations could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We cannot assure you that violations of these laws and regulations will not occur in the future or have not occurred in the past as a result of human error, accidents, equipment failure or other causes. The expense associated with environmental regulation and remediation could harm our financial condition and operating results.

Risks Related to Our Common Stock

Future sales and issuances of securities could negatively affect our stock price and dilute the ownership interest of our existing investors.

Our expected future capital requirements may depend on many factors, including expanding our customer base, the expansion of our salesforce, and the timing and extent of spending on the development of our technology to increase our product offerings. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Additionally, new investors could gain rights, preferences and privileges senior to those of existing holders of our common stock. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.

Sales or issuances of a substantial amount of securities, or the perception that such sales could occur, may cause a decline in the price of our common stock. Future resales of our common stock by our existing stockholders could cause the market price of our common stock to decline. In addition, the shares of common stock subject to outstanding options and restricted stock units under our 2016 Equity Incentive Plan and our 2016 Employee Stock Purchase Plan and the shares reserved for future issuance under both such plans may become eligible for sale in the public markets in the future, subject to certain legal and control limitations.

We may sell shares or other securities in any offering at a price per share that is less than the price per share paid by existing investors, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the price per share paid by existing investors.

The market price of our common stock may fluctuate substantially, and you could lose all or part of your investment.

The market price of our common stock may fluctuate substantially in response to, among other things, the risk factors described in this Quarterly Report on Form 10-Q and other factors, many of which are beyond our control, including:


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


•	quarterly variations in our or our competitors’ results of operations;


•	periodic fluctuations in our revenue, due in part to the way in which we recognize revenue;


•	the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;


•	general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors;


•	changes in reimbursement by current or potential payors;


•	changes in CPT codes or the establishment of new CPT codes applicable to the Zio service;


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


•	actual or anticipated changes in regulatory oversight of our products;


•	the results of our clinical trials;


•	the loss of key personnel, including changes in our board of directors and management;


•	legislation or regulation of our market;


•	lawsuits threatened or filed against us;


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


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


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


•	developments in our industry.

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

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

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

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

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

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could

result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

We will incur additional compensation costs in the event that we decide to pay our executive officers cash compensation closer to that of executive officers of other public medical device companies, which would increase our general and administrative expense and could harm our profitability. Any future equity awards will also increase our compensation expense. We also expect that being a public company and compliance with applicable rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee and compensation committee.

As a result of disclosure of information in this filing and in other filings required of a public company, our business and financial condition is more visible, which could be advantageous to our competitors and other third parties and could result in threatened or actual litigation. If such claims are successful, our business and operating results could be harmed, and even if the claims are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results.

Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws, and Delaware law, could discourage a change in control of our company or a change in our management.

Our amended and restated certificate of incorporation and bylaws contain provisions that might enable our management to resist a takeover. These provisions include:


•	a classified board of directors;


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


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


•	the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer;


•	allowing stockholders to remove directors only for cause;


•	a requirement that the authorized number of directors may be changed only by resolution of the board of directors;


•	allowing all vacancies, including newly created directorships, to be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum, except as otherwise required by law;


•	a requirement that our stockholders may only take action at annual or special meetings of our stockholders and not by written consent;


•	limiting the forum to Delaware for certain litigation against us; and


•	limiting the persons that can call special meetings of our stockholders to our board of directors, the chairperson of our board of directors, the chief executive officer or the president (in the absence of a chief executive officer).

These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ abilities to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation provides that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or to our stockholders, (iii) any action asserting a claim arising pursuant to the Delaware General Corporation Law or our amended and restated certificate of incorporation or bylaws, (iv) any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or bylaws or (v) any action asserting a claim governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, financial condition and operating results.

We have not paid dividends in the past and do not expect to pay dividends in the future, and, as a result, any return on investment may be limited to the value of our stock.

We have never paid cash dividends and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends will depend on our earnings, capital requirements, financial condition, prospects and other factors our board of directors may deem relevant. In addition, our loan agreements limit our ability to, among other things, pay dividends or make other distributions or payments on account of our common stock, in each case subject to certain exceptions. If we do not pay dividends, our stock may be less valuable because a return on your investment will only occur if you sell our common stock after our stock price appreciates.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

We were incorporated in Delaware on September 14, 2006. Our principal executive offices are now located at 699 8th Street, Suite 600, San Francisco, CA 94103, and our telephone number is (415) 632-5700. Our website address is www.iRhythmTech.com. Investors and others should note that we announce material financial information to our investors using SEC filings, press releases, our investor relations website, public conference calls and webcasts. We use these channels as well as social media to communicate with investors, customers and the public about our company, our products and other issues. It is possible that information we post on social media channels could be deemed to be material information. We encourage investors, our customers and others interested in our company to review the information we post on our Facebook page (https://www.facebook.com/iRhythmTechnologies/) and Twitter feed (https://twitter.com/iRhythmTech). The information on, or that may be accessed through, our website and social media channels is not incorporated by reference into this Quarterly Report on Form 10-Q and should not be considered a part of this Quarterly Report on Form 10-Q.

ITEM 6. EXHIBITS

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

EXHIBIT INDEX



Exhibit Number		Description

10.1		2016 Employee Stock Purchase Plan, as amended February 26, 2019, and related form agreements.
10.2		Employment Letter to Mark Day dated September 3, 2007 between the Registrant and Mark Day.
10.3+		Development collaboration agreement by and among Verily Life Sciences LLC, Verily Ireland Limited, and iRhythm Technologies, Inc.
31.1		Certification of Principal Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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

+ Portions omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.

SIGNATURES

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



	iRhythm Technologies, Inc.

Date: December 23, 2019	By:	/s/ Kevin M. King
		Kevin M. King President and Chief Executive Officer (Principal Executive Officer)

Date: December 23, 2019	By:	/s/ Matthew C. Garrett
		Matthew C. Garrett Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer)

Exhibit

IRHYTHM, INC.

2016 EMPLOYEE STOCK PURCHASE PLAN

(as amended effective February 26, 2019)

1.Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Companies with an opportunity to purchase Common Stock through accumulated Contributions. The Company intends for the Plan to have two components: a Code Section 423 Component (“423 Component”) and a non-Code Section 423 Component (“Non-423 Component”). The Company’s intention is to have the 423 Component of the Plan qualify as an “employee stock purchase plan” under Section 423 of the Code. The provisions of the 423 Component, accordingly, will be construed so as to extend and limit Plan participation in a uniform and nondiscriminatory basis consistent with the requirements of Section 423 of the Code. In addition, this Plan authorizes the grant of an option to purchase shares of Common Stock under the Non-423 Component that does not qualify as an “employee stock purchase plan” under Section 423 of the Code; such an option will be granted pursuant to rules, procedures or sub-plans adopted by the Administrator designed to achieve tax, securities laws or other objectives for Eligible Employees and the Company. Except as otherwise provided herein, the Non-423 Component will operate and be administered in the same manner as the 423 Component.

2.Definitions.

(a) “Administrator” means the Board or any Committee designated by the Board to administer the Plan pursuant to Section 14.

(b) “Affiliate” means any entity, other than a Subsidiary, in which the Company has an equity or other ownership interest.

(c) “Applicable Laws” means the requirements relating to the administration of equity-based awards under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where options are, or will be, granted under the Plan.

(d) “Board” means the Board of Directors of the Company.

(e) “Change in Control” means the occurrence of any of the following events:

(i) A change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group (“Person”), acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutes more than fifty percent (50%) of the total voting power of the stock of the Company; provided, however, that for purposes of this subsection, the acquisition of additional stock by any one Person, who is considered to own more than fifty percent (50%) of the total voting power of the stock of the Company will not be considered a Change in Control; or

(ii) A change in the effective control of the Company which occurs on the date that a majority of members of the Board is replaced during any twelve (12) month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. For purposes of this clause (ii), if any Person is considered to be in effective control of the Company, the acquisition of additional control of the Company by the same Person will not be considered a Change in Control; or

(iii) A change in the ownership of a substantial portion of the Company’s assets which occurs on the date that any Person acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions; provided, however, that for purposes of this subsection, the following will not constitute a change in the ownership of a substantial portion of the Company’s assets: (A) a transfer to an entity that is controlled by the Company’s stockholders immediately after the transfer, or (B) a transfer of assets by the Company to: (1) a stockholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s stock, (2) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the Company, (3) a Person, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company, or (4) an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a Person described in this subsection (iii)(B)(3). For purposes of this subsection, gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

For purposes of this definition, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company.

Notwithstanding the foregoing, a transaction will not be deemed a Change in Control unless the transaction qualifies as a change in control event within the meaning of Code Section 409A, as it has been and may be amended from time to time, and any proposed or final U.S. Treasury Regulations and Internal Revenue Service guidance that has been promulgated or may be promulgated thereunder from time to time.

Further and for the avoidance of doubt, a transaction will not constitute a Change in Control if: (i) its sole purpose is to change the state of the Company’s incorporation, or (ii) its sole purpose is to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

(f) “Code” means the U.S. Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code or U.S. Treasury Regulation thereunder will include such section or regulation, any valid regulation or other official applicable guidance promulgated under such section, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation.

(g) “Committee” means a committee of the Board appointed in accordance with Section 14 hereof.

(h) “Common Stock” means the common stock of the Company.

(i) “Company” means iRhythm Technologies, Inc., a Delaware corporation, or any successor thereto.

(j) “Compensation” means an Eligible Employee’s base straight time gross earnings, but exclusive of payments for incentive compensation, bonuses, payments for overtime and shift premium, equity compensation income and other similar compensation. The Administrator, in its discretion, may, on a uniform and nondiscriminatory basis, establish a different definition of Compensation for a subsequent Offering Period.

(k) “Contributions” means the payroll deductions and other additional payments that the Company may permit to be made by a Participant to fund the exercise of options granted pursuant to the Plan.

(l) “Designated Company” means any Subsidiary or Affiliate that has been designated by the Administrator from time to time in its sole discretion as eligible to participate in the Plan. For purposes of the 423 Component, only the Company and its Subsidiaries may be Designated Companies, provided, however that at any given time, a Subsidiary that is a Designated Company under the 423 Component will not be a Designated Company under the Non-423 Component.

(m) “Director” means a member of the Board.

(n) “Eligible Employee” means any individual who is a common law employee providing services to the Company or a Designated Company and is customarily employed for at least ten (10) hours per week and more than five (5) months in any calendar year by the Employer, or any lesser number of hours per week and/or number of months in any calendar year established by the Administrator (if required under applicable local law) for purposes of any separate Offering or for Eligible Employees participating in the Non-423 Component. For purposes of the Plan, the employment relationship will be treated as continuing intact while the individual is on sick leave or other leave of absence that the Employer approves or is legally protected under Applicable Laws. Where the period of leave exceeds three (3) months and the individual’s right to reemployment is not guaranteed either by statute or by contract, the employment relationship will be deemed to have terminated three (3) months and one (1) day following the commencement of such leave. The Administrator, in its discretion, from time to time may, prior to an Enrollment Date for all options to be granted on such Enrollment Date in an Offering, determine (on a uniform and nondiscriminatory basis or as otherwise permitted by Treasury Regulation Section 1.423‑2) that the definition of Eligible Employee will or will not include an individual if he or she: (i) has not completed at least two (2) years of service since his or her last hire date (or such lesser period of time as may be determined by the Administrator in its discretion), (ii) customarily works not more than twenty (20) hours per week (or such lesser period of time as may be determined by the Administrator in its discretion), (iii) customarily works not more than five (5) months per calendar year (or such lesser period of time as may be determined by the Administrator in its discretion), (iv) is a highly compensated employee within the meaning of Section 414(q) of the Code, or (v) is a highly compensated employee within the meaning of Section 414(q) of the Code with compensation above a certain level or is an officer or subject to the disclosure requirements of Section 16(a) of the Exchange Act, provided the exclusion is applied with respect to each Offering in an identical manner to all highly compensated individuals of the Employer whose Employees are participating in that Offering. Each exclusion will be applied with respect to an Offering in a manner complying with U.S. Treasury Regulation Section 1.423‑2(e)(2)(ii).

(o) “Employer” means the employer of the applicable Eligible Employee(s).

(p) “Enrollment Date” means the first day of each Offering Period.

(q) “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended, including the rules and regulations promulgated thereunder.

(r) “Exercise Date” means, with respect to Offering Periods commencing prior to January 1, 2019, the first Trading Day on or after June 1 and December 1 of each Purchase Period and, with respect to Offering Periods commencing on or after January 1, 2019, May 31 or November 30 of each Purchase Period (provided that if May 31 or November 30, as applicable, is not a Trading Day, the Exercise Date will be the last Trading Date to occur prior to such date).

(s) “Fair Market Value” means, as of any date and unless the Administrator determines otherwise, the value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the New York Stock Exchange, NASDAQ Global Select Market, the NASDAQ Global Market or the NASDAQ Capital Market of The NASDAQ Stock Market, its Fair Market Value will be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value will be the mean between the high bid and low asked prices for the Common Stock on the date of determination (or if no bids and asks were reported on that date, as applicable, on the last Trading Day such bids and asks were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof will be determined in good faith by the Administrator; or

(t) “Fiscal Year” means the fiscal year of the Company.

(u) “New Exercise Date” means a new Exercise Date if the Administrator shortens any Offering Period then in progress.

(v) “Offering” means an offer under the Plan of an option that may be exercised during an Offering Period as further described in Section 4. For purposes of the Plan, the Administrator may designate separate Offerings under the Plan (the terms of which need not be identical) in which Employees of one or more Employers will participate, even if the dates of the applicable Offering Periods of each such Offering are identical and the provisions of the Plan will separately apply to each Offering. To the extent permitted by U.S. Treasury Regulation Section 1.423‑2(a)(1), the terms of each Offering need not be identical provided that the terms of the Plan and an Offering together satisfy U.S. Treasury Regulation Section 1.423‑2(a)(2) and (a)(3).

(w) “Offering Periods” means the periods of approximately twelve (12) months during which an option granted pursuant to the Plan may be exercised. Prior to January 1, 2019, Offering Periods will commence on the first Trading Day on or after June 1 and December 1 of each year and terminate on the first Trading Day on or after June 1 and December 1, approximately twelve (12) months later. On and after January 1, 2019, Offering Periods will commence on the first Trading Day on or after June 1 and December 1 of each year and terminate on May 31 and November 30, twelve (12) months later (provided that if May 31 or November 30, as applicable, is not a Trading Day, the applicable Offering Period will terminate on the last Trading Date to occur prior to such date). For the avoidance of doubt, Offering Periods that commenced in 2018 will terminate on the first Trading Day on or after June 1, 2019 and December 1, 2019, respectively, subject to Section 26. The duration and timing of Offering Periods may be changed pursuant to Sections 4 and 20.

(x) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

(y) “Participant” means an Eligible Employee that participates in the Plan.

(z) “Plan” means this iRhythm Technologies, Inc. 2016 Employee Stock Purchase Plan.

(aa) “Purchase Period” means the approximately six (6) month period commencing after one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period will commence on the Enrollment Date and end with the next Exercise Date. Unless the Administrator provides otherwise, the Purchase Period will have the same duration and coincide with the length of the Offering Period.

(bb) “Purchase Price” means an amount equal to eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower; provided however, that the Purchase Price may be determined for subsequent Offering Periods by the Administrator subject to compliance with Section 423 of the Code (or any successor rule or provision or any other Applicable Law, regulation or stock exchange rule) or pursuant to Section 20.

(cc) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

(dd) “Trading Day” means a day on which the national stock exchange upon which the Common Stock is listed is open for trading.

(ee) “U.S. Treasury Regulations” means the Treasury regulations of the Code. Reference to a specific Treasury Regulation or Section of the Code will include such Treasury Regulation or Section, any valid regulation promulgated under such Section, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such Section or regulation.

3.Eligibility.

(a) Offering Periods. Any Eligible Employee on a given Enrollment Date will be eligible to participate in the Plan, subject to the requirements of Section 5.

(b) Non-U.S. Employees. Eligible Employees who are citizens or residents of a non-U.S. jurisdiction (without regard to whether they also are citizens or residents of the United States or resident aliens (within the meaning of Section 7701(b)(1)(A) of the Code)) may be excluded from participation in the Plan or an Offering if the participation of such Eligible Employees is prohibited under the laws of the applicable jurisdiction or if complying with the laws of the applicable jurisdiction would cause the Plan or an Offering to violate Section 423 of the Code. In the case of the Non-423 Component, Eligible Employees may be excluded from participation in the Plan or an Offering if the Administrator has determined that participation of such Eligible Employees is not advisable or practicable.

(c) Limitations. Any provisions of the Plan to the contrary notwithstanding, no Eligible Employee will be granted an option under the Plan (i) to the extent that, immediately after the grant, such Eligible Employee (or any other person whose stock would be attributed to such Eligible Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company or any Parent or Subsidiary of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Parent or Subsidiary of the Company, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans (as defined in Section 423 of the Code) of the Company or any Parent or Subsidiary of the Company accrues at a rate, which exceeds twenty-five thousand dollars ($25,000) worth of stock (determined at the Fair Market Value of the stock at the time such option is granted) for each calendar year in which such option is outstanding at any time, as determined in accordance with Section 423 of the Code and the regulations thereunder.

4.Offering Periods. The Plan will be implemented by consecutive Offering Periods with a new Offering Period commencing on the first Trading Day on or after June 1 and December 1 of each year, or on such other date as the Administrator will determine. The Administrator will have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future Offerings without stockholder approval if such change is announced prior to the scheduled beginning of the first Offering Period to be affected thereafter; provided, however, that no Offering Period may last more than twenty-seven (27) months.

5.Participation. An Eligible Employee may participate in the Plan pursuant to Section 3(a) by (i) submitting to the Company’s stock administration office (or its designee), on or before a date determined by the Administrator prior to an applicable Enrollment Date, a properly completed subscription agreement authorizing Contributions in the form provided by the Administrator for such purpose, or (ii) following an electronic or other enrollment procedure determined by the Administrator.

6.Contributions.

(a) At the time a Participant enrolls in the Plan pursuant to Section 5, he or she will elect to have Contributions (in the form of payroll deductions or otherwise, to the extent permitted by the Administrator) made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation, which he or she receives on each pay day during the Offering Period, provided that, should a pay day occur on an Exercise Date, a Participant will have any payroll deductions made on such day applied to his or her account under the subsequent Purchase Period or Offering Period. The Administrator, in its sole discretion, may permit all Participants in a specified Offering to contribute amounts to the Plan through payment by cash, check or other means set forth in the subscription agreement prior to each Exercise Date of each Purchase Period. A Participant’s subscription agreement will remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof.

(b) In the event Contributions are made in the form of payroll deductions, such payroll deductions for a Participant will commence on the first pay day following the Enrollment Date and will end on the last pay day prior to the Exercise Date of such Offering Period to which such authorization is applicable, unless sooner terminated by the Participant as provided in Section 10 hereof.

(c) All Contributions made for a Participant will be credited to his or her account under the Plan and Contributions will be made in whole percentages only. A Participant may not make any additional payments into such account.

(d) A Participant may discontinue his or her participation in the Plan as provided in Section 10. Except as may be permitted by the Administrator, as determined in its sole discretion, a Participant may reduce, but may not increase, the rate of his or her Contributions during an Offering Period by providing written notice to the Company.

(e) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(c), a Participant’s Contributions may be decreased to zero percent (0%) at any time during a Purchase Period. Subject to Section 423(b)(8) of the Code and Section 3(c) hereof, Contributions will recommence at the rate originally elected by the Participant effective as of the beginning of the first Purchase Period scheduled to end in the following calendar year, unless terminated by the Participant as provided in Section 10.

(f) Notwithstanding any provisions to the contrary in the Plan, the Administrator may allow Eligible Employees to participate in the Plan via cash contributions instead of payroll deductions if (i) payroll deductions are not permitted under applicable local law, (ii) the Administrator determines that cash contributions are permissible under Section 423 of the Code or (iii) for Participants participating in the Non-423 Component.

(g) At the time the option is exercised, in whole or in part, or at the time some or all of the Common Stock issued under the Plan is disposed of (or any other time that a taxable event related to the Plan occurs), the Participant must make adequate provision for the Company’s or Employer’s federal, state, local or any other tax liability payable to any authority including taxes imposed by jurisdictions outside of the U.S., national insurance, social security or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock (or any other time that a taxable event related to the Plan occurs). At any time, the Company or the Employer may, but will not be obligated to, withhold from the Participant’s compensation the amount necessary for the Company or the Employer to meet applicable withholding obligations, including any withholding required to make available to the Company or the Employer any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Eligible Employee. In addition, the Company or the Employer may, but will not be obligated to, withhold from the proceeds of the sale of Common Stock or any other method of withholding the Company or the Employer deems appropriate to the extent permitted by U.S. Treasury Regulation Section 1.423‑2(f).

7.Grant of Option. On the Enrollment Date of each Offering Period, each Eligible Employee participating in such Offering Period will be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of Common Stock determined by dividing such Eligible Employee’s Contributions accumulated prior to such Exercise Date and retained in the Eligible Employee’s account as of the Exercise Date by the applicable Purchase Price; provided that in no event will an Eligible Employee be permitted to purchase during each Purchase Period more than 2,000 shares of Common Stock (subject to any adjustment pursuant to Section 19) and provided further that such purchase will be subject to the limitations set forth in Sections 3(c) and 13. The Eligible Employee may accept the grant of such option with respect to any Offering Period under the Plan by electing to participate in the Plan in accordance with the requirements of Section 5. The Administrator may, for future Offering Periods, increase or decrease, in its absolute discretion, the maximum number of shares of Common Stock that an Eligible Employee may purchase during each Purchase Period of an Offering Period. Exercise of the option will occur as provided in Section 8, unless the Participant has withdrawn pursuant to Section 10. The option will expire on the last day of the Offering Period.

8.Exercise of Option.

(a) Unless a Participant withdraws from the Plan as provided in Section 10, his or her option for the purchase of shares of Common Stock will be exercised automatically on the Exercise Date, and the maximum number of full shares subject to the option will be purchased for such Participant at the applicable Purchase Price with the accumulated Contributions from his or her account. No fractional shares of Common Stock will be purchased; any Contributions accumulated in a Participant’s account, which are not sufficient to purchase a full share will be retained in the Participant’s account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the Participant as provided in Section 10. Any other funds left over in a Participant’s account after the Exercise Date will be returned to the Participant. During a Participant’s lifetime, a Participant’s option to purchase shares hereunder is exercisable only by him or her.

(b) If the Administrator determines that, on a given Exercise Date, the number of shares of Common Stock with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Enrollment Date of the applicable Offering Period, or (ii) the number of shares of Common Stock available for sale under the Plan on such Exercise Date, the Administrator may in its sole discretion (x) provide that the Company will make a pro rata allocation of the shares of Common Stock available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as will be practicable and as it will determine in its sole discretion to be equitable among all Participants exercising options to purchase Common Stock on such Exercise Date, and continue all Offering Periods then in effect or (y) provide that the Company will make a pro rata allocation of the shares available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as will be practicable and as it will determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and terminate any or all Offering Periods then in effect pursuant to Section 20. The Company may make a pro rata allocation of the shares available on the Enrollment Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional shares for issuance under the Plan by the Company’s stockholders subsequent to such Enrollment Date.

9.Delivery. As soon as reasonably practicable after each Exercise Date on which a purchase of shares of Common Stock occurs, the Company will arrange the delivery to each Participant of the shares purchased upon exercise of his or her option in a form determined by the Administrator (in its sole discretion) and pursuant to rules established by the Administrator. The Company may permit or require that shares be deposited directly with a broker designated by the Company or to a designated agent of the Company, and the Company may utilize electronic or automated methods of share transfer. The Company may require that shares be retained with such broker or agent for a designated period of time and/or may establish other procedures to permit tracking of disqualifying dispositions of such shares. No Participant will have any voting, dividend, or other stockholder rights with respect to shares of Common Stock subject to any option granted under the Plan until such shares have been purchased and delivered to the Participant as provided in this Section 9.

10.Withdrawal.

(a) A Participant may withdraw all but not less than all the Contributions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by (i) submitting to the Company’s stock administration office (or its designee) a written notice of withdrawal in the form determined by the Administrator for such purpose (which may be similar to the form attached hereto as Exhibit B), or (ii) following an electronic or other withdrawal procedure determined by the Administrator. All of the Participant’s Contributions credited to his or her account will be paid to such Participant promptly after receipt of notice of withdrawal and such Participant’s option for the Offering Period will be automatically terminated, and no further Contributions for the purchase of shares will be made for such Offering Period. If a Participant withdraws from an Offering Period, Contributions will not resume at the beginning of the succeeding Offering Period, unless the Participant re-enrolls in the Plan in accordance with the provisions of Section 5.

(b) A Participant’s withdrawal from an Offering Period will not have any effect upon his or her eligibility to participate in any similar plan that may hereafter be adopted by the Company or in succeeding Offering Periods that commence after the termination of the Offering Period from which the Participant withdraws.

11.Termination of Employment. Upon a Participant’s ceasing to be an Eligible Employee for any reason, he or she will be deemed to have elected to withdraw from the Plan and the Contributions credited to such Participant’s account during the Offering Period but not yet used to purchase shares of Common Stock under the Plan will be returned to such Participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15, and such Participant’s option will be automatically terminated. A Participant whose employment transfers between entities through a termination with an immediate rehire (with no break in service) by the Company or a Designated Company will not be treated as terminated under the Plan; however, if a Participant transfers from an Offering under the 423 Component to the Non-423 Component, the exercise of the option will be qualified under the 423 Component only to the extent it complies with Section 423 of the Code.

12.Interest. No interest will accrue on the Contributions of a participant in the Plan, except as may be required by Applicable Law, as determined by the Company, and if so required by the laws of a particular jurisdiction, will apply to all Participants in the relevant Offering under the 423 Component, except to the extent otherwise permitted by U.S. Treasury Regulation Section 1.423‑2(f).

13.Stock.

(a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, the maximum number of shares of Common Stock that will be made available for sale under the Plan will be 483,031 shares of Common Stock, plus the number of shares of Common Stock to be added to the Plan pursuant to the next sentence. The number of shares of Common Stock available for issuance under the Plan will be increased on the first day of each Fiscal Year beginning with the 2017 Fiscal Year equal to the least of (i) 966,062 shares of Common Stock, (ii) one and one half percent (1.5%) of the outstanding shares of Common Stock on the last day of the immediately preceding Fiscal Year, or (iii) an amount determined by the Administrator.

(b) Until the shares of Common Stock are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), a Participant will have only the rights of an unsecured creditor with respect to such shares, and no right to vote or receive dividends or any other rights as a stockholder will exist with respect to such shares.

(c) Shares of Common Stock to be delivered to a Participant under the Plan will be registered in the name of the Participant or in the name of the Participant and his or her spouse.

14.Administration. The Plan will be administered by the Board or a Committee appointed by the Board, which Committee will be constituted to comply with Applicable Laws. The Administrator will have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to designate separate Offerings under the Plan, to designate Subsidiaries and Affiliates as participating in the 423 Component or Non-423 Component, to determine eligibility, to adjudicate all disputed claims filed under the Plan and to establish such procedures that it deems necessary for the administration of the Plan (including, without limitation, to adopt such procedures and sub-plans as are necessary or appropriate to permit the participation in the Plan by employees who are foreign nationals or employed outside the U.S., the terms of which sub-plans may take precedence over other provisions of this Plan, with the exception of Section 13(a) hereof, but unless otherwise superseded by the terms of such sub-plan, the provisions of this Plan will govern the operation of such sub-plan). Unless otherwise determined by the Administrator, the Employees eligible to participate in each sub-plan will participate in a separate Offering or in the Non-423 Component. Without limiting the generality of the foregoing, the Administrator is specifically authorized to adopt rules and procedures regarding eligibility to participate, the definition of Compensation, handling of Contributions, making of Contributions to the Plan (including, without limitation, in forms other than payroll deductions), establishment of bank or trust accounts to hold Contributions, payment of interest, conversion of local currency, obligations to pay payroll tax, determination of beneficiary designation requirements, withholding procedures and handling of stock certificates that vary with applicable local requirements. The Administrator also is authorized to determine that, to the extent permitted by U.S. Treasury Regulation Section 1.423‑2(f), the terms of an option granted under the Plan or an Offering to citizens or residents of a non-U.S. jurisdiction will be less favorable than the terms of options granted under the Plan or the same Offering to employees resident solely in the U.S. Every finding, decision and determination made by the Administrator will, to the full extent permitted by law, be final and binding upon all parties.

15.Designation of Beneficiary.

(a) If permitted by the Administrator, a Participant may file a designation of a beneficiary who is to receive any shares of Common Stock and cash, if any, from the Participant’s account under the Plan in the event of such Participant’s death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such Participant of such shares and cash. In addition, if permitted by the Administrator, a Participant may file a designation of a beneficiary who is to receive any cash from the Participant’s account under the Plan in the event of such Participant’s death prior to exercise of the option. If a Participant is married and the designated beneficiary is not the spouse, spousal consent will be required for such designation to be effective.

(b) Such designation of beneficiary may be changed by the Participant at any time by notice in a form determined by the Administrator. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant’s death, the Company will deliver such shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.

(c) All beneficiary designations will be in such form and manner as the Administrator may designate from time to time. Notwithstanding Sections 15(a) and (b) above, the Company and/or the Administrator may decide not to permit such designations by Participants in non-U.S. jurisdictions to the extent permitted by U.S. Treasury Regulation Section 1.423‑2(f).

16.Transferability. Neither Contributions credited to a Participant’s account nor any rights with regard to the exercise of an option or to receive shares of Common Stock under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the Participant. Any such attempt at assignment, transfer, pledge or other disposition will be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof.

17.Use of Funds. The Company may use all Contributions received or held by it under the Plan for any corporate purpose, and the Company will not be obligated to segregate such Contributions except under Offerings or for Participants in the Non-423 Component for which Applicable Laws require that Contributions to the Plan by Participants be segregated from the Company’s general corporate funds and/or deposited with an independent third party. Until shares of Common Stock are issued, Participants will have only the rights of an unsecured creditor with respect to such shares.

18.Reports. Individual accounts will be maintained for each Participant in the Plan. Statements of account will be given to participating Eligible Employees at least annually, which statements will set forth the amounts of Contributions, the Purchase Price, the number of shares of Common Stock purchased and the remaining cash balance, if any.


19.	Adjustments, Dissolution, Liquidation, Merger or Change in Control.

(a) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Common Stock or other securities of the Company, or other change in the corporate structure of the Company affecting the Common Stock occurs, the Administrator, in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, will, in such manner as it may deem equitable, adjust the number and class of Common Stock that may be delivered under the Plan, the Purchase Price per share and the number of shares of Common Stock covered by each option under the Plan that has not yet been exercised, and the numerical limits of Sections 7 and 13.

(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, any Offering Period then in progress will be shortened by setting a New Exercise Date, and will terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Administrator. The New Exercise Date will be before the date of the Company’s proposed dissolution or liquidation. The Administrator will notify each Participant in writing or electronically, prior to the New Exercise Date, that the Exercise Date for the Participant’s option has been changed to the New Exercise Date and that the Participant’s option will be exercised automatically on the New Exercise Date, unless prior to such date the Participant has withdrawn from the Offering Period as provided in Section 10 hereof.

(c) Merger or Change in Control. In the event of a merger or Change in Control, each outstanding option will be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, the Offering Period with respect to which such option relates will be shortened by setting a New Exercise Date on which such Offering Period will end. The New Exercise Date will occur before the date of the Company’s proposed merger or Change in Control. The Administrator will notify each Participant in writing or electronically prior to the New Exercise Date, that the Exercise Date for the Participant’s option has been changed to the New Exercise Date and that the Participant’s option will be exercised automatically on the New Exercise Date, unless prior to such date the Participant has withdrawn from the Offering Period as provided in Section 10 hereof.

20.Amendment or Termination.

(a) The Administrator, in its sole discretion, may amend, suspend, or terminate the Plan, or any part thereof, at any time and for any reason. If the Plan is terminated, the Administrator, in its discretion, may elect to terminate all outstanding Offering Periods either immediately or upon completion of the purchase of shares of Common Stock on the next Exercise Date (which may be sooner than originally scheduled, if determined by the Administrator in its discretion), or may elect to permit Offering Periods to expire in accordance with their terms (and subject to any adjustment pursuant to Section 19). If the Offering Periods are terminated prior to expiration, all amounts then credited to Participants’ accounts that have not been used to purchase shares of Common Stock will be returned to the Participants (without interest thereon, except as otherwise required under Applicable Laws, as further set forth in Section 12 hereof) as soon as administratively practicable.

(b) Without stockholder consent and without limiting Section 20(a), the Administrator will be entitled to change the Offering Periods or Purchase Periods, designate separate Offerings, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit Contributions in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the Company’s processing of properly completed Contribution elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant properly correspond with Contribution amounts, and establish such other limitations or procedures as the Administrator determines in its sole discretion advisable that are consistent with the Plan.

(c) In the event the Administrator determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Administrator may, in its discretion and, to the extent necessary or desirable, modify, amend or terminate the Plan to reduce or eliminate such accounting consequence including, but not limited to:

(i) amending the Plan to conform with the safe harbor definition under the Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor thereto), including with respect to an Offering Period underway at the time;

(ii) altering the Purchase Price for any Offering Period or Purchase Period including an Offering Period or Purchase Period underway at the time of the change in Purchase Price;

(iii) shortening any Offering Period or Purchase Period by setting a New Exercise Date, including an Offering Period or Purchase Period underway at the time of the Administrator action;

(iv) reducing the maximum percentage of Compensation a Participant may elect to set aside as Contributions; and

(v) reducing the maximum number of Shares a Participant may purchase during any Offering Period or Purchase Period.

Such modifications or amendments will not require stockholder approval or the consent of any Participants.

21.Notices. All notices or other communications by a Participant to the Company under or in connection with the Plan will be deemed to have been duly given when received in the form and manner specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.

22.Conditions Upon Issuance of Shares. Shares of Common Stock will not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto will comply with all applicable provisions of law, domestic or foreign, including, without limitation, the U.S. Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and will be further subject to the approval of counsel for the Company with respect to such compliance.

As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law.

23.Code Section 409A. The 423 Component of the Plan is exempt from the application of Code Section 409A and any ambiguities herein will be interpreted to so be exempt from Code Section 409A. In furtherance of the foregoing and notwithstanding any provision in the Plan to the contrary, if the Administrator determines that an option granted under the Plan may be subject to Code Section 409A or that any provision in the Plan would cause an option under the Plan to be subject to Code Section 409A, the Administrator may amend the terms of the Plan and/or of an outstanding option granted under the Plan, or take such other action the Administrator determines is necessary or appropriate, in each case, without the Participant’s consent, to exempt any outstanding option or future option that may be granted under the Plan from or to allow any such options to comply with Code Section 409A, but only to the extent any such amendments or action by the Administrator would not violate Code Section 409A. Notwithstanding the foregoing, the Company will have no liability to a Participant or any other party if the option to purchase Common Stock under the Plan that is intended to be exempt from or compliant with Code Section 409A is not so exempt or compliant or for any action taken by the Administrator with respect thereto. The Company makes no representation that the option to purchase Common Stock under the Plan is compliant with Code Section 409A.

24.Term of Plan. The Plan will become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company. It will continue in effect for a term of twenty (20) years, unless sooner terminated under Section 20.

25.Stockholder Approval. The Plan will be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted by the Board. Such stockholder approval will be obtained in the manner and to the degree required under Applicable Laws.

26.Automatic Transfer to Low Price Offering Period. Unless the Administrator, in its sole discretion, chooses otherwise prior to an Enrollment Date, and to the extent permitted by Applicable Laws, if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period automatically will be withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof and the preceding Offering Period will terminate.

27.Governing Law. The Plan will be governed by, and construed in accordance with, the laws of the State of California (except its choice-of-law provisions).

28.No Right to Employment. Participation in the Plan by a Participant will not be construed as giving a Participant the right to be retained as an employee of the Company or a Subsidiary or Affiliate, as applicable. Furthermore, the Company or a Subsidiary or Affiliate may dismiss a Participant from employment at any time, free from any liability or any claim under the Plan.

29.Severability. If any provision of the Plan is or becomes or is deemed to be invalid, illegal, or unenforceable for any reason in any jurisdiction or as to any Participant, such invalidity, illegality or unenforceability will not affect the remaining parts of the Plan, and the Plan will be construed and enforced as to such jurisdiction or Participant as if the invalid, illegal or unenforceable provision had not been included.

30.Compliance with Applicable Laws. The terms of this Plan are intended to comply with all Applicable Laws and will be construed accordingly.

EXHIBIT A

IRHYTHM TECHNOLOGIES, INC.

2016 EMPLOYEE STOCK PURCHASE PLAN

SUBSCRIPTION AGREEMENT

_____ Original Application Offering Date:

_____ Change in Payroll Deduction Rate

1.____________________ hereby elects to participate in the iRhythm Technologies, Inc. 2016 Employee Stock Purchase Plan (the “Plan”) and subscribes to purchase shares of the Company’s Common Stock in accordance with this Subscription Agreement and the Plan.

2.I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (from 0 to 15%) during the Offering Period in accordance with the Plan. (Please note that no fractional percentages are permitted.)

3.I understand that said payroll deductions will be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option and purchase Common Stock under the Plan.

4.I have received a copy of the complete Plan and its accompanying prospectus. I understand that my participation in the Plan is in all respects subject to the terms of the Plan.

5.Shares of Common Stock purchased for me under the Plan should be issued in the name(s) of _____________ (Eligible Employee or Eligible Employee and Spouse only).

6.I understand that if I dispose of any shares received by me pursuant to the Plan within two (2) years after the Offering Date (the first day of the Offering Period during which I purchased such shares) or one (1) year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price that I paid for the shares. I hereby agree to notify the Company in writing within thirty (30) days after the date of any disposition of my shares and I will make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the two (2) year and one (1) year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (a) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (b) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain.

7.I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan.

Employee’s Social

Security Number:

Employee’s Address:

I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT WILL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.

Dated:

Signature of Employee

EXHIBIT B

IRHYTHM TECHNOLOGIES, INC.

2016 EMPLOYEE STOCK PURCHASE PLAN

NOTICE OF REDUCTION OF CONTRIBUTIONS

WITHDRAWAL

Check Appropriate Box

Reduction of Contributions. The undersigned Participant in the Offering Period of the iRhythm Technologies, Inc. 2016 Employee Stock Purchase Plan that began on ____________, ______ (the “Offering Date”) hereby notifies the Company that he or she hereby wishes to reduce payroll contributions to the following percentage:

_________% (the “Reduced Rate”)

The undersigned understands that all subsequent payroll deductions will be made at the Reduced Rate for the purchase of shares in the current Offering Period and for subsequent Offering Periods. The undersigned will be eligible to participate in succeeding Offering Periods at a higher rate of contribution only by delivering to the Company a new Subscription Agreement.

Withdrawal. The undersigned Participant in the Offering Period of the iRhythm Technologies, Inc. 2016 Employee Stock Purchase Plan that began on ____________, ______ (the “Offering Date”) hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be terminated automatically. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned will be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement.

Name and Address of Participant:

Signature:

Date:

Exhibit

IRHYTHM TECHNOLOGIES, INC,

AT-WILL EMPLOYMENT, CONFIDENTIAL INFORMATION,
INVENTION ASSIGNMENT, AND ARBITRATION AGREEMENT

As a condition of my employment with iRhythm Technologies, Inc., its subsidiaries, affiliates, successors or assigns (together the "Company”), and in consideration of my employment with the Company and my receipt of the compensation now and hereafter paid to me by Company, I agree to the following:

1,At-Will Employment.

I UNDERSTAND AND ACKNOWLEDGE THAT: (i) MY EMPLOYMENT WITH THE COMPANY IS FOR AN UNSPECIFIED DURATION AND CONSTITUTES “AT- WILL” EMPLOYMENT; (ii) ANY REPRESENTATION TO THE CONTRARY IS UNAUTHORIZED AND NOT VALID UNLESS IN WRITING AND SIGNED BY THE PRESIDENT OF THE COMPANY; AND (iii) MY EMPLOYMENT RELATIONSHIP MAY BE TERMINATED AT ANY TIME, WITH OR WITHOUT GOOD CAUSE OR FOR ANY OR NO CAUSE, AT MY OPTION OR AT THE OPTION OF THE COMPANY, WITH OR WITHOUT NOTICE.

2,Confidential Information,

A.Company Information. I agree at all times during my employment with the Company and thereafter, to hold in the strictest confidence, and not to use, except for the benefit of the Company, or to disclose to any person, firm or corporation without written authorization of the President or the Board of Directors of the Company, any Company Confidential Information. I understand that my unauthorized use or disclosure of Company Confidential Information during my employment will lead to disciplinary action, up to and including immediate termination and legal action by the Company. I understand that “Company Confidential Information” means any non-public information that relates to the actual or anticipated business, research or development of the Company, or to the Company’s technical data, trade secrets or know-how, including, but not limited to, research, product plans or other information regarding the Company’s products or services and markets therefor, customer lists and customers (including, but not limited to, customers of the Company on which I called or with which I may become acquainted during the term of my employment), software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, finances and other business information; provided, however Company Confidential Information does not include any of the foregoing items to the extent the same have become publicly known and made generally available through no wrongful act of mine or of others.

B.Former Employer Information. 1 agree that during my employment with the Company, I will not improperly use, disclose, or induce the Company to use any proprietary information or trade secrets of any former or concurrent employer or other person or entity. I further agree that I will not bring onto the premises of the Company or transfer onto the Company’s technology systems any unpublished document, proprietary information or trade secrets belonging to any such employer, person or entity unless consented to in writing by both Company and such employer, person or entity.

C.Third Party Information. 1 recognize that the Company may have received and in the future may receive from third parties associated with the Company, e.g., the Company’s customers, suppliers, licensors, licensees, partners, or collaborators (“Associated Third Parties”) their confidential or proprietary information (“Associated Third Party Confidential Information”). By way of example, Associated Third Party Confidential Information may include the habits or practices of Associated Third Parties, the technology of Associated Third Parties, requirements of Associated Third Parties, and information related to the business conducted between the Company and such Associated Third Parties. I agree at all times during my employment with the Company and thereafter, to hold in the strictest confidence, and not to use or to disclose to any person, firm or corporation any Associated Third Party Confidential Information, except as necessary in carrying out my work for the Company consistent with the Company’s agreement with such Associated Third Parties. I understand that my unauthorized use or disclosure of Associated Third Party Confidential Information during my employment will lead to disciplinary action, up to and including immediate termination and legal action by the Company.

3.Inventions.

A.Inventions Retained and Licensed. I have attached hereto as Exhibit A. a list describing all inventions, discoveries, original works of authorship, developments, improvements, and trade secrets, which were conceived in whole or in part by me prior to my employment with the Company to which I have any right, title or interest, which are subject to California Labor Code Section 2870 attached hereto as Exhibit B, and which relate to the Company’s proposed business, products, or research and development (“Prior Inventions”); or, if no such list is attached, I represent and warrant that there are no such Prior Inventions. Furthermore, I represent and warrant that the inclusion of any Prior Inventions from Exhibit A of this Agreement will not materially affect my ability to perform all obligations under this Agreement. If, in the course of my employment with the Company, I incorporate into or use in connection with any product, process, service, technology or other work by or on behalf of Company any Prior Invention, I hereby grant to the Company a nonexclusive, royalty-free, fully paid-up, irrevocable, perpetual, worldwide license, with the right to grant, and authorize sublicenses, to make, have made, modify, use, import., offer for sale, and sell such Prior Invention as part of or in connection with such product, process, service, technology or other work and to practice any method related thereto.

Assignment of Inventions. I agree that I will promptly make lull written disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and hereby assign to the Company, or its designee, all my right, title, and interest, in and to any and all inventions, original works of authorship, developments, concepts, improvements, designs, discoveries, ideas, trademarks or trade secrets, whether or not. patentable or registrable under patent, copyright or similar laws, which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the employ of the Company (including during my off-duty hours), or with the use of Company’s equipment., supplies, facilities, or Company Confidential Information, except as

provided in Section 3.E below (collectively referred to as “Inventions”). I further acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of and during the period of my employment with the Company and which are protectable by copyright are “works made for hire,” as that term, is defined in the United States Copyright Act, I understand and agree that the decision whether or not to commercialize or market any Inventions is within the Company’s sole discretion and for the Company’s sole benefit and that no royalty or other consideration will be due to me as a result of the Company’s efforts to commercialize or market any such Inventions.

B.Maintenance oj Records. I agree to keep and maintain adequate, current, accurate, and authentic written records of all Inventions made by me (solely or jointly with others) during the term of my employment with the Company. The records will be in the form of notes, sketches, drawings, electronic files, reports, or any other format that may be specified by the Company. The records are and will be available to and remain the sole property of the Company at all times.

C.Patent and Copyright Registrations. I agree to assist the Company, or its designee, at the Company’s expense, in every proper way to secure the Company’s rights in the Inventions and any rights relating thereto in any and all countries, including the disclosure to the Company of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments and all other instruments which the Company shall deem proper or necessary in order to apply for, register, obtain, maintain, defend, and enforce such rights and in order to assign and convey to the Company, its successors, assigns, and nominees the sole and exclusive rights, title and interest in and to such Inventions and any rights relating thereto, and testifying in a suit or other proceeding relating to such Inventions and any rights relating thereto. I further agree that, my obligation, to execute or cause to be executed, when it is in my power to do so, any such instrument or papers shall continue after the termination of this Agreement. If the Company is unable because of my mental or physical incapacity or for any other reason to secure my signature with respect to any Inventions including, without limitation, to apply for or to pursue any application for any United States or foreign patents or copyright registrations covering such Inventions, then I hereby irrevocably designate and appoint: the Company and its duly authorized officers and agents as my agent and attorney in fact, to act for and in my behalf and stead to execute and file any papers, oaths and to do all other lawfully permitted acts with respect to such Inventions with the same legal force and effect as if executed by me.

D.Exception to Assignments. I understand that the provisions of this Agreement requiring assignment of Inventions to the Company do not apply to any invention which qualifies fully under the provisions of California Labor Code Section 2870 (attached hereto as Exhibit B). I will advise the Company promptly in writing of any inventions that I believe meet the criteria in California Labor Code Section 2870 and not otherwise disclosed on Exhibit A.

4.Conflicting Employment.

A.Current Obligations. 1 agree that during the term of my employment with the Company, I will not engage in or undertake any other employment, occupation, consulting relationship or commitment that is directly related, to the business in which the Company is now involved or becomes involved or has plans to become involved, nor will 1 engage in any other activities that conflict with my obligations to the Company.

B.Prior Relationships. Without limiting Section 4.A, 1 represent that 1 have no other agreements, relationships or commitments to any other person or entity that conflict with my obligations to the Company under this Agreement or my ability to become employed and perform the services for which 1 am being hired by the Company. 1 further agree that if 1 have signed a confidentiality agreement or similar type of agreement with any former employer or other entity, I will comply with the terms of any such agreement to the extent that its terms are lawful under applicable law. I represent and warrant that after undertaking a careful search (including searches of my computers, cell phones, electronic devices and documents), I have returned all property and confidential information belonging to all prior employers. Moreover, in the event that the Company or any of its directors, officers, agents, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor or successor corporations, or assigns is sued based on any obligation or agreement to which I am a party or am bound, I agree to fully indemnify the Company, its directors, officers, agents, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns for all verdicts, judgments, settlements, and other losses incurred by the Company (the indemnitee) in the event that it is the subject of any legal action resulting from any breach of my obligations under this Agreement, as well as any reasonable attorneys⁵ fees and costs if the plaintiff is the prevailing party in such an action.

5.Returning Company Documents. Upon separation from employment with the Company or on demand by the Company during my employment, I will immediately deliver to the Company, and will not keep in my possession, recreate or deliver to anyone else, any and all Company property, including, but not limited to, Company Confidential Information, Associated Third Party Confidential Information, as well as all devices and equipment belonging to the Company (including computers, handheld electronic devices, telephone equipment, and other electronic devices), Company credit cards, records, data, notes, notebooks, reports, files, proposals, lists, correspondence, specifications, drawings blueprints, sketches, materials, photographs, charts, all documents and property, and reproductions of any of the aforementioned items that were developed by me pursuant to my employment with the Company, obtained by me in connection with my employment with the Company, or otherwise belonging to the Company, its successors or assigns, including, without limitation, those records maintained pursuant to Section 3.C. I also consent to an exit interview to confirm my compliance with this Section 5.

6.Termination Certification. Upon separation from employment with the Company,

1 agree to immediately sign and deliver to the Company the “Termination Certification⁵⁵ attached hereto as Exhibit C. I also agree to keep the Company advised of my home and business address for a period of three (3) years after termination of my employment with the Company, so that the Company can contact me regarding my continuing obligations provided by this Agreement.

7.Notification of New Employer. In the event that 1 leave the employ of the Company, I hereby grant consent to notification by the Company to my new employer about my obligations under this Agreement.

8.Solicitation of Employees. I agree that for a period of twelve (12) months immediately following the termination of my relationship with the Company for any reason, whether voluntary or involuntary, with or without cause, I shall not either directly or indirectly solicit any of the Company’s employees to leave their employment, or attempt to solicit employees of the Company, either for myself or for any other person or entity,

9.Conflict of Interest Guidelines. I agree to diligently adhere all to policies of the Company including the Company’s insider’s trading policies and the Conflict of Interest Guidelines attached as Exhibit D hereto, which may be revised from time to time during my employment.

10.Representations. 1 agree to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. I represent that my performance of all the terms of this Agreement, will not breach any agreement to keep in confidence proprietary information acquired by me in confidence or in trust prior to my employment by the Company, I hereby represent and warrant that 1 have not entered into, and I will not enter into, any oral or written agreement in conflict herewith.

11.Audit. I acknowledge that I have no reasonable expectation of privacy in any computer, technology system, email, handheld device, telephone, or documents that are used to conduct the business of the Company. As such, the Company has the right to audit and search all such items and systems, without further notice to me, to ensure that the Company is licensed to use the software on the Company’s devices in compliance with the Company’s software licensing policies, to ensure compliance with the Company’s policies, and for any other business-related purposes in the Company’s sole discretion. I understand that I am not permitted to add any unlicensed, unauthorized or non-comp] iant applications to the Company’s technology systems and that I shall refrain from copying unlicensed software onto the Company’s technology systems or using non-licensed software or web sites. I understand that it is my responsibility to comply with the Company’s policies governing use of the Company’s documents and the internet, email, telephone and technology systems to which I will have access in connection with my employment,

12.Arbitration and Equitable Relief.

A.Arbitration. IN CONSIDERATION OF MY EMPLOYMENT WITH

THE COMPANY, ITS PROMISE TO ARBITRATE ALL EMPLOYMENT-RELATED DISPUTES, AND MY RECEIPT OF THE COMPENSATION, PAY RAISES AND OTHER BENEFITS PAID TO ME BY THE COMPANY, AT PRESENT AND IN THE FUTURE, I AGREE THAT ANY AND ALL CONTROVERSIES, CLAIMS, OR DISPUTES WITH ANYONE (INCLUDING THE COMPANY AND ANY EMPLOYEE, OFFICER, DIRECTOR, SHAREHOLDER OR BENEFIT PLAN OF THE COMPANY IN THEIR CAPACITY AS SUCH OR OTHERWISE), WHETHER BROUGHT ON AN INDIVIDUAL, GROUP, OR CLASS BASIS, ARISING OUT OF, RELATING TO, OR RESULTING FROM MY EMPLOYMENT WITH THE COMPANY OR THE TERMINATION OF MY EMPLOYMENT WITH THE COMPANY, INCLUDING ANY BREACH OF THIS AGREEMENT, SHALL BE SUBJECT TO BINDING ARBITRATION UNDER THE ARBITRATION RULES SET FORTH IN CALIFORNIA CODE OF CIVIL PROCEDURE. SECTION 1280 THROUGH 1294.2, INCLUDING SECTION 1283.05 (THE “RULES”) AND PURSUANT TO CALIFORNIA LAW, DISPUTES WHICH I AGREE TO ARBITRATE, AND THEREBY AGREE TO WAIVE ANY RIGHT TO A TRIAL BY JURY, INCLUDE ANY STATUTORY CLAIMS UNDER STATE OR FEDERAL LAW, INCLUDING, BUT NOT LIMITED TO, CLAIMS UNDER TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE OUTER WORKERS BENEFIT PROTECTION ACT, THE SARBANES- OXLEY ACT, THE WORKER ADJUSTMENT AND RETRAINING NOTIFICATION ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, THE FAMILY AND MEDICAL LEAVE ACT, THE CALIFORNIA FAMILY RIGHTS ACT', THE CALIFORNIA LABOR CODE, CLAIMS OF HARASSMENT, DISCRIMINATION AND WRONGFUL TERMINATION AND ANY STATUTORY CLAIMS. I FURTHER UNDERSTAND THAT THIS AGREEMENT TO ARBITRATE ALSO APPLIES TO ANY DISPUTES THAT THE COMPANY MAY HAVE WITH ME.

B.Procedure. I AGREE THAT ANY ARBITRATION WILL BE ADMINISTERED BY THE AMERICAN ARBITRATION ASSOCIATION (“AAA”) AND THAT THE NEUTRAL ARBITRATOR WILL BE SELECTED IN A MANNER CONSISTENT WITH AAA’S NATIONAL RULES FOR THE RESOLUTION OF EMPLOYMENT DISPUTES. 1 AGREE THAT THE ARBITRATOR SHALL HAVE THE POWER TO DECIDE ANY MOTIONS BROUGHT BY ANY PARTY TO THE ARBITRATION, INCLUDING MOTIONS FOR SUMMARY JUDGMENT AND/OR ADJUDICATION, MOTIONS TO DISMISS AND DEMURRERS, AND MOTIONS FOR CLASS CERTIFICATION, PRIOR TO ANY ARBITRATION HEARING. I ALSO AGREE THAT THE ARBITRATOR SHALL HAVE THE POWER TO AWARD ANY REMEDIES AVAILABLE UNDER APPLICABLE LAW, AND THAT' THE ARBITRATOR SHALL AWARD ATTORNEYS'' FEES AND COSTS TO THE PREVAILING PARTY EXCEPT AS PROHIBITED BY LAW, I UNDERSTAND THAI' THE COMPANY WILL PAY FOR ANY ADMINISTRATIVE OR HEARING FEES CHARGED BY THE ARBITRATOR OR AAA EXCEPT THAT I SHALL PAY THE FIRST $125.00 OF ANY FILING FEES ASSOCIATED WITH ANY ARBITRATION I INITIATE. I AGREE THAT THE ARBITRATOR SHALL ADMINISTER AND CONDUCT ANY ARBITRATION IN A MANNER CONSISTENT WITH THE RULES AND THAT TO THE EXTENT THAT THE AAA’S NATIONAL RULES FOR THE RESOLUTION OF EMPLOYMENT DISPUTES CONFLICT WITH THE RULES, THE RULES SHALL TAKE PRECEDENCE, I AGREE THAT THE DECISION OF THE ARBITRATOR SHALL BE IN WRITING. I AGREE THAT ANY ARBITRATION UNDER THIS AGREEMENT SHALL BE CONDUCTED IN SANTA CLARA COUNTY, CALIFORNIA,

C.Remedy. EXCEPT AS PROVIDED BY THE RULES AND THIS AGREEMENT, ARBITRATION SHALL. BE THE SOLE, EXCLUSIVE AND FINAL REMEDY FOR ANY DISPUTE BETWEEN ME AND THE COMPANY. ACCORDINGLY, EXCEPT AS PROVIDED FOR BY THE RULES AND THIS AGREEMENT, NEITHER I NOR THE COMPANY WILL, BE PERMITTED TO PURSUE COURT ACTION REGARDING CLAIMS THAT ARE SUBJECT TO ARBITRATION. NOT WITHSTANDING, THE ARBITRATOR WILL NOT HAVE THE AUTHORITY TO DISREGARD OR REFUSE TO ENFORCE ANY LAWFUL COMPANY POLICY, AND THE ARBITRATOR SHALL

NOT ORDER OR REQUIRE THE COMPANY TO ADOPT A POLICY NOT OTHERWISE REQUIRED BY LAW. NOTHING IN THIS AGREEMENT OR IN THIS PROVISION IS INTENDED TO WAIVE THE PROVISIONAL RELIEF REMEDIES AVAILABLE UNDER THE RULES.

D. Administrative Relief. I UNDERSTAND THAT ITUS AGREEMENT' DOES NOT PROHIBIT ME FROM PURSUING AN ADMINISTRATIVE CLAIM WITH A LOCAL, STATE OR FEDERAL ADMINISTRATIVE BODY SUCH AS THE DEPARTMENT OF FAIR EMPLOYMENT AND HOUSING, THE EQUAL EMPLOYMENT’ OPPORTUNITY COMMISSION OR THE WORKERS⁵ COMPENSATION BOARD. THIS AGREEMENT DOES, HOWEVER, PRECLUDE ME FROM PURSUING COURT ACTION REGARDING ANY SUCH CLAIM.

E. Voluntary Nature of Agreement. I ACKNOWLEDGE AND AGREE THAT I AM EXECUTING THIS AGREEMENT VOLUNTARILY AND WITHOUT ANY DURESS OR UNDUE INFLUENCE BY THE COMPANY OR ANYONE ELSE. I FURTHER ACKNOWLEDGE AND AGREE THAT I HAVE CAREFULLY READ THIS AGREEMENT AND THAT I HAVE ASKED ANY QUESTIONS NEEDED FOR ME TO UNDERSTAND THE TERMS, CONSEQUENCES AND BINDING EFFECT OF THIS AGREEMENT AND FULLY UNDERSTAND IT, INCLUDING THAT I AM WAIVING MY RIGHT TO A JURY TRIAL. FINALLY, I AGREE THAT I HAVE BEEN PROVIDED AN OPPORTUNITY TO SEEK THE ADVICE OF AN ATTORNEY OF MY CHOICE BEFORE SIGNING THIS AGREEMENT.

13.General Provisions.

A.Governing Law; Consent to Personal Jurisdiction. This Agreement will be governed by the laws of the State of California without giving effect to any choice of law rules or principles that may result in the application of the laws of any jurisdiction other than California. To the extent that any lawsuit is permitted under this Agreement, I hereby expressly consent to the persona] jurisdiction of the state and federal courts located in California for any lawsuit filed against me by the Company .

B.Entire Agreement. This Agreement, together with the Exhibits herein, sets forth the entire agreement and understanding between the Company and me relating to the subject matter herein and supersedes all prior discussions or representations between us including, but not limited to, any representations made during my interview(s) or relocation negotiations, whether written or oral. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing signed by the President of the Company and me. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement.

C.Severability. If one or more of the provisions in this Agreement are deemed void by law, then the remaining provisions will continue in full force and effect.

D.Successors and Assigns. This Agreement will be binding upon my heirs, executors, assigns, administrators and other legal representatives and will be for the benefit ofthe Company, its successors, and its assigns. There are no intended third party beneficiaries to this Agreement except as expressly stated,

E,Waiver. Waiver by the Company of a breach of any provision of this Agreement will not operate as a waiver of any other or subsequent breach,

F,Survivorship. The rights and obligations of the parties to this Agreement will survive termination of my employment with the Company.

G,Signatures. This Agreement may be signed in two counterparts, each of which shall be deemed an original, with the same force and effectiveness as though executed in a single document.

Date: September 3, 2007

Signature: /s/ Mark J. Day

Name of Employee (typed or printed)

Witness: /s/ Uday N. Kumar

Name (typed or printed)

Exhibit A

LIST OF PRIOR INVENTIONS
AND ORIGINAL WORKS OF AUTHORSHIP



Title	Date	Identifying Number or Brief Description

Exhibit B

CALIFORNIA LABOR CODE SECTION 2870
INVENTION ON OWN TIME-EXEMPTION FROM AGREEMENT

"(a) Any provision in an employmenl agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:

(1)R elate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or

(2)Result from any work performed by the employee for the employer.

(b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from, being required to be assigned under subdi vi sion (a), the provision is against the public policy of this state and is unenforceable.”

Exhibit C

IRHYTHM TECHNOLOGIES, INC,

TERMINATION CERTIFICATION

This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items belonging to iRhythm Technologies, Inc., its subsidiaries, affiliates, successors or assigns (together, the “Company”).

I further certify that I have complied with all the terms of the Company’s At Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement signed by me, including the reporting of any inventions and original works of authorship (as defined therein), conceived or made by me (solely or jointly with others) covered by that agreement.

I further agree that, in compliance with the At Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement, I will preserve as confidential all Company Confidential Information and Associated Third Party Confidential Information including trade secrets, confidential knowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, data bases, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining to any business of the Company or any of its employees, clients, consultants or licensees,

I also agree that for twelve (12) months from this date, I will not either directly or indirectly solicit, induce, recruit or encourage any of the Company’s employees to leave their employment, or to enter into an employment, consulting, contractor, or other relationship with any other person, firm, business entity, or organization (including with myself).

After leaving the Company’s employment, I will be employed by in the position of:

Signature of employee

Print name

Date-

Address for Notifications:

Exhibit D

IRHYTHJM TECHNOLOGIES, INC.

CONFLICT OF INTEREST GUIDELINES

It is the policy of iRhythm Technologies, Inc. to conduct its affairs in strict compliance with the letter and spirit of the law and to adhere to the highest principles of business ethics. Accordingly, all officers, employees and independent contractors must avoid activities which are in conflict, or give the appearance of being in conflict, with these principles and with the interests of the Company. The following are potentially compromising situations which must be avoided. Any exceptions must be reported to the President and written approval for continuation must be obtained.

1.Revealing confidential information to outsiders or misusing confidential information. Unauthorized divulging of information is a violation of this policy whether or not for personal gain and whether or not harm to the Company is intended. (The At Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement elaborates on this principle and is a binding agreement.)

2.Accepting or offering substantial gifts, excessive entertainment, favors or payments which may be deemed to constitute undue influence or otherwise be improper or embarrassing to the Company.

3.Participating in civic or professional organizations that might involve divulging confidential information of the Company.

4.Initiating or approving personnel actions affecting reward or punishment of employees or applicants where there is a family relationship or is or appears to be a personal or social involvement.

5.Initiating or approving any form of personal or social harassment of employees.

6.Investing or holding outside directorship in suppliers, customers, or competing companies, including financial speculations, where such investment or directorship might influence in any manner a decision or course of action of the Company.

7.Borrowing from or lending to employees, customers or suppliers.

8.Acquiring real estate of interest to the Company.

Improperly using or disclosing to the Company any proprietary information or trade secrets of any former or concurrent employer or other person or entity with whom obligat ions of confidentiality exist.

9.Unlawfully discussing prices, costs, customers, sales or markets with competing companies or their employees.

10.Making any unlawful agreement with distributors with respect to prices.

11.Improperly using or authorizing the use of any inventions which are the subject of patent claims of any other person or entity.

12.Engaging in any conduct which is not in the best interest of the Company.

Each officer, employee and independent contractor must take every necessary action to ensure compliance with these guidelines and to bring problem areas to the attention of higher management for review. Violations of this conflict of interest policy may result in discharge without warning.

Exhibit

Execution Version

***Certain identified information has been excluded from this exhibit because it is both not material and would likely cause competitive harm to the registrant if publicly disclosed***

DEVELOPMENT COLLABORATION AGREEMENT

by and among

VERILY LIFE SCIENCES LLC,

VERILY IRELAND LIMITED,

and

iRHYTHM TECHNOLOGIES, INC.

TABLE OF CONTENTS

1. Definitions

2. Governance

2.1 Establishment and Term of the JSC

2.2 Composition of the JSC

2.3 Meetings of the JSC

2.4 Responsibilities of the JSC

2.5 JSC Decision Making

2.6 Limitations on JSC Authority

2.7 Alliance Managers.

3. Development

3.1 Development Plan

3.2 Dependencies

3.3 Subcontracting

3.4 Exclusivity

3.5 No Other Exclusive Rights or Obligations

3.6 Phase Ib Agreement

4. Regulatory Matters

4.1 Regulatory Strategy and Filings for AF System

4.2 Regulatory Strategy and Filings for End-to-End System

4.3 Right of Reference

4.4 Clinical Trials

5. Financial Terms

5.1 Upfront Payment

5.2 Milestone Payments

5.3 Payment Method; Late Payments

5.4 Taxes

6. Intellectual Property Rights; Data

6.1 Ownership of Background IP

6.2 Ownership of Developed IP

6.3 Development License to Verily

6.4 Development License to IRTC

6.5 AF Algorithm Licenses

6.6 Performance by Affiliates

6.7 Data Ownership

6.8 Data License to Verily

6.9 Data License to IRTC

6.10 Patent Prosecution

6.11 No Implied Licenses

7. Confidentiality

7.1 Confidential Information

7.2 Use of Confidential Information

7.3 Permitted Disclosures

7.4 Notification

7.5 Publicity

7.6 Publication

8. Representations, Warranties, and Covenants

8.1 Mutual Representations and Warranties

8.2 Mutual Covenants

8.3 Verily Additional Representations and Warranties

8.4 IRTC Additional Representations and Warranties

9. Indemnification

9.1 Indemnification by IRTC

9.2 Indemnification by Verily

9.3 Indemnification Procedures

9.4 DISCLAIMER

9.5 LIMITATION OF LIABILITY

10. Term and Termination

10.1 Term

10.2 Termination for Bankruptcy

10.3 Termination for Material Breach

10.4 Termination by Mutual Agreement

10.5 Termination for Failure to [***]

10.6 Termination for Safety

10.7 Effects of Termination

10.8 Rights in Bankruptcy

10.9 Survival

11. Governing Law and Dispute Resolution

11.1 Governing Law

11.2 Dispute Resolution

11.3 Intellectual Property Rights Disputes

11.4 Injunctive Relief

12. Miscellaneous

12.1 Force Majeure

12.2 Further Assurances

12.3 Independent Contractors

12.4 Notices

12.5 Entire Agreement

12.6 Interpretation

12.7 Headings

12.8 Assignment

12.9 No Third Party Beneficiaries

12.10Amendment; Modification; Waiver

12.11Severability

12.12Counterparts

Exhibits

Exhibit 1.25Development Plan

Exhibit 7.5 Press Release

Exhibit 11.3 Binding Arbitration

DEVELOPMENT COLLABORATION AGREEMENT

This Development Collaboration Agreement (together with all schedules and exhibits, the “Agreement”), is entered into as of the date of last signature below (the “Effective Date”) by and among Verily Life Sciences LLC, organized under the laws of Delaware and having a principal place of business at 269 East Grand Avenue, South San Francisco, CA 94080 (“VLS”), Verily Ireland Limited, organized under the laws of Ireland and having a principal place of business at 70 Sir John Rogerson’s Quay, Dublin 2, Ireland (“VIL,” and together with VLS, “Verily”), and iRhythm Technologies, Inc., organized under the laws of Delaware and having a principal place of business at 650 Townsend Street, Suite 500, San Francisco, CA 94103 (“IRTC”). Each of Verily and IRTC are referred to as a “Party” and together the “Parties.”

WHEREAS, Verily is a leader in developing tools and platforms to enable more continuous health data collection for timely decision-making and effective interventions, running longitudinal studies to better understand ways to predict and prevent disease onset and progression, and transforming the way healthcare is delivered;

WHEREAS, Verily’s [***] has, prior to the Effective Date, received 510(k) Clearance from the FDA as a Class II prescription-only medical device [***];

WHEREAS, Verily intends to seek an additional 510(k) Clearance for [***] from the FDA for [***];

WHEREAS, IRTC is a leader in the development and commercialization of wearable biosensor devices, cloud-based data analytics and ambulatory ECG monitoring services redefining the way cardiac arrhythmias are detected;

WHEREAS, the Parties desire to collaborate to use the [***] and the Zio Monitor to Develop the AF System, and integrate the AF System with IRTC’s analysis and reporting system to create the End-to-End System, in each case, for technology validation and market exploration purposes and as set forth in the Development Plan.

WHEREAS, the Parties wish to enter into discussions to consider further collaboration on matters [***].

NOW THEREFORE, in consideration of the mutual covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows.


1.	Definitions

As used in this Agreement, the following capitalized terms will have the following meanings:


1.1	“510(k) Clearance” means an order from the FDA declaring that the device described in a 510(k) Notification is substantially equivalent to a legally marketed predicate device.


1.2	“510(k) Notification” means the premarket submission made to the FDA under § 510(k) of the FDCA (21 U.S.C. § 360(k)) to establish substantial equivalence to a legally marketed device, in accordance with 21 C.F.R. 807.92(a)(3).


1.3	“AF” means atrial fibrillation.


1.4	“AF Algorithms” means [***].


1.4.1.	“IRTC AF Algorithms” means IRTC’s algorithms for [***].


1.4.2.	“Verily AF Algorithms” means Verily’s algorithms for [***].


1.5	“AF System” means [***].

1.6

“Affiliate” means (a) with respect to Verily, the wholly-owned subsidiaries of VLS and VIL, and (b) with respect to IRTC, any Person directly or indirectly controlling, controlled by, or under common control with IRTC, where “control” is defined as the direct or indirect holding of a majority of the stock entitled to vote (or other voting interest) or to otherwise appoint and remove the management of such Person. For the avoidance of doubt, the following will not be considered Affiliates of Verily: (i) Alphabet Inc. or any subsidiaries of Alphabet Inc. other than VLS and VIL and their wholly-owned subsidiaries, (ii) Google LLC or any subsidiaries of Google LLC, (iii) Calico LLC, (iv) all portfolio companies of Google Ventures, Google Capital, and any other investment arm of VLS, VIL, or Alphabet Inc., and (v) any joint venture entity formed by VLS, VIL,, or their subsidiaries together with one or more Third Parties.


1.7	“Agreement” has the meaning set forth in the preamble.


1.8	“Applicable Law” means any federal, national, supranational, state, provincial, local, or similar statute, law, ordinance, regulation, rule, code, order, requirement, or rule of law (including common law) of any Governmental Authority applicable to a Party or activities under or relating to this Agreement.


1.9	“Background IP” means the Verily Background IP and the IRTC Background IP.


1.10	“Bankruptcy Code” means Title 11 of the United States Code.


1.11	“Business Day” means any day except: any Saturday, any Sunday, any day that is a federal legal holiday in the United States, or any day on which banking institutions in the State of California are authorized or required by law or other action of a Governmental Authority to close.

1.12

“Calendar Quarter” means each successive period of three calendar months commencing on January 1, April 1, July 1, and October 1, except that the first Calendar Quarter of the Term commences on the Effective Date and ends on the day immediately before the first to occur of January 1, April 1, July 1, or October 1 after the Effective Date, and the last Calendar Quarter ends on the last day of the Term.

1.13

“Calendar Year” means each successive period of 12 calendar months commencing on January 1 and ending on December 31, except that the first Calendar Year of the Term commences on the Effective Date and ends on December 31 of the year in which the Effective Date occurs and the last Calendar Year of the Term commences on January 1 of the year in which the Term ends and ends on the last day of the Term.

1.14

“Cardiac Monitoring Company” means any company that develops or commercializes a cardiac monitoring device or cardiac monitoring service that involves providing or facilitating ECG analysis or diagnostic tests or using an independent diagnostic testing facility or physician diagnostic reporting system. For clarity, Cardiac Monitoring Companies shall not include academic institutions, hospitals or physicians’ practices.


1.15	“Clinical Trials” means the clinical studies required by any Regulatory Authority to be conducted in order to obtain, maintain, or modify any Regulatory Approval for a product.


1.16	“Commercialize” or “Commercialization” means to promote, distribute, market, sell, have sold, offer for sale, import, export, have exported, or otherwise commercialize a product, including the Manufacture of such product in connection with any of the foregoing activities, but excluding any Clinical Trials or Validation Studies.

1.17

“Commercially Reasonable Efforts” means, with respect to the efforts to be expended by a Party with respect to any objective, activity, or decision hereunder, such reasonable, diligent, good faith efforts to accomplish such objective, activity, or decision as a similarly situated company (with respect to such company’s size, stage of development of products, and assets) would normally use to accomplish a similar objective, activity, or decision under similar circumstances with respect to products of similar market potential, strategic importance, and profit potential (taking into account payments under this Agreement), based on conditions then prevailing and other Relevant Factors.


1.18	“Confidential Information” is defined in Section 7.1 (Confidential Information).

1.19

“Control” means, with respect to any Intellectual Property Rights, Study Data, Historical Zio Service Data, Confidential Information, or Materials, the possession of (whether by ownership, license, or permission, other than pursuant to this Agreement) the ability of a Party or its Affiliates to grant to the other Party access, a license, or a sublicense, as applicable to such Intellectual Property Rights, Study Data, Historical Zio Service Data, Confidential Information, or Materials in accordance with this Agreement without requiring the consent of, or additional payment to, a Third Party, or violating the terms of any agreement or other arrangement with or obligation to a Third Party.


1.20	“Debarred” means a Person who has been debarred under § 306(a) or (b) of the FDCA, convicted of any offenses described in such subsections, or is otherwise excluded from participating in Federal Healthcare Programs.

1.21

“Develop” or “Development” means all research and development activities with respect to a product, including activities relating to the generation, optimization, construction, and production of such product, non-clinical and pre-clinical development activities relating to the testing and qualification of such product, quality assurance and quality control development, software, hardware, firmware, and algorithm development, statistical analysis and report writing, together with clinical studies (including Clinical Trials and Validation Studies), regulatory affairs, and activities relating to obtaining, maintaining, or modifying Regulatory Approvals.


1.22	“Developed AF Algorithms” means AF Algorithms that are (a) created under the Development Plan or (b) improvements to existing AF Algorithms to the extent such improvements are created under the Development Plan. For clarity, Developed AF Algorithms include IRTC Developed AF Algorithms and Verily Developed AF Algorithms.


1.22.1.	“IRTC Developed AF Algorithms” means the Developed AF Algorithms that comprise improved (or improvements to) IRTC AF Algorithms.


1.22.2.	“Verily Developed AF Algorithms” means the Developed AF Algorithms that comprise improved (or improvements to) Verily AF Algorithms.


1.23	“Developed IP” means IRTC Developed IP, Verily Developed IP, and Jointly Developed General IP.

1.24

“Development Plan” means the plan describing the Development activities of each of the Parties for the AF System and End-to-End System, attached hereto as Exhibit 1.25 (Development Plan), with such updates made in accordance with Section 2.4 (Responsibilities of the JSC). At a minimum the Development Plan will specify (a) the activities, deliverables, and dependencies that the Parties are responsible for Developing the AF System and End-to-End System in the Field and the timelines for performing or providing such items; (b) the Materials to be provided by the Parties to each other (including maximum quantities of products to be supplied for Clinical Trials and Validation Trials); (c) allocation of responsibility for seeking Regulatory Approval for all components of the End-to-End System (other than the AF System); (d) a description of the Clinical Trials and Validation Studies (if any) to be conducted; and (e) the criteria for achieving the Milestone Events set forth in Rows 1 and 2 of Table 5.2.


1.25	“Disclosing Party” means the Party that discloses or authorizes the disclosure of Confidential Information to the other Party.


1.26	“Disease Management Competitor” means [***].

1.27

"Disease Management Platform" means a software platform providing home-centered or virtual clinical or behavioral interventions for the diagnosis or management of chronic disease condition(s); provided that Disease Management Platforms shall not include telemedicine platforms if such telemedicine platforms are only supplemental to the primary, in-person healthcare offering and facilitate the remote treatment or diagnosis of patients by physicians or other healthcare providers on an as-needed basis.


1.28	“Dispute” is defined in Section 11.2 (Dispute Resolution).


1.29	“Dispute Notice” is defined in Section 11.2 (Dispute Resolution).


1.30	“Dollars” or “$” means U.S. dollars.


1.31	“ECG” means electrocardiogram.


1.32	“Effective Date” has the meaning set forth in the preamble.


1.33	“End-to-End System” means a system integrating the AF System together with any or all of the following not already included as part of the AF System as of the Effective Date: [***].


1.34	“Executive Officers” means the chief executive officers of the Parties, or their respective designees.


1.35	“FDA” means the U.S. Food and Drug Administration.


1.36	“FDCA” means the U.S. Federal Food, Drug, and Cosmetic Act.


1.37	“Federal Healthcare Program” means the Medicare program, the Medicaid program, the Maternal and Child Health Services Block Grant program, the Block Grants for State for Social Services program, any state Children’s Health Insurance program, or any similar program.


1.38	“Field” means [***].


1.39	“Force Majeure Event” is defined in Section 12.1 (Force Majeure).

1.40

“Governmental Authority” means any supranational, international, national, state, provincial, county, city, or other local agency, authority, department, commission, board, bureau, instrumentality, or other governmental, quasi-governmental regulatory authority of any thereof, or any court, tribunal, arbitrator or judicial body, in each case acting for, with, or by empowerment of any of the foregoing.

1.41

“Historical Zio Service Data” means select data generated, received, or collected by or through the Zio Monitor or through the Zio Service, including ECG data and data analytics derived therefrom by IRTC, other than Prior Clinical Data and data generated, received, or collected in the course of performing activities under this Agreement, whether before or after the Effective Date, which select data is set forth in the Development Plan to be shared with Verily or is otherwise agreed by IRTC in writing to be provided to Verily for purposes of the Development Plan.


1.42	“Indemnification Claim Notice” is defined in Section 9.3(a) (Notice of Claim).


1.43	“Indemnified Party” is defined in Section 9.3(a) (Notice of Claim).


1.44	“Indemnifying Party” is defined in Section 9.3(a) (Notice of Claim).


1.45	“Indemnitee” is defined in Section 9.3(a) (Notice of Claim).


1.46	“Intellectual Property Rights” means all rights, title, and interests in and to, anywhere in the world, Patents, Know-How, and registered or unregistered copyrights.


1.47	“Intended Submission” a 510(k) Notification submitted by Verily to the FDA on or around the Effective Date to obtain 510(k) Clearance for the [*], as filed by Verily prior to the Effective Date in a pre-submission filing to the FDA titled [*].


1.48	“IRTC” has the meaning set forth in the preamble.

1.49

“IRTC Background IP” means any Intellectual Property Rights (a) Controlled by IRTC or its Affiliates prior to the Effective Date, or (b) that come under the Control of IRTC or its Affiliates during the Term other than in the course of performing activities pursuant to the Development Plan contemplated by this Agreement and, in each case ((a) and (b)), that are necessary or useful for the Development, Manufacture, or Commercialization of the AF System.


1.50	“IRTC Back-End Systems” means IRTC’s physician/end-user portal and diagnostic processing and reporting systems, including [***].


1.51	“IRTC Developed IP” means any Intellectual Property Rights made, invented, developed, created, conceived, or reduced to practice, solely by or on behalf of IRTC in the course of performing its obligations under the Development Plan pursuant to this Agreement.


1.52	“IRTC Improvements” means Developed IP comprising improvements to IRTC Back-End Systems, excluding any and all Developed AF Algorithms. For clarity, IRTC Improvements shall not include the AF System or improvements to [***].


1.53	“IRTC Indemnitees” is defined in Section 9.2 (Indemnification by Verily).


1.54	“IRTC Shared Know-How” means the Know-How within the IRTC Background IP that is disclosed to Verily by IRTC in the performance of the Development Plan; provided that the IRTC Shared Know-How shall not include any IRTC Back-End Systems algorithms or other software source or object code.

1.55

“Jointly Developed General IP” means any Intellectual Property Rights made, invented, developed, created, conceived, or reduced to practice, jointly by or on behalf of Verily and by or on behalf of IRTC in the course of performing their respective obligations under the Development Plan pursuant to this Agreement. Notwithstanding anything to the contrary, Jointly Developed General IP includes any Developed AF Algorithms that are not Verily Developed AF Algorithms or IRTC Developed AF Algorithms [***]; but excludes any Verily Developed AF Algorithms, IRTC Developed AF Algorithms, [***].


1.56	“Jointly Developed Patents” means all Patents included within the Jointly Developed General IP.


1.57	“JSC” is defined in Section 2.1 (Establishment of JSC).

1.58

“Know-How” means all proprietary or non-public information or Materials, whether patentable or not, including ideas, concepts, discoveries, inventions, improvements, feedback (except for Third Party System Feedback), trade secrets, products, technologies, equipment, apparatuses, source code, object code, algorithms, techniques, design rights, database rights, methods, procedures, processes, protocols, technical, medical, clinical, and other scientific data (except for Study Data and Historical Zio Service Data), or other information relating to any of the foregoing, drawings, plans, designs, diagrams, sketches, specifications, or other documents containing or relating to such information or Materials. For clarity, Know-How excludes Patents.


1.59	“Licensed IP” means, with respect to a Party, the Intellectual Property Rights under which such Party grants a license to the other Party pursuant to Section 6.3 (Development License to Verily), Section 6.4 (Development License to IRTC), or Section 6.5 (AF Algorithm Licenses), as applicable.


1.60	“Licensee” is defined in Section 10.8 (Rights in Bankruptcy).


1.61	“Licensor” is defined in Section 10.8 (Rights in Bankruptcy).


1.62	“Losses” means, collectively, liability, damage, tax, costs, loss, or expense (including reasonable outside attorneys’ fees and expenses of litigation).


1.63	“Manufacture” means activities directed to producing, manufacturing, processing, packaging, labeling, testing, shipping, and storage of a product.


1.64	“Materials” means all tangible materials provided by a Party to the other Party in connection with the activities conducted under the Development Plan.


1.65	“Milestone Event” is defined in Section 5.2 (Milestone Payments).


1.66	“Milestone Payment” is defined in Section 5.2 (Milestone Payments).


1.67	“Party” has the meaning set forth in the preamble.

1.68

“Patents” means all patents, patent applications, and any patents issuing therefrom worldwide, together with any extensions, registrations, confirmations, reissues, continuations, divisionals, continuations-in-part, reexamination certificates, substitutions, or renewals, supplemental protection certificates, term extensions (under applicable patent law or regulation), or certificates of inventions.


1.69	“Person” means any individual, partnership, limited liability company, corporation, firm, trust, association, unincorporated organization, Governmental Authority, or any other entity.


1.70	[***].


1.71	“Prior Clinical Data” means all data collected in the course of conducting the clinical trial contemplated by the Prior Clinical Trial Agreement, including data from subjects.


1.72	“Prior Clinical Trial Agreement” means that certain Clinical Trial Supply Agreement by and between the Parties, effective as of October 18, 2018, as amended by that certain Amendment to the Clinical Trial Supply Agreement between the Parties dated April 16, 2019.


1.73	“Prior NDA” means that certain Non-Disclosure Agreement by and between the Parties, effective as of July 7, 2018.


1.74	“Qualified Opportunity” means [***].


1.75	“Receiving Party” means the Party receives Confidential Information from the other Party under this Agreement.

1.76

“Regulatory Approval” means, with respect to any jurisdiction, any approval (other than Reimbursement Approvals), licenses, registrations, authorizations, clearances, agreements, determinations, decisions, or allowances of any Regulatory Authority necessary or useful for the Development, Manufacture, or Commercialization of any product in such jurisdiction, including (a) approvals of investigational device exemptions, 510(k) Clearances, approvals of Premarket Approval Applications, approvals of Marketing Authorization Applications, and supplements and amendments thereto; (b) pre- and post-approval marketing authorizations, clearances or allowances (including any prerequisite manufacturing approval or authorization related thereto); (c) labeling approval; and (d) technical, medical, and scientific licenses.


1.77	“Regulatory Authority” means, with respect to any jurisdiction, the Governmental Authority having responsibility for granting approvals, licenses, registrations, authorizations, clearances, or allowances that are necessary or useful for the Development, Manufacture, or Commercialization of any medical device product, including the AF System or End-to-End System, in such jurisdiction.

1.78

“Reimbursement Approval” means, with respect to any jurisdiction, any approvals (other than Regulatory Approvals), licenses, registrations, authorizations, clearances, agreements, determinations, decisions, or allowances establishing the pricing or reimbursement for a product that can be charged or reimbursed in regulatory jurisdictions where the applicable Governmental Authorities negotiate, approve, or determine the price or reimbursement of a product.

1.79

“Relevant Factors” means all relevant factors that may affect the Development, or Regulatory Approval of a product, including, as applicable: the product profile, the market potential, the competitiveness of alternative products sold by Third Parties in the marketplace, the patent and other proprietary position of the product, the likelihood and timing of Regulatory Approval, including costs associated with, and probability of success of, Clinical Trials, and other relevant scientific, technical, operational, and commercial factors.


1.80	“Remaining Jointly Developed General IP” has the meaning set forth in Section 6.2 (Ownership of Developed IP).


1.81	“Representative” means a Person’s employees, independent contractors, consultants, agents, directors, officers, and permitted sublicensees.


1.82	“Study Data” means the data collected in connection with Clinical Trials or any Validation Studies conducted pursuant to the Development Plan under this Agreement, including [***]. For the avoidance of doubt, Study Data excludes Historical Zio Service Data.


1.83	[***].


1.84	“Substitution Option” has the meaning set forth in Section 4.4(d) (Supply for Clinical Trials and Validation).


1.85	“Substitution Wearable” means [***].


1.86	“Term” is defined in Section 10.1 (Term).


1.87	“Third Party” means any Person other than a Party or its Affiliates.


1.88	“Third Party Claim” means any and all demands, claims, actions, suits, and proceedings (whether criminal or civil, in contract, tort, or otherwise), in each case that are brought by a Third Party.


1.89	“Third Party System Feedback” means any feedback, comments, or suggestions received during the Term by or on behalf of IRTC or Verily directly or indirectly from any Third Parties (including partners, customers, suppliers, and manufacturers) related to the AF System, including any of the foregoing that relate to the design, performance, operation, construction, or methods of the AF System.


1.90	“U.S.” means the United States of America.


1.91	“Validation Studies” means market access studies, pilot studies, or user experience studies involving the AF System or End-to-End System as set forth in the Development Plan.


1.92	“Verily” has the meaning set forth in the preamble.

1.93

“Verily Background IP” means any Intellectual Property Rights (a) Controlled by Verily or its Affiliates prior to the Effective Date, or (b) that comes under the Control of Verily or its Affiliates during the Term other than in the course of performing activities pursuant to the Development Plan contemplated by this Agreement and, in each case ((a) and (b)), that are necessary for the Development, Manufacture or Commercialization of the End-to-End System, including as such development is contemplated under the Development Plan.


1.94	“Verily Developed IP” means any Intellectual Property Rights made, invented, developed, created, conceived, or reduced to practice, solely by or on behalf of Verily in the course of performing its obligations under the Development Plan pursuant to this Agreement.


1.95	“Verily Improvements” means Developed IP comprising improvements to the AF System, excluding any and all Developed AF Algorithms. For clarity, Verily Improvements shall not include the IRTC Back-End System or any components thereof or improvements thereto.


1.96	“Verily Indemnitees” is defined in Section 9.1 (Indemnification by IRTC).


1.97	“Verily Shared Know-How” means the Know-How within the Verily Background IP that is disclosed to IRTC by Verily in the performance of the Development Plan; provided that the Verily Background Know-How shall not include any AF System algorithms or other software source or object code.


1.98	“Zio Monitor” means IRTC’s proprietary, patented, FDA-cleared cardiac monitoring wearable biosensor technology platform and services referred to as the Zio® XT Monitor.


1.99	“Zio Service” means IRTC’s commercially-available service that includes the Zio Monitor and FDA-cleared ECG data analysis and reporting system, conducted at the independent diagnostic testing facility (IDTF).

1.94 “Zio Service Data” means any and all data generated, received, or collected by or through the Zio Monitor or through the Zio Service, including ECG data and data analytics derived therefrom by IRTC, other than in the course of performing activities under this Agreement, whether before or after the Effective Date. For clarity, Zio Service Data includes all Historical Service Data.


2.	Governance

2.1

Establishment and Term of the JSC. Within 15 Business Days after the Effective Date, the Parties will establish a joint steering committee (the “JSC”) in accordance with this Section 2 (Governance). Unless otherwise agreed by the Parties, the JSC will be disbanded upon completion of all activities set forth in the Development Plan, including completion of all Validation Studies described in the Development Plan.

2.2

Composition of the JSC. The JSC will be comprised of two members (or more, as the Parties may agree in writing) each from Verily and IRTC. Each member of the JSC will be an employee of the Party that it represents and have the appropriate experience, decision-making authority, and expertise to perform its respective responsibilities on the JSC. One Verily JSC member and one IRTC member will serve as the co-chairperson of the JSC unless otherwise agreed to by the Parties in writing. Each Party may change its JSC members from time to time in its sole discretion, effective upon notice to the other Party of such change.

2.3

Meetings of the JSC. Unless otherwise agreed by the JSC, the JSC will meet no less frequently than two times per Calendar Year, which meetings may be in person (alternating between a site designated by Verily and IRTC) or by video or telephone conference. Specific meeting dates will be determined by agreement of the JSC. The JSC co-chairpersons will jointly (a) be responsible for setting the agenda for meetings of the JSC with input from members representing each Party, (b) be responsible for conducting the meetings of the JSC, (c) prepare and disseminate agendas and presentations no later than five Business Days in advance of each JSC meeting unless otherwise agreed to by the Parties in writing or by email, (d) prepare and disseminate minutes from each JSC meeting within five Business Days after each such meeting, and (e) ensure that the minutes set forth in the foregoing (d) are reviewed and approved in writing or by email by the Parties within five Business Days after such minutes are circulated or such minutes will be deemed final. If agreed by the JSC (as set forth in Section 2.5 (JSC Decision Making)) on a case-by-case basis, the JSC may invite non-members to participate in the discussions and meetings of the JSC; provided that any such non-members who are not employees of either Party are bound by written obligations of confidentiality and non-use provisions at least as protective of the Parties as those set forth in this Agreement and the attendance of such non-members will be subject to the prior written consent of the other Party, not to be unreasonably withheld. Each Party will bear its own expenses related to the attendance of JSC meetings by its members.


2.4	Responsibilities of the JSC. Subject to Section 2.5 (JSC Decision Making) and Section 2.6 (Limitations on JSC Authority), the JSC will:


(a)	Oversee and monitor the Parties’ progress against the Development Plan;


(b)	Propose, review and discuss potential modifications to the Development Plan;


(c)	Review, discuss, and decide whether to amend the Development Plan to include any alternatives to the Developed AF Algorithms brought to the JSC by Verily under Section 3.4(a)(C);


(d)	Monitor and advise the Parties on Clinical Trials and filings with Regulatory Authorities made pursuant to this Agreement;


(e)	Determine whether certain Milestones have been met, as set forth in Section 5.2 (Milestone Payments);


(f)	Discuss any potential future supply needs of the AF System for market access, additional Validation Studies, or other activities contemplated by this Agreement;


(g)	Form such other committees as the JSC may deem appropriate;


(h)	[***]; and


(i)	Perform such other functions as expressly set forth in this Agreement or allocated to the JSC by the written agreement of the Parties.


2.5	JSC Decision Making. A quorum must be present for any decision to be made by the JSC. A quorum for a meeting of the JSC will require the presence of at least one JSC member from each Party. [***].

2.6

Limitations on JSC Authority. Each Party will retain the rights, powers, and discretion granted to it under this Agreement and no such rights, powers, or discretion will be delegated to or vested in the JSC unless such delegation or vesting of rights is expressly provided for in this Agreement or the Parties expressly so agree in an amendment to this Agreement. Without limiting the generality of the foregoing, the JSC will not have the power to do any of the following, and any JSC approval of the following will be void:


(a)	Amend, modify, waive, or determine compliance with this Agreement;


(b)	Modify the Parties’ rights and remedies under this Agreement;


(c)	Approve, amend, modify, or waive any obligations under the Development Plan; or


(d)	Bind the Parties to financial or developmental obligations not defined in this Agreement or the Development Plan, or to take any action inconsistent with or outside the scope of this Agreement or the Development Plan.

2.7

Alliance Managers. The Parties shall additionally each appoint an alliance manager (each, an “Alliance Manager”), who must not be a member of the JSC, with responsibility for managing relationship matters between the Parties in respect of this Agreement and preparations for the JSC meetings. The name and contact information for such Alliance Manager, as well as any replacement(s) chosen by either Party in their sole discretion from time to time, shall be promptly provided to the other Party in writing. The Alliance Managers shall be responsible for preparing and circulating draft minutes of each meeting of the JSC including (a) a summary description of the discussions at the meeting and (b) a list of any actions, decisions or determinations approved by the JSC. Draft minutes shall be deemed to be finalized, true and accurate minutes of a meeting only after approved by both Parties. [***], definitive minutes of all JSC meetings shall be finalized no later than thirty (30) days after the meeting to which the minutes pertain.


3.	Development

3.1

Development Plan. The objective of this Agreement is to Develop the AF System, and End-to-End System for technology validation and to integrate the AF System into the End-to-End System. Each Party will use Commercially Reasonable Efforts to perform the activities assigned to such Party under the Development Plan in accordance with the applicable timelines set forth in the Development Plan. Each Party will bear its own expenses relating to the performance of its assigned activities under the Development Plan. The Development Plan may be amended from time-to-time by mutual written agreement of the Parties.

3.2

Dependencies. Each Party’s performance of the activities and delivery of the deliverables assigned to such Party under the Development Plan is dependent upon the performance of certain activities and delivery of certain deliverables by or on behalf of the other Party, as set forth in the Development Plan. Such Party’s obligation to perform any of the activities and deliver any of the deliverables assigned to such Party under the Development Plan will be suspended to the extent and for so long as such performance or delivery is delayed or prevented by the other Party’s failure to perform such activities and deliver such deliverables assigned to the other Party under the Development Plan.

3.3

Subcontracting. Neither Party may conduct its activities under the Development Plan or perform its obligations under this Agreement through any of its Affiliates or Third Parties without the other Party’s written consent; provided that the Parties acknowledge and agree that Verily may subcontract obligations and responsibilities under this Agreement, and activities under the Development Plan, that are (i) related to infrastructural platform services, including cloud computing and data storage, to Alphabet Inc. or Google LLC and (ii) related to the manufacturing of the AF System for purposes of meeting its development and supply obligations under this Agreement; and provided further that IRTC may subcontract obligations and responsibilities under this Agreement, and activities under the Development Plan, that are related to the IRTC Back-End Systems. Verily hereby represents and warrants that such subcontractors shall be subject to terms and conditions protecting and limiting the access, use, disclosure, and publication of Confidential Information of IRTC prior to performing any of Verily’s obligations and responsibilities under this Agreement.


3.4	Exclusivity.


(a)	From the Effective Date until expiration or termination of this Agreement, Verily and its Affiliates will not Develop (other than pursuant to this Agreement or as set forth in (A)(B) and (C) below), Manufacture, supply or Commercialize a wearable device utilizing [***].


(b)	[*] During the period commencing on the Effective Date and ending upon the expiration or termination of this Agreement, Verily will not, directly or indirectly through any of its Affiliates, [*].


(c)	IRTC Exclusivity.

(i)

During the period commencing on the Effective Date and ending upon the expiration or termination of this Agreement, IRTC will not, directly or indirectly through any of its Affiliates, [***]. Notwithstanding the foregoing, this Section 3.4(c)(i) shall not restrict or limit in any way (x) IRTC’s development or commercialization of the Zio Monitor or the Zio Service, whether through a Disease Management Platform or otherwise, or (y) IRTC from Developing or using AF Algorithms for internal research and development.


(ii)	In the event that IRTC is presented with a Qualified Opportunity, IRTC will, [***].

3.5

No Other Exclusive Rights or Obligations. Except as set forth in Section 3.4 (Exclusivity), nothing in this Agreement will impose any right or obligation of exclusivity on either Party. Subject to Section 3.4 (Exclusivity), Section 6 (Intellectual Property Rights; Data), and Section 7 (Confidentiality), this Agreement will not prevent either Party or its Affiliates from entering into any similar or competitive agreement with Third Parties. Nothing in this Agreement will create any obligation for the Parties to enter into subsequent agreements, to further Develop, and except as expressly set forth in Section 3.6, nothing in this Agreement will create any obligation or to enter into any discussions relating to either of the foregoing.

3.6

Phase Ib Agreement. Promptly after the JSC makes a determination to start discussions under Section 2.4 (Responsibilities of the JSC), but in no event later than twelve (12) months after the Effective Date, the Parties will enter into good faith negotiations regarding an additional agreement between the Parties (the “Phase Ib Agreement”). If applicable to the activities contemplated by the Phase 1b Agreement, the Phase1b Agreement will contain terms for Verily’s supply of AF Systems to IRTC for the activities contemplated by the Phase 1b Agreement. Nothing in this Agreement creates a binding obligation to proceed with the Phase Ib Agreement, and the terms of this Agreement, including expiration or termination thereof, remain in full force and effect in the event the Parties do not reach mutual agreement on the Phase Ib Agreement.


4.	Regulatory Matters

4.1

Regulatory Strategy and Filings for AF System. Except for the Intended Submission, Verily will determine, in consultation with IRTC, the regulatory strategy for seeking Regulatory Approval for the AF System. Verily will have the sole and exclusive right and authority to prepare, own, and maintain all filings submitted to Regulatory Authorities related to seeking Regulatory Approval and Reimbursement Approval for the AF System. From time to time, and excluding the Intended Submission, Verily will consult with and seek input or comments from IRTC with respect to such regulatory strategy and draft and final filings. Verily will consider comments and input from IRTC with respect to such regulatory strategy and filings and will provide copies of all such filings to IRTC. IRTC will promptly cooperate with Verily and provide all applicable documents and records within IRTC’s reasonable possession and control as are reasonably requested by Verily in connection with the determination of such regulatory strategy and filings for the AF System. For the avoidance of doubt, Verily will have no obligation under this Agreement to seek any Regulatory Approvals other than the Intended Submission.

4.2

Regulatory Strategy and Filings for End-to-End System. IRTC will determine the regulatory strategy for seeking Regulatory Approval for all components of the End-to-End System (other than the AF System, which will be subject to Section 4.1 (Regulatory Strategy and Filings for AF System)) in a manner consistent with any such strategy set forth in the Development Plan. IRTC will prepare, own, and maintain all filings submitted to Regulatory Authorities related to seeking Regulatory Approval for the End-to-End System other than the AF System. IRTC will provide copies of all such draft filings to Verily reasonably in advance of submission to a Regulatory Authority, and IRTC (a) will not unreasonably withhold acceptance of any comments or recommendations relating to such draft filings provided by Verily [***], and (b) will accept any comments or recommendations [***] where the failure to do so has a reasonable likelihood of adversely impacting the AF System as determined by Verily in good faith . [***]. Verily will promptly cooperate with IRTC and provide all applicable documents and records in Verily’s reasonable possession or control as are reasonably requested by IRTC in connection with the determination of such regulatory strategy and filings for the End-to-End System. The Parties will coordinate the strategy and timing for regulatory filings for the AF System and End-to-End System through the JSC.


4.3	Right of Reference.

(a)

Verily Right of Reference. IRTC hereby grants to Verily a right of reference during the Term to all Study Data, Historical Zio Service Data, and other data included in regulatory filings Controlled by IRTC or its Affiliates for the AF System or End-to-End System, solely for purposes of making the regulatory filings for the AF System contemplated in this Section 4 (Regulatory Matters). As soon as reasonably practicable, and in no event later than ten days after Verily’s written request, IRTC will deliver to Verily (to the extent not already in Verily’s possession) for filing with any Regulatory Authority designated by Verily any (i) Study Data, (ii) Prior Clinical Data and (ii) Historical Zio Service Data,, in each case as Verily reasonably deems necessary for the purpose of exercising its rights under this Section 4 (Regulatory Matters). For clarity, nothing in this Section 4.3(a) is intended to give Verily broader rights to the Historical Zio Service Data than those in Section 6.8(a).

(b)

IRTC Right of Reference. Verily hereby grants to IRTC a right of reference to all Study Data and other data included in regulatory filings (including the Intended Submission) Controlled by Verily or its Affiliates for the AF System or End-to-End System solely for purposes of making the regulatory filings for the End-to-End System contemplated in this Section 4 (Regulatory Matters). As soon as reasonably practicable, and in no event later than ten days after IRTC’s written request, Verily will deliver to IRTC (to the extent not already within IRTC’s possession) for filing with any Regulatory Authority designated by IRTC any Study Data or Prior Clinical Data that relates to the AF System or End-to-End System, as IRTC reasonably deems necessary for the purpose of exercising its rights under this Section 4 (Regulatory Matters).


4.4	Clinical Trials.


(a)	Clinical Trials for AF System. Verily will be solely responsible for conducting all Clinical Trials reasonably necessary to obtain 510(k) Clearance of the Intended Submission. Verily will have sole discretion over the conduct of such Clinical Trials (including the protocols and informed consents for such Clinical Trials), and will bear all costs and expenses associated with such Clinical Trials.

(b)

Clinical Trials for End-to-End System. IRTC will be solely responsible for conducting any Clinical Trials reasonably necessary to obtain, maintain, or modify any 510(k) Clearance for the End-to-End System. IRTC will be responsible for the design and conduct of such Clinical Trials (including the protocols and informed consents for such Clinical Trials); provided that IRTC will provide copies of all such portions of the protocol related to the distribution, use, or other aspects of the AF System to Verily reasonably in advance of submission to a Regulatory Authority or initiation of a Clinical Trial, and Verily will have the final right to approve or disapprove any such protocol involving the AF System, including to suggest revisions to such protocol involving the AF System, which approval shall not be unreasonably withheld, conditioned or delayed. IRTC will bear all costs and expenses associated with such Clinical Trials.

(c)

Validation Studies for End-to-End System. IRTC has the right, but not the obligation, to conduct any number of additional Validation Studies reasonably necessary to gather additional information regarding the use and efficacy of the End-to-End System in the Field, in each case as such studies are specified in the Development Plan, and Verily will supply the amount of AF Systems for such additional Validation Studies requested by IRTC, provided that Verily’s obligation to supply the AF System (or the Substitution Wearable if the Substitution Option is exercised) will not exceed two thousand AF System units in the aggregate (across all Validation Studies under this Agreement). IRTC will bear all costs and expenses associated with such Validation Studies. Notwithstanding anything to the contrary herein, IRTC will not conduct any Clinical Trials or other studies involving the AF System other than the Clinical Trials and Validation Studies specifically permitted by Section 4.4(b) (Clinical Trials for End-to-End System) and this Section 4.4(c) (Validation Studies for End-to-End System).

(d)

Supply for Clinical Trials and Validation. The Parties agree that: (a) Verily will supply the AF System to IRTC and (b) IRTC will supply the Zio Monitor and Zio System to Verily, in each case ((a) and (b)), in order for the Parties to conduct, and solely to be used for purposes of conducting, any Clinical Trials and Validation Studies in accordance with the Development Plan and this Agreement, including the limitation on the quantity of AF Systems provided by Verily for purposes of Validation Studies under Section 4.4(c) (Validation Studies for End-to-End System). If at any time during the Term, Verily seeks Regulatory Approval for a Substitution Wearable, then IRTC will (at its option) have the right, but not the obligation, to choose to receive a substantially similar supply of the Substitution Wearable instead of its supply of the AF System (the “Substitution Option”). For the avoidance of doubt, the activities under this Agreement do not include modifications, updates, or changes to the design, features, or firmware of a Substitution Wearable.


5.	Financial Terms


5.1	Upfront Payment. No later than 30 days after the Effective Date, IRTC will pay to Verily a one-time upfront payment in the amount of $5,000,000.

5.2

Milestone Payments. IRTC will make the one-time milestone payments set forth in Table 5.2 (each, a “Milestone Payment”) within 30 days following the achievement of the milestone events set forth in Table 5.2 (each, a “Milestone Event”). The JSC will be responsible for determining that Milestone 1, Milestone 2, Milestone 3, Milestone 5, and Milestone 6 have been achieved. Achievement of all other Milestones will be determined by written agreement of the Parties. Each Milestone Payment will only be payable to Verily once. The maximum total Milestone Payments payable by IRTC to Verily under this Agreement is $12,750,000.



Table 5.2 –Milestones
Milestone Event	Documentation of Milestone Event	Milestone Payments
1. [***]	[***]	[***]
2. [***]	[***]	[***]
3. [***]	[***]	[***]
4. [***]	[***]	[***]
5. [***]	[***]	[***]
6. [***]	[***]	[***]

5.3

Payment Method; Late Payments. IRTC will make all payments due to VLS hereunder in Dollars by check or wire transfer of immediately available funds into an account designated by Verily. If any undisputed payment due to VLS under this Agreement is not paid when due, then IRTC will pay interest thereon at an annual rate (but with interest accruing on a daily basis) of one percentage point over the then-current prime rate reported in The Wall Street Journal or the maximum rate allowable under Applicable Law, whichever is lower, such interest to run from the date on which payment of such sum became due until payment thereof in full together with such interest.

5.4

Taxes. Amounts payable under this Agreement do not include any sales, use, excise, value added or other applicable taxes, tariffs or duties. The payor will make all payments to the payee under this Agreement without deduction or withholding for taxes, except to the extent that any such deduction or withholding is required by Applicable Law. Any tax required to be withheld on amounts payable under this Agreement will be paid by the payor to the appropriate Governmental Authority, and the payor will furnish the payee with proof of payment of such tax. IRTC and Verily will cooperate with respect to all documentation required by any Governmental Authority or reasonably requested by the payor to secure a reduction in the rate of applicable withholding taxes.


6.	Intellectual Property Rights; Data.


6.1	Ownership of Background IP. As between the Parties, Verily will retain sole ownership of the Verily Background IP, and IRTC will retain sole ownership of the IRTC Background IP. No ownership interest in any Background IP will transfer by virtue of this Agreement.

6.2

Ownership of Developed IP. Verily will solely and exclusively own all rights, title, and interests in and to all [***]. IRTC shall assign, and hereby assigns, to Verily all of IRTC’s and its Affiliates’ right, title and interest in and to any [***]. IRTC will solely and exclusively own all rights, title, and interests in and to all [***]. Verily shall assign, and hereby assigns, to IRTC all of Verily and its Affiliates’ right, title and interest in and to any [***]. Verily and IRTC will jointly own all rights, title, and interests in and to all [***]. Each Party shall assign, and hereby assigns, to the other Party a joint ownership interest in the [***]. If any jurisdiction requires the further consent of either Party to permit the other Party to practice or license [***] as contemplated in this Section 6.2 (Developed IP), then such Party will promptly provide such consent to the other Party upon request. In any jurisdiction in which laws do not permit the allocation of rights in this Section 6.2 (Developed IP), each Party will, and hereby does, grant to the other Party a non-exclusive, royalty-free, fully paid-up, non-transferable (other than as set forth in Section 12.8 (Assignment)) perpetual license, with the right to grant sublicenses through multiple tiers, under its interest in all [***], to make, have made, use, have used, sell, offer for sale, import, export, and otherwise practice and exploit such [***].

6.3

Development License to Verily. Subject to the terms and conditions of this Agreement, IRTC hereby grants, and agrees to grant, to Verily a non-exclusive, royalty-free, fully paid-up, non-sublicensable (except for purposes of subcontracting in accordance with Section 3.3), non-transferable (other than as set forth in Section 12.8 (Assignment)) license during the Term under the IRTC Background IP, IRTC Developed IP and the IRTC Developed AF Algorithms to (a) Develop the AF System and End-to-End System in the Field as set forth in the Development Plan, and (b) Manufacture and supply the AF System in support of the activities set forth in the Development Plan.

6.4

Development License to IRTC. Subject to the terms and conditions of this Agreement, Verily hereby grants, and agrees to grant, to IRTC a non-exclusive, royalty-free, fully paid-up, non-sublicensable (except for purposes of subcontracting in accordance with Section 3.3), non-transferable (other than as set forth in Section 12.8 (Assignment)) license during the Term under the Verily Background IP, Verily Developed IP, Verily Developed AF Algorithms and Third Party System Feedback to Develop the AF System and End-to-End System in the Field as set forth in the Development Plan.


6.5	AF Algorithm Licenses.

(a)

Subject to the terms and conditions of this Agreement, IRTC hereby grants, and agrees to grant, to Verily a perpetual, irrevocable, non-exclusive, royalty-free, fully paid-up, non-sublicensable non-transferable (other than as set forth in Section 12.8 (Assignment)) license under [***]. For clarity, the rights granted under this Section 6.5 (AF Algorithm Licenses) do not include any rights or licenses to [***].

(b)

Subject to the terms and conditions of this Agreement, Verily hereby grants, and agrees to grant, to IRTC a perpetual, irrevocable, non-exclusive, royalty-free, fully paid-up, non-sublicensable non-transferable (other than as set forth in Section 12.8 (Assignment)) license [***]. For clarity, the rights granted under this Section 6.5 (AF Algorithm Licenses) do not include any Intellectual Property Rights in [***].


6.6	Performance by Affiliates. Either Party may exercise its rights and perform its obligations under this Agreement directly or through one or more of its Affiliates; provided, however that such Party will be responsible for the acts or omissions of its Affiliates as if such Party were itself exercising such rights or performing such obligations.

6.7

Data Ownership. As between the Parties, (a) the Parties will jointly own and continue to own all Study Data, and (b) IRTC will own and continue to own all Zio Service Data. Ownership of the Prior Clinical Data will be determined according to the Prior Clinical Trial Agreement. The Parties will secure all data consents, approvals, and permissions necessary for the other Party to exploit any of the licenses granted under Section 6.8 (Data License to Verily) or Section 6.9 (Data License to IRTC). Promptly after the Effective Date and continuing throughout the Term, each Party shall deliver to the other Party a copy of all Prior Clinical Data in such Party’s possession. Each Party shall assign, and hereby assigns, to the other Party a joint ownership interest in the Study Data, and each Party shall promptly disclose all Study Data generated by or on behalf of such Party hereunder to the other Party. For clarity, each Party will have the right to anonymize and aggregate the Study Data and Prior Clinical Data or otherwise use it for any purpose, including for commercial purposes, without accounting to the other Party, provided that the Party complies with all Applicable Laws in connection with such use of the Study Data and Prior Clinical Data and subject to Section 3.4 (Exclusivity).


6.8	Data License to Verily. Subject to the terms and conditions of this Agreement, IRTC hereby grants, and agrees to grant, to Verily:


(a)	a non-exclusive, irrevocable, royalty-free, fully paid-up, sublicensable (but only for purposes of exercising rights under Section 4.3(a)), non-transferable (other than as set forth in Section 12.8 (Assignment)) license to use the Historical Zio Service Data during the Term for purposes of performing its activities under Development Plan pursuant to this Agreement; and


(b)	a perpetual, non-exclusive, irrevocable, royalty-free, fully paid-up, sublicensable, non-transferable (other than as set forth in Section 12.8 (Assignment)) license to use the Prior Clinical Data during and after the Term for any purpose whatsoever.


6.9	Data License to IRTC. Subject to the terms and conditions of this Agreement, Verily hereby grants, and agrees to grant, to IRTC a perpetual, non-exclusive, irrevocable, royalty-free, fully paid-up, sublicensable, non-transferable (other than as set forth in Section 12.8 (Assignment)) license to use the Prior Clinical Data during and after the Term for any purpose whatsoever.


6.10	Patent Prosecution.

As between the Parties, each Party will have the sole right to prepare, file, prosecute, maintain, defend, and enforce all Patents solely owned by such Party pursuant to this Section 6 (Intellectual Property Rights; Data). As between the Parties, Verily will have the first right to prepare, file, prosecute, maintain, defend, and enforce [***]. Each Party shall provide the other Party with written notice of any Third Party infringement of [***].


6.11	No Implied Licenses. Except as explicitly set forth in this Agreement, neither Party will be deemed to have granted the other Party any license or other right to any Intellectual Property Rights, Study Data, or Zio Service Data Controlled by such Party, whether by estoppel, implication, or otherwise.


7.	Confidentiality

7.1

Confidential Information. The Disclosing Party may disclose to the Receiving Party, and the Receiving Party may acquire during the course and conduct of activities under this Agreement, Confidential Information of the Disclosing Party. “Confidential Information” means all proprietary or confidential information disclosed under this Agreement, including technical and non-technical information conveyed from one Party to the other in any form, electronic data, and other proprietary information. Study Data and the terms of this Agreement will be the Confidential Information of both Parties, Zio Service Data will be the Confidential Information of IRTC, and the Prior Clinical Data will be the Confidential Information of the Party owning such Prior Clinical Data pursuant to the Prior Clinical Trial Agreement. “Confidential Information” will also include all “Confidential Information” under the Prior NDA. Notwithstanding any other provisions herein, Confidential Information does not include information to the extent that such information: (a) was known to the Receiving Party or any of its Affiliates prior to the time of disclosure; (b) is at the time of disclosure under this Agreement or later becomes public knowledge through no breach of this Agreement by Receiving Party or any of its Affiliates or Representatives; (c) is obtained by the Receiving Party or any of its Affiliates from a Third Party under no obligation of confidentiality to the Disclosing Party with respect to such information; or (d) has been independently developed by Representatives of the Receiving Party or any of its Affiliates without the aid, application, or use of, or reference to, the Disclosing Party’s Confidential Information, as evidenced by contemporaneous written records.

7.2

Use of Confidential Information. The Receiving Party will take reasonable steps to safeguard the Disclosing Party’s Confidential Information from unauthorized access and use. The Receiving Party will not use the Disclosing Party’s Confidential Information except as reasonably necessary in connection with the performance of its obligations and exercise of its rights under this Agreement. The Receiving Party will not disclose the Disclosing Party’s Confidential Information, except the Receiving Party may disclose such Confidential Information to the extent reasonably necessary to the Receiving Party’s Representatives and permitted subcontractors under this Agreement who have a need to know such Confidential Information in connection with the performance of the Receiving Party’s obligations and exercise of its rights under this Agreement; provided that such Representatives and subcontractors to which Confidential Information is disclosed are bound by written obligations of confidentiality at least as stringent as those set forth in this Agreement. Notwithstanding the foregoing, the Receiving Party will remain liable for any breach of this Section 7.2 (Use of Confidential Information) as the result of any use or disclosure of such Confidential Information by any Person to which the Receiving Party has disclosed the Disclosing Party’s Confidential Information.


7.3	Permitted Disclosures.


(a)	Notwithstanding Section 7.2 (Use of Confidential Information), each Party may disclose the other Party’s Confidential Information to the extent such disclosure is reasonably necessary in the following instances:


(i)	to Governmental Authorities (A) to the extent desirable to obtain, maintain, or modify Regulatory Approvals or Reimbursement Approvals for the AF System or End-to-End System in accordance with this Agreement in the Field, and (B) in order to respond to inquiries, requests, or investigations by a Governmental Authority relating to the AF System or End-to-End System or this Agreement;


(ii)	to its Representatives, advisory boards, and non-clinical and clinical investigators, in each case to the extent desirable to Develop the AF System or End-to-End System in accordance with this Agreement; provided that such Third Parties to which Confidential Information is disclosed are bound by written obligations of confidentiality at least as stringent as those set forth in this Agreement;


(iii)	in connection with prosecuting or defending litigation as permitted by this Agreement;


(iv)	to the extent necessary or desirable in order to enforce its rights under this Agreement; and


(v)	to actual or potential investors, acquirers or partners as reasonably necessary in the context of due diligence in contemplation of such a transaction.

(b)

If a Receiving Party deems it reasonably necessary to disclose the Disclosing Party’s Confidential Information pursuant to Section 7.3(a) (Permitted Disclosures), then the Receiving Party will to the extent possible give reasonable advance written notice of such disclosure to the Disclosing Party and take such measures to ensure confidential treatment of such Confidential Information as is reasonably required by the Disclosing Party, at the Receiving Party’s expense.


7.4	Notification. [***]

7.5

Publicity. Neither Party, nor any of their Affiliates (including their respective directors, officers, employees, representatives, or agents) will (a) make any public statement or disclosure regarding this Agreement or the transactions contemplated by this Agreement without the prior written consent of the other Party, or (b) use the name, insignia, symbol, trademark, trade name, or logo of the other Party or its Affiliates in any manner without the prior written consent of the other Party in each instance, provided however, that neither Party will be prevented from complying with any duty of disclosure it may have pursuant to Applicable Laws or pursuant to the rules of any recognized stock exchange or quotation system, subject to that Party notifying the other Party of such duty and limiting such disclosure as reasonably requested by the other Party (and giving the other Party sufficient time (not to exceed five days) to review and comment on any such proposed disclosure and to request confidential treatment thereof). Notwithstanding the foregoing, within four business days after the Effective Date, the Parties shall agree to the final form of a press release substantially based on the draft press release attached hereto as Exhibit 7.5 (Press Release). Each Party may issue the agreed upon final press release (which, for clarity, excludes the draft press release) in connection with the execution of this Agreement without the further consent of the other Party; [***].


7.6	Publication. Neither Party will publish the results of the Development Plan or any Developed IP without the prior written consent of the other Party, other than as permitted pursuant to Section 6.11.


8.	Representations, Warranties, and Covenants


8.1	Mutual Representations and Warranties. Each Party represents and warrants to the other Party that, as of the Effective Date:


(a)	it is duly organized, validly existing, and in good standing under the laws and regulations of its jurisdiction of incorporation, organization, or chartering;


(b)	it has the full right, power, and authority to enter into this Agreement and to perform its obligations hereunder;


(c)	the execution of this Agreement by a Representative of such Party whose signature is set forth at the end hereof has been duly authorized by all necessary corporate action of the Party;


(d)	when executed and delivered by the Party, this Agreement will constitute the legal, valid and binding obligation of that Party, enforceable against that Party in accordance with its terms;


(e)	it is under no obligation to any Person that would interfere with its representations, warranties, or covenants under this Agreement;


(f)	neither it nor its Representatives performing activities and obligations under this Agreement is Debarred;


(g)	to its knowledge, no Person performing activities under this Agreement on such Party’s behalf is threatened with being Debarred.


8.2	Mutual Covenants. Each Party covenants to the other Party that during the Term:


(a)	it will retain the right, power, and authority to grant the rights granted to the other Party hereunder to the Licensed IP, pursuant to the terms of this Agreement;


(b)	it will, and will ensure that its Affiliates and Representatives, comply with Applicable Law in the exercise of its rights of performance of its obligations under this Agreement;


(c)	it will not use in any capacity the services of any Person who has been Debarred with respect to activities to be performed under this Agreement;


(d)	it will promptly notify the other Party if any Person performing any activities under this Agreement becomes Debarred; and


(e)	it will not enter into any agreement or grant any Person any rights with respect to its Licensed IP that would limit or encumber the other Party’s ability to exercise the rights and licenses granted to such other Party under this Agreement.


8.3	Verily Additional Representations and Warranties. Verily further represents and warrants to IRTC that, as of the Effective Date:

(a)

it has not entered into any agreement or granted any Person any rights with respect to Verily’s Licensed IP or the AF System that are inconsistent with the rights granted to IRTC under this Agreement or which would limit or encumber Verily’s ability to perform all of the obligations undertaken by Verily hereunder or limit or encumber IRTC’s ability to exercise the rights and licenses granted to IRTC under this Agreement;


(b)	it has valid and enforceable agreements with all current and former Representatives that assign and require assignment to Verily of all right, title, and interest, in and to Intellectual Property Rights or Study Data conceived, reduced to practice, created, or developed by such Representatives pursuant to this Agreement;

(c)

to Verily’s knowledge, no Representative of Verily has entered into any contractual obligation with any Person (including any academic or medical institution) or has had any obligation under applicable terms and conditions of employment or retention with any such Person, during or prior to the term of employment or engagement with Verily, that conflicts in any way with the work for which the Representative has been engaged by Verily to do pursuant to the Development Plan or requires the Representative to transfer or assign any rights in the Representative’s work for Verily pursuant to the Development Plan to anyone other than Verily;


(d)	it is the sole and exclusive owner of, or has a valid right or license to, the Patents within the Licensed IP Controlled by Verily;


(e)	it has the unconditional and irrevocable right, power, and authority to grant the rights granted to IRTC hereunder to the Patents within the Licensed IP Controlled by Verily;


(f)	it has not granted any licenses or other contingent or non-contingent right, title, or interest under or relating to the Patents within the Licensed IP Controlled by Verily, and is not subject to any obligation, that conflicts with this Agreement, including any Party’s representations, warranties, or obligations, or rights, or licenses hereunder; and


(g)	there are no encumbrances, liens, or security interests involving the Patents within the Licensed IP Controlled by Verily.


8.4	IRTC Additional Representations and Warranties. IRTC further represents and warrants to Verily that, as of the Effective Date:

(a)

it has not entered into any agreement or granted any Person any rights with respect to IRTC’s Licensed IP or Zio Service Data that are inconsistent with the rights granted to Verily under this Agreement or which would limit or encumber IRTC’s ability to perform all of the obligations undertaken by IRTC hereunder or limit or encumber Verily’s ability to exercise the rights and licenses granted to Verily under this Agreement;


(b)	it has valid and enforceable agreements with all current and former Representatives that assign and require assignment to IRTC of all right, title, and interest, in and to Intellectual Property Rights, Study Data, and Zio Service Data conceived, reduced to practice, created, or developed by such Representatives pursuant to this Agreement;

(c)

to IRTC’s knowledge, no Representative of IRTC has entered into any contractual obligation with any Person (including any academic or medical institution) or has had any obligation under applicable terms and conditions of employment or retention with any such Person, during or prior to the term of employment or engagement with IRTC, that conflicts in any way with the work for which the Representative has been engaged by IRTC to do pursuant to the Development Plan or requires the Representative to transfer or assign any rights in the Representative’s, work for IRTC pursuant to the Development Plan to anyone other than IRTC;


(d)	it is the sole and exclusive owner of, or has a valid right or license to, the Patents within the Licensed IP Controlled by IRTC;


(e)	it has the right, power, and authority to grant the rights granted to Verily hereunder to the Zio Service Data and to the Patents within the Licensed IP Controlled by IRTC;


(f)	it has not granted any licenses or other contingent or non-contingent right, title, or interest under or relating to the Patents within the Licensed IP Controlled by IRTC, and is not be subject to any obligation, that conflicts with or otherwise affects this Agreement, including any Party’s representations, warranties, or obligations, or rights, or licenses hereunder; and


(g)	there are no encumbrances, liens, or security interests involving the Patents within the Licensed IP Controlled by IRTC that would conflict with the rights and licenses granted to Verily hereunder.


9.	Indemnification


9.1	Indemnification by IRTC. IRTC hereby agrees to indemnify, defend, and hold Verily, its Affiliates, and their respective Representatives (collectively, the “Verily Indemnitees”) harmless from and against any and all Losses arising in connection with any and all Third Party Claims against the Verily Indemnitees arising from or relating to [***].


9.2	Indemnification by Verily. Verily hereby agrees to indemnify, defend, and hold IRTC, its Affiliates, and their respective Representatives (collectively, the “IRTC Indemnitees”) harmless from and against any and all Losses arising in connection with any and all Third Party Claims against the IRTC Indemnitees arising from or relating to [***].


9.3	Indemnification Procedures.

(a)

Notice of Claim. All indemnification claims in respect of any indemnitee seeking indemnity under Section 9.1 (Indemnification by IRTC) or Section 9.2 (Indemnification by Verily), as applicable (collectively, the “Indemnitees” and each, an “Indemnitee”) will be made solely by the corresponding Party (the “Indemnified Party”). The Indemnified Party will give the indemnifying Party (the “Indemnifying Party”) prompt written notice (an “Indemnification Claim Notice”) of any Losses and any Third Party Claim initiated against the Indemnified Party as to which the Indemnified Party intends to make a request for indemnification under Section 9.1 (Indemnification by IRTC) or Section 9.2 (Indemnification by Verily), as applicable. Each Indemnification Claim Notice will contain a description of the Third Party Claim and the nature and amount of such Loss (to the extent that the nature and amount of such Loss are known at such time). Together with the Indemnification Claim Notice, the Indemnified Party will furnish promptly to the Indemnifying Party copies of all notices, materials and documents (including court papers) received by any Indemnitee in connection with the Third Party Claim or otherwise related to the allegation that preceded the indemnification claim.

(b)

Control of Defense. At its option, the Indemnifying Party may assume the defense of any Third Party Claim subject to indemnification as provided for in Section 9.1 (Indemnification by IRTC) or Section 9.2 (Indemnification by Verily), as applicable, by giving written notice to the Indemnified Party within 30 days after the Indemnifying Party’s receipt of an Indemnification Claim Notice. Upon assuming the defense of a Third Party Claim, the Indemnified Party must tender sole control of the indemnified portion of the Third Party Claim to the Indemnifying Party, subject to this Section 9.3(b), Section 9.3(d) (Settlement) and the following: (a) the Indemnified Party has the right to approve controlling counsel, such approval not to be unreasonably withheld (and which approval may be withheld or withdrawn if there is a conflict of interest) and (b) the Indemnified Party may appoint its own non-controlling counsel in the defense of the Third Party Claim at its own expense. The Indemnifying Party will defend such Third Party Claim in good faith and the Indemnified Party will provide reasonable cooperation to the Indemnifying Party in defending the Third Party Claim. Should the Indemnifying Party assume the defense of a Third Party Claim (and continue to defend such Third Party Claim in good faith), the Indemnifying Party will not be liable to the Indemnified Party or any other Indemnitee for any legal expenses subsequently incurred by such Indemnified Party or other Indemnitee in connection with the analysis, defense, or settlement of the Third Party Claim, unless the Indemnifying Party has failed to assume the defense and engage counsel in accordance with this Section 9.3 (Indemnification Procedures). In the event that (a) there is any delay in providing an Indemnification Claim Notice or (b) the Indemnified Party does not cooperate with the Indemnifying Party in defending the Third Party Claim, then in each case (a) or (b), if the delay or omissions materially prejudice the defense of such Third Party Claim, the Indemnifying Party’s obligations under this Section 9.3(b) will be reduced in proportion to the prejudice.

(c)

Right to Participate in Defense. Without limiting Section 9.3(b) (Control of Defense), any Indemnitee will be entitled to participate in the defense of a Third Party Claim for which it has sought indemnification hereunder and to engage counsel of its choice for such purpose; provided, however, that such engagement will be at the Indemnitee’s own expense unless (i) the engagement thereof has been specifically authorized by the Indemnifying Party in writing, or (ii) the Indemnifying Party has failed to assume the defense (or continue to defend such Third Party Claim in good faith) and engage counsel in accordance with this Section 9.3 (Indemnification Procedures), in which case, the Indemnified Party will be allowed to control the defense. In no event will the Indemnifying Party be obligated to pay for more than one Indemnitee counsel at any given time (excluding a change in counsel where representation by both counsels does not run in parallel) in connection with a given Third Party Claim; provided that local counsel engaged by controlling counsel for a discrete legal issue will not be considered an additional counsel for purposes of this Section 9.3(c).

(d)

Settlement. With respect to any Losses relating solely to the payment of money damages in connection with a Third Party Claim and that will not result in the Indemnitee becoming subject to injunctive or other relief or otherwise adversely affect the business of the Indemnitee in any manner, the Indemnifying Party will have the sole right to consent to the entry of any judgment, enter into any settlement, or otherwise dispose of such Losses, on such terms as the Indemnifying Party, in its reasonable discretion, will deem appropriate (provided, however, that such terms will include a complete and unconditional release of the Indemnified Party from all liability with respect thereto), and will transfer to the Indemnified Party all amounts that said Indemnified Party will be liable to pay prior to the time of the entry of judgment. With respect to all other Losses in connection with Third Party Claims, if the Indemnifying Party has assumed the defense of the Third Party Claim in accordance with Section 9.3(b) (Control of Defense), then the Indemnifying Party will have authority to consent to the entry of any judgment, enter into any settlement, or otherwise dispose of such Loss; provided that the Indemnifying Party obtains the prior written consent of the Indemnified Party (which consent will not be unreasonably withheld). The Indemnifying Party that has assumed the defense of (and continues to defend) the Third Party Claim in accordance with Section 9.3(b) (Control of Defense) will not be liable for any settlement or other disposition of a Loss by an Indemnitee that is reached without the written consent of such Indemnifying Party. Regardless of whether the Indemnifying Party chooses to defend or prosecute any Third Party Claim, no Indemnitee will admit any liability with respect to, or settle, compromise, or discharge, any Third Party Claim without first offering to the Indemnifying Party the opportunity to assume the defense of the Third Party Claim in accordance with Section 9.3(b) (Control of Defense).

(e)

Cooperation. If the Indemnifying Party chooses to defend or prosecute any Third Party Claim, then the Indemnified Party will, and will cause each other Indemnitee to, cooperate in the defense or prosecution thereof and will furnish such records, information, and testimony, provide such witnesses, and attend such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested in connection with such Third Party Claim. Such cooperation will include access during normal business hours afforded to the Indemnifying Party to, and reasonable retention by the Indemnified Party of, records and information that are reasonably relevant to such Third Party Claim, and making Indemnitees and other employees and agents available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder, and the Indemnifying Party will reimburse the Indemnified Party for all its documented, reasonable external expenses incurred in connection with such cooperation.

(f)

Expenses of the Indemnified Party. Except as provided above, the reasonable and verifiable costs and expenses, including fees and disbursements of counsel, incurred by the Indemnified Party in connection with any Third Party Claim will be reimbursed on a Calendar Quarter basis by the Indemnifying Party, without prejudice to the Indemnifying Party’s right to contest the Indemnified Party’s right to indemnification and subject to refund in the event the Indemnifying Party is ultimately held not to be obligated to indemnify the Indemnified Party.

9.4

DISCLAIMER. EXCEPT FOR (A) LOSSES SUBJECT TO INDEMNIFICATION BY ANY PARTY UNDER SECTION 9.1 (INDEMNIFICATION BY IRTC) OR SECTION 9.2 (INDEMNIFICATION BY VERILY), (B) BREACH OF SECTION 6 (INTELLECTUAL PROPERTY RIGHTS; DATA), OR SECTION 7 (CONFIDENTIALITY), OR (C) A PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, PUNITIVE, OR INDIRECT DAMAGES, OR LOST PROFITS OR LOST REVENUES, ARISING FROM OR RELATING TO THIS AGREEMENT, REGARDLESS OF ANY NOTICE OF THE POSSIBILITY OF SUCH DAMAGES.


9.5	LIMITATION OF LIABILITY. [***].


10.	Term and Termination


10.1	Term. This Agreement will commence on the Effective Date and, unless terminated earlier in accordance with this Section 10 (Term and Termination), will remain in full force and effect until the date that is twenty four (24) months from the Effective Date (the “Term”).

10.2

Termination for Bankruptcy. Either Party may terminate this Agreement if the other Party (a) becomes insolvent or admits its inability to pay its debts generally as they become due; (b) becomes subject, voluntarily or involuntarily, to any proceeding under any domestic or foreign bankruptcy or insolvency law, that is not fully stayed, dismissed, or vacated within 30 Business Days after filing; (c) is dissolved or liquidated or takes any corporate action for such purpose; (d) makes a general assignment for the benefit of creditors; or (e) has a receiver, trustee, custodian, or similar agent appointed by order of any court of competent jurisdiction to take charge of or sell any material portion of its property or business.

10.3

Termination for Material Breach. If either Party commits a material breach of this Agreement and fails to cure any such material breach 30 days after receipt of written notice thereof from the non-breaching Party, then the non-breaching Party may terminate this Agreement by giving the breaching Party notice in writing following the expiration of such cure period during and such termination will take effect immediately upon the date of such notice from the non-breaching Party. The non-breaching Party’s failure to exercise its right to terminate this Agreement for one material breach will not prejudice its rights to terminate for any subsequent material breach. All applicable statutes of limitations, time-based defenses, and cure periods hereunder will be tolled during the pendency of any Dispute, including any dispute regarding whether a Party has materially breached this Agreement.


10.4	Termination by Mutual Agreement. The Parties may mutually agree in writing to terminate this Agreement at any time.


10.5	Termination for Failure to [*]. Either Party will have the right to terminate this Agreement if Milestone 4 is not achieved within [*] from the Effective Date.

10.6

Termination for Safety. Either Party may terminate this Agreement (or a particular Clinical Trial if the safety concern is specific to such Clinical Trial) upon at least 30 days’ written notice if (a) termination is reasonably required in order to protect the safety of study subjects in a Clinical Trial being conducted pursuant to the Development Plan, including if a serious adverse event has occurred in respect of any of the study subjects or a Regulatory Authority requires a Party to, or recommends that a Party, cease such Clinical Trial, (b) termination is reasonably necessary to avoid a material safety concern in relation to the use of the AF System or End-to-End System in accordance with this Agreement, (c) Verily is unable to obtain the applicable license, consents or approvals required from the applicable Regulatory Authority in order to conduct the necessary Clinical Trials set forth in the Development Plan, or (d) if either Party is in breach of Section 8.2(c) (Mutual Covenants - Debarment).

10.7

Effects of Termination. Upon expiration or termination of this Agreement, (a) all licenses granted by Verily under this Agreement will terminate, except for the licenses granted by Verily to IRTC (i) under Verily’s interest in [***] pursuant to Section 6.2 (Ownership of Developed IP), (ii) pursuant to Section 6.5 (AF Algorithm License), (iii) pursuant to Section 6.9 (Data License to IRTC), and (iv) otherwise under this Agreement that are strictly necessary for IRTC to conduct ongoing Clinical Trials pursuant to Section 10.7(d), but solely for the duration of such Clinical Trials; (b) all licenses granted by IRTC under this Agreement will terminate, except for the licenses granted by IRTC to Verily (i) under IRTC’s interest in [***] pursuant to Section 6.2 (Ownership of Developed IP), (ii) pursuant to Section 6.5 (AF Algorithm License), (iii) pursuant to Section 6.8(b) (Data License to Verily), (iv) otherwise under this Agreement that are strictly necessary for Verily to conduct ongoing Clinical Trials pursuant to Section 10.7(d), but solely for the duration of such Clinical Trials; (c) the Parties’ exclusivity obligations under Section 3.4 (Exclusivity) will terminate; (d) the Parties will promptly wind-down and cease all work under this Agreement and the Development Plan, except that the Parties may continue to conduct any ongoing Clinical Trials until completion of such Clinical Trials; (e) subject to the foregoing clauses, the Parties will deliver to each other any property in such Party’s possession that belongs to the other Party, including [***], Substitution Wearables, Zio Monitors, or AF Systems; (f) the Parties will cease using the other Party’s Confidential Information and will return or destroy such Confidential Information, at the Disclosing Party’s election, except, in each case, to the extent necessary to exercise its surviving rights; and (g) will promptly execute and deliver all documents reasonably necessary or useful to perfect the Parties’ respective ownership in and to all Developed IP, Verily Improvements, IRTC Improvements, Developed AF Algorithms and Third Party System Feedback in accordance with Section 6.2 (Ownership of Developed IP).


10.8	Rights in Bankruptcy.

(a)

All rights and licenses now or hereafter granted by one Party to the other Party under or under this Agreement, including pursuant to Section 6.2 (Ownership of Developed IP), Section 6.3 (Development License to Verily), Section 6.4 (Development License to IRTC), Section 6.5 (AF Algorithm Licenses), Section 6.8 (Data License to Verily), or Section 6.9 (Data License to IRTC), are for all purposes of Section 365(n) of the Bankruptcy Code, licenses of rights to “intellectual property” as defined in the Bankruptcy Code. Upon the occurrence of any of the events set forth in Section 10.2 (Termination for Bankruptcy) with respect to the Party licensing such rights to intellectual property (“Licensor”), Licensor agrees that the other Party (“Licensee”), as licensee of such rights under this Agreement, will retain and may fully exercise all of its rights and elections under the Bankruptcy Code. Without limiting the generality of the foregoing, the Parties intend and agree that any sale of Licensor’s assets under Section 363 of the Bankruptcy Code will be subject to Licensee’s rights under Section 365(n) of the Bankruptcy Code, that Licensee cannot be compelled to accept a money satisfaction of its interests in the intellectual property licensed under this Agreement, and that any such sale therefore may not be made to a purchaser “free and clear” of Licensee’s rights under this Agreement and Section 365(n) of the Bankruptcy Code without the express, contemporaneous consent of Licensee. Further, each Party agrees and acknowledges that all payments by IRTC to Verily hereunder or under any ancillary agreement hereto do not constitute royalties within the meaning of Section 365(n) of the Bankruptcy Code or relate to licenses of intellectual property hereunder. Licensor will, during the term of this Agreement, create and maintain current copies or, if not amenable to copying, detailed descriptions or other appropriate embodiments, to the extent feasible, of all such intellectual property. Licensor and Licensee acknowledge and agree that “embodiments” of intellectual property within the meaning of Section 365(n) of the Bankruptcy Code include product prototypes, inventory, Study Data, Zio Service Data, and other data, Regulatory Approvals, Reimbursement Approvals, algorithms, software, hardware, prototypes, models, devices, components, and accessories. If (i) a case under the Bankruptcy Code is commenced by or against Licensor, (ii) this Agreement is rejected as provided in the Bankruptcy Code, and (iii) Licensee elects to retain its rights hereunder as provided in Section 365(n) of the Bankruptcy Code, Licensor (in any capacity, including debtor-in-possession) and its successors and assigns (including a trustee) will:

(i)

provide to Licensee all such Intellectual Property Rights, Study Data, and Historical Zio Service Data (including all embodiments thereof) then licensed to Licensee hereunder held by Licensor and such successors and assigns, or otherwise available to them, immediately upon Licensee’s written request. Whenever Licensor or any of its successors or assigns provides to Licensee any of the Licensed IP (or any embodiment thereof) pursuant to this Section 10.8 (Rights in Bankruptcy), Licensee will have the right to perform Licensor’s obligations hereunder with respect to such Intellectual Property Rights, Study Data, and Historical Zio Service Data, but neither such provision nor such performance by Licensee will release Licensor from liability resulting from rejection of the license or the failure to perform such obligations; and

(ii)

not interfere with Licensee’s rights under this Agreement, or any agreement supplemental hereto, to such Intellectual Property Rights, Study Data, and Historical Zio Service Data (including such embodiments), including any right to obtain such Intellectual Property Rights, Study Data, and Historical Zio Service Data (or such embodiments) from another entity, to the extent provided in Section 365(n) of the Bankruptcy Code.

(b)

All rights, powers, and remedies of Licensee provided herein are in intended to be consistent with any and all other rights, powers, and remedies now or hereafter existing at law or in equity (including the Bankruptcy Code) in the event of the commencement of a case under the Bankruptcy Code with respect to Licensor. The Parties agree that they intend the following rights to extend to the maximum extent permitted by law, and to be enforceable under Section 365(n) of the Bankruptcy Code:


(i)	the right of access to any Intellectual Property Rights (including all embodiments thereof) of Licensor, or any Third Party with whom Licensor contracts to perform an obligation of Licensor under this Agreement, and, in the case of the Third Party, that are necessary for the exercise of the licenses granted herein.

10.9

Survival. Expiration or termination of this Agreement will not relieve the Parties of any obligations accruing prior to the effective date of expiration or termination. Any expiration or termination of this Agreement will not preclude either Party from pursuing all rights and remedies it may have hereunder at law or in equity with respect to any breach of this Agreement nor prejudice either Party’s right to obtain performance of any obligation. The rights and obligations of the Parties set forth in Section 6.2 (Ownership of Developed IP), Section 6.5 (AF Algorithm Licenses), Section 6.6 (Performance by Affiliates), Section 6.7 (Data Ownership), Section 6.8(b) (Data License to Verily), Section 6.9 (Data License to IRTC), Section 6.10 (Patent Prosecution), Section 7 (Confidentiality), Section 9 (Indemnification), Section 10.7 (Effects of Termination), Section 10.8 (Bankruptcy), and this Section 10.9 (Survival), Section 11 (Governing Law and Dispute Resolution), and Section 12 (Miscellaneous), will survive any such termination or expiration.


11.	Governing Law and Dispute Resolution


11.1	Governing Law. The rights and obligations of the Parties will be governed by, and this Agreement will be interpreted, construed, and enforced in accordance with, the laws of the State of California, excluding its conflict of laws rules to the extent such rules would apply the law of another jurisdiction.


11.2	Dispute Resolution. Except as otherwise set forth in this Agreement, in the event of a dispute arising under this Agreement between Verily and IRTC (a “Dispute”), the Parties will exclusively follow the following procedures in any attempt to resolve the dispute.


(a)	[***].


(b)	[***].


11.3	Intellectual Property Rights Disputes. Notwithstanding anything to the contrary in this Agreement, including Section 11.2 (Dispute Resolution), any Dispute relating to the scope, validity, enforceability, inventorship, ownership, or infringement of any Developed IP will be submitted to a court of competent jurisdiction in the jurisdiction in which such Developed IP was granted or arose.

11.4

Injunctive Relief. Notwithstanding Section 11.2 (Dispute Resolution), nothing contained in this Agreement will deny any Party the right to seek preliminary or emergency temporary injunctive relief from a court of competent jurisdiction pursuant to Section 11.2 (Jurisdiction), and an action for such particular purpose may be filed and maintained prior to the initiation of any arbitration pursuant to Section 11.2 (Dispute Resolution).


12.	Miscellaneous

12.1

Force Majeure. Neither Party will be liable or responsible to the other Party, nor be deemed to have defaulted under or breached this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement, when and to the extent such failure or delay is caused by acts of God; flood, fire, earthquake, or explosion; war, terrorism, invasion, riot, or other civil unrest; embargoes or blockades; or national or regional emergency (each, a “Force Majeure Event”); provided, in each case, that (a) such Force Majeure Event is outside the reasonable control of the affected Party; (b) the affected Party provides prompt notice to the other Party, stating the period of time the occurrence is expected to continue; and (c) the affected Party uses diligent efforts to end the failure or delay and minimize the effects of such Force Majeure Event. The Party not subject to such Force Majeure Event may terminate this Agreement upon notice to the other Party if such Force Majeure Event continues for a period of longer than 90 days.


12.2	Further Assurances. Each Party will, upon the reasonable request of the other Party, promptly execute such documents and perform such acts as may be necessary to give full effect to the terms of this Agreement.

12.3

Independent Contractors. The relationship between the Parties is that of independent contractors. Nothing contained in this Agreement will be construed as creating any agency, partnership, joint venture, or other form of joint enterprise, employment, or fiduciary relationship between the Parties, and neither Party will have authority to contract for or bind the other Party in any manner whatsoever.

12.4

Notices. Any notice or notification required or permitted to be provided under this Agreement will be in writing and will be deemed given (a) upon receipt if delivered personally, (b) five days after deposited in the mail if mailed by registered or certified mail (return receipt requested) postage prepaid, or (c) on the next Business Day if sent by overnight delivery using a nationally recognized express courier service and specifying next Business Day delivery (receipt verified), to the Parties at the following addresses (or at such other address as a Party may specify by like notice, provided, however, that notices of a change of address will be effective only upon receipt thereof):



If to VLS:	Verily Life Sciences LLC 269 East Grand Avenue South San Francisco, CA 94080 Attention: General Counsel [***]



If to VIL:	Verily Ireland Limited 70 Sir John Rogerson’s Quay Dublin 2 Ireland Attention: General Counsel [***]



If to IRTC:	iRhythm Technologies Inc. 650 Townsend Street, Suite 500 San Francisco, CA 94103 Attention: Chief Financial Officer [***]

12.5

Entire Agreement. This Agreement, together with all exhibits, schedules, and any other documents incorporated herein by reference, constitutes the sole and entire agreement of the Parties with respect to the subject matter herein, and supersedes all prior and contemporaneous understandings and agreements, both written and oral, with respect to such subject matter, including the Prior NDA; provided that the Prior NDA will continue to govern with respect to information disclosed by the Parties to each other under the Prior NDA prior to the Effective Date and with respect to information unrelated to the subject matter of this Agreement.

12.6

Interpretation. For purposes of this Agreement, (a) the words “include,” “includes” and “including” will be deemed to be followed by the words “without limitation”; (b) the term “or” will be interpreted in the inclusive sense commonly associated with the term “and/or”; (c) the words “herein,” “hereof,” “hereby,” “hereto,” and “hereunder” refer to this Agreement as a whole; (d) the word “shall” will be construed to have the same meaning and effect as the word “will,” and vice versa; (e) any reference herein to any Person will be construed to include the Person’s successors and assigns; and (f) references to “written” or “in writing” include in electronic form. Unless the context otherwise requires, references herein (x) to Sections, Schedules, and Exhibits refer to the Sections, Schedules, and Exhibits attached to this Agreement; (y) to an agreement, instrument, or other document means such agreement, instrument, or other document as amended, supplemented, and modified from time to time to the extent permitted by the provisions thereof; and (z) to a statute means such statute as amended from time to time and includes any successor legislation thereto and any regulations promulgated thereunder. This Agreement will be construed without regard to any presumption or rule requiring construction or interpretation against the Party drafting an instrument or causing any instrument to be drafted. Any exhibits and schedules referred to herein will be construed with, and as an integral part of, this Agreement to the same extent as if they were set forth verbatim herein.


12.7	Headings. The headings in this Agreement are for reference only and will not affect the interpretation of this Agreement.

12.8

Assignment. Neither Party may assign this Agreement, its rights or obligations, or any portion thereof without the prior written consent of the other Party, except that either Party may assign this Agreement (a) to an Affiliate, or (b) by way of sale of itself or the sale of the portion of its business to which this Agreement relates, through merger, sale of assets or sale of stock or ownership interest; provided that, in each case ((a) and (b)), the assigning Party will give the other Party prompt written notice of such assignment and the assignee will expressly agree to be bound by such Party’s obligations under this Agreement and that such sale is not primarily for the benefit of creditors; and provided further, a Party assigning this Agreement to an Affiliate will be and remain responsible for such Affiliate’s performance or non-performance under this Agreement. Any purported assignment of this Agreement or any part thereof in violation of this Section 12.8 (Assignment) will be void and without any force or effect. Subject to Section 12.8 (Assignment), this Agreement will bind and inure to the benefit of the Parties hereto and their respective successors and permitted assigns.


12.9	No Third Party Beneficiaries. This Agreement is for the sole benefit of the Parties hereto and their respective successors and permitted assigns, and nothing herein, express or implied, is intended to or will confer upon any other Person any legal or equitable right, benefit, or remedy of any nature whatsoever, under or by reason of this Agreement.

12.10

Amendment; Modification; Waiver. This Agreement may only be amended, modified, or supplemented by an agreement in writing signed by each Party. No waiver by any Party of any of the provisions hereof will be effective unless explicitly set forth in writing and signed by a duly authorized Representative of the waiving Party. Except as otherwise set forth in this Agreement, no failure to exercise, or delay in exercising, any rights, remedy, power, or privilege arising from this Agreement will operate or be construed as a waiver thereof; nor will any single or partial exercise of any right, remedy, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power, or privilege.

12.11

Severability. If any term or provision of this Agreement is invalid, illegal, or unenforceable in any jurisdiction, such invalidity, illegality, or unenforceability will not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction. Upon a determination that any term or other provision is invalid, illegal, or unenforceable, the Parties hereto will negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible.

12.12

Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will be deemed to be one and the same agreement. A signed copy of this Agreement delivered by facsimile, email, or other means of electronic transmission (to which a PDF copy is attached) will be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.

(Signature page follows.)

In witness whereof, the Parties have executed this Agreement by their duly authorized Representatives, to be effective as of the Effective Date.

VERILY LIFE SCIENCES LLC

By: /s/ Andrew Conrad

Name: Andrew Conrad

Title: Chief Executive Officer

Date: August 28, 2019

iRHYTHM TECHNOLOGIES, INC.

By: /s/ Kevin M. King

Name: Kevin M. King

Title: President and CEO

Date: September 3, 2019

Exhibit 1.25

Development Plan

See attached

[***]

Exhibit 7.5

Press Release

[***]

Exhibit 11.3

Binding Arbitration

[***]

Exhibit

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to

Securities Exchange Act Rules 13a-14(a) and 15d-14(a),

As Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Kevin M. King, certify that:


1.	I have reviewed this Quarterly Report on Form 10-Q of iRhythm Technologies, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:


a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


c.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



/s/ Kevin M. King
Kevin M. King
President, Chief Executive Officer and Director
(Principal Executive Officer)

Date: December 23, 2019

Exhibit

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

Pursuant to

Securities Exchange Act Rules 13a-14(a) and 15d-14(a),

As Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Matthew C. Garrett, certify that:


1.	I have reviewed this Quarterly Report on Form 10-Q of iRhythm Technologies, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:


a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


c.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



/s/ Matthew C. Garrett
Matthew C. Garrett
Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: December 23, 2019

Exhibit

Exhibit 32.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of iRhythm Technologies, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2019, as filed with the Securities and Exchange Commission (the “Report”), Kevin M. King, as Chief Executive Officer of the Company, and Matthew Garrett, as Chief Financial Officer of the Company, each hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), to his knowledge:


1.	The Report, fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act of 1934, as amended; and


2.	The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/ Kevin M. King
Kevin M. King
President, Chief Executive Officer and Director
(Principal Executive Officer)

Date: December 23, 2019



/s/ Matthew C. Garrett
Matthew C. Garrett
Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: December 23, 2019

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of iRhythm Technologies, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.