What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-06 compared with 2020-08-07 · 151 added, 193 removed, 562 unchanged (38% of the section changed)

3 unchanged sentences

(In thousands, except share and per share data)

September 30,

2020 December 31,

2 unchanged sentences

Short-term investments 231,901 120,089

Accounts receivable, net of allowances for doubtful accounts of $ 11,265 and $ 9,049 as of June 30, 2020 and December 31, 2019, respectively

Accounts receivable, net of allowances for doubtful accounts of $ 11,037 and $ 9,049 as of September 30, 2020 and December 31, 2019, respectively

28,955 23,867

21 unchanged sentences

Stockholders’ equity:

Preferred stock, $ 0.001 par value – 5,000,000 shares authorized at June 30, 2020 and December 31, 2019;

and none issued and outstanding at June 30, 2020 and December 31, 2019

Common stock, $ 0.001 par value – 100,000,000 shares authorized at June 30, 2020 and December 31, 2019;

27,364,151 and 26,682,720 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

Preferred stock, $ 0.001 par value – 5,000,000 shares authorized at September 30, 2020 and December 31, 2019;

and none issued and outstanding at September 30, 2020 and December 31, 2019

Common stock, $ 0.001 par value – 100,000,000 shares authorized at September 30, 2020 and December 31, 2019;

28,855,261 and 26,682,720 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

Additional paid-in capital 629,484 395,695

8 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

19 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

8 unchanged sentences

(In thousands)

Six Months Ended

Nine Months Ended

September 30,

Cash flows from operating activities

14 unchanged sentences

( 347 ) ( 12 )

( 3,438 ) ( 2,366 )

Accounts payable

16 unchanged sentences

96,645 77,900

Net cash provided by investing activities

Net cash used in investing activities

( 114,906 ) ( 76,766 )

Cash flows from financing activities

Proceeds from issuance of common stock 9,361 5,409

Proceeds from issuance of common stock in connection with employee equity incentive plans

Tax withholding upon vesting of restricted stock awards

( 8,712 ) ( 5,111 )

Other — ( 46 )

Issuance of common stock in connection with follow-on public offering, net of offering costs 206,387 107,082

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

211,357 108,380

Net increase in cash and cash equivalents

74,874 14,611

Cash and cash equivalents beginning of period

4 unchanged sentences

Interest paid

$ 1,132 $ 1,246

Non-cash investing and financing activities

Property and equipment costs included in accounts payable and accrued liabilities

$ 1,369 $ 300

Right-of-use assets obtained in exchange for new operating lease liabilities

$ 621 $ 89,170

Offering costs in accounts payable and accrued liabilities $ 356 $ 217

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

4 unchanged sentences

Shares Amount Additional Paid-In Capital Accumulated Deficit Comprehensive Income (Loss) Stockholders' Equity

Balances at March 31, 2020 27,026,975 $ 25 $ 394,507 $ ( 269,919 ) $ 364 $ 124,977

Balances at June 30, 2020 27,364,151 $ 25 $ 408,096 $ ( 290,356 ) $ 181 $ 117,946

Issuance of common stock in connection with employee equity incentive plans, net 233,968 — 4,321 — — 4,321

Issuance of common stock in connection with follow-on public offering, net of discounts and issuance costs 1,257,142 2 206,029 — — 206,031

Tax withholding upon vesting of restricted stock awards — — ( 3,563 ) — — ( 3,563 )

2 unchanged sentences

Net change in unrealized gain on investments — — — — ( 113 ) ( 113 )

Balances at June 30, 2020 27,364,151 $ 25 $ 408,096 $ ( 290,356 ) $ 181 $ 117,946

Balances at September 30, 2020 28,855,261 $ 27 $ 629,484 $ ( 295,033 ) $ 68 $ 334,546

Common Stock Accumulated Other Total

2 unchanged sentences

Issuance of common stock in connection with employee equity incentive plans, net 915,399 — 13,682 — — 13,682

Issuance of common stock in connection with follow-on public offering, net of discounts and issuance costs 1,257,142 2 206,029 — — 206,031

Tax withholding upon vesting of restricted stock awards — — ( 8,712 ) — — ( 8,712 )

4 unchanged sentences

Net change in unrealized gain on investments — — — — ( 14 ) ( 14 )

Balances at June 30, 2020 27,364,151 $ 25 $ 408,096 $ ( 290,356 ) $ 181 $ 117,946

Balances at September 30, 2020 28,855,261 $ 27 $ 629,484 $ ( 295,033 ) $ 68 $ 334,546

Common Stock Accumulated Other Total

Shares Amount Additional Paid-In Capital Accumulated Deficit Comprehensive Income (Loss) Stockholders' Equity

Balances at March 31, 2019 24,628,643 $ 24 $ 261,672 $ ( 214,075 ) $ 27 $ 47,648

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 )

2 unchanged sentences

Net change in unrealized gain on investments — — — — ( 21 ) ( 21 )

Balances at June 30, 2019 24,836,171 $ 23 $ 271,469 $ ( 224,800 ) $ 60 $ 46,752

Balances at September 30, 2019 26,525,201 $ 25 $ 385,614 $ ( 243,093 ) $ 39 $ 142,585

Common Stock Accumulated Other Total

2 unchanged sentences

Issuance of common stock in connection with employee equity incentive plans, net 578,936 — 6,409 — — 6,409

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 — — ( 5,111 ) — — ( 5,111 )

2 unchanged sentences

Net change in unrealized gain on investments — — — — 55 55

Balances at June 30, 2019 24,836,171 $ 23 $ 271,469 $ ( 224,800 ) $ 60 $ 46,752

Balances at September 30, 2019 26,525,201 $ 25 $ 385,614 $ ( 243,093 ) $ 39 $ 142,585

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

16 unchanged sentences

Total proceeds received from the offering were $ 107.3 million, after deducting discounts and issuance costs.

Revision of Prior Period Financial Statements

In 2019, and as previously disclosed in the Company’s Quarterly Report on Form 10-Q for the three and nine-months 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 accompanying 2017 annual financial statements, 2018 unaudited quarterly and audited annual financial statements and its 2019 unaudited first and second quarter 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 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 its results of operations for the three and nine months ended September 30, 2019 and the year-ended December 31, 2019.

Accordingly, the Company has revised its previously issued financial statements to correct for such immaterial errors.

A summary of the impact of the revisions to our previously issued interim financial statements for the three and six months ended June 30, 2019 is included in Note 13, Revision of Prior Period Financial Statements.

The affected balances in the accompanying footnotes to these condensed consolidated financial statements have also been revised accordingly.

On August 21, 2020, the Company issued and sold an aggregate of 1,257,142 shares (the "Shares") of common stock, in a public offering at a price of $ 175.00 per share.

The Shares included the full exercise of the underwriters’ option to purchase an additional 163,975 shares of common stock.

Total proceeds received from the offering were $ 206.8 million, after deducting discounts and issuance costs.

Summary of Significant Accounting Policies

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These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair statement of the Company’s condensed consolidated financial information.

The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020, or for any other interim period or for any other future year.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020, 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, 2019, included in the Company’s annual report on Form 10-K, filed with the SEC on March 2, 2020.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Risks and Uncertainties

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GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, contractual allowances, allowance for doubtful accounts, the useful lives of property and equipment, the recoverability of long-lived assets including the estimated usage of the printed circuit board assemblies (“PCBAs”), the incremental borrowing rate for operating leases, accounting for income taxes, the fair value of the Company’s common stock and stock-based compensation.

On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, contractual allowances, allowance for doubtful accounts, the useful lives of property and equipment, the recoverability of long-lived assets including the estimated usage of the printed circuit board assemblies (“PCBAs”), the incremental borrowing rate for operating leases, accounting for income taxes, and various inputs used in estimating stock-based compensation.

Certain of these estimates are impacted by uncertainties surrounding COVID-19 such as revenue recognition, contractual allowances for revenue, allowance for doubtful accounts, and stock based compensation.

1 unchanged sentence

Actual results may differ from those estimates.

As a result of the COVID-19 pandemic, the Company has experienced significant business disruptions, including delays in receiving Zio XT back from patients with some patients not returning the device at all, restrictions on its ability to travel, reduction in access to customers due to diverted resources at hospitals, and shortened business hours as governments institute prolonged shelter-in-place and/or self-quarantine mandates.

Governmental mandates related to the COVID-19 pandemic have impacted Company personnel and personnel at third-party manufacturing facilities in the United States and other countries, and the availability or cost of materials, which could disrupt our supply chain and reduce margins.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

As a result of the COVID-19 pandemic, the Company has experienced significant business disruptions, restrictions on its ability to travel, reduction in access to customers due to diverted resources at hospitals, and shortened business hours as governments institute prolonged shelter-in-place and/or self-quarantine mandates.

Governmental mandates related to the COVID-19 pandemic have impacted, and is expected to continue to impact, Company personnel and personnel at third-party manufacturing facilities in the United States and other countries, and the availability or cost of materials, which could disrupt our supply chain and reduce margins.

For instance, on or about March 16, 2020, the Health Officers of the counties of San Francisco (where the Company's headquarters is located), Santa Clara, San Mateo, Marin, Contra Costa and Alameda, where many employees are located, issued mandatory shelter-in-place orders and all employees transitioned to a remote work environment.

4 unchanged sentences

While hospital systems and healthcare facilities shift their focus and resources to treating COVID-19 patients and combating the spread of the coronavirus, the Company has adapted its service to meet the immediate needs of physicians, customers, and patients and significantly increased the utilization of its home enrollment service which allows patients to receive and wear the single-use Zio device without going to a healthcare facility.

Given the disruption in demand and an uncertain length of time to recovery, the Company adjusted its operating plan by taking steps to reduce operating spend.

These steps included eliminating or delaying spending on non-essential programs, reducing spend on travel and consulting, implementing a hiring freeze, furloughing approximately 5 % of employees, conducting a layoff of approximately 2 % of employees and implementing temporary pay reductions from May 2020 to July 2020 for salaried workforce.

Furthermore, from May 2020 to July 2020, the Company’s Chief Executive Officer, other named executive officers and other senior executives agreed to base salary reductions and the Board of Directors agreed to a reduction in its fees until business and economic conditions improve.

In August 2020, the Company reinstated furloughed employees and removed pay reductions for its salaried employees.

Given the disruption in demand and an uncertain length of time to recovery, the Company adjusted its operating plan in the second quarter of 2020 by taking steps to reduce operating spend.

From May 2020 to July 2020, the Company’s Chief Executive Officer, other named executive officers and other senior executives agreed to temporary base salary reductions and the Board of Directors agreed to a reduction in its fees until business and economic conditions improve.

The Company also increased it’s bad debt reserve in anticipation of a potential increase in uncollectible co-payments from patients using the Zio Service.

In August 2020, the Company reinstated furloughed employees, removed pay reductions for its salaried employees, and resumed hiring for most positions.

The Company is continuously reviewing its liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 pandemic.

The Company believes it will have adequate liquidity over the next 12 months to operate its business and to meet its cash requirements, although current liquidity will constrain the level of growth investments that can be made.

As of June 30, 2020, the Company is in compliance with its financial covenants in its debt agreement.

On March 27, 2020, the U.S.

government enacted the Coronavirus Aid Relief, and Economic Security Act (the "CARES Act") to support businesses during the COVID-19 pandemic, including deferment of the employer portion of certain payroll taxes, refundable payroll tax credits, and technical amendments to tax depreciation methods for qualified improvement property.

The Company is currently evaluating how to avail itself of the benefits of the CARES Act, such as the ability to defer the payroll tax and applying for tax credits, and how it may impact its financial position, results of operations and cash flows.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

The Company believes it will have adequate liquidity over the next 12 months to operate its business and to meet its cash requirements.

As of September 30, 2020, the Company is in compliance with its financial covenants in its debt agreement.

On March 27, 2020, as a result of the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to support businesses during the COVID-19 pandemic, including deferment of the employer portion of certain payroll taxes, refundable payroll tax credits, and technical amendments to tax depreciation methods for qualified improvement property.

The primary provisions of the CARES Act which are potentially applicable to us include:

• certain amendments to the limitations on the deductibility of interest contained in Section 163(j) of the Internal Revenue Code of 1986, as amended, for taxable years beginning in 2019 and 2020;

• an allowance of net operating loss carrybacks for taxable years beginning in 2018 and before 2021.

The Company did not qualify for the Paycheck Protection Program under the CARES Act due to the number of employees in our organization.

The CARES Act did not have material impact on the Company’s overall consolidated financial statements.

The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change.

This impact is having a material, adverse impact on liquidity, capital resources, operations and business and those of the third parties on which the Company relies, and could worsen over time.

The extent to which the COVID-19 pandemic impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions to contain the COVID-19 pandemic or treat its impact, among others.

The extent to which the COVID-19 pandemic impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

emerge concerning the severity of the COVID-19 pandemic and the actions to contain the COVID-19 pandemic or treat its impact, among others.

The full extent of potential delays or impacts on the business, financial condition, cash flows and results of operations remains unknown.

Additionally, while the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing the Company’s ability to raise additional capital through equity, equity-linked or debt financings, which could negatively impact short-term and long-term liquidity and the ability to operate on a timely basis, or at all.

Furthermore, capital markets and economies worldwide have been negatively impacted by the COVID-19 pandemic, which may result in a period of regional, national, and global economic slowdown or regional, national, or global recessions that could curtail or delay demand for the Zio service as well as increase the risk of customer defaults or delays in payments.

9 unchanged sentences

Expected credit losses on available-for-sale debt securities are recognized in other income, net in the condensed consolidated statements of operations, and any remaining unrealized losses, net of taxes, are reported as a component of accumulated other comprehensive loss.

The Company did not recognize any credit losses on its available-for-sale securities during the three and six months ended June 30, 2020 and there were no impairment charges for unrealized losses in the periods presented.

The Company did not recognize any credit losses on its available-for-sale securities during the three and nine months ended September 30, 2020 and there were no impairment charges for unrealized losses in the periods presented.

The cost of available-for-sale securities sold is based on the specific-identification method and realized gains and losses are included in earnings.

10 unchanged sentences

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

Six Months Ended June 30, 2020 Year Ended December 31,

2019 Six Months Ended June 30, 2019

Nine Months Ended September 30, 2020 Year Ended December 31,

2019 Nine Months Ended September 30, 2019

Balance, beginning of period $ 9,049 $ 7,296 $ 7,296

4 unchanged sentences

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

Six Months Ended June 30, 2020 Year Ended December 31,

2019 Six Months Ended June 30, 2019

Nine Months Ended September 30, 2020 Year Ended December 31,

2019 Nine Months Ended September 30, 2019

Balance, beginning of period $ 15,433 $ 9,205 $ 9,205

11 unchanged sentences

The Company records an allowance for doubtful accounts based on the assessment of the collectability of customer accounts, considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.

Centers for Medicare and Medicaid Services (“CMS”), accounted for approximately 27 % of the Company’s revenue for each of the three and six months ended June 30, 2020, respectively, and 28 % and 27 %, of the Company's revenue for the three and six months ended June 30, 2019, respectively.

CMS accounted for 22 % and 22 % of accounts receivable at June 30, 2020 and June 30, 2019, respectively.

Centers for Medicare and Medicaid Services (“CMS”), accounted for approximately 28 % and 27 % of the Company’s revenue for each of the three and nine months ended September 30, 2020, respectively, and 28 % and 27 %, of the Company's revenue for the three and nine months ended September 30, 2019, respectively.

CMS accounted for 22 % and 20 % of accounts receivable at September 30, 2020 and December 31, 2019, respectively.

Revenue Recognition

6 unchanged sentences

The Zio AT service revenue is recognized over the prescription period and delivery of an electronic Zio Report with two performance obligations.

The Company recognizes as revenue the amount of consideration to which it expects to be entitled in exchange for performing the service.

The consideration the Company is entitled to varies by portfolio, as further defined below, and includes

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

estimates that require significant judgment by management.

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.

25 unchanged sentences

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.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

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.

4 unchanged sentences

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 six months ended June 30, 2020 and June 30, 2019 were as follows (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Disaggregated revenue by payor type and major service line for three and nine months ended September 30, 2020 and September 30, 2019 were as follows (in thousands):

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

2020 2019 2020 2019

8 unchanged sentences

Such advance payments are contract liabilities and are recorded as deferred revenue on the Condensed Balance Sheets and revenue is recognized when reports are delivered to the healthcare provider.

During each of the three and six months ended June 30, 2020, $ 1.2 million relating to the contract liability balance at the beginning of 2020 was recognized as revenue.

Total revenue recognized during each of the three and six months ended June 30, 2019 that was included in the contract liability balance at the beginning of 2019, was $ 0.1 million and $ 1.2 million, respectively.

During each of the nine months ended September 30, 2020, $ 1.2 million relating to the contract liability balance at the beginning of 2020 was recognized as revenue.

Total revenue recognized during the nine months ended September 30, 2019 that was included in the contract liability balance at the beginning of 2019 was $ 1.2 million.

Contract Costs

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Stock-based compensation expense is recognized over the requisite service period using the straight-line method and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest.

As such, the Company’s stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

For restricted stock, the compensation cost for these awards is based on the closing price of the Company’s common stock on the date of grant, and recognized as compensation expense on a straight-line basis over the requisite service period.

The Company recognizes compensation expense related to the Employee Stock Purchase Program (“ESPP”) based on the estimated fair value of the options on the date of grant, net of estimated forfeitures.

The Company estimates the grant date

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

fair value, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model for each purchase period.

The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model for each purchase period.

The grant date fair value is expensed on a straight-line basis over the offering period.

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Cash Equivalents and Investments

The fair value of cash equivalents and available-for-sale investments at June 30, 2020 and December 31, 2019, were as follows (in thousands):

June 30, 2020

The fair value of cash equivalents and available-for-sale investments at September 30, 2020 and December 31, 2019, were as follows (in thousands):

September 30, 2020

Cost Gross Unrealized Estimated

2 unchanged sentences

Corporate notes 26,632 4 ( 6 ) 26,630

Commercial paper 26,978 — — 26,978

Total cash equivalents and available-for-sale investments $ 306,619 $ 75 $ ( 7 ) $ 306,687

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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,

2020 December 31,

2 unchanged sentences

Total cash equivalents and available-for-sale investments $ 306,687 $ 142,016

There were no available-for-sale securities that were in an unrealized loss position as of June 30, 2020.

The following tables present the Company's available-for-sale securities that were in an unrealized loss position as of September 30, 2020 (in thousands):

September 30, 2020

Less than 12 months

Assets Fair Value Unrealized Loss

government securities $ 28,270 $ ( 1 )

Corporate notes 18,153 ( 6 )

Total $ 46,423 $ ( 7 )

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

There were no available-for-sale securities that were in an unrealized loss position for more than twelve months as of September 30, 2020.

Unrealized losses as of December 31, 2019 were not material.

Available-for-sale securities held as of June 30, 2020 had a weighted average maturity of 44 days.

Available-for-sale securities held as of September 30, 2020 had a weighted average maturity of 109 days.

At September 30, 2020, six investments were in an unrealized loss position and no investments have been in an unrealized loss position for more than one year.

Fair Value Measurements

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

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

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

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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 June 30, 2020 are $ 34.9 million and $ 36.2 million, respectively.

The carrying amount and the estimated fair value of the Company’s outstanding interest-bearing obligations at September 30, 2020 are $ 34.9 million and $ 36.0 million, respectively.

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

June 30, 2020

September 30, 2020

Level 1 Level 2 Level 3 Total

2 unchanged sentences

Corporate notes — 26,630 — 26,630

Commercial paper — 26,978 — 26,978

Total $ 74,786 $ 231,901 $ — $ 306,687

9 unchanged sentences

Inventory consisted of the following (in thousands):

September 30,

2020 December 31,

2 unchanged sentences

Total $ 5,062 $ 4,037

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

The Company uses Printed Circuit Board Assemblies (“PCBAs”), in each wearable Zio XT and Zio AT monitor as well as in the wireless gateway used in conjunction with the Zio AT monitor.

2 unchanged sentences

Each time a wireless gateway is used with a Zio AT monitor, a portion of the gateway is recorded as a cost of revenue.

PCBAs which are recorded as other assets, were $ 10.3 million and $ 7.4 million as of June 30, 2020, and December 31, 2019, respectively.

PCBAs which are recorded as other assets, were $ 11.1 million and $ 7.4 million as of September 30, 2020, and December 31, 2019, respectively.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Property and Equipment, Net

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

September 30,

2020 December 31,

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Total property and equipment, net $ 32,775 $ 26,464

Depreciation and amortization expense was $ 1.6 million and $ 3.2 million for the three and six months ended June 30, 2020, respectively, and $ 0.7 million and $ 1.3 million for three and six months ended June 30, 2019, respectively.

Depreciation and amortization expense was $ 1.7 million and $ 4.9 million for the three and nine months ended September 30, 2020, respectively, and $ 0.9 million and $ 2.3 million for three and nine months ended September 30, 2019, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

September 30,

2020 December 31,

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Costs incurred by the Company in connection with the Development Agreement will be expensed as research and development expense in accordance with ASC 730, Research and Development.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

The Company and Verily will develop certain next-generation atrial fibrillation (“AF”) screening, detection, or monitoring products pursuant to the Development Agreement, which products will involve combining Verily and the Company’s technology platforms and capabilities.

1 unchanged sentence

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 Development Agreement, which payments will be made in cash to Verily.

During the year ended December 31, 2019 the Company achieved a milestone resulting in additional expense of $ 1.0 million which was included in accounts payable as of December 31, 2019 and paid in the first quarter of 2020.

During the three and six months ended June 30, 2020, the Company achieved an additional milestone resulting in expense of $ 3.0 million, which was paid in June 2020.

During the year ended

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

December 31, 2019 the Company achieved a milestone resulting in additional expense of $ 1.0 million which was included in accounts payable as of December 31, 2019 and paid in the first quarter of 2020.

During the nine months ended September 30, 2020, the Company achieved an additional milestone resulting in expense of $ 3.0 million, which was paid in June 2020.

The Development Agreement provides each party with licenses to use certain intellectual property of the other party for development activities in the field of AF screening, detection, or monitoring.

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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.

In December 2015, the Company entered into a Second Amended and Restated Loan and Security Agreement with SVB, (the “SVB Loan Agreement”).

In December 2015, the Company entered into a Second Amended and Restated Loan and Security Agreement ("Loan Agreement”) with Silicon Valley Bank ("SVB").

Under the SVB Loan Agreement, the Company 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.

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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.

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The Company may borrow up to 75 % of eligible accounts receivable, up to the maximum of $ 25.0 million.

As of June 30, 2020, no amount was outstanding under the revolving credit line.

As of September 30, 2020, no amount was outstanding under the revolving credit line.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

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 June 30, 2020.

The Company was in compliance with loan covenants as of September 30, 2020.

The obligations under the Third Amended and Restated Loan Agreement are collateralized by substantially all assets of the Company.

The Company recorded a tax provision related to its U.K.

subsidiary during the six months ended June 30, 2020 and June 30, 2019.

subsidiary during the nine months ended September 30, 2020 and September 30, 2019.

Due to the uncertainties surrounding the realization of the U.S.

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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 June 30, 2020.

No dividends were declared through September 30, 2020.

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

September 30,

2020 December 31,

19 unchanged sentences

Awards withheld for tax purposes 76,936

Balance at June 30, 2020 6,524,643

During the six months ended June 30, 2020, 534,857 restricted stock units ("RSUs") were granted, 161,347 RSUs vested, and 116,136 RSUs were forfeited.

Balance at September 30, 2020 6,506,482

During the nine months ended September 30, 2020, 582,322 restricted stock units ("RSUs") were granted, 219,436 RSUs vested, and 125,617 RSUs were forfeited.

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

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Options forfeited ( 24,191 ) $ 66.99

Balances at June 30, 2020 943,850 $ 34.70 6.55 $ 76,628

Options exercisable – June 30, 2020 724,804 $ 28.33 6.30 $ 63,462

Options vested and expected to vest – June 30, 2020 936,269 $ 34.47 6.54 $ 76,235

Balances at September 30, 2020 747,874 $ 37.92 6.40 $ 149,719

Options exercisable – September 30, 2020 584,180 $ 31.68 6.16 $ 120,594

Options vested and expected to vest – September 30, 2020 742,666 $ 37.71 6.39 $ 148,827

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 six months ended June 30, 2019, the Company granted options with a weighted-average grant date fair value of $ 38.29 per share.

The Company did no t grant any options during the six months ended June 30, 2020.

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

The Company did no t grant any options during the nine months ended September 30, 2020.

IRHYTHM TECHNOLOGIES, INC.

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

June 30, Six Months Ended

Expected term (in years) 6.1 6.1

Three Months Ended September 30, Nine Months Ended

September 30,

Expected term (in years) n/a 6.1

Expected volatility — % 45.0 %

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Dividend yield — % — %

The Company did no t grant stock options during the nine months ended September 30, 2020.

Market-based RSU Valuation

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Additional details on the Company's market based RSUs are included below.

Six Months Ended

Nine Months Ended

September 30,

Expected term (in years) 0.74

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Three Months Ended,

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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Total stock-based compensation expense $ 17,444 $ 7,401 $ 27,517 $ 19,064

As of June 30, 2020, there was total unamortized compensation costs of $ 5.3 million, net of estimated forfeitures, related to unvested stock options which the Company expects to recognize over a period of approximately 1.3 years, $ 65.1 million, net of estimated forfeitures, related to unrecognized restricted stock unit (“RSU”) expense, which the Company expects to recognize over a period of 2.6 years, and $ 2.5 million unrecognized ESPP expense, which the Company will recognize over 0.4 years.

As of September 30, 2020, there was total unamortized compensation costs of $ 5.0 million, net of estimated forfeitures, related to unvested stock options which the Company expects to recognize over a period of approximately 1.2 years, $ 61.3 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 $ 1.8 million unrecognized ESPP expense, which the Company will recognize over 0.2 years.

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

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In February 2019, the company granted PRSU's ("2019 awards") to be earned based on the compound annual growth rate ("CAGR") of fiscal year 2020's revenue compared to fiscal year 2018's revenue, measuring a minimum performance threshold of 75 % to earn 50 % of target, and a maximum threshold of 125 % achieved to earn 200 % of target.

The 2019 awards also include a service-based component.

Due to the impact of the COVID-19 pandemic, management determined that the Company’s achievement of its performance targets described above, was not probable in the first quarter of fiscal year 2020.

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The total incremental compensation cost resulting from the modification of $ 13.6 million will be recognized ratably through March of 2021.

The Company recognized $ 0.5 million of compensation cost in connection with the 2019 awards during the three months ended June 30, 2020.

In February 2020, the company granted PRSU's ("2020 awards") for fiscal year 2022's annual unit volume CAGR compared to fiscal year 2019's annual unit volume CAGR, measuring a minimum performance threshold of 19.7 % to earn 50 % of target, and a maximum threshold of 29 % achieved to earn 200 % of target.

The Company recognized $ 4.6 million and $ 5.1 million of compensation cost for the three and nine months ended September 30, 2020, respectively, in connection with the 2019 awards.

February 2020 Awards

In February 2020, the company granted PRSU's ("February 2020 awards") for fiscal year 2022's annual unit volume CAGR compared to fiscal year 2019's annual unit volume CAGR, measuring a minimum performance threshold of 19.7 % to earn 50 % of target, and a maximum threshold of 29 % achieved to earn 200 % of target.

A total of 133,834 PRSU shares were granted with grant date fair value of $ 11.0 million.

The 2020 awards also include a service-based component.

Due to the impact of the COVID-19 pandemic, management determined that the Company’s achievement of its performance targets described above, was not probable in the first and second quarters of fiscal year 2020.

No compensation cost related to the 2020 awards has been recognized as of June 30, 2020.

Compensation cost in connection with the probable number of shares that will vest will be recognized ratably through March of 2021.

During the three months ended September 30, 2020, the Company determined that it was probable that the February 2020 Awards would vest and recognized $ 1.3 million of compensation cost in connection with the February 2020 awards.

Employee Bonus to be Settled in Shares

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Compensation cost is recorded at fair value based on the probability of achievement at each period end and expensed ratably through March of fiscal year 2021.

Non employee Stock-Based Compensation

On July 3, 2020, the Company’s Chief Financial Officer (“CFO”) resigned and entered into a Consulting and Professional Services Agreement (“CPSA”) with the Company to provide consulting services through July 2, 2021.

Pursuant to the original terms of the awards, the CFO will continue to vest in outstanding awards as long as services are provided to the Company under the CPSA as a non-employee consultant.

In accordance with ASC 718, the Company recognized expense related to all awards expected to vest over the duration of the CPSA in the current period as an equity- based severance cost as the consulting services are not substantive.

Total expense related to non-employee stock- based compensation recognized for the three and nine months ended September 30, 2020 was $ 1.8 million.

IRHYTHM TECHNOLOGIES, INC.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

2020 2019 2020 2019

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Net loss per common share, basic and diluted $ ( 0.17 ) $ ( 0.72 ) $ ( 1.25 ) $ ( 1.50 )

The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per common share for the six months ended June 30, 2020 and 2019, because their inclusion would be anti-dilutive:

Six Months Ended

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, 2020 and 2019, because their inclusion would be anti-dilutive:

Nine Months Ended

September 30,

Options to purchase common stock 747,874 1,625,627

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Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Revision of Prior Period Financial Statements

As discussed in Note 1, the Company has revised certain prior period financial statements to correct 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

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

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

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 )

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Revised Consolidated Statements of Comprehensive 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 )

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 ) 262 235

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 decrease in cash, cash equivalents, and restricted cash ( 3,869 ) ( 170 ) ( 4,039 )

Cash and cash equivalents 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)

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements