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Item 1A. Risk Factors

2022-02-28 compared with 2021-02-26 · 217 added, 180 removed, 799 unchanged (33% of the section changed)

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Summary of Risk Factors

Our business is subject to numerous risks and uncertainties that you should consider before investing in our company, as fully described below.

Our business is subject to numerous risks and uncertainties that you should consider before investing in our company, as more fully described below.

The principal factors and uncertainties that make investing in our company risky include, among others:

• changes in public health insurance coverage and CMS reimbursement rates for the Zio service could affect the adoption and profitability of our Zio service;

• 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;

• 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 as a result of the CMS and Medicare Administrative Contractor (“MAC”) reimbursement rates, including Novitas Solutions' reimbursement rates for our Zio XT service, or if we are unable to successfully negotiate reimbursement contracts, our commercial success could be compromised;

• the COVID-19 pandemic and efforts to reduce its spread have adversely impacted, and is expected to continue to materially and adversely impact, our business and operations;

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The COVID-19 pandemic has had, and is expected to continue to have, an adverse impact on our operations, particularly as a result of preventive and precautionary measures that we, other businesses, and governments are taking.

The spread of COVID-19 in the United States has resulted in travel restrictions impacting our sales representatives and customer service team.

The spread of

COVID-19 in the United States has resulted in travel restrictions impacting all areas of our business, most notably our sales representatives.

Many hospitals have also limited access for non-patients, including our sales professionals, which has negatively impacted our access to physicians and their patients.

New hospital sanitization and social distancing protocols, as well as increased competition for resources within hospitals that have dedicated certain resources to COVID patients, have impacted and may continue to impact our business and operations.

Additionally, we anticipate that an increase in the unemployment rate due to the impact of COVID-19 will decrease the number of potential patients with access to health insurance, which may result in fewer diagnostic procedures.

We have also noted staffing shortage at providers in certain regions in the United States and we believe that the status of provider capacity and resource prioritization, vaccination levels and other pandemic-related effects could materially impact our revenue in future periods.

Additionally, we anticipate that an increase in the unemployment rate due to the impact of COVID-19 would decrease the number of potential patients with access to health insurance, which may result in fewer diagnostic procedures.

As hospitals cancel and defer diagnostic and elective procedures, it reduces their revenue and impacts their financial results, which could result in pricing pressure on our services as they seek cost savings.

Prolonged restrictions relating to COVID-19 could adversely affect our revenue, results of operations, cash flows, and financial position.

Although we saw recovery of patient registrations for the Zio service in the second half of 2020, we expect these challenges of the COVID-19 pandemic to continue to impact the volume of Zio services provided for the duration of the pandemic, but its extent cannot be quantified at this time.

Although we saw recovery of patient registrations for the Zio service in 2021, we expect these challenges of the COVID-19 pandemic to continue to impact the volume of Zio services provided for the duration of the pandemic, but its extent cannot be quantified at this time.

Our customers’ patients are also experiencing the economic impact of the current pandemic.

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Governmental mandates related to the COVID-19 pandemic have impacted, and are expected to continue to impact, our 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 our headquarters is located), Santa Clara, San Mateo, Marin, Contra Costa and Alameda, where many of our employees are located, issued mandatory shelter-in-place orders and all employees transitioned to a remote work environment.

We are also subject to orders in Southern California that temporarily shut down our manufacturing and distribution facilities in Cypress, California.

For a limited number of employees who continue to support essential operations, including those at its manufacturing facilities, we have instituted protective equipment policies and, to the degree practical, social distancing measures to protect the safety of our employees.

For the employees who continue to support essential operations, including those at its manufacturing facilities, we have instituted protective equipment policies and, to the degree practical, social distancing measures to protect the safety of our employees.

While we have continued to deliver our Zio service by operating with remote employees and essential employees on site, an extended implementation of these governmental mandates could further impact our ability to effectively provide our Zio service, and could impede progress of all ongoing initiatives.

Appropriate social distancing techniques and other measures at our facilities have been implemented for the limited number of employees who have returned to work to support essential operations, and will not return until the risk to employee health has meaningfully diminished.

While we expect the COVID-19 pandemic to impact our business over the short term as some procedures are temporarily deferred, we took measures intended to reduce business disruptions and preserve financial flexibility in the second quarter 2020.

In assessing our own cash conservation options, we took preemptive steps to curtail near-term spending, including eliminating or delaying spending on non-essential programs, reducing spend on travel and consulting, implementing a hiring freeze, furloughing approximately 5% of our employees, conducting a layoff of approximately 2% of our employees and implementing temporary pay reductions for our salaried workforce.

Furthermore, our Chief Executive Officer, other named executive officers and other senior executives agreed to base salary reductions and our Board of Directors agreed to a reduction in its fees until business and economic conditions improve.

In August 2020, we reinstated furloughed employees, removed pay reductions for our salaried employees, and resumed hiring for most positions.

Our ongoing operations may be impacted as a result of employees assuming additional roles and responsibilities within our organization and we would have fewer resources available to run our operations, which could negatively impact our business operations and revenue as a result.

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If key personnel or large groups of our employees contract the virus, that may also impact our business and operations.

For example, an outbreak in our manufacturing facility could cause us to have to shut down our manufacturing operations, which would in turn present risk

to the ongoing supply of devices required to continue our business operations.

For example, an outbreak in our manufacturing facility could cause us to have to shut down our manufacturing operations, which would in turn present risk to the ongoing supply of devices required to continue our business operations.

In the meantime, we have taken steps to support our employees, including providing the ability for the majority of employees to work remotely and implementing policies to enhance employee safety, including appropriate social distancing techniques, for those employees required to work in our facilities.

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Finally, we anticipate that the COVID-19 pandemic may impact clinical and regulatory matters.

While we do not have any clinical trials currently in process, COVID-19 is delaying enrollment in new clinical trials across the medical device industry and may affect any new trials we decide to pursue.

The potential effects of COVID-19 could also have the effect of heightening many of the other risks described in this “Risk Factors” section.

COVID-19 is delaying enrollment in new clinical trials across the medical device industry and may affect any new trials we decide to pursue.

Regulatory clearances may take extended duration of time as agencies focus on COVID-19-related priorities which, in turn, would delay our introduction of new products and services.

The COVID-19 pandemic has also created global supply chain shortages and delays, particularly for some electronic components, such as those contained in our PCBAs.

We have experienced longer lead times, sometimes in excess of 52 weeks,

and increased broker fees during the COVID-19 pandemic, which has increased our cost of revenue.

We have also had to increase our inventory levels as a result of these potential shortages.

If we are unable to secure our typical supply of components on a timely basis, it may affect our ability to provide the Zio service on a timely basis, which would affect our cash flows and ability to operate on a timely basis.

Any of these occurrences may significantly harm our business, financial condition, cash flows and prospects.

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We have incurred net losses since our inception in September 2006.

For the year ended December 31, 2020 and 2019, we had net losses of $43.8 million and $54.6 million, respectively, and expect to continue to incur additional losses.

As of December 31, 2020, we had an accumulated deficit of $304.7 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.

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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.

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 our Zio service, which is currently our only product offering.

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:

• while we intend to continue to expand our manufacturing capacity, our production processes may have to change to accommodate this growth, potentially involving significant capital expenditures;

• 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;

• shelter-in-place orders in effect in California and elsewhere due to the COVID-19 outbreak;

• 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”), the EU’s Medical Device Directive (“MDD”) and, as of May 2021, the EU’s Medical Device Regulation (“MDR”), and the developing regulations by Medicines & Healthcare Regulatory Agency (“MHRA”) post Brexit in the United Kingdom 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;

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

• in response to unexpectedly rapid growth of our business, clinical operations capacity may not meet demand while new resources are being recruited and trained, which could delay the return of Zio reports to our customers.

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, MDD, MDR, UK MDR 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.

Failure to maintain compliance with, or not fully complying with the requirements of, MDD, MDR, and UK MDR could result in similar disruptions in these markets.

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 and sub-assemblies 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, including those caused by pandemics such as COVID-19;

• 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, state regulatory authorities, and in some cases the Notified Body audits;

• 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;

• an outbreak of disease or similar public health threat, such as the existing threat of coronavirus, particularly as it may impact our supply chain;

• 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;

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

• delays in obtaining required materials and components that are in short supply within the time frames we require, at an affordable cost, or at all.

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.

Our revenue relies substantially on our Zio service, which is currently our only offering.

If the Zio service or future product offerings fail to gain, or lose, market acceptance, our business will suffer.

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• general economic, industry and market conditions;

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

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

• the regulatory environment;

• expenses associated with unforeseen product quality issues;

• expenses or loss of sales 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;

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

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

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On October 25, 2019, the AMA’s CPT Editorial Panel established two new Category I CPT codes which are applicable to the Zio service and took effect on January 1, 2021.

In August 2020, CMS published the Calendar Year 2021 Medicare Physician Fee Schedule Proposed Rule which proposed reimbursement for the Category I CPT codes that were higher than their associated Category III CPT codes.

Following a comment period through October 2020, CMS published its Calendar Year 2021 Medicare Physician Fee Schedule Final Rule (the “Final Rule”) in December 2020.

In the Final Rule, CMS chose not to finalize national pricing for four of the eight Category I CPT codes (93241, 93243, 93245 and 93247) which include the CPT codes that we will primarily use to seek reimbursement for Zio XT.

Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through a national coverage determination (“NCD”) by CMS, or at the local level through a local coverage determination (“LCD”), by one or more of the regional Medicare Administrative Contractors (“MACs”) who are private contractors that process and pay claims on behalf of CMS for different regions.

In November 2021, CMS published its Calendar Year 2022 Medicare Physician Fee Schedule Final Rule (the “2022 Final Rule”).

In the Final Rule, CMS did not issue national pricing and continued carrier pricing for calendar year 2022 on Category I CPT codes 93241, 93243, 93245 and 93247 for extended external ECG monitoring, the relevant codes for our Zio XT service.

These codes were designated by CMS for contractor pricing in calendar 2022, which means that prices will be determined regionally by each Medicare Administrative Contractor (“MAC” or “MACs”).

Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through a national coverage determination (“NCD”) by CMS, or at the local level through a local coverage determination (“LCD”), by one or more of the regional MACs who are private contractors that process and pay claims on behalf of CMS for different regions.

In the absence of a specific NCD, as is the case with Zio XT historically and for Calendar Year 2022 following the Final Rule, the MAC with jurisdiction over a specific geographic region will have the discretion to make an LCD.

We will be subject to LCD pricing until such time CMS establishes a NCD and we are seeking to establish LCD pricing with one or more MACs to establish pricing for 2021.

On January 29, 2021, Novitas Solutions, the MAC which covers the region where our IDTF in Houston, Texas is located and where almost all of our Medicare services for Zio XT are processed, published rates for 2021 that were significantly below our historical Medicare rates for Zio XT.

that the published rates by Novitas on January 29, 2021, are crosswalked from CPT codes 93224 and 93226, which are existing CPT codes for external continuous electrocardiographic recording up to 48 hours, while the Zio service is capable of continuous monitoring for up to 14 days.

We are in the process of negotiating with Novitas to establish higher pricing for the Category I CPT Codes but can offer no assurances as to the timing or outcome of those discussions.

If the published rates by Novitas remain unchanged or are not significantly improved for the CPT codes listed above, thereby allowing us to obtain adequate Medicare reimbursement for the Zio service in the future, we may be unable to provide the Zio XT service or would experience a significant loss of revenue, either of which would have a material adverse effect on our cash flows, results of operations, and financial condition.

The Company is seeking to establish LCD pricing with one or more MACs to establish pricing for 2022 and will be subject to LCD pricing until such time CMS establishes a NCD.

In January 2022, Novitas Solutions, the MAC which covers the region where our Independent Diagnostic Testing Facility (“IDTF”) in Houston, Texas is located and where almost all of our Medicare services for Zio XT are processed, updated reimbursement rates for CPT codes 93243 and 93247 for the Houston jurisdiction to $223 and $233, respectively.

These updated rates are retroactive to January 1, 2022.

These rates were higher than the rates posted by Novitas Solutions in 2021, but continue to be significantly below our historical Medicare rates for our Zio XT service.

We are continuing to negotiate with Novitas Solutions and other MACs to establish higher pricing for the Category I CPT Codes but can offer no assurances as to the timing or outcome of those discussions.

We remain engaged with all of the MACs and are working with other industry participants to submit additional cost data on long-term continuous electrocardiogram (“ECG”) monitoring for consideration to establish appropriate local rates.

We cannot provide certainty at this time on the potential outcome of the discussions with the MACs or on the timing of any action to be taken.

Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through a national coverage determination (“NCD”) by CMS, or at the local level through a local coverage determination (“LCD”), by one or more of the regional MACs who are private contractors who establish and write LCD policies and process and pay claims on behalf of CMS for different regions.

In the absence of a specific NCD, the MAC with jurisdiction over a specific geographic region will have the discretion to make an LCD.

If Novitas Solutions were to change, limit or cease to cover the Zio service by altering the existing LCD, it would negatively impact our revenue from CMS.

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.

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 XT service.

If published rates by Novitas are not increased to above the cost of revenue for the Zio service, and we are unable to achieve a level of revenues adequate to support our cost structure, this would raise substantial doubts about our ability to continue as a going concern.

We are currently holding a majority of Zio XT claims due to the CPT code transition.

Claims are being held due to a combination of negotiations with payors and administrative delays with payors.

We expect the level of held claims to remain high through the end of the first quarter of 2021 and potentially beyond.

The high level of held claims will delay most first quarter 2021 cash flows into the second quarter of 2021 or potentially beyond, and may impact the timing and accounting for various income statement items, particularly revenue recognition and bad debt expense.

We believe we have adequate balance sheet liquidity to manage through these delays in cash flow timing.

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 will continue to be subject to changes in the level of Medicare coverage for its products, and unfavorable coverage determinations at the national or local level could adversely affect its results of operations.

Although a large majority of commercial customers have re-contracted the Zio XT service since the establishment of the Category I codes on January 1, 2021 matching to pre-existing rates, if we are unsuccessful in improving the Medicare rates, we believe that commercial rates may begin to be more negatively impacted.

As a result of the CPT code changes that took effect January 1, 2021, the number of claims from the first half of 2021 which contained differences between the submitted price and reimbursement rate and overall denials increased significantly compared to our historical experience as a result of CPT code transition issues with the payors.

We continue to work with the payors to collect on these claims and the collection cycle for these claims is significantly longer than usual and may lead to higher write-offs of doubtful accounts for those periods and negatively impact our results of operations.

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

Controls imposed by CMS and commercial third-party payors designed to reduce costs, commonly referred to as “utilization review”, may affect our operations.

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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.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education

Affordability Reconciliation Act (the “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.

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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.

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.

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.

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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.

If third-party commercial payors do not provide any or adequate reimbursement, including as a result of the CMS and MAC reimbursement rates for our Zio XT service, 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.

These commercial payors may reimburse our products, including the Zio service, at inadequate rates, suspend or discontinue reimbursement at any time, impose requirements that may result in a greater number of denied claims, or require or increase co-payments from patients.

The recent actions taken by CMS and MACs to reduce the reimbursement rates for use of the Zio XT service by Medicare patients could influence the price that commercial payors are willing to pay for our Zio service.

Contracts with commercial payors, which set forth the Zio XT service reimbursement rates for us and prescribing physicians, could be terminated or payors could seek to renegotiate such contracts at any time to try to obtain pricing at reduced amounts at or near the Novitas Solutions reimbursement rates.

Some payors do not have contracts with us and others that are already in the process of negotiating contracts may look to negotiate lower reimbursement rates for the Zio XT service in response to actions taken by Novitas Solutions.

Any such actions could have a significant and adverse effect on our revenue and the revenue of physicians who prescribe our Zio service.

Physicians may not prescribe our Zio service 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.

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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.

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.

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Rapid expansion in personnel could mean that less experienced people manufacture our Zio monitors, market, sell and support 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.

Additionally, rapid expansion could require us to rely on overtime to increase capacity that could, in turn, result in greater employee attrition and a loss in productivity during the process of recruiting and training additional resources and add to our operating expenses.

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.

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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.

We have 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.

However, 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.

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, potentially involving significant capital expenditures;

• 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;

• shelter-in-place orders in effect in California and elsewhere due to the COVID-19 outbreak;

• 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”), the EU’s Medical Device Directive (“MDD”) and, as of May 2021, the EU’s Medical Device Regulation (“MDR”) 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;

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