iRhythm Holdings, Inc 10-Q for FY2024 Q3
iRhythm Holdings, Inc. (IRTC)
10-Q
2024-10-30
For: 2024-09-30
View Original
Added on
April 10, 2026
About this 10-Q
iRhythm Holdings, Inc filed this 10-Q on October 30, 2024, covering the quarter ended September 30, 2024 (FY2024 Q3).
Headline figures
Quarter ended September 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $147.54M
- up 18.4% from $124.6M a year earlier
- Net loss
- $46.18M
- compared with a net loss of $27.12M a year earlier
- Diluted EPS
- -$1.48
- compared with -$0.89 a year earlier
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, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission file number: 001-37918
_______________________________________________________________________
(Exact Name of Registrant as Specified in its Charter)
_______________________________________________________________________
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||||||||
(415 ) 632-5700
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
_______________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☑ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of October 23, 2024, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 31,298,034 .
IRHYTHM TECHNOLOGIES, INC.
TABLE OF CONTENTS
| Page No | |||||
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements concerning our plans, objectives, and expectations for our business, operations, and financial performance and condition, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would”, and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
•the expected impact of global business, political, and macroeconomic conditions, including inflation, interest rate volatility, cybersecurity events, potential instability in the global banking system, and volatile market conditions, and global events, including public health crises, and ongoing geopolitical conflicts, such as the war in Ukraine and conflict in the Middle East, on our business, operations, and financial results;
•the impact of supply chain disruptions on our operations and financial results;
•the impact of inflationary costs on our operations and financial results;
•plans to conduct further clinical studies, including any clinical trials initiated by third parties;
•our plans to modify our current systems and services, or identify and develop, or acquire, new products or services, to address additional indications;
•the expected growth of our business and our organization;
•our expectations regarding government and third-party payor coverage and reimbursement or other regulatory actions or decisions;
•our compliance with all applicable laws, rules, and regulations, including those of the U.S. Food and Drug Administration;
•our expectations regarding the size of our sales organization and expansion of our sales and marketing efforts, including in international geographies;
•our expectations regarding revenue, cost of revenue, cost of service per device, operating expenses, including research and development expense, sales and marketing expense and general and administrative expenses;
•our ability to retain and recruit key personnel, including the continued development of a sales and marketing infrastructure;
•our ability to obtain and maintain intellectual property protection for our systems and services;
•our estimates of our expenses, ongoing losses, future revenue, capital requirements, and our needs for, or ability to obtain, additional financing;
•our financial performance; and
•developments and projections relating to our competitors or our industry.
We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. These forward-looking statements are based on management’s current expectations, estimates, forecasts, and projections about our business and the industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We assume no obligation to update or revise these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, even if new information becomes available in the future.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the Securities and Exchange Commission (the “SEC”) as exhibits to the Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IRHYTHM TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(In thousands, except par value)
| September 30, 2024 | December 31, 2023 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Restricted cash, long-term | |||||||||||
| Goodwill | |||||||||||
Long-term strategic investments | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Operating lease liabilities, current portion | |||||||||||
| Total current liabilities | |||||||||||
| Long-term senior convertible notes | |||||||||||
| Debt, noncurrent portion | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Operating lease liabilities, noncurrent portion | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 7) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
Treasury stock, at cost; | ( | ||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
IRHYTHM TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||
| Revenue, net | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Acquired in-process research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
Impairment charges | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
Interest and other income (expense), net: | |||||||||||||||||||||||
Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
Loss on extinguishment of debt | ( | ||||||||||||||||||||||
Other income (expense), net | ( | ( | |||||||||||||||||||||
Total interest and other income (expense), net | ( | ||||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax provision | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per common share, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted-average shares, basic and diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
IRHYTHM TECHNOLOGIES, INC.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
Net change in unrealized gain (loss) from marketable securities | ( | ||||||||||||||||||||||
Cumulative translation adjustment | ( | ||||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
IRHYTHM TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| (unaudited) | |||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation | |||||||||||
| Amortization of premium and accretion of discounts, net | ( | ( | |||||||||
| Amortization of operating lease right-of-use assets | |||||||||||
| Amortization of debt discount | |||||||||||
Change in fair value of strategic investments | ( | ||||||||||
| Provision for credit losses and contractual allowances | |||||||||||
Acquired in-process research and development | |||||||||||
| Loss on extinguishment of debt | |||||||||||
| Impairment charges | |||||||||||
| Other | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventory | ( | ||||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable and accrued liabilities | ( | ||||||||||
| Deferred revenue | ( | ||||||||||
| Operating lease liabilities | ( | ( | |||||||||
Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Purchases of marketable securities | ( | ( | |||||||||
| Maturities of marketable securities | |||||||||||
| Purchases of strategic investments | ( | ( | |||||||||
Purchases of acquired in-process research and development | ( | ||||||||||
Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Payment of SVB term loan and termination costs | ( | ||||||||||
| Proceeds from Braidwell debt | |||||||||||
| Payments of issuance costs for Braidwell debt | ( | ||||||||||
| Payment of Braidwell debt and termination costs | ( | ||||||||||
| Proceeds from issuance of 2029 Notes | |||||||||||
| Payments of issuance costs for 2029 Notes | ( | ||||||||||
| Purchases of capped call transactions | ( | ||||||||||
| Purchase of treasury stock | ( | ||||||||||
Proceeds from issuance of common stock in connection with employee equity incentive plans | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | ( | ||||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | $ | |||||||||
4
IRHYTHM TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(In thousands)
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
Reconciliation of cash, cash equivalents and restricted cash | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash, long-term | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Interest paid | $ | $ | |||||||||
| Cash taxes paid | $ | $ | |||||||||
| Cash received from tenant improvement allowances | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Property and equipment costs included in accounts payable and accrued liabilities | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | $ | |||||||||
| Capitalized stock-based compensation in property and equipment | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
IRHYTHM TECHNOLOGIES, INC.
Condensed Consolidated Statement of Stockholders’ Equity
(In thousands)
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee equity incentive plans, net | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Purchase of capped call transactions | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | ( | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Net change in unrealized (loss) on marketable securities | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2024 | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee equity incentive plans, net | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Net change in unrealized (loss) on marketable securities | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2024 | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee equity incentive plans, net | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
Net change in unrealized gain on marketable securities | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Cumulative translation adjustment | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
Balances at September 30, 2024 | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||
6
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee equity incentive plans, net | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
| Net change in unrealized gain on marketable securities | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee equity incentive plans, net | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
| Net change in unrealized loss on marketable securities | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2023 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee equity incentive plans, net | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
Net change in unrealized gain on marketable securities | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Cumulative translation adjustment | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2023 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
iRhythm Technologies, Inc. (the “Company”) was incorporated in the state of Delaware in September 2006. The Company is a leading digital healthcare company that creates trusted solutions that detect, predict, and prevent disease. The Company's principal business is the design, development, and commercialization of device-based technology to provide remote cardiac monitoring services that it believes allow clinicians to diagnose certain arrhythmias quicker and with greater efficiency than other services that rely on traditional technology.
Since first receiving clearance from the U.S. Food and Drug Administration (“FDA”) for the Company's technology in 2009, the Company has supported physician and patient use of its technology and provided remote cardiac monitoring services from its Medicare-enrolled independent diagnostic testing facilities (“IDTFs”) and its qualified technicians. The Company has provided the Zio remote cardiac monitoring services, including extended Holter, traditional Holter, and mobile cardiac telemetry (“MCT”) monitoring services (“Zio Services”), using the Zio Systems.
The Company is headquartered in San Francisco, California, which also serves as a clinical center. The Company has additional clinical centers in Deerfield, Illinois and Houston, Texas, a manufacturing facility in Cypress, California and administrative office space in Solana Beach, California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries, and have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. As permitted under those rules, the condensed consolidated financial statements and related disclosures as of December 31, 2023 have been derived from the audited consolidated financial statements but do not include all of the information required by GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair statement of the Company’s unaudited condensed consolidated financial information. The results of operations for the three and nine months ended September 30, 2024, are not necessarily indicative of the results to be expected for the year ending December 31, 2024, or for any other interim period or for any other future year.
The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10-K, filed with the SEC on February 22, 2024.
Reclassification
Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications have no impact on previously reported results of operations or financial position.
8
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Risks and Uncertainties
Macroeconomic Factors and Supply Chain Constraints
The Company’s operations and performance may vary based on worldwide economic and political conditions, which have been adversely impacted by continued global economic uncertainty, political instability, and military hostilities in multiple geographies including ongoing geopolitical conflicts, such as the war in Ukraine and conflict in the Middle East, domestic and global inflationary trends, interest rate volatility, potential instability in the global banking system, global supply shortages, and a tightening labor market. A severe or prolonged economic downturn or period of global political instability could drive hospitals and other healthcare professionals to tighten budgets and curtail spending, which could in turn negatively impact rates at which physicians prescribe the Company’s Zio Services. In addition, higher unemployment rates or reductions in employer-provided benefits plans could result in fewer commercially insured patients, resulting in a reduction in the Company’s margins and impairing the ability of uninsured patients to make timely payments. A weak or declining economy could also strain the Company’s suppliers, possibly resulting in supply delays and disruptions. There is also a risk that one or more of the Company’s current service providers, suppliers, or other partners may not survive such difficult economic times, which could directly affect the Company’s ability to attain its goals on schedule and on budget. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. The Company cannot predict the timing, strength, or duration of an economic downturn, instability, or recovery, whether worldwide, in the United States, or within its industry.
The Company’s hybrid work arrangements and decision to pursue a sublease for its leased San Francisco headquarters resulted in an impairment of its right-of-use ("ROU") asset and related leasehold improvements and furniture and fixtures during the years ended December 31, 2023 and 2022. As the Company continues to evaluate its global real estate footprint, the Company may incur additional impairment charges related to real property lease agreements.
The Company is continuously reviewing its liquidity and anticipated capital requirements. The Company believes it has adequate liquidity over the next 12 months to operate its business and to meet its cash requirements.
Reimbursement
The Company receives revenue for the Zio Services primarily from third-party payors, which include commercial payors and government agencies, such as the Centers for Medicare & Medicaid Services (“CMS”). Third-party payors require the Company to identify the service for which it is seeking reimbursement by using a Current Procedural Terminology (“CPT”) code set maintained by the American Medical Association. These CPT codes are subject to periodic change and update, which will impact the reimbursement rates for the Company’s Zio Services.
Based on relative value units, CMS annually updates the reimbursement rates for diagnostic tests performed by IDTFs via the Medicare Physician Fee Schedule. CMS establishes national payment rates for the CPT codes the Company uses to report the long-term Holter monitoring services it performs with its Zio XT System: CPT codes 93247 (for wear-time of greater than 7 days and up to 15 days) and 93243 (for wear-time of greater than 48 hours and up to 7 days). Because remote cardiac monitoring technology, including the Zio System, is rapidly evolving, there is a continuing risk that relative value units assigned, and reimbursement rates set, by CMS may not adequately reflect the value and expense of this technology and associated monitoring services, and CMS may reduce these rates in the future, which would adversely affect the Company’s financial results.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, contractual allowances, provision for credit losses, the useful lives of property and equipment, the recoverability of long-lived assets, including the estimated usage of the printed circuit board assemblies (“PCBAs”), the incremental borrowing rate for operating leases, accounting for income taxes, impairment of ROU assets, contingent consideration liabilities, and various inputs used in estimating stock-based compensation. Actual results may differ from those estimates.
Significant Accounting Policies
During the nine months ended September 30, 2024, there were no changes to the Company’s significant accounting policies as described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023, with the exception of the following:
9
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the date of purchase.
Under the terms of certain facility operating lease agreements, the Company is required to maintain a letter of credit as collateral during the term of the lease. As of September 30, 2024, restricted cash of $8.4 million was pledged as collateral under the letter of credit with Silicon Valley Bank.
Fair Value Option
The Company elected the fair value option, Accounting Standards Codification (“ASC”) 825-10, Financial Instruments - Overall, to account for its strategic loan investments. The Company recorded the strategic loan investments at fair value within long-term strategic investments in the Company’s unaudited condensed consolidated balance sheets with changes in fair value recorded on the unaudited condensed consolidated statements of operations. The primary reason for electing the fair value option was for simplification and cost-benefit considerations of accounting for the strategic loan investments at fair value versus bifurcation of the embedded derivatives. Refer to Note 5, Fair Value Measurements, for further details relating to the Company's strategic investments.
Acquired In-Process Research and Development Expenses
Acquired in-process research and development (“IPR&D”) assets, as a result of an asset acquisition, for use in research and development activities with no alternative future use are expensed in the condensed consolidated statements of operations on the acquisition date. Accounting for acquisitions of IPR&D requires the Company to make certain judgements to determine if the transaction should be accounted for as an asset acquisition or a business combination, as well as assess if the IPR&D acquired has alternative future use in research and development activities.
Contingent Consideration
Certain agreements the Company entered into involve payments that are contingent upon the achievement of milestones. Contingent consideration obligations incurred in connection with acquired in-process research and development assets are recorded at fair value, with changes in fair value recorded to acquired in-process research and development expenses in the unaudited condensed consolidated statements of operations.
Concentrations of Risk
Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. Cash balances are deposited in financial institutions which, at times, may be in excess of federally insured limits. Cash equivalents are invested in highly rated money market funds. The Company invests in a variety of financial instruments, such as, but not limited to, U.S. government securities, corporate notes, commercial paper and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. The Company has not experienced any material losses on its deposits of cash and cash equivalents or investments.
Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company’s customer base and their dispersion across many geographies. The Company does not require collateral. During the first quarter of 2024, the Company experienced a temporary delay in the billing of the Company's contracted and non-contracted payer customers, performed by the Company's third-party claims processing vendor. The delay was due to a cybersecurity incident experienced by Change Healthcare, a division of UnitedHealth Group, which the Company's third-party vendor engages for services relating to billing and collections. While the Company substantially cleared the billing backlog as of the end of the first quarter of 2024, the delay in billing resulted in a temporary delay in the Company's cash collections. During the second and third quarters of 2024, the Company has received a significant portion of its cash collections from the delayed billings.
10
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Supply Risk
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which updates reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The amendments are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating this ASU to determine its impact on the Company's financial statement disclosures as a single operating segment.
In December 2023, the FASB issued ASU No. 2023-09 (“ASU 2023-09”), Income Taxes (Topic 740): Improvement to Income Tax Disclosures to enhance the transparency and decision usefulness of income tax disclosures. Two primary enhancements related to this ASU include disaggregating existing income tax disclosures relating to the effective tax rate reconciliation and income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating this ASU to determine its impact on the Company's financial statement disclosures.
On March 6, 2024, the SEC adopted SEC Release Nos. 33-11275; 34-99678, The Enhancement and Standardization of Climate-Related Disclosures for Investor, to require the disclosure of certain climate-related information in registration statements and annual reports, including Scope 1 and 2 emissions and information about climate-related risks that have materially impacted, or are reasonably likely to have a material impact on, a company’s business strategy, results of operations, or financial condition. In addition, under the final rules, certain disclosures related to severe weather events and other natural conditions will be required in audited financial statements. The disclosure requirements will begin phasing in for the Company's reports and registration statements including financial information in the fiscal year ending December 31, 2025. In April 2024, the SEC issued an order staying the final rules until the completion of judicial review. The Company is currently evaluating the impact of this final rule on the Company's consolidated financial statements and related disclosures.
3. REVENUE AND ACCOUNTS RECEIVABLE
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers by payor type. The Company believes these categories aggregate the payor types by nature, amount, timing and uncertainty of its revenue streams. Disaggregated revenue by payor type and major service line for the three and nine months ended September 30, 2024 and 2023 were as follows (in thousands, except percentages):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | Amount | % of Revenue | Amount | % of Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contracted third-party payors | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Centers for Medicare and Medicaid | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare institutions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-contracted third-party payors | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue generated from the United States comprised substantially all of the Company's revenue. No other commercial customer or country comprised 10% or greater of the Company's revenue during the three and nine months ended September 30, 2024 and 2023.
11
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Accounts Receivable, Provision for Credit Losses and Contractual Allowances
Accounts receivable includes amounts due to the Company from healthcare institutions, third-party payors, and government payors and their related patients, as a result of the Company's normal business activities. Accounts receivable is reported on the unaudited condensed consolidated balance sheets net of an estimated provision for credit losses and contractual allowances.
The Company establishes a provision for credit losses for estimated uncollectible receivables based on its assessment of the collectability of customer accounts and recognizes the provision as a component of selling, general and administrative expenses. The Company records a provision for contractual allowances based on the estimated differences between contracted amounts and expected collection rates for services performed. Such provisions are based on the Company's historical experience and are reported as a reduction of revenue.
The Company regularly reviews the allowances by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.
The following table presents the changes in the provision for credit losses (in thousands):
| Nine Months Ended September 30, 2024 | Year Ended December 31, 2023 | Nine Months Ended September 30, 2023 | |||||||||||||||
| Balance, beginning of period | $ | $ | $ | ||||||||||||||
Provision for credit losses | |||||||||||||||||
Write-offs, net of recoveries and other adjustments | ( | ( | ( | ||||||||||||||
| Balance, end of period | $ | $ | $ | ||||||||||||||
The following table presents the changes in the contractual allowance (in thousands):
| Nine Months Ended September 30, 2024 | Year Ended December 31, 2023 | Nine Months Ended September 30, 2023 | |||||||||||||||
| Balance, beginning of period | $ | $ | $ | ||||||||||||||
| Add: provision for contractual adjustments | |||||||||||||||||
| Less: contractual adjustments | ( | ( | ( | ||||||||||||||
| Balance, end of period | $ | $ | $ | ||||||||||||||
Contract Liabilities
ASC 606, Revenue from Contracts with Customers, requires an entity to present a revenue contract as a contract liability when the Company has an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer, or an amount of consideration from the customer is due and unconditional (whichever is earlier).
Contract Costs
Under ASC 340, Other Assets and Deferred Costs ("ASC 340"), the incremental costs of obtaining a contract with a customer are recognized as an asset. Incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained.
The Company’s current commission programs are considered incremental. However, as a practical expedient, ASC 340 permits the Company to immediately expense contract acquisition costs, because the asset that would have resulted from capitalizing these costs will be amortized in one year or less.
12
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
4. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The fair value of cash equivalents and marketable securities as of September 30, 2024 and December 31, 2023, were as follows (in thousands):
| September 30, 2024 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized | Fair Value | |||||||||||||||||||||
| Gains | Losses | ||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. government securities | ( | ||||||||||||||||||||||
| Total cash equivalents and marketable securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Classified as: | |||||||||||||||||||||||
| Cash equivalents | $ | ||||||||||||||||||||||
| Marketable securities | |||||||||||||||||||||||
| Total cash equivalents and marketable securities | $ | ||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized | Fair Value | |||||||||||||||||||||
| Gains | Losses | ||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. government securities | ( | ||||||||||||||||||||||
| Total cash equivalents and marketable securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Classified as: | |||||||||||||||||||||||
| Cash equivalents | $ | ||||||||||||||||||||||
| Marketable securities | |||||||||||||||||||||||
| Total cash equivalents and marketable securities | $ | ||||||||||||||||||||||
5. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
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.
13
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The U.S. government securities are classified as Level 2 as they were valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.
The Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value.
The following tables present the fair value of the Company’s financial assets determined using the inputs defined above (in thousands):
| September 30, 2024 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. government securities | |||||||||||||||||||||||
| Strategic investments | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Liabilities | |||||||||||||||||||||||
Contingent consideration | $ | $ | $ | $ | |||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. government securities | |||||||||||||||||||||||
Strategic investments | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The Company's debt obligation as of December 31, 2023 is classified as Level 2 input. The fair value of the Company’s outstanding interest-bearing obligation as of December 31, 2023 approximated the carrying value of $35.0 million.
Fair Value of Strategic Investments
The Company holds strategic investments upon which it measures the fair value on a recurring basis. The carrying value of these investments are $59.1 million and $3.0 million as of September 30, 2024 and December 31, 2023, respectively.
The Company's strategic investments are with privately held companies, and as such, limited information is available. On a quarterly basis, the Company monitors information that becomes available and adjusts the carrying values of these investments if there are identified events or changes in circumstances that have a significant effect on their fair values. The strategic investments are categorized as Level 3 investments within the fair value hierarchy due to the uncertainty of the fair value measurement with respect to the use of significant unobservable inputs and included within long-term strategic investments in the Company’s unaudited condensed consolidated balance sheets.
14
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
During the nine months ended September 30, 2024, the Company made an aggregate of $55.0 million in strategic loan investments in BioIntelliSense, Inc. (“BioIS”), a privately-held company. The loan investments have maturity dates ranging from April 2029 through August 2029. The loan investments can convert into preferred shares of BioIS based upon certain qualifying financing events. The aggregate fair value of the strategic loan investments is $55.6 million as of September 30, 2024. In accordance with ASC 820, Fair Value Measurement, the Company elected to apply the fair value option to these strategic loan investments, with changes in fair value reported within other income (expense), net in the Company's unaudited condensed consolidated statements of operations at each reporting period. During the three and nine months ended September 30, 2024, the Company increased the fair value of the strategic loan investments by $0.6
The recurring Level 3 fair value measurements of the loan investment include the following significant unobservable inputs as of September 30, 2024:
| September 30, 2024 | |||||
Discount rate | % | ||||
Equity volatility | % | ||||
Expected years (range) | 2025 - 2029 | ||||
During the year ended December 31, 2023, the Company made a $3.0 million strategic equity investment in a separate privately-held company. During the three months ended September 30, 2024, the Company increased the fair value of the strategic equity investment by $0.5 million. The carrying value of the strategic equity investment is $3.5 million as of September 30, 2024. The change in fair value is recorded within other income (expense), net in the Company’s unaudited condensed consolidated statements of operations.
The following table sets forth the changes in the estimated fair value of the Company's strategic investments measured on a recurring basis (in thousands):
| Nine Months Ended September 30, 2024 | Year Ended December 31, 2023 | ||||||||||
| Balance, beginning of period | $ | $ | |||||||||
Additions during the period | |||||||||||
Changes in estimated fair value | |||||||||||
| Balance, end of period | $ | $ | |||||||||
Contingent Consideration Liabilities
The Company established contingent consideration liabilities in conjunction with the development milestones associated with the acquisition of certain technology from BioIS. The fair value of contingent consideration liabilities is determined using PWERM, with scenarios that correspond to the contractual settlement events. There are significant inputs of such model that are not observable in the market, such as probability of achievement of stated milestones and expected term. The unobservable inputs represent a Level 3 measurement. Fair value adjustments to contingent consideration liabilities are assessed quarterly and recorded through operating expenses within acquired in-process research and development in the unaudited condensed consolidated statements of operations. Refer to Note 7, Commitments and Contingencies, for further details relating to the BioIS contingent consideration liabilities.
The recurring Level 3 fair value measurements of contingent consideration liabilities associated with the development agreement milestones include the following significant unobservable inputs as of September 30, 2024:
| September 30, 2024 | |||||
Probability of achievement (range) | |||||
Expected years | 2025 - 2026 | ||||
15
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Contingent consideration liabilities for BioIS at the inception of acquisition of the licensed technology were $17.0 million. Contingent consideration liabilities were $17.1 million as of September 30, 2024, and were included in other noncurrent liabilities in the Company’s unaudited condensed consolidated balance sheet.
The following table sets forth the changes in the estimated fair value of the Company’s contingent consideration liabilities measured on a recurring basis (Level 3) (in thousands):
| Nine Months Ended September 30, 2024 | |||||
Balance, beginning of period | $ | ||||
Additions during the period | |||||
Changes in estimated fair value | |||||
Balance at end of period | $ | ||||
Fair Value of Senior Convertible Notes
The fair value, based on a quoted market price (Level 1), of the Company’s senior convertible notes due 2029 (the "2029 Notes") is as follows (in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||||||||
| Senior Convertible Notes due 2029 | $ | $ | |||||||||||||||
6. BALANCE SHEET COMPONENTS
Inventory
Inventory consisted of the following (in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||
Raw materials and work-in-progress | $ | $ | |||||||||
| Finished goods | |||||||||||
| Total | $ | $ | |||||||||
Long-term Strategic Investments
Long-term strategic investments consisted of the following (in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||
Strategic loan investments | $ | $ | |||||||||
Strategic equity investment | |||||||||||
Total | $ | $ | |||||||||
Other Assets
Other assets consisted of the following (in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||
| PCBAs | $ | $ | |||||||||
| Cloud computing arrangements | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
The Company reuses PCBAs in each wearable Zio Monitor patch, Zio XT patch, and Zio AT patch, as well as the wireless gateway used in conjunction with the Zio AT patch. As PCBAs are used in a wearable Zio Monitor patch, Zio XT patch, or Zio AT patch, a portion of the cost of the PCBA is recorded as a cost of revenue. The PCBAs are charged over a period beyond one year . Charges to cost of revenue were $4.2 million and $9.9 million for the three and nine months ended September 30, 2024, respectively, and $2.4 million and $5.4 million for the three and nine months ended September 30, 2023, respectively.
16
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, 2024 | December 31, 2023 | ||||||||||
| Laboratory and manufacturing equipment | $ | $ | |||||||||
| Computer equipment and software | |||||||||||
| Furniture and fixtures | |||||||||||
| Leasehold improvements | |||||||||||
Internal-use software in service | |||||||||||
| Internal-use software in development | |||||||||||
| Construction in progress | |||||||||||
| Total property and equipment, gross | |||||||||||
| Less: accumulated depreciation and amortization | ( | ( | |||||||||
| Total property and equipment, net | $ | $ | |||||||||
Depreciation and amortization expense for the three and nine months ended September 30, 2024 was $5.1 million and $15.4 million, respectively, and $4.1 million and $11.4 million for three and nine months ended September 30, 2023, respectively, of which amortization related to internal-use software, was $3.6 million and $11.0 million for the three and nine months ended September 30, 2024, respectively, and $3.1 million and $8.6 million, for the three and nine months ended September 30, 2023, respectively.
During the three and nine months ended September 30, 2024, internal-use software, both in service and in development, increased by $8.6 million and $27.5 million, respectively. This increase is related to enhancements in the Company’s core technology, products and services and artificial intelligence, as well as investment in future technology supporting the Zio Monitor System, the Company's next generation biosensor technology platform.
During the three and nine months ended September 30, 2024, the Company recorded an impairment charge of $0.6 No
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||
| Accrued payroll and related expenses | $ | $ | |||||||||
| Accrued vacation | |||||||||||
| Accrued expenses | |||||||||||
| Claims payable | |||||||||||
| Accrued employee share purchase plan contributions | |||||||||||
Accrued state and foreign income and sales taxes | |||||||||||
| Accrued professional services fees | |||||||||||
| Total accrued liabilities | $ | $ | |||||||||
17
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
7. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, manufacturing, and clinical centers under non-cancelable operating leases which expire on various dates through 2033. These leases generally contain scheduled rent increases or escalation clauses and renewal options. Operating lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease ROU assets also include any lease payments made to the lessor at or before the commencement date as well as variable lease payments which are based on a consumer price index. The Company is also subject to variable lease payments related to janitorial services and electricity which are not included in the operating lease ROU asset as they are based on actual usage. The Company recognizes operating lease expenses, generally on a straight-line basis over the lease period.
During the nine months ended September 30, 2024, there were no material changes to the leases from those described in Note 8, Commitments and Contingencies, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
Contractual obligations under operating lease liabilities were as follows (in thousands):
Year Ended December 31: | |||||
2024 (remainder of the year) | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
2028 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less: imputed interest | ( | ||||
| Total lease liabilities | $ | ||||
Legal Proceedings
From time to time, the Company is involved in claims and legal proceedings or investigations, that arise in the ordinary course of business. Such matters could have an adverse impact on the Company's reputation, business, and financial condition and divert the attention of its management from the operation of the Company's business. These matters are subject to many uncertainties and outcomes that are not predictable.
On February 1, 2021, a putative class action lawsuit was filed in the United States District Court for the Northern District of California (the "Court") alleging that the Company and its former Chief Executive Officer, Kevin M. King, violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder. On August 2, 2021, the lead plaintiff filed an amended complaint, and filed a further amended complaint on September 24, 2021. The amended complaint names as defendants, in addition to the Company and Mr. King, its former Chief Executive Officer, Michael J. Coyle, and former Chief Financial Officer and former Chief Operating Officer, Douglas J. Devine. The purported class in the amended complaint includes all persons who purchased or acquired the Company's common stock between August 4, 2020 and July 13, 2021, and seeks unspecified damages purportedly sustained by the class. On October 27, 2021, the Company filed a motion to dismiss, which the Court granted on March 31, 2022, entering judgment in favor of the Company and the other defendants. On April 29, 2022, the original named plaintiff appealed to the Ninth Circuit Court of Appeals. On October 11, 2023, after briefing by the parties and oral argument, the Ninth Circuit dismissed the appeal for lack of jurisdiction. The appellant filed a petition for rehearing en banc, which was denied on December 6, 2023. On April 16, 2024, the original named plaintiff appealed the Ninth Circuit’s decision regarding jurisdiction to the United States Supreme Court (the “Supreme Court”) and, on May 20, 2024, the Company waived its right to provide a statement of opposition with respect to the issue of jurisdiction. On June 4, 2024, the Supreme Court requested the Company provide a statement of opposition, which was due August 2, 2024. On October 7, 2024, the Supreme Court denied the plaintiff’s petition for appeal, thereby ending the matter.
18
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
On February 6, 2024, a second putative class action lawsuit was filed in the Court alleging that the Company's current Chief Executive Officer, Quentin Blackford, the Company's former Chief Financial Officer, Brice Bobzien, and our former Chief Financial Officer and former Chief Operating Officer, Mr. Devine violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder, and seeks unspecified damages purportedly sustained by the class. On July 19, 2024, an amended complaint was filed, naming the Company, Mr. Blackford, Mr. Bobzien, Mr. Devine, our Chief Commercial Officer Chad Patterson, our former Chief Technology Officer Mark Day, and our Chief Medical Officer, Chief Scientific Officer, and Executive Vice President of Product Innovation, Mintu Turakhia, as defendants. On October 7, 2024, a second amended complaint was also filed to include events from the recent FDA inspections.
The Company believes the above securities class action lawsuits to be without merit and plans to continue to defend itself vigorously.
On March 26, 2021, the Company received a grand jury subpoena from the U.S. Attorney’s Office for the Northern District of California requesting information related to communications with FDA and the Company's products and services. On September 13, 2021, the Company received a second subpoena requesting additional information. On April 4, 2023, the Company received a Subpoena Duces Tecum from the Consumer Protection Branch, Civil Division of the U.S. Department of Justice (the "DOJ"), requesting production of various documents regarding the Company’s products and services. The Company has been cooperating fully on these matters. On July 1, 2024, the DOJ filed with the United States District Court for the Northern District of California a Petition for Order to Show Cause and Application for Enforcement with respect to the production of certain documentary materials which the Company asserts are protected by legal privileges. The Company intends to defend its privilege assertions over such materials in its response to the DOJ's petition.
On February 20, 2024, Welch Allyn, a subsidiary of Hill-Rom Holdings, Inc. which was acquired by Baxter International, Inc., filed a lawsuit against the Company in the United States District Court for the District of Delaware, alleging that the Company's Zio devices infringe certain of its patents and that the Company’s infringement was willful. The Company filed a motion to dismiss Welch Allyn’s willful infringement claims on April 11, 2024. Welch Allyn filed an amended complaint on April 24, 2024 that continued to allege that the Company's devices infringe certain of its patents and that the Company’s infringement was willful. The Company filed a motion to dismiss Welch Allyn’s willful infringement allegations found in the amended complaint on June 12, 2024. Welch Allyn seeks money damages and attorneys’ fees. The Company believes this lawsuit is without merit and plans to defend itself vigorously.
Technology License Agreement
On August 30, 2024, the Company entered into a Technology License Agreement (the “License Agreement”) with BioIS, pursuant to which (i) the Company will receive a perpetual fully paid up license to certain of BioIS’ intellectual property, technology and products for research, development and commercialization of potential next generation products and services in certain fields of use, including an exclusive license to develop and commercialize pulse oximetry, accelerometry, and trending non-invasive blood pressure technologies for use within the Company’s ambulatory cardiac monitoring products and services, and (ii) the Company and BioIS agreed to negotiate in good faith a supply agreement for pulse oximetry hardware.
Under the terms of the License Agreement, during the third quarter of 2024 the Company paid BioIS an upfront fee of $15.0 million in cash consideration. In connection with the License Agreement, the Company also purchased an aggregate of $40.0 million of convertible promissory notes from BioIS (the "Convertible Notes"), of which $20.0 million of the convertible promissory notes ("Milestone Notes") were designated for satisfaction of the Company's regulatory milestone payment obligations. The Milestone Notes, plus accrued and unpaid interest, if any, shall be cancelled, if outstanding, upon the achievement of the regulatory milestones up through December 31, 2026. The Company has recorded a charge for $32.1 15.0 million as well as contingent consideration of $17.1
19
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Development Agreement
On September 3, 2019, the Company entered into a Development Collaboration Agreement with Verily Life Sciences LLC, an Alphabet company (“VLS”) and Verily Ireland Limited (“VIL” and together with VLS, “Verily”) (such Development Collaboration Agreement, as amended by Amendment No. 1 dated April 26, 2021 and Amendment No.2 dated January 24, 2022, the “Development Agreement”). The Development Agreement involves joint development and production of intellectual property between the Company and Verily. Each participant has primary responsibility for certain aspects of development and approval, with all processes to be performed at each respective party’s own cost. Costs incurred by the Company in connection with the Development Agreement will be expensed as research and development expense in accordance with ASC 730, Research and Development.
The Company and Verily will develop certain next-generation atrial fibrillation (“Afib”) screening, detection, or monitoring products pursuant to the Development Agreement, which products will involve combining Verily's and the Company’s technology platforms and capabilities. Under the terms of the Development Agreement, the Company paid Verily an upfront fee of $5.0 million in 2019. In addition, the Company agreed to make additional milestone payments to Verily up to an aggregate of $12.75 million upon achievement of various development and regulatory milestones over the term of the Development Agreement. The Company has achieved milestones tied to payments totaling $11.0 million to date and may make additional payments over the term of the Development Agreement of $1.75 million, subject to the achievement of specified milestones. No payments were made during the three and nine months ended September 30, 2024 and 2023.
The Development Agreement provides each party with licenses to use certain intellectual property of the other party for development activities in the field of Afib screening, detection, or monitoring. Ownership of developed intellectual property will be allocated to the Company or Verily depending on the subject matter of the underlying developed intellectual property, and, for certain subject matter, shall be jointly owned.
Indemnifications
In the ordinary course of business, the Company enters into agreements pursuant to which it agrees to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including losses arising out of the breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by applicable law. The Company currently has directors’ and officers’ insurance.
8. DEBT
The carrying amounts of the Company’s 2029 Notes were as follows (in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||
Principal amount | $ | $ | |||||||||
Unamortized debt issuance costs | ( | ||||||||||
Carrying amount of senior convertible notes due 2029 | $ | $ | |||||||||
20
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
The following table summarizes the components of interest expense and the effective interest rate for the 2029 Notes for the periods shown (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Contractual coupon interest | $ | $ | $ | $ | |||||||||||||||||||
Amortized debt issuance costs | |||||||||||||||||||||||
Total interest expense recognized on senior convertible notes due 2029 | $ | $ | $ | $ | |||||||||||||||||||
Effective interest rate | % | % | % | % | |||||||||||||||||||
On March 7, 2024, the Company completed an offering of $661.3 million aggregate principal amount of unsecured senior convertible notes with a stated interest rate of 1.50 % and a maturity date of September 1, 2029. The proceeds include the full exercise of the option granted by the Company to the initial purchasers of the 2029 Notes to purchase up to an additional $86.3 million aggregate principal amount of notes. Interest on the 2029 Notes is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2024. The net proceeds from the offering, after deducting initial purchasers’ discounts and costs directly related to the offering, were approximately $643.8 million. The initial conversion rate of the 2029 Notes is 6.7927 shares per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $147.22 per share, subject to adjustments. The 2029 Notes may be settled in cash, stock, or a combination thereof, solely at the Company's discretion.
The Company used net proceeds from the offering to purchase capped calls, as well as repayment of the Company's outstanding debt which is described below. In addition, the Company also used net proceeds from the offering to repurchase shares of the Company's common stock. Refer to Note 10, Stockholders' Equity for further details relating to the Company's shares repurchase.
No principal payments are due on the 2029 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the indenture relating to the 2029 Notes (the “Indenture”) includes customary terms and covenants, including certain events of default after which the 2029 Notes may be due and payable immediately. The Company uses the if-converted method for assumed conversion of the 2029 Notes to compute the weighted-average shares of common stock outstanding for diluted earnings per share, when applicable.
Conversion Rights at the Option of the Holders
Holders of the 2029 Notes who convert their notes in connection with a make-whole fundamental change (as defined in the Indenture) or convert their 2029 Notes called (or deemed called) for redemption in connection with any optional redemption are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change (as defined in the Indenture), holders of the 2029 Notes may require the Company to repurchase for cash all or a portion of their notes at a price equal to 100 % of the principal amount of notes, plus any accrued and unpaid interest to, but excluding, the repurchase date.
Holders of the 2029 Notes may convert all or a portion of their notes prior to the close of business on the business day immediately preceding June 1, 2029, in multiples of $1,000 principal amount, only under the following circumstances:
(1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2024 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price of the 2029 Notes on each applicable trading day;
(2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the 2029 Notes for each trading day of that measurement period was less than 98 % of the product of the last reported sale price of the Company's common stock and the conversion rate of the 2029 Notes on such trading day;
(3) if the Company calls any or all 2029 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the 2029 Notes called (or deemed called) for redemption; or
(4) upon the occurrence of specified corporate events as specified in the Indenture.
21
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
On or after June 1, 2029, until 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding September 1, 2029, holders of the notes may convert the 2029 Notes, in multiples of $1,000 principal amount, at their option regardless of the foregoing circumstances.
Conversion Rights at Our Option
The Company may not redeem the 2029 Notes prior to September 5, 2027. On or after September 5, 2027 and prior to June 1, 2029, the Company may redeem at its option for cash all or any portion of the 2029 Notes, at the redemption price, if the last reported sale price of the Company's common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides the redemption notice. The redemption price will be equal to 100 % of the principal amount of the 2029 Notes, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
2029 Capped Call Transactions
On March 4, 2024, in connection with the offering of the 2029 Notes, the Company entered into privately negotiated capped call transactions (the “2029 Capped Calls”) with certain financial institutions. The 2029 Capped Calls will cover, subject to anti-dilution adjustments substantially similar to those applicable to the 2029 Notes, the number of shares of the Company's common stock that will initially underlie the 2029 Notes. The 2029 Capped Calls are expected generally to reduce potential dilution to the Company's common stock upon conversion of the 2029 Notes and/or offset any cash payments that the Company could be required to make in excess of the principal amount of converted 2029 Notes, as the case may be, with such reduction and/or offset subject to a cap. The 2029 Capped Calls have an initial cap price of $218.10 per share, subject to adjustments, which represents a premium of 100 % over the closing price of the Company's common stock of $109.05 per share on the Nasdaq Global Select Market on March 4, 2024. The Company completed the purchase of the 2029 Capped Calls on March 7, 2024, for the amount of $72.4 million. The cost to purchase the 2029 Capped Calls was recorded as a reduction to additional paid-in capital in the Company's consolidated balance sheets, as the 2029 Capped Calls met the criteria for classification within stockholders’ equity.
Braidwell Debt
On January 3, 2024 (the “Closing Date”), the Company entered into the Credit, Security and Guaranty Agreement (the “Braidwell Credit Agreement”) with Braidwell Transactions Holdings LLC – Series 5 (“Braidwell”), which provided for a senior secured term loan in an aggregate principal amount of up to $150.0 million (the “Braidwell Term Loan Facility”). An initial tranche of $75.0 million (“Initial Loan”) was funded on the Closing Date. In addition to the Initial Loan, the Braidwell Term Loan Facility included an additional tranche of $75.0 million, which was accessible by the Company through the one year anniversary of the Closing Date, so long as the Company satisfied certain customary conditions. The Braidwell Term Loan Facility had a maturity date of January 3, 2029 (the “Maturity Date”) and provided, at the Company’s election, for the option to have a portion of interest added to principal rather than paid in cash during the term of the loan, with principal and accrued interest due at the Maturity Date.
On March 7, 2024, in connection with the offering of the 2029 Notes, the Company used approximately $80.2 million of the net proceeds for the repayment in full of the $75.0 million outstanding Initial Loan, as well as interest, fees and expenses associated with terminating the agreement. Interest expense for the three and nine months ended September 30, 2024 was nil and $1.8 million, respectively. Interest expense for the nine months ended September 30, 2024 consisted of contractual coupon interest and amortized debt issuance costs of $1.6 million and $0.2 million, respectively. The Company incurred $5.6 million of fees and expenses relating to the repayment of the Initial Loan and the termination of the Braidwell Credit Agreement, inclusive of unamortized debt origination costs, which has been recorded within loss on extinguishment of debt in the Company’s unaudited condensed consolidated statements of operations for the nine months ended September 30, 2024.
SVB Term Loan
In October 2018, the Company entered into the Third Amended and Restated Loan and Security Agreement (“SVB Loan Agreement”) with Silicon Valley Bank (“SVB”). Under the SVB Loan Agreement, the Company had borrowed $35.0 million and had made repayments through March 2022, at which time the outstanding balance was $18.5 million.
On March 28, 2022, the Company entered into a Second Amendment (“2022 Amendment”) to its SVB Loan Agreement which provided for a term loans facility in the aggregate principal amount of up to $75.0 million (the “2022 Term Loans”), of which $35.0 million was borrowed at closing and a portion of the proceeds was used to pay in full the outstanding balance of $18.5 million under the SVB Loan Agreement. None of the remaining $40.0 million of the 2022 Term Loans was borrowed up through December 31, 2023.
22
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
The 2022 Amendment also amended the terms of the revolving credit line under the SVB Loan Agreement, which provided for an aggregate principal amount of $25.0 million.
On January 3, 2024, in connection with the entry into the Braidwell Credit Agreement, the Company used approximately $37.8 million of the net proceeds for the repayment in full of the $35.0 million outstanding principal balance as well as interest, fees and expenses associated with terminating the agreement. Upon termination of the SVB Loan Agreement, SVB’s security interest in the Company’s assets and property was released.
Interest expense for three and nine months ended September 30, 2023 was $0.8 million and $2.5 million, respectively. Contractual coupon interest for the three and nine months ended September 30, 2023 was $0.8 million and $2.2 million, respectively. Amortized debt issuance costs for the three and nine months ended September 30, 2023 were $0.1 million and $0.3 million, respectively. Interest expense, contractual coupon interest, and amortized debt issuance costs for the three and nine months ended September 30, 2024 was nil 2.0 million of fees and expenses relating to the termination of the SVB Loan Agreement, which has been recorded within loss on extinguishment of debt in the Company's unaudited condensed consolidated statements of operations during the nine months ended September 30, 2024.
9. INCOME TAXES
The Company recorded a tax provision related to its U.S. state taxes and its foreign subsidiaries during the three and nine months ended September 30, 2024 and 2023. Due to the uncertainties surrounding the realization of the U.S. deferred tax assets through future taxable income, the Company has provided a full valuation allowance and, therefore, no benefit has been recognized for the net operating loss carryforwards and other deferred tax assets.
10. STOCKHOLDERS' EQUITY
Treasury Shares
On March 7, 2024, the Company used approximately $25.0 million of the net proceeds from the 2029 Notes offering to repurchase 229,252 shares of the Company's common stock at a purchase price of $109.05 per share via privately negotiated transactions effected through one of the initial purchasers or its affiliate. Repurchased shares of the Company's common stock are held as treasury shares until they are reissued or retired.
11. STOCK-BASED COMPENSATION
The following table summarizes the total stock-based compensation expense included in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2024 and 2023 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Cost of revenue | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
Restricted Stock Units and Performance-Based Restricted Stock Units
As of September 30, 2024, there was a total of 1.5 million awards outstanding and total unamortized compensation cost of $121.9 million, net of estimated forfeitures, related to restricted stock units ("RSUs"), which the Company expects to recognize over a weighted average period of 1.7 years.
As of September 30, 2024, there was a total of 0.9 million awards outstanding and total unamortized compensation cost of $36.0 million, net of estimated forfeitures, related to performance based RSUs ("PRSUs"), which the Company expects to recognize over a weighted average remaining period of 1.4 years. PRSUs are based on the maximum number of PRSUs issuable in the key executive grant agreements. The actual number of PRSUs awarded will be based on company performance criteria.
23
IRHYTHM TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Market-based PRSUs
The Company grants PRSUs to its key executives. PRSUs can be earned in accordance with the performance equity program for each respective grant.
In February 2024, the Company granted market-based PRSUs to senior executive officers. These PRSUs to be earned will be based on the cumulative annual growth rate ("CAGR") of annual unit volume calculated between fiscal year 2026 and fiscal year 2023 and measured against performance thresholds, as well as a relative comparison of the S&P Healthcare Equipment Select Industry Index to the Company's Total Shareholder Return (“TSR”). The grant date fair value of the TSR was based on the expected term of 2.8 years, interest risk free rate of 4.4 %, implied volatility of 67.95 % and no dividend yield. These February 2024 awards are subject to the recipient senior executive officer's continued employment through the vesting date of March 16, 2027.
Options
As of September 30, 2024, the Company had a total of 0.3 million options outstanding. As of September 30, 2024, the options were fully vested.
Employee Stock Purchase Plan
As of September 30, 2024, the Company had $2.6 million of unrecognized compensation expense that will be recognized over a weighted average period of 0.6 years.
12. NET LOSS PER SHARE
As the Company had net losses for the three and nine months ended September 30, 2024 and 2023, all potential common shares were determined to be anti-dilutive. The following table sets forth the computation of the basic and diluted net loss per share during the three and nine months ended September 30, 2024 and 2023 (in thousands, except per share data):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares used to compute net loss per common share, basic and diluted | |||||||||||||||||||||||
| Net loss per common share, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The Company applies the if-converted method in computing the effect of the Company's senior convertible notes on diluted net income per share. For periods in which the Company reports net income, the numerator of the diluted per share computation is adjusted for interest expense and amortization of debt issuance costs, net of tax, and the denominator is adjusted for the weighted average number of shares into which each of the Company’s senior convertible notes could be converted. The effect is only included in the calculation of diluted net income per share for those senior convertible notes which reduce net income per share.
The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per common share for the three and nine months ended September 30, 2024 and 2023 because their inclusion would be anti-dilutive (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Options to purchase common stock | |||||||||||||||||||||||
RSUs and PRSUs1 | |||||||||||||||||||||||
Senior convertible notes | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
1PRSUs are based on the maximum number of PRSUs in the key executive grant agreements. The actual number of PRSUs awarded will be based on company performance criteria and relative TSR, as discussed in Note 11, Stock-Based Compensation.
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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 condensed consolidated financial statements and related notes included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this Quarterly Report on Form 10-Q entitled “Risk Factors."
Overview
We are a leading digital healthcare company that creates trusted solutions that detect, predict, and prevent disease. Our principal business is the design, development, and commercialization of device-based technology to provide remote cardiac monitoring services that we believe allow clinicians to diagnose certain arrhythmias quicker and with greater efficiency than other services that rely on traditional technology.
Each Zio System combines an FDA-cleared and CE-marked, wire-free, patch-based, 14-day wearable biosensor that continuously records ECG data with a proprietary, FDA-cleared, CE-marked cloud-based data analytic software to help physicians monitor patients and diagnose arrhythmias. Since receiving FDA clearance, we have provided the Zio Services to over six million patients and have collected over 1.8 billion hours of curated heartbeat data.
Since first receiving clearance from FDA for our technology in 2009, we have supported physician and patient use of our technology and provided ambulatory cardiac monitoring services from our Medicare-enrolled IDTFs and with our qualified technicians. We have provided our Zio Services using our Zio Systems.
We receive revenue for the Zio Services primarily from third-party payors, which include contracted third-party payors and CMS. The remainder of our revenue comes from healthcare institutions, which are typically hospitals or private physician practices, who purchase the Zio Services from us directly. We rely on third-party billing partners to submit patient claims and collect from commercial payors, certain government agencies, and patients.
The following are Zio Services shown as a percentage of revenue:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Contracted third-party payors | 53% | 54% | 54% | 55% | |||||||||||||||||||
| Centers for Medicare and Medicaid | 24% | 25% | 24% | 25% | |||||||||||||||||||
| Healthcare institutions | 16% | 14% | 15% | 14% | |||||||||||||||||||
| Non-contracted third-party payors | 7% | 7% | 7% | 6% | |||||||||||||||||||
Key Business Metric
Non-GAAP Financial Measure
Adjusted EBITDA is a key measure we use to assess our financial performance and it is also used for internal planning and forecasting purposes. We believe Adjusted EBITDA is helpful to investors, analysts, and other interested parties because it can assist in providing a more consistent and comparable overview of our operational performance across our historical financial periods. In addition, this measure is frequently used by analysts, investors, and other interested parties to evaluate and assess performance.
We define Adjusted EBITDA for a particular period as net loss before income tax provision, depreciation and amortization, interest expense, interest income and as further adjusted for stock-based compensation expense, changes in fair value of strategic investments, impairment and restructuring charges, business transformation costs, and loss on extinguishment of debt. Business transformation costs include costs associated with professional services, employee termination and relocation, third-party merger and acquisition, integration, and other costs to augment and restructure the organization, inclusive of both outsourced and offshore resources.
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Adjusted EBITDA is a non-GAAP financial measure and is presented for supplemental informational purposes only and should not be considered as an alternative or substitute to financial information presented in accordance with GAAP. This measure has certain limitations in that it does not include the impact of certain expenses that are reflected in our unaudited condensed consolidated statements of operations that are necessary to run our business. We may identify additional charges and gains to exclude from Adjusted EBITDA that are significant in nature which may impact period to period comparability and do not represent the ongoing results of the business. Other companies, including other companies in our industry, may not use this measure or may calculate this measure differently than as presented in this Quarterly Report on Form 10-Q, limiting its usefulness as a comparative measure.
The following table presents a reconciliation of Net loss, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted EBITDA (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Net loss1 | $ | (46,182) | $ | (27,116) | $ | (111,956) | $ | (84,707) | |||||||||||||||
| Interest expense | 3,329 | 927 | 9,501 | 2,709 | |||||||||||||||||||
Interest income | (6,456) | (1,717) | (16,198) | (4,619) | |||||||||||||||||||
Changes in fair value of strategic investments | (1,059) | — | (1,059) | — | |||||||||||||||||||
| Income tax provision | 188 | 195 | 414 | 495 | |||||||||||||||||||
| Depreciation and amortization | 5,135 | 4,067 | 15,426 | 11,434 | |||||||||||||||||||
| Stock-based compensation | 17,158 | 21,008 | 59,970 | 53,358 | |||||||||||||||||||
Impairment charges | 641 | — | 641 | — | |||||||||||||||||||
| Business transformation costs | 7,360 | 2,999 | 8,656 | 14,094 | |||||||||||||||||||
| Loss on extinguishment of debt | — | — | 7,589 | — | |||||||||||||||||||
| Adjusted EBITDA | $ | (19,886) | $ | 363 | $ | (27,016) | $ | (7,236) | |||||||||||||||
1 Net loss for the three and nine months ended September 30, 2024 includes $32.1 million of acquired in-process research and development expense.
Macroeconomic Factors
Our future results of operations and liquidity could be materially adversely affected by macroeconomic factors contributing to delays in payments of outstanding receivables, supply chain disruptions, including shortages and inflationary pressure, uncertain or reduced demand, and the impact of any initiatives or programs that we may undertake to address financial and operational challenges faced by our customers.
The current macroeconomic environment is impacting our customers, both financially and operationally. Hospitals are experiencing staffing shortages and supply chain issues that could affect their ability to provide patient care. Additionally, hospitals are facing significant financial pressure as supply chain constraints and inflation drive up operating costs, rising interest rates make access to credit more expensive, unrealized losses decrease available cash reserves, and fiscal stimulus programs enacted during the COVID-19 pandemic continue to wind down. As a consequence of the financial pressures and decreased profitability, some hospitals have indicated that they are lowering their capital investment plans and tightening their operational budgets. Climate-related events, including the increasing frequency of extreme weather events, natural disasters, or other catastrophic events may cause damage or disruption to our domestic or global customers or our operations, which could have an adverse effect on our business, operating results, and financial condition.
We have adapted our Zio Services to meet the immediate needs of physicians, customers, and patients and significantly increased the utilization of our home enrollment service, which allows patients to receive and wear the single-use Zio patch without going to a healthcare facility.
Our hybrid work arrangements and decision to pursue a sublease for our leased San Francisco headquarters resulted in an impairment of its ROU asset and related leasehold improvements and furniture and fixtures during the years ended December 31, 2023 and 2022. As we continue to evaluate our global real estate footprint, we may incur additional impairment charges related to real property lease agreements.
Revenue
The majority of our revenue is derived from provision of our Zio Services to customers in the United States. We earn revenue from the provision of our Zio Services primarily from contracted third-party payors, CMS, and healthcare institutions. A small percentage of our revenue is from non-contracted third-party payors.
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We recognize revenue on an accrual basis based on estimates of the amount that will ultimately be realized, which considers the amount submitted for payment and the amount received. These estimates require significant judgment by management. In determining the amount to accrue for the Zio Services (including a delivered report), we consider factors such as claim payment history from both payors and patient, available reimbursement, including whether there is a contract between us and the payor or healthcare institution and historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments.
We typically experience reduced revenue during the third quarter, as well as during the year-end holiday season. We believe this is the result of physicians and patients taking vacations and patients electing to delay our monitoring services during the summer months or holidays. Revenue may be impacted by the outcome of adjudications with contracted and non-contracted payors, as well as changes in CMS reimbursement rates like we experienced with final, lower rates being established for our Zio Services as of January 1, 2024. Clinical capacity limitations may also restrict our ability to complete the performance obligations to achieve revenue recognition.
Cost of Revenue
Cost of revenue includes direct labor, material costs, equipment and infrastructure expenses, amortization of internal-use software, allocated overhead, royalties, and shipping and handling. Direct labor includes payroll-related costs including stock-based compensation involved in manufacturing, clinical data curation, and customer service. Material costs include both the disposable materials costs of the Zio patches and amortization of the re-usable printed circuit board assemblies ("PCBAs"). Each Zio XT patch and Zio Monitor patch includes a PCBA, and each Zio AT patch includes a PCBA and gateway board, the cost of which is amortized over the expected useful life of the board. We expect cost of revenue to increase in absolute dollars as our revenue increases due to increased direct labor, direct materials, and variable spending, as well as amortization of internal-use software, partially offset by economies of scale in relation to fixed costs such as overhead and facilities costs.
Our gross margin has been and will continue to be affected by a variety of factors, including increased contracting with third-party payors and institutional providers. We have in the past been able to increase our pricing as third-party payors become more familiar with the benefits of the Zio Services and move to contracted pricing arrangements. We expect increases to the cost of revenues due to increases to materials and electronics components pricing, labor rates, shipping rates, amortization of capitalized internal-use software, and increases in the general level of inflation, partially offset by reduced costs from obtaining volume purchase discounts for our material costs, implementing scan-time algorithms and process improvements, automating manufacturing assembly and packaging, and through software-driven and other workflow enhancements to reduce labor costs.
Research and Development Expenses
We expense research and development costs as they are incurred. Research and development expenses include payroll-related costs, including stock-based compensation, consulting services, clinical studies, laboratory supplies and allocated facility overhead costs. In addition, we expense milestone payments, when probable, for the Development Agreement with Verily. We expect our research and development costs to increase in absolute dollars as we hire additional personnel to develop new product and service offerings, product enhancements, and clinical evidence.
Acquired In-Process Research and Development Expenses
Our in-process research and development acquired in an asset acquisition for use in research and development activities with no alternative future use is expensed in the condensed consolidated statements of operations on the acquisition date.
Selling, General and Administrative Expenses
Our sales and marketing expenses consist of payroll-related costs, including stock-based compensation, sales commissions, travel expenses, consulting, public relations costs, direct marketing, tradeshow and promotional expenses, and allocated facility overhead costs.
Our general and administrative expenses consist primarily of payroll-related costs for executive, finance, legal and administrative personnel, including stock-based compensation. Other significant expenses include professional fees for legal and accounting services, consulting fees, recruiting fees, bad debt expense, third-party patient claims processing fees, business transformation, and travel expenses.
Interest Income
Interest income consists of interest income received on our cash and cash equivalents, marketable securities, and other investments.
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Interest Expense
Interest expense is attributable to borrowings under our loan agreements and 2029 Notes. See Note 8, Debt, in the notes to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our debt.
Other Income (Expense), Net
Other income (expense), net consists primarily of changes in fair value of our strategic loan and equity investments, as well as realized and unrealized foreign currency exchange gains or losses.
Loss on Extinguishment of Debt
Loss on extinguishment of debt reflects the losses incurred in the early repayment of debt. See Note 8, Debt, in the notes to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our loss on extinguishment of debt.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2024 and 2023
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ Change | % Change | 2024 | 2023 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
(in thousands, except percentages) * | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenue, net | $ | 147,538 | $ | 124,604 | $ | 22,934 | 18 | % | $ | 427,514 | $ | 360,170 | $ | 67,344 | 19 | % | |||||||||||||||||||||||||||||||
| Cost of revenue | 46,062 | 42,130 | 3,932 | 9 | % | 135,051 | 115,790 | 19,261 | 17 | % | |||||||||||||||||||||||||||||||||||||
| Gross profit | 101,476 | 82,474 | 19,002 | 23 | % | 292,463 | 244,380 | 48,083 | 20 | % | |||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | 15,694 | 16,309 | (615) | (4) | % | 52,378 | 44,828 | 7,550 | 17 | % | |||||||||||||||||||||||||||||||||||||
| Acquired in-process research and development | 32,069 | — | 32,069 | N/M | 32,069 | — | 32,069 | N/M | |||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 103,375 | 93,768 | 9,607 | 10 | % | 318,797 | 285,531 | 33,266 | 12 | % | |||||||||||||||||||||||||||||||||||||
Impairment charges | 641 | — | 641 | N/M | 641 | — | 641 | N/M | |||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 151,779 | 110,077 | 41,702 | 38 | % | 403,885 | 330,359 | 73,526 | 22 | % | |||||||||||||||||||||||||||||||||||||
| Loss from operations | (50,303) | (27,603) | (22,700) | 82 | % | (111,422) | (85,979) | (25,443) | 30 | % | |||||||||||||||||||||||||||||||||||||
Interest and other income (expense), net: | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest income | 6,456 | 1,717 | 4,739 | 276 | % | 16,198 | 4,619 | 11,579 | 251 | % | |||||||||||||||||||||||||||||||||||||
| Interest expense | (3,329) | (927) | (2,402) | 259 | % | (9,501) | (2,709) | (6,792) | 251 | % | |||||||||||||||||||||||||||||||||||||
Loss on extinguishment of debt | — | — | — | N/M | (7,589) | — | (7,589) | N/M | |||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 1,182 | (108) | 1,290 | (1,194) | % | 772 | (143) | 915 | (640) | % | |||||||||||||||||||||||||||||||||||||
Total interest and other income (expense), net | 4,309 | 682 | 3,627 | 532 | % | (120) | 1,767 | (1,887) | (107) | % | |||||||||||||||||||||||||||||||||||||
| Loss before income taxes | (45,994) | (26,921) | (19,073) | 71 | % | (111,542) | (84,212) | (27,330) | 32 | % | |||||||||||||||||||||||||||||||||||||
| Income tax provision | 188 | 195 | (7) | (4) | % | 414 | 495 | (81) | (16) | % | |||||||||||||||||||||||||||||||||||||
| Net loss | $ | (46,182) | $ | (27,116) | $ | (19,066) | 70 | % | $ | (111,956) | $ | (84,707) | $ | (27,249) | 32 | % | |||||||||||||||||||||||||||||||
N/M - Not meaningful
* Certain numbers expressed may not sum due to rounding.
Revenue
Revenue increased by $22.9 million, or 18%, to $147.5 million during the three months ended September 30, 2024, as compared to $124.6 million during the three months ended September 30, 2023. Revenue increased by $67.3 million, or 19%, to $427.5 million during the nine months ended September 30, 2024, as compared to $360.2 million during the nine months ended September 30, 2023. For the three and nine months ended September 30, 2024, the increases in revenue were primarily attributable to increases in the volume of Zio Services resulting from increased demand. Average selling price remained relatively stable period over period.
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Cost of Revenue
Cost of revenue increased by $3.9 million, or 9%, to $46.1 million during the three months ended September 30, 2024, as compared to $42.1 million during the three months ended September 30, 2023. Cost of revenue increased by $19.3 million, or 17%, to $135.1 million during the nine months ended September 30, 2024, as compared to $115.8 million during the nine months ended September 30, 2023. The increase in cost of revenue was due primarily to increases in headcount-related costs associated with the increase in volume of Zio Services. For the three and nine months ended September 30, 2024, additional impacts to cost of revenue include an increase of approximately $1.3 million and $3.9 million, respectively, in amortization charges for Zio XT and Zio Monitor PCBAs in conjunction with the ongoing commercial launch of Zio Monitor, as well as an increase of approximately $0.5 million and $2.4 million, respectively, in amortization charges for internal-use software which support delivery of our services.
Research and Development Expenses
Research and development expenses decreased by $0.6 million, or 4%, to $15.7 million during three months ended September 30, 2024, as compared to $16.3 million during the three months ended September 30, 2023. Research and development expenses increased by $7.6 million, or 17%, to $52.4 million during the nine months ended September 30, 2024, as compared to $44.8 million during the nine months ended September 30, 2023. The decrease in research and development expenses during the three months ended September 30, 2024 was primarily related to lower headcount-related costs (including stock-based compensation). The increase in research and development expenses during the nine months ended September 30, 2024 was primarily due to higher headcount-related costs (including stock-based compensation), consulting costs to support regulatory and legal matters, and further development, enhancement and functionality of our current and future product offerings.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $9.6 million, or 10%, to $103.4 million during the three months ended September 30, 2024, as compared to $93.8 million during the three months ended September 30, 2023. Selling, general, and administrative expenses increased by $33.3 million, or 12%, to $318.8 million during the nine months ended September 30, 2024, as compared to $285.5 million during the nine months ended September 30, 2023. For the three months ended September 30, 2024, the increase was primarily attributable to third-party patient claims processing fees, legal and professional fees, and patient credit loss provisions, offset by a reduction of stock-based compensation expense. For the nine months ended September 30, 2024, the increase was primarily attributable to third-party patient claims processing fees, stock-based compensation expense, and legal fees, offset by reductions in professional fees to support scaling the organization. During the three and nine months ended September 30, 2024, we incurred $7.4 million and $8.7 million of business transformation costs, respectively, primarily related to severance, professional fees, and third-party merger and acquisition fees. During the three and nine months ended September 30, 2023, we incurred $3.0 million and $14.1 million of business transformation costs, respectively, primarily related to severance and professional fees, to support growth in our operations.
Impairment Charges
During the three and nine months ended September 30, 2024, the Company recorded an impairment charge of $0.6 million related to internal-use software in development not expected to be completed.
Acquired In-Process Research and Development
Acquired IPR&D expense was $32.1 million during the three and nine months ended September 30, 2024. The expense was related to the Technology License Agreement (the “License Agreement”) we entered into with BioIntelliSense, Inc. (“BioIS”) during the third quarter of 2024. See Note 7, Commitments and Contingencies, in the notes to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details.
Interest Income
Interest income increased by $4.7 million to $6.5 million during the three months ended September 30, 2024, as compared to $1.7 million during the three months ended September 30, 2023. Interest income increased by $11.6 million to $16.2 million during the nine months ended September 30, 2024, as compared to $4.6 million during the nine months ended September 30, 2023. The increase was attributable to higher market interest rates earned from our cash and cash equivalents and marketable securities, an increase in the average invested balances during the three and nine months ended September 30, 2024, as compared to the same periods in 2023, primarily as a result of the borrowing under the 2029 Notes in March 2024.
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Interest Expense
Interest expense increased by $2.4 million to $3.3 million during the three months ended September 30, 2024, as compared to $0.9 million during the three months ended September 30, 2023. Interest expense increased by $6.8 million to $9.5 million during the nine months ended September 30, 2024, as compared to $2.7 million during the nine months ended September 30, 2023. The increase in interest expense was primarily attributable to the $75.0 million Braidwell Term Loan Facility borrowed and repaid during the first quarter of 2024, as well as the $661.3 million 2029 Notes borrowed in March 2024.
Other Income (Expense), Net
Other income (expense), net increased by $1.3 million to $1.2 million during the three months ended September 30, 2024, as compared to other income (expense), net of ($0.1 million) during the three months ended September 30, 2023. Other income (expense), net increased by $0.9 million to $0.8 million during the nine months ended September 30, 2024, as compared to other income (expense), net of ($0.1 million) during the nine months ended September 30, 2023. The increases were primarily attributable to the changes in the fair value of our strategic debt and equity investments recognized during the three months ended September 30, 2024.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was nil and $7.6 million for the three and nine months ended September 30, 2024, respectively. The loss was related to the early extinguishment of both the SVB Loan Agreement and the Braidwell Term Loan Facility during the first quarter of 2024. See Note 8, Debt, in the notes to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for details of our financing activities.
Liquidity and Capital Resources
Overview
As of September 30, 2024, we had cash and cash equivalents of $519.5 million, marketable securities of $2.5 million, and accounts receivable of $77.4 million, with a significant portion of our cash and cash equivalents balance deposited within our interest-bearing bank concentration accounts. We continuously review our liquidity and anticipated capital requirements in light of the significant uncertainty created by the current macroeconomic environment, including inflation, interest rate volatility, and potential instability in the global banking system. We intend to continue to make investments to support our business, which may require us to engage in equity or debt financings to secure additional funds. During the first quarter of 2024, we experienced a temporary delay in the billing of our contracted and non-contracted payer customers, performed by our third-party claims processing vendor. The delay was due to a cybersecurity incident experienced by Change Healthcare, a division of UnitedHealth Group, which our third-party vendor engages for services relating to billing and collections. While we substantially cleared the billing backlog as of the end of the first quarter of 2024, the delay in billing resulted in a temporary delay in our cash collections. During the second and third quarters of 2024, we received a significant portion of our cash collections from the delayed billings. We believe that our current cash, cash equivalents, and marketable securities balances, together with income to be derived from the sales of our Zio Services, will be sufficient to meet our liquidity requirements for at least the next 12 months.
Under the terms of the Development Agreement with Verily, we agreed to make milestone payments to Verily up to an aggregate of $12.75 million upon achievement of various development and regulatory milestones. We have achieved milestones tied to payments totaling $11.0 million through September 30, 2024, and may make additional milestone payments of $1.75 million, subject to the achievement of specified milestones.
On August 30, 2024, we entered into a Technology License Agreement (the “License Agreement”) with BioIS, pursuant to which (i) we will receive a perpetual fully paid up license to certain of BioIS’ intellectual property, technology and products for research, development and commercialization of potential next generation products and services in certain fields of use, including an exclusive license to develop and commercialize pulse oximetry, accelerometry, and trending non-invasive blood pressure technologies for use within our ambulatory cardiac monitoring products and services, and (ii) iRhythm and BioIS agreed to negotiate in good faith a supply agreement for pulse oximetry hardware.
Under the terms of the License Agreement, during the third quarter of 2024 we paid BioIS an upfront fee of $15.0 million in cash consideration. In connection with the License Agreement, we also purchased an aggregate of $40.0 million of convertible promissory notes from BioIS of which $20.0 million of the convertible promissory notes ("Milestone Notes") were designated for satisfaction of the Company's regulatory milestone payment obligations. The Milestone Notes, plus accrued and unpaid interest, if any, shall be cancelled, if outstanding, upon the achievement of the regulatory milestones up through December 31, 2026.
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The following table summarizes our cash flows for the periods indicated (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
Net cash used in operating activities | $ | (15,842) | $ | (34,129) | |||||||
Net cash used in investing activities | (824) | (2,609) | |||||||||
Net cash provided by financing activities | 508,394 | 5,352 | |||||||||
Operating Activities
During the nine months ended September 30, 2024, cash used in operating activities was $15.8 million, a decrease of $18.3 million, as compared to cash used in operating activities of $34.1 million during the nine months ended September 30, 2023. The reduction in cash used in operating activities was primarily attributable to favorable impacts from decreases in prepaid and other current assets, and a reduction in other long-term assets primarily from lower levels of purchases of PCBAs. Additionally, timing of collections associated with our accounts receivable, offset with the timing of payments associated with our accounts payable and accrued liabilities, is further contributing to our net usage levels of cash in operations.
Investing Activities
During the nine months ended September 30, 2024, cash used in investing activities was $0.8 million, an decrease of $1.8 million, as compared to cash used by investing activities of $2.6 million during the nine months ended September 30, 2023. The decrease was primarily attributable to a net increase in the change in marketable securities of $69.0 million. This was offset by an increase of $52.0 million in cash used for the purchases of strategic investments, as well as $15.0 million of acquired in-process research and development from BioIS, during the nine months ended September 30, 2024.
Financing Activities
During the nine months ended September 30, 2024, cash provided by financing activities was $508.4 million, an increase of $503.0 million as compared to $5.4 million during the nine months ended September 30, 2023. The increase was primarily attributed to $661.3 million in proceeds from the issuance of our 2029 Notes. The increase was offset by $37.8 million associated with the payment of the SVB Loan Agreement and related termination costs, payment of $5.6 million associated with the Braidwell Term Loan Facility debt issuance and termination costs, payment of $17.4 million associated with debt issuance costs for our 2029 Notes, payment of $72.4 million for the purchase of the 2029 Capped Calls, and payment of $25.0 million for the repurchase of shares of our common stock.
1.50% Senior Convertible Notes due 2029
On March 7, 2024, we completed an offering of $661.3 million aggregate principal amount of unsecured senior convertible notes with a stated interest rate of 1.50% and a maturity date of September 1, 2029 (the “2029 Notes”). The proceeds include the full exercise of the option granted by us to the initial purchasers of the 2029 Notes to purchase up to an additional $86.3 million aggregate principal amount of notes. Interest on the 2029 Notes is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2024. The net proceeds from the offering, after deducting initial purchasers’ discounts and estimated costs directly related to the offering, were $643.8 million. The initial conversion rate of the 2029 Notes is 6.7927 shares per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $147.22 per share, subject to adjustments. The 2029 Notes may be settled in cash, stock, or a combination thereof, solely at our discretion.
We used approximately $72.4 million of the net proceeds from the offering to pay the cost of the 2029 Capped Calls, as described below. In addition, we used approximately $80.2 million of the net proceeds from the offering for the repayment in full of the indebtedness outstanding from the Initial Tranche of the Braidwell Term Loan Facility (as each such term is defined below). We also used approximately $25.0 million of the net proceeds from the offering to repurchase 229,252 shares of our common stock at a purchase price of $109.05 per share in privately negotiated transactions effected through one of the initial purchasers or its affiliate. These repurchases could increase (or reduce the size of any decrease in) the market price of our common stock, and could result in a higher effective conversion price for the 2029 Notes. We intend to use the remainder of the net proceeds from the offering for general corporate purposes.
No principal payments are due on the 2029 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the indenture relating to the 2029 Notes includes customary terms and covenants, including certain events of default after which the 2029 Notes may be due and payable immediately.
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In connection with the offering of the 2029 Notes, we entered into the privately negotiated capped call transactions (the “2029 Capped Calls”) with certain financial institutions. The 2029 Capped Calls will cover, subject to anti-dilution adjustments substantially similar to those applicable to the 2029 Notes, the number of shares of our common stock that will initially underlie the 2029 Notes. The 2029 Capped Calls are expected generally to reduce potential dilution to our common stock upon conversion of the 2029 Notes and/or offset any cash payments that we could be required to make in excess of the principal amount of converted 2029 Notes, as the case may be, with such reduction and/or offset subject to a cap. The 2029 Capped Calls have an initial cap price of $218.10 per share, subject to adjustments, which represents a premium of 100% over the closing price of our common stock of $109.05 per share on the Nasdaq Global Select Market on March 4, 2024.
Braidwell Debt
On January 3, 2024 (the “Closing Date”), we entered into the Credit, Security and Guaranty Agreement (the “Braidwell Credit Agreement”) with Braidwell Transactions Holdings LLC – Series 5 (“Braidwell”), which provided for a senior secured term loan in an aggregate principal amount of up to $150.0 million (the “Braidwell Term Loan Facility”). An initial tranche of $75.0 million (“Initial Loan”) was funded on the Closing Date. An additional tranche of $75.0 million was accessible through the one year anniversary of the Closing Date, so long as we satisfied certain customary conditions.
Our net proceeds from the Initial Loan were approximately $35 million, after deducting costs, fees and expenses, and repayment of our existing term loan from Silicon Valley Bank, as discussed below.
On March 7, 2024, in conjunction with the issuance of the 2029 Notes, we used approximately $80.2 million of the net proceeds for the repayment in full of the $75.0 million outstanding Initial Loan and $5.2 million for interest, fees and expenses associated with terminating the Braidwell Credit Agreement.
SVB Term Loan
In October 2018, we entered into the Third Amended and Restated Loan and Security Agreement ("SVB Loan Agreement") with Silicon Valley Bank ("SVB"). Under the SVB Loan Agreement, we had borrowed $35.0 million and had made repayments through March 2022, at which time the outstanding balance was $18.5 million.
On March 28, 2022, we entered into a Second Amendment (the “2022 Amendment”) to our SVB Loan Agreement which provided for a term loans facility in the aggregate principal amount of up to $75.0 million (the “2022 Term Loans”), of which $35.0 million was borrowed at closing and a portion of the proceeds was used to pay in full the outstanding balance of $18.5 million under the SVB Loan Agreement. None of the remaining $40.0 million of the 2022 Term Loans was borrowed up through December 31, 2023.
The 2022 Amendment also amended the terms of the revolving credit line under the SVB Loan Agreement, which provided for an aggregate principal amount of $25.0 million.
On January 3, 2024, in connection with the entry into the Braidwell Credit Agreement, we used approximately $37.8 million of the net proceeds for the repayment in full of the $35.0 million outstanding principal balance as well as interest, fees and expenses associated with terminating the agreement. Upon termination of the SVB Loan Agreement, SVB’s security interest in our assets and property was released. We continue to hold $8.4 million in letters of credit with SVB, securing them with cash on deposit.
Contractual Obligations
Our contractual obligations as of December 31, 2023, are presented in our Annual Report on Form 10-K filed with the SEC on February 22, 2024. There were no significant changes to our lease obligations during the nine months ended September 30, 2024. As of September 30, 2024, we had approximately $43.4 million of open purchase orders and contractual obligations in the ordinary course of business, the majority of which are due within one year. See Note 8, Debt, in the notes to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for changes in our debt obligations during the nine months ended September 30, 2024.
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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Updates to our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, in the notes to our unaudited condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q. The critical accounting estimates that are most critical to a full understanding and evaluation of our reported financial results are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. There were no material changes to our critical accounting estimates during the nine months ended September 30, 2024.
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 marketable securities of $522.0 million and $133.8 million as of September 30, 2024, and December 31, 2023, respectively, which consisted of bank deposits, money market funds and U.S. government securities. Such interest-earning instruments carry a degree of interest rate risk.
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 would have had a $0.6 million and $1.6 million impact to interest income for the three and nine months ended September 30, 2024, respectively. For the three and nine months ended September 30, 2023, a hypothetical 10% change in interest rates would have had an immaterial and $0.5 million impact to interest income, respectively.
As of September 30, 2024, we had $661.3 million in outstanding aggregate principal amount of fixed rate debt relating to our 2029 Notes. Accordingly, we do not have economic interest rate exposure on the 2029 Notes. However, changes in interest rates could impact the fair market value of the 2029 Notes. Generally, the fair market value of the fixed interest rate of the 2029 Notes will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of our 2029 Notes as of September 30, 2024 was $601.8 million.
Market Price Sensitive Instruments
The 2029 Capped Calls are expected generally to reduce potential dilution to our common stock upon conversion of the 2029 Notes and/or offset any cash payments that we could be required to make in excess of the principal amount of converted 2029 Notes, with such reduction and/or offset subject to a cap. See Note 8, Debt, in the notes to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our debt.
Foreign Currency Exchange Rate Sensitivity
As of September 30, 2024, there had not been a material change in any of the foreign currency risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) (principal executive officer) and Chief Financial Officer (“CFO”) (principal financial officer), as appropriate to allow for timely decisions regarding required disclosure. 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, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a under the Exchange Act, our management, including our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and our CFO have concluded that our disclosure controls and procedures are effective at the reasonable assurance level as of September 30, 2024.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the three months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override of the controls. Projections of any evaluation of controls effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with policies or procedures.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in claims and legal proceedings or investigations, that arise in the ordinary course of business. Such matters could have an adverse impact on our reputation, business, and financial condition and divert the attention of our management from the operation of our business. These matters are subject to many uncertainties and outcomes that are not predictable.
On February 1, 2021, a putative class action lawsuit was filed in the United States District Court for the Northern District of California (the "Court") alleging that we and our former Chief Executive Officer, Kevin M. King, violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder. On August 2, 2021, the lead plaintiff filed an amended complaint, and filed a further amended complaint on September 24, 2021. The amended complaint names as defendants, in addition to us and Mr. King, our former Chief Executive Officer, Michael J. Coyle, and former Chief Financial Officer and former Chief Operating Officer, Douglas J. Devine. The purported class in the amended complaint includes all persons who purchased or acquired our common stock between August 4, 2020 and July 13, 2021, and seeks unspecified damages purportedly sustained by the class. On October 27, 2021, we filed a motion to dismiss, which the Court granted on March 31, 2022, entering judgment in favor of us and the other defendants. On April 29, 2022, the original named plaintiff appealed to the Ninth Circuit Court of Appeals. On October 11, 2023, after briefing by the parties and oral argument, the Ninth Circuit dismissed the appeal for lack of jurisdiction. The appellant filed a petition for rehearing en banc, which was denied on December 6, 2023. On April 16, 2024, the original named plaintiff appealed the Ninth Circuit’s decision regarding jurisdiction to the United States Supreme Court (the “Supreme Court”) and, on May 20, 2024, we waived our right to provide a statement of opposition with respect to the issue of jurisdiction. On June 4, 2024, the Supreme Court requested we provide a statement of opposition, which was due August 2, 2024. On October 7, 2024, the Supreme Court denied the plaintiff’s petition for appeal, thereby ending the matter.
On February 6, 2024, a second putative class action lawsuit was filed in the Court alleging that we and our current Chief Executive Officer, Quentin Blackford, our former Chief Financial Officer, Brice Bobzien, and our former Chief Financial Officer and former Chief Operating Officer, Mr. Devine violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder, and seeks unspecified damages purportedly sustained by the class. On July 19, 2024, an amended complaint was filed, naming us, Mr. Blackford, Mr. Bobzien, Mr. Devine, our Chief Commercial Officer Chad Patterson, our former Chief Technology Officer Mark Day, and our Chief Medical Officer, Chief Scientific Officer, and Executive Vice President of Product Innovation Mintu Turakhia as defendants. On October 7, 2024, a second amended complaint was also filed to include events from the recent FDA inspections.
We believe the above securities class action lawsuits to be without merit and plan to continue to defend ourselves vigorously.
On March 26, 2021, we received a grand jury subpoena from the U.S. Attorney’s Office for the Northern District of California requesting information related to communications with the Food and Drug Administration and our products and services. On September 13, 2021, we received a second subpoena requesting additional information. On April 4, 2023, we received a Subpoena Duces Tecum from the Consumer Protection Branch, Civil Division of the U.S. Department of Justice (the "DOJ", requesting production of various documents regarding our products and services. We are cooperating fully on these matters. On July 1, 2024, the DOJ filed with the United States District Court for the Northern District of California a Petition for Order to Show Cause and Application for Enforcement with respect to the production of certain documentary materials which we assert are protected by legal privileges. We intend to defend our privilege assertions over such materials in our response to the DOJ's petition.
On February 20, 2024, Welch Allyn, Inc. (“Welch Allyn”), a subsidiary of Hill-Rom Holdings, Inc. which was acquired by Baxter International, Inc., filed a lawsuit against us in the United States District Court for the District of Delaware, alleging that our Zio devices infringe certain of its patents and that the Company’s infringement was willful. We filed a motion to dismiss Welch Allyn’s willful infringement claims on April 11, 2024. Welch Allyn filed an amended complaint on April 24, 2024 that continued to allege that our Zio devices infringe certain of its patents and that our infringement was willful. We filed a motion to dismiss Welch Allyn’s willful infringement allegations found in the amended complaint on June 12, 2024. Welch Allyn seeks money damages and attorneys’ fees. We believe this lawsuit is without merit and plan to defend ourselves vigorously.
At this time, we are unable to predict the eventual scope, duration or outcome of the aforementioned proceedings. See also Part II, Item 1A “Risk Factors — Risks Related to Other Legal and Regulatory Matters” for more information on these matters.
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ITEM 1A. RISK FACTORS
Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. Before making a decision to invest in, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Quarterly Report on Form 10-Q, as well as the other information we file with the SEC. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that case, the value of our common stock could decline and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business, financial condition and results of operations. Refer to our disclaimer regarding forward-looking statements at the beginning of "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2 of this Quarterly Report.
Summary of Risk Factors
•Reimbursement by Medicare is highly regulated and subject to change, and our failure to comply with applicable regulations, including regulations not designed for remote diagnostic tests like our Zio Services, could prevent us from receiving reimbursement under the Medicare program and some commercial payors, subject us to penalties, and adversely affect our reputation, business, and results of operations.
•If reimbursement or other payment for our Zio Services is reduced or modified in the United States, including through cost containment measures or changes to policies with respect to coding, coverage, and pricing, our business could suffer.
•If we are unable to expand the number of third-party commercial payors with which we contract or expand coverage for existing third-party commercial payors, our commercial success could be impacted.
•Our revenue relies on our Zio Services, which are currently our only offerings. If our Zio Services or future service offerings fail to gain, or lose, market acceptance, our business will suffer.
•The market for remote cardiac monitoring solutions is highly competitive. If our competitors are able to develop or market monitoring devices and services that are more effective, or gain greater acceptance in the marketplace, than any services and related devices we develop, our commercial opportunities will be reduced or eliminated.
•Billing for our Zio Services is complex and highly regulated, and we must dedicate substantial time and resources to the billing process. Failure to comply with legal, regulatory, or contractual requirements applicable to our billing and collection activities could subject us to penalties, and adversely affect our reputation, business and results of operations.
•Audits or denials of our claims by government agencies or payors could expose us to recoupment, regulatory scrutiny, and penalties.
•Although our current Zio Systems are comprised of medical devices that have received FDA marketing authorization (510(k) clearance) as well as regulatory certifications in the European Union, the United Kingdom, and Japan, we may regularly engage in product enhancements and in iterative changes to existing products, as well as seek to develop new technology or use of technology for new indications for use. These medical device developments may trigger further regulatory reviews and the results of those reviews are unpredictable.
•We are subject to extensive compliance requirements for the quality, design, safety, performance, and post-market surveillance of the medical devices we manufacture for use in our Zio Services, and for vigilance on complaint-handling, escalation, assessment, and reporting of adverse events and malfunctions. A wide range of quality, risk, regulatory, or safety matters could trigger the need for a recall, a hold on the distribution of the marketed product, or other corrective actions to marketed products.
•Because of the patient populations for which our services are provided and the complexity of the healthcare environment in which we operate, a high degree of medical and clinical input may be necessary to evaluate complaints and adverse events, and in some cases, there may be disagreement over whether our services or the medical devices used in our services may have caused or contributed to an adverse event.
•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.
•We may face risks associated with acquisitions of companies, products, and technologies and our business could be harmed if we are unable to address these risks.
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•Our use of third-party service providers or company resources located outside the United States to support certain customer care, clinical, and other operations of our independent diagnostic testing facilities ("IDTFs") may present challenges, and if we are ineffective in limiting work performed by these service providers or company resources consistent with applicable regulations or our contractual agreements with commercial payors, we may be subject to penalties or experience loss of revenue.
•If we fail to comply with medical device, healthcare, and other governmental regulations, we could face substantial penalties and our business, results of operations, and financial condition could be adversely affected.
•Changes in applicable laws or regulations or the interpretation or enforcement policies of regulators governing our IDTFs and Zio Services may constrain or require us to restructure our operations or adapt certain business strategies, which may harm our revenue and operating results.
•Our business relies on orders from licensed healthcare providers, and the continuing clinical acceptance and adoption of our Zio Services depends upon strong working relationships with healthcare providers, including physicians. These relationships, interactions, and arrangements are subject to a high degree of scrutiny by government regulators and enforcement bodies.
•Our communications with healthcare stakeholders – physicians and other healthcare professionals, payors and similar entities, as well as patients and lay caregivers – are subject to a high degree of scrutiny for compliance with a wide range of laws and regulations. Continuing or increasing our sales and marketing and other external communication efforts may expose us to additional risk of being alleged or deemed to be non-compliant by regulators, enforcement authorities, or competitors.
•In the future we may identify additional material weaknesses or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
•Our financial results may fluctuate significantly from quarter-to-quarter and may not fully reflect the underlying performance of our business.
•We are subject to legal proceedings and government investigations that could adversely affect our business, financial condition, and results of operations.
•We are subject to complex and evolving U.S. and foreign laws and regulations and other requirements regarding privacy, data protection, security, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in customer growth or engagement, or otherwise harm our business.
•If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
•Our stock price is highly volatile and investing in our stock involves a high degree of risk, which could result in substantial losses for investors.
•Increasing our financial leverage could affect our operations and profitability.
Risks Related to Our Industry, Business and Operations
Reimbursement by Medicare is highly regulated and subject to change, and our failure to comply with applicable regulations, including regulations not designed for remote diagnostic tests like our Zio Services, could prevent us from receiving reimbursement under the Medicare program and some commercial payors, subject us to penalties, and adversely affect our reputation, business, and results of operations.
During the three and nine months ended September 30, 2024, we received approximately 24% of our total revenue from the Medicare program (inclusive of Medicare Advantage). The Medicare program is administered by CMS, which imposes extensive and detailed requirements on diagnostic services providers, including IDTFs. These requirements include, but are not limited to, rules that govern how we structure our relationships with physicians, how we operate our IDTFs and market our Zio Services, when we may perform diagnostic tests, and how and when we submit reimbursement claims. Our failure to comply with the applicable Medicare rules and requirements could result in discontinuation of our reimbursement under the Medicare program, a requirement to return funds already paid to us, civil monetary penalties, criminal penalties, and/or exclusion from the Medicare program, which would have a material adverse impact on our reputation, business, and results of operations.
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CMS has acknowledged that the IDTF regulations were designed for “traditional” IDTFs that administer tests to patients in-person, at a single point in time, and from a single location, and only recently has CMS initiated changes to the regulations to address IDTFs like ours that furnish “indirect tests” that do not require in-person interaction and involve technicians performing computer analyses offsite or at another location. The changes, however, do not address all gaps identified by CMS relating to IDTF operations and the Medicare billing requirements. For example, CMS has not addressed billing for remote diagnostic tests that are performed from one or more IDTF or other remote locations. Our failure to comply with the applicable Medicare regulations, or regulators’ disagreement with our interpretation of the regulations as applied to indirect tests, such as the Zio Services, could result in the discontinuation of our reimbursement under the Medicare program, a requirement to return funds already paid to us, civil monetary penalties, criminal penalties, and/or exclusion from the Medicare program.
In addition, many commercial payors require our IDTFs to maintain enrollment with the Medicare program as well as accreditation and certification with the Joint Commission. If we fail to obtain and maintain IDTF enrollment or accreditation and certification, our Zio Services may no longer be reimbursed by those commercial payors, which could have a material adverse impact on our reputation, business, and results of operations.
If reimbursement or other payment for our Zio Services is reduced or modified in the United States, including through cost containment measures or changes to policies with respect to coding, coverage, and pricing, our business could suffer.
We receive a substantial portion of our revenue from Medicare and third-party commercial payors with which we contract, and we cannot predict whether and to what extent existing reimbursement rates will continue to be available. If CMS or any of our key commercial payors reduce reimbursement rates for our Zio Services, our business, operating results, and prospects would be adversely affected.
CMS updates the reimbursement rates for diagnostic tests performed by IDTFs annually via the Medicare Physician Fee Schedule. Effective January 1, 2024, CMS updated the national payment rates for the CPT codes we use to report the long-term continuous monitoring services we perform with our Zio XT System and our Zio Monitor System: CPT codes 93247 (for wear-time of greater than 7 days and up to 15 days) and 93243 (for wear-time of greater than 48 hours and up to 7 days). On March 9, 2024, the Further Consolidated Appropriations Act, 2024, Pub. L. 118-47, was signed into law, which included an adjustment to the Medicare Physician Fee Schedule conversion factor for claims with dates of service after March 9, 2024. Based on the relative value units CMS assigned to CPT codes 93247 and 93243, from January 1, 2024 to March 8, 2024, the national reimbursement rates for our services were $230.52 and $219.71, respectively, and ranged from $231.34 to $326.79 and $220.51 to $311.46 for our Medicare-enrolled IDTF locations in Deerfield, Illinois, Houston, Texas, and San Francisco, California, when considering the geographic practice cost index for these locations. Currently, the national reimbursement rates for CPT codes 93247 and 93243 are $234.34 and $223.36, respectively, and range from $235.18 to $332.21 and from $224.16 to $316.62, respectively, for our IDTF locations.
On July 10, 2024, CMS released its CY 2025 Medicare Physician Fee Schedule proposed rule, which includes proposed updates to the pricing for the extended external ECG patch, medical magnetic tape recorder (SD339) supply item used to perform our services. Specifically, based on the public submission of invoices following publication of the CY 2024 Medicare Physician Fee Schedule final rule, CMS proposes to increase the price for the SD339 supply item from $260.35 to $292.50 (i.e., a 12% increase) and to increase the relative value units for CPT codes 93247 and 93243 by 3.4% and 4.5%, respectively. There is no guarantee, however, that this proposed increase will become final, or that other changes ultimately will not be adopted that negatively impact the overall reimbursement available for our services. For example, CMS also proposes to decrease the relative value units for CPT code 93229 by 5.6%. Because remote cardiac monitoring technology, including the Zio System, is rapidly evolving, there is a continuing risk that relative value units assigned, and reimbursement rates set, by CMS may not adequately reflect the value and expense of this technology and associated monitoring services, and CMS may reduce these rates in the future, which would adversely affect our financial results.
Additionally, commercial payors with which we contract may seek to reduce our reimbursement rate through further contract negotiations. For example, the actions taken by CMS in 2022 to establish national reimbursement rates for CPT Codes 93247 and 93243 effective January 1, 2023 reduced the Medicare reimbursement rates for these services performed at our Deerfield, Illinois location. Accordingly, we may observe certain commercial payors in this region seeking to adjust their reimbursement rates for these services as well.
In addition, our agreements with commercial payors typically allow either party to terminate the contract at any time by providing prior written notice, in accordance with the agreement, to the other party, which means our commercial payors may elect to terminate their contracts with us for any reason. A commercial payor who terminates or does not renew their contract with us may, or may not, alter their coverage for the type of services we provide. In the event any of our key commercial payors terminate their agreements with us, elect not to renew or enter into new agreements with us upon expiration of their current agreements, or do not renew or establish new agreements on terms as favorable as are currently contracted, our business, operating results, and prospects would be adversely affected.
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Finally, government and commercial payors have and may, in the future, consider healthcare policies and proposals intended to limit or reduce perceived increases in healthcare costs, including those that could significantly affect reimbursement for healthcare products such as our systems and services. These policies have included, and may in the future include: basing reimbursement policies and rates on clinical outcomes, the comparative effectiveness, and costs, of different treatment technologies and services, as well as other measures. Future significant changes in the healthcare systems in the United States or elsewhere could also have a negative impact on the demand for our current and future products and services. These include changes that may reduce reimbursement rates for our products and changes that may be proposed or implemented by the current or future laws or regulations.
If we are unable to expand the number of third-party commercial payors with which we contract or expand coverage for existing third-party commercial payors, our commercial success could be impacted.
There is significant uncertainty concerning third-party reimbursement of any new service until a contracted rate is established for that service with the commercial payor. Reimbursement by a commercial payor may depend on several factors, including, but not limited to, a payor’s determination that the ordered service is not experimental or investigational, medically necessary and appropriate for the specific patient, cost effective, supported by peer-reviewed publications, and accepted and used by physicians and other clinicians within their provider network.
Since each payor decides whether to establish a policy concerning reimbursement or to 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 commercial payors and supporting payors’ reimbursement determinations by demonstrating the clinical value of our Zio Services through studies and physician adoption, we may encounter several adverse consequences that could compromise the commercial success of our business. Such adverse consequences may include an inability to secure additional contracts with commercial payors, reluctance by physicians to order our Zio Services due to concerns that patients may face significant out-of-pocket expenses associated with an out-of-network IDTF, a decline in the amount that we are reimbursed for our services, less predictable revenue, and an increase in the efforts and resources necessary to obtain reimbursement for our services on a claim-by-claim basis.
Additionally, for our out-of-network or cash pay patients, we may be subject to state and federal surprise billing laws that impose limits on amounts that can be charged to such patients and/or the amount we can receive for out-of-network services from commercial payors as well as penalties for noncompliance. One such law, the federal No Surprises Act, requires covered providers to provide “good faith estimates” to uninsured and self-pay patients of their out-of-pocket responsibility and establishes a detailed and potentially costly independent dispute resolution process governing fee disputes between our IDTFs and payors. These laws and regulations may change and we anticipate these evolving, highly technical requirements may apply to our business in the future and could necessitate the dedication of additional resources to ensure compliance.
We report to third party payors the technical components of the remote cardiac monitoring services that are performed with our Zio Monitor, Zio XT, and Zio AT Systems using CPT codes established by the American Medical Association. These CPT codes are manufacturer- and technology-agnostic but describe general technical features required to support the diagnostic medical procedures represented by these billing codes. Given the nature of CPT codes, there is always some degree of risk for an entity that bills for its services that regulators or other third parties could assert that the CPT codes utilized were not appropriate, and recent events have the potential to increase the risk of questions or inquiry regarding our use of a specific CPT code.
The CPT codes used to report remote cardiac monitoring services, including those used to report our Zio Services, were drafted by the American Medical Association (“AMA”) in a manufacturer- and specific technology-agnostic manner. Regulators or other third parties could assert that our technology does not support certain diagnostic procedures described by the CPT codes that we currently use to report our Zio Services. For example, a regulator or other third party could assert that the Zio AT System cannot support MCT services, which could jeopardize our ability to submit claims for reimbursement for services utilizing our Zio AT System and may require us to evaluate whether we have received any overpayments that must be reported and returned to third-party payors. Certain language in a warning letter we received from FDA on May 25, 2023 could increase the risk of inquiries regarding our historical or current use of CPT code 93229. Consistent with the AMA’s definition of MCT and the technology categorization in FDA’s outpatient cardiac telemetry product code, the Zio AT System’s indications for use under our 510(k) clearance include uninterrupted ECG recording during normal day-to-day activities to capture, analyze, and report diagnostic information regarding asymptomatic arrhythmias, as well as other transient, non-critical symptoms (e.g., palpitations, pre-syncope, syncope, shortness of breath, or dizziness) for review by our IDTFs and escalation to the patient’s treating healthcare professional, consistent with the healthcare professional’s prescribed notification criteria, during the monitoring period.
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Our revenue relies on our Zio Services, which are currently our only offerings. If our Zio Services or future service offerings fail to gain, or lose, market acceptance, our business will suffer.
Our current revenue is dependent on orders for our Zio Services, and we expect that reimbursement for our Zio Services will account for substantially all our revenue for the foreseeable future. We are in various stages of research and development for other diagnostic screening solutions and new indications for our technology and our Zio Services; however, there can be no assurance that we will be able to successfully develop and commercialize any new services and related devices. Any new services may not be accepted by physicians or may merely replace revenue generated by our Zio Services and not generate additional revenue. If we have difficulty launching new services, 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 who may require a different type of marketing effort. If we are unable to increase orders for our Zio Services, expand reimbursement for our Zio Services, or successfully develop and commercialize new services and related devices, our revenue and our ability to achieve and sustain profitability would be impaired.
The market for remote cardiac monitoring solutions is highly competitive. If our competitors are able to develop or market monitoring devices and services that are more effective, or gain greater acceptance in the marketplace, than any services and related devices we develop, our commercial opportunities will be reduced or eliminated.
The market for remote cardiac monitoring products and services is competitive, characterized by rapid change resulting from technological advances, scientific discoveries, and other market activities of industry participants. Our Zio Services compete with a variety of products and services that provide alternatives for remote cardiac monitoring, including traditional, short-term Holter monitors and event 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 ordering physicians, recruiting and retaining qualified personnel, acquiring technology, and developing products and services that compete with our Zio Services and related devices. Our ability to compete effectively depends on our ability to distinguish our company and our Zio Services from our competitors and their products and services, and includes such factors as safety and effectiveness; acute and long-term outcomes; ease of use; price; physician, hospital, and clinic acceptance; and third-party reimbursement.
Our industry is subject to rapid change and is significantly affected by new product introductions, results of clinical research, corporate combinations, and other factors. Large competitors in the remote cardiac market include companies that sell standard Holter monitors including GE Healthcare, Philips Healthcare, Mortara Instrument, Inc., Spacelabs Healthcare Inc. and Welch Allyn Holdings, Inc. (acquired by Hill-Rom Holdings, Inc. which was acquired by Baxter International, Inc.). Additional competitors, such as BioTelemetry, Inc. (acquired by Royal Philips), Preventice Solutions, Inc. (acquired by Boston Scientific, Inc.), and Bardy Diagnostics, Inc. (acquired by Hill-Rom Holdings, Inc. which was acquired by Baxter International, Inc.) manufacture remote cardiac monitoring devices and also offer monitoring services. These companies have also developed other patch-based cardiac monitors that have received FDA and foreign regulatory clearances. There are also several small start-up companies trying to compete in the patch-based cardiac monitoring space, as well as several entering the patch-based cardiac monitoring market.
We have also 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., Fitbit and Samsung, among others, have added capabilities on their platforms to measure non-continuous ECG and to alert customers to the potential presence of irregular heartbeats suggestive of asymptomatic Afib. These competitors and potential competitors may introduce new products and services that more directly compete with our Zio Services and related devices.
Billing for our Zio Services is complex and highly regulated, and we must dedicate substantial time and resources to the billing process. Failure to comply with legal, regulatory, or contractual requirements applicable to our billing and collection activities could subject us to penalties, and adversely affect our reputation, business and results of operations.
Billing for diagnostic services is complex, highly regulated, time-consuming, and expensive, and failure to comply with legal or contractual requirements applicable to our billing and collection activities could subject us to penalties, and adversely affect our reputation, business and results of operations. Depending on the billing arrangement and applicable law, we bill several types of entities and payors, including federal healthcare programs, third-party commercial payors, healthcare providers, and healthcare institutions, which may have different billing requirements, coverage criteria, procedures, or expectations. We also bill insured patients for co-payments, co-insurance, and deductible amounts, as well as bill self-pay patients directly.
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Several factors make the billing and collection process uncertain, including differences between the submitted claim price for our Zio Services and the reimbursement rates of payors; compliance with complex federal and state regulations related to billing the Medicare and Medicaid programs and collecting co-payments, co-insurance, and deductible amounts from patients and other guarantors; the effect of patient co-payments, co-insurance, and deductible amounts, which may vary depending on the timing of the claim relative to the insured’s annual policy year; differences in coverage policies, criteria, and billing requirements among payors; and incorrect or missing patient history, indications, or billing information and delays in verifying and resolving the same. We also 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. We may also be adversely affected by the growth in patient responsibility accounts, as a result of increases in the adoption of plan structures, due to evolving health care policy and insurance landscapes, that shift greater responsibility for care to individuals through greater exclusions, prior authorizations, and co-payment and deductible amounts.
Additionally, our billing activities require us to implement compliance procedures and oversight, train and monitor our employees, subcontractors, and agents, and undertake internal review procedures to evaluate compliance with applicable laws, regulations, and internal policies. These activities require a tremendous dedication of resources and, as a result, we have engaged third-party vendors, such as XIFIN, Inc. (“XIFIN”) and OMH HealthEdge Holdings, Inc. (“Omega”), to undertake certain components of our billing and collections operations. We have substantially transitioned the overall processing of claims to Omega from XIFIN. The transition of this engagement is a time-consuming and costly process to which we are dedicating substantial resources. If our transition plans are ineffective or we are ineffective in executing the transition, we may experience delays or errors in our claims submission process, increased denials, and lost revenue, which would materially impact our operating results. While common in the healthcare industry, the outsourcing of billing and collections activities to third-party vendors requires diligent monitoring and oversight to ensure the completeness, accuracy, and propriety of the claims submitted to federal healthcare programs and other third-party commercial payors for our Zio Services. We may be held responsible by our regulators or payors for any acts, errors, or omissions by the third-party vendors engaged to perform billing and collections activities on our behalf.
The complexities we face related to billing for our Zio Services, and the related uncertainty in obtaining payment for our Zio Services, could negatively affect our revenue and cash flow, our ability to achieve profitability, and the consistency and comparability of our results of operations.
Audits or denials of our claims by government agencies or payors could expose us to recoupment, regulatory scrutiny, and penalties.
As an IDTF, we submit claims directly to, and receive reimbursement from, federal healthcare programs, including Medicare, as well as other third-party commercial payors for tests ordered by unaffiliated healthcare providers. These programs and payors, including contractors on their behalf, may conduct pre- and post-payment audits and reviews of claims submitted for reimbursement, including audits and reviews focused on the appropriateness of unaffiliated healthcare providers’ decisions to order a particular test furnished by our IDTF, which impact our claims. Further, the federal healthcare programs may impose suspensions on both payment and participation in response to allegations of fraud or other noncompliance.
Other controls imposed by CMS and commercial payors designed to reduce costs, commonly referred to as “utilization review,” may also 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 quality improvement organization review a sampling of claims for Medicare beneficiaries to assess the quality of care and appropriateness of the services provided. These quality improvement organizations may deny payment for services or assess fines and have the authority to recommend to CMS that a provider in substantial noncompliance with applicable Medicare requirements and quality standards be excluded from participation in the Medicare program. The Affordable Care Act also expands the use of prepayment review by Medicare Administrative Contractors by eliminating statutory restrictions on their use and, as a result, we except efforts to impose more stringent cost controls to continue. As a provider enrolled in federal healthcare programs, we expect to be subject to such audits and claims reviews in the future, which may result in suspensions or other restrictions on our ability to submit claims for our services, payment delays, overpayment recoupments, and claims denials, which would negatively impact our business, financial condition, and results of operations, and may jeopardize our participation in these federal healthcare programs.
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We are currently undertaking a transformation of our revenue cycle management function and we may fail to realize the anticipated benefits of these efforts. These activities involve significant time and resources, and our failure to execute these activities efficiently and effectively may cause our revenue and accounts receivable to be delayed or reduced and could have an adverse effect on our business and cause reputational harm.
We are undertaking a transformation of our revenue cycle management function, which transformation includes the engagement of service providers to support certain activities. The success of this plan depends on our ability to integrate these service providers in a timely manner to scale our operations to facilitate growth opportunities, without adversely affecting current revenues and accounts receivable. If we are not able to successfully achieve these objectives, the anticipated benefits of this transformation may not be realized fully or at all or may take longer to realize than expected. In addition, there is a significant degree of difficulty and management distraction inherent in the process of integrating with service providers. These difficulties include challenges supporting certain operations and activities with more than one service provider, integrating technologies (including IT systems and processes, procedures, policies and operations, and retaining key personnel). These activities may be complex and time-consuming and involve delays or additional and unforeseen expenses. The process of transitioning to these service providers, the integration process, and other disruptions may also disrupt our ongoing businesses or cause inconsistencies in standards, controls, procedures, and policies that could adversely affect our relationships with payors, patients, employees, and others. Any failure to execute these activities effectively and efficiently may cause our revenue and accounts receivable to be delayed or reduced and could have an adverse effect on our business and cause reputational harm.
Although our current Zio Systems are comprised of medical devices that have received FDA marketing authorization (510(k) clearance) as well as regulatory certifications in the EU and the UK, we may regularly engage in product enhancements and in iterative changes to existing products, as well as seek to develop new technology or use of technology for new indications for use. These medical device developments may trigger further regulatory reviews and the results of those reviews are unpredictable.
Before a new medical device or a new intended use for a medical device can be marketed in the United States, a company must first submit an application and receive either 510(k) clearance, De Novo marketing rights, or premarket approval from FDA, unless an exemption applies. All of these processes can be expensive, lengthy, and unpredictable. We may not be able to obtain the clearances or approvals we seek or may be unduly delayed in doing so, which could harm our business. 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) clearances to market our Zio Systems, our clearances can be revoked if safety, efficacy, or significant regulatory compliance problems develop. Even planned changes and improvements to devices and their uses can trigger the need for a new submission. FDA requirements dictate that we must evaluate potential changes and document our decision-making regarding the need for additional submissions and clearances or approvals. Unless effectively planned for in advance, our desired commercial timeline may be impacted.
Significant changes or modifications in design, components, method of manufacture, or the intended use or technological characteristics of our Zio Systems may require new or modified FDA marketing authorization, CE Mark certification (EU), or UKCA Mark certification (UK). In some instances, we have identified a need for, and sought and obtained new, 510(k) clearances from FDA for these changes or modifications.
As permitted by applicable law, FDA allows device manufacturers to internally analyze and document a decision that a new clearance or approval is viewed by the manufacturer as unnecessary. Accordingly, we have made certain changes and modifications to our Zio Systems in the past that we believe did not require additional clearances or approvals by FDA.
Such internal decisions are, however, subject to review by FDA, and may require additional action in the event FDA questions earlier internal decision-making. For example, FDA raised questions in the warning letter issued on May 25, 2023 regarding certain changes and modifications to the Zio AT System for which we did not make 510(k) submissions, and rather documented our analysis in letters to file. We have recently (following, and in alignment with, discussion with FDA) submitted an updated 510(k) to address Zio AT Device modifications that were, prior to our receipt of the warning letter, previously documented in letters to file.
In instances where FDA or an EU/UK Notified/Approved Body disagrees with our internal analysis and decision that a new or additional approval or marketing authorization or certification is not needed for any such modifications, we may be required to recall and/or stop the distribution of the impacted Zio System and/or correct the labeling for such Zio System. We may be required to submit a new marketing application or certification, which could require additional testing or other supporting data, a redesign of a product, or otherwise impact the provision of services. In these circumstances, the process may require engagement with regulators to resolve concerns and reach a resolution for a product, and we may be subject to significant enforcement actions.
We may not be able to obtain additional marketing authorizations in a timely fashion, or at all, which could harm our ability to introduce new or enhanced products in a timely manner and to meet market expectations for the provision of the services, which in turn could harm our future growth.
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We are subject to extensive compliance requirements for the quality, design, safety, performance, and post-market surveillance of the medical devices we manufacture for use in our Zio Services, and for vigilance on complaint-handling, escalation, assessment, and reporting of adverse events and malfunctions. A wide range of quality, risk, regulatory, or safety matters could trigger the need for a recall, a hold on the distribution of the marketed product, or other corrective actions to marketed products.
Our design and manufacturing facilities and processes and those of certain third-party suppliers are subject to FDA, state, and Notified/Approved Body regulatory inspections for compliance with various medical device regulations and standards, including the Quality System Regulation (“QSR”), also known as 21 CFR Part 820, European Union Medical Device Directive (“EU MDD”), New European Union's Medical Device Regulations (“EU MDR”), and UK Medical Device Regulations (“UK MDR”) requirements. Developing and maintaining a compliant quality system is time consuming and investment intensive. Requirements and standards may change and evolve over time, and we will need to adapt. Failure to maintain compliance with, or not fully complying with, the requirements of FDA and state regulators could result in enforcement actions, 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 full compliance with the requirements of EU MDD, EU MDR, and UK MDR could result in similar disruptions in these markets.
We are required to file various reports with FDA, and EU or UK regulators, including reports required by each jurisdiction’s adverse event, certain malfunctions, and field action reporting regulations. These reports are often required if our Zio System 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. They may also be reasonable, necessary, or prudent for a range of other reasons relating to the importance of gathering information in the post marketing setting and managing risk throughout the product lifecycle, or to address requests from regulators to increase or expand the scope of reporting. For example, in the fourth quarter of 2023, as part of our commitments following the FDA Form 483 observations and FDA warning letter issued on May 25, 2023, we retrospectively submitted certain Medical Device Reports (“MDRs”) to FDA. An increase in the reporting of events associated with the use of our products and services from us or others and any delays to the filing of reports may increase regulator and public scrutiny. Regulators may impose sanctions and we may be subject to product liability or regulatory enforcement actions, all of which could harm our business. These reports are typically publicly available information in most jurisdictions, including the United States. If we initiate a field action (whether a “correction” made relative to a device that remains in the field, which could be through a labeling or software update, or “removal” or “recall” and return of that device to us, or field advisory notices) to reduce a risk to health posed by our Zio System, we would be required to report the Correction or Removal to FDA and, in many cases, similar reports to other regulatory agencies.
For example, on September 28, 2022, we initiated a Customer Advisory Notice to Zio AT customers regarding a Zio AT labeling correction; the labeling changes involve additions and modifications to the Zio AT labeling precautions relating to the device’s maximum transmission limits during wear, and also to the need for healthcare providers to complete registration to initiate monitoring services. We reported this Customer Advisory Notice and related information to FDA under 21 C.F.R., Part 806 and FDA classified this field action as a Class II Recall following our initial 806 report. We have completed the distribution of the Advisory Notice to our identified impacted customers; and although the status remains open in FDA recall database, we requested the closure of this field action on March 31, 2023. This labeling correction followed our assessment of topics raised in the August 2022 FDA inspection focused on Zio AT. We were in dialogue with FDA in relation to the inspection process, and in connection with our Customer Advisory Notice and 806 report. FDA observation responses, field action or corrections and the 806 process can be unpredictable and can present regulatory and commercial risks and uncertainties relating to matters including product labeling, the scope and approach of the correction, and/or customer and patient perception of our technologies and services.
Depending on the reason for the correction or removal and the potential severity of the impact to patient safety or the effectiveness of the device, FDA may require differing degrees of communication to alert those who may be in possession of an impacted device. We would generally be subject to similar requirements in jurisdictions outside the United States where the Zio products are used. Furthermore, even if we adhere to regulatory standards and expectations in our corrective actions, the public nature of such actions can result in broader negative publicity and perceptions, which could harm our reputation.
If we assess a potential quality issue or complaint or product enhancement 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 or course of action, we may be subject to a range of potential regulatory enforcement actions or required to take corrective actions, which depending on their nature and scope could harm our business.
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Additionally, on May 25, 2023, we received a warning letter from FDA, which alleged non-conformities to regulations for medical devices, including medical device reporting requirements, relating to our Zio AT System and medical device quality system requirements. We submitted a timely response to FDA on June 16, 2023 and are continuing to work with the agency to address the issues outlined in the warning letter. Although our belief based on the dialogue with FDA to date following our warning letter response is that we will be able to work through FDA’s matters of concern relating to our Zio AT System, we cannot give any assurances that FDA will be satisfied with our response, the actions taken to resolve the concerns raised in the warning letter, or the expected date for the resolution of such matters. Until the issues identified in the warning letter are resolved to FDA’s satisfaction, additional legal or regulatory action may be taken with or without further notice. The warning letter is publicly available on FDA’s website and has been the subject of a high degree of media and industry attention, which subjects us to additional scrutiny. We have been providing FDA with updates on our progress on commitments made in the warning letter, and we are in continued dialogue with FDA on key topics and our planned path forward. On October 21, 2024, we were granted FDA clearance for one 510(k) encompassing design updates that had previously been documented through letters to file and on October 30, 2024 we were granted FDA clearance on a second 510(k) submission related to design modifications and labeling updates for the Zio AT device.
On July 15, 2024, FDA initiated inspections of our Cypress and San Francisco FDA-registered facilities. We received Form 483 observations at the close of the inspections of our Cypress and San Francisco facilities. These inspections broadly evaluated medical device quality system requirements and other medical device regulatory topics, and the observations generally centered on complaint handling and medical device reporting, risk analysis regarding the involvement of the technicians to prepare the Zio ECG reports, the corrective and preventive action process, process controls and statistical techniques. We timely submitted our initial responses regarding the July 2024 483 Observations to FDA on August 21, 2024, and provided supplemental information on September 6, 2024. In these responses we committed to a number of follow-up actions, and intend to work with FDA to resolve the issues identified. Executing on our follow-up actions, commitments to FDA, and remediation activities will require significant time, attention, and resources that might otherwise be applied to future product development activities and initiatives, and could result in delays or changes to these plans. Our commitments will also require a high degree of attention to design strategy and compliance going forward.
As we are already subject to an FDA warning letter associated with our Cypress facility, and in light of the 2024 inspection results, if we are unable to successfully execute follow-up actions consistent with our commitments to FDA, or if FDA determines that our follow-up commitments are insufficient or are not completed with sufficient promptness, we may face a greater risk of potential escalation, which could involve issuance of additional warning letters, or there is a possibility that FDA could initiate consent decree discussions.
Because of the patient populations for which our services are provided and the complexity of the healthcare environment in which we operate, a high degree of medical and clinical input may be necessary to evaluate complaints and adverse events, and in some cases, there may be disagreement over whether our services or the medical devices used in our services may have caused or contributed to an adverse event.
Our Zio Systems and Zio Services are not intended to be prescribed or ordered for use as an emergency system. They are not intended for critical care patients or patients suspected of life-threatening arrhythmias who require inpatient or emergency ECG monitoring. Given the nature of arrhythmias and the patient population for which our Zio Services are ordered by physicians, in which there may be several health conditions present, there are instances in which a patient may experience a medical event during the wear period of a Zio System. In some cases, it may be medically and logistically challenging to obtain information sufficient to definitively determine all contributing factors to an event. In some instances, we may receive initial reports of complaints from the certified cardiographic technicians (“CCTs”) or through our customer service representatives. The initial reports of these non-physicians are likely to contain information that requires verification and further investigation.
In addition, even though our services and their associated devices are not intended to recognize, detect, or initiate response to terminal end-of-life events (for example, cardiac arrest), a patient may nevertheless be wearing a Zio device when they experience such an event (for example, as was the case with the patients involved in COMP-2021-6388 and COMP-2021-6385 which were referenced by FDA in the May 25, 2023 warning letter). Given the functionality of our technology and our services, we may become aware of data reflecting a non-survivable, end-of-life cardiac event. We (going forward and in light of recent feedback from FDA regarding its reporting expectations) or others (such as healthcare professionals, patients, or family members) may report such events even where it does not appear to us that our device caused or could have prevented an end-of-life event. Given the structure of such reporting to FDA the full medical context is not generally available to the public, which may cause additional scrutiny, questions, or concerns regarding our products and services. For example, in the fourth quarter of 2023, as part of our commitments following the FDA Form 483 observations and warning letter issued on May 25, 2023, we retrospectively submitted certain MDRs to FDA, and the publicly available information in these reports may receive additional scrutiny.
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We are subject to FDA requirements to investigate complaints about our Zio Systems. If we do not effectively manage and monitor our complaint-handling procedures, we may be subject to regulatory enforcement action, litigation risks, and risk of negative publicity.
If we are unable to keep up with demand for our Zio Services, our revenue could be impaired, market acceptance for our Zio Services could be harmed, and physicians may instead order our competitors’ services.
As demand for our Zio Services 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;
•we may experience technical challenges to increasing manufacturing capacity, including in connection with equipment design, automation, validation and installation, contractor issues and delays, licensing and permitting delays or rejections, materials procurement, manufacturing site expansion, problems with production yields, and quality control and assurance;
•key components of our Zio Systems are provided by a sole or 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 Systems, 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;
•to increase our manufacturing output significantly and scale our services, we will have to attract and retain qualified employees for our operations; and
•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 negatively impact our volume capacity for our Zio Services.
If we were unable to successfully manufacture our Zio Systems in sufficient quantities, or to maintain sufficient capacity to provide our Zio Services, it would materially harm our business.
We depend on third-party vendors for the supply and manufacture of certain components of our Zio Systems, as well as for other aspects of our operations.
We rely on third-party vendors for components and sub-assemblies used in our Zio Systems and in connection with certain logistical aspects of our Zio Services. 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, including due to our reliance on a single supplier for certain critical components and materials for which, in some cases, there are relatively few alternative sources of supply;
•modifications to, or discontinuation of, a vendor’s operations due to natural disasters, labor disruptions, human error, infrastructure failure, pandemics, military conflicts, or political or economic disruption, which may adversely impact our operations or otherwise lead to interruption of or shortage or delays in supply, including shortages impacting our printed circuit board assembly;
•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 our quality criteria and specifications and, where applicable, 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 in delayed delivery of acceptable materials or components for incorporation into our devices or recall of finished products;
•delays in device shipments resulting from quality issues or 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;
•delays in delivery by our suppliers due to changes in demand from us or their other customers; and
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•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.
Further, we rely on single suppliers for the supply of components related to our adhesive sub-assembly, disposable plastic housings, instruments, and other materials that we use to manufacture and label our Zio patches. 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 patches if our existing suppliers were unable to satisfy our supply requirements.
Any significant delay or interruption in the supply of components or sub-assemblies, such as those that we experienced during the COVID-19 pandemic, 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 Services, significantly affect our future revenue, and harm our relations and reputation with physicians, hospitals, clinics, and patients.
We also rely on certain third-party vendors in connection with the analysis we perform to create diagnostic reports for our Zio Services, which is dependent upon a recording made by each Zio System. For long-term continuous monitoring utilizing our Zio XT System, for example, requires the physical return of the Zio XT patch to one of our clinical centers and we predominantly rely on the U.S. Postal Service (“USPS”) to perform this delivery service. Delivery of the Zio XT patch to one of our clinical centers may be subject to disruption to the USPS delivery infrastructure. Further, for the MCT monitoring services utilizing our Zio AT System, we rely on the provision of cellular communication services for the timely transmission of patient information and reportable events. The reliability of the electronic communication and cloud services required for these operations are 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 our Zio Services and bill for those services, adversely affecting our operating results, causing significant distraction for management, and negatively impacting our business reputation. We also expect that our reliance on third-party vendors will increase as our business grows, exposing us to increased harm if such disruptions occur.
We have incorporated and continue to work to further incorporate AI into our products, services, and internal operations. Implementation of artificial intelligence and machine learning technologies may result in legal and regulatory risks, reputational harm, or other adverse consequences to our business.
We have and are continuing to incorporate AI, including machine learning and independent algorithms, in certain of our products, services and internal operations, including in our MCT services with our Zio AT System, which is intended to enhance their operation and effectiveness internally and for physicians and patients. Our research and development of such technology remains ongoing. AI innovation presents risks and challenges that could impact our business. AI algorithms may be flawed or datasets may be insufficient or contain biased information resulting in perceived or actual negative outcomes. Additionally, many countries and regions, including the EU, have proposed or passed new and evolving regulations related to the use of AI and machine learning technologies. The regulations may impose onerous obligations and may require us to unexpectedly rework or reevaluate improvements to be compliant. In particular, the EU Artificial Intelligence Act will have a material impact on the way AI is regulated in the EU, may affect our use of AI technologies, and may require additional compliance measures and changes to our operations and processes. Use of AI technologies may expose us to an increased risk of regulatory enforcement and litigation. Moreover, some of the AI features involve the processing of personal data and may be subject to laws, policies, legal obligations, and codes of conduct related to privacy and data protection. AI development and deployment practices could subject us to competitive harm, regulatory enforcement, increased cyber risks, reputational harm, and legal liability.
Our ability to compete depends on our ability to innovate successfully.
The market for medical devices, including the remote cardiac monitoring segment, is competitive, dynamic, and marked by rapid and substantial technological development and product innovation. While there are barriers that would challenge new entrants or existing competitors from developing products that compete directly with the devices used in our Zio Services, these barriers can be overcome. Demand for our Zio Services and future related devices or services could be diminished by equivalent or superior products and technologies offered by competitors. If we are unable to innovate successfully, our services and related devices could become obsolete and our revenue would decline as our customers prescribe or purchase our competitors’ services.
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In order to remain competitive, we must continue to develop new product offerings and enhancements to our Zio Services. We can provide no assurance that we will be successful in fully recognizing the strategic value of our ECG database, expanding the indications for our Zio Services, developing new services and related devices, or commercializing them in ways that achieve market acceptance. In addition, if we develop new services, sales of those services may reduce revenue generated from our existing services. Maintaining adequate research and development personnel and resources to meet the demands of the market is essential. If we are unable to develop new services and related devices, 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, inability or delay to obtain FDA marketing authorization or regulatory clearances in the EU and the UK, 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 development agreement with a third party, and we may explore or enter into other development or collaboration agreements with other third parties in the future. These development and collaboration agreements may not result in the development of commercially viable devices or the generation of significant future revenues.
We have entered into the Development Agreement with Verily to develop certain next-generation Afib screening, detection, or monitoring devices to enhance our Zio Services, which involves combining our technology platforms and capabilities with those of Verily. As part of the Development Agreement, we paid Verily an up-front fee of $5.0 million in cash, and through September 30, 2024, we have achieved milestones and additional related payment obligations totaling $11.0 million. We have agreed to make additional payments over the term of the Development Agreement up to an aggregate of $1.75 million, subject to achievement of certain specified 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 efforts requires significant resources, including research and development, manufacturing, quality assurance, and clinical and regulatory personnel. Even with FDA’s clearance of our clinically-integrated ZEUS System for the Zio Watch, continued product testing, market research, and related activities may result in a delay to device launch and additional expense associated with any commercialization efforts. Even if and when launched, the developed devices may also not be accepted in the marketplace, and there is no assurance that adequate coverage or reimbursement would be available, or that an alternative payment model can be developed.
After the initial term and scope of the Development Agreement, and in order to commercialize any services in connection with the developed devices 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 devices, and ultimately services, that achieve commercial success and could be terminated prior to developing any devices. In the event of any termination or expiration of the Development Agreement, we may be required to devote additional resources to device 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 devices and services, 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 devices and services or result in significant additional future revenues for our company.
We generally intend to continue assessing the potential pathways for expanding indications and use cases for our Zio Services, and developing potential new products and services, for patient populations with unmet needs in the remote cardiac monitoring market and adjacent markets. We intend to continue to invest in research and development efforts to further differentiate our biosensor, data analytics and reporting, information system, and digital platform and we may explore or enter into development or collaboration agreements with third parties to further these efforts. We cannot predict whether such efforts will be viable from a regulatory and commercial standpoint, and development or collaboration agreements may not result in the development of commercially viable products or services or the generation of significant future revenues. For example, enforcement action such as that conveyed through the May 25, 2023 warning letter we received, as well as other digital health industry regulatory developments, may also impact the availability or viability of potential opportunities.
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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.
While we currently derive substantially all of our revenue and maintain substantially all of our assets in the United States, we intend to continue to pursue growth opportunities outside of the United States, especially in the Philippines, the EU, the UK and Japan, and we may increase our use of administrative and support functions from locations outside the United States, which could expose us to risks associated with international sales and operations. Additionally, our international expansion efforts may not be successful, we may experience difficulties in scaling these functions from locations outside the United States, and we may not experience the expected cost efficiencies.
Our international operations are, and will continue to be, subject to 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, certifications, and regulatory compliance where required for the sale of our Zio Services in various countries or regions;
•requirements to maintain data and the processing of that data on servers located within such countries or regions, which requirements may be subject to change;
•complexities associated with managing multiple payor reimbursement regimes, government payors, or patient self-pay systems, as well as with participating in public tenders or procurement processes run by national healthcare systems;
•logistics and regulations associated with shipping and returning our Zio patches following patient use;
•limits on our ability to penetrate international markets if we are required to process our Zio Services 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 services, fluctuations in trade policy and tariff regulations, changes in international tax regulations applicable to our business, and exposure to foreign currency exchange rate fluctuations, which may reduce the reported value of our foreign currency denominated revenues, expenses, and cash flows;
•decreased emphasis or enforcement of intellectual property protections in some countries outside the United States in comparison to that in the United States;
•increased risk of litigation or administrative proceedings in connection with our relationships with international business partners, including 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, as well as disputes regarding government and public tenders, any of which may result in substantial costs to us, adverse judgments, settlements, and diversion of our management’s attention;
•natural disasters, political and economic instability, including wars and other geopolitical conflicts, 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 Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), UK Bribery Act of 2010, and comparable laws and regulations in other countries;
•compliance risks associated with the General Data Protection Regulation (the “GDPR”) (including as it applies in the UK by virtue of the Data Protection Act 2018), enacted to protect the privacy of all individuals in the EU and the UK, and which places certain restrictions on the export of personally identifiable data outside of the EU or the UK, as applicable;
•compliance risks associated with the revised regulations in the EU MDR that outline the requirements for medical device CE marking;
•compliance risks associated with the UK MDR, which replaces the CE marking requirements for medical devices marketed and sold in the UK with a UKCA mark following the UK’s withdrawal from the EU, and the UK government’s announcement to amend the UK MDR, in particular to create a new access pathway to support innovation and create an innovative framework for regulating software and AI as medical devices;
•compliance risks associated with the Japan Pharmaceutical and Medical Device Act (PMD Act);
•compliance risks associated with new or upcoming regulations associated with AI applicable to Software as a Medical Device; and
•compliance risks associated with new or upcoming requirements and expectations associated with medical device cybersecurity.
Any of these factors may require significant resources to address and could significantly harm our future international expansion and operations and, consequently, our revenue and results of operations.
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Exposure to UK political developments, including the outcome of its withdrawal from membership in the EU, could be costly and difficult to comply with and could seriously harm our business.
Our operations in the UK account for approximately 1% of our revenue for the three and nine months ended September 30, 2024, and we intend to continue to pursue growth opportunities in the UK. There are still a number of areas of uncertainty in connection with the future of the UK and its relationship with the EU following the UK’s exit from the EU in 2020 (commonly referred to as “Brexit”), including the application and interpretation of the UK-EU trade agreement (the “Trade and Cooperation Agreement”), which went into force in May 2021. For example, because a significant proportion of the regulatory framework in the UK is currently derived from EU directives and regulations, Brexit could result in material changes to the regulatory regime applicable to many of our current operations. The UK government and the MHRA began undertaking public consultations on the future regulation of medical devices in 2022 and plan to introduce the new regulatory system from July 2025 onwards, subject to appropriate transitional arrangements. The consultation indicated that the MHRA will publish guidance in relation to the changes to the regulatory framework and may rely more heavily on guidance to add flexibility to the regime. Although the Trade and Cooperation Agreement offers UK and EU companies preferential access to each other’s markets, ensuring imported goods will be free of tariffs and quotas, economic relations between the UK and the EU are on more restricted terms than existed previously. Therefore, at this time, we cannot predict the impact that the Trade and Cooperation Agreement and any future agreements contemplated under the terms of the Trade and Cooperation Agreement will have on our future business efforts to commercialize our Zio Services in the UK and the EU. Accordingly, it is possible that the Trade and Cooperation Agreement may adversely affect our operations and financial results.
Our success depends on our ability to attract and retain senior management and key personnel.
Our success depends on our ability to retain our senior management and to attract and retain qualified personnel in the future. Competition for senior management personnel, as well as salespersons, scientists, clinicians, and engineers, is intense and we may not be able to retain our personnel. The loss of key personnel, including key members of our senior management team or members of our board of directors, as well as certain of our key finance, legal, regulatory, research and development, quality, and clinical personnel, could disrupt our operations and have a material and adverse effect on our ability to grow our business. Each of our officers may terminate their employment at any time without notice and without cause or good reason. The loss of a member of our senior management team or our professional staff would require the remaining executive officers to divert immediate and substantial attention to seeking a replacement.
We have recently experienced significant changes in our executive leadership, including the appointment of Quentin S. Blackford as our President and Chief Executive Officer in October 2021 following the resignation of our prior President and Chief Executive Officer, Kevin King, in January 2021. Douglas Devine, our former Chief Operating Officer, and Michael Coyle served as Chief Executive Officer from June 2021 to October 2021 and January 2021 to June 2021, respectively, before Mr. Blackford’s appointment. We have had additional executive officer positions changes recently (including the March 2023 resignation of Douglas Devine as Chief Operating Officer and the August 2024 resignation of Brice Bobzien as Chief Financial Officer) and may experience further changes in executive leadership in the future.
Changes to strategic or operating goals, which can often times occur with the appointment of new executives, can create uncertainty, may negatively impact our ability to execute quickly and effectively, and may ultimately be unsuccessful. If we do not integrate new executives successfully, we may be unable to manage and grow our business, and our financial condition and profitability may suffer as a result. In addition, to the extent we experience additional management turnover, competition for top management is high and it may take months to find a candidate that meets our requirements. If we are unable to attract and retain qualified management personnel, our business could suffer.
Further, we may undertake reorganizations of our workforce from time to time, which may result in a temporary reduction in the number of employees in certain locations. We would undertake a reorganization to reduce operating expenses or achieve other business objectives, though we cannot guarantee any specific amount of long-term cost savings. Further, the turnover in our employee base could result in operational and administrative inefficiencies, which could adversely impact the results of our operations, stock price, and customer relationships, could complicate our efforts to retain other valuable employees, and could make recruiting for future management and other positions more difficult.
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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, manufacturing, clinical, customer care, and billing operations and general and administrative infrastructure. In addition to the need to scale our operational and service 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 impact our capacity to manufacture our Zio patches, market, sell, and support our Zio Services, and analyze the data to produce Zio reports, which could result in inefficiencies and unanticipated costs, impacts to our Zio Services, including our Zio patches, 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/or a loss in productivity during the process of recruiting and training additional resources and add to our operating expenses. Further, a move toward automation to address, for example, staffing or scalability needs, could result in unintended consequences, such as increased scrap rate negatively impacting profitability.
As we seek to gain greater efficiency, we may look for ways to expand the automated portion of our Zio Services and require productivity improvements from our CCTs, within the framework of our wide-ranging regulatory obligations. Such improvements could impact the content 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.
Failure to receive the Zio System patches used for the provision of the Zio Services we provide may result in a loss of capital as well as revenue where the receipt of returned devices and processing of data retrieved from returned devices is required to provide our Zio Services.
Our Zio System patches and gateways are provided to patients either (1) during in-office visits with a healthcare provider or (2) remotely via at-home hookup. We have also seen hybrid situations where accounts, in response to staffing shortages, provide in-clinic Zio device packages to patients for application at home. Although in all three scenarios there is the potential that a patient will not return the device(s) at the conclusion of the wear period, home hookups historically result in a higher likelihood that the patient will fail to return his or her device, which negatively impacts our financial condition when we are unable to provide the Zio Services. For example, when the patient returns the Zio Monitor patch to us at the end of the patient wear period, we provide the Zio Monitor Services, which include the end of service report based on the data stored on the Zio Monitor patch, after which we submit a claim to the relevant payor or to the patient for the services rendered. If a patient fails to return a device, we experience financial losses, which include the cost of the device as well as the loss of potential revenue for the service that is contingent on the returned device for the submission of the associated claim.
Our strategic plans include a high degree of focus on the mSToPs criteria for Afib screening. There are risks that the clinical or payor community will not fully accept these criteria as a basis for selection of patients suitable for screening.
In January 2022, the U.S. Preventive Services Task Force (“USPSTF”) published a recommendation statement on the screening criteria for Afib screening, stating that the current evidence (including the mSToPs study) is insufficient to assess the balance of benefits and harm of Afib screening, and thus found that it could neither recommend for or against screening of adults 50 years or older without a diagnosis or symptoms of Afib and without a history of transient ischemic attack or stroke. In its recommendation, the USPSTF also identified research needs and gaps, including for example assurance that future research involves randomized trials of diverse patient populations and conducting research to optimize the accuracy of screening for Afib. This USPSTF recommendation statement may deter some clinicians or payors from accepting the mSToPs study inclusion and exclusion criteria as a standard for selecting patients for screening for Afib. We cannot predict whether or when the USPSTF’s recommendation on Afib screening will change or be modified based on findings from additional randomized trials, other research, or through the continued use of our products and services or other similarly situated products and services designed for remote cardiac monitoring.
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We may face risks associated with acquisitions of companies, products, and technologies and our business could be harmed if we are unable to address these risks.
If we are presented with appropriate opportunities, we could acquire or make other investments in complementary companies, products, or technologies. We may not realize the anticipated benefit of our acquisitions, or the realization of the anticipated benefits may require greater expenditures than anticipated by us. For example, the License Agreement that we entered into with BioIS may not result in the development of commercially viable products or services or the generation of significant future revenues. The success of our efforts is highly dependent on the efforts and skill sets of our employees, and support of these efforts requires significant resources, including research and development, manufacturing, quality assurance, and clinical and regulatory personnel. Even if and when launched, the developed devices may also not be accepted in the marketplace, and there is no assurance that adequate coverage or reimbursement would be available, or that an alternative payment model can be developed.
In addition, we will likely face risks, uncertainties, and disruptions associated with the integration process, including difficulties in the integration of the operations and services of any acquired company, integration of acquired technology with our Zio Services, including our Zio Systems, diversion of our management’s attention from other business concerns, the potential loss of key employees or suppliers of the acquired businesses, and impairment charges if future acquisitions are not as successful as we originally anticipated. If we fail to successfully integrate other companies, products, or technologies that we acquire, our business could be harmed. Furthermore, we may have to incur debt or issue equity or equity-linked securities to pay for any future acquisitions or investments, the issuance of which could be dilutive to our existing stockholders. In addition, our operating results may suffer because of acquisition-related costs, amortization expenses, investment required to address risks associated with the acquisition, or charges relating to acquired intangible assets.
Risks Related to Healthcare Regulatory Matters
Our use of third-party service providers or company resources located outside the United States to support certain customer care, clinical, and other operations of our IDTFs may present challenges, and if we are ineffective in limiting work performed by these service providers or company resources consistent with applicable regulations or our contractual agreements with commercial payors, we may be subject to penalties or experience loss of revenue.
Beginning in the third quarter of 2022, we engaged Sutherland Healthcare Solutions, Inc. and Techindia Infoway Private Limited to support certain customer care and clinical operations of our IDTFs. We have developed operational and technical controls to limit the work performed by these vendors consistent with our interpretation of the Medicare coverage exclusion of services furnished outside the United States, other applicable laws and regulations, and any requirements imposed pursuant to our contracts with commercial payors. If these controls do not work as intended, or if regulators or commercial payors disagree with our interpretation of these requirements and their application to our operations, we may be subject to a requirement to return funds already paid to us, civil monetary penalties, other government enforcement, as highlighted by a recent enforcement action against our competitor, BioTelemetry, Inc., with respect to the support of certain clinical operations by vendors performing work outside the United States, and termination of contracts with commercial payors, as well as the loss of revenue associated with those contracts.
In addition, we are currently engaging with other third-party service providers that have resources located outside the United States, and we have established company resources in the Philippines to provide services in support of our IDTFs. These services include benefits verification, billing, collections, and customer service, which require complex oversight and monitoring for appropriate capture and escalation of complaint information that may be relevant to the quality, performance, and safety of our medical devices or the quality of our clinical services. If we are unable to effectively manage this oversight and monitoring, we may be subject to regulatory enforcement action or inquiries which may be expensive and time consuming to resolve. In addition, certain contracts with commercial payors include restrictions related to accessing patient data outside the United States and we have implemented reasonable controls intended to prohibit unauthorized use of patient data by service providers and company resources located outside the United States for these commercial payors, as appropriate. If these controls do not work as intended, or if the payor information we receive from ordering healthcare providers is delayed or inaccurate, we may encounter the suspension or termination of contracts with commercial payors, as well as any contractual remedies such payors might pursue. The suspension or loss of any of our key commercial payor agreements would have an adverse impact on our revenue and our results of operations.
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If we fail to comply with medical device, healthcare, and other governmental regulations, we could face substantial penalties and our business, results of operations, and financial condition could be adversely affected.
The services and related devices we offer are highly regulated, and the regulatory environment in which we operate may change significantly and adversely in the future. Our arrangements with physicians, hospitals, clinics, and other stakeholders in the healthcare industry may expose us to broadly applicable medical device laws and healthcare fraud and abuse and other laws and regulations that may restrict the financial arrangements and relationships through which we market, sell, distribute, and provide our services and related devices. Our employees, consultants, and commercial partners and collaborators 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:
•state licensure laws applicable to the manufacture, marketing, distribution, and sale of medical devices;
•federal and state laws and regulations regarding billing, claims payment, and enrollment for participation in government healthcare programs;
•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 Medicare and Medicaid programs;
•the federal FCA, 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 UK Bribery Act of 2010, and other local anti-corruption, anti-kickback, and transparency laws that apply to our international activities;
•the federal Physician Payment Sunshine Act, or Open Payments, and its implementing regulations, which requires us to report payments or other transfers of value made to licensed physicians and certain mid-level health practitioners and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;
•Health Insurance Portability and Accountability Act (“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 and the UK Data Protection Act 2018, which each provide legal requirements for the handling and disclosure (including across borders) of personal data collected in the EU and the UK, respectively;
•the FDA’s Code of Federal Regulations, including but not limited to, 21 CFR Parts 820, 803, 806, and 801, that outlines requirements for medical device design, testing, marketing authorization, manufacturing, labeling, distribution, and post-market surveillance requirements;
•the EU MDD and EU MDR that outline requirements for medical device CE marking;
•the UK MDR, which, post the UK’s withdrawal from the EU, replaces the CE marking requirement for medical devices sold in the UK with a UKCA mark; and
•state law equivalents of each of the above U.S. 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 individually identifiable information in certain circumstances (e.g., the Telephone Consumer Protection Act, the CAN-SPAM Act, and state privacy, consumer protection, and breach notification laws), many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
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These laws are broad in scope and available exceptions and exemptions are narrow; 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 if 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 FCA including mandatory treble damages and significant per-claim penalties, which were increased from $13,946 to $27,894 per false claim for violations assessed after February 12, 2024. For example, our industry has experienced recent FCA enforcement, including a December 2023 settlement by BioTelemetry, Inc. and its subsidiary LifeWatch Services Inc. involving allegations that these companies submitted claims to federal programs for a higher level of remote cardiac monitoring than physicians had intended to order or that was medically necessary, thus inflating the level of reimbursement paid, which highlights the importance of compliance with the rules and regulations governing claims submitted to federal healthcare programs.
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, or 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 we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business and our financial results.
Further, in June 2024, the U.S. Supreme Court reversed its longstanding approach under the Chevron doctrine, which provided for judicial deference to regulatory agencies, including the FDA. As a result of this decision, we cannot be sure whether there will be increased challenges to existing agency regulations or how lower courts will apply the decision in the context of other regulatory schemes without more specific guidance from the U.S. Supreme Court. For example, this decision may result in more companies bringing lawsuits against the FDA to challenge longstanding decisions and policies of the FDA, which could undermine the FDA’s authority, lead to uncertainties in the industry, and disrupt the FDA’s normal operations, which could impact the timely review of any regulatory filings or applications we submit to the FDA.
Changes in applicable laws or regulations or the interpretation or enforcement policies of regulators governing our IDTFs and Zio Services may constrain or require us to restructure our operations or adapt certain business strategies which may harm our revenue and operating results.
Healthcare laws and regulations, and interpretations of the same, change frequently and may change significantly in the future. We may not be able to adapt our operations to address every new regulation or interpretation, and new regulations or interpretations may adversely affect our business. We also cannot assure 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.
Our business relies on orders from licensed healthcare providers, and the continuing clinical acceptance and adoption of our Zio Services depends upon strong working relationships with healthcare providers, including physicians. These relationships, interactions, and arrangements are subject to a high degree of scrutiny by government regulators and enforcement bodies.
As a CMS-enrolled IDTF, we may only provide our Zio Services upon receipt of a valid order from a licensed healthcare provider for use in the diagnosis and treatment of a patient’s medical condition. Accordingly, our revenue and the success of our business rely on the continued clinical acceptance and adoption of our Zio Services by healthcare providers whose patients require remote cardiac monitoring services. In addition to continuing to demonstrate the clinical value of our Zio Services, we also must support widespread clinical acceptance and adoption of our Zio Services by maintaining strong working relationships with these healthcare providers, including physicians. However, as we work to establish and maintain these relationships, we face significant scrutiny of these relationships, interactions, and arrangements by government regulators and enforcement agencies. Failure to structure and maintain these relationships, interactions, and arrangements in compliance with applicable laws and regulations, including those targeted at fraud and abuse like the federal Anti-Kickback Statute and the FCA, could expose us to significant legal and financial repercussions, including government civil and criminal investigations, civil monetary penalties, criminal penalties, and/or exclusion from federal healthcare programs.
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Our communications with healthcare stakeholders – physicians and other healthcare professionals, payors, and similar entities, as well as patients and lay caregivers – are subject to a high degree of scrutiny for compliance with a wide range of laws and regulations. Continuing or increasing our sales and marketing and other external communication efforts may expose us to additional risk of being alleged or deemed to be non-compliant by regulators, enforcement authorities, or competitors.
Our sales and marketing efforts and initiatives, as well as other communications with healthcare professionals ("HCPs"), may subject us to a high degree of scrutiny for compliance with applicable laws and regulations and our practices of effective communication of risk information, benefits, or claims will be subject to oversight by FDA, the Federal Trade Commission (“FTC”) and others.
In addition, FDA applies a heightened level of scrutiny to comparative claims when applying its statutory standards for advertising and promotion, including with regard to its requirement that promotional labeling be truthful and not misleading. There is potential for differing interpretations of whether certain communications are consistent with a product’s FDA-required labeling, including with respect to communications that may reference or contemplate the use of the Zio devices with specified patient populations. FDA will evaluate communications, in context, on a fact-specific basis. This is a continued area of focus for regulators. In the fourth quarter of 2023, FDA issued final guidance focused on the presentation of quantitative risk and efficacy information to the consumer audience, with heightened focus on presenting such information in a manner that is accurate, understandable, and consumer-friendly. The FTC has also released updated guidance on health claims, with a high expectation for clinical data to support these claims.
In addition, making comparative claims may draw scrutiny from our competitors. Where a company makes a claim in advertising or promotion that its product is superior to the product of a competitor (or that the competitor’s product is inferior), this creates a risk of a lawsuit by the competitor under federal and state false advertising or unfair and deceptive trade practices law, and possibly also state libel law. Such a suit may seek injunctive relief against further advertising, a court order directing corrective advertising, and compensatory and punitive damages where permitted by law. If our compliance program and training and monitoring do not effectively keep pace with our sales and marketing growth, we may encounter increased risk in execution of activities by our personnel, potential enforcement and other exposure.
We may also seek to communicate certain information with physicians and scientists and their practices and health systems or with payors and similar entities, and may rely on a range of laws, regulations, regulatory guidance governing topics, including scientific exchange, and communication of healthcare economic information and product information under the Preapproval Information Exchange Act. Recent FDA draft guidance on communication of scientific information on unapproved uses of cleared/approved medical products with HCPs further illustrates the agency’s focus on ensuring that such communications to those in a position to order or prescribe products are consistent with available scientific data and subject to organizational controls maintaining separation and distinction from promotional marketing.
For example, certain of our physicians may order the Zio Services for patients who are under 18, which is outside the cleared indications for use. While we do not intend for any personnel to promote our devices for pediatric use and we have policies addressing appropriate responses to unsolicited requests for information about pediatric use, our approach may be subject to ongoing scrutiny from FDA.
If FDA or other federal, state, or foreign enforcement authorities determine that our labeling, advertising, promotional materials, or user training materials, or representations made by our personnel include the promotion of an off-label use for the device, or that we have made false or misleading or inadequately substantiated promotional claims, or claims that could potentially change the regulatory status of the product, FDA or other authorities could take the position that these materials have misbranded our devices and request that we modify our labeling, advertising, or user training or promotional materials and/or subject us to regulatory or legal enforcement actions, including the issuance of an Untitled Letter or a Warning Letter, injunction, seizure, recall, adverse publicity, civil penalties, criminal penalties, including substantial fines, or other adverse actions. In that event, we would be subject to extensive fines and penalties and our reputation could be damaged and adoption of the products would be impaired. Although we intend to refrain from statements that could be considered off-label promotion of our products, FDA or another regulatory agency could disagree and conclude that we have engaged in off-label promotion.
Changes in laws and regulations governing our communications with patients or the interpretation or enforcement policies of regulators could subject us to regulatory scrutiny, damage awards, or fines.
As a Medicare-enrolled IDTF, we are prohibited from directly soliciting patients for diagnostic medical procedures. While we can engage in general marketing initiatives, consistent with applicable law, we cannot make telephone, computer, and in-person contacts for the purpose of soliciting business for our IDTF.
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Regarding patients for whom we have received a valid order for our Zio Services, we may send or make text messages, emails, phone calls, and other communications for various informational, business purposes, including to confirm accurate demographic and payor information or to assist a patient via a home hookup. Communication-related laws require consent prior to certain communications and provide a specified monetary damage award or fine for each violation which could result in particularly significant damage awards or fines. For example, under the Telephone Consumer Protection Act (“TCPA”), plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may treble the damage award for willful or knowing violations. In the wake of a 2021 decision by the U.S. Supreme Court that limited the applicability of the TCPA, several states have enacted or introduced legislation that would regulate text messages and certain telephone calls to individuals. We may be subject to lawsuits (including class-action lawsuits) containing allegations that our business violated the TCPA or other communications laws. These lawsuits may seek damages (including statutory damages) and injunctive relief, among other remedies. A determination that there have been violations of the TCPA or other statutes regulating communications with patients could expose us to significant damage awards that could, individually or in the aggregate, materially harm our business.
While most of our revenue results from claims submitted to payors for diagnostic medical procedures, we offer, and are looking to expand, alternative payment and service delivery models. Piloting, evaluating, and implementing these alternative payment and service delivery models requires interactions with commercial payors, physicians, and patients; these interactions are subject to laws and regulations aimed at preventing healthcare fraud and abuse. If these models are unsuccessful, or if we are unable to fully comply with such laws as we pursue these strategies, our commercial success could be compromised and we could face substantial penalties.
Our operations may be directly or indirectly affected by various broad state and federal healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, the FCA, the Anti-Mark Up Rule, and the Medicare Beneficiary Inducement Statute. For some of our services, we directly bill physicians or other healthcare entities, that, in turn, bill payors, and the amounts we bill may include a risk-based pricing component. We are also developing alternative service delivery models that include using our Zio Monitoring System or Zio XT System to screen at-risk patient populations as part of a value-added service offered by managed care organizations, including Medicare Advantage Organizations, to qualifying participants. Although we have endeavored to properly design these billing and service models and structure our program development efforts, including related affiliations and relationships with physicians or other healthcare entities, to comply with applicable laws and regulations, these types of initiatives may draw a high degree of scrutiny and may subject us to assertions of non-compliance. If our past, present, or future operations are found to be in violation of fraud and abuse laws, we or our officers may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment, and exclusion from Medicare program participation. Furthermore, if we knowingly file, or “cause” the filing of, false claims for reimbursement with government programs such as Medicare, we may be subject to substantial civil penalties, including treble damages.
Risks Related to Financial and Accounting Matters
In the future we may identify additional material weaknesses or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
We previously identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a 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 consolidated financial statements will not be prevented or detected on a timely basis. As previously disclosed, in preparing our consolidated financial statements as of and for the years ended December 31, 2021 and 2020, our management concluded that our disclosure controls and procedures and our internal control over financial reporting were not effective at the reasonable assurance level due to a failure to maintain a sufficient number of professionals with an appropriate level of accounting and internal control knowledge, training, and experience to timely and accurately analyze, record, and disclose accounting matters. This material weakness contributed to additional material weaknesses, which have been previously disclosed and remediated. In aggregate, these material weaknesses (including the previously remediated material weaknesses) contributed to 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 our 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, June 30, 2019, and September 30, 2019. Additionally, this material weakness could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
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To address this material weakness, we took actions designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weakness, including hiring additional accounting and finance personnel with an appropriate level of expertise, providing for additional management oversight over financial reporting including through the establishment of a SOX Steering Committee within our internal audit function, and implementing new controls and processes. As of the year ended December 31, 2022, we concluded that our remediation efforts had been successful and that the previously identified material weakness in internal control over financial reporting had been remediated. However, while the material weakness has been remediated, we continue to seek improvements to enhance our control environment and to strengthen our internal controls to provide reasonable assurance that our financial statements continue to be fairly stated in all material respects.
If we discover additional weaknesses in our system of internal financial and accounting controls and procedures, our consolidated financial statements may contain material misstatements, and we could be required to restate our financial results. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
Any failure to implement and maintain effective internal control over financial reporting could cause investors to lose confidence in our reported financial and other information, adversely impact our stock price, cause us to incur increased costs to remediate any deficiencies, and attract regulatory scrutiny or lawsuits that could be costly to resolve and distract management’s attention, limit our ability to access the capital markets, or cause our stock to be delisted from The Nasdaq Global Select Market or any other securities exchange on which it is then listed. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
Our financial results may fluctuate significantly from quarter-to-quarter and may not fully reflect the underlying performance of our business.
Our revenue and operating results may fluctuate significantly from quarter to quarter as a result of a variety of factors, a number of which are outside our control, and may therefore not fully reflect the underlying performance of our business. Such factors may include, for example, seasonal variations in prescription rates. We typically experience reduced revenue during the third quarter, as well as during the year-end holiday season. We believe this is the result of physicians and patients taking vacations, and patients electing to delay our monitoring services during the summer months and holidays. We believe that period-to-period comparisons of our operating results may not be meaningful and should not be relied on as an indication of our future performance. If quarterly revenues or operating results fall below the expectations of investors or public market analysts, the trading price of our common stock could decline substantially. Factors that might cause quarterly fluctuations in our operating results include:
•our inability to manufacture an adequate supply of our Zio Systems to support demand for our Zio Services at appropriate quality levels and acceptable costs;
•possible delays in our research and development programs or in the completion of any third-party clinical trials relating to our Zio Services;
•a lack of acceptance of our Zio Services, including our Zio Systems, by physicians and potential patients;
•the inability of patients to receive reimbursements from third-party payors;
•the purchasing patterns of physicians and patients, including as a result of seasonality;
•failures to comply with regulatory requirements, which could lead to withdrawal of our Zio Services, including our Zio Systems, from the market;
•our failure to continue the commercialization of our Zio Services;
•competition;
•inadequate financial and other resources; and
•global business, political, and economic conditions, including inflation, increasing interest rates, cybersecurity events, uncertainty with respect to the federal debt ceiling and budget and potential government shutdowns related thereto, potential instability in the global banking system, political instability, and military hostilities, including ongoing geopolitical conflicts, such as the war in Ukraine and conflict in the Middle East.
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Further, we recognize a portion of our revenue from non-contracted third-party commercial payors. For example, during the three and nine months ended September 30, 2024, revenue from non-contracted third-party commercial payors accounted for approximately 7% of our total revenue. We have limited visibility as to when we will receive payment for our Zio Services with non-contracted payors and we, XIFIN, or Omega must appeal any negative payment decisions, which often delays 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 may not receive 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 have a history of operating losses and may not achieve or sustain profitability in the future.
We have incurred net losses since our inception in September 2006. We generated net losses of $46.2 million and $27.1 million during the three months ended September 30, 2024 and 2023, respectively, and $112.0 million and $84.7 million during the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, we had an accumulated deficit of $757.6 million. We have financed our operations to date primarily through private and public offerings of equity securities and revenue generated by prescriptions of our Zio Services. We have and expect to continue to incur significant research and development, sales and marketing, regulatory, and other expenses as we expand our marketing efforts to increase the prescription of our Zio Services, expand existing relationships with physicians, obtain regulatory clearances or approvals for our current or future services and related devices, conduct clinical trials on our existing and future services, and develop new services or add new features to our existing Zio Services. We also expect that our general and administrative expenses will continue to increase due to, among other things, the operational and regulatory burdens applicable to medical service providers that are public companies. As a result, we expect to continue to incur operating losses in the future. These losses, among other things, may have an adverse effect on our stockholders’ equity and the value of our common stock.
We may require additional capital to support the growth of our business, and this capital might not be available on acceptable terms, if at all.
Our operations have consumed substantial amounts of cash since inception. We intend to continue to make investments to support our business, which may require us to engage in equity or debt financings to secure additional funds. Additional financing may not be available on a timely basis on terms acceptable to us, or at all. Any additional financing may be dilutive to stockholders or may require us to grant a lender a security interest in our assets. The amount of funding we may need will depend on many factors, including:
•the revenue generated by our Zio Services;
•the costs, timing, and risks of delay of additional regulatory approvals;
•the expenses we incur in manufacturing, developing, selling, and marketing our Zio Services;
•our ability to scale our manufacturing operations to meet demand for the Zio Systems used in our current and any future Zio Services or other offerings;
•the costs of filing, prosecuting, defending, and enforcing any patent claims and other intellectual property rights;
•the rate of progress and cost of our clinical trials and other development activities;
•the success of our research and development efforts;
•the emergence of competing or complementary technologies;
•the terms and timing of any collaborative, licensing, and other arrangements that we may establish;
•the cost of ongoing compliance with legal and regulatory requirements, and third-party payors’ policies;
•the cost of obtaining and maintaining regulatory or payor clearance or approval for our current or future offerings including those integrated with other companies’ products; and
•the acquisition of business, products, and technologies.
If adequate funds are not available, we may not be able to commercialize our Zio Services at the rate we desire and/or we may have to delay the development or commercialization of our Zio Services or license to third parties the rights to commercialize services or technologies that we would otherwise seek to commercialize. We also may have to reduce sales, marketing, customer support, or other resources devoted to our Zio Services. Any of these factors could harm our business and financial condition.
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Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations which could subject our business to higher tax liability.
Our ability to use our net operating losses (“NOLs”) to offset future taxable income may be subject to certain limitations which could subject our business to higher tax liability. We may be limited in the portion of NOL carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes, and federal tax credits to offset federal tax liabilities. Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state law provisions, limit the use of NOLs and tax credits after a cumulative change in corporate ownership of more than 50% occurs within a three-year period. The statutes place a formula limit on how much NOLs and tax credits a corporation can use in a tax year after a change in ownership. Avoiding an ownership change is generally beyond our control. We could experience an ownership change that might limit our use of NOLs and tax credits in the future. In addition, realization of deferred tax assets, including NOL carryforwards, depends upon our future earnings in applicable tax jurisdictions. If we have insufficient future taxable income in the applicable tax jurisdiction for any reason, including any future corporate reorganization or restructuring activities, we may be limited in our ability to utilize some or all of our net operating losses to offset such income and reduce our tax liability in that jurisdiction. See Note 9, Income Taxes to the consolidated financial statements included herein for additional information.
There is also a risk that due to regulatory changes or changes to federal or state law, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable either in whole or in part to offset future income tax liabilities. For example, under the Coronavirus Aid, Relief, and Economic Security Act of 2020, which amended certain provisions of the Tax Cuts and Jobs Act (“TCJA”), NOLs arising in taxable years beginning after December 31, 2017 may offset no more than 80% of current taxable income annually for taxable years beginning after December 31, 2020. Therefore, we may be required to pay U.S. federal income taxes in future years despite the NOL carryforwards we have accumulated.
Risks Related to Other Legal and Regulatory Matters
We are subject to legal proceedings and government investigations that could adversely affect our business, financial condition, and results of operations.
We are involved in legal proceedings related to securities litigation and other matters and may become involved in other legal proceedings that arise from time to time in the future. For example, as discussed further in Note 7, Commitments and Contingencies, to the consolidated financial statements included herein, a putative securities class action lawsuit has been filed against us and certain current officers or former officers of the company alleging violations of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder.
Any claims against us, whether meritorious or not, can be time-consuming, result in costly litigation, be harmful to our reputation, require significant management attention, and divert significant resources. In addition, the expense of litigation and the timing of this expense from period to period are difficult to estimate and subject to change. Litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. Given the uncertain nature of legal proceedings generally, we are not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome. We could incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in any particular period.
In addition, healthcare companies are subject to numerous investigations and inquiries by various governmental agencies. For example, as discussed further in Note 7, Commitments and Contingencies, to the consolidated financial statements included herein, in March 2021, we received a grand jury subpoena from the U.S. Attorney’s Office for the Northern District of California requesting information related to communications with FDA and our Zio Systems, and, in September 2021, received a subpoena requesting additional information. More recently, on April 4, 2023, we received a Subpoena Duces Tecum from the Consumer Protection Branch, Civil Division of the U.S. Department of Justice, requesting production of various documents regarding our products and services. In addition, on May 25, 2023, we received a warning letter from FDA, which resulted from the inspection of our facility located in Cypress, California that concluded in August 2022. The warning letter alleges non-conformities to regulations for medical devices, including medical device reporting requirements, relating to our Zio AT System and medical device quality system requirements. On July 15, 2024, FDA initiated inspections of our Cypress and San Francisco facilities. We received 483 observations at the close of the inspection. We are cooperating fully in connection with these matters. Any future investigations of our executives, our managers, or our company could result in significant liabilities or penalties to us, as well as adverse publicity. Even if we are found to have complied with applicable law, the investigation or litigation may pose a considerable expense and would divert management’s attention, and have a potentially negative impact on the public’s perception of us, all of which could negatively impact our financial position and results of operations. Further, should we be found out of compliance with any of these laws, regulations, or programs, depending on the nature of the findings, our business, our financial position, and our results of operations could be negatively impacted.
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Further, three decisions from the U.S. Supreme Court in July 2024 may lead to an increase in litigation against regulatory agencies that could create uncertainty and thus negatively impact our business. The first decision overturned established precedent that required courts to defer to regulatory agencies’ interpretations of ambiguous statutory language. The second decision overturned regulatory agencies’ ability to impose civil penalties in administrative proceedings. The third decision extended the statute of limitations within which entities may challenge agency actions. These cases may result in increased litigation by industry against regulatory agencies and impact how such agencies choose to pursue enforcement and compliance actions. However, the specific, lasting effects of these decisions, which may vary within different judicial districts and circuits, is unknown. We also cannot predict the extent to which FDA and SEC regulations, policies, and decisions may become subject to increasing legal challenges, delays, and changes.
Compliance with requirements of being a public company may strain our resources and divert management’s attention.
As a public company, we are subject to laws and regulations relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the rules and regulations implemented by the SEC, and The Nasdaq Stock Market listing rules. Compliance with these laws and regulations, including new laws and regulations or revisions to existing laws and regulations, has required and will continue to require, substantial management time and oversight and the incurrence of significant accounting and legal costs. 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 continue 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 adversely affected.
We could be subject to changes in our tax rates, new U.S. or international tax legislation, or additional tax liabilities.
We are subject to taxes in the United States and numerous foreign jurisdictions, where certain of our subsidiaries are organized. The tax laws in the United States and in other countries in which we and our subsidiaries do business could change on a prospective or retroactive basis, and any such changes could adversely affect our business and financial condition. Our effective tax rates could be affected by numerous factors, including changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws or their interpretation, both in and outside the United States.
For example, in 2017, the U.S. government enacted the TCJA, which made significant changes to the taxation of business entities, including the requirement to capitalize research and development expenditures and amortize such expenditures over five years for domestic expenditures and fifteen years for foreign expenditures. While it is possible that Congress may modify or repeal this provision, we have no assurance that this provision will be modified or repealed and even if Congress makes any such decision, it may not be retroactive, and could still therefore result in an impact on cash from operating activities and on the balance of our deferred taxes. In addition, we have a presence in the UK, as well as sales in the UK, such that any changes in tax laws in the UK will impact our business. The overall impact of these changes is uncertain, and our business and financial condition could be adversely affected.
In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations, including those relating to income tax nexus, by recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities. The TCJA of 2017 introduced a Base Erosion and Anti-Abuse Tax ("BEAT") which imposes a minimum tax on adjusted income of corporations with average applicable gross receipt of at least $500 million for the prior three tax years and that make certain payments to related foreign persons. In addition, the Organization for Economic Cooperation and Development has proposed a global minimum tax of 15% of reported profits ("Pillar 2") that has been agreed upon in principle by over 140 countries. During 2023, many countries took steps to incorporate Pillar 2 into their domestic tax laws. While neither BEAT nor Pillar 2 impact our results of operations currently, if applicable in the future, they could have an impact on our financial results, the extent of which is uncertain.
Our tax returns and other tax matters also are subject to examination by the U.S. Internal Revenue Service and other tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes. We cannot guarantee the outcome of these examinations. If our effective tax rates were to increase, particularly in the United States, or in other jurisdictions implementing legislation to reform existing tax legislation, including the UK, or if the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, our financial condition, operating results, and cash flows could be adversely affected.
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We may be liable for contamination or other harm caused by materials that we handle, and changes in environmental regulations could cause us to incur additional expense.
Our research and development and manufacturing operations may involve the use or handling of hazardous materials. We are subject to a variety of federal, state, local, and international laws, rules, and regulations governing the use, handling, storage, disposal and remediation of hazardous and biological materials, as well as the sale, labeling, collection, recycling, treatment, and disposal, of products containing such hazardous substances, and we incur expenses relating to compliance with these laws and regulations. If we violate environmental, health, and safety laws, including as a result of human error, equipment failure, or other cases, we could face substantial liabilities, fines, and penalties, personal injury and third-party property damage claims, and substantial investigation and remediation costs. These expenses or this liability could have a significant negative impact on our financial condition. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We are subject to potentially conflicting and changing regulatory agendas of political, business, and environmental groups. Changes to or restrictions on the procedures for hazardous or biological material storage or handling might require unplanned capital investment or relocation of our facilities. Failure to comply, or the cost of complying, with new or existing laws or regulations could harm our business, financial condition, and results of operations.
Risks Related to Intellectual Property
We are subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from shipping affected devices, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief.
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. Our patents and patent applications are directed to covering key aspects of the design, manufacture, and use of our Zio Services, including our Zio Systems.
Third parties may assert infringement or misappropriation claims against us with respect to our current or future Zio Services, including our Zio Systems. We are aware of numerous patents issued to third parties that may relate to aspects of our business, including the design and manufacture of the Zio Systems used in connection with our Zio Services. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual property rights of such third parties or others. Our competitors may assert that our Zio Systems or the methods we employ to deliver our Zio Services are covered by U.S. or foreign patents held by them and we may be required to settle such allegations in the future. This risk is exacerbated by the fact that there are numerous issued patents and pending patent applications relating to remote cardiac monitoring services and the associated devices. There may be existing patents or patent applications now pending of which we are unaware that may later result in issued patents that our Zio Services, including our Zio Systems, inadvertently infringe. As the number of competitors in the remote cardiac monitoring market grows, the possibility of patent infringement by us or a patent infringement claim against us increases. If we are unable to successfully defend any such claims as they may arise or enter into or extend settlement and license agreements on acceptable terms or at all, our business operations may be harmed.
Any infringement or misappropriation claim could cause us to incur significant costs, place significant strain on our financial resources, divert management’s attention from our business, and harm our reputation. In addition, if the relevant patents are upheld as valid and enforceable and we are found to infringe such patents, we could be prohibited from using any portion of our Zio Services, including our Zio Systems, that is found to infringe such patent unless we could obtain licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain a license on terms acceptable to us, if at all, and we may not be able to redesign our Zio Services, including our Zio Systems, to avoid infringement. We may be unable to maintain or renew licenses on terms acceptable to us, if at all, and we may be prohibited from selling any portion of our Zio Services, including our Zio Systems, that required the technology covered by the relevant licensed patents. Although patent and intellectual property disputes in the healthcare and medical devices area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and would likely include ongoing royalties. Even if we are able to redesign our Zio Services, including our Zio Systems, to avoid an infringement claim, we may not receive FDA approval for such changes in a timely manner or at all.
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Further, if we are found to infringe third-party patents, a court could order us to pay damages to compensate the patent owner for the infringement, such as a reasonable royalty amount and/or profits lost by the patent owners, along with prejudgment and/or post-judgment interest. Furthermore, if we are found to willfully infringe third-party patents, we could, in addition to other penalties, be required to pay treble damages; and if the court finds the case to be exceptional, we may be required to pay attorneys’ fees for the prevailing party. If we are found to infringe third-party copyrights or trademarks or misappropriate third-party trade secrets, based on the intellectual property at issue, a court could order us to pay statutory damages, actual damages, or profits, such as reasonable royalty or lost profits of the owners, unjust enrichment, disgorgement of profits, and/or a reasonable royalty, and the court could potentially award attorneys’ fees or exemplary or enhanced damages. If litigation were to be initiated by intellectual property owners, there could significant legal fees and costs incurred in defending litigation (which may include filing administrative actions to attack the intellectual property) as well as a potential monetary settlement payment to the owners, even if the matter is resolved before going to trial. Moreover, the owners may take an overly aggressive approach and/or include multiple allegations in a single litigation.
Our inability to adequately protect our intellectual property could allow our competitors and others to produce devices and offer services based on our technology, which could substantially impair our ability to compete.
Our success and our ability to compete depend, in part, upon our ability to maintain the proprietary nature of our technologies. We rely on a combination of patent, copyright, and trademark law, and trade secrets and nondisclosure agreements to protect our intellectual property. However, such methods may not be adequate to protect us or permit us to gain or maintain a competitive advantage.
For example, our patent applications may not issue as patents in a form that will be advantageous to us, or at all. Our issued patents, and those that may issue in the future, may be challenged, invalidated, or circumvented, which could limit our ability to stop competitors from marketing related devices and services. In addition, there are numerous recent changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office (“USPTO“), which may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. We also 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 invention assignment and confidentiality agreements and other contractual restrictions we include in contracts with such parties. 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. In addition, 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. Further, 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. Additionally, we are aware of at least one third party that has registered the “IRHYTHM” mark in the EU 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. However, despite that registration, we have successfully obtained a registration for the IRHYTHM mark in the EU in Classes 9 and 10 and we also own many national registrations for IRHYTHM in Europe.
To protect our proprietary rights, we may in the future need to assert claims of infringement against third parties. The outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets, or trademarks is highly unpredictable, could result in substantial costs and diversion of resources, and could have a material adverse effect on our business, financial condition, and results of operations regardless of the final outcome of such litigation. In the event of an adverse judgment, a court could hold that some or all of our asserted intellectual property rights are not infringed, or are invalid or unenforceable, and could award attorneys’ fees.
Despite our efforts to safeguard our unpatented and unregistered intellectual property rights, we may not succeed in doing so or the steps taken by us in this regard may not be adequate to detect or deter misappropriation of our technology or to prevent an unauthorized third party from copying or otherwise obtaining and using our devices, technology, or other information that we regard as proprietary. In addition, third parties may be able to design around our patents. Furthermore, the laws of foreign countries may not protect our proprietary rights to the same extent as the laws of the United States.
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Risks Related to Privacy and Security
Cybersecurity risks, including those involving network security breaches, services interruptions and other incidents affecting the confidentiality, integrity or availability of our data and systems, could result in the compromise of confidential data or critical data systems and give rise to potential harm to our patients, remediation and other expenses, expose us to liability under HIPAA, breach notification laws, consumer protection laws, or other common law theories, subject us to litigation and federal and state governmental inquiries, damage our reputation, and otherwise be disruptive to our business and operations.
Cybersecurity threats can come from a variety of sources, ranging in sophistication from an individual hacker to malfeasance by employees, consultants or other service providers to criminal or other unauthorized threat actors, including state-sponsored attacks. Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff. Cyber threats may be generic, or they may be custom-crafted against our information systems. Cyber incidents can result from deliberate attacks or unintentional events. Over the past several years, cyber-attacks and other cyber incidents have become more prevalent and much harder to detect and defend against. These cyber attacks and other incidents include unauthorized access to our network, information technology and data, and that our of contractors; compromise of employee credentials and accounts; transmission of computer viruses and other malware; phishing and spamming attacks; ransomware attacks and other acts of cyber extortion; and malicious actions by persons inside our organization and other insider threats. For example, during the first quarter of 2024, we experienced a temporary delay in the billing of our contracted and non-contracted payer customers, performed by our third-party claims processing vendor. The delay was due to a cybersecurity incident experienced by Change Healthcare, a division of UnitedHealth Group, which our third-party vendor engages for services relating to billing and collections. While we substantially cleared the billing backlog as of the end of the first quarter of 2024, the delay in billing resulted in a temporary delay in our cash collections. The increasing use of mobile devices for remote access to our systems and data also increases these vulnerabilities and risks. Our internal technology systems and infrastructure, and those of our contractors, are also vulnerable to damage from natural disasters, acts of terrorism, war and other acts of foreign governments and failures of telecommunication, electrical and other critical systems. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security or other problems that unexpectedly could interfere with our business operations. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these incidents or techniques, timely discover them, or implement adequate preventative measures.
We have in the past been subject to cyber-attacks and data breaches and expect that we will be subject to additional cyber-attacks in the future and may experience future data breaches. Such incidents may impact the integrity, availability or confidentiality of the sensitive data we maintain or disrupt our information systems, devices or business, including our ability to deliver our services. As a result, cybersecurity, physical security and the continued development and enhancement of our controls, processes and practices designed to protect our enterprise, information systems and data from attack, damage or unauthorized access remain a priority for us. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any cybersecurity vulnerabilities.
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We are subject to complex and evolving U.S. and foreign laws and regulations and other requirements regarding privacy, data protection, security, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in customer growth or engagement, or otherwise harm our business.
In the ordinary course of our business, we collect, use and store, and transmit sensitive data, such as our proprietary business information and that of our suppliers, contractors, customers, vendors and others, as well as personal information, including health information, of these parties and of our patients. As a result, we are subject to several foreign, federal and state laws and regulations protecting the use, disclosure and confidentiality of certain personal information, namely individually identifiable information (e.g., names, social security numbers, addresses, birth dates), and restricting the use and disclosure of that information. These laws include foreign, federal and state healthcare privacy laws, telehealth laws, breach notification laws and consumer protection laws. These frameworks impose stringent privacy and security standards and potentially significant non-compliance penalties and liability. In addition, a comprehensive federal privacy bill, which includes a private right of action for violations, has been proposed and is under review by the House of Representatives. Foreign data protection, privacy, and related laws and regulations can be more restrictive than those in the United States. For example, data localization laws in some countries generally mandate that certain types of data collected in a particular country be stored and/or processed solely within that country. In addition, both foreign and U.S. legislators and regulators may make legal and regulatory changes, or interpret and apply existing laws, in ways that require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices. Further, the SEC recently adopted new cybersecurity disclosure rules for public companies that require disclosure regarding cybersecurity risk management (including the board’s role in overseeing cybersecurity risks, management’s role and expertise in assessing and managing cybersecurity risks, and processes for assessing, identifying, and managing cybersecurity risks) in annual reports on Form 10-K. These new cybersecurity disclosure rules also require the disclosure of material cybersecurity incidents by Form 8-K, within four business days of determining an incident is material. These changes or increased costs could negatively impact our business and results of operations in material ways. Refer to “Cybersecurity” in Part I, Item 1C of our Annual Report on Form 10-K for the year ended December 31, 2023 for further details.
The secure maintenance, processing, and transmission of this sensitive information is critical to our business operations and we are dependent on sophisticated information technology systems to operate our business. System failures or outages, including any potential disruptions due to significantly increased global demand on certain cloud-based systems, or failures to adequately scale our data platforms and architectures to support patient care could compromise our ability to perform these functions in a timely manner, which could harm our ability to conduct business or delay our financial reporting. We have implemented multiple layers of security measures and monitoring to protect the confidentiality, integrity, and availability of this data and the systems and devices that store and transmit such data. Despite our security measures and business controls, which undergo routine testing internally and by external parties, our information technology and infrastructure may be vulnerable to attacks by criminals and criminal enterprises, foreign governments and other state-sponsored actors, and terrorists and lone wolves; breaches due to employee, contractor, or vendor error; or malfeasance or other disruptions or subject to the inadvertent or intentional unauthorized release of information. Any such occurrence could compromise our data centers and networks and the information stored thereon could be inappropriately accessed, publicly disclosed, lost, or stolen. Further, any such access, disclosure, or other loss of information could result in legal claims or proceedings, and liability under laws that protect the privacy of personal information and regulatory penalties, increase in operating expenses, incurrence of expenses, including notification, mitigation, and remediation costs, disrupt our operations and the services we provide to our clients, or damage our reputation, any of which could adversely affect our profitability, revenue, and competitive position.
Cyber-attacks aimed at accessing our devices and services, or related devices and services, and modifying or using them in a way inconsistent with our FDA marketing authorizations and regulatory certifications in the EU and the UK, could create risks to patients.
Medical devices are increasingly connected to the Internet, hospital networks, and other medical devices to provide features that improve healthcare and increase the ability of healthcare providers to treat patients and of patients to manage their conditions and are subject to extensive oversight from FDA and foreign regulatory authorities with requirements designed to manage the risks of cyber-attacks with the potential to impact patient safety. As such, cyber-attacks aimed at accessing our devices and services, or related devices and services, and modifying or using them in a way inconsistent with our FDA marketing authorizations and regulatory certifications in the EU and the UK, may create risks to patients and potential exposure to our company.
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We are required to comply with various laws and regulations with respect to implementing appropriate cybersecurity measures to ensure our devices and services are not compromised or disrupted, which could lead to potential risk of harm or injury to patients. FDA has issued guidance on cybersecurity management of medical devices during post market, and more recently finalized guidance on cybersecurity considerations for quality systems in device premarket submissions. These guidance documents serve as an indicator of agency expectations. If we do not implement the necessary quality measures to manage cybersecurity and minimize or avoid risks of a potential cyber-attack that impacts our devices and services, we could be subject to a range of FDA enforcement action, and such a situation could trigger the need for a recall, a hold on the distribution of our products, or require other corrective actions to our products.
In the EU, a number of interlocking rules regulate cybersecurity for medical devices. For example, the new Cybersecurity Directive (EU) 2022/2555 (also known as the NIS 2 Directive (Network and Information Security)) entered into force in January 2023 and EU Member States have until October 17, 2024 to transpose the measures into national law. The EU NIS 2 Directive affects Critical National Infrastructure (CNI) providers, which includes the health sector and the manufacturers of medical devices considered to be critical during a public health emergency, as well as other covered entities. The requirements in the NIS 2 Directive will sit alongside the cybersecurity requirements addressed in the EU MDR, which are supplemented by specific guidance issued by the EU’s Medical Device Coordination Group. In addition, at this time, we cannot predict the impact on cybersecurity compliance that forthcoming EU legislation such as the Artificial Intelligence Act and the European Health Data Space Regulation, may have. In the UK, the government announced as part of its consultations on the future regulation of medical devices, that it intends to develop legislation to impose cybersecurity requirements for software as a medical device, including for AI.
Risks Related to Our Common Stock
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over the analysts, or the content and opinions included in their reports. If any of the analysts who cover us issues an adverse or misleading opinion regarding us, our business model, our intellectual property, or our stock performance, or if any third-party preclinical studies and clinical trials involving our Zio Services or our results of operations fail to meet the expectations of analysts, our stock price would likely decline. If one or more of such analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause a decline in our stock price or trading volume.
Our stock price is highly volatile and investing in our stock involves a high degree of risk, which could result in substantial losses for investors.
Historically, the market price of our common stock, like the securities of many other medical service providers that are public companies, has fluctuated. It is likely that our stock price will continue to be volatile in the future. In addition, the trading prices for our common stock and the common stocks of other medical service providers been highly volatile as a result of macroeconomic conditions, including inflation, rising interest rates and ongoing geopolitical conflicts, such as the war in Ukraine and conflict in the Middle East.
The market price of our common stock is influenced by many factors that are beyond our control, including the following:
•securities analyst coverage or lack of coverage of our common stock or changes in their estimates of our financial performance;
•variations in quarterly operating results;
•future sales of our common stock by our stockholders;
•investor perception of us and our industry;
•announcements by us or our competitors of significant agreements, acquisitions, or capital commitments or service or product launches or discontinuations;
•changes in market valuation or earnings of our competitors;
•negative business or financial announcements regarding our partners;
•regulatory actions;
•legislation and political conditions;
•cybersecurity events;
•global health pandemics, such as the COVID-19 pandemic;
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•terrorist acts, acts of war, or periods of widespread civil unrest, including ongoing geopolitical conflicts, such as the war in Ukraine and conflict in the Middle East; and
•general economic, industry, and market conditions, including inflation, interest rate volatility, uncertainty with respect to the federal debt ceiling and budget and potential government shutdowns related thereto, potential instability in the global banking system, and fluctuating foreign currency exchange rates.
Please also refer to the factors described elsewhere in this “Risk Factors” section. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated and disproportionate to the operating performance of companies in our industry. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.
Securities class action litigation has often been brought against public companies that experience periods of volatility in the market prices of their securities. Securities class action litigation could result in substantial costs and a diversion of our management’s attention and resources.
Anti-takeover effects of our charter documents and Delaware law could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our common stock.
There are provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions in the Delaware General Corporation Law (“DGCL”), that may discourage, delay, or prevent a change of control of our company that might otherwise be beneficial to stockholders. These provisions could also make it difficult for stockholders to elect directors who are not nominated by current members of our board of directors or take other corporate actions, including effecting changes in our management. For example:
•our board of directors may, without stockholder approval, issue shares of preferred stock with special voting or economic rights;
•our stockholders do not have cumulative voting rights and, therefore, each of our directors can only be elected by holders of a majority of our outstanding common stock;
•a special meeting of stockholders may only be called by a majority of our board of directors, the chairman of our board of directors, our chief executive officer, or our president (in the absence of a chief executive officer);
•our stockholders may not take action by written consent; and
•we require advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
Moreover, Section 203 of the DGCL may discourage, delay, or prevent a change of control of our company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock.
The exclusive forum provision in our organizational documents may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, or the underwriters of any offering giving rise to such claim, which may discourage lawsuits with respect to such claims.
Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware is the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a claim of breach of fiduciary duty owed by any director, officer, or other employee or agent of the company to us or our stockholders; any action asserting a claim against us arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation, or our amended and restated bylaws; any action to interpret, apply, enforce, or determine the validity of our amended and restated certificate of incorporation, or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. This exclusive forum provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act.
Notwithstanding the foregoing, our stockholders will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder. Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and consented to our exclusive forum provisions. The exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provisions contained in our amended and restated certificate of incorporation or amended and restated bylaws 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, operating results, and financial condition.
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We do not intend to pay dividends for the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends on our capital stock in the foreseeable future. As a result, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
Risks Related to Our Debt
Our indebtedness could adversely affect our financial health and our ability to respond to changes in our business.
As a result of our level of increased debt following the completion of the offering of our 2029 Notes:
•our vulnerability to adverse general economic conditions and competitive pressures will be heightened;
•we will be required to dedicate a larger portion of our cash flow from operations to interest payments, limiting the availability of cash for other purposes;
•our flexibility in planning for, or reacting to, changes in our business and industry may be more limited; and
•our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired.
We cannot be sure that our leverage resulting from the level of increased debt will not materially and adversely affect our ability to finance our operations or capital needs or to engage in other business activities. In addition, we cannot be sure that additional financing will be available when required or, if available, will be on terms satisfactory to us. Further, even if we are able to obtain additional financing, we may be required to use such proceeds to repay a portion of our debt.
Furthermore, we will not be restricted under the terms of the indenture governing the 2029 Notes from incurring additional debt, securing future debt, recapitalizing our debt, repurchasing our stock, pledging our assets, making investments, paying dividends, guaranteeing debt or taking a number of other actions that could have the effect of diminishing our ability to make payments on the 2029 Notes when due.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our indebtedness.
Our ability to repay the principal of, to pay interest on or to refinance our indebtedness, including the 2029 Notes, or to make cash payments in connection with any conversions of 2029 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our existing indebtedness and any future indebtedness we may incur and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, restructuring debt or obtaining additional debt financing or equity capital on terms that may be onerous or highly dilutive. Our ability to refinance any current or future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms or at all, which could result in a default on our debt obligations. In addition, any of our future current or future debt agreements may contain restrictive covenants that may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of our debt.
In addition, we may be unable to repurchase the 2029 Notes upon a fundamental change when required by the holders or repay prior to maturity any accelerated amounts due under the 2029 Notes upon an event of default or redeem the 2029 Notes or pay cash upon conversion of the 2029 Notes, and our future debt may contain limitations on our ability to pay cash upon conversion, repurchase or repayment of the 2029 Notes.
The capped call transactions may affect the value of our common stock.
In connection with the pricing of the 2029 Notes, we entered into capped call transactions with the option counterparties. The capped call transactions are expected generally to reduce the potential dilution to our common stock upon conversion of the 2029 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2029 Notes, as the case may be, with such reduction and/or offset subject to a cap.
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The option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 2029 Notes (and are likely to do so during any observation period related to a conversion of 2029 Notes or following any redemption or repurchase of 2029 Notes by us, in each case, if we elect to unwind a corresponding portion of the capped call transactions in connection with such conversion or such redemption or repurchase). This activity could also cause or avoid an increase or a decrease in the market price of our common stock.
We are subject to counterparty risk with respect to the capped call transactions.
The option counterparties are financial institutions or affiliates of financial institutions, and we are subject to the risk that one or more of such option counterparties may default under the capped call transactions. Our exposure to the credit risk of the option counterparties is not secured by any collateral. Past and current global economic conditions, including recent increases in prevailing interest rates, have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If any option counterparty becomes subject to bankruptcy or other insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the capped call transaction with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be positively correlated to an increase in our common stock market price and in the volatility of the market price of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and dilution with respect to our common stock. We can provide no assurance as to the financial stability or viability of any option counterparty.
Conversion of the 2029 Notes will, to the extent we deliver shares upon conversion of such 2029 Notes, dilute the ownership interest of existing stockholders, including holders who had previously converted their 2029 Notes, or may otherwise depress our stock price.
The conversion of some or all of the 2029 Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of any of such 2029 Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the 2029 Notes may encourage short selling by market participants because the conversion of the 2029 Notes could be used to satisfy short positions, or anticipated conversion of the 2029 Notes into shares of our common stock could depress our stock price.
The conditional conversion feature of the 2029 Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the 2029 Notes is triggered, holders of the 2029 Notes will be entitled to convert the 2029 Notes at any time during specified periods at their option. If one or more holders elect to convert their 2029 Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than cash in lieu of any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders of the 2029 Notes do not elect to convert their 2029 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2029 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the 2029 Notes, could have a material effect on our reported financial results.
Under current accounting principles, we do not expect to separately account for the liability and equity components of the 2029 Notes and will instead present the entire amount of the 2029 Notes as debt on the balance sheet. Additionally, under the “if-converted” method, diluted earnings per share is generally calculated assuming that all the debt securities were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be anti-dilutive, which could adversely affect our diluted earnings per share. However, if we were to make an irrevocable election to settle the principal amount of the 2029 Notes in cash, the if-converted method for calculating diluted earnings per share will only take into consideration the number of shares that would be issuable based on the extent to which the conversion value of such 2029 Notes exceeds their principal amount, provided the effect were dilutive. Furthermore, if any of the conditions to the convertibility of the 2029 Notes is satisfied, then we may be required under applicable accounting standards to reclassify the liability carrying value of the 2029 Notes as a current, rather than a long-term, liability. This reclassification could be required even if no holders convert their 2029 Notes and could materially reduce our reported working capital.
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General Risk Factors
We may be impacted by domestic and global economic and political conditions, as well as natural disasters, pandemics, and other catastrophic events, which could adversely affect our business, financial condition, or results of operations.
Our operations and performance may vary based on worldwide economic and political conditions, which have been adversely impacted by continued global economic uncertainty, political instability, and military hostilities in multiple geographies, including ongoing geopolitical conflicts such as the war in Ukraine and conflict in the Middle East, domestic and global inflationary trends, interest rate volatility, uncertainty with respect to the federal debt ceiling and budget and potential government shutdowns related thereto, potential instability in the global banking system, global supply shortages, and a tightening labor market. A severe or prolonged economic downturn or period of global political instability could drive hospitals and other healthcare professionals to tighten budgets and curtail spending, which could in turn negatively impact rates at which physicians prescribe our Zio Services. In addition, higher unemployment rates or reductions in employer-provided benefits plans could result in fewer commercially insured patients, resulting in a reduction in our margins and impairing the ability of uninsured patients to make timely payments. A weak or declining economy could also strain our suppliers, possibly resulting in supply delays and disruptions. There is also a risk that one or more of our current service providers, suppliers, or other partners may not survive such difficult economic times, which could directly affect our ability to attain our goals on schedule and on budget. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. We cannot predict the timing, strength, or duration of an economic downturn, instability, or recovery, whether worldwide, in the United States, or within our industry.
In addition, legislation has been introduced in Congress to limit certain U.S. biotechnology companies from using equipment or services produced or provided by select Chinese biotechnology companies, including those affiliated with the manufacture of certain components of our Zio Monitor system, and others in Congress have advocated for the use of existing executive branch authorities to limit those Chinese service providers’ ability to engage in business in the U.S. We cannot predict what actions may ultimately be taken with respect to trade relations between the United States and China or other countries, what products and services may be subject to such actions or what actions may be taken by the other countries in retaliation.
Further, climate-related events, including the increasing frequency of extreme weather events, natural disasters, or other catastrophic events may cause damage or disruption to our operations, international commerce, and the global economy, and could have an adverse effect on our business, operating results, and financial condition. In the event of a natural disaster, including a major earthquake, blizzard, or hurricane, or a catastrophic event such as a fire, power loss, cyberattack, or telecommunications failure, we may be unable to continue our operations and may endure system and service interruptions, reputational harm, delays in development of our Zio Systems and Zio Services, breaches of data security, and loss of critical data, all of which could cause us to experience higher attrition, losses, and additional costs to maintain or resume operations, or otherwise have an adverse effect on our business and operating results. Further, we do not maintain insurance sufficient to compensate us for the potentially significant losses that could result from disruptions to our services. Additionally, all the aforementioned risks may be further increased if our or our partners’ disaster recovery plans are inadequate.
Environmental, social, and corporate governance (“ESG”) regulations, policies, and provisions may make our supply chain more complex and may adversely affect our relationships with customers.
There is an increasing focus from certain investors, physicians, patients, employees, and other stakeholders concerning corporate citizenship and sustainability matters and the governance of environmental and social risks. An increasing number of participants in the medical services industry are joining voluntary ESG groups or organizations, such as the Responsible Business Alliance. These ESG provisions and initiatives are subject to change, can be unpredictable, and may be difficult and expensive for us to comply with, given our reliance on our supply chain and the outsourced manufacturing of certain components and sub-assemblies of the Zio Systems used with our Zio Services.
Further, we have in the past and may continue to communicate certain initiatives, including goals, regarding environmental matters, responsible sourcing, and social investments. We could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could fail in fully and accurately reporting our progress on such initiatives and goals. In addition, we could be criticized for the scope of such initiatives or goals or perceived as not acting responsibly in connection with these matters.
If we are not effective in addressing ESG matters affecting our business, or setting and meeting relevant ESG goals, our reputation and financial results may suffer.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sales of Unregistered Securities
None.
Use of Proceeds
None.
Issuer Purchases of Equity Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Trading Plans
During the three months ended September 30, 2024, no Section 16 officers or directors adopted terminated
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.
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EXHIBIT INDEX
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit Number | Description | Form | File No. | Exhibit No. | Filing Date | Provided Herewith | ||||||||||||||||||||||||||||||||
10.1** | X | |||||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
| 32.1* | X | |||||||||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document | X | ||||||||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||||||||
* The certifications filed as Exhibits 32.1 are not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall they be deemed and are not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended or the Exchange Act, 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 of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| iRhythm Technologies, Inc. | ||||||||
| Date: October 30, 2024 | By: | /s/ Quentin S. Blackford | ||||||
| Quentin S. Blackford President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| Date: October 30, 2024 | By: | /s/ Daniel Wilson | ||||||
Daniel Wilson Chief Financial Officer (Principal Financial Officer) | ||||||||
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***CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS BOTH NOT MATERIAL AND IS THE TYPE THAT THE REGISTRANT TREATS AS PRIVATE AND CONFIDENTIAL***
TECHNOLOGY LICENSE AGREEMENT
This Technology License Agreement (this “Agreement”) is entered into as of August 30, 2024 (the “Effective Date”) by and between iRhythm Technologies, Inc., a Delaware corporation with a principal place of business at 699 8th Street, Suite 600, San Francisco, CA 94103 (“iRTC”) and BioIntelliSense, Inc., a Delaware corporation, with a principal place of business at 17301 W. Colfax Avenue, Golden, CO 80401 (“BioIS”). iRTC and BioIS may each be referred to herein as a “Party” and collectively as the “Parties”.
WHEREAS, iRTC is in the business of developing and commercializing wearable biosensor products, cloud-based data analytics, and ambulatory cardiac monitoring services redefining the way cardiac arrhythmias are detected;
WHEREAS, BioIS is in the business of developing and commercializing a portfolio of wearable biosensor, clinical and patient interfaces, and data analytics technology;
WHEREAS, in addition to two prior investments and concurrent with the execution of this Agreement, iRTC will invest an additional Forty Million US Dollars (US $40,000,000) via multiple convertible notes (such notes, the “Additional Notes” and the collective investment amount, the “Additional Note Investment”), one of the Additional Notes with an original principal amount of Ten Million US Dollars (US $10,000,000) may be used to satisfy the [***] Fee (the “[***] Note”) and one of the Additional Notes with an original principal amount of Ten Million US Dollars (US $10,000,000) may be used to satisfy the [***] Fee (the “[***] Note”) under this Agreement;
WHEREAS, concurrently with the execution of this Agreement and issuance of the Additional Notes for the Additional Note Investment, the Parties are entering into [***];
WHEREAS, iRTC desires to obtain, and BioIS wishes to grant to iRTC, license rights in certain BioIS’s intellectual property, technology, and products for research, development and commercialization of potential next-generation products and services in certain fields of use, on the terms and conditions of this Agreement; and
WHEREAS, the Parties wish to, in accordance with the terms and conditions of this Agreement, negotiate in good faith (i) [***]; and (ii) [***].
NOW THEREFORE, in consideration of the mutual covenants and promises herein contained, iRTC and BioIS agree as follows:
1.DEFINITIONS.
1.1“Accounting Standard” means, with respect to a Party or its Affiliate or Sublicensee, as applicable, either Generally Accepted Accounting Principles or International Financial Reporting Standards that such Party or its Affiliate or Sublicensee follows for its financial reporting from time to time, in each case, consistently applied.
1.2“ACM” means ambulatory cardiac monitoring.
1.3“ACM Billing Code” means any of the following: an Existing ACM Billing Code, a Future ACM Billing Code or a Foreign Equivalent ACM Billing Code.
1.4“ACM Clinical Trials Field of Use” means the conduct of clinical trials involving the use of ACM devices as the primary indication to evaluate the effects other devices or drugs on health-related biomedical or behavioral outcomes.
1.5“ACM Competitive Infringement” has the meaning set forth in Section 8.5(c) (Prosecution and Maintenance of Licensed Patents).
1.6[***].
1.7“ACM Field of Use” means the provision of services eligible for billing or reimbursement under any ACM Billing Code, or bundled payment codes that but for the bundle would be eligible for reimbursement under any ACM Billing Code. For clarity, unless any of the following is otherwise eligible for any ACM Billing Code, the ACM Field of Use excludes: [***].
1.8“ACM-Specific Patent Right” has the meaning set forth in Section 8.5(d) (Prosecution and Maintenance of Licensed Patents).
1.9“Acquiring Entity” has the meaning set forth in Section 1.20 (Control).
1.10“Affiliate” means, with respect to a Party, a corporation or other entity that directly or indirectly controls or is controlled by or is under common control with such Party; where “control” means: (a) the direct or indirect ownership of more than fifty percent (50%) of the capital stock of the subject entity; (b) control of more than fifty percent (50%) of the voting rights of the subject entity; or (c) possession, directly or indirectly, of the power to direct or cause direction of the management or policies of the subject entity (whether through ownership of securities or other ownership interests, by contract or otherwise). Notwithstanding the foregoing, with respect to BioIS, any portfolio companies of venture capital or investment funds that are, or otherwise affiliated with, any equity holder of BioIS, which portfolio companies may otherwise be deemed to be under control, controlled by or under common control with BioIS shall be excluded as Affiliates hereunder.
1.11“Anti-Corruption Laws” means the United States Foreign Corrupt Practices Act, the United States Anti-Kickback Statute and any other Applicable Laws of a similar nature for the prevention of inter alia, fraud, corruption, racketeering, money laundering and terrorism.
1.12“Applicable Law” means, with respect to a Party, any and all federal, state, local, national and supra-national laws, statutes, rules and regulations, including any rules, regulations, guidelines, or other requirements of the Regulatory Authorities, major national securities exchanges or major securities listing organizations, that may be in effect from time to time during the Term and applicable to both the business of the applicable Party and its performance under this Agreement, including Anti-Corruption Laws.
1.13“BioIS Indemnitee” has the meaning set forth in Section 9.2 (Indemnification by iRTC).
1.14“[***]” has the meaning set forth in Section 4.1 ([***] Procurement).
1.15“Calendar Quarter” means each of the three-month periods ending March 31, June 30, September 30 and December 31; provided that the first Calendar Quarter of the Term will extend from the
Effective Date to the end of the then-current Calendar Quarter, and the last Calendar Quarter of the Term will extend from the first calendar day of such Calendar Quarter until the effective date of the termination or expiration of this Agreement.
1.16“Change of Control” means, with respect to a Party, a change in the corporation or other entity that directly or indirectly controls such Party; where “control” means: (a) the direct or indirect ownership of more than fifty percent (50%) of the capital stock of the subject entity; (b) control of more than fifty percent (50%) of the voting rights of the subject entity; or (c) possession, directly or indirectly, of the power to direct or cause direction of the management or policies of the subject entity (whether through ownership of securities or other ownership interests, by contract or otherwise).
1.17“Claims” has the meaning set forth in Section 9.1 (Indemnification by BioIS).
1.18“CoC IP” has the meaning set forth in Section 1.20 (Control).
1.19“Confidential Information” has the meaning set forth in Section 6.1 (Confidential Information).
1.20“Control”, “Controls”, or “Controlled by” means, with respect to BioIS and the applicable Intellectual Property Right or Regulatory Approval, that BioIS has the ability to grant to IRTC any right (including access or reference), license, or sublicense (as applicable) to such Intellectual Property Right or Regulatory Approval as provided for herein without violating the terms of any agreement with any Third Party existing at the time BioIS would be first required hereunder to grant IRTC such right, license or sublicense, provided that, to the extent any payment is due to the applicable Third Party as a result of IRTC’s or any of its Affiliates’ or sublicensees’ use or practice of such Intellectual Property Right or Regulatory Approval under this Agreement, IRTC agrees in writing to be responsible for such payment. Notwithstanding the foregoing, in the event BioIS undergoes a Change of Control (such Third Party acquiror and its Affiliates immediately prior to such Change of Control, collectively the “Acquiring Entities” and individually an “Acquiring Entity”), then BioIS will not be deemed to “Control” any material, know-how, Regulatory Approval, Patents or Intellectual Property Right that, (i) prior to the effective date of such Change of Control, is owned or in-licensed by any Acquiring Entity that becomes an Affiliate of such acquired Party after the Effective Date as a result of such Change of Control or (ii) developed or acquired by any Acquiring Entity after the effective date of such Change of Control without accessing or practicing the Licensed Technology or any Confidential Information exchanged hereunder (such material, know-how, Regulatory Approval, Patent rights and other Intellectual Property Right, collectively, the “CoC IP”) unless (a) prior to the effective date of such Change of Control, such acquired Party or any of its Affiliates also Controlled such CoC IP, or (b) such CoC IP is incorporated in any Licensed Technologies, whether prior to or after the effective date of such Change of Control.
1.21“Cover,” “Covering” or “Covers” means with respect to a product or other subject matter at issue, (a) an issued Patent, that, in the absence of a license granted under, or ownership of, such Patent, the making, using, selling, offering for sale or importation of such product or other subject matter would infringe such Patent or, (b) claims within a pending Patent application, the making, using, selling, offering for sale or importation of such product or other subject matter would infringe such claims if the Patent were to be issued without modification of such claims.
1.22“Current Procedural Terminology” or “CPT” means the medical code set developed by the American Medical Association that enables physicians and other healthcare providers to describe
and report the medical, surgical, and diagnostic procedures and services they perform to government and private payers, researchers and other interested parties.
1.23“Disclosing Party” has the meaning set forth in Section 6.1 (Confidential Information).
1.24“Dispute” has the meaning set forth in Section 12.2 (Dispute Resolution).
1.25“Distributor” means any Third Party that is appointed by a Selling Entity to distribute, market and resell a Licensed Product in a country, regardless of whether such Third Party is granted ancillary rights to further package or obtain Regulatory Approvals of such Licensed Product, provided that such Third Party is not obligated to pay to the applicable Selling Entity any royalty other payment calculated based on amounts invoiced or received by such entity for the sale, disposition or other transfer of such Licensed Products.
1.26“ECG” means electrocardiogram.
1.27[***].
1.28 “Existing ACM Billing Code(s)” means CPT [***]; or any existing bundled payment codes that, but for the bundle, would be eligible for reimbursement under CPT [***].
1.29“Existing Licensed Patents” means any and all Licensed Patents included in the Licensed IP Rights existing as of the Effective Date. Existing Licensed Patents include the Patents set forth in Exhibit A.
1.30“Existing Licensed Technologies” means any and all Technologies generated, created, developed, made, or otherwise acquired or possessed by BioIS or its Affiliates as of the Effective Date, which Technologies embody, or are otherwise necessary to enable the Licensed Applications. Existing Licensed Technologies include the Technologies set forth in the Tech Transfer Plan in Exhibit B.
1.31“First Commercial Sale” means the [***].
1.32“FDA” means the United States Food and Drug Administration, or any successor agency thereto.
1.33“[***] Fee” has the meaning set forth in Section 5.2 ([***] Fee).
1.34“[***] Fee” has the meaning set forth in Section 5.3 ([***] Fee).
1.35“FFDCA” means the United States Federal Food, Drug, and Cosmetic Act, 21 U.S.C. 301, et. seq., and the rules, regulations, guidance, guidelines and requirements promulgated or issued thereunder.
1.36“Foreign Equivalent ACM Billing Code” means a coding or classification for services, in any jurisdiction outside the United States, that requires utilization of a Valid ACM Device in the provision of that service, and that substantially corresponds to the services described under an Existing ACM Billing Code or a Future ACM Billing Code in the United States.
1.37“Funding Date” has the meaning set forth in Section 1.27 ([***]).
1.38“Future ACM Billing Code” means any future and/or revised CPT code for services that utilize a Valid ACM Device to provide services described under Existing ACM Billing Codes. For clarification purposes, in the event a new billing code is established:
(a)for the provision of products or services using a Valid ACM Device that includes [***], such services and any devices utilized to provide or facilitate the delivery of such services will be deemed within the ACM Field of Use;
(b)for the provision of services using a Valid ACM Device that includes [***], such services and any devices utilized to provide or facilitate the delivery of such services will be deemed within the ACM Field of Use;
(c)for the provision of services using a Valid ACM Device [***], such services and any devices utilized to provide or facilitate the delivery of such service, will be deemed within the ACM Field of Use; and
(d)that alters or expands [***] associated with any Existing ACM Billing Code, but otherwise generally comports with any Existing ACM Billing Code, such services and any devices utilized to provide or facilitate the delivery of such services will be deemed within the ACM Field of Use.
1.39“Governmental Authority” means any: (a) federal, state, provincial, local, municipal, or other government; (b) governmental or quasi-governmental authority of any nature (including any agency, board, body, branch, bureau, commission, council, department, entity, governmental division, instrumentality, office, officer, official, organization, representative, subdivision, unit and any court or other tribunal); (c) multinational governmental organization or body; or (d) entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any nature (including any arbiter). Governmental Authorities include all Regulatory Authorities.
1.40“HST” means home sleep testing.
1.41“HST Billing Code” means any HST billing or reimbursement code including CPT codes [***], Healthcare Common Procedural Coding System codes [***], any future and/or revised billing or reimbursement code or any other corresponding or equivalent code or other system for billing or reimbursement of HST products or services in the Territory.
1.42“HST Field of Use” means [***].
1.43“Indemnified Party” has the meaning set forth in Section 9.3 (Indemnification Procedure).
1.44“Indemnifying Party” has the meaning set forth in Section 9.3 (Indemnification Procedure).
1.45“In-Facility Patient Monitoring” means in-facility (hospital, nursing home, long term care, assisted living, etc.) patient monitoring services provided that such services are not eligible for any ACM Billing Code.
1.46“Intellectual Property Rights” means any and all intellectual property and proprietary rights recognized in any country or jurisdiction in the world, including (i) rights associated with works of
authorship, including copyrights, rights associated with computer programs, mask works and moral rights; (ii) rights in know-how, trade secrets, hardware, schematics, design documentation, design history files or proprietary information; (iii) Patents, utility models, design rights and other rights in industrial designs; and (iv) rights in or relating to registrations, renewals, extensions, combinations, divisions and reissues of and applications for and rights to claim priority from any of the rights referred to in clauses (i) through (iii). Notwithstanding the foregoing, for purposes of this Agreement, Intellectual Property Rights will not include trademarks, trade names, logos and service marks.
1.47“Invention” means any invention, process, method, article of manufacture, discovery, or finding, whether or not patentable, that is conceived or reduced to practice in connection with activities performed under this Agreement.
1.48“iRTC Indemnitee” has the meaning set forth in Section 9.1 (Indemnification by BioIS).
1.49“Licensed Applications” means: (a) pulse oximetry measurement and/or monitoring, accelerometry-based heart rate and respiratory rate measurement and/or monitoring, and non-invasive trending blood pressure measurement (for clarity, excluding measurement of absolute numerical values) and/or monitoring (the “Restricted Applications”); and (b) accelerometry-based activity (including steps, gait, cadence, symmetry, body position) measurement and/or monitoring, Bluetooth (device-side) wireless streaming tools, skin temperature measurement and/or monitoring, biophone, and iOS and Android mobile applications (the “Unrestricted Applications”).
1.50“Licensed Data” means any current or future data generated from or about BioIS products and services incorporating or containing Licensed Technologies (including [***]) that is relied upon for purposes of validation, development and regulatory clearance of any BioIS products and services, in each case, only as such data relates to the Licensed Technologies.
1.51“Licensed Improvements” means any Technologies which (a) consist of improvements, modifications, enhancements, derivatives, or revisions to the Existing Licensed Technologies, (b) are otherwise necessary to implement, or otherwise enable the Licensed Applications, which Technologies under (a) and (b) are generated, created, developed or otherwise made by or on behalf of BioIS or its Affiliates during the [***]. For clarity, any [***] Technologies developed by or on behalf of BioIS or its Affiliates during the [***] shall constitute Licensed Improvements. For clarity, BioIS is under no obligation to iRTC to make future improvements, modifications, enhancements, derivates or revisions to the Existing Licensed Technologies.
1.52“Licensed IP Rights” means any Intellectual Property Rights Controlled by BioIS or its Affiliates as of the Effective Date or at any time thereafter during the Term which (a) Cover the Licensed Technologies, or implementations thereof made by iRTC, its Affiliates and/or Sublicensees, or (b) are embodied in or are otherwise necessary to implement, or otherwise enable the Licensed Technologies, or such implementations. Licensed IP Rights include the Licensed Patents.
1.53“Licensed Patents” means any Patents included in the Licensed IP Rights. Licensed Patents include the Existing Licensed Patents and any and all Patents Controlled by BioIS and its Affiliates that Cover Licensed Improvements.
1.54“Licensed Product” means any product or service developed, manufactured or commercialized by or on behalf of iRTC, its Affiliates or Sublicensees, which is Covered by, incorporates or embodies any Licensed IP Rights.
1.55“Licensed Technologies” means the Existing Licensed Technologies and the Licensed Improvements.
1.56“Losses” has the meaning set forth in Section 9 (Indemnification; Insurance).
1.57“Net Sales” means, with respect to a Royalty-Bearing HST Product, for any period, [***]:
(a)[***];
(b)[***];
(c)[***];
(d)[***];
(e)[***];
(f)[***];
(g)[***]; and
(h)any other similar and customary deductions that are consistent with the Selling Entity’s normal practices and the applicable Accounting Standard.
Any of the deductions listed above that involves a payment by the Selling Entity will be [***].
1.58“Open-Source Components” has the meaning set forth in Section 3.3(a) (Dependencies).
1.59“Open-Source License” has the meaning set forth in Section 3.3 (Dependencies).
1.60“Patent” means: (a) any patent or patent application in any country or supranational jurisdiction worldwide, including any provisional patent application; (b) any application claiming priority to any such patent or patent application or any substitution, divisional, continuation, continuation-in-part, reissue, renewal, registration, confirmation or the like of any such patent or patent application; or (c) any extension or restoration by any existing or future extension or restoration mechanism, including revalidation, reissue, re-examination or extension, including any supplementary protection certificate of any of the foregoing.
1.61“Patent Authority” means the Governmental Authority responsible for the granting of Patents in any national, regional, supranational, or international jurisdiction.
1.62“Person” means any individual, partnership, joint venture, limited liability company, corporation, firm, trust, association, unincorporated organization, Governmental Authority or any other entity not specifically listed herein.
1.63“Post-Acute Discharge Setting” means the [***] following a patient’s discharge from an acute care facility.
1.64 “Prescription” means a valid order from a licensed physician or other licensed healthcare practitioner having a valid NPI (National Provider Identifier) or international equivalent. “Prescribe” or “Prescribed” have a correlative meaning.
1.65“Prosecution and Maintenance”, “Prosecution, Maintenance”, “Prosecute and Maintain” or “Prosecute, Maintain” means, with regard to a Patent, the preparation, filing, prosecution and maintenance of such Patent, as well as re-examinations, reissues and appeals with respect to such Patent, together with the initiation or defense of interferences, oppositions, inter partes review, derivations, re-examinations, post-grant proceedings and other similar proceedings (or other defense proceedings with respect to such Patent, but excluding the defense of challenges to such Patent as a counterclaim in an infringement proceeding) with respect to the particular Patent, and any appeals therefrom, and actions to obtain patent term extensions and supplementary protection certificates with respect to such Patent and the like. For clarification, “Prosecution and Maintenance” or “Prosecute and Maintain” will not include any other enforcement actions taken with respect to a Patent.
1.66“[***]” has the meaning set forth in Section 4.1 ([***]).
1.67“Receiving Party” has the meaning set forth in Section 6.1 (Confidential Information).
1.68“Regulatory Approval” means the authorization from a Regulatory Authority that is necessary prior to commercial sale and distribution of a medical device or other regulated product with respect to specific indications for use (e.g., 510(k) clearance, de novo authorization, or Premarket Approval (PMA)).
1.69“Regulatory Authority” means, with respect to any jurisdiction, (a) any supranational, national, state, or local regulatory agency, administration, department, bureau, commission, council or other governmental entity involved in the granting of a Regulatory Approval and (b) any court, agency, department, bureau, commission, counsel, authority, or other instrumentality of any national, state, province, county, city or other political subdivision. For clarity, the FDA is a Regulatory Authority.
1.70“Regulatory Documentation” means all (a) applications, registrations, licenses, authorizations and approvals (including Regulatory Approvals); and (b) correspondence, reports and other submissions submitted to or received from any Regulatory Authority and all supporting documents with respect thereto, including all adverse event files and complaint files.
1.71“Remote Physiologic Monitoring” or “RPM” means remote physiologic monitoring services eligible for billing or reimbursement under CPT codes [***] in effect as of the Effective Date (or replacement codes therefor).
1.72“Remote Therapeutic Monitoring” or “RTM” means remote physiologic monitoring services eligible for billing or reimbursement under CPT codes [***] in effect as of the Effective Date (or replacement codes therefor).
1.73“Representatives” means, with respect to a Party, such Party’s Affiliates and such Party’s and its Affiliates’ respective directors, officers, employees, contractors and agents.
1.74“Restricted Applications” has the meaning set forth in Section 1.49 (Licensed Applications).
1.75“Royalty-Bearing HST Product” means any product or service that (a) [***] and (b) [***].
1.76“Royalty Report” has the meaning set forth in Section 5.4(b) (Royalty Reporting).
1.77“Royalty Term” has the meaning set forth in Section 5.4(a) (Royalty Payments).
1.78[***].
1.79“Rules” has the meaning set forth in Section 12.2(b) (Arbitration).
1.80“Securities Regulator” has the meaning set forth in Section 6.5 (Securities Filings; Disclosure under Applicable Law).
1.81“Selling Entity” has the meaning set forth in Section 1.57 (Net Sales).
1.82“Senior Officer” means, with respect to BioIS, Chief Executive Officer or his/her designee, and with respect to iRTC, Chief Executive Officer or his/her designee.
1.83“Soliciting Party” has the meaning set forth in Section 7.4 (Non-Solicitation).
1.84“Source Code” means the human readable source code of the software to which it relates, in the programming language in which such software was written, together with all related flow charts and technical documentation, including a description of the procedure for generating object code, all of a level sufficient to enable a programmer reasonably fluent in such programming language to understand, operate, support, maintain, and develop modifications, upgrades, updates, enhancements, improvements, and new versions of, and to develop computer programs compatible with, such software.
1.85“Sublicensee” means, with respect to iRTC, a Third Party to whom iRTC has granted a sublicense in accordance with Section 2.2 (Sublicensing) under the licenses in Section 2.1 (Licenses to iRTC) to develop, manufacture and/or commercialize Licensed Products, but not, for the avoidance of doubt, any Third Party who acts as a service provider (e.g., contract research organizations, contract manufacturers, academic institutions, clinical trial service providers which perform directly or through multiple tiers services for iRTC), or any Distributor of iRTC or its Affiliate or such Sublicensee.
1.86[***].
1.87“Technology” or “Technologies” means all tangible materials, software (including Source Code), firmware, hardware, know-how, trade secrets, Confidential Information, processes, methods, techniques, specifications, design and manufacturing documentation and any invention, process, method, article of manufacture, discovery, or finding, whether or not patentable.
1.88“Term” has the meaning set forth in Section 11.1 (Term).
1.89“Territory” means worldwide, subject to Section 2.5 (BioIS Products in ACM Field of Use).
1.90“Third Party” means any Person other than the Parties and their respective Affiliates.
1.91“Third Party Materials” has the meaning set forth in Section 3.3(b) (Dependencies).
1.92“Unrestricted Applications” has the meaning set forth in Section 1.49 (Licensed Applications).
1.93“Upfront Fee” has the meaning set forth in Section 5.1 (Upfront Fee).
1.94“Valid ACM Device” means a medical device subject to (a) FDA clearance (or approval by an equivalent regulatory body in a jurisdiction outside the United States) and (b) Prescription, which device (i) is wearable by the patient (as differentiated from implantable or handheld); (ii) has ECG capabilities, and (iii) is used for the primary purpose of screening for, diagnosing, or monitoring of any International Statistical Classification of Diseases and Related Health Problems (ICD) condition that is eligible for billing or reimbursement under any ACM Billing Code.
1.95“Valid Claim” means a claim contained in (a) an issued and unexpired patent, which claim has not been revoked or held unenforceable or invalid by a decision of a court or governmental agency of competent jurisdiction, which decision is not appealable or has not been appealed within the time allowed for appeal, and has not been abandoned, disclaimed, denied or admitted to be invalid or unenforceable through reissue, re-examination, disclaimer or otherwise, or (b) a patent application that has not been irretrievably cancelled, withdrawn or abandoned and that has been pending for less than seven (7) years from the filing date from which such claim takes priority. If a claim of a patent application that ceased to be a Valid Claim under clause (b) of the preceding sentence because of the passage of time later issues as a part of a patent within clause (a) of the preceding sentence, then it shall again be considered a Valid Claim effective as of the issuance of such patent.
2.LICENSES.
2.1Licenses to iRTC.
(a)Exclusive ACM Field of Use License. Upon payment of the Upfront Fee, BioIS, on its own behalf and on behalf of its Affiliates, hereby grants to iRTC a limited, perpetual, non-terminable, irrevocable, fully paid-up, royalty-free, transferrable (to the extent permitted under Section 12.3 (Assignment)) and sublicensable (through multiple tiers in accordance with Section 2.2 (Sublicensing)) license under all of the Licensed IP Rights to research, develop, make, have made, use, import, distribute, publicly display, copy, make derivative works of, offer for sale, sell, commercialize and otherwise exploit Valid ACM Devices in the ACM Field of Use in the Territory. The foregoing license grant will be exclusive (even with respect to BioIS and its Affiliates) for twenty (20) years after the Effective Date, and thereafter the foregoing license grant will become non-exclusive. For clarity, BioIS retains the right under the Licensed IP Rights to research, develop, make, have made, use, import, distribute, publicly display, copy, make derivative works of, offer for sale, sell, commercialize and otherwise exploit Valid ACM Devices which have application outside of the ACM Field of Use, provided that such Valid ACM Devices are in no event exploited in the ACM Field of Use.
(b)Non-Exclusive HST Field of Use License. Upon payment of the Upfront Fee, BioIS, on its own behalf and on behalf of its Affiliates, hereby grants to iRTC a limited, perpetual, non-terminable, irrevocable, non-exclusive, royalty-bearing, transferrable (to the extent permitted under Section 12.3 (Assignment)) and sublicensable (through multiple tiers in accordance with Section 2.2 (Sublicensing)) license under all of the Licensed IP Rights to research, develop, make, have made, use, import, distribute, copy, publicly display, make derivative works of, offer for sale, sell, commercialize and otherwise exploit products and services in the HST Field of Use in the Territory. Following the expiration of the Royalty Term for a Royalty-Bearing HST Product in a country, the foregoing license
grant to iRTC under Section 2.1(b) shall become fully paid-up and royalty free, for such Royalty-Bearing HST Product in such country.
(c)Non-Exclusive ACM Clinical Trials Field of Use License. Upon payment of the Upfront Fee, BioIS, on its own behalf and on behalf of its Affiliates, hereby grants to iRTC a limited, perpetual, non-terminable, irrevocable, fully paid-up, non-exclusive, royalty-free, transferrable (to the extent permitted under Section 12.3 (Assignment)) and sublicensable (through multiple tiers in accordance with Section 2.2 (Sublicensing)) license under all of the Licensed IP Rights to research, develop, make, have made, use, import, distribute, copy, publicly display, make derivative works of, offer for sale, sell, commercialize and otherwise exploit products and services in the ACM Clinical Trials Field of Use in the Territory.
(d)Non-Exclusive Unrestricted Applications License. Upon payment of the Upfront Fee, BioIS, on its own behalf and on behalf of its Affiliates, hereby grants to iRTC a limited, perpetual, non-terminable, irrevocable, fully paid-up, non-exclusive, royalty-free, transferrable (to the extent permitted under Section 12.3 (Assignment)) and sublicensable (through multiple tiers in accordance with Section 2.2 (Sublicensing)) license under all of the Licensed IP Rights to research, develop, make, have made, use, import, distribute, copy, publicly display, make derivative works of, offer for sale, sell, commercialize and otherwise exploit products and services related to the Unrestricted Applications in any field of use in the Territory.
2.2Sublicensing.
(a)Right to Sublicense. iRTC will have the right, without BioIS’s consent, to grant a sublicense under the licenses in Section 2.1 (Licenses to iRTC) to (a) any of its Affiliates, (b) any patients, prescribers, and other end-users as necessary to use iRTC’s current or future products and/or services, and (c) any Third Party (including but not limited to manufacturers, subcontractors, service providers, development partners, or commercial partners) in connection with the development, manufacturing or commercialization of any current or future iRTC product or service, whether directly or through multiple tiers.
(b)Sublicensing Requirement. The following terms will apply to each sublicense granted by iRTC to any Affiliate or Third Party (other than patients, prescribers and end users): (a) any such permitted sublicense will be consistent with and subject to the terms and conditions of this Agreement and (b) iRTC will continue to be responsible for the performance of its obligations under this Agreement.
2.3BioIS Retained Rights.
(a)[***]. For clarity, BioIS shall not grant to any Third Party any rights to research, develop, make, have made, use, import, distribute, copy, publicly display, make derivative works of, offer for sale, sell, commercialize and otherwise exploit Valid ACM Devices and services in the ACM Field of Use with respect to any Licensed Technologies (including any BioIS products and services that exist as of the Effective Date).
(b)[***].
(i)[***], and BioIS shall (1) contractually require such recipients to comply with this sub-clause 2.3(b)(i), and (2) use diligent efforts to enforce such contractual requirements;
(ii)[***];
(iii)[***], and BioIS shall (1) contractually require such recipients to comply with this sub-clause 2.3(b)(iii)(x) and (2) use diligent efforts to enforce such contractual requirements; or
(iv)[***], and BioIS shall (1) contractually require such recipients to comply with this sub-clause 2.3(b)(iv) and (2) use diligent efforts to enforce such contractual requirements.
Notwithstanding anything to the contrary in this Agreement, neither BioIS and its Affiliates [***], and BioIS shall (1) contractually require such recipients to comply with the foregoing covenant and (2) use diligent efforts to enforce such contractual requirements.
[***].
2.4Embedded Licensed Technologies. The Parties acknowledge that to the extent any Licensed Technology related to the Restricted Applications, whether software or hardware, is embedded in a Licensed Product, if such embedded Technology is deactivated, disabled or removed during the patient wear period, then none of the field of use restrictions set forth in Sections 2.1(a) (Exclusive ACM Field of Use License), 2.1(b) (Non-Exclusive HST Field of Use License), and 2.1(c) (Non-Exclusive ACM Clinical Trials Field of Use License) will apply to the exercise of the rights granted hereunder.
2.5BioIS Products in ACM Field of Use. iRTC may, in its sole discretion, by notice in writing to BioIS in response to BioIS’s reasonable written request, permit BioIS to directly commercialize BioIS products (as identified in iRTC’s notice) in one or more specific country(is) in the Territory in the ACM Field of Use, on a case-by-case basis. For purposes of the foregoing, iRTC may consider any or none of the following factors:
(a)whether iRTC is not commercializing and does not intend to commercialize a product or service in the country in the ACM Field of Use;
(b)whether iRTC is not distributing and does not intend to distribute BioIS’s products or services in the country in the ACM Field of Use;
(c)whether BioIS has contracted with iRTC to be its exclusive provider of ECG analysis and/or IDTF equivalent services in said country; and
(d)whether iRTC retains all other rights in the country pursuant to the licenses granted herein.
2.6No Implied Licenses. Except as expressly set forth in this Agreement, neither Party shall be deemed by estoppel, implication or otherwise to have granted the other Party any license or other right to any Intellectual Property Rights of such Party. For clarity, none of the licenses granted to iRTC in Section 2.1 shall be construed to restrict BioIS in any respect as to research, development, marketing, sales or other activities outside the ACM Field of Use.
3.TECHNOLOGY TRANSFER; REGULATORY MATTERS.
3.1Alliance Managers. Promptly following the Effective Date, each Party shall appoint a representative of such Party as the primary contact for all technical, business and day-to-day matters related to this Agreement (the “Alliance Managers”). The Alliance Managers shall facilitate open and
transparent communication and collaboration between the Parties and shall seek to facilitate resolution of potential and pending issues and potential disputes. Either Party may replace its Alliance Manager at any time upon prior written notification (including by email) to the other Party.
3.2Technology Transfer.
(a)Subject to Sections 3.2(b), 3.2(d), and 3.3, promptly (but in no event later than thirty (30) days) after the Effective Date, BioIS shall make available and securely transfer to iRTC all the Existing Licensed Technologies and all Licensed Data except those related to the Restricted Applications. Such transfer will be in the form and format, and by such means, as may be reasonably requested by iRTC and in accordance with the plan set forth in Exhibit B (Technology Transfer Plan) (“Tech Transfer Plan”).
(i)[***].
(b)[***].
(c)[***].
(d)[***].
(e)All Source Code transferred from BioIS to iRTC will be [***].
3.3Dependencies. Prior to or concurrently with BioIS’s transfer to iRTC of any Licensed Technologies, (i) [***]; and (ii) [***]. Any use of such Open-Source Components by iRTC will be governed by, and subject to, the terms and conditions of the applicable Open-Source Licenses. In this Section 3.3:
(a)“Open-Source Components” means [***]; and
(b)“Third Party Materials” means [***].
3.4Regulatory.
(a)Regulatory Matters - General. Each Party will be responsible for obtaining and maintaining all Regulatory Approvals for its products, including (i) overseeing, monitoring, and coordinating all interactions with Regulatory Authorities; (ii) preparing, filing and maintaining all Regulatory Documentation; and (iii) maintaining all regulatory records as required by Applicable Law; in each case, with respect to such products. BioIS will provide to iRTC such cooperation as may be reasonably requested by iRTC to obtain and maintain Regulatory Approvals for the Licensed Products in the Territory.
(b)[***].
4.[***]; [***]; ADDITIONAL SERVICES.
4.1[***].
(a)Commencing on the Effective Date and for [***] days thereafter, the Parties shall [***] in accordance with the terms and conditions attached as Exhibit C ([***] Agreement Terms and
Conditions). Notwithstanding the foregoing, iRTC may elect, in its sole discretion, to [***]. BioIS will reasonably cooperate with iRTC to [***].
(b)With respect to the [***], in the event iRTC implements the [***] on an iRTC product, such iRTC product will only be subject to the field of use and other restrictions contained herein in the event the [***] is operational, meaning that such [***] is collecting and/or transmitting [***] data.
4.2[***].
4.3[***].
4.4[***].
5.FEES & PAYMENT TERMS.
5.1Upfront Fee. In consideration of the licenses granted by BioIS to iRTC under Section 2.1 (Licenses to iRTC) and subject to the terms and conditions of this Agreement, upon iRTC’s Acceptance of the initial transfer of the Existing Licensed Technologies and Licensed Data pursuant to Section 3.2(a) (Technology Transfer), iRTC will pay to BioIS a one-time payment of Fifteen Million US Dollars (US $15,000,000) (the “Upfront Fee”) in immediately available funds, in accordance with the instructions to be provided by BioIS to iRTC. Upon payment of such Upfront Fee and execution of the Additional Notes for the Additional Note Investment, the licenses granted to iRTC herein shall become irrevocable and the licenses granted in Sections 2.1(a) (Exclusive ACM Field of Use License), 2.1(c) (Non-Exclusive ACM Clinical Trials Field of Use License) and 2.1(d) (Non-Exclusive Unrestricted Applications License) shall be fully paid-up. [***].
5.2[***] Fee. If BioIS has [***], then, and conditioned on the execution of the [***] Agreement, iRTC shall also pay to BioIS a fee of Ten Million US Dollars (US $10,000,000) plus any unpaid accrued interest under the [***] Note upon written notice from BioIS (which includes the [***]) of such [***] (the “[***] Fee”); provided, however, the [***] Fee shall be offset by the outstanding principal amount plus any unpaid accrued interest of the [***] Note and the cancellation of the [***] Note. In the event BioIS has not yet completed [***] by December 31, 2025, Five Million US Dollars (US $5,000,000) plus any unpaid accrued interest on such principal amount due the [***] Note will be forgiven in full satisfaction of the [***] Fee, and no [***] Fee shall be due. For purposes of this Section 5.2, [***]; provided that, prior to [***], (a) BioIS shall provide iRTC (including its Chief Executive Officer, Alliance Manager and legal department) with a copy [***] as reasonably sufficient to confirm compliance with [***], (b) iRTC will have ten (10) days to review and verify such compliance, and (c) during such ten (10) day review period, iRTC may initiate the dispute resolution process in Section 12.2 (Dispute Resolution) if iRTC determines that [***] does not comply with such specifications.
5.3[***] Fee. If BioIS [***] prior to December 31, 2026, then, conditioned on (a) [***] having been completed by December 31, 2025 as set forth in Section 5.2 and (b) the execution of the [***] Agreement, iRTC shall also pay to BioIS a fee of Ten Million US Dollars (US $10,000,000) plus any unpaid accrued interest under the [***] Note upon iRTC’s receipt of written notice from BioIS (which includes a copy of [***]) of such [***] (the “[***] Fee”); provided, however, the [***] Fee shall be offset by the outstanding principal amount plus any unpaid accrued interest of the [***] Note and the cancellation of the [***] Note. For clarity, in the event BioIS has [***] before December 31, 2025, but has not [***] by December 31, 2026, iRTC shall not be required to pay the [***] Fee. For purposes of this Section 5.3, [***] means BioIS’s [***].
5.4Royalties for Royalty-Bearing HST Products.
(a)Royalty Payments. Subject to the terms and conditions of this Agreement, on a Royalty-Bearing HST Product-by-Royalty-Bearing HST Product and country-by-country basis, commencing upon the First Commercial Sale of a Royalty-Bearing HST Product in the applicable country in the Territory and ending upon the later of ten (10) years after such First Commercial Sale and expiration of the last Valid Claim of a Licensed Patent Right that Covers such Royalty-Bearing HST Product in such country (the “Royalty Term”), iRTC shall pay to BioIS a royalty of [***] on Net Sales of such Royalty-Bearing HST Product in such country. [***].
(b)Royalty Reporting. [***].
5.5Exchange Rate; Manner and Place of Payment. All references to dollars and “$” herein shall refer to U.S. dollars. All payments hereunder shall be payable in U.S. dollars. Currencies other than the U.S. Dollars shall be converted into U.S. Dollars at the average of the daily foreign exchange rates published in the Wall Street Journal (New York Edition), or any other qualified source that is mutually acceptable, for the calendar quarter in which such payments accrue, or, for periods less than a calendar quarter, the average of the daily rates published in the Wall Street Journal (New York Edition) for such period. All payments owed to BioIS under this Agreement shall be made by wire transfer in immediately available funds to a bank and account designated in writing by BioIS, unless otherwise specified in writing by BioIS. If the conversion of a local currency in the Territory into dollars or transfer of funds out of a country or jurisdiction in the Territory becomes materially restricted, forbidden, or substantially delayed due to Applicable Law, then iRTC shall promptly notify BioIS and amounts accrued in such country or jurisdiction may be paid by iRTC in local currency into an account in a local bank designated by BioIS, unless the Parties otherwise agree.
5.6Late Payments. [***].
5.7Taxes. [***].
5.8Exclusions. The fees set forth herein do not include charges for the following, which will all generate additional fees:
(a)[***];
(b)[***]; and
(c)[***] and other BioIS products.
5.9Records; Audit. [***].
6.CONFIDENTIALITY.
6.1Confidential Information. “Confidential Information” of a Party means any non-public or other proprietary information disclosed or otherwise made available by or on behalf of that Party (the “Disclosing Party”) to the other Party (the “Receiving Party”), whether made available orally, in writing, or in electronic form, before or during the Term (including with respect to information disclosed or made available by or on behalf of BioIS to iRTC or its Representatives in connection with any due diligence conducted by iRTC prior to the Effective Date) that: (a) if disclosed in writing or in the form of tangible materials, is marked “confidential” or “proprietary” or with a similar designation at the time of
such disclosure; (b) if disclosed orally or presented visually, is identified as “confidential” or “proprietary” at the time of such disclosure, and is summarized in a writing sent by the disclosing party to the receiving party within thirty (30) days after any such disclosure; or (c) due to its nature or the circumstances of its disclosure, a person exercising reasonable business judgment would understand to be confidential or proprietary. The terms and conditions of this Agreement (including the Additional Notes, [***], [***], the [***] agreement, the distribution agreements in Section 4.2, the services agreements in Sections 4.3 and 4.4, and any other ancillary documents to this Agreement) will be the Confidential Information of each Party. Notwithstanding anything to the contrary in this Section 6, any proprietary information, data or know-how disclosed by BioIS to iRTC under this Agreement that are solely applicable to the ACM Field of Use shall constitute the Confidential Information of iRTC.
6.2Exceptions. Notwithstanding Section 6.1, in no event is information Confidential Information if it (i) was, at the date of disclosure, or have subsequently become, generally known or available to the public through no act or failure to act by Receiving Party; (ii) was in Receiving Party’s possession before receipt from Disclosing Party, as documented by contemporaneous written records provided that the foregoing exception shall not apply to iRTC-made Improvements; (iii) is received by Receiving Party from a Third Party who has the right to disclose such information or materials without breach of any obligation of confidentiality; or (iv) is independently developed by Receiving Party without use of or reference to the Confidential Information of Disclosing Party.
6.3Confidentiality Obligations. Each Receiving Party will: (a) maintain the Disclosing Party’s Confidential Information in strict confidence; (b) protect and safeguard it using at least the same degree of care as it uses to protect the confidentiality of its own confidential information of similar importance, but no less than a commercially reasonable degree of care; and (c) not use the Confidential Information of the Disclosing Party except as necessary to perform its obligations or the exercise of its rights under this Agreement (for clarity, the foregoing clause (c) is not a license of Intellectual Property Rights does not modify or expand the Intellectual Property Rights that are licensed pursuant to Section 2 (Licenses) or Section 3.2(c) (if any)). The Receiving Party will not disclose or cause to be disclosed any Confidential Information of the Disclosing Party without first obtaining the prior written consent of the Disclosing Party, except for disclosures expressly permitted pursuant to this Section 6 (Confidentiality). Receiving Party shall immediately, upon discovery of any disclosure or use of Confidential Information not authorized hereunder, notify Disclosing Party and take reasonable steps to prevent any further unauthorized disclosure or unauthorized use of Confidential Information. Receiving Party’s obligations under this Section 6.3 (Confidentiality Obligations) with respect to Confidential Information of the Disclosing Party shall survive for a period of five (5) years following the termination or expiration of this Agreement except with respect to trade secrets, which shall survive as long as such information constitutes a trade secret. To the extent of any conflict between this Section 6 (Confidentiality) and any of Sections 2.1 (Licenses to iRTC) and 3.2 (Technology Transfer), Sections 2.1 (Licenses to iRTC) and 3.2 (Technology Transfer), as applicable, shall govern and control.
6.4Authorized Disclosures. Notwithstanding Section 6.3 (Confidentiality Obligations), the Receiving Party may disclose Confidential Information belonging to the Disclosing Party in the following instances:
(a)to those Representatives of the Receiving Party (including Receiving Party’s confidential advisors such as insurance brokers, lenders, auditors, attorneys and accountants) who have a bona fide need to know such Confidential Information to perform under this Agreement and who are bound by written agreements with non-use and confidentiality obligations at least as protective as those set forth in this Agreement;
(b)in the case of iRTC, to any actual or potential collaborators, partners, sublicensees or subcontractors who have a bona fide need to know such Confidential Information for iRTC or its Affiliates to exercise its rights or licenses hereunder (provided that, for clarity, the foregoing is not a license of Intellectual Property Rights does not modify or expand the Intellectual Property Rights that are licensed pursuant to Section 2 (Licenses) or Section 3.2(c) (if any)) and who are bound by written agreements with non-use and confidentiality obligations at least as protective as those set forth in this Agreement;
(c)disclosure to potential Third Party investors or acquirers in connection with due diligence activities, provided, in each case, that any such Third Party agrees to be bound by reasonable obligations of confidentiality and non-use; and
(d)pursuant to an order of a court or other Governmental Authority of competent jurisdiction, subject to the Receiving Party providing to the Disclosing Party reasonable advance notice to allow the Disclosing Party to seek a protective order or otherwise contest the disclosure. The Receiving Party shall disclose no more than that portion of the Confidential Information which, on the advice of legal counsel, such order or law specifically requires the Receiving Party to disclose.
6.5Securities Filings; Disclosure under Applicable Law. Each Party acknowledges and agrees that the other Party may submit this Agreement to, or file this Agreement with, the U.S. Securities and Exchange Commission or any other securities exchange that may be applicable to a Party in the Territory (each, a “Securities Regulator”) or other Persons as may be required by Applicable Law, and if a Party submits this Agreement to, or files this Agreement with, any Securities Regulator or other Person as may be required by Applicable Law, such Party agrees to consult with the other Party with respect to the preparation and submission of a confidential treatment request for this Agreement. Notwithstanding the foregoing, if a Party is required by any Securities Regulator or other Person as may be required by Applicable Law to make a disclosure of the terms of this Agreement in a filing or other submission as required by such Securities Regulator or such other Person, and such Party has: (a) provided copies of the disclosure to the other Party reasonably in advance under the circumstances of such filing or other disclosure; (b) promptly notified the other Party in writing of such requirement and any respective timing constraints; and (c) given the other Party reasonable time under the circumstances from the date of provision of copies of such disclosure to comment upon and request confidential treatment for such disclosure, then such Party will have the right to make such disclosure at the time and in the manner reasonably determined by its counsel to be required by the Securities Regulator or the other Person. Notwithstanding the foregoing, if a Party seeks to make a disclosure as required by a Securities Regulator or other Person as may be required by Applicable Law as set forth in this Section 6.5 (Securities Filings; Disclosure under Applicable Law) and the other Party provides comments in accordance with Section 6.5 (Securities Filings; Disclosure under Applicable Law), then the Party seeking to make such disclosure or its counsel, as the case may be, will incorporate such comments to the extent legally permissible.
6.6No Publicity. Unless expressly permitted herein, a Party will not issue any press release or other public communication, whether written or oral, relating to this Agreement or the transactions contemplated hereby without the prior written approval of the other Party, not to be unreasonably withheld, conditioned, or delayed. Notwithstanding anything to the contrary in the foregoing, either Party may issue such press releases as it determines reasonably necessary to comply with Applicable Law. Each Party shall provide the other Party with advance notice of any such legally required press release to the extent practicable and consider its comments in good faith. In addition, after the existence of this Agreement, the identity of the other Party, or any terms of this Agreement are publicly disclosed in accordance with this Agreement, either Party shall be free to disclose, without the other Party’s prior
written consent, such information as has already been publicly disclosed in accordance with this Agreement.
6.7Return of Confidential Information. Upon termination or expiration of this Agreement, upon the request of Disclosing Party, Receiving Party shall promptly return to Disclosing Party or destroy Disclosing Party’s Confidential Information in its possession (other than Confidential Information that is treated as Confidential Information of both Parties), except to the extent that retention of such Confidential Information is reasonably necessary for the Receiving Party to exploit any continuing rights it has pursuant to this Agreement and/or to fulfill its obligations contemplated herein, including one copy of the Confidential Information stored in a secure place for the sole purposes of monitoring its compliance under this Agreement or evidence. The return and/or destruction of such Confidential Information as provided above shall not relieve the Receiving Party of its obligations under this Agreement. The obligation to return or destroy shall not apply to copies of electronically exchanged Confidential Information made as a matter of routine information technology backup and to Confidential Information or copies thereof which must be stored by the Receiving Party according to provisions of Applicable Law or the Receiving Party’s generally applicable written internal policies and procedures.
7.REPRESENTATIONS, WARRANTIES AND COVENANTS.
7.1Mutual Representations, Warranties and Covenants.
(a)Authority. BioIS and iRTC each represents and warrants to the other Party that, as of the Effective Date, (i) it is duly organized and validly existing under the laws of its jurisdiction of incorporation or formation, and it has full power and authority to enter into this Agreement and carry out the transactions contemplated hereby, (ii) it is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder, and the person or persons executing this Agreement on its behalf has been duly authorized to do so by all requisite corporate or partnership action, and (iii) this Agreement is legally binding upon it, enforceable in accordance with its terms, and does not conflict with any agreement, instrument, or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any material law or regulation of any court, governmental body, or administrative or other agency having jurisdiction over it.
(b)Compliance. BioIS and iRTC each represents, warrants and covenants to the other Party that it: (i) will perform its obligations under this Agreement in accordance with Applicable Law; and (ii) will obtain and maintain on an active and current basis, all licenses, permits, registrations, approvals and other authority from all applicable federal, state, and local governments and agencies having jurisdiction over the subject matter of this Agreement as necessary to perform its obligations under this Agreement.
7.2BioIS Representations, Warranties, and Covenants. BioIS represents, warrants and covenants (as applicable) to iRTC that:
(a)BioIS and its Affiliates, as of the Effective Date, are the sole and exclusive owners of the entire right, title, and interest in and to each of the Licensed IP Rights and Intellectual Property Rights in and to the Licensed Technologies (excluding any non-exclusive rights or licenses of Non-Material IP), free and clear of all liens, encumbrances and security interests, other than (i) any lien or encumbrance that arises out of taxes either not delinquent or the validity of which is being contested in good faith by appropriate proceedings, (ii) any lien or encumbrance representing the rights of customers, suppliers and subcontractors in the ordinary course of business under the terms of any contracts to which
the relevant party is a party or under general principles of commercial or government contract law (including mechanics’, materialmen’s, carriers’, workmen’s, warehouseman’s, repairmen’s, landlords’ and similar liens granted or which arise in the ordinary course of business), (iii) any license of Intellectual Property Rights outside of the exploitation of Valid ACM Devices in the ACM Field of Use that does not otherwise conflict with the licenses granted by BioIS under this Agreement and (iv) the [***] Exception (collectively, (i)-(iv), “Permitted Encumbrances”). Exhibit A (Existing Licensed Patents) sets forth a complete and accurate list of all Licensed Patents Controlled by BioIS or any of its Affiliates existing as of the Effective Date. Exhibit B (Technology Transfer Plan) sets forth a complete and accurate list of all Licensed Technologies existing as of the Effective Date. For purposes of this Agreement, “Non-Material IP” means (i) Intellectual Property Rights other than patent rights that (a) are granted to the Company or its Affiliates by providers of research, development, manufacturing or other related services to BioIS or any of its Affiliates in order to enable BioIS or any of its Affiliates to use such services under the relevant agreements and (b) are not material to the exploitation of Licensed Products and (ii) software licenses for commercially available, off-the-shelf software;
(b)[***];
(c)[***];
(d)[***]:
(i)[***]:
(ii)[***].
(iii)[***].
(iv)[***].
(v)[***].
(e)as of the Effective Date, (i) BioIS has complied in all material respects with all Applicable Laws in connection with the Prosecution and Maintenance of the Existing Licensed Patents, including any disclosure requirements of the United States Patent and Trademark Office and any foreign patent office, and has timely paid all filing and renewal fees payable with respect thereto, (ii).neither BioIS nor its Affiliates have received any notice, written or otherwise, of any claim or threat of any claim made by any Person against BioIS or its Affiliates that alleges that any Existing Licensed Patent is invalid or unenforceable and there is no pending adverse action, suit or proceeding against BioIS in relation to any Existing Licensed Patent. BioIS will promptly notify iRTC if BioIS or any of its Affiliates receives any notice, written or otherwise, of any claim or threat of any claim by any Person against BioIS or its Affiliates alleging that any Licensed Patent is invalid or unenforceable;
(f)as of the Effective Date, there are no claims, judgments, settlements, litigations, suits, actions, disputes, arbitration, judicial or legal, administrative or other proceedings, or governmental investigations (each, an “Action”) pending, threatened or, to BioIS’ knowledge, anticipated in writing against BioIS or its Affiliates which could reasonably be expected to adversely affect or restrict the ability of BioIS to consummate or perform the transactions and obligations contemplated under this Agreement, or which would reasonably be expected to adversely affect the Licensed IP Rights, BioIS’s Control thereof or the Licensed Technologies. BioIS will promptly notify iRTC if BioIS or any of its Affiliates
receives any notice, written or otherwise, of any such Action or threat of any such Action by any Person against BioIS or any of its Affiliates;
(g)as of the Effective Date, to its knowledge, BioIS has not misappropriated, infringed or otherwise violated, and will not misappropriate, infringe or otherwise violate, any property (whether Patent, Technologies, or otherwise) of a Third Party in connection with developing the Licensed Technologies. Neither BioIS nor its Affiliates have received any written notice of any claim that any property (whether Patent, Technologies, or otherwise) controlled by a Third Party would be infringed, misappropriated or otherwise violated by the performance of the activities hereunder in accordance with this Agreement, and BioIS will promptly notify iRTC if BioIS or any of its Affiliates receives any notice, written or otherwise, of any such claim or threat of any such claim. To BioIS’s knowledge, no Third Party is infringing, misappropriating or otherwise violating, or threatening to infringe, misappropriate or otherwise violate the Licensed Technologies;
(h)BioIS or its Affiliate have obtained from all individuals who participated, and will obtain from all individuals who participate during the Term, in any respect in the invention, authorship or other creation of any Licensed Technology owned or purported to be owned by BioIS or such Affiliate valid and enforceable written assignments of all rights of such individuals in such Licensed Technology. To BioIS’s knowledge, as the Effective Date, no Person who claims to be an inventor of an Invention claimed in a Licensed Patent owned by or exclusively licensed to BioIS or any of its Affiliates is not identified as an inventor of such Invention in the filed patent documents for such Licensed Patent. As of the Effective Date, no dispute regarding inventorship or ownership has been alleged or threatened with respect to any Licensed Technology owned by or exclusively licensed to BioIS or any of its Affiliates. BioIS will promptly notify iRTC if BioIS or any of its Affiliates receives any notice, written or otherwise, of any such dispute;
(i)as of the Effective Date, neither BioIS nor its Affiliates is a party to any agreement with any Governmental Authority that refers or relates to the Licensed IP Rights, Licensed Patents or Licensed Technologies, or any activity contemplated hereunder;
(j)(a) as of the Effective Date, neither BioIS nor any of its Affiliates has been debarred or is subject to debarment pursuant to the FFDCA or subject to any similar sanction pursuant to any Applicable Law (including outside the United States) or is listed on any excluded list maintained by any Governmental Authority; and (b) neither it nor any of its Affiliates has, to its knowledge, used in any capacity, and will not use in any capacity, in connection with the activities to be performed under this Agreement, any individual or entity that has been debarred pursuant to the FFDCA or subject to any similar sanction pursuant to any Applicable Law (including outside the United States), or that is the subject of a conviction described in the FFDCA or subject to any similar sanction pursuant to any Applicable Law (including outside the United States), or listed on any excluded list maintained by any Governmental Authority; and
(k)BioIS and its Affiliates have taken commercially reasonable measures consistent with industry practices to protect the secrecy, confidentiality and value of all trade secrets and confidential information in the Licensed Technologies, including by requiring all employees, consultants and subcontractors to execute binding and enforceable agreements requiring all such employees, consultants and subcontractors to maintain the confidentiality of all such Licensed Technologies. To BioIS’s knowledge: (i) the trade secrets and confidential information of BioIS or its Affiliates in the Licensed Technology has not been disclosed to, or used or discovered by, any Third Party except pursuant to such confidentiality agreements or as disclosed in any published patent application filed by or on behalf
of BioIS or its Affiliates; and (ii) there has not been a breach by any party of such confidentiality agreements.
7.3[***].
7.4Non-Solicitation. During the period commencing on the Effective Date and ending on the five (5) year anniversary of the Effective Date, each Party (a “Soliciting Party”) shall not, and shall cause its Affiliates (and any other Person engaged by such Soliciting Party or its Affiliate to act on its behalf for such purpose) not to, directly or indirectly, solicit for employment current employees of the other Party without the other Party’s prior written consent (which will not be unreasonably withheld); provided, however, the Soliciting Party and its Affiliates shall not be restricted from (a) hiring or soliciting any employee of the other Party (or its Affiliates) through a general solicitation of employees (including through the use of general advertisement in the mass media, participation in job fairs or website postings) not specifically directed or targeted at any such persons or (b) hiring any employee of the other Party (or its Affiliates) who contacts the Soliciting Party on his or her own initiative without any direct or indirect solicitation from Soliciting Party (or any of its Affiliates).
8.INTELLECTUAL PROPERTY.
8.1Ownership. Inventorship of any Invention and all Intellectual Property Rights therein shall be determined in accordance with principles of inventorship for patent rights under US law. Except as expressly set forth in Section 8.2(b) with respect to iRTC-made Improvements, ownership shall follow inventorship.
8.2Improvements.
(a)BioIS Ownership of Licensed Improvements. BioIS will own all Licensed Improvements, and Intellectual Property Rights in and to the Licensed Improvements Controlled by BioIS shall be automatically included in the Licensed IP Rights. [***].
(b)Assignment of iRTC-made Improvements.
(i)iRTC agrees to assign and hereby assigns to BioIS all of its right, title and interests in and to any iRTC-made Improvements. [***].
(ii)[***].
(iii)[***].
8.3Intentionally Left Blank.
8.4Joint Development. The Parties acknowledge and agree that no joint development work is contemplated hereunder, and any such work by the Parties, if mutually agreed upon by the Parties, will be addressed in a separate joint development agreement.
8.5Prosecution and Maintenance of Licensed Patents.
(a)Except as set forth in Section 8.5(d), BioIS will have sole control, in its sole discretion over the Prosecution and Maintenance of the Licensed Patents and will pay all fees and costs related thereto. BioIS will provide, during the initial twenty-four (24) months quarterly and then annually
thereafter, updates to iRTC with respect to the status and scope of the Licensed Patents. iRTC will promptly notify BioIS if iRTC becomes aware of any known or suspected infringement of the Licensed Patents in the Territory.
(b)Except as set forth in Sections 8.5(c) and 8.5(d), BioIS will have sole control, in its sole discretion over enforcement and defense of the Licensed Patents against third-party infringers. If BioIS initiates any enforcement action against any Third Party infringer, iRTC will reasonably cooperate with BioIS with respect to such action. BioIS will be responsible for all reasonable out-of-pocket costs, expenses, and legal fees incurred by iRTC in connection with such cooperation provided by iRTC, and will be entitled to all damages awarded as a result of or agreed to in a monetary settlement of any such action.
(c)Notwithstanding the foregoing, if BioIS does not initiate an enforcement action to abate an ACM Competitive Infringement within one hundred twenty (120) days following delivery of notice thereof by iRTC to BioIS, then iRTC may upon written notice to BioIS initiate and maintain an enforcement action of the applicable Licensed Patents against the applicable Third Party infringer, at iRTC’s cost and expense, provided that before initiating such action iRTC shall consult in good faith with BioIS, including, to the extent reasonably feasible, providing to BioIS reasonable documentation showing the basis for such action. If iRTC does initiate such action, BioIS will reasonably cooperate with iRTC with respect to such action, and iRTC shall keep BioIS reasonably informed as to the status of any such action and shall consider in good faith the comments of BioIS with respect thereto. iRTC will be responsible for all reasonable out-of-pocket costs, expenses, and legal fees incurred by the BioIS in connection with such cooperation provided by BioIS, and will be entitled to all damages awarded as a result of or agreed to in a monetary settlement of any such action. For purposes of this Section 8.5(c), “ACM Competitive Infringement” shall mean an infringement of the Licensed Patents which adversely affects or could reasonably be expected to adversely affect the development, manufacture or commercialization of Valid ACM Device in the ACM Field of Use by iRTC, its Affiliates and Sublicensees in the ACM Field of Use in the Territory, or any related declaratory judgment or equivalent action.
(d)To the extent any Licensed Technology has any sole application with respect to a Valid ACM Device in the ACM Field of Use, BioIS shall file, in each case as requested by iRTC and at iRTC’s reasonable costs and expense, one or more Patent application(s) (including, if applicable, divisional(s) or continuation(s) based on Existing Licensed Patents) directed to such application(s) (each an “ACM-Specific Patent Right”) and will transfer to iRTC promptly following such filing any related materials, including the prosecution files. iRTC will have sole control over the Prosecution and Maintenance of any and all ACM-Specific Patent Rights and will pay all fees and costs related thereto. iRTC shall provide to BioIS (a) any material documentation received by iRTC from any patent authority in the Territory regarding the prosecution of any ACM-Specific Patent Right, and (b) drafts of all material filings or correspondence planned by iRTC to be submitted to any patent authority in the Territory regarding the prosecution of any ACM-Specific Patent Right sufficiently in advance of submitting so as to allow for a reasonable opportunity for BioIS to review and comment thereon, it being understood that iRTC shall consider in good faith any such comment. In the event that iRTC intends to abandon or cease the Prosecution or Maintenance any ACM-Specific Patent Right, iRTC shall provide reasonable prior written notice to BioIS of such intention to abandon or cease the Prosecution or Maintenance of such abandoned ACM-Specific Patent Right (“Abandoned ACM Specific Patent Right”). Following delivery of such notice (which shall be given no later than thirty (30) days prior to the next deadline for any action that must be taken with respect to any such Abandoned ACM-Specific Patent Right in the relevant patent office), iRTC shall have no responsibility for such Abandoned ACM-Specific Patent Right. In such case,
at BioIS’s sole discretion, and upon written notice to iRTC, iRTC will transfer to BioIS sole control of the prosecution and maintenance of such Abandoned ACM-Specific Patent Right and any related materials, including the prosecution files. Thereafter, BioIS will have sole control over the Prosecution and Maintenance of such Abandoned ACM-Specific Patent Right, and will pay all fees and costs related thereto. Any and all such Abandoned ACM-Specific Patent Rights shall no longer be part of the ACM-Specific Patent Rights, but shall remain Licensed Patents under this Agreement.
(e) iRTC will have sole control over enforcement and defense of any ACM-Specific Patent Right against Third Party infringers, at iRTC’s cost and expense, provided that before initiating such action iRTC shall consult in good faith with BioIS, including, to the extent reasonably feasible, by providing to BioIS reasonable documentation showing the basis for such action. If iRTC does initiate such action, BioIS will reasonably cooperate with iRTC with respect to such action, and iRTC shall keep BioIS reasonably informed as to the status of any such action and shall consider in good faith the comments of BioIS with respect thereto. iRTC will be responsible for all reasonable out-of-pocket costs, expenses, and legal fees incurred by the BioIS in connection with such cooperation provided by BioIS, and will be entitled to all damages awarded as a result of or agreed to in a monetary settlement of any such claim.
9.INDEMNIFICATION; INSURANCE.
9.1Indemnification by BioIS. BioIS shall defend, indemnify and hold iRTC and its Affiliates and their respective directors, officers, employees, and agents (each, a “iRTC Indemnitee”) harmless from and against any and all actions, suits, claims, demands and proceedings (“Claims”) brought by any Third Party, and any liability, damages, loss, cost and expense (including reasonable attorneys’ fees) (“Losses”) resulting therefrom, arising out of or in connection with: (a) BioIS’s breach of this Agreement; (b) the gross negligence or willful misconduct of BioIS or any of its Representatives in connection with its performance under this Agreement or (c)[***]; except, in each case (a)-(c), to the extent such Losses arise out of any activities set forth in Section 9.2 (Indemnification by iRTC) for which iRTC is obligated to indemnify any BioIS Indemnitee under Section 9.2.
9.2Indemnification by iRTC. iRTC shall defend, indemnify and hold BioIS and its Affiliates and their respective directors, officers, employees, and agents (each, a “BioIS Indemnitee”) harmless from and against any and all Claims brought by any Third Party, and any Losses resulting therefrom, arising out of or in connection with: (a) iRTC’s breach of this Agreement; (b) the gross negligence or willful misconduct of iRTC or any of its Representatives in connection with its performance under this Agreement; or (c) the development, manufacture, use, commercialization or other exploitation of any Licensed Product by or on behalf of iRTC, its Affiliates or Sublicensees; except, in each case (a)-(c), to the extent such Losses arise out of any activities set forth in Section 9.1 (Indemnification by BioIS) for which BioIS is obligated to indemnify any iRTC Indemnitee under Section 9.1.
9.3Indemnification Procedure. The Parties’ indemnification obligations set forth in this Section 9 (Indemnification; Insurance) are conditioned upon the Party claiming indemnification hereunder (the “Indemnified Party”) (a) promptly notifying the other Party (the “Indemnifying Party”) of a Claim (provided, however, that failure to provide such notice shall relieve the Indemnifying Party from its liability or obligation hereunder only to the extent of any material prejudice as a direct result of such failure); (b) promptly giving the Indemnifying Party the right to control and direct the investigation, preparation, defense and settlement of such Claim with counsel of the Indemnifying Party’s own choosing; and (c) giving assistance and full cooperation for the defense of same. Without limiting the foregoing, the Indemnified Party shall have the right to reasonably participate, at its own expense, in the
defense or settlement of any Claim. The Indemnifying Party shall not settle any Claim without the prior written consent of the Indemnified Party, not to be unreasonably withheld, conditioned, or delayed, unless the settlement involves only the payment of money, no admission of wrong-doing or fault by the Indemnified Party, and no restriction on the future actions or activities of the Indemnified Party. So long as the Indemnifying Party is actively defending the Claim in good faith, the Indemnified Party shall not settle such Claim without the prior written consent of the Indemnifying Party. If the Indemnifying Party does not assume and conduct the defense of the Claim as provided above, (i) the Indemnified Party may defend against and consent to the entry of any judgment, or enter into any settlement with respect to, the Claim in any manner the Indemnified Party may deem reasonably appropriate (and, provided that the Indemnified Party consults with and obtains any consent from the Indemnifying Party in connection with such settlement, not to be unreasonably withheld, conditioned, or delayed), and (ii) the Indemnifying Party will remain responsible to indemnify the Indemnified Party as provided in this Section 9 (Indemnification; Insurance).
9.4Insurance. During the Term and for [***] thereafter, each Party, at its own expense, shall maintain commercial general liability insurance and other appropriate insurance in an amount consistent with sound business practice and reasonable in light of its obligations under this Agreement. Each Party shall provide a certificate of insurance (or evidence of self-insurance) evidencing such coverage to the other Party upon the other Party’s request.
10.DISCLAIMER; LIMITATION OF LIABILITY.
10.1Disclaimer. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, STATUTE, OR OTHERWISE, AND EACH PARTY SPECIFICALLY DISCLAIMS ANY AND ALL IMPLIED OR STATUTORY WARRANTIES INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IRTC MAKES NO REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, THAT IT WILL BE ABLE TO SUCCESSFULLY ADVANCE ANY LICENSED PRODUCT OR DEVELOP, ACHIEVE MARKETING APPROVAL FOR, MANUFACTURE, COMMERCIALIZE OR OTHERWISE EXPLOIT ANY LICENSED PRODUCT OR, IF COMMERCIALIZED, THAT ANY PARTICULAR SALES LEVEL OR PROFIT OF SUCH LICENSED PRODUCT WILL BE ACHIEVED, AND BIOIS ACKNOWLEDGES THAT ALL BUSINESS DECISIONS HEREUNDER, WITH RESPECT TO THE DESIGN, MANUFACTURE, SALE, PRICE, AND PROMOTION OF LICENSED PRODUCTS, AS WELL AS THE DECISION WHETHER OR NOT TO DEVELOP OR COMMERCIALIZE LICENSED PRODUCTS, WILL BE WITHIN THE SOLE DISCRETION OF IRTC.
10.2Limitation of Liability. EXCEPT FOR (A) A PARTY’S GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR FRAUD, (B) A PARTY’S INDEMNIFICATION OBLIGATIONS UNDER SECTION 8, (C) A PARTY’S BREACH OF SECTION 6 (CONFIDENTIALITY), AND (D) A PARTY’S BREACH OF ITS REPRESENTATIONS, WARRANTIES AND COVENANTS UNDER SECTION 7: (1) IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL, PUNITIVE, SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES OF ANY KIND (INCLUDING LOST PROFITS OR LOST REVENUES), REGARDLESS OF WHETHER THE PARTY WAS ADVISED, HAD OTHER REASON TO KNOW OR IN FACT KNEW OF THE POSSIBILITY OF THE FOREGOING; AND (2) EACH PARTY’S TOTAL CUMULATIVE LIABILITY ARISING FROM OR RELATING TO THE AGREEMENT WILL NOT EXCEED THE AGGREGATE OF THE UPFRONT FEE, ANY FEES THAT ARE DUE AND PAYABLE UNDER SECTION 5.2 OR SECTION
5.2, ANY ROYALTIES THAT ARE DUE AND PAYABLE UNDER SECTION 5.4 AND ALL COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS’ FEES) TO TAKE ACTION IN RESPECT THEREOF.
11.TERM; TERMINATION.
11.1Term. The term of this Agreement shall commence on the Effective Date and continue in full force and effect, unless and until terminated in accordance with this Section 11 (“Term”).
11.2Termination for Convenience. iRTC may terminate this Agreement, as a whole or on a country-by-country or field-by-field basis, at any time by giving BioIS [***] prior notice in writing.
11.3Termination for Breach. Either Party shall be entitled to terminate this Agreement for cause, by written notice to the other Party and with immediate effect, if the other Party breaches any of its material obligations under this Agreement and, if such breach is curable, fails to cure such breach within [***] following its receipt of written notice thereof from the terminating Party. Notwithstanding the foregoing, in the event of a curable non-monetary default, if the default is not cured and not reasonably capable of being cured within the [***] cure period by the defaulting Party and such defaulting Party is making a good faith effort to cure such default, this Agreement will not terminate upon the expiration of such [***] cure period, provided however, that the notifying Party may terminate this Agreement with immediate effect by notice in writing to the breaching Party if such default is not cured within [***] of such original notice of default. Notwithstanding the foregoing, if either Party is alleged to be in material breach as provided herein and disputes such allegation, and the terminating Party’s right to terminate this Agreement based thereon, in good faith and on the basis of detailed reasons through the dispute resolution procedures set forth in Section 12.2 (Dispute Resolution), then upon referral of such Dispute pursuant to Section 12.2(a) (Referral to Senior Officers) provided that such Dispute is referred pursuant to Section 12.2 (Dispute Resolution) on or before the end of such initial ninety (90) day cure period by the Party alleged to be in breach, the beginning of the cure period shall be tolled for so long as the matter is in the dispute resolution process offset forth in Section 12.2 (Dispute Resolution) and the Party alleged to be in breach is diligently pursuing such procedure. Such dispute resolution proceedings referred to in this Section 11.3 do not suspend any obligations of either Party hereunder, and each Party shall use reasonable efforts to mitigate any damage.
11.4Insolvency.
(a)Termination for Insolvency. iRTC may terminate this Agreement by notice in writing to BioIS if BioIS (i) becomes insolvent or admits inability to pay its debts generally as they become due; (ii) becomes subject, voluntarily or involuntarily, to any proceeding under any domestic or foreign bankruptcy or insolvency law, which is not fully stayed within [***] or is not dismissed or vacated within [***]; (iii) is dissolved or liquidated or takes any corporate action for such purpose; (iv) makes a general assignment for the benefit of creditors; or (v) 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.
(b)Rights Upon Insolvency. All rights and licenses granted by BioIS under this Agreement, including all rights and licenses that extend beyond the term hereof, are and shall be deemed to be rights and licenses to “intellectual property”, for purposes of, and as such terms are used in and interpreted under, Section 365(n) of the United States Bankruptcy Code (the “Code”). If BioIS or its estate shall become subject to any bankruptcy or similar proceeding, iRTC shall retain and have the right
to fully exercise all rights, licenses, elections, and protections under this Agreement, the Code and all other applicable bankruptcy, insolvency and similar Laws with respect to any licenses and rights that extend beyond the term hereof. Without limiting the generality of the foregoing, BioIS acknowledges and agrees that, if BioIS or its estate shall become subject to any bankruptcy or similar proceeding:
(i)all rights and licenses granted to iRTC hereunder shall continue and shall not be affected, even by BioIS’s rejection of this Agreement; and
(ii)iRTC shall be entitled to a complete duplicate of (or complete access to, as appropriate) all such intellectual property and embodiments of intellectual property comprising or relating to any Licensed Technologies, and the same, if not already in iRTC’s possession, shall be promptly delivered to iRTC, unless BioIS elects to and does in fact continue to perform all of its obligations under this Agreement.
11.5[***].
11.6Effect of Termination. On any expiration or termination of the entirety of this Agreement, except to the extent that retention of any Confidential Information is reasonably necessary for the Receiving Party to exploit any continuing rights it has pursuant to this Agreement, the Receiving Party shall (a) return to the Disclosing Party all documents and tangible materials (and any copies) containing, reflecting, incorporating, or based on the Disclosing Party’s Confidential Information; (b) permanently erase the Disclosing Party’s Confidential Information from its computer systems; and (c) certify in writing to the Disclosing Party that it has complied with the requirements of this Section 11.6 (Effects of Termination).
11.7Survival. Expiration or termination of this Agreement shall not relieve each Party of any obligation or right accruing prior to such expiration or termination, including for breach of Section 7.1 (Mutual Representations, Warranties and Covenants) or 7.2 (BioIS Representations, Warranties, and Covenants). Except as set forth below or elsewhere in this Agreement, the obligations and rights of the Parties under the following provisions of this Agreement shall survive expiration or termination of this Agreement: Section 1 (Definitions) (to the extent such definitions are used in surviving provisions), Section 2 (Licenses), Section 5 (Fees & Payment Terms), Section 6 (Confidentiality), Sections 7.3 (iRTC Additional Covenant) and 7.4 (Non-solicitation), Section 8.1 (Ownership), Section 8.2 (Improvements), Section 8.5 (Prosecution and Maintenance of Licensed Patents), Section 9 (Indemnification; Insurance), Section 10 (Disclaimer; Limitation of Liability), Section 11.6 (Effect of Termination), Section 11.7 (Survival) and Section 12 (General).
12.GENERAL.
12.1Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to any principles of conflict of laws that would lead to the application of the laws of another jurisdiction.
12.2Dispute Resolution. Any dispute or claim (including non-contractual disputes or claims) arising out of or relating to this Agreement (a “Dispute”), shall be resolved pursuant to this Section 12.2.
(a)[***].
(b)Arbitration. Subject to Sections 12.2(c) (Disputes Related to Patent Rights) and 12.2(d) (Interim Relief) below, any Dispute, which is not resolved pursuant to Section 12.2(a), shall be
referred to and finally resolved by arbitration pursuant to JAMS’ Comprehensive Arbitration Rules and Procedures (the “Rules”) by a panel of three arbitrators appointed in accordance with the Rules, if, however, the aggregate award sought by the Parties is less than [***] and equitable relief is not sought, a single arbitrator shall be chosen in accordance with the Rules. Each arbitrator shall be a lawyer with at least fifteen (15) years of experience with a law firm or corporate law department of over 25 lawyers and at least ten (10) years representing (either as outside counsel or in-house counsel) companies in the same industry as the Parties in connection with licensing transactions, provided that no such individual shall be a current or former employee or director, or a current stockholder, of either Party or any of their respective Affiliates. The place of arbitration shall be Wilmington, Delaware and the language to be used in any such proceeding (and for all testimony, evidence and written documentation) shall be English. The decision rendered by the arbitrators shall be final, binding and non-appealable, and judgment may be entered upon it in any court of competent jurisdiction. Except to the extent necessary to confirm, enforce, or challenge an award of the arbitration, to protect or pursue a legal right, or as otherwise required by Applicable Law or regulation or securities exchange, the existence, content, or results of any Dispute or arbitration hereunder (including any submissions (including exhibits, testimony, proposed rulings, briefs and transcripts) and the arbitrators’ rulings and award) shall be Confidential Information of both Parties.
(c)Disputes Related to Patent Rights. Without prejudice to the generality of Section 12.2(b) (Arbitration), if a Dispute arises in respect to the inventorship, validity, construction, scope, enforceability or infringement, of any Patents, and such Dispute cannot be resolved in accordance with Section 12.2(a) (Referral to Senior Officers) then, unless otherwise agreed by the Parties in writing, such Dispute shall not be subject to an arbitration proceeding pursuant to Section 12.2(b) (Arbitration) and instead either Party may bring an action in any court or administrative agency of competent jurisdiction in which such rights apply, to resolve such Dispute.
(d)Interim Relief. Notwithstanding anything herein to the contrary in this Section 12.2, in the event that a Party reasonably requires relief on a more expedited basis than would be possible pursuant to the procedure set forth in this Agreement, such Party may seek interim or provisional relief, including a temporary restraining order, preliminary injunction or other interim equitable relief concerning a Dispute, if necessary to protect the interests of such Party. This Section 12.2(d) (Interim Relief) shall be specifically enforceable.
12.3Assignment. Neither Party may assign or transfer this Agreement, by operation of law or otherwise without the other Party’s prior written consent, which will not be unreasonably withheld, conditioned, or delayed. Any attempt to assign or transfer this Agreement without such consent will be void. Notwithstanding the foregoing, each Party (and, in the case of BioIS, subject to its compliance with the terms of the [***]) may assign or transfer this Agreement to (i) an Affiliate (in the case of BioIS, provided that such Affiliate also acquires in connection with such assignment or transfer all of the Licensed IP Rights and Licensed Technologies) or (ii) any Third Party that succeeds to all or substantially all of the assigning Party’s business and assets relating to the subject matter of this Agreement, whether by sale, merger, operation of law or otherwise. Subject to the foregoing, this Agreement is binding upon and will inure to the benefit of each of the Parties and their respective successors and permitted assigns. Any purported assignment in violation of this Section 12.3 (Assignment) shall be null and void.
12.4Severability. If, for any reason, any part of this Agreement is adjudicated invalid, unenforceable, or illegal by a court of competent jurisdiction, such adjudication shall not affect or impair, in whole or in part, the validity, enforceability, or legality of any remaining portions of this Agreement. The Parties will in such an instance use their best efforts to replace the invalid, unenforceable, or illegal
provision(s) with valid, enforceable, and legal provision(s) that best implement the original intent of the Parties and purposes of this Agreement.
12.5Notices. All notices required or permitted under this Agreement will be in writing, will reference this Agreement, and will be deemed given: (i) when delivered personally; (ii) one (1) business day after deposit with a nationally-recognized express courier, with written confirmation of receipt; (iii) when sent by email, on the date the email was sent without a bounce back message if sent during normal business hours of the receiving Party, and on the next business day if sent after normal business hours of the receiving Party; or (iv) three (3) business days after having been sent by registered or certified mail, return receipt requested, postage prepaid. All such notices will be sent to the addresses set forth below or to such other address as may be specified by either Party to the other Party in accordance with this Section.
In the case of BioIS, to: BioIntelliSense, Inc. 17301 W. Colfax Avenue Golden, CO 80401 Attn: Legal Department with a copy (which shall not constitute notice) to: [***] | In the case of iRTC, to: iRhythm Technologies, Inc. 699 8th Street, Suite 600 San Francisco, CA 94103 Attn: Legal Department with a copy (which shall not constitute notice) to: [***] | ||||
12.6Waiver. Either Party’s failure to enforce any provision of this Agreement will not constitute a waiver of future enforcement of that or any other provision. No waiver of any provision of this Agreement will be effective unless it is in writing and signed by the Party granting the waiver.
12.7Entire Agreement; Amendment. This Agreement, including each exhibit attached hereto (each, an “Exhibit”), is the complete and exclusive agreement between the Parties with respect to its subject matter and supersedes all prior or contemporaneous agreements, communications and understandings, both written and oral, with respect to its subject matter. This Agreement may be amended or modified only by a written document executed by duly authorized representatives of the Parties.
12.8Relationship of the Parties. Nothing in this Agreement shall be construed to place the Parties in an agency, employment, franchise, joint venture, or partnership relationship. Neither Party shall have the authority to obligate or bind the other in any manner. Neither Party shall represent to the contrary, either expressly, implicitly or otherwise.
12.9No Third-Party Beneficiaries. Unless otherwise expressly provided, no provisions of this Agreement are intended or will be construed to confer upon or give to any Third Party any rights, remedies or other benefits under or by reason of this Agreement.
12.10Non-Exclusive Remedies. Except as expressly set forth in this Agreement, the exercise by either Party of any remedy under this Agreement will be without prejudice to its other remedies under this Agreement or otherwise.
12.11Non-Use of Names. BioIS shall not use the name, trademark, logo, or physical likeness of iRTC or its respective officers, directors or employees, or any adaptation of any of them, in any advertising, promotional or sales literature, without iRTC’s prior written consent. BioIS shall require its
Affiliates to comply with the foregoing. iRTC shall not use the name, trademark, logo, or physical likeness of BioIS or its officers, directors or employees, or any adaptation of any of them, in any advertising, promotional or sales literature, without BioIS’s prior written consent. iRTC shall require its Affiliates and Sublicensees to comply with the foregoing.
12.12Construction. This Agreement has been negotiated by each of the Parties and each of their respective counsel. This Agreement shall be fairly interpreted in accordance with its terms and without any strict construction in favor of or against either Party.
12.13Headings; Interpretation. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. This Agreement shall be deemed to comprise the language mutually chosen by the Parties and no rule of strict construction shall be applied against any Party. Unless otherwise expressly provided herein or the context of this Agreement otherwise requires, (a) words such as “herein”, “hereof”, “hereby” and “hereunder” refer to this Agreement as a whole; (b) the words “include(s)”, “including”, “such as”, “in particular” and “for example” shall be deemed to be followed by the phrase “but not limited to”, “without limitation” or words of similar import unless otherwise specified; (c) the word “or” shall be deemed to mean “and/or” unless the context dictates otherwise because the subjects of the conjunction are, or are intended to be, mutually exclusive; (d) the terms “will” and “shall” shall be deemed to have the same meaning; (e) unless otherwise provided herein, any reference to “days” means calendar days; and (f) references to Applicable Law includes any amendment or modification to such Applicable Law.
12.14Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. This Agreement may be executed by electronic signatures and such signatures shall be deemed to bind each Party hereto as if they were the original signatures, and facsimile, .pdf or electronic copies hereof shall be deemed to constitute duplicate originals.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the Parties have caused this Technology License Agreement to be executed by their respective duly authorized representatives as of the Effective Date.
IRHYTHM TECHNOLOGIES, INC. By: /s/ Quentin Blackford Name: Quentin Blackford Title: Chief Executive Officer | BIOINTELLISENSE, INC. By: /s/ James R. Mault Name: James R. Mault Title: Chief Executive Officer | ||||
EXHIBIT A
Existing Licensed Intellectual Property
[***]
EXHIBIT B
Technology Transfer Plan
[***]
EXHIBIT C
[***]Agreement Terms and Conditions
[***]
EXHIBIT D
[***]
ANNEX 1
[***]
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, Quentin S. Blackford, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and 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.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.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
d.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 fiscal 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.
Date: October 30, 2024 | By: | /s/ Quentin S. Blackford | ||||||
Quentin S. Blackford, President and Chief Executive Officer (Principal Executive Officer) | ||||||||
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, Daniel Wilson, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and 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.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.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
d.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 fiscal 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.
Date: October 30, 2024 | By: | /s/ Daniel Wilson | ||||||
Daniel Wilson Chief Financial Officer (Principal Financial Officer) | ||||||||
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, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1.The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: October 30, 2024 | By: | /s/ Quentin S. Blackford | ||||||
| Quentin S. Blackford President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| By: | /s/ Daniel Wilson | |||||||
| Daniel Wilson Chief Financial Officer (Principal Financial Officer) | ||||||||
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.