iRhythm(IRTC) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's analysis of financial condition and operations Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for iRhythm Technologies, Inc., including the Balance Sheets, Statements of Operations, Comprehensive Loss, Cash Flows, and Stockholders' Equity, along with detailed notes explaining significant accounting policies, financial instrument fair values, balance sheet components, commitments, debt, income taxes, and equity-related activities Condensed Consolidated Balance Sheets This section provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific points in time Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Total Assets | $207,295 | $119,710 | | Total Liabilities | $158,687 | $65,288 | | Total Stockholders' Equity | $48,608 | $54,422 | - Total assets increased significantly from $119.7 million at December 31, 2018, to $207.3 million at June 30, 2019, primarily due to the recognition of operating lease right-of-use assets[13] - Total liabilities also saw a substantial increase from $65.3 million to $158.7 million, largely driven by the recognition of operating lease liabilities[13] Condensed Consolidated Statements of Operations This section details the company's revenues, expenses, and net loss over specific reporting periods Condensed Consolidated Statements of Operations (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $53,331 | $35,469 | $100,545 | $66,034 | | Gross Profit | $40,506 | $25,979 | $75,990 | $47,933 | | Net Loss | $(11,467) | $(12,206) | $(19,486) | $(23,323) | | Net Loss Per Share | $(0.46) | $(0.51) | $(0.79) | $(0.99) | - Revenue increased by 50% for the three months ended June 30, 2019, and by 52% for the six months ended June 30, 2019, compared to the respective prior periods[15] - Net loss decreased for both the three-month and six-month periods ended June 30, 2019, indicating improved operational efficiency despite continued investments[15] Condensed Consolidated Statements of Comprehensive Loss This section presents the net loss and other comprehensive income (loss) components, reflecting total comprehensive loss Condensed Consolidated Statements of Comprehensive Loss (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Loss | $(11,467) | $(12,206) | $(19,486) | $(23,323) | | Comprehensive Loss | $(11,434) | $(12,159) | $(19,410) | $(23,296) | - Comprehensive loss for the three months ended June 30, 2019, was $(11,434) thousand, an improvement from $(12,159) thousand in the prior year period[18] Condensed Consolidated Statements of Cash Flows This section outlines the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(16,781) | $(19,623) | | Net cash provided by investing activities | $11,106 | $28,162 | | Net cash provided by financing activities | $1,806 | $2,031 | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(3,869) | $10,570 | - Net cash used in operating activities decreased from $(19.6) million in H1 2018 to $(16.8) million in H1 2019[21] - Cash provided by investing activities significantly decreased from $28.2 million in H1 2018 to $11.1 million in H1 2019, mainly due to changes in purchases and maturities of available-for-sale investments[21] Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Equity Component (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------ | :----------------------------- | :----------------------------- | | Common stock, ending balance | $23 | $23 | | Additional paid-in capital, ending balance | $271,551 | $247,039 | | Accumulated other comprehensive income (loss), ending balance | $35 | $(38) | | Accumulated deficit, ending balance | $(223,001) | $(178,557) | | Total stockholders' equity | $48,608 | $68,467 | - Total stockholders' equity decreased from $68.5 million at June 30, 2018, to $48.6 million at June 30, 2019, primarily due to an increased accumulated deficit[23] - Additional paid-in capital increased by $24.5 million for the six months ended June 30, 2019, driven by stock-based compensation expense and proceeds from common stock issuance[23] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of the accounting policies, financial instrument fair values, and other financial statement components 1. Organization and Description of Business This note describes iRhythm Technologies, Inc.'s core business, incorporation details, and operational focus on cardiac arrhythmia diagnosis - iRhythm Technologies, Inc. is a digital healthcare company incorporated in Delaware in September 2006, focused on diagnosing cardiac arrhythmias using wearable biosensing technology, cloud-based data analytics, and deep-learning capabilities[26] - The company commenced commercial operations in the U.S. in 2009 and manages its operations as a single segment, with substantially all assets and revenue derived from the United States[26][27] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the condensed consolidated financial statements - The financial statements are prepared in accordance with U.S. GAAP and SEC interim reporting rules, with certain footnotes condensed or omitted[28] - Accounts receivable are reported net of estimated allowance for doubtful accounts and contractual allowance, with provisions recognized as selling, general and administrative expenses or reductions to revenue, respectively[30][31] Allowance for Doubtful Accounts and Contractual Allowance (in thousands) | Allowance Type (in thousands) | June 30, 2019 | December 31, 2018 | | :---------------------------- | :------------ | :---------------- | | Allowance for doubtful accounts | $4,672 | $4,851 | | Contractual allowance | $14,369 | $10,601 | - Federal government agencies (CMS and military) accounted for approximately 36% of revenue for the three and six months ended June 30, 2019[35] - Revenue is primarily generated from the Zio XT cardiac rhythm monitoring service, recognized upon delivery of monitoring reports to healthcare providers[36] Revenue by Payor Type (in thousands) | Payor Type (in thousands) | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :----------------------------- | | Commercial Payors | $27,631 | $51,978 | | Centers for Medicare & Medicaid | $14,747 | $27,493 | | Healthcare Institutions | $10,953 | $21,074 | | Total Revenue | $53,331 | $100,545 | - The company adopted ASU No. 2016-02, Leases (Topic 842) on January 1, 2019, recognizing right-of-use assets of $10.4 million and lease liabilities of $10.2 million, with no cumulative-effect adjustment[58] 3. Cash Equivalents and Investments This note details the composition and fair value of the company's cash equivalents and available-for-sale marketable debt securities Available-for-Sale Marketable Debt Securities (in thousands) | Security Type (in thousands) | Fair Value (June 30, 2019) | Fair Value (December 31, 2018) | | :--------------------------- | :------------------------- | :----------------------------- | | Money market funds | $9,748 | $10,606 | | U.S. government securities | $33,058 | $9,975 | | Corporate notes | $1,999 | $16,499 | | Commercial paper | $8,183 | $36,331 | | Total | $52,988 | $73,411 | - Total available-for-sale marketable debt securities decreased from $73.4 million at December 31, 2018, to $53.0 million at June 30, 2019[62] - As of June 30, 2019, no investments were in an unrealized loss position, and the weighted average maturity of available-for-sale securities was 93 days[62] 4. Fair Value Measurements This note explains the company's methodology for fair value measurements and the classification of financial assets into valuation levels - The company classifies fair value measurements into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[64][65][66] - Corporate notes, commercial paper, and U.S. government securities are classified as Level 2, valued based on quoted market prices for similar instruments or model-based techniques with observable inputs[67] Fair Value Measurements by Level (in thousands) | Asset Type (in thousands) | Level 1 (June 30, 2019) | Level 2 (June 30, 2019) | Total (June 30, 2019) | | :------------------------ | :---------------------- | :---------------------- | :-------------------- | | Money market funds | $9,748 | — | $9,748 | | U.S. government securities | — | $33,058 | $33,058 | | Corporate notes | — | $1,999 | $1,999 | | Commercial paper | — | $8,183 | $8,183 | | Total | $9,748 | $43,240 | $52,988 | 5. Balance Sheet Components This note provides a breakdown of specific balance sheet items, including inventory, property and equipment, and accrued liabilities Inventory Components (in thousands) | Inventory Component (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------------------------- | :------------ | :---------------- | | Raw materials | $1,974 | $1,028 | | Finished goods | $4,543 | $3,565 | | Total | $6,517 | $4,593 | | Classified as: Inventory | $2,774 | $2,062 | | Classified as: Other assets | $3,743 | $2,531 | Property and Equipment, Net (in thousands) | Property and Equipment (in thousands) | June 30, 2019 | December 31, 2018 | | :------------------------------------ | :------------ | :---------------- | | Total property and equipment, gross | $19,140 | $14,388 | | Less: accumulated depreciation and amortization | $(6,522) | $(5,230) | | Total property and equipment, net | $12,618 | $9,158 | Accrued Liabilities (in thousands) | Accrued Liabilities (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------------------------- | :------------ | :---------------- | | Accrued vacation | $3,646 | $2,825 | | Accrued payroll and related expenses | $13,338 | $18,188 | | Accrued professional services fees | $895 | $1,243 | | Claims payable | $3,220 | $2,374 | | Other | $2,205 | $1,940 | | Total accrued liabilities | $23,304 | $26,570 | 6. Commitments and Contingencies This note describes the company's lease obligations and potential future liabilities from legal proceedings or other contingencies - The company leases office, manufacturing, and clinical centers under non-cancelable operating leases expiring through 2031[76] - A new San Francisco office lease commenced on May 13, 2019, expiring on August 31, 2031, with a tenant improvement allowance of up to $2.4 million and a $6.9 million standby letter of credit[77][78][79] Operating Lease Liabilities (in thousands) | Period Ending December 31: | Operating Lease Liabilities (in thousands) | | :------------------------- | :--------------------------------------- | | 2019 (remainder of year) | $1,743 | | 2020 | $11,757 | | 2021 | $11,760 | | 2022 | $11,317 | | 2023 | $11,639 | | Thereafter | $100,764 | | Total lease liabilities | $95,490 | 7. Debt This note details the company's debt agreements, including the SVB Term Loan and revolving credit line, and their associated terms - The company repaid the $30.0 million Pharmakon Loan Agreement in October 2018, incurring a $3.0 million loss on early extinguishment[86] - In October 2018, the company entered into a Third Amended and Restated Loan and Security Agreement with SVB, obtaining a $35.0 million term loan to pay off the Pharmakon loan[89][91] - The SVB Term Loan requires interest-only payments through October 31, 2020, followed by 36 monthly principal and interest payments, with an interest rate greater of Prime Rate minus 0.75% or 4.25%[91] - The company also has a revolving credit line with SVB up to $25.0 million, including an $11.0 million standby letter of credit sublimit, with no outstanding amount as of June 30, 2019[92] 8. Income Taxes This note discusses the company's income tax provision and the impact of net operating loss carryforwards and valuation allowances - The company recorded an income tax provision for its U.K. entity during the three and six months ended June 30, 2019[96] - No income tax benefit was recognized for net operating loss carryforwards and other deferred tax assets due to a full valuation allowance[96] 9. Stockholders' Equity This note outlines the authorized and issued shares of common and preferred stock, along with shares reserved under stock plans - The company is authorized to issue 100,000,000 shares of common stock and 5,000,000 shares of preferred stock, with no preferred stock issued[97] Reserved Shares | Reserved Shares | June 30, 2019 | December 31, 2018 | | :---------------------- | :------------ | :---------------- | | Options issued and outstanding | 1,715,389 | 2,094,137 | | Unvested restricted stock units | 886,404 | 547,891 | | Common stock warrants issued and outstanding | 4,857 | 4,857 | | Shares available for grant under future stock plans | 6,763,074 | 5,607,014 | | Total | 9,369,724 | 8,253,899 | 10. Stock Incentive Plans This note provides details on the company's stock option activity, including outstanding options and their weighted-average exercise prices Stock Option Activity | Stock Option Activity | June 30, 2019 | December 31, 2018 | | :-------------------- | :------------ | :---------------- | | Options outstanding | 1,715,389 | 2,094,137 | | Weighted-average exercise price | $26.06 | $23.20 | | Weighted-average remaining contractual life (years) | 6.57 | 7.02 | | Aggregate intrinsic value (in thousands) | $91,452 | $97,976 | - The weighted-average grant date fair value of options granted was $38.29 per share for the six months ended June 30, 2019, compared to $30.80 per share for the same period in 2018[100] 11. Stock-Based Compensation This note details the stock-based compensation expense recognized across various functional areas and the impact of performance-based RSUs Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $137 | $21 | $225 | $138 | | Research and development | $1,278 | $781 | $2,151 | $1,357 | | Selling, general and administrative | $5,915 | $3,274 | $9,369 | $5,828 | | Total stock-based compensation expense | $7,330 | $4,076 | $11,745 | $7,323 | - Total stock-based compensation expense increased by 79.8% for the three months and 60.4% for the six months ended June 30, 2019, compared to the prior year periods[104] - The company granted performance-based RSUs (PRSUs) to key executives in February 2019, with a 2-year performance period measuring target revenue CAGR. As of June 30, 2019, management expects to achieve performance targets at the 125% level, recognizing $1.7 million in PRSU expense[105] 12. Net Loss Per Common Share This note presents the calculation of basic and diluted net loss per common share, explaining the anti-dilutive effect of potential common shares Net Loss Per Common Share | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss (in thousands) | $(11,467) | $(12,206) | $(19,486) | $(23,323) | | Weighted-average shares, basic and diluted | 24,724,808 | 23,747,131 | 24,600,250 | 23,614,281 | | Net loss per common share, basic and diluted | $(0.46) | $(0.51) | $(0.79) | $(0.99) | - All potential common shares were excluded from diluted net loss per common share calculations for both periods due to the company's net losses, making them anti-dilutive[106][108] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, highlighting revenue growth driven by increased Zio service adoption and expanded payor coverage. It details changes in revenue, cost of revenue, operating expenses, and net loss for the three and six months ended June 30, 2019, compared to the prior year, and discusses liquidity, capital expenditures, and debt Overview This section introduces iRhythm Technologies, Inc.'s business model, its Zio service, market disruption goals, and revenue sources - iRhythm Technologies is a digital healthcare company focused on diagnosing cardiac arrhythmias using its Zio service, which combines wearable biosensing technology with cloud-based data analytics and deep-learning capabilities[111] - The Zio service includes Zio XT and Zio AT monitors, cloud-based analysis, certified cardiographic technician review, and an easy-to-read Zio report for physicians[115] - The company aims to disrupt the $1.8 billion U.S. ambulatory cardiac monitoring market, having provided the Zio service to over one million patients and collected approximately 400 million hours of heartbeat data[113] - Revenue is primarily from third-party payors (commercial and government agencies like CMS), with a smaller portion from healthcare institutions. Third-party payors accounted for approximately 91% of revenue for the six months ended June 30, 2019[112] Components of Results of Operations This section explains the key drivers and accounting treatment for revenue, cost of revenue, and operating expenses - Revenue is primarily from Zio service sales in the U.S., recognized on an accrual basis based on estimated realizable amounts, considering claim payment history, payor coverage, and contracts[116][117] - Cost of revenue includes direct labor, materials (Zio monitors and amortized PCBAs), equipment, infrastructure, and allocated overhead. Gross margin is influenced by increased contracting with payors and institutional providers, leading to higher average selling prices and efforts to reduce per-device service costs[119][120] - Research and development expenses are expensed as incurred, covering payroll, consulting, clinical studies, and laboratory supplies, expected to increase with new product development[121] - Selling, general and administrative expenses include payroll, sales commissions, travel, professional fees, and bad debt, expected to increase with salesforce expansion and international market exploration[122][123] Comparison of the Three Months Ended June 30, 2019 and 2018 This section analyzes the financial performance changes for the three-month period, including revenue, gross margin, and operating expenses Financial Performance Comparison (Three Months Ended June 30, in thousands) | Metric (in thousands) | June 30, 2019 | June 30, 2018 | $ Change | % Change | | :-------------------- | :------------ | :------------ | :------- | :------- | | Revenue | $53,331 | $35,469 | $17,862 | 50% | | Cost of revenue | $12,825 | $9,490 | $3,335 | 35% | | Gross profit | $40,506 | $25,979 | $14,527 | 56% | | Gross margin | 76% | 73% | | | | Research and development | $8,639 | $4,564 | $4,075 | 89% | | Selling, general and administrative | $43,189 | $33,094 | $10,095 | 31% | | Loss from operations | $(11,322) | $(11,679) | $357 | 3% | | Net loss | $(11,467) | $(12,206) | $739 | 6% | - Revenue increased by $17.9 million (50%) due to higher Zio service volume, expanded coverage, increased payors, and improved collection experience[127] - Gross margin improved to 76% from 73%, driven by reduced manufacturing costs, fixed cost absorption, and lower labor costs per device[129] - Research and development expenses surged by 89% to $8.6 million, primarily due to Zio AT and other product development efforts, including increased payroll and facility-related expenses[130] - Selling, general and administrative expenses rose by 31% to $43.2 million, mainly from increased headcount, stock-based compensation, and rent expense from the new San Francisco Lease[131] Comparison of the Six Months Ended June 30, 2019 and 2018 This section analyzes the financial performance changes for the six-month period, including revenue, gross margin, and operating expenses Financial Performance Comparison (Six Months Ended June 30, in thousands) | Metric (in thousands) | June 30, 2019 | June 30, 2018 | $ Change | % Change | | :-------------------- | :------------ | :------------ | :------- | :------- | | Revenue | $100,545 | $66,034 | $34,511 | 52% | | Cost of revenue | $24,555 | $18,101 | $6,454 | 36% | | Gross profit | $75,990 | $47,933 | $28,057 | 59% | | Gross margin | 76% | 73% | | | | Research and development | $15,395 | $8,583 | $6,812 | 79% | | Selling, general and administrative | $79,894 | $61,671 | $18,223 | 30% | | Loss from operations | $(19,299) | $(22,321) | $3,022 | 14% | | Net loss | $(19,486) | $(23,323) | $3,837 | 16% | - Revenue increased by $34.5 million (52%) due to increased Zio service volume, expanded payor coverage, physician acceptance, sales force expansion, and improved collection experience[136] - Gross margin improved to 76% from 73%, driven by reduced manufacturing costs, fixed cost absorption, and lower labor costs per device through algorithm and workflow enhancements[138] - Research and development expenses increased by 79% to $15.4 million, primarily due to Zio AT and other product development, including a $4.4 million increase in payroll and personnel-related expenses[139] - Selling, general and administrative expenses increased by 30% to $79.9 million, mainly from a $13.4 million increase in payroll and stock-based compensation, and $1.3 million in rent expense from the San Francisco Lease[140] Liquidity and Capital Expenditures This section discusses the company's cash position, short-term investments, accumulated deficit, and future capital needs - As of June 30, 2019, the company had $16.2 million in cash and cash equivalents, $43.2 million in short-term investments, and an accumulated deficit of $223.0 million[144] - Future capital requirements depend on expanding the customer base, salesforce, and technology development, with potential for dilution from equity issuance or restrictive covenants from debt financing[144][145] Cash Flows This section provides a detailed analysis of cash flows from operating, investing, and financing activities for the period Cash Flow Activities (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(16,781) | $(19,623) | | Net cash provided by investing activities | $11,106 | $28,162 | | Net cash provided by financing activities | $1,806 | $2,031 | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(3,869) | $10,570 | - Cash used in operating activities decreased by $2.8 million, primarily due to non-cash charges like stock-based compensation and allowance for doubtful accounts, partially offset by an increase in accounts receivable[147][148] - Cash provided by investing activities decreased by $17.1 million, mainly due to changes in purchases and maturities of available-for-sale investments and capital expenditures[149][150] - Cash provided by financing activities decreased slightly, driven by tax withholding on restricted stock awards and proceeds from common stock issuance[151][152] Indebtedness This section details the company's debt obligations, including the SVB Term Loan and revolving credit facility, and compliance with covenants - The company repaid the $30.0 million Pharmakon Loan Agreement in October 2018, incurring a $3.0 million loss on early extinguishment[155] - A $35.0 million SVB Term Loan was obtained in October 2018 to pay off the Pharmakon loan, with interest-only payments until October 2020[159] - The company has a $25.0 million revolving credit line with SVB, including an $11.0 million standby letter of credit sublimit, with no outstanding balance as of June 30, 2019[160] - The company was in compliance with all loan covenants as of June 30, 2019, and the obligations are collateralized by substantially all assets[161] Off-Balance Sheet Arrangements This section confirms the absence of off-balance sheet arrangements or variable interest entities - The company has not entered into any off-balance sheet arrangements and does not hold any variable interest entities[164] Contractual Obligations This section notes that there have been no material changes to the company's contractual obligations since the last annual report - There have been no material changes to the company's contractual obligations since December 31, 2018, as presented in its Form 10-K[165] Critical Accounting Policies and Estimates This section refers to the annual report for a comprehensive overview of critical accounting policies and estimates - For a complete description of critical accounting policies and estimates, refer to the Annual Report on Form 10-K for the year ended December 31, 2018, with an update on the lease accounting policy upon adoption of ASC 842[166] Recently Adopted Accounting Guidance This section describes the impact of newly adopted accounting standards, specifically ASU No. 2016-02 on leases - The company adopted ASU No. 2016-02, Leases (Topic 842) on January 1, 2019, using the modified retrospective method, recognizing $10.4 million in right-of-use assets and $10.2 million in lease liabilities[167] - Practical expedients adopted include not reassessing embedded leases, lease classification, and indirect costs, and combining lease and non-lease components[168] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate sensitivity and foreign currency exchange rate sensitivity. It notes that a hypothetical 10% change in interest rates would not materially impact financial statements and that foreign exchange risk is currently not material - The company had $59.4 million in cash, cash equivalents, and investments as of June 30, 2019, exposed to interest rate risk, but historical fluctuations in interest income have not been significant[170] - A hypothetical 10% change in interest rates would not have a material impact on the condensed consolidated financial statements, including the $34.9 million outstanding debt with a variable interest rate[171][172] - Foreign currency exchange rate sensitivity, primarily in British Pound Sterling, is not considered material as of June 30, 2019, and the company does not use forward foreign exchange contracts[173] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of June 30, 2019, due to unremediated material weaknesses related to the control environment, financial statement close process, and revenue/accounts receivable accounting. Despite these weaknesses, the financial statements are deemed to fairly present the company's financial position. The company is actively implementing a remediation plan, including increasing finance staff experience and hiring an Internal Audit Director - Disclosure controls and procedures were not effective as of June 30, 2019, due to material weaknesses identified in the control environment, financial statement close process, and review of revenue and related accounts receivable[174][175] - Despite material weaknesses, management concluded that the condensed consolidated financial statements fairly present the financial position, results of operations, and cash flows[176] - The company is remediating material weaknesses by increasing finance organization depth and experience, hiring an Internal Audit Director, and improving key controls for transaction cycles and financial statement preparation[178][179] PART II. OTHER INFORMATION This section contains other information not included in the financial statements, such as legal proceedings and risk factors Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings but acknowledges potential involvement in future litigation related to product liability, unfair competition, or intellectual property. Such disputes could be costly, divert management attention, and adversely affect financial results - The company is not currently involved in any material legal proceedings[182] - Potential future litigation includes product liability, unfair competition, or intellectual property disputes, which could be costly, divert management resources, and harm reputation and financial performance[182] Item 1A. Risk Factors This section outlines significant risks to investors, including the company's history of net losses and uncertainty of future profitability, dependence on physician adoption of the Zio service, fluctuations in quarterly results due to seasonality and other factors, and regulatory risks related to CMS reimbursement and healthcare laws. Other risks include competition, reliance on third-party suppliers, potential for security breaches, product liability, and challenges in managing rapid growth and international expansion - The company has a history of net losses, with an accumulated deficit of $223.0 million as of June 30, 2019, and expects to continue incurring losses due to substantial investments in technology and market expansion[184] - Business success is highly dependent on broad physician adoption of the Zio service, which may be hindered by lack of compelling efficacy data or insufficient reimbursement from third-party payors and CMS[185] - Quarterly and annual results may fluctuate significantly due to factors like market acceptance, reimbursement rates, competition, seasonality (e.g., summer and holiday periods), and insurance deductibles[187][189] - Changes in CMS reimbursement policies, CPT codes, or coverage determinations could significantly harm revenue, as approximately 27% of revenue for the six months ended June 30, 2019, came from CMS[190][191] - The company faces intense competition in the ambulatory cardiac monitoring market from larger companies with greater resources, and its ability to compete depends on continuous innovation and distinguishing its Zio service[220][221] - Security breaches, data loss, or system disruptions could compromise sensitive patient information, leading to liability under HIPAA and GDPR, reputational harm, and increased costs[239][244] - Material weaknesses in internal control over financial reporting, if not remediated, could result in material misstatements in financial statements and negatively affect stock price[300][301] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the current report Item 3. Defaults Upon Senior Securities This item is not applicable to the current report Item 4. Mine Safety Disclosures This item is not applicable to the current report Item 5. Other Information This item is not applicable to the current report Item 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, and XBRL-related documents - The report includes certifications from the Principal Executive Officer and Principal Financial Officer as Exhibits 31.1 and 31.2, respectively, pursuant to the Sarbanes-Oxley Act of 2002[322] - XBRL Instance Document and Taxonomy Extension documents are also filed as exhibits[322] Signatures The report is duly signed on behalf of iRhythm Technologies, Inc. by its President and Chief Executive Officer, Kevin M. King, and Chief Financial Officer, Matthew C. Garrett, on August 5, 2019 - The report was signed on August 5, 2019, by Kevin M. King, President and Chief Executive Officer, and Matthew C. Garrett, Chief Financial Officer[326][328]