iRhythm(US:IRTC)2019-12-23 12:04PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for iRhythm Technologies, Inc. as of September 30, 2019, and for the three and nine-month periods then ended, including a revision of prior period financial statements to correct immaterial errors Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $310,080 | $117,523 | | Total current assets | $184,880 | $104,295 | | Total Liabilities | $167,495 | $65,386 | | Total current liabilities | $45,467 | $30,334 | | Total Stockholders' Equity | $142,585 | $52,137 | - Total assets increased significantly from $117.5 million at the end of 2018 to $310.1 million as of September 30, 2019, primarily driven by an increase in cash, cash equivalents, and investments, as well as the recognition of operating lease right-of-use assets14 Condensed Consolidated Statements of Operations Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue, net | $54,673 | $38,441 | $155,448 | $105,495 | | Gross profit | $40,888 | $28,488 | $116,878 | $77,506 | | Loss from operations | $(18,260) | $(9,221) | $(37,029) | $(32,600) | | Net loss | $(18,293) | $(9,727) | $(37,268) | $(34,108) | | Net loss per share | $(0.72) | $(0.40) | $(1.50) | $(1.44) | - Revenue grew 42% YoY for the third quarter and 47% for the nine-month period, while net loss also widened due to a significant increase in operating expenses, particularly in Research and Development and Selling, General and Administrative16 Condensed Consolidated Statements of Cash Flows Cash Flow Summary for the Nine Months Ended September 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(17,003) | $(24,720) | | Net cash (used in) provided by investing activities | $(76,766) | $29,848 | | Net cash provided by financing activities | $108,380 | $3,546 | | Net increase in cash and cash equivalents | $14,611 | $8,674 | - Financing activities provided $108.4 million in cash, primarily from a public stock offering of $107.1 million, which significantly boosted the company's cash position despite negative cash flow from operations and investing activities22 Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, financial statement line items, prior period revisions, revenue recognition, collaboration agreements, debt, and stock-based compensation - On September 10, 2019, the company completed a public offering of 1,575,342 shares of common stock, raising total net proceeds of $107.3 million31 - The company identified and corrected immaterial errors in its historical accounting for revenues, contractual allowances, and other items, leading to a revision of previously issued financial statements to avoid a significant cumulative impact on Q3 2019 results32 Disaggregation of Revenue by Payor Type (in thousands) | Payor Type | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | | Contracted third-party payors | $72,040 | $38,270 | | Non-contracted third-party payors | $9,016 | $10,302 | | Centers for Medicare & Medicaid | $42,573 | $29,317 | | Healthcare Institutions | $31,819 | $27,606 | | Total | $155,448 | $105,495 | - On September 3, 2019, the company entered into a Development Collaboration Agreement with Verily Life Sciences, involving an upfront fee of $5.0 million and potential milestone payments up to $12.75 million for next-generation atrial fibrillation screening products9192 - Subsequent to the quarter end, on November 12, 2019, the company entered into a Master Services Agreement with Bristol-Meyers Squibb (BMS) to provide Zio services for clinical studies, with potential fees up to $6.8 million under the first Statement of Work134 Management's Discussion and Analysis of Financial Condition and Results of Operations) Management discusses the company's financial performance, highlighting 47% revenue growth, increased operating expenses, and a strong cash position following a public stock offering - Revenue for the nine months ended September 30, 2019, increased by 47% year-over-year, primarily due to increased volume of Zio services from expanded payor coverage, growing physician acceptance, and sales force expansion161 - Gross margin improved to 75% for the nine months of 2019 from 73% in 2018, attributed to lower manufacturing costs, fixed cost absorption, and algorithm-driven labor efficiencies163 - Research and Development expenses increased 103% for the nine months of 2019 compared to 2018, largely due to a $5.0 million payment to Verily and a $6.4 million increase in payroll and personnel-related expenses from increased headcount164 - Selling, General and Administrative expenses rose 31% for the nine months of 2019, driven by a $22.6 million increase in payroll and personnel costs, a $5.5 million increase in bad debt expense, and $3.9 million in rent for the new San Francisco headquarters165 - As of September 30, 2019, the company had $34.6 million in cash and cash equivalents and $118.1 million in short-term investments, bolstered by a recent public offering169 Quantitative and Qualitative Disclosures About Market Risk The company discloses its exposure to market risks, primarily interest rate and foreign currency exchange rate sensitivity, concluding neither is material to its financial position - The company's primary market risks are interest rate sensitivity on its cash, investments, and variable-rate debt, and foreign currency exchange risk related to the British Pound Sterling198202 - Management has determined that the company is not exposed to material risks from changes in interest rates or foreign currency exchange rates, and a hypothetical 10% change would not have a material impact200201202 Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2019, due to material weaknesses in internal control over financial reporting, with a remediation plan underway - Management concluded that as of September 30, 2019, the company's disclosure controls and procedures were not effective due to material weaknesses203 - Identified material weaknesses include an ineffective control environment due to insufficient accounting personnel, ineffective controls over the financial statement close process, and ineffective controls over the accounting for revenue, bad debt, and related reserves204205 - These weaknesses resulted in the misstatement and subsequent revision of financial statements for 2017, 2018, and interim periods in 2019, with a remediation plan being executed to address the underlying causes206209 PART II. OTHER INFORMATION Legal Proceedings The company states it is not currently a party to any material legal proceedings but may become involved in such matters in the ordinary course of business - As of the filing date, the company is not a party to any material legal proceedings212 Risk Factors This section details significant risks that could adversely affect the company's business, financial condition, and operating results, including business, intellectual property, regulatory, and common stock-related risks Risks Related to Our Business - The company has a history of net losses, with a net loss of $37.3 million for the nine months ended September 30, 2019, and expects to continue incurring losses as it invests in growth214 - Business success is highly dependent on physician adoption of the Zio service and securing adequate reimbursement from third-party payors and CMS215227 - The company's revenue relies substantially on the Zio service, its only product offering, and failure to maintain or grow its market acceptance would harm the business216 - The company relies on single suppliers for critical components of the Zio monitor, making it vulnerable to supply shortages and price fluctuations240 - A collaboration with Verily Life Sciences to develop new products may not result in commercially viable products or significant future revenue257 Risks Related to Our Intellectual Property - The company may become involved in costly intellectual property litigation, as the medical device industry is characterized by extensive patent disputes296 - The company's intellectual property rights, including patents and trade secrets, may not provide adequate protection, potentially allowing competitors to develop similar products301303 - Recent and future changes in U.S. patent law, such as the Leahy-Smith Act and recent court decisions, could diminish the value of patents and impair the ability to protect products309310 Risks Related to Government Regulation - The company is subject to extensive and complex healthcare regulations, including the federal Anti-Kickback Statute, False Claims Act, and HIPAA, with non-compliance potentially resulting in substantial penalties313 - Failure to obtain and maintain necessary regulatory clearances from the FDA and other bodies for products and services could harm commercial operations317 - Manufacturing processes must comply with the FDA's Quality System Regulation (QSR), and failure to pass regulatory inspections could lead to a shutdown of manufacturing operations325 Risks Related to Our Common Stock - The market price of the company's common stock may fluctuate substantially due to a variety of factors, including operational results, analyst recommendations, and market conditions336 - The identification of material weaknesses in internal control over financial reporting could cause investors to lose confidence in financial reports, potentially decreasing the stock price293294 - Future sales of equity securities to raise capital could dilute the ownership of existing stockholders333 Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period Defaults Upon Senior Securities This item is not applicable for the reporting period Mine Safety Disclosures This item is not applicable for the reporting period Other Information This section provides the company's principal executive office address and notes the channels it uses for investor communications Exhibits This section refers to the Exhibit Index, which lists all documents filed as part of the Quarterly Report on Form 10-Q