iRhythm(IRTC) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents iRhythm Technologies' unaudited condensed consolidated financial statements as of September 30, 2020, including balance sheets, statements of operations, comprehensive loss, cash flows, and stockholders' equity Condensed Consolidated Balance Sheets Total assets significantly increased to $497.2 million by September 30, 2020, from $306.2 million at year-end 2019, driven by cash and investments, while stockholders' equity grew to $334.5 million due to capital raised Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $95,336 | $20,462 | | Short-term investments | $231,901 | $120,089 | | Total current assets | $365,939 | $172,792 | | Total assets | $497,201 | $306,212 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $55,866 | $52,066 | | Total liabilities | $162,655 | $170,803 | | Total stockholders' equity | $334,546 | $135,409 | | Total liabilities and stockholders' equity | $497,201 | $306,212 | Condensed Consolidated Statements of Operations Q3 2020 revenue grew 32% to $71.9 million, with net loss narrowing to $4.7 million, while nine-month revenue increased 20% to $186.4 million, and net loss improved to $34.2 million Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue, net | $71,944 | $54,673 | $186,357 | $155,448 | | Gross profit | $53,712 | $40,888 | $136,578 | $116,878 | | Loss from operations | $(4,757) | $(18,260) | $(34,092) | $(37,029) | | Net loss | $(4,677) | $(18,293) | $(34,179) | $(37,268) | | Net loss per share | $(0.17) | $(0.72) | $(1.25) | $(1.50) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities was $21.6 million for the nine months ended September 30, 2020, with $211.4 million provided by financing activities, leading to a $74.9 million net increase in cash and cash equivalents Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(21,577) | $(17,003) | | Net cash used in investing activities | $(114,906) | $(76,766) | | Net cash provided by financing activities | $211,357 | $108,380 | | Net increase in cash and cash equivalents | $74,874 | $14,611 | - The company raised $206.4 million (net) from a follow-on public offering in the first nine months of 2020, significantly bolstering its cash position[22] Notes to Condensed Consolidated Financial Statements This section details significant accounting policies, the impact of COVID-19, revenue recognition by payor, balance sheet components, commitments including the Verily development agreement, debt, and stock-based compensation - The company's business was significantly disrupted by the COVID-19 pandemic, leading to cost-reduction measures in Q2 2020, including furloughs, layoffs, and temporary pay reductions[35][38] However, by August 2020, most of these measures were reversed as business conditions improved[38] Revenue by Payor Type (in thousands) | Payor Type | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Contracted third-party payors | $36,317 | $25,961 | $94,571 | $73,006 | | Non-contracted third-party payors | $4,607 | $2,686 | $10,851 | $8,050 | | Centers for Medicare & Medicaid | $19,978 | $15,379 | $51,012 | $42,573 | | Healthcare Institutions | $11,042 | $10,647 | $29,923 | $31,819 | | Total | $71,944 | $54,673 | $186,357 | $155,448 | - The company has a development collaboration agreement with Verily Life Sciences to create next-generation atrial fibrillation (AF) screening products[91] The company paid a $5.0 million upfront fee in 2019 and an additional $3.0 million milestone payment in June 2020[92][93] - Due to the impact of COVID-19, the company determined that performance targets for its 2019 Performance-based RSUs (PRSUs) were not probable[116] The terms were modified in June 2020 to vest based on the company's average stock price, resulting in an incremental compensation cost of $13.6 million to be recognized through March 2021[117] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, noting a 32% Q3 2020 revenue increase driven by Zio service volume, COVID-19 impact and recovery, and strengthened liquidity from a $206.8 million public offering - The company's Zio service revenue is primarily from third-party payors[127] For the nine months ended September 30, 2020, contracted third-party payors accounted for 51% of revenue, CMS for 27%, healthcare institutions for 16%, and non-contracted payors for 6%[127] - The COVID-19 pandemic led to decreased patient registrations in mid-March 2020[131] However, during Q3 2020, patient registrations for the Zio service recovered to pre-COVID levels seen in Q1 2020[131] - In response to the pandemic, the company significantly increased the utilization of its "Home Enrollment" service, which allows patients to receive and use the Zio monitor without visiting a healthcare facility[133] Comparison of Results for the Three Months Ended September 30 (in thousands) | Metric | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $71,944 | $54,673 | $17,271 | 32% | | Gross Profit | $53,712 | $40,888 | $12,824 | 31% | | Gross Margin | 75% | 75% | - | - | | Loss from Operations | $(4,757) | $(18,260) | $13,503 | (74)% | | Net Loss | $(4,677) | $(18,293) | $13,616 | (74)% | Comparison of Results for the Nine Months Ended September 30 (in thousands) | Metric | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $186,357 | $155,448 | $30,909 | 20% | | Gross Profit | $136,578 | $116,878 | $19,700 | 17% | | Gross Margin | 73% | 75% | - | - | | Loss from Operations | $(34,092) | $(37,029) | $2,937 | (8)% | | Net Loss | $(34,179) | $(37,268) | $3,089 | (8)% | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate sensitivities on cash, investments, and variable-rate debt, and foreign currency exchange rates, though these are not considered material - The company's primary market risks are interest rate sensitivity and foreign currency exchange rate sensitivity[187] - As of September 30, 2020, the company had $327.2 million in cash, cash equivalents, and investments, and $34.9 million in outstanding debt with a variable interest rate[188][190] Management concluded that a hypothetical 10% change in interest rates would not materially impact the financial statements[190] - Foreign exchange risk from transactions denominated in currencies other than U.S. dollars, particularly the British Pound Sterling, is not considered material as of September 30, 2020[191] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2020, due to material weaknesses in the control environment, financial statement close process, and revenue accounting, with a remediation plan underway - As of September 30, 2020, management concluded that disclosure controls and procedures were not effective due to ongoing material weaknesses[192] - The identified material weaknesses relate to: 1) an ineffective control environment due to insufficient experienced accounting personnel, 2) an ineffective financial statement close process, and 3) ineffective controls over accounting for revenue and related receivables and reserves[193][196] - The company is executing a remediation plan that includes hiring additional finance and internal audit personnel and modifying the design of key controls related to journal entries, business performance reviews, and revenue accounting[197][198] PART II. OTHER INFORMATION Legal Proceedings The company is not currently a party to any material legal proceedings, though it may encounter legal matters in the ordinary course of business - As of the report date, iRhythm is not a party to any material legal proceedings[201] Risk Factors Key risks include the ongoing material adverse impact of COVID-19, a history of net losses, reliance on Zio service adoption and reimbursement, intense competition, potential CMS policy changes, supply chain dependence, and internal control weaknesses - The COVID-19 pandemic is expected to continue to materially and adversely impact the business through reduced patient volumes, limited access for sales staff to hospitals, and potential supply chain disruptions[203][204][205] - The company has a history of net losses, with an accumulated deficit of $295.0 million as of September 30, 2020, and expects to continue incurring losses as it invests in growth[211] - A significant portion of revenue (approximately 27% for the nine months ended Sep 30, 2020) comes from CMS, making the business highly sensitive to changes in Medicare regulations and reimbursement rates[217] - The company faces intense competition from large, established medical device companies and smaller service providers, some of whom have greater financial resources and broader product offerings[250][251][252] - The company has identified and is remediating material weaknesses in its internal control over financial reporting, which could result in material misstatements if not corrected[293] Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the current reporting period - Not applicable[352] Other Information A new Severance and Change in Control Policy was approved, standardizing severance payments and benefits for executives for qualifying terminations - A new Severance and Change in Control Policy was approved, standardizing benefits for executives[354] - In a change of control scenario, qualifying terminated officers are entitled to benefits including lump sum salary payments (24 months for the CEO, 15 for other officers), bonus payments (150% of target for CEO, 100% for others), COBRA premium payments, and 100% accelerated vesting of unvested equity awards[356] - For terminations outside of a change of control period, benefits include continued salary payments (18 months for the CEO, 12 for others) and COBRA premium payments for the same duration[357] Exhibits This section lists exhibits filed as part of the Quarterly Report on Form 10-Q, including officer certifications and XBRL data files