iRhythm(IRTC) - 2020 Q4 - Annual Report

PART I Business iRhythm Technologies is a digital healthcare company specializing in ambulatory cardiac monitoring with its Zio service, reporting $265.2 million revenue and a $43.8 million net loss in 2020 - iRhythm is a digital healthcare company diagnosing cardiac arrhythmias via its Zio service, which has served over three million patients and accumulated over 750 million hours of heartbeat data[14] Financial Performance (2019-2020) | Metric | 2020 (million $) | 2019 (million $) | | :--- | :--- | :--- | | Revenue | $265.2 | $214.6 | | Net Loss | $43.8 | $54.6 | - The Zio service platform features the Zio XT monitor for continuous monitoring and the Zio AT monitor for timely transmission of significant arrhythmia events[19][23] - Growth strategy focuses on U.S. market penetration, sales force expansion, international growth (U.K.), and new clinical use cases for high-risk asymptomatic patients and post-procedure monitoring[74][75][76] - In September 2019, iRhythm collaborated with Verily Life Sciences to develop next-generation atrial fibrillation screening and detection products, involving upfront and milestone payments[71] - As of December 31, 2020, the company employed 1,157 full-time staff, including 145 direct sales representatives[23][97] Risk Factors The company faces significant risks from reimbursement changes, intense competition, operational execution, and the ongoing impact of the COVID-19 pandemic, alongside a history of net losses - Adverse changes in CMS reimbursement rates for the Zio service, particularly new CPT code rates published in January 2021, pose a significant risk to revenue if not favorably renegotiated[160][180][181] - The COVID-19 pandemic adversely impacted operations through limited sales access, deferred diagnostic procedures, and supply chain disruptions[160][161][163] - The company has a history of net losses, reporting $43.8 million in 2020 and $54.6 million in 2019, with continued losses expected due to growth investments[170] - Business success is highly dependent on broad physician adoption of the Zio service; failure to achieve this would adversely impact operations[160][171] - The ambulatory cardiac monitoring market is highly competitive, with recent industry consolidation intensifying pressure from rivals possessing greater resources[160][212][213] - Recent management turnover, including the CEO's retirement and CFO/COO resignations, introduces operational uncertainty[160][222] Unresolved Staff Comments The company reports no unresolved staff comments - Not applicable[313] Properties The company leases all its facilities, including corporate headquarters in San Francisco, clinical centers, and manufacturing in Cypress, deemed sufficient for current needs Leased Facilities | Facility Type | Location | Size (sq. ft.) | | :--- | :--- | :--- | | Corporate Headquarters | San Francisco, CA | 117,560 | | Clinical Center | Lincolnshire, IL | 41,500 | | Clinical Center | Houston, TX | 20,276 | | Manufacturing/Distribution | Cypress, CA | 17,558 | Legal Proceedings The company faces a putative class action lawsuit filed February 1, 2021, alleging Exchange Act violations, which it believes is without merit - A putative class action lawsuit was filed on February 1, 2021, alleging violations of Sections 10(b) and 20(a) of the Exchange Act for the period August 4, 2020, to January 28, 2021[319] - The company believes the lawsuit lacks merit and intends to defend itself vigorously[319] Mine Safety Disclosures This item is not applicable to the company - Not applicable[320] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "IRTC"; it has never paid cash dividends and plans to retain earnings for business development Quarterly Stock Price (2020) | Quarter | High ($) | Low ($) | | :--- | :--- | :--- | | First | 101.40 | 57.79 | | Second | 131.18 | 72.13 | | Third | 238.11 | 111.60 | | Fourth | 261.17 | 180.80 | - The company has never declared or paid cash dividends and does not anticipate paying any in the foreseeable future[325] Selected Consolidated Financial Data Selected financial data for 2016-2020 shows consistent revenue growth to $265.2 million in 2020, alongside continuous net losses, reaching $43.8 million in 2020 Selected Financial Data (2016-2020, in thousands) | Metric | 2020 (thousands $) | 2019 (thousands $) | 2018 (thousands $) | 2017 (thousands $) | 2016 (thousands $) | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $265,166 | $214,552 | $147,277 | $99,129 | $64,551 | | Gross Profit | $194,889 | $162,067 | $108,482 | $70,926 | $43,660 | | Net Loss | $(43,830) | $(54,568) | $(50,378) | $(29,740) | $(20,795) | | Total Assets | $511,739 | $306,212 | $117,523 | $133,379 | $138,635 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, revenue grew 24% to $265.2 million, while gross margin declined to 73%; operating loss decreased to $43.7 million, and liquidity improved with a $206.8 million public offering despite COVID-19 disruptions Results of Operations Comparison (2019 vs. 2020) | Metric (thousands $) | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $265,166 | $214,552 | $50,614 | 24% | | Gross Profit | $194,889 | $162,067 | $32,822 | 20% | | Gross Margin | 73% | 76% | - | - | | Loss from Operations | $(43,673) | $(54,755) | $11,082 | 20% | | Net Loss | $(43,830) | $(54,568) | $10,738 | 20% | - The 24% revenue growth in 2020 was driven by increased Zio service volume, while gross margin decreased due to product mix and fixed costs during the COVID-19 pandemic[355][357] - COVID-19 caused a mid-March 2020 decline in patient registrations, but volumes recovered in the second half, supported by increased "Home Enrollment" services[340][342] Cash Flow Summary (in thousands) | Activity | 2020 (thousands $) | 2019 (thousands $) | 2018 (thousands $) | | :--- | :--- | :--- | :--- | | Net cash used in Operating | $(13,759) | $(21,863) | $(29,093) | | Net cash (used in) provided by Investing | $(132,391) | $(89,274) | $34,142 | | Net cash provided by Financing | $214,316 | $111,576 | $6,303 | - As of December 31, 2020, the company held $88.6 million in cash and equivalents and $246.6 million in short-term investments, with liquidity significantly enhanced by a $206.0 million public offering in August 2020[373][383] Quantitative and Qualitative Disclosures About Market Risk The company's market risks, primarily from interest rate sensitivity and British Pound Sterling foreign currency exposure, are not considered material by management - The company faces interest rate risk on cash, investments, and variable-rate debt, but a hypothetical 10% interest rate change would not materially impact financial statements[419][421] - Foreign currency exchange risk, mainly from British Pound Sterling transactions, is not considered material[422] Financial Statements and Supplementary Data This section presents audited financial statements for 2020, with PricewaterhouseCoopers LLP identifying a material weakness in internal control over financial reporting due to an ineffective control environment - PricewaterhouseCoopers LLP concluded that internal control over financial reporting was ineffective as of December 31, 2020, citing a material weakness from an ineffective control environment and insufficient accounting expertise[428][429] - The auditor identified the estimation of Contractual Allowance and Allowance for Doubtful Accounts for third-party payors as a Critical Audit Matter, given significant management judgment[437][438] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2020 (thousands $) | Dec 31, 2019 (thousands $) | | :--- | :--- | :--- | | Cash, cash equivalents, & short-term investments | $335,217 | $140,551 | | Total Assets | $511,739 | $306,212 | | Total Liabilities | $170,127 | $170,803 | | Total Stockholders' Equity | $341,612 | $135,409 | Consolidated Statement of Operations (in thousands) | Account | 2020 (thousands $) | 2019 (thousands $) | 2018 (thousands $) | | :--- | :--- | :--- | | Revenue | $265,166 | $214,552 | $147,277 | | Gross Profit | $194,889 | $162,067 | $108,482 | | Loss from Operations | $(43,673) | $(54,755) | $(45,691) | | Net Loss | $(43,830) | $(54,568) | $(50,378) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None[622] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2020, due to a material weakness in the control environment, though prior weaknesses were remediated - Management concluded that disclosure controls and procedures were ineffective as of December 31, 2020, due to a material weakness in internal control over financial reporting[624] - The material weakness identified is an ineffective control environment, resulting from insufficient accounting and internal control expertise amidst rapid company growth[627] - Remediation efforts include hiring additional experienced finance staff and two Internal Audit Directors to enhance the control environment[630] - Previously disclosed material weaknesses in the 2019 10-K, concerning financial statement close and revenue accounting, were remediated by December 31, 2020[632][634] Other Information The company reports no other information to disclose for this item - None[637] PART III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees and Services Information for Items 10-14, covering governance, compensation, and ownership, is incorporated by reference from the 2021 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the definitive Proxy Statement, to be filed within 120 days after December 31, 2020[640][641][642] PART IV Exhibits, Financial Statement Schedules This section lists exhibits for the 10-K, with financial statement schedules omitted, and includes an index of material agreements and corporate governance documents - All required financial statements are included; financial statement schedules are omitted as not applicable or already present in the statements and notes[648] - An index of exhibits, as required by Item 601 of Regulation S-K, provides a list of material agreements and corporate governance documents[649][650]