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EX-32.1 - EX-32.1 - iRhythm Technologies, Inc.irtc-ex321_8.htm
EX-31.2 - EX-31.2 - iRhythm Technologies, Inc.irtc-ex312_6.htm
EX-31.1 - EX-31.1 - iRhythm Technologies, Inc.irtc-ex311_7.htm
EX-10.29 - EX-10.29 - iRhythm Technologies, Inc.irtc-ex1029_147.htm

 

 

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, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                    

Commission file number: 001-37918

 

iRhythm Technologies, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

20-8149544

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

650 Townsend Street, Suite 500,

San Francisco, California

 

94103

(Address of Principal Executive Offices)

 

(Zip Code)

 

(415) 632-5700

(Registrant’s Telephone Number, Including Area Code)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

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 31, 2017, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 22,981,467.

 

 

 


 

 


IRHYTHM TECHNOLOGIES, INC.

TABLE OF CONTENTS

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

1

 

 

 

Item 1. Financial Statements (Unaudited):

 

1

Condensed Consolidated Balance Sheets

 

1

Condensed Consolidated Statements of Operations

 

2

Condensed Consolidated Statements of Comprehensive Loss

 

3

Condensed Consolidated Statements of Cash Flows

 

4

Notes to Condensed Consolidated Financial Statements 

 

5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

30

Item 4. Controls and Procedures

 

30

 

 

 

PART II. OTHER INFORMATION

 

31

 

 

 

Item 1. Legal Proceedings

 

31

Item 1A. Risk Factors

 

31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

59

Item 3. Defaults Upon Senior Securities

 

59

Item 4. Mine Safety Disclosures 

 

59

Item 5. Other Information

 

59

Item 6. Exhibits

 

59

 

 

 

Exhibit Index

 

60

 

 

 

Signatures

 

61

 

 


i


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be 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:

 

plans to conduct further clinical studies

 

our plans to modify our current products, or develop new products, to address additional indications

 

the expected growth of our business and our organization

 

our expectations regarding government and third party payor coverage and reimbursement

 

our expectations regarding the size of our sales organization and expansion of our sales and marketing efforts 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 products

 

our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for, or ability to obtain, additional financing

 

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act

 

our ability to identify and develop new and planned products and acquire new products

 

our financial performance

 

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, 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. We undertake no obligation to update publicly any 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.

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 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

(Unaudited)

(In thousands, except share and per share data)

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,429

 

 

$

51,643

 

Investments, short-term

 

 

87,017

 

 

 

54,407

 

Accounts receivable, net

 

 

12,039

 

 

 

9,406

 

Inventory

 

 

1,314

 

 

 

1,390

 

Prepaid expenses and other current assets

 

 

1,989

 

 

 

1,671

 

Restricted cash

 

 

 

 

 

91

 

Total current assets

 

 

122,788

 

 

 

118,608

 

Investments, long-term

 

 

 

 

 

10,981

 

Property and equipment, net

 

 

6,207

 

 

 

4,653

 

Goodwill

 

 

862

 

 

 

862

 

Other assets

 

 

3,798

 

 

 

3,052

 

Total assets

 

$

133,655

 

 

$

138,156

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,076

 

 

$

2,103

 

Accrued liabilities

 

 

11,436

 

 

 

10,165

 

Deferred revenue

 

 

904

 

 

 

947

 

Accrued interest, current portion

 

 

149

 

 

 

 

Debt, current portion

 

 

1,479

 

 

 

 

Total current liabilities

 

 

16,044

 

 

 

13,215

 

Debt

 

 

32,053

 

 

 

32,227

 

Deferred rent, noncurrent portion

 

 

169

 

 

 

26

 

Accrued interest, net of current portion

 

 

 

 

 

126

 

Total liabilities

 

 

48,266

 

 

 

45,594

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value – 5,000,000 authorized at September 30, 2017 and

   December 31, 2016, respectively; and none issued and outstanding at September 30,

   2017 and December 31, 2016, respectively

 

 

 

 

 

 

Common stock, $0.001 par value – 100,000,000 shares authorized at September 30,

   2017 and December 31, 2016, respectively; 22,978,954 and 22,139,346 shares

   issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

28

 

 

 

22

 

Additional paid-in capital

 

 

230,831

 

 

 

219,718

 

Accumulated other comprehensive loss

 

 

(30

)

 

 

(9

)

Accumulated deficit

 

 

(145,440

)

 

 

(127,169

)

Total stockholders’ equity

 

 

85,389

 

 

 

92,562

 

Total liabilities and stockholders’ equity

 

$

133,655

 

 

$

138,156

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

1


IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

$

25,035

 

 

$

16,780

 

 

$

70,327

 

 

$

45,368

 

Cost of revenue

 

 

6,920

 

 

 

5,282

 

 

 

20,002

 

 

 

15,097

 

Gross profit

 

 

18,115

 

 

 

11,498

 

 

 

50,325

 

 

 

30,271

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,790

 

 

 

1,635

 

 

 

9,187

 

 

 

4,847

 

Selling, general and administrative

 

 

20,308

 

 

 

12,529

 

 

 

57,787

 

 

 

36,658

 

Total operating expenses

 

 

24,098

 

 

 

14,164

 

 

 

66,974

 

 

 

41,505

 

Loss from operations

 

 

(5,983

)

 

 

(2,666

)

 

 

(16,649

)

 

 

(11,234

)

Interest expense

 

 

(862

)

 

 

(807

)

 

 

(2,522

)

 

 

(2,388

)

Other income (expense), net

 

 

321

 

 

 

(602

)

 

 

900

 

 

 

(1,015

)

Net loss

 

$

(6,524

)

 

$

(4,075

)

 

$

(18,271

)

 

$

(14,637

)

Net loss per common share, basic and diluted

 

$

(0.29

)

 

$

(2.80

)

 

$

(0.81

)

 

$

(10.20

)

Weighted-average shares used to compute net loss per common

   share, basic and diluted

 

 

22,811,907

 

 

 

1,454,307

 

 

 

22,446,399

 

 

 

1,434,583

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2


IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net Loss

 

$

(6,524

)

 

$

(4,075

)

 

$

(18,271

)

 

$

(14,637

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on available-for-sale securities

 

 

21

 

 

 

 

 

 

(19

)

 

 

 

Comprehensive loss

 

$

(6,503

)

 

$

(4,075

)

 

$

(18,290

)

 

$

(14,637

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

3


IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(18,271

)

 

$

(14,637

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,103

 

 

 

646

 

Stock-based compensation

 

 

7,024

 

 

 

1,251

 

Amortization of debt discount and issuance costs

 

 

197

 

 

 

284

 

Amortization of premiums (accretion of discounts) on investments, net

 

 

(207

)

 

 

 

Non-cash interest expense

 

 

1,152

 

 

 

1,099

 

Provision for bad debt and contractual allowance

 

 

5,927

 

 

 

3,384

 

Change in fair value of preferred stock warrant liabilities

 

 

 

 

 

996

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(8,560

)

 

 

(7,115

)

Inventory

 

 

76

 

 

 

(527

)

Prepaid expenses and other current assets

 

 

(197

)

 

 

(301

)

Other assets

 

 

(793

)

 

 

(842

)

Accounts payable

 

 

(33

)

 

 

69

 

Accrued liabilities

 

 

1,294

 

 

 

(363

)

Deferred revenue

 

 

(43

)

 

 

344

 

Deferred rent

 

 

143

 

 

 

(1

)

Net cash used in operating activities

 

 

(11,188

)

 

 

(15,713

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Change in restricted cash

 

91

 

 

 

 

Purchases of property and equipment

 

 

(2,651

)

 

 

(1,821

)

Purchases of available-for-sale investments

 

 

(90,243

)

 

 

 

Maturities of available-for-sale investments

 

 

68,682

 

 

 

 

Net cash used in investing activities

 

 

(24,121

)

 

 

(1,821

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net proceeds from employee stock transactions

 

 

4,095

 

 

 

82

 

Payments of deferred issuance costs

 

 

 

 

 

(1,995

)

Net cash provided by (used in) financing activities

 

 

4,095

 

 

 

(1,913

)

Net decrease in cash and cash equivalents

 

 

(31,214

)

 

 

(19,447

)

Cash and cash equivalents, beginning of period

 

 

51,643

 

 

 

25,208

 

Cash and cash equivalents, end of period

 

$

20,429

 

 

$

5,761

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

1,152

 

 

$

1,213

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Deferred offering costs included in accounts payable and accrued liabilities

 

$

 

 

$

637

 

Property, plant and equipment costs included in accounts payable

 

$

6

 

 

$

152

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

4


 

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 digital healthcare company redefining the way cardiac arrhythmias are clinically diagnosed by combining wearable biosensing technology with cloud-based data analytics and machine-learning capabilities. The Company commenced commercial introduction of its products in the United States in 2009 following clearance by the U.S. Food and Drug Administration.

The Company’s headquarters are based in San Francisco, California, and the Company has manufacturing facilities in Cypress, California, and clinical centers in Lincolnshire, Illinois and Houston, Texas. In March 2016, the Company formed a wholly-owned subsidiary in the United Kingdom. The Company manages its operations as a single operating segment. Substantially all of the Company’s assets are maintained in the United States. The Company derives substantially all of its revenue from sales to customers in the United States, based upon the billing address of the customer.

 

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements at that date but does 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 condensed consolidated financial information. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other interim period or for any other future year.

The accompanying interim 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, 2016 included in the Company’s Form 10-K, filed with the SEC on March 31, 2017.

Principles of Consolidation

The accompanying interim unaudited condensed consolidated financial statements are consolidated for the nine months ended September 30, 2017 and 2016 and include the accounts of iRhythm Technologies, Inc. and its wholly-owned subsidiary, iRhythm Technologies Ltd., established in March 2016. The financial statements of iRhythm Technologies Ltd. use the U.S. dollar as the functional currency. For all non-functional currency balances, the remeasurement of such balances to functional currency results in a foreign exchange transaction gain or loss, which is recorded in the consolidated statements of operations.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. 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 reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, contractual allowances for revenue, allowance for doubtful accounts, 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 valuation of deferred tax assets, the fair value of the Company’s preferred and common stock and stock-based compensation. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. Actual results may differ from those estimates.

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, which include cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short maturities.

5


IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

Cash Equivalents

Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the date of purchase.

Investments

Short-term investments consist of debt securities classified as available-for-sale and have maturities greater than 90 days, but less than 365 days from the date of acquisition. Long-term investments have maturities greater than 365 days as of the balance sheet date. All investments are carried at fair value based upon quoted market prices. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reported as a component of accumulated other comprehensive loss. The cost of available-for-sale securities sold is based on the specific-identification method. Realized gains and losses are included in earnings, and are derived for specific-identification method for determining the costs of investments sold.

Restricted Cash

Restricted cash consists of certificates of deposit held with a financial institution as security deposits for building leases and is included in short-term assets on the Company's condensed consolidated balance sheets.

Accounts Receivable, Allowance for Doubtful Accounts and Contractual Allowance

Accounts receivable consists of amounts due to the Company from institutions, government payors and third-party commercial payors as a result of the Company's normal business activities. Accounts receivable is reported on the condensed consolidated balance sheets net of an estimated allowance for doubtful accounts and contractual allowance.

The Company establishes an allowance for doubtful accounts for estimated uncollectible receivables based on its historical experience, and recognizes the provision as a component of selling, general and administrative expenses. The Company establishes a contractual allowance, which is a reduction in revenue, for estimated uncollectible amounts from Centers for Medicare & Medicaid Services (“CMS”) and contracted third-party commercial payors.

The following table presents the changes in the allowance for doubtful accounts:

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Balance, beginning of period

 

$

1,792

 

 

$

1,125

 

Add: provision for doubtful accounts

 

 

1,855

 

 

 

1,960

 

Less: write-offs, net of recoveries and other adjustments

 

 

(852

)

 

 

(1,293

)

Balance, end of period

 

$

2,795

 

 

$

1,792

 

 

The following table presents the changes in the contractual allowance:

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Balance, beginning of period

 

$

2,340

 

 

$

338

 

Add: contractual allowances

 

 

4,072

 

 

 

2,726

 

Less: write-offs, net of recoveries and other adjustments

 

 

(678

)

 

 

(724

)

Balance, end of period

 

$

5,734

 

 

$

2,340

 

 

Management reviews and updates its estimates for the allowances for doubtful accounts and contractual allowance periodically to reflect its experience regarding historical collections. If management were to make different judgments or utilize different estimates in the allowances for doubtful accounts and contractual allowance, differences in the amount of reported selling, general and administrative expenses and revenue could result, respectively.

6


IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

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, cash equivalents, and investments 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, United States 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. The Company records an allowance for doubtful accounts when it becomes probable that a receivable will not be collected. Government agencies, including CMS and the Veterans Administration, accounted for approximately 39%, 38%, 38% and 40% of the Company’s revenue for the three and nine months ended September 30, 2017 and 2016 respectively. Accounts receivable related to government agencies accounted for 26% and 27% at September 30, 2017 and December 31, 2016, respectively.

Supply Risk

While the Company has not experienced manufacturing supply disruptions to date, the Company relies on single-source vendors for the supply of its disposable housings, instruments and other materials used to manufacture the ZIO Patch and the adhesive that binds the ZIO Patch to a patient’s body. These components and materials are critical, and there could be a considerable delay in finding alternative sources of supply.

Inventory

Inventory is stated at the lower of cost or net realizable value, cost being determined on a standard cost basis for material costs and on actual cost basis for labor and overhead, which approximates actual cost on a first in, first out  (“FIFO)” basis, and market being determined as the lower of cost or net realizable value. The Company records write-downs of inventory that is obsolete or in excess of anticipated demand or market value based on consideration of product lifecycle stage, technology trends, product development plans and assumptions about future demand and market conditions. Actual demand may differ from forecasted demand and such differences may have a material effect on recorded inventory values. Inventory write-downs are charged to cost of revenue and establish a new cost basis for the inventory.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred and improvements and betterments are capitalized.

Internal-Use Software

The Company capitalizes costs related to internal-use software during the application development stage. Costs related to planning and post implementation activities are expensed as incurred. Capitalized internal-use software is amortized, and recognized as cost of revenue, on a straight-line basis over the estimated useful life, which is up to five years. The Company evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Capitalized internal-use software costs are classified as a component of property and equipment.

7


IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

Goodwill

Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in business combinations. Goodwill is tested for impairment on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Such events or circumstances may include significant adverse changes in the general business climate, among other things. The impairment test is performed by determining the enterprise fair value of the Company, which is primarily based on the Company’s market capitalization. If the Company’s carrying value, as a one reporting unit entity, is less than its fair value, then the fair value is allocated to all of its assets and liabilities (including any unrecognized intangible assets) as if the fair value was the purchase price to acquire the Company. The excess of the fair value over the amounts assigned to the Company’s assets and liabilities is the implied fair value of the goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company performs its annual evaluation of goodwill during the fourth quarter of each fiscal year. The Company did not record any charges related to goodwill impairment in any of the periods presented in these condensed consolidated financial statements.

Impairment of Long-Lived Assets

The Company annually reviews long-lived assets for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. To date there have been no such impairments of long-lived assets.

Other Assets

Included in the other assets are PCBAs totaling $3.5 million and $2.8 million as of September 30, 2017 and December 31, 2016, respectively. The Company uses a PCBA in each wearable device and it is used numerous times and has a useful life beyond one year. Each time the PCBA is used in a wearable device, a portion of the cost of the PCBA is recorded as a cost of revenue. The Company has based its estimates of how many times a PCBA can be used on testing in research and development, loss rates, product obsolescence, and the amount of time it takes the device to go through the manufacturing, shipping, customer shelf and patient wear time and upload process. The Company periodically evaluates the use estimate.

Comprehensive Loss

Comprehensive loss represents all changes in stockholders' equity except those resulting from and distributions to stockholders. The Company’s unrealized gains and losses on available-for-sale securities represent the only component of other comprehensive loss that are excluded from the reported net loss and that are presented in the condensed consolidated statements of comprehensive loss.

Revenue Recognition

The Company’s devices, cardiac rhythm monitors, have a wear period for up to 14 days for the ZIO Service or 30 days for the ZIO Event Card. The Company's services, consisting of the delivery of reports containing analysis of data captured by the physical device to the prescribing physician, are generally billable at the start of the wear period or when reports are issued to physicians, depending on the service provided. For the ZIO Event Card, the Company recognizes revenue on a straight-line basis over the applicable wear period, as the event monitoring results are delivered to physicians. For the ZIO Service, the Company recognizes the revenue at the time that a report is delivered to a physician. For all services performed, the Company considers whether or not the following revenue recognition criteria are met: persuasive evidence of an arrangement exists and delivery has occurred or services have been rendered. For services performed for customers the Company invoices directly, additional revenue recognition criteria include that the price is fixed and determinable and collectability is reasonably assured; for customers in which the Company submits claims to third-party commercial and governmental payors for reimbursement, it recognizes revenue only when a reasonable estimate of reimbursement can be made.

8


IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

The assessment of whether a reasonable estimate of reimbursement can be made requires significant judgment by management. Where management's judgment indicates a reasonable estimate of reimbursement can be made, revenue is recognized upon delivery of the patient report for the ZIO Service and straight-line for the ZIO Event Card. Some patients have out-of-pocket costs for amounts not covered by their insurance carrier, and the Company may bill the patient directly for these amounts in the form of co-payments and co-insurance in accordance with their insurance carrier and health plans. Some payors may not cover the Company's service as ordered by the prescribing physician under their reimbursement policies. In the absence of an agreement with the patient or other clearly enforceable legal right to demand payment from the patient, the related revenue is recognized upon the earlier of notification of the payor benefits allowed or when payment is received, until the Company has the ability to make a reasonable estimate.  Once a reasonable estimate can be made, revenue is recognized upon delivery of the service. During 2017, the Company recognized revenue from certain non-contracted payors as a reasonable estimate was able to be made, primarily based on the consistency of historical payments.

The Company recognizes revenue related to billings for CMS and commercial payors on an accrual basis, net of contractual allowances, when a reasonable estimate of reimbursement can be made. These contractual allowances represent the difference between the list price (the billing rate) and the reimbursement rate for each payor. Upon ultimate collection from CMS and commercial payors, the amount is compared to the previous estimates and the contractual allowance is adjusted accordingly. Until a contract has been negotiated with a commercial payor, the Company’s services may or may not be covered by these entities' existing reimbursement policies. In addition, patients do not enter into direct agreements with the Company that commit them to pay any portion of the cost of the service in the event that their insurance declines to reimburse the Company. In the absence of an agreement with the patient or other clearly enforceable legal right to demand payment from the patient, the related revenue is recognized upon the earlier of notification of the payor benefits allowed or when payment is received, until the Company has the ability to make a reasonable estimate. Contracted revenue recognized on an accrual basis was $22.5 million, $13.3 million, $62.1 million and $37.6 million for the three and nine months ended September 30, 2017 and 2016, respectively. Revenue related to non-contracted claims was $2.5 million, $3.5 million, $8.2 million and $7.8 million for the three and nine months ended September 30, 2017 and 2016, respectively.

Certain of the Company’s customers pay the Company directly for the ZIO Service upon shipment of devices. Such advance payments are recorded as deferred revenue on the condensed consolidated balance sheets and revenue is recognized when reports are delivered to physicians.

Cost of Revenue

Cost of revenue is expensed as incurred and includes direct labor, material costs, equipment and infrastructure expenses, amortization of internal-use software, allocated overhead, and shipping and handling. Material costs include both the disposable costs of the device and amortization of the PCBAs. Each time the PCBA is used in a wearable device, a portion of the cost of the PCBA is recorded as a cost of revenue.

Research and Development

The Company’s research and development costs are expensed as incurred. Research and development costs include, but are not limited to, payroll and personnel-related expenses, laboratory supplies, consulting costs and overhead charges.

Income Taxes

The Company uses the asset and liability method to account for income taxes in accordance with the authoritative guidance for income taxes. Under this method, deferred tax assets and liabilities are determined based on future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits in income tax expense. To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits.

9


IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

Stock-based Compensation

The Company measures its stock-based awards made to employees based on the estimated fair values of the awards as of the grant date.  The fair value of stock options are determined using the Black-Scholes option pricing model. Stock-based compensation expense is recognized over the requisite service period using the straight-line method and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, the Company’s stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For restricted stock, the compensation cost for these awards is based on the closing price of the Company’s common stock on the date of grant, and recognized as compensation expense on a straight-line basis over the requisite service period.

The Company recognizes compensation expense related to the Employee Stock Purchase Program (“ESPP”) based on the estimated fair value of the options on the date of grant, net of estimated forfeitures. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model for each purchase period. The grant date fair value is expensed on a straight-line basis over the offering period.

Net Loss per Common Share

Basic net loss per common share is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding during the period, without consideration of potentially dilutive securities. Diluted net loss per common share is the same as basic net loss per common share for all periods presented since the effect of potentially dilutive securities are anti-dilutive.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the Company’s results of operations, net loss or cash flows.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Areas of revenue recognition that will be affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. In addition, Topic 606 requires more detailed disclosures to enable users of financial statements to understand the nature, timing and uncertainty of revenue and cash flows arising from a review of historical accounting policies and practices to identify potential differences in applying Topic 606.

The Company plans to adopt this standard on January 1, 2018 and will use the modified retrospective approach recognizing the cumulative effect of adopting this guidance as an adjustment to its opening accumulated deficit balance, which will have no effect on the Company’s consolidated statements of operations or cash flows for the quarter or year ended December 31, 2017.  Prior periods will not be retrospectively adjusted.  While the evaluation of the new standard is ongoing, the Company believes the adoption will result in a change to net revenue primarily due to the recognition of bad debt expense related to the patient responsibility of both contracted and non-contracted claims, which was $1.7 million for the nine months ended September 30, 2017, as a reduction of gross revenue rather than as a component of selling, general and administrative and, to a lesser extent, due to timing differences in its recognition of revenue related to non-contracted third-party payor claims as a result of changing from recognition based on the earlier of notification of the payor benefits allowed or when payment is received to the accrual basis based on historical experience.

10


IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718). This ASU was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. This standard covers accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. As a result of adopting ASU No. 2016‑09 on January 1, 2017, the Company has made an accounting policy election to continue to estimate forfeitures. The adoption of ASU No. 2016‑09 also requires excess tax benefits and tax deficiencies be recorded in the income statement as opposed to additional paid‑in capital when the awards vest or are settled, and has been applied on a prospective basis with no impact on the condensed consolidated financial statements as of and for the three months ended September 30, 2017. As a result of the adoption, the Company increased its total NOLs by $0.1 million on January 1, 2017 related to deferred tax assets that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting purposes. This amount is fully offset by the valuation allowance.

On May 10, 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. This ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of this new guidance.

 

 

3. Cash Equivalents and Investments

The fair value of securities, not including cash at September 30, 2017 and December 31, 2016, were as follows (in thousands):

 

 

 

September 30, 2017

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Estimated

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Money market funds

 

$

5,722

 

 

$

 

 

$

 

 

$

5,722

 

U.S. government securities

 

 

35,942

 

 

 

1

 

 

 

(26

)

 

 

35,917

 

Corporate notes

 

 

15,669

 

 

 

1

 

 

 

(4

)

 

 

15,666

 

Commercial paper

 

 

48,130

 

 

 

 

 

 

 

 

 

48,130

 

Total available-for-sale securities

 

$

105,463

 

 

$

2

 

 

$

(30

)

 

$

105,435

 

Classified as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

18,418

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

87,017

 

Total cash equivalents and investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

105,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Estimated

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Money market funds

 

$

45,937

 

 

$

 

 

$

 

 

$

45,937

 

U.S. government securities

 

 

16,479

 

 

 

11

 

 

 

 

 

 

16,490

 

Corporate notes

 

 

23,947

 

 

 

 

 

 

(20

)

 

 

23,927

 

Commercial paper

 

 

24,971

 

 

 

 

 

 

 

 

 

24,971

 

Total available-for-sale securities

 

$

111,334

 

 

$

11

 

 

$

(20

)

 

$

111,325

 

Classified as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

45,937

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54,407

 

Long-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,981

 

Total cash equivalents and investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

111,325

 

 

Available-for-sale securities held as of September 30, 2017 had a weighted average days to maturity of 122 days. There have been no material realized gains or realized losses on available-for-sale securities for the periods presented.

11


IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

As the carrying value approximates the fair value for the Company’s cash equivalents, short-term and long-term investments shown in the tables above, the following table summarizes the fair value of the Company’s cash equivalents, short-term and long-term investments classified by maturity (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Due within one year

 

$

105,435

 

 

$

100,344

 

Due after one year through three years

 

 

 

 

 

10,981

 

Total available-for-sale marketable debt

   securities

 

$

105,435

 

 

$

111,325

 

 

 

4. Fair Value Measurements

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. 

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 corporate notes, commercial paper and government bonds 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.

Based on Level 2 inputs and the borrowing rates currently available to the Company for loans with similar terms and maturities, the carrying value of the Company’s debt approximates its fair value.

The following table presents the fair value of the Company’s financial assets and liabilities determined using the inputs defined above (amounts in thousands).

 

 

 

September 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

5,722

 

 

$

 

 

$

 

 

$

5,722

 

U.S. government securities

 

 

 

 

 

35,917

 

 

 

 

 

 

35,917

 

Corporate notes

 

 

 

 

 

15,666

 

 

 

 

 

 

15,666

 

Commercial paper

 

 

 

 

 

48,130

 

 

 

 

 

 

48,130

 

Total

 

$

5,722

 

 

$

99,713

 

 

$

 

 

$

105,435

 

12


IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

45,937

 

 

$

 

 

$

 

 

$

45,937

 

U.S. government securities

 

 

 

 

 

16,490

 

 

 

 

 

 

16,490

 

Corporate notes

 

 

 

 

 

23,927

 

 

 

 

 

 

23,927

 

Commercial paper

 

 

 

 

 

24,971

 

 

 

 

 

 

24,971

 

Total

 

$

45,937

 

 

$

65,388

 

 

$

 

 

$

111,325

 

 

The following table sets forth a summary of the changes in the fair value of the preferred stock warrants which is classified as Level 3 in the fair value hierarchy. There were no transfers into or out of Level 3 during the periods (in thousands):

 

 

 

Nine Months Ended

September 30,

2017

 

 

Nine Months Ended

September 30,

2016

 

Beginning balance

 

$

 

 

$

2,949

 

Total change in fair value recorded as other expense, net

 

 

 

 

 

996

 

Ending balance

 

$

 

 

$

3,945

 

 

The valuation of the preferred stock warrant liabilities is discussed in Note 11.

 

 

5. Balance Sheet Components

Inventory and PCBAs

Inventory and PCBAs consisted of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Raw materials

 

$

737

 

 

$

839

 

Finished goods

 

 

4,119

 

 

 

3,324

 

Total

 

$

4,856

 

 

$

4,163

 

 

Reported on the consolidated balance sheet as:

 

 

 

 

 

 

 

 

Inventory

 

$

1,314

 

 

$

1,390

 

Other assets

 

 

3,542

 

 

 

2,773

 

Total

 

$

4,856

 

 

$

4,163

 

 

Amounts reported as other assets are comprised of the PCBA costs that are included in both raw materials and finished goods totals above.

13


IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Laboratory and manufacturing equipment

 

$

2,028

 

 

$

1,509

 

Computer equipment and software

 

 

916

 

 

 

736

 

Furniture and fixtures

 

 

928

 

 

 

657

 

Leasehold improvements

 

 

703

 

 

 

502

 

Internal-use software

 

 

4,387

 

 

 

2,900

 

Total property and equipment, gross

 

 

8,962

 

 

 

6,304

 

Less: accumulated depreciation and amortization

 

 

(2,755

)

 

 

(1,651

)

Total property and equipment, net

 

$

6,207

 

 

$

4,653

 

 

Depreciation and amortization expense for the three and nine months ended September 30, 2017 and 2016 was $0.5 million, $0.2 million, $1.1 million and $0.6 million, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):  

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Accrued vacation

 

$

1,923

 

 

$

1,642

 

Accrued payroll and related expenses

 

 

5,627

 

 

 

6,179

 

Accrued ESPP contributions

 

 

1,029

 

 

 

417

 

Accrued professional services fees

 

 

555

 

 

 

636

 

Other

 

 

2,302

 

 

 

1,291

 

Total accrued liabilities

 

$

11,436

 

 

$

10,165

 

 

 

6. Related-Party Transactions

Kaiser Permanente (“Kaiser”) is a common stockholder of the Company, representing 6.1% ownership of the total outstanding shares of the Company as of December 31, 2016. For the three and nine months ended September 30, 2017 and 2016, the Company recognized revenue of $1.0 million, $0.4 million, $2.8 million and $1.8 million, respectively, for transactions with Kaiser. The amounts receivable from transactions with Kaiser were $0.7 million and $0.4 million as of September 30, 2017 and December 31, 2016, respectively. Kaiser performs services related to clinical trials and the Company utilizes Kaiser for employee healthcare and the total expense recorded was $0.3 million, $0.1 million, $0.5 million, and $0.5 million as of the three and nine months ended September 30, 2017 and 2016, respectively. The amounts outstanding and included in accounts payable and accrued liabilities were $0.3 million and $0.2 million as of September 30, 2017, and December 31, 2016 respectively.

 

 

7. Commitments and Contingencies

 

Lease Arrangements

 

The Company leases office and manufacturing space under non-cancelable operating leases which expire on various dates through 2027. These leases generally contain scheduled rent increases or escalation clauses and renewal options. The Company recognizes rent expense on a straight-line basis over the lease period.

 

In May 2017, the Company entered into a commercial building lease agreement for its clinical center in Houston, Texas which expires in September 2027.

 

14


IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

The following table summarizes the Company’s future minimum lease payments as of September 30, 2017 (in thousands):

 

Period Ending December 31:

 

 

 

 

2017 (remainder of year)

 

$

1,263

 

2018

 

 

5,089

 

2019

 

 

5,108

 

2020

 

 

1,178

 

2021

 

 

406

 

Thereafter

 

 

2,541

 

Total

 

$

15,585

 

 

The Company’s rent expense was $1.3 million, $0.6 million, $3.8 million and $1.6 million for the three and nine months ended September 30, 2017 and 2016, respectively.

Legal Proceedings

From time to time, the Company may become involved in legal proceedings arising from the ordinary course of its business. Management is currently not aware of any matters that could have a material adverse effect on the financial position, results of operations or cash flows of the Company.

Indemnifications

In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. 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 California corporate law. The Company currently has directors’ and officers’ insurance. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions, and believes that the estimated fair value of these indemnification obligations is not material and it has not accrued any amounts for these obligations.

 

 

8. Debt

Pharmakon Loan Agreement

In December 2015, the Company entered into the Loan Agreement with Biopharma Secured Investments III Holdings Cayman LP, or Pharmakon (the “Pharmakon Loan Agreement”). The Pharmakon Loan Agreement provides for up to $55.0 million in term loans split into two tranches as follows: (i) the Tranche A Loans are $30.0 million in term loans, and (ii) the Tranche B Loans are up to $25.0 million in term loans. The Tranche A Loans were drawn on December 4, 2015. The Tranche B Loans were available to be drawn prior to December 4, 2016. No additional draw was made.

During the first full eight quarters, payments are interest only and for the first two years, 50% of the interest will be “paid-in-kind.” The Company is subject to a financial covenant related to minimum trailing revenue targets that begins in June 2017, and is tested on a semi-annual basis. The minimum net revenue covenant ranges from $44.7 million for the period ended June 30, 2017 to $102.6 million for the period ended December 31, 2021. To date all minimum revenue targets have been achieved. The minimum net revenues financial covenant has a 45-day equity cure period following required delivery date of the financial statements. Pursuant to this equity cure provision, the Company may cure a revenue covenant default by raising additional funds from the sale of equity. The Company was in compliance with loan covenants as of September 30, 2017. The loan matures December 2021.

The Tranche A Loans bear interest at a fixed rate equal to 9.50% per annum that is due and payable quarterly in arrears. During the first eight calendar quarters, 50% of the interest due and payable shall be added to the then outstanding principal.

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IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

The Pharmakon Loan Agreement requires the Company to maintain a minimum consolidated liquidity and minimum net revenue during the term of the loan facility and contains customary affirmative and negative covenants and event of default provisions that could result in the acceleration of the repayment obligations under the loan facility. Upon a change in control of the Company, Pharmakon has the option to demand payment in full of the outstanding loans together with any prepayment premium.

The obligations under the Pharmakon Loan Agreement are secured by a security interest in substantially all of the Company’s assets pursuant to the Pharmakon Guaranty and Security Agreement and this security interest is governed by an intercreditor agreement between Pharmakon and Silicon Valley Bank (“SVB”).

In December 2015, the Company used the proceeds from the Pharmakon Loan Agreement to repay $4.9 million of bank debt to SVB. The issuance costs and debt discount have been netted against the borrowed funds on the balance sheet. The debt balance as of September 30, 2017 and December 31, 2016 was $32.1 million and $30.8 million, respectively.

Bank Debt

In June 2014, the Company refinanced its debt with SVB by entering into the Second Amendment to the Amended and Restated Loan Security Agreement (“Second Amendment”). Under this amendment, the Company borrowed $4.9 million with an additional advance of $5.0 million available. All the borrowings under the Second Amended Loan Agreement were collateralized by all of the Company’s assets, excluding intellectual property. In connection with entering into the Amended Loan Agreement, the Company issued warrants to purchase 20,136 shares of Series D at $7.31 per share that expire in June 2024 (See Note 11).

In December 2015, the Company used the proceeds from the Pharmakon Loan Agreement to repay $4.9 million of bank debt to SVB and entered into a Second Amended and Restated Loan and Security Agreement with SVB, or the SVB Loan Agreement. Under the SVB Loan Agreement the Company may borrow, repay and reborrow under a revolving credit line, but not in excess of the maximum loan amount of $15.0 million, until December 4, 2018, when all outstanding principal and accrued interest becomes due and payable. Any principal amount outstanding under the SVB revolving credit line shall bear interest at a floating rate per annum equal to the rate published by The Wall Street Journal as the “Prime Rate” plus 0.25%, are tied to the Company’s trailing six-month revenue and subject to certain revenue targets. The Company may borrow up to 80% of its eligible accounts receivable, up to the maximum of $15.0 million.

In August 2016, the Company obtained a $3.1 million standby letter of credit pursuant to the SVB revolving credit facility in connection with a lease for the San Francisco office. As of September 30, 2017 and December 31, 2016, the Company was eligible to borrow up to $7.7 million and $2.5 million, respectively, under the SVB revolving credit line.

The SVB Loan Agreement requires the Company to maintain a minimum consolidated liquidity and minimum net sales during the term of the loan facility. In addition, the SVB Loan Agreement contains customary affirmative and negative covenants and events of default. The Company was in compliance with loan covenants as of September 30, 2017. The obligations under the SVB Loan Agreement are collaterialized by substantially all assets of the Company and this security interest is governed by an intercreditor agreement between Pharmakon and SVB.

California HealthCare Foundation Note

In November 2012, the Company entered into a Note Purchase Agreement and Promissory Note with the California HealthCare Foundation, or the CHCF Note, through which the Company borrowed $1.5 million. The CHCF Note accrues simple interest of 2.0%. The accrued interest and the principal was to mature in November 2016. In partial consideration for the issuance of the CHCF Note, the Company issued warrants to purchase 22,807 shares of the Company’s Series D convertible preferred stock.

In June 2015, the Company amended the CHCF Note to extend the maturity date to May 2018. In partial consideration for the amendment, the Company issued 8,552 warrants at $6.58 exercise price per share of the Company’s Series D convertible preferred stock. The CHCF note is subordinate to other debt. The debt balance, net of debt discount, as of September 30, 2017 and December 31, 2016 was $1.6 million and $1.5 million, respectively.

 

 

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IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

9. Income Taxes

The Company did not record a provision or benefit for income taxes during the three and nine months ended September 30, 2017 and 2016, respectively, as it reported losses in each period which are not more likely than not to be realized. Due to the uncertainties surrounding the realization of 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.

At December 31, 2016, the Company had $0.6 million of unrecognized tax benefit, none of which, if recognized, would affect the effective tax rate as most of the unrecognized tax benefit is deferred tax assets currently offset by a valuation allowance.

A number of years may elapse before an uncertain tax position is audited and finally resolved.  While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most likely outcome.  The Company adjusts these reserves in light of changing facts and circumstances.  Settlement of any particular position could require the use of cash.  As of September 30, 2017, changes to the Company’s uncertain tax positions in the next twelve months that are reasonably probable are not expected to have a material impact on the Company’s financial position or results of operations.

 

 

10. Stockholders’ Equity

Common stock

As of September 30, 2017, the Company’s amended and restated certificate of incorporation dated October 2016, authorized the Company to issue 100,000,000 shares of common stock with a par value of $0.001 per share and 5,000,000 shares of preferred stock with a par value of $0.001 per share. The holders of common stock are entitled to receive dividends whenever funds and assets are legally available and when declared by the board of directors. No dividends were declared through September 30, 2017.

The Company had reserved shares of common stock for issuance as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Options issued and outstanding

 

 

2,765,902

 

 

 

2,977,218

 

Unvested restricted stock units

 

 

453,063