iRhythm Holdings, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) (principal executive officer) and Chief Financial Officer (“CFO”) (principal financial officer), as appropriate to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15(b) under the Exchange Act, our management, including our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our CEO and our CFO have concluded that as of December 31, 2020, our disclosure controls and procedures were not effective at the reasonable assurance level because of the material weakness in internal controls previously disclosed and discussed below. Notwithstanding the material weakness, our management, including our CEO and CFO, has concluded that our consolidated financial statements, included in the 2020 Annual Report on Form 10-K, fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. In light of the material weakness described below, the Company performed additional analysis and other post-closing procedures to determine its consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management concluded that the financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented. Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2020 using the criteria described in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We did not design or maintain an effective control environment commensurate with our financial reporting requirements. Given the rapid growth in the size and complexity of the business, we failed to maintain a sufficient number of professionals with an appropriate level of accounting and internal control knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. This material weakness contributed to additional material weaknesses, previously disclosed and remediated, as discussed below. In aggregate, these material weaknesses resulted in the misstatement of our revenues, revenue reserves, bad debt expense, property and equipment, research and development 119 Table of Contents expense and related financial disclosures, and in the revision of the Company’s consolidated financial statements for the years ended December 31, 2017, December 31, 2018, and each interim period therein as well as the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019. Additionally, this material weakness could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Based on this assessment and because of this material weakness, we concluded that the Company's internal control over financial reporting was not effective as of December 31, 2020. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in Part II, Item 8 of this Annual Report on Form 10-K. Remediation Plan Activities As it relates to the material weakness that continues to exist as of December 31, 2020, we performed the following actions: • Increased the depth and experience of our Finance organization by increasing the number of management and staff members, expanding our technical experience in accounting, auditing and reporting matters, and performing internal controls training for management and staff members. • Hired two Internal Audit Directors (one with broad Finance experience and one with relevant control experience over information technology environments). These individuals are focused on the development, maintenance and monitoring of our overall control environment and system of key internal controls over financial reporting. We remain committed to the continued hiring and on-boarding of additional members of the organization supporting the internal control over financial reporting. As of December 31, 2020, we have filled key positions within the Finance organization and will continue to add skilled talent as complexities grow and needs arise. These investments in resources have significantly improved the stability of our accounting organization. While significant progress has been made in response to the material weakness in the control environment, key remediation plan activities include additional training programs and hiring of additional resources in support of certain control activities. Additionally, time is needed to demonstrate sustainability as it relates to our internal control over financial reporting and improvements made to our complement of resources, including demonstrating sustained operating effectiveness of our internal controls. Remediation of Previously Disclosed Material Weaknesses Additional material weaknesses were previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 and the following elements have been remediated as of December 31, 2020: • Material weakness related to the financial statement close process We did not effectively execute our controls over the financial statement close process, to ensure the prevention or detection of a misstatement that could be material. Specifically, we previously concluded we did not have an effective business performance review control used to monitor the completeness and accuracy of the financial results and to identify potential failures in lower level controls. This control may not have detected errors in a timely manner that could be material to our interim or annual financial statements. Additionally, we did not have appropriate control over the review of journal entries to ensure that they were properly supported and recorded completely and accurately. • Material weakness related to the accounting for revenue and related accounts receivables and reserves We did not maintain effective controls with respect to the review of the accounting for revenue and related accounts receivable, including maintaining effective controls to prevent or detect errors in the assessment of bad debt and revenue reserves. Specifically, we did not detect errors within the contractual allowance and bad debt expense analyses which resulted in immaterial misstatements to revenue, accounts receivable and bad debt expense. During the year ended December 31, 2020, we completed the testing and evaluation of the operating effectiveness of the newly designed and implemented and enhanced controls and concluded these material weaknesses have been remediated as of December 31, 2020. 120 Table of Contents Changes in Internal Control Over Financial Reporting There have been no changes in internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override of the controls. Projections of any evaluation of controls effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with policies or procedures. Item 9B. Other Information. None. 121 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance. The information required by this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC in connection with our 2021 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2020. Item 11. Executive Compensation. The information required by this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC in connection with our 2021 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2020. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC in connection with our 2021 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2020. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC in connection with our 2021 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2020. Item 14. Principal Accounting Fees and Services. The information required by this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC in connection with our 2021 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2020. 122 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules. (a) List the following documents filed as a part of this Annual Report on Form 10-K: i. All financial statements; ii. Those financial statement schedules required to be filed by Item 8 of this form, and by paragraph (b) below. All financial statement schedules are omitted because they are not applicable or the amounts are immaterial or the required information is presented in the consolidated financial statements and notes thereto in Part II, Item 8 above. iii. Those exhibits required by Item 601 of Regulation S-K (§ 229.601 of this chapter) and by paragraph (b) below. Identify in the list each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 15(b) of this report. (b) Registrants shall file, as exhibits to this form, the exhibits required by Item 601 of Regulation S-K (§ 229.601 of this chapter). (c) Registrants shall file, as financial statement schedules to this form, the financial statements required by Regulation S-X (17 CFR 210) which are excluded from the annual report to shareholders by Rule 14a-3(b) including (1) separate financial statements of subsidiaries not consolidated and fifty percent or less owned persons; (2) separate financial statements of affiliates whose securities are pledged as collateral; and (3) schedules. 123 Table of Contents Exhibit Index Incorporated by Reference Exhibit Number Exhibit Title Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 8-K 001-37918 3.1 October 26, 2016 3.2 Amended and Restated Bylaws of the Registrant. 8-K 001-37918 3.2 October 26, 2016 4.1 Specimen Common Stock Certificate of the Registrant. S-1 333-213773 4.1 September 23, 2016 4.2 Amended and Restated Investors’ Rights Agreement dated May 16, 2014 by and among the Registrant and certain stockholders. S-1/A 333-213773 4.2 October 7, 2016 4.3 Description of the Registrant's securities registered pursuant to section 12 of the securities exchange act of 1934. 10-K 333-213773 4.3 March 2, 2020 4.4 First amendment to third amended and restated loan and security agreement. 10-K 333-213773 4.4 March 2, 2020 4.8 Warrant to Purchase Stock issued to Life Science Loans, LLC dated as of June 3, 2014. S-1 333-213773 4.8 September 23, 2016 10.1+ Form of Indemnification Agreement for directors and executive officers. S-1 333-213773 10.1 September 23, 2016 10.2+ 2006 Stock Plan, as amended, and Form of Option Agreement thereunder. S-1 333-213773 10.2 September 23, 2016 10.3+ 2016 Equity Incentive Plan and related form agreements. S-1/A 333-213773 10.3 October 7, 2016 10.4+ 2016 Employee Stock Purchase Plan and related form agreements. S-1/A 333-213773 10.4 October 7, 2016 10.5+ Executive Incentive Compensation Plan. S-1/A 333-213773 10.5 October 7, 2016 10.6 Manufacturing Services Agreement dated March 1, 2009 between the Registrant and Jabil Circuit, Inc. S-1 333-213773 10.6 September 23, 2016 10.7 Memorandum of Understanding dated February 16, 2015 between the Registrant and Jabil Circuit, Inc. S-1 333-213773 10.7 September 23, 2016 10.8 Warland Business Park Lease dated April 20, 2015 between the Registrant and Warland Investments Company. S-1 333-213773 10.8 September 23, 2016 10.9 Office Lease dated April 30, 2008 between the Registrant and 650 Townsend Associates, LLC. S-1/A 333-213773 10.9 October 7, 2016 10.10 First Amendment to Lease dated February 26, 2010 between the Registrant and 650 Townsend Associates, LLC. S-1 333-213773 10.10 September 23, 2016 10.11 Second Amendment to Lease dated December 19, 2011 between the Registrant and 650 Townsend Associates, LLC. S-1 333-213773 10.11 September 23, 2016 10.12 Third Amendment to Lease dated January 8, 2014 between the Registrant and Big Dog Holdings, LLC, as successor in interest to 650 Townsend Associates LLC. S-1 333-213773 10.12 September 23, 2016 10.13 Fourth Amendment to Lease dated April 22, 2015 between the Registrant and Big Dog Holdings, LLC, as successor in interest to 650 Townsend Associates LLC. S-1 333-213773 10.13 September 23, 2016 10.14 Fifth Amendment to Lease dated November 20, 2015 between the Registrant and Big Dog Holdings, LLC, as successor in interest to 650 Townsend Associates LLC. S-1 333-213773 10.14 September 23, 2016 10.15 Sixth Amendment to Lease dated August 10, 2016 between the Registrant and Big Dog Holdings, LLC, as successor in interest to 650 Townsend Associates LLC. S-1 333-213773 10.15 September 23, 2016 10.16 Sublease dated October 29, 2009 between the Registrant and Freedomroads, LLC. S-1/A 333-213773 10.16 October 7, 2016 10.17 First Amendment to Sublease dated June 1, 2010 between the Registrant and Freedomroads, LLC. S-1/A 333-213773 10.17 October 7, 2016 10.18 Second Amendment to Sublease dated September 24, 2013 between the Registrant, Freedomroads, LLC and FRHP Lincolnshire, LLC. S-1 333-213773 10.18 September 23, 2016 10.19 Sublease dated April 15, 2014 between the Registrant and Lone Star R.S. Platou, Inc. S-1 333-213773 10.19 September 23, 2016 10.20± Services Agreement dated December 24, 2013 between the Registrant and XIFIN, Inc. S-1 333-213773 10.20 September 23, 2016 Table of Contents 10.21 Second Amended and Restated Loan and Security Agreement dated December 4, 2015 between the Registrant and Silicon Valley Bank. S-1/A 333-213773 10.21 October 7, 2016 10.22 Loan Agreement dated December 4, 2015 between the Registrant and Biopharma Secured Investments III Holdings Cayman LP. S-1 333-213773 10.22 September 23, 2016 10.23 Guaranty and Security Agreement dated December 4, 2015 by the Registrant and each other grantor from time to time party thereto in favor of Biopharma Secured Investments III Holdings Cayman LP. S-1 333-213773 10.23 September 23, 2016 10.24 Note Purchase Agreement dated November 16, 2012, as amended, by and between the Registrant and California HealthCare Foundation, exhibits related thereto and related Promissory Note. S-1/A 333-213773 10.24 October 7, 2016 10.25+ Employment Letter to Kevin M. King dated July 23, 2012 between the Registrant and Kevin M. King. S-1 333-213773 10.25 September 23, 2016 10.26+ Employment Letter to David A. Vort dated November 22, 2013 between the Registrant and David A. Vort. S-1 333-213773 10.26 September 23, 2016 10.27+ Employment Letter to Derrick Sung dated March 24, 2015 between the Registrant and Derrick Sung. S-1 333-213773 10.27 September 23, 2016 10.28+ Employment Letter to Matthew C. Garrett dated December 2, 2012 between the Registrant and Matthew C. Garrett. S-1 333-213773 10.28 September 23, 2016 10.29 Form of Change of Control and Severance Agreement to be effective upon the closing of the offering. 10-Q 333-213773 10.29 November 14, 2017 10.30 Office Lease (Suite 500) dated August 9, 2016 between the Registrant and Big Dog Holdings, LLC. S-1 333-213773 10.30 September 23, 2016 10.31 Note and Warrant Purchase Agreement dated November 1, 2012, by and among the Registrant and the persons and entities listed on the Schedule of Investors attached thereto as Exhibit A and exhibits related thereto. S-1/A 333-213773 10.31 October 7, 2016 10.32 Office Lease dated May 1, 2017 between the Registrant and Radler Limited Partnership. 10-Q 333-213773 10.32 August 7, 2017 10.33 Employment Letter to Karim Karti dated June 12, 2018 between the Registrant and Karim Karti. 10-Q 333-213773 10.33 August 3, 2018 10.34 First Amendment to Lease dated June 5, 2018 between the Registrant and Warland Investments Company. 10-Q 333-213773 10.34 August 3, 2018 10.35 Office Lease dated October 4, 2018 between the Registrant and Big Dog Holdings LLC. 10.36 Third Amended and Restated Loan and Security Agreement, dated as of October 23, 2018, between Silicon Valley Bank, a California corporation, and iRhythm Technologies, Inc., a Delaware corporation. 8-K 333-213773 10.1 October 29, 2018 10.37 2016 Employee Stock Purchase Plan, as amended February 26, 2019, and related form agreements. 10-Q 333-213773 10.37 December 23, 2019 10.38 Employment Letter to Mark Day dated September 3, 2007 between the Registrant and Mark Day. 10-Q 333-213773 10.38 December 23, 2019 10.39 Development collaboration agreement by and among Verily Life Sciences LLC, Verily Ireland Limited, and iRhythm Technologies, Inc. 10-Q 333-213773 10.39 December 23, 2019 10.40 Executive Change in Control and Severance Policy 10-Q 333-213773 10.40 August 7, 2020 10.41 Underwriting Agreement by and among iRhythm Technologies, Inc. and J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC as representatives of the several underwriters named therein, dated August 18, 2020. 8-K 333-213773 10.41 August 21, 2020 21.10 List of Subsidiaries of Registrant. S-1 333-213773 21.1 September 23, 2016 23.10 Consent of Independent Registered Public Accounting Firm 31.10 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Table of Contents 31.20 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1† Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document ________________________________________________________________________________________________ † The certifications attached as Exhibit 32.1 and 32.2 that accompany this Annual Report on Form 10-K, are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of iRhythm Technologies, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing. † Indicates management contract or compensatory plan. † Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and have been filed separately with the Securities and Exchange Commission. Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Company Name Date: February 26, 2021 By: /s/ Michael Coyle Michael Coyle President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name Title Date /s/ Michael Coyle President, Chief Executive Officer and Director (Principal Executive Officer) February 26, 2021 Michael Coyle /s/ Douglas J. Devine Chief Financial Officer (Principal Financial Officer) February 26, 2021 Douglas J. Devine /s/ Bruce G. Bodaken Director February 26, 2021 Bruce G. Bodaken /s/ Ralph Snyderman M.D. Director February 26, 2021 Ralph Snyderman M.D. /s/ C. Noel Bairey Merz, M.D. Director February 26, 2021 C. Noel Bairey Merz, M.D. /s/ Mark J. Rubash Director February 26, 2021 Mark J. Rubash /s/ Raymond W. Scott Director February 26, 2021 Raymond W. Scott /s/ Renee Budig Director February 26, 2021 Renee Budig /s/ Kevin M. King Director February 26, 2021 Kevin M. King /s/ Abhijit Y. Talwalkar Director and Chairman of the Board February 26, 2021 Abhijit Y. Talwalkar