iRhythm Technologies, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The company provides ambulatory cardiac rhythm monitoring services, primarily through its Zio platform. Figures below are unaudited; financial amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $102.1 million | $81.3 million | $194.4 million | $155.6 million |
| Gross profit | $70.2 million | $55.3 million | $132.0 million | $106.1 million |
| Gross margin | 69% | 68% | 68% | 68% |
| Operating loss | $23.5 million | $17.0 million | $72.0 million | $44.5 million |
| Net loss | $23.9 million | $17.4 million | $74.5 million | $45.1 million |
| Basic and diluted loss per share | $0.80 | $0.59 | $2.51 | $1.54 |
- Q2 revenue rose 26% year over year; management attributed growth mainly to higher Zio service volume and improved CMS reimbursement, partly offset by weaker payor adjudication. First-half revenue increased 25%.
- Q2 operating expenses increased 30% to $93.7 million, led by higher SG&A. First-half expenses included $23.2 million of asset impairment and $3.4 million of restructuring charges.
- Cash used in operating activities was $39.3 million in the first half, versus $42.4 million a year earlier. Capital expenditures were $16.4 million.
- At June 30, cash and cash equivalents were $101.3 million and short-term investments were $103.2 million, totaling $204.5 million. Accounts receivable was $57.4 million; inventory was $14.4 million.
- Debt carrying value was $34.9 million, all noncurrent; no revolving-credit loans were outstanding. The company had an additional $40 million of term-loan capacity and a $25 million revolving line available, subject to agreement terms. Stockholders’ equity was $244.6 million and accumulated deficit was $480.6 million.
Material changes and unusual items
- Revenue mix shifted toward CMS: CMS represented 23% of first-half revenue in 2022, up from 14% in 2021; contracted third-party payors represented 55%, down from 62%.
- The company recorded a $23.2 million impairment after deciding to seek a sublease for approximately half of its San Francisco headquarters space, and $3.4 million of severance and other restructuring costs.
- In March 2022, the company refinanced its prior SVB borrowing with a new term-loan facility: $35 million was drawn to repay $18.5 million outstanding under the prior facility. The loan bears a floating rate and interest-only payments continue until April 2025; principal amortization is scheduled thereafter, with maturity in March 2027.
- Interest expense for the first half rose to $2.5 million from $0.6 million, including financing fees associated with the new loan.
Outlook, risks and contingencies
- Management said available liquidity should be adequate for the next 12 months. The filing gives no revenue, earnings, or cash-flow guidance.
- CMS had not set national 2022 prices for key Zio XT codes; regional MAC rates applied. In July, CMS proposed 2023 national rates that the company estimated at $215 for code 93247 and $204 for code 93243, before location adjustments. The final rule was pending, and rates could differ or contractor pricing could continue.
- Uncollected claims related to the 2021 CPT-code transition were $10.7 million, net of contractual allowances. Longer collection cycles, denials, and potential further allowances or bad-debt provisions could weigh on revenue, earnings, and cash flow. CMS provided 24% of Q2 revenue.
- COVID-related supply constraints, component lead times, inflation and labor costs may pressure service capacity and margins. The company also cited reimbursement uncertainty, competition, continued losses, and dependence on physician adoption and payor coverage.
- Disclosure controls were deemed ineffective because a previously reported material weakness in the control environment remained. Management reported remediation actions, but the weakness was not considered remediated as of June 30.
- A securities class action had been dismissed, but the plaintiff appealed. The company was also cooperating with a U.S. Attorney’s Office grand jury subpoena concerning FDA communications and products. The filing does not provide a clear estimate of any potential loss for these matters.
Important facts for investors to verify
- Final 2023 CMS reimbursement rates and their effect on realized pricing, commercial contract renewals, and margins.
- Progress in collecting the $10.7 million of legacy CPT-transition claims and any changes to receivable allowances or bad-debt expense.
- Operating cash use, receivables growth, and whether management’s 12-month liquidity assessment remains supportable.
- Use and cost of available term-loan capacity, floating-rate exposure, and ongoing covenant compliance.
- Whether the financial-reporting material weakness is remediated and controls operate effectively over a sufficient testing period.
- Outcome of the securities-litigation appeal and developments in the federal investigation.