iRhythm Technologies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. iRhythm provides cardiac rhythm monitoring services, primarily its Zio XT and Zio AT offerings, combining wearable monitors with cloud-based analysis. Substantially all revenue is generated in the United States.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $74.3 million | $63.5 million |
| Gross profit / margin | $50.9 million / 68% | $47.5 million / 75% |
| Operating expenses | $78.3 million | $56.6 million |
| Operating loss | $27.5 million | $9.2 million |
| Net loss | $27.8 million | $9.1 million |
| Basic and diluted loss per share | $0.95 | $0.34 |
| Cash used in operating activities | $41.8 million | $22.4 million |
At March 31, 2021, cash and cash equivalents were $137.4 million and short-term investments were $124.9 million, totaling $262.3 million. Current assets were $336.1 million and current liabilities $59.4 million. Debt carrying value was approximately $30.1 million; no revolving-credit balance was outstanding. The company reported compliance with its debt covenants. Accumulated deficit was $332.5 million.
Changes versus prior-year quarter
- Revenue rose 17%, primarily on higher Zio service volume. Contracted commercial payors contributed $46.6 million, up from $31.7 million; CMS revenue declined to $10.2 million from $17.3 million.
- Gross margin fell seven percentage points, to 68%. Management attributed the decline primarily to the lower Novitas Medicare reimbursement rates, as well as higher service volume and costs.
- SG&A increased 45% to $69.8 million. Stock-based compensation expense increased substantially, with total company stock-based compensation of $20.2 million versus $0.3 million a year earlier. Management cited higher stock compensation and payroll, partly offset by lower travel and consulting costs.
- Operating cash outflow increased, notably reflecting a $39.8 million rise in accounts receivable amid delayed claim processing and collections.
Outlook, risks and unusual items
- Guidance: The company suspended forward-looking guidance because the extent and duration of COVID-19’s financial impact could not be predicted. Management said patient registrations had recovered to pre-pandemic levels in the second half of 2020 and increased in Q1 2021, but cautioned that this might not be sustainable. It expected COVID-19 effects to remain more significant in the near term.
- Medicare reimbursement: Novitas published updated 2021 rates on April 10, retroactive to January 1: $103 for code 93243 and $115 for code 93247. The company reflected the update in Q1 financial statements as a recognized subsequent event, but said the rates remained materially below historical rates. It warned that if rates are not improved, it may be unable to serve Medicare fee-for-service patients or could suffer significant revenue loss; rates below service cost could raise substantial doubt about its ability to continue as a going concern.
- Claims and cash collection: The company was holding a majority of Zio XT claims during the CPT-code transition, due to negotiations and administrative delays. It expected held claims to remain high through Q2 2021 or longer, delaying cash receipts and potentially affecting revenue recognition and bad-debt expense. Management said liquidity was adequate to manage the timing delays.
- COVID-19: Risks include reduced hospital access and prescriptions, delayed or unreturned monitors, patient affordability and collection challenges, and possible supply-chain disruption. Management said it believed liquidity was adequate for the next 12 months.
- Stock compensation and cash use: Q1 financing cash outflow included $25.1 million of tax withholding on vested restricted stock units. The company said that beginning in June 2021 employees would sell shares to cover tax liabilities, rather than the company using cash for withholding.
- Controls: Disclosure controls and internal control over financial reporting were not effective at March 31, 2021 because a previously disclosed material weakness in the control environment remained. The weakness had contributed to prior-period financial statement revisions. Remediation efforts included finance staffing and internal audit hires, but further work and sustained effectiveness remained necessary.
- Other matters: A putative securities class action filed February 1, 2021 seeks unspecified damages; the company said it considers the complaint without merit and intends to defend it. The company also expected approximately $3.0 million of additional 2021 expense under its Verily development agreement. The CEO and CFO had both changed since the prior year.
Most important facts for investors to verify
- Whether Novitas reimbursement rates improve, and how the rates compare with the cost of providing Zio XT.
- Progress in processing held Medicare and other claims, collections, accounts receivable, and any resulting revenue or bad-debt adjustments.
- Whether commercial payors maintain existing contract rates or seek reductions following the Medicare rate changes.
- Revenue growth, gross margin, operating cash burn, and the scale and duration of stock-based compensation expense.
- Remediation of the material weakness and evidence that financial reporting controls operate effectively over time.
- COVID-19 effects on patient registrations, device returns, supply availability, and the company’s liquidity.