iRhythm Technologies, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing issuer is iRhythm Technologies, Inc. (Nasdaq: IRTC). The company provides wearable cardiac monitoring and analysis services, primarily through its Zio platform. Unless otherwise noted, figures below are in millions of dollars. Prior-year comparatives reflect revisions described in the filing.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $50.9 | $52.4 | $114.4 | $100.8 |
| Gross profit / margin | $35.4 / 70% | $39.4 / 75% | $82.9 / 72% | $76.0 / 75% |
| Operating expenses | $55.6 | $50.0 | $112.2 | $94.8 |
| Operating loss | $(20.2) | $(10.6) | $(29.3) | $(18.8) |
| Net loss | $(20.4) | $(10.7) | $(29.5) | $(19.0) |
| Loss per share, basic and diluted | $(0.75) | $(0.43) | $(1.09) | $(0.77) |
- Q2 revenue decreased 3% year over year; first-half revenue increased 14%, mainly from higher service volume, expanded coverage, and more payors.
- Q2 gross margin fell five percentage points, to 70%; first-half margin declined three points, to 72%. Management cited product mix and fixed-cost absorption amid lower registrations.
- Operating cash use was $32.5 million in the first half, versus $16.1 million in the prior-year period. Capital expenditures were $5.6 million.
- At June 30, cash and cash equivalents were $81.7 million and short-term investments were $33.2 million. Total current assets were $146.5 million and current liabilities $47.3 million.
- Debt had a carrying value of approximately $34.9 million, including $7.8 million current and $27.2 million noncurrent. No amount was drawn on the $25 million revolving facility; the company reported covenant compliance.
- Management said liquidity was adequate for the next 12 months, while noting it would constrain growth investment. The company had an accumulated deficit of $290.4 million.
Material changes and notable items
- COVID-19 reduced patient registrations beginning in mid-March and contributed to Q2’s revenue decline. The company reported a modest registration recovery during Q2, but said pandemic effects were expected to continue.
- Q2 R&D expense rose 60% to $12.5 million, including a $3.0 million Verily development milestone. First-half R&D increased 44% to $21.0 million.
- First-half SG&A rose 14% to $91.2 million, with increases including payroll and stock compensation, facility costs, and bad-debt expense.
- Operating cash use increased year over year. Investing cash inflow of $89.6 million primarily reflected maturities and sales of investments, rather than operating cash generation.
- The company revised previously issued 2019 interim financial statements for errors involving revenue, contractual allowances, doubtful accounts, and other items. It said the errors were not material to prior periods individually, but corrected the comparative figures presented here.
- Management determined the 2019 performance-based awards’ original targets were not probable and reversed $4.8 million of previously recognized expense in Q1 2020. In June, it modified those awards; the filing reports $13.6 million of incremental compensation cost to be recognized through March 2021.
Outlook, risks, and controls
- The company suspended and withdrew full-year 2020 financial guidance because the duration and effects of COVID-19 could not be predicted. It expected near-term pandemic effects to remain significant.
- Management cited reduced physician access and prescriptions, delayed or unreturned devices, patient affordability and insurance concerns, and possible supply-chain and manufacturing disruption. Home enrollment was expanded to help patients receive devices without visiting healthcare facilities.
- To conserve cash, the company reduced discretionary spending, froze hiring, furloughed about 5% of employees, laid off about 2%, and temporarily reduced salaries from May through July. It said furloughed employees were reinstated and salaried pay reductions removed in August.
- Key ongoing risks include reimbursement and payor contracting, dependence on the Zio service, sustained losses, competition, debt covenants, supplier concentration, and regulatory requirements. CMS represented about 27% of revenue in the first half.
- Disclosure controls were ineffective as of June 30, 2020 because three previously identified material weaknesses remained: control environment, financial-statement close, and revenue/receivables/reserve accounting. Remediation was underway, but management said the weaknesses would not be considered remediated until controls had operated effectively for a sufficient period and been tested.
- The company reported no material legal proceedings and no material changes to contractual obligations since its 2019 Form 10-K. It adopted the expected-credit-loss standard in 2020, recording a $0.5 million cumulative-effect adjustment to accumulated deficit.
Important facts for investors to verify
- Whether patient registrations and revenue recovered after Q2, and how pandemic conditions affected device returns and service capacity.
- Whether gross margin and operating cash use improved, and whether management’s stated 12-month liquidity expectation remains supportable.
- Reimbursement rates and the transition to new Category I CPT codes scheduled to take effect January 1, 2021.
- Progress in testing and remediating the material weaknesses, and whether future filings require further revisions.
- The timing and amount of Verily milestone payments and stock-based compensation expense, including the modified 2019 awards.