iRhythm Technologies, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company provides ambulatory cardiac monitoring services, primarily through its Zio platform. Figures are unaudited; dollar amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $103.9 | $85.4 | $298.3 | $241.0 |
| Gross profit / margin | $70.9 / 68% | $56.1 / 66% | $202.9 / 68% | $162.3 / 67% |
| Operating loss | $(21.1) | $(23.3) | $(93.1) | $(67.7) |
| Net loss | $(21.5) | $(23.7) | $(96.0) | $(68.9) |
| Basic and diluted loss per share | $(0.71) | $(0.81) | $(3.22) | $(2.35) |
- Revenue growth: Q3 revenue increased 22%; nine-month revenue increased 24%. Management attributed growth mainly to higher Zio service volume and improved CMS reimbursement, partly offset by weaker claims adjudication with contracted and non-contracted payors.
- Margins and expenses: Gross margin expanded year over year in both periods. Q3 operating loss narrowed, while nine-month operating loss widened, principally reflecting $26.6 million in impairment and restructuring charges, increased operating expenses, and higher interest expense.
- Cash flow: Operating cash use was $35.6 million for the nine months, versus $24.7 million in 2021. Investing cash use was $44.3 million, including $22.7 million in capital expenditures and net purchases of short-term investments. Financing provided $23.6 million.
- Balance sheet at September 30: Cash and equivalents were $71.2 million and short-term investments were $132.3 million. Total current assets were $285.9 million versus current liabilities of $83.6 million. Accounts receivable was $60.5 million. Debt carrying value was $34.9 million; no revolver borrowings were outstanding. Total liabilities were $201.2 million and stockholders’ equity was $239.2 million.
Material changes and notable items
- Revenue rose across the principal payor categories, with CMS revenue at $27.3 million in Q3 versus $12.4 million a year earlier. CMS represented 26% of Q3 revenue and 24% for the nine-month period, compared with 15% and 14%, respectively, in 2021.
- Nine-month selling, general and administrative expense increased 16% to $235.5 million; research and development expense increased 27% to $33.9 million. Management cited higher personnel, professional services, bad debt and facility costs among the drivers.
- The company recorded $23.2 million of impairment charges and $3.4 million of restructuring costs in the first nine months. The impairment followed the decision to sublease about half of its San Francisco headquarters space; management said the local sublease market was challenging and expected sublease rates below existing lease costs.
- In March 2022, the company amended its SVB facility, borrowed $35 million, and used part of the proceeds to repay the prior $18.5 million loan balance. Up to $40 million of additional term loans could be drawn through December 31, 2023. Interest-only payments continue until April 2025, with maturity in March 2027. The company reported covenant compliance at quarter-end.
Outlook, risks and contingencies
- Management stated it believed liquidity was adequate for the next 12 months. It also disclosed that macroeconomic conditions were materially adversely affecting liquidity, capital resources, supply chain and operations, and noted uncertainty around collections, demand, inflation and supply constraints. No specific revenue or earnings guidance was provided in the filing text.
- CMS’s 2023 fee schedule, released after quarter-end, was interpreted by the company as indicating national rates of $224 for CPT code 93247 and $213 for 93243, before geographic adjustments. The company estimated location-specific ranges of $227–$307 and $216–$292, respectively, and said discussions with CMS and regional contractors continued. Reimbursement changes may also pressure commercial rates.
- Uncollected claims tied to the 2021 CPT-code transition were $11.5 million net of contractual allowances at September 30. Longer collection cycles, denials and possible further allowance provisions may affect revenue, bad debt expense and cash flow. CMS accounted for 20% of accounts receivable at quarter-end.
- The company disclosed an FDA-reported Zio AT labeling correction initiated September 28, 2022, following an FDA inspection. The correction addressed transmission limits and clinician registration; FDA communications continued. Management did not expect a material business risk at that time but acknowledged regulatory and commercial uncertainty. A U.S. Attorney’s Office grand jury subpoena relating to FDA communications and products remained under cooperation.
- A securities class action dismissal was appealed; the company said it believed the action lacked merit. The filing also disclosed a continuing material weakness in internal control over financial reporting and concluded disclosure controls were not effective as of September 30. Remediation efforts included finance, IT compliance and internal audit hires, but management said remediation was not complete.
- Other material risks include continued losses, reimbursement and collection uncertainty, supply constraints and inflation, customer budget pressures, dependence on the Zio service, competition, regulatory compliance, and execution amid management turnover. The company reported an accumulated deficit of $502.0 million and said sustained losses could raise going-concern doubts if revenue or cost reductions prove inadequate.
Key facts for investors to verify
- Whether revenue growth and gross-margin improvement persist, and whether higher operating costs can be controlled.
- Collections and aging of receivables, including the $11.5 million of CPT-transition claims, allowance adequacy, and operating cash use.
- Actual Medicare reimbursement by region under the 2023 fee schedule and any resulting commercial-payor repricing.
- Available liquidity, use of the remaining term-loan capacity, variable-rate interest costs, and continued covenant compliance.
- Progress in remediating the material weakness, and developments in the FDA matter, grand jury inquiry and securities litigation appeal.