iRhythm Technologies, Inc. — FY2021 Form 10-K
Period and business: Fiscal year ended December 31, 2021. The filing is for iRhythm Technologies, Inc. (the metadata names iRhythm Holdings, Inc.). This is an annual report, not a standalone fourth-quarter report; standalone Q4 financial results are not provided in the supplied filing text. The company provides ambulatory ECG monitoring services, primarily through its Zio XT and Zio AT wearable monitors and related analytics.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $322.8 million | $265.2 million | +22% |
| Cost of revenue | $109.3 million | $70.3 million | +55% |
| Gross profit / margin | $213.6 million / 66% | $194.9 million / 73% | Margin down 7 percentage points |
| Operating expenses | $313.5 million | $238.6 million | +31% |
| Operating loss | $(99.9) million | $(43.7) million | Loss increased |
| Net loss | $(101.4) million | $(43.8) million | Loss increased 131% |
| Net loss per share, diluted | $(3.46) | $(1.58) | Loss per share increased |
| Cash used in operating activities | $37.8 million | $13.8 million | Cash use increased |
Balance sheet at December 31, 2021: Cash and cash equivalents were $127.6 million and short-term investments were $111.6 million, totaling $239.1 million in cash, cash equivalents and investments. Current assets were $305.5 million and current liabilities $87.9 million. Debt was $21.4 million, including $11.7 million current; the company reported no revolver borrowings and compliance with loan covenants. Accumulated deficit was $406.0 million.
Cash flow and obligations: Investing activities provided $105.3 million, primarily reflecting maturities of investments, while capital expenditures were $28.1 million. Financing activities used $28.6 million, including $11.7 million of debt repayment and $25.9 million of tax withholding on vested restricted stock. Contractual operating lease payments totaled $136.5 million, including $12.6 million due within 12 months; purchase obligations were $53.5 million.
Material changes and management commentary
- Revenue growth reflected higher Zio service volumes, partly offset by lower CMS revenue following reimbursement-rate changes.
- Gross margin declined as Medicare reimbursement fell and clinical capacity constraints and COVID-related labor costs increased expenses; higher volume and improved payor adjudications partly offset these pressures.
- SG&A rose 39% to $274.8 million, mainly from increased headcount, executive hires and stock-based compensation. FY2021 stock-based compensation was $54.5 million.
- Contracted commercial payors represented approximately 60% of revenue, CMS 14%, healthcare institutions 18%, and non-contracted payors and self-pay 8%. CMS represented 27% of revenue in FY2020.
- Patient registrations rose in the first half of 2021 but declined in the second half; the filing attributes the later decline in part to provider staffing shortages. It gives no clear standalone Q4 revenue or profit figure.
Outlook, risks, contingencies and unusual items
- Outlook: The filing gives no numerical FY2022 revenue or earnings guidance. Management stated it expected adequate liquidity for the next 12 months and planned continued investment in adoption, sales capacity, product development and new clinical use cases.
- Reimbursement risk: Medicare contractor pricing replaced national pricing for relevant Zio XT codes. In January 2022, Novitas set Houston-area rates of $223 and $233 for two codes, retroactive to January 1, 2022; the company said these remained significantly below historical Medicare rates and it was negotiating for higher pricing. Lower Medicare rates could pressure commercial reimbursement as well.
- Claims and estimates: CPT code transition issues caused delayed claims, increased denials and longer collection cycles. Accounts receivable was $46.4 million; the year-end contractual allowance was $31.3 million. Further allowance or doubtful-account provisions could reduce future revenue or earnings.
- COVID-19 and operations: The pandemic affected patient registrations, provider access and staffing, device returns, payor processing and supply availability. Component lead times and inflation increased costs; the company reported semiconductor-related supply constraints and reliance on single-source suppliers for some components.
- Profitability: The company has a history of losses and expects losses to continue. It cautioned that inadequate revenue or inability to lower its cost structure could raise substantial doubt about its ability to continue as a going concern, while separately stating it believed liquidity was adequate for the next 12 months.
- Controls: Management and the auditor concluded internal control over financial reporting was ineffective at year-end because of a material weakness in the control environment and insufficient accounting and internal-control expertise. The auditor nevertheless gave an unqualified opinion on the financial statements. Remediation was ongoing.
- Legal matters: A securities class action seeking unspecified damages was pending; the company said it intended to defend itself. The U.S. Attorney’s Office issued subpoenas seeking information about FDA communications and company products; the company said it was cooperating. No outcome is stated.
- Other items: In February 2022, the board approved pursuing a reduction in San Francisco headquarters space; a lease right-of-use asset impairment was possible, with the impact still under assessment. The company had recently experienced executive turnover, including appointment of a new CEO effective October 2021.
Key facts investors should verify
- Whether Novitas and other Medicare contractors establish higher rates, and the resulting effect on commercial contract pricing and gross margins.
- Subsequent collections, denials and any revisions to the $31.3 million contractual allowance and doubtful-account estimates.
- Whether patient registrations, provider capacity and component supply recover sufficiently to support growth without further margin deterioration.
- Progress and sustained effectiveness of remediation for the material weakness in financial reporting controls.
- Developments in the securities lawsuit, government subpoenas and potential San Francisco lease impairment.
- Cash burn relative to the $239.1 million of cash, cash equivalents and short-term investments, debt repayment schedule and lease and purchase commitments.