iRhythm Technologies, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. The registrant named in the filing is iRhythm Technologies, Inc.
Business context
iRhythm provides ambulatory cardiac monitoring through its Zio XT and Zio AT services, combining wearable ECG monitors, cloud-based analysis and clinician-reviewed reports. Revenue is substantially from U.S. Zio services. The company reported more than two million patients served and over 500 million hours of curated heartbeat data. Zio AT, which adds timely event notifications during monitoring, was fully launched commercially in October 2019.
Financial results and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $214.6 million | $147.3 million | +46% |
| Gross profit / margin | $162.1 million / 76% | $108.5 million / 74% | Margin +2 percentage points |
| Operating expenses | $216.8 million | $154.2 million | +41% |
| Operating loss | $54.8 million | $45.7 million | Loss widened |
| Net loss | $54.6 million | $50.4 million | Loss widened 8% |
| Net loss per share | $2.16 | $2.11 | Loss per share widened |
- Fourth quarter: Revenue was $59.1 million versus $41.8 million in Q4 2018; net loss was $17.3 million versus $16.3 million.
- Cash flow: Operating cash use was $21.9 million, compared with $29.1 million in 2018. Investing activities used $89.3 million, including $20.5 million of capital expenditures; financing provided $111.6 million, primarily from a $107.4 million net public offering.
- Liquidity: Year-end cash and cash equivalents were $20.5 million, with short- and long-term investments of $128.1 million. Working capital was $120.7 million; cash plus investments totaled approximately $148.6 million.
- Debt and leases: Debt carrying value was $34.9 million, mainly under the Silicon Valley Bank term loan; no revolving-credit balance was outstanding, and the company reported covenant compliance. Operating lease liabilities totaled $93.7 million.
- Revenue mix: Contracted commercial payors contributed 47% of revenue, CMS 27%, healthcare institutions 20%, and non-contracted payors/self-pay 5% (rounded). CMS was approximately 27% of revenue in both 2018 and 2019.
Changes, outlook and material risks
- Revenue growth was attributed to higher service volume, expanded coverage and payor contracting, greater physician acceptance and sales-force expansion. Gross margin improved through manufacturing efficiencies, lower labor per device and improved pricing and mix.
- Research and development expense increased 79% to $37.3 million; selling, general and administrative expense increased 35% to $179.5 million. The company reported ongoing net losses and said it expected further losses while investing in adoption, reimbursement, sales capacity and product development. No specific revenue or earnings guidance was provided.
- The company paid Verily $5.0 million upfront and recorded $6.0 million of 2019 R&D expense related to the collaboration; up to $12.75 million of additional milestone payments may be due over the agreement’s 24-month term.
- CMS reimbursement and coverage are significant risks. New Category I CPT codes for the Zio service were established to take effect January 1, 2021; CMS reimbursement values were still to be determined. Commercial coverage, collection estimates and claim denials also affect revenue and cash flow.
- Prior-period accounting errors involving revenue, contractual allowances, doubtful accounts and other items led to revisions of 2017, 2018 and interim results. The filing says these errors were not material to prior periods individually, but their cumulative correction was significant to 2019 results.
- Management and the auditor concluded that internal control over financial reporting was ineffective at year-end due to material weaknesses in the control environment, financial close and review of revenue and receivables. The auditor’s opinion on the financial statements was unqualified; the financial statements were considered fairly presented.
- Other disclosed risks include continued losses, reimbursement changes, competition, reliance on single-source components and one manufacturing site, regulatory compliance, and possible supply-chain effects from the coronavirus outbreak. The filing reported no material litigation and no off-balance-sheet arrangements.
Important facts for investors to verify
- Progress in remediating the material weaknesses and whether revenue, receivable and allowance controls operate effectively.
- CMS valuation and commercial-payor response to the Category I CPT codes effective in 2021, including any effect on reimbursement and margins.
- Cash collection trends, accounts receivable and the significant judgment involved in contractual allowances and doubtful-account estimates.
- Whether revenue growth and gross-margin gains can outpace continued operating-expense growth and narrow operating losses.
- Remaining Verily milestone obligations, the terms of any future commercialization agreement, and the performance of Zio AT.
- Debt amortization beginning after the interest-only period, lease commitments, and the company’s ability to fund operations without further dilution or borrowing.