iRhythm Technologies, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The filing identifies the registrant as iRhythm Technologies, Inc. (Nasdaq: IRTC).
Business context
iRhythm is a digital healthcare company whose primary business is the Zio ambulatory cardiac monitoring service, combining wearable ECG monitors with cloud-based analysis. It operates as one segment and derives substantially all revenue from U.S. services.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $92.4 million | $74.3 million | Up 24% |
| Gross profit / margin | $61.8 million / 67% | $50.9 million / 68% | Margin down 1 percentage point |
| Operating expenses | $110.3 million | $78.3 million | Up 41% |
| Operating loss | $(48.5) million | $(27.5) million | Loss increased |
| Net loss | $(50.6) million | $(27.8) million | Loss increased 82% |
| Net loss per share | $(1.71) | $(0.95) | — |
| Cash used in operating activities | $38.9 million | $41.8 million | Use decreased |
- At March 31, cash and cash equivalents were $94.8 million and short-term investments were $114.0 million, or approximately $208.8 million combined. The company reported an accumulated deficit of $456.7 million.
- Carrying value of debt was $34.9 million, all noncurrent. Operating lease liabilities totaled $97.8 million.
- Gross margin declined primarily due to clinical operations capacity constraints and higher costs, partly offset by volume and average selling price improvements.
Material changes versus the prior-year quarter
- Revenue increased by $18.1 million, attributed primarily to higher Zio service volume and improved CMS reimbursement and payor adjudication.
- Operating expenses included $23.2 million of asset impairment charges related to the planned San Francisco headquarters sublease and $3.4 million of restructuring charges. The company approved a plan to reduce its San Francisco leased footprint by approximately 50% and recorded severance costs.
- On March 28, 2022, the company amended its SVB facilities, borrowed $35.0 million under a term loan, and used part of the proceeds to repay the prior $18.5 million balance. Up to another $40.0 million may be drawn through December 31, 2023. The amended facility provides interest-only payments until April 2025, with maturity in March 2027. A $25.0 million revolving line was undrawn at quarter-end.
- Interest expense rose to $2.0 million from $0.3 million, primarily due to financing fees associated with the term loan.
Outlook, risks and unusual items
- Management said it believed available liquidity was adequate for the next 12 months. It expected completion of build-outs at its manufacturing and Deerfield facilities in the first half of 2022 and the next potential Verily milestone in 2023. The filing provides no specific revenue or earnings guidance.
- CMS reimbursement remains a significant uncertainty. For Houston, the relevant Novitas rates for codes 93243 and 93247 were $223 and $233, respectively, effective January 1, 2022, and were described as materially below historical Medicare rates. NGS later set rates of $334 and $347 for the Suburban Chicago jurisdiction, effective April 1, 2022. Management was seeking improved local pricing; outcomes were uncertain.
- $12.9 million of claims associated with the 2021 CPT-code transition remained uncollected at March 31, 2022. Longer collection cycles and claim denials could require additional contractual allowances or bad-debt provisions.
- COVID-19 effects, supply constraints and inflation may affect operations, costs and margins. The company reported component lead times sometimes exceeding 52 weeks and increased inventory to mitigate supply risks.
- Disclosure controls and internal control over financial reporting were not effective at quarter-end due to a previously reported material weakness in the control environment. Remediation efforts were ongoing; management stated the financial statements fairly presented the company’s results.
- The securities class action was dismissed with prejudice on March 31, 2022; the plaintiff appealed. The company also reported cooperating with a U.S. Attorney’s Office grand jury investigation concerning communications with the FDA and company products.
Important facts for investors to verify
- Whether CMS and commercial reimbursement rates, including local MAC pricing, support expected revenue and margins.
- Collections and ultimate recoverability of the $12.9 million in CPT-transition claims, and any subsequent changes to reserves.
- Cash burn, available borrowing capacity, floating-rate debt costs and compliance with loan covenants.
- Whether operating capacity, supply availability and facility build-outs can support service growth without further margin pressure.
- Progress and sustained effectiveness of remediation for the material weakness in financial reporting controls.
- Developments in the securities-action appeal and the ongoing government investigation.