iRhythm Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The filing identifies the registrant as iRhythm Technologies, Inc. (NASDAQ: IRTC). The company provides wearable cardiac monitoring and analytics services, principally through its Zio platform, and generates substantially all revenue in the United States.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $71.9 million | $54.7 million | $186.4 million | $155.4 million |
| Gross margin | 75% | 75% | 73% | 75% |
| Operating loss | $4.8 million | $18.3 million | $34.1 million | $37.0 million |
| Net loss | $4.7 million | $18.3 million | $34.2 million | $37.3 million |
| Basic and diluted loss per share | $0.17 | $0.72 | $1.25 | $1.50 |
- Q3 revenue increased 32%; management attributed growth primarily to higher Zio service volume and customer demand. Nine-month revenue rose 20%.
- Q3 gross margin was unchanged year over year; nine-month margin declined two percentage points, which management attributed mainly to product mix and fixed-cost absorption, partly offset by higher volume.
- At September 30, cash and cash equivalents were $95.3 million and short-term investments were $231.9 million. The company reported an accumulated deficit of $295.0 million.
- Debt carrying value was $34.9 million, including $10.7 million current and $24.3 million noncurrent. No revolving-credit balance was outstanding; the company was in compliance with loan covenants.
- For the nine months, operating cash use was $21.6 million (versus $17.0 million in 2019); investing cash use was $114.9 million, including investment purchases and $11.2 million of capital expenditures. Financing provided $211.4 million, principally from a follow-on offering. Cash increased $74.9 million.
Changes, outlook and material matters
- Operating loss and net loss narrowed versus Q3 2019, while nine-month losses also improved modestly. Q3 research and development expense fell 35%, largely because the prior-year quarter included a Verily milestone expense. SG&A increased 9% in Q3 and 12% for the nine-month period, reflecting higher payroll and stock-based compensation.
- The August 2020 follow-on offering raised approximately $206.4 million net of discounts and issuance costs. The company issued 1.26 million shares; common shares outstanding increased to 28.86 million from 26.68 million at December 31, 2019.
- COVID-19 reduced patient registrations beginning in mid-March through deferred procedures, reduced facility access and other disruptions. Management reported Q3 registrations had recovered to Q1 2020 pre-COVID levels, but anticipated near-term pandemic effects and uncertainty. The company withdrew full-year 2020 financial guidance and stated it could not predict the extent or duration of the impact.
- Management said available liquidity should fund operations and cash requirements for the next 12 months. It also cited potential risks from further pandemic disruption, patient affordability and collections, supply constraints, and reduced access to hospitals and physicians.
- CMS accounted for approximately 28% of Q3 revenue and 27% for the nine months. New Category I CPT codes were scheduled to take effect January 1, 2021; CMS’s final reimbursement decision was expected December 1, 2020. The filing cautions that final rates could differ from the proposal and affect commercial reimbursement.
- Material weaknesses in internal control over financial reporting remained unremediated as of September 30. They related to the control environment, financial close, and revenue, receivables and reserves. Remediation was underway, but effectiveness testing was not complete; management nevertheless stated the financial statements were fairly presented in all material respects.
- Other notable items: the 2019 executive performance awards were modified, generating $13.6 million of incremental compensation cost to be recognized through March 2021. The CFO resigned effective July 3 and entered a consulting agreement. Management reported no material legal proceedings.
Key facts for investors to verify
- Whether patient registrations, revenue growth and collections remained resilient after the Q3 recovery, particularly amid renewed COVID-19 disruption.
- The final CMS reimbursement rates for the new CPT codes and any resulting changes in commercial-payor rates.
- Receivables quality and reserve adequacy: accounts receivable was $29.0 million net, with an $11.0 million allowance for doubtful accounts; operating cash use increased year over year.
- Progress in remediating and testing the disclosed material weaknesses, and whether any additional reporting errors emerge.
- Future gross-margin trends, stock-based compensation expense, and cash requirements as term-loan principal payments began after October 31, 2020.
- Potential dilution and ongoing share-based compensation following the public offering and increased equity awards.