iRhythm Technologies, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 26, 2021. This is an annual report, not a standalone fourth-quarter filing. The issuer identifies as iRhythm Technologies, Inc. The company provides wearable ECG monitoring and analysis services through its Zio XT and Zio AT products.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $265.2 million | $214.6 million | +24% |
| Gross profit / margin | $194.9 million / 73% | $162.1 million / 76% | Margin down 3 percentage points |
| Operating expenses | $238.6 million | $216.8 million | +10% |
| Operating loss | $(43.7) million | $(54.8) million | Loss narrowed |
| Net loss | $(43.8) million | $(54.6) million | Loss narrowed 20% |
| Net loss per share | $(1.58) | $(2.16) | |
| Cash used in operating activities | $(13.8) million | $(21.9) million | Use of cash decreased |
Revenue growth was attributed mainly to higher Zio service volume. Cost of revenue rose 34%, faster than revenue, and management cited product mix and fixed-cost absorption as factors in the lower gross margin. R&D expense increased 11% to $41.3 million; selling, general and administrative expense increased 10% to $197.2 million. FY2020 stock-based compensation was $41.5 million.
Fourth-quarter context: Revenue was $78.8 million, gross profit $58.3 million, and net loss $9.7 million. In Q4 2019, those amounts were $59.1 million, $45.2 million, and $17.3 million, respectively.
Liquidity, debt, and cash flow
- At year-end, cash and cash equivalents were $88.6 million and short-term investments were $246.6 million, totaling $335.2 million in cash and investments. Working capital was $312.2 million.
- Net cash from financing was $214.3 million, primarily including $206.0 million of net proceeds from an August 2020 public offering. The offering increased shares outstanding.
- Investing activities used $132.4 million, largely reflecting purchases of available-for-sale investments; capital expenditures were $13.6 million.
- Debt was $33.0 million, including $11.7 million current and $21.3 million noncurrent. No revolving-credit balance was outstanding; $7.7 million was available to borrow under the borrowing base at year-end. Debt is secured by substantially all assets, and the company reported compliance with loan covenants.
- Operating lease liabilities totaled $89.5 million. The filing reports $132.5 million of undiscounted future lease payments.
Material changes, outlook, and risks
- COVID-19: The pandemic reduced registrations and physician access beginning in March 2020, disrupted sales activity, delayed device returns, and affected margins. Registrations recovered to pre-COVID Q1 levels in the second half of 2020, but the duration and future impact remained uncertain. Management suspended forward-looking guidance and said near-term pandemic effects could continue.
- Medicare reimbursement and claims: New Category I CPT codes took effect January 1, 2021. CMS left pricing for key codes to local Medicare Administrative Contractors. On January 29, 2021, Novitas published rates management described as significantly below historical Zio XT Medicare rates; negotiations for higher rates were ongoing with no assurance of outcome. The company warned that inadequate rates could materially harm revenue and cash flows and, if rates remain below service cost without sufficient offsetting revenue, raise substantial doubt about its ability to continue as a going concern. A majority of Zio XT claims were being held during the code transition, delaying expected cash receipts into Q2 2021 or later.
- Payor mix: Contracted commercial payors represented 51% of FY2020 revenue, CMS 27%, healthcare institutions 16%, and non-contracted payors and self-pay 6%. Management said more than 95% of U.S. patients could access reimbursed services, excluding state Medicaid programs; Medicaid coverage and rates vary and can be low or zero.
- Profitability and execution: The company has a history of losses and expects further losses as it invests in adoption, reimbursement, sales capacity, and product development. It depends substantially on the Zio service, physician adoption, reimbursement, and a third-party billing provider. Competition, supplier concentration, manufacturing capacity, regulatory compliance, and data security are material risks.
- Internal controls: Management and the auditor concluded internal control over financial reporting was not effective at year-end because of a material weakness in the control environment and insufficient accounting and internal-control expertise. Previously identified weaknesses in the close process and revenue/receivables controls were reported remediated. Prior-period financial statements were revised for errors management considered immaterial to those periods.
- Other notable matters: The CEO and CFO changed during 2020, and the former CEO announced retirement from that role. A putative securities class action filed February 1, 2021 seeks unspecified damages; the company says it will defend the case. The Verily development collaboration incurred $7.0 million of R&D expense in 2020, with further milestones and commercialization dependent on development, regulatory, and commercial outcomes.
Most important facts for investors to verify
- Novitas and other MAC reimbursement decisions for the new CPT codes, including the final effective rates and whether any rates are retroactive.
- Resolution and timing of held Medicare claims, collections, revenue estimates, and bad-debt reserves.
- Whether patient volumes and gross margin sustain recovery after COVID-19 disruptions.
- Progress in remediating the remaining material weakness and evidence that controls operate effectively over time.
- Debt repayment capacity, covenant compliance, liquidity needs, and the impact of future investment and operating spend.
- Developments in the securities lawsuit, Verily collaboration, and supply constraints, including the disclosed semiconductor shortage.