iRhythm Technologies, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. iRhythm provides remote cardiac monitoring services through its Zio Systems, primarily to U.S. patients, with revenue largely reimbursed by commercial payors and Medicare. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $124.6 | $103.9 | $360.2 | $298.3 |
| Gross profit | $82.5 | $70.9 | $244.4 | $202.9 |
| Gross margin | 66.2% | 68.3% | 67.9% | 68.0% |
| Operating loss | $(27.6) | $(21.1) | $(86.0) | $(93.1) |
| Net loss | $(27.1) | $(21.5) | $(84.7) | $(96.0) |
| Adjusted EBITDA, non-GAAP | $0.4 | $(2.6) | $(7.2) | $(12.3) |
| Basic and diluted loss per share | $(0.89) | $(0.71) | $(2.78) | $(3.22) |
Revenue grew 20% in Q3 and 21% for the nine-month period, primarily from higher Zio service volume, partly offset by a slight decline in average selling price. Cost of revenue rose 28% in Q3, faster than revenue; management cited higher service volume and $3.1 million of excess Zio XT PCBA components. Q3 gross margin declined year over year. Research and development and selling, general and administrative expenses increased, including from higher headcount, stock-based compensation, business transformation, legal and consulting, and infrastructure costs. Nine-month net loss improved year over year in part because 2022 included $26.6 million of impairment and restructuring charges; Q3 net loss increased.
Cash, liquidity and debt
- At September 30, 2023, cash and cash equivalents were $47.5 million and marketable securities were $111.0 million, totaling $158.5 million. Current assets were $234.3 million and current liabilities $102.3 million.
- Operating cash use was $34.1 million for the first nine months of 2023, versus $35.6 million a year earlier. Investing cash use was $2.6 million; financing provided $5.4 million. Cash and cash equivalents decreased by $31.4 million.
- Capital expenditures for property and equipment were $26.9 million. The company also purchased a $3.0 million strategic investment. Other assets rose to $47.0 million, largely reflecting PCBAs, which increased by $19.4 million, primarily for the Zio Monitor launch and needs for other patches.
- Debt, net of issuance costs, was $34.9 million; no revolving-credit loans were outstanding. The company reported $16.6 million of revolving credit availability after $8.4 million of letters of credit, and up to $40.0 million of additional term loans subject to facility terms and a December 31, 2023 draw deadline. It was in compliance with debt covenants.
- Management said available cash, marketable securities, the term-loan facility and expected Zio service revenue should meet liquidity requirements for at least 12 months. This is management’s assessment, not a guarantee.
Changes, outlook and material risks
- For 2024, CMS’s proposed national payment rates were expected by the company to average approximately 5% below 2023 rates, excluding geographic adjustments. The final 2024 fee schedule had not been released as of November 1, 2023. No formal revenue or earnings guidance is provided in the supplied filing text.
- Management expects cost of revenue and R&D spending to rise in absolute dollars as service volume and product development expand. It expected business transformation costs to continue through 2023, with restructuring activities substantially complete by mid-2024; it anticipates efficiencies afterward but gives no quantified savings forecast.
- Regulatory matters are significant: FDA issued a May 25, 2023 warning letter alleging medical-device reporting and quality-system nonconformities related to the Zio AT System. The company responded and said it was working with FDA, but cannot assure the agency will be satisfied or specify when matters will be resolved. A previously reported Zio AT labeling correction was classified by FDA as a Class II recall; the company requested closure, while the FDA database status remained open.
- The company is cooperating with U.S. Department of Justice inquiries, including grand jury subpoenas and an April 2023 subpoena concerning its products and services. It says the scope, duration and outcome are not predictable. A securities class-action appeal was dismissed by the Ninth Circuit for lack of jurisdiction on October 11, 2023; the appellant stated an intent to seek rehearing.
- Other key exposures include Medicare and commercial reimbursement changes, complex claims collection and revenue estimates, reliance on some single-source suppliers and semiconductor/PCBA availability, clinical and manufacturing capacity, competition, cybersecurity and privacy, and macroeconomic pressure on hospitals and suppliers. CMS represented approximately 25% of Q3 and nine-month 2023 revenue.
Important facts for investors to verify
- Final 2024 CMS reimbursement rates and any related commercial-payor contract or rate changes.
- Progress and outcome of FDA’s warning-letter matters, including any required corrective actions or effect on Zio AT operations.
- Status and potential consequences of DOJ inquiries and the securities litigation proceedings.
- Whether revenue growth can continue while average selling price, gross margin, operating costs and cash use remain under pressure.
- Collections, contractual allowances and doubtful-account estimates, and the company’s ability to maintain liquidity and meet loan covenants as available facilities and cash are used.
- Execution of the Zio Monitor launch, supply availability, and the timing and cost of global operational expansion and business transformation.