iRhythm Technologies, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The filing issuer is iRhythm Technologies, Inc. The company provides wearable cardiac monitoring services and related analytics, primarily through its Zio platform, and reports one operating segment.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $85.4 million | $71.9 million | $241.0 million | $186.4 million |
| Gross profit / margin | $56.1 million / 66% | $53.7 million / 75% | $162.3 million / 67% | $136.6 million / 73% |
| Operating expenses | $79.4 million | $58.5 million | $230.0 million | $170.7 million |
| Operating loss | $(23.3) million | $(4.8) million | $(67.7) million | $(34.1) million |
| Net loss | $(23.7) million | $(4.7) million | $(68.9) million | $(34.2) million |
| Basic and diluted loss per share | $(0.81) | $(0.17) | $(2.35) | $(1.25) |
At September 30, 2021, cash and cash equivalents were $167.4 million and short-term investments were $89.4 million, totaling $256.8 million. Current assets were $325.2 million and current liabilities $82.8 million. Debt was $24.3 million, including current and noncurrent portions; no amount was drawn on the revolving credit line. The company was in compliance with debt covenants.
For the first nine months, operating cash outflow was $24.7 million, capital expenditures were $23.4 million, and financing cash outflow was $28.9 million. Investing activities provided $132.4 million, principally reflecting maturities of investments. Accounts receivable increased to $52.8 million from $29.9 million at year-end 2020.
Changes versus the prior comparable period
- Revenue rose 19% in Q3 and 29% for the nine-month period, primarily on higher Zio service volumes and improved payor adjudication. Contracted third-party payor revenue increased, while CMS revenue fell: Q3 CMS revenue was $12.4 million versus $20.0 million, and nine-month CMS revenue was $33.6 million versus $51.0 million.
- Gross margin declined 9 percentage points in Q3 and 6 points year to date. Management attributed pressure to lower Novitas Medicare reimbursement rates, capacity constraints and higher operating costs, partly offset by volume benefits and improved adjudication.
- SG&A increased 42% in Q3 and 44% year to date, driven primarily by higher compensation, headcount and related costs. Nine-month R&D expense declined 10%, including lower Verily milestone expense and increased capitalization of internal-use software costs.
- Net loss widened substantially. Nine-month stock-based compensation was $42.7 million, compared with $27.5 million in 2020.
- Operating cash use increased to $24.7 million from $21.6 million. Delayed claim submissions and collections, along with the increase in receivables, affected cash-flow timing.
Outlook, commentary and key risks
- Outlook: The filing gives no numerical revenue or earnings guidance. Management said it expected adequate liquidity for the next 12 months. It planned continued debt payments and completion of a manufacturing facility build-out; future capital needs depend on growth, salesforce expansion and product development.
- Medicare reimbursement: Novitas’s 2021 rates for relevant Zio XT codes remained significantly below historical rates. Management was seeking improved pricing and warned that unchanged rates could make Medicare service uneconomic, reduce revenue and cash flow, and potentially raise substantial doubt about the company’s ability to continue as a going concern if revenue and cost reductions prove insufficient. CMS’s 2022 proposed rule continued contractor pricing for the codes.
- Claims and collections: Most first- and second-quarter claims held during the CPT-code transition had been submitted by the end of Q2; less than 2% of claims were on hold at Q3 end. A larger-than-normal denial appeals backlog remained, and appeals may be costly, delayed or unsuccessful. Management said collection delays affected revenue recognition and bad-debt expense.
- COVID-19 and supply chain: Provider staffing constraints were cited as a possible reason for lower Q3 patient registrations. The company also reported component shortages, longer lead times—sometimes exceeding 52 weeks—and higher inventory costs. Further disruption could affect service capacity and margins.
- Controls and governance: Disclosure controls and internal control over financial reporting were not effective at September 30 because a previously reported material weakness in the control environment remained unresolved. Remediation included finance staffing, internal audit hires and training; management’s stated target was remediation by year-end 2021, subject to demonstrating sustained effectiveness.
- Legal and regulatory matters: A securities class action naming the company and current and former executives sought unspecified damages; the company filed a motion to dismiss and said it would defend the action. The company also received two grand jury subpoenas concerning FDA communications and products and said it was cooperating.
Most important facts for investors to verify
- Whether Novitas or other Medicare contractors improve reimbursement rates, and the resulting effect on service economics, commercial payor negotiations and margins.
- Whether delayed claims, denial appeals and receivables convert to cash as expected, and whether bad-debt or contractual-allowance estimates change.
- Whether patient registrations, clinical capacity and component availability support growth without further margin deterioration.
- Progress in remediating the material weakness and evidence that controls operate effectively over time.
- Developments in the securities litigation and federal grand jury inquiry, including any financial, operational or disclosure consequences.