iRhythm Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2020. The filing is for iRhythm Technologies, Inc.; the request metadata names iRhythm Holdings, Inc. iRhythm provides wearable cardiac-monitoring services, principally its Zio XT and Zio AT offerings, and derives substantially all revenue from the United States.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $63.5 million | $48.3 million | +31% |
| Gross profit / margin | $47.5 million / 75% | $36.6 million / 76% | Gross profit +30%; margin down 1 percentage point |
| Operating expenses | $56.6 million | $44.8 million | +27% |
| Operating loss | $9.2 million | $8.2 million | Loss widened by $1.0 million |
| Net loss | $9.1 million | $8.3 million | Loss widened by $0.8 million; diluted loss per share was $0.34 in both periods |
| Cash used in operating activities | $22.4 million | $17.2 million | Use increased by $5.2 million |
Revenue growth reflected higher Zio service volume, expanded coverage, and a larger number of payors. Contracted commercial payors contributed about 50% of revenue, CMS 27%, healthcare institutions 18%, and non-contracted payors and self-pay about 5%. Management said revenue declined in the second half of March because of COVID-19.
Cash and cash equivalents were $56.5 million and short-term investments $65.3 million at quarter-end, totaling $121.8 million. Total debt was about $34.9 million; no revolving-credit balance was outstanding, and reported unused facility availability was $4.4 million. The company was compliant with debt covenants. Operating cash outflow exceeded the net loss, with working-capital movements and receivables among the drivers. Investing cash inflow of $59.9 million mainly reflected investment maturities and sales, not operating cash generation.
Changes and notable items
- Cost of revenue rose 36%, faster than revenue, and gross margin declined to 75% from 76%.
- SG&A increased 27%, including higher payroll and stock compensation, $2.6 million more bad-debt expense, and higher rent. The allowance for doubtful accounts increased to $11.8 million from $9.0 million at year-end 2019.
- Q1 2019 comparative financial statements were revised for prior-period accounting errors involving revenue, contractual allowances, doubtful accounts, and other items. The company said the errors were not material to prior periods individually, but revised comparisons should be considered when assessing trends.
- Adoption of the expected-credit-loss standard on January 1, 2020 resulted in a $0.5 million cumulative-effect increase to accumulated deficit and the allowance for doubtful accounts.
Outlook, risks, and contingencies
- The company suspended and withdrew full-year 2020 guidance because the duration and scale of COVID-19 effects could not be predicted. Management expected a more significant near-term impact and warned that reduced hospital access, deferred procedures, lower prescriptions, payment delays, and customer financial stress could affect results.
- In April, the company began cost-reduction actions including temporary salary reductions, furloughs and layoffs, a hiring freeze, and cuts or delays to non-essential spending. It had not yet determined the related termination-benefit costs and could take further measures.
- Management believed liquidity would be adequate for the next 12 months, while noting substantial uncertainty. Key risks include continued pandemic effects, reimbursement and collection estimates, reliance on CMS and commercial payors, competition, and supply-chain or operational disruption.
- Management concluded disclosure controls were ineffective at March 31, 2020 because material weaknesses remained in the control environment, financial close and review, and revenue and receivables controls. Remediation work was ongoing; the weaknesses had contributed to prior-period revisions.
- The Verily development agreement runs for 24 months and concerns next-generation atrial-fibrillation products. Up to $12.75 million of additional milestone payments may be due; no new milestones were achieved in Q1. Management reported no material legal proceedings and no material adverse contingency known at the reporting date.
Investor facts to verify
- How COVID-19 affected service volumes, revenue, collections, and margins after the late-March decline, and whether the April cost actions were sufficient.
- Subsequent receivables, contractual-allowance, and bad-debt trends, given the larger allowance and the company’s prior accounting revisions.
- Cash burn, investment balances, available credit, debt repayment requirements, and covenant compliance.
- Progress remediating the disclosed material weaknesses and evidence that the revised financial reporting controls operate effectively.
- CMS reimbursement decisions and timing for new Category I CPT codes expected to take effect January 1, 2021.