iRhythm(IRTC) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Q1 2020 financials show a 31% revenue increase to $63.5 million, a net loss of $9.1 million, and total assets of $282.9 million, with prior period revisions for immaterial errors Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $56,514 | $20,462 | | Short-term investments | $65,256 | $120,089 | | Total current assets | $154,431 | $172,792 | | Total assets | $282,940 | $306,212 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $42,845 | $52,066 | | Total liabilities | $157,963 | $170,803 | | Total stockholders' equity | $124,977 | $135,409 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Revenue, net | $63,535 | $48,334 | | Gross profit | $47,472 | $36,561 | | Loss from operations | $(9,173) | $(8,204) | | Net loss | $(9,065) | $(8,250) | | Net loss per common share | $(0.34) | $(0.34) | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(22,366) | $(17,163) | | Net cash provided by investing activities | $59,911 | $26,379 | | Net cash used in financing activities | $(1,493) | $(1,138) | | Net increase in cash and cash equivalents | $36,052 | $8,078 | Notes to Condensed Consolidated Financial Statements - The company identified and revised prior period financial statements for immaterial errors in its historical accounting for revenues, contractual allowances, and allowance for doubtful accounts, impacting 2017, 2018, and early 2019 financials[29] - The COVID-19 outbreak caused significant business disruptions, including travel restrictions and reduced customer access. The company transitioned to remote work and increased utilization of its home enrollment service[33][34][35] - Revenue is disaggregated by payor type, with Contracted third-party payors and Centers for Medicare & Medicaid (CMS) being the largest contributors[58] - Due to the impact of the COVID-19 pandemic, management determined that achievement of performance targets for Performance-based RSUs (PRSUs) is not probable. As a result, $4.8 million in PRSU expense recognized in 2019 was reversed in Q1 2020[104] - In response to COVID-19, the company initiated cost reduction measures starting in April 2020, including temporary salary reductions for all salaried employees, furloughs, layoffs, and reduced executive and board compensation[114] Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 2020 revenue grew 31% to $63.5 million, operating expenses increased, resulting in a $9.1 million net loss; financial guidance suspended due to COVID-19 - The company's Zio service combines a wearable biosensor (Zio XT and Zio AT) with cloud-based data analytics to diagnose cardiac arrhythmias. Revenue is primarily from third-party payors, with CMS accounting for approximately 27% of revenue in Q1 2020[117][118] - In response to COVID-19, the company has suspended financial guidance, transitioned employees to remote work, and significantly increased the use of its home enrollment service to ensure uninterrupted patient care[122][124] Results of Operations Comparison (in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $63,535 | $48,334 | 31% | | Gross profit | $47,472 | $36,561 | 30% | | Gross margin | 75% | 76% | -1 ppt | | Total operating expenses | $56,645 | $44,765 | 27% | | Net loss | $(9,065) | $(8,250) | 10% | - As of March 31, 2020, the company had cash and cash equivalents of $56.5 million and short-term investments of $65.3 million. Net cash used in operating activities was $22.4 million for the quarter[141][144] Quantitative and Qualitative Disclosures About Market Risk Market risk exposure from interest rates and foreign currency exchange rates is deemed immaterial as of March 31, 2020 - The company's interest-earning instruments and variable-rate debt carry interest rate risk, but a hypothetical 10% change in interest rates would not have a material impact[163][166] - Foreign exchange risk from transactions in currencies other than U.S. dollars, particularly the British Pound Sterling, is not considered material as of March 31, 2020[167] Controls and Procedures Disclosure controls were ineffective as of March 31, 2020, due to material weaknesses in control environment, financial close, and revenue recognition; a remediation plan is underway - Management concluded that disclosure controls and procedures were not effective as of March 31, 2020, due to ongoing material weaknesses[168] - Specific material weaknesses include: an ineffective control environment lacking sufficient accounting professionals, ineffective controls over the financial statement close process, and ineffective controls over revenue recognition and related accounts receivable[168][169][170] - A remediation plan is in progress, focusing on new finance hires, enhanced internal control education, and consistent execution of controls, particularly in financial close and order-to-cash cycles[175] PART II. OTHER INFORMATION Legal Proceedings The company is not currently a party to any material legal proceedings but may become involved in future matters - As of the report date, the company is not a party to any material legal proceedings[179] Risk Factors Significant risks include COVID-19 impacts, a history of net losses, dependence on Zio service, reimbursement uncertainties, and material weaknesses in internal controls - The COVID-19 pandemic poses a significant risk, potentially impacting sales due to reduced access to hospitals, deferred diagnostic procedures, and increased unemployment affecting patient insurance coverage[181][182] - The company has a history of net losses, with a net loss of $9.1 million for Q1 2020 and an accumulated deficit of $269.9 million, and expects to continue incurring losses[188] - Business success is highly dependent on the adoption of the Zio service by physicians and securing adequate reimbursement from third-party payors, including CMS, which accounted for 27% of revenue in Q1 2020[189][190][196] - The company faces risks from its reliance on single suppliers for critical components, which could lead to supply shortages and price fluctuations that could harm the business[215][218] - Previously identified material weaknesses in internal control over financial reporting could result in material misstatements in financial statements if not successfully remediated[271] Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period - Not applicable[330] Defaults Upon Senior Securities This item is not applicable for the reporting period - Not applicable[331] Mine Safety Disclosures This item is not applicable for the reporting period - Not applicable[332] Other Information Corporate contact information and channels for investor communication, including social media, are disclosed - The company discloses its principal executive office location and contact information and states that it uses various channels, including social media, to communicate material information to investors[333] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - The report includes certifications from the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act of 2002[337]