iRhythm(US:IRTC)2023-05-04 21:15markdown PART I. FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements for Q1 2023, showing **revenue growth of 21% to $111.4 million** and a **net loss improvement to $39.1 million** Condensed Consolidated Statements of Operations (Q1 2023 vs Q1 2022) | Financial Metric | Q1 2023 (in thousands) | Q1 2022 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | **Revenue, net** | $111,436 | $92,378 | 20.6% | | **Gross Profit** | $75,681 | $61,759 | 22.5% | | **Loss from Operations** | $(39,504) | $(48,549) | -18.6% | | **Net Loss** | $(39,109) | $(50,609) | -22.7% | | **Net Loss per Share** | $(1.29) | $(1.71) | -24.6% | Condensed Consolidated Balance Sheets | Asset/Liability | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $52,804 | $78,832 | | Total current assets | $253,890 | $288,772 | | **Total Assets** | **$421,701** | **$448,222** | | Total current liabilities | $81,903 | $89,096 | | **Total Liabilities** | **$199,867** | **$208,410** | | **Total Stockholders' Equity** | **$221,834** | **$239,812** | Condensed Consolidated Statements of Cash Flows (Q1 2023 vs Q1 2022) | Cash Flow Activity | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(30,753) | $(38,885) | | Net cash provided by (used in) investing activities | $3,820 | $(8,527) | | Net cash provided by financing activities | $905 | $14,636 | [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section details the company's business, accounting policies, revenue disaggregation, legal proceedings, debt, and stock-based compensation - The company's principal business is the design, development, and commercialization of device-based technology for remote cardiac monitoring services, primarily the **Zio Services**[26](index=26&type=chunk) Revenue by Payor Type (Q1 2023 vs Q1 2022) | Payor Type | Q1 2023 Revenue (in thousands) | % of Revenue | Q1 2022 Revenue (in thousands) | % of Revenue | | :--- | :--- | :--- | :--- | :--- | | Contracted third-party payors | $61,907 | 56% | $51,751 | 56% | | Centers for Medicare and Medicaid | $26,491 | 24% | $20,062 | 22% | | Healthcare institutions | $15,781 | 14% | $15,078 | 16% | | Non-contracted third-party payors | $7,257 | 6% | $5,487 | 6% | | **Total** | **$111,436** | **100%** | **$92,378** | **100%** | - The company is involved in a **securities class action lawsuit** and has received **subpoenas from the U.S. Attorney's Office and the Department of Justice**[86](index=86&type=chunk)[87](index=87&type=chunk) - The company has a development agreement with Verily Life Sciences to develop next-generation atrial fibrillation screening products, with **$11.0 million paid in milestone payments** as of March 31, 2023[88](index=88&type=chunk)[89](index=89&type=chunk) - The company has a loan agreement with SVB (now First-Citizens Bank) for a **$75.0 million term loan facility**, with **$35.0 million drawn** and a **$25.0 million revolving credit line**[94](index=94&type=chunk)[95](index=95&type=chunk)[97](index=97&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=29&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2023 financial performance, noting **21% revenue growth to $111.4 million** and a **narrowed net loss to $39.1 million** Results of Operations Comparison (Q1 2023 vs Q1 2022) | Metric (in thousands) | Q1 2023 | Q1 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | **Revenue** | $111,436 | $92,378 | $19,058 | 21% | | **Gross Profit** | $75,681 | $61,759 | $13,922 | 23% | | **Gross Margin** | 68% | 67% | - | - | | **R&D Expenses** | $14,842 | $10,542 | $4,300 | 41% | | **SG&A Expenses** | $100,343 | $73,158 | $27,185 | 37% | | **Loss from Operations** | $(39,504) | $(48,549) | $9,045 | (19)% | | **Net Loss** | $(39,109) | $(50,609) | $11,500 | (23)% | - Revenue growth was primarily driven by **increased volume of Zio Services** and **improved CMS reimbursement rates**[140](index=140&type=chunk) - The **37% increase in SG&A expenses** was primarily due to a **$13.3 million increase in payroll-related costs** and **$5.7 million in transformation costs**[144](index=144&type=chunk) Reconciliation of Net Loss to Adjusted EBITDA (Non-GAAP) | Metric (in thousands) | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net loss | $(39,109) | $(50,609) | | Stock-based compensation | $18,251 | $13,903 | | Impairment and restructuring charges | $— | $26,608 | | Transformation costs | $5,686 | $258 | | **Adjusted EBITDA** | **$(11,993)** | **$(4,753)** | - As of March 31, 2023, the company had **$52.8 million in cash and cash equivalents** and **$123.5 million in short-term investments**, with management believing current liquidity is sufficient[148](index=148&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company faces market risks primarily from **interest rate sensitivity** and **foreign currency exchange fluctuations**, neither considered material - The company's primary market risks are **interest rate sensitivity** and **foreign currency exchange rate sensitivity**[165](index=165&type=chunk) - A hypothetical **10% change in interest rates** would have had a **$0.4 million impact on interest income** for Q1 2023[167](index=167&type=chunk)[168](index=168&type=chunk) - Foreign currency exchange risk, primarily from the **British Pound Sterling**, is not considered material[169](index=169&type=chunk) [Controls and Procedures](index=37&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded the company's **disclosure controls and procedures were effective** as of March 31, 2023, with no material changes - The CEO and CFO concluded that the company's **disclosure controls and procedures are effective** at the reasonable assurance level as of March 31, 2023[171](index=171&type=chunk) - There were **no material changes in internal control over financial reporting** during Q1 2023[172](index=172&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=38&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in a **securities class action lawsuit** and **government investigations** by the DOJ, with full cooperation - A **putative securities class action lawsuit** filed in February 2021 is on appeal, which the company believes is without merit[176](index=176&type=chunk) - The company received **grand jury subpoenas** from the U.S. Attorney's Office and a **subpoena from the U.S. Department of Justice** regarding its products and services, with full cooperation[177](index=177&type=chunk) [Risk Factors](index=38&type=section&id=Item%201A.%20Risk%20Factors) This section details numerous risks, including **reimbursement dependency, intense competition, regulatory compliance, supply chain, legal, and cybersecurity threats** - **Reimbursement Risk:** The company's revenue is highly dependent on **Medicare (24% of Q1 2023 revenue)** and commercial payors; policy changes could significantly harm the business[182](index=182&type=chunk)[183](index=183&type=chunk)[186](index=186&type=chunk) - **Regulatory & Compliance Risk:** The company is subject to extensive **FDA regulations**, **healthcare fraud and abuse laws**, and **data privacy laws**; non-compliance could lead to substantial penalties[204](index=204&type=chunk)[206](index=206&type=chunk)[240](index=240&type=chunk) - **Competitive Risk:** The market is highly competitive, with competition from **large medical device companies** and **potential new entrants like Apple** potentially reducing commercial opportunities[194](index=194&type=chunk)[195](index=195&type=chunk) - **Supply Chain Risk:** The company relies on **single-source vendors for critical Zio patch components**; supply disruptions could impair demand fulfillment[213](index=213&type=chunk)[214](index=214&type=chunk)[215](index=215&type=chunk) - **Legal & Investigation Risk:** The company faces a **securities class action lawsuit** and **ongoing government investigations** by the Department of Justice, risking significant liabilities and reputational harm[266](index=266&type=chunk)[268](index=268&type=chunk) - **Cybersecurity Risk:** Handling sensitive patient health information makes the company a target for **cyber-attacks**, risking significant liability and reputational damage[284](index=284&type=chunk)[285](index=285&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=69&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported **no unregistered sales of equity securities** during the period covered by this report - No unregistered sales of equity securities were reported[309](index=309&type=chunk) [Other Information](index=70&type=section&id=Item%205.%20Other%20Information) This section provides the company's **principal executive office address** and details on **material financial information dissemination** - The company's principal executive offices are located at **699 8th Street, Suite 600, San Francisco, CA 94103**[312](index=312&type=chunk) [Exhibits](index=70&type=section&id=Item%206.%20Exhibits) This section lists the **exhibits filed with the Quarterly Report on Form 10-Q**, including CEO/CFO certifications - Exhibits filed include **CEO and CFO certifications** and a **Resignation, Release and Consulting Agreement with former COO Douglas Devine**[313](index=313&type=chunk)[316](index=316&type=chunk)