iRhythm(US:IRTC)2022-11-04 21:07PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for the period ended September 30, 2022, detail the company's financial position, operational results, and cash flows, reflecting revenue growth, continued net losses, and significant cash usage Condensed Consolidated Balance Sheets As of September 30, 2022, the company's total assets were $440.4 million, a decrease from $463.0 million at the end of 2021, primarily due to a reduction in cash and cash equivalents. Total liabilities increased to $201.2 million from $183.5 million, driven by an increase in noncurrent debt. Consequently, total stockholders' equity declined to $239.2 million from $279.5 million | Balance Sheet Items (In thousands) | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $71,222 | $127,562 | | Accounts receivable, net | $60,534 | $46,430 | | Total current assets | $285,850 | $305,522 | | Total assets | $440,390 | $462,967 | | Liabilities & Equity | | | | Total current liabilities | $83,591 | $87,853 | | Debt, noncurrent portion | $34,931 | $9,690 | | Total liabilities | $201,166 | $183,452 | | Total stockholders' equity | $239,224 | $279,515 | Condensed Consolidated Statements of Operations For the third quarter of 2022, revenue grew to $103.9 million from $85.4 million in Q3 2021, with gross profit increasing to $70.9 million. However, the company reported a net loss of $21.5 million for the quarter. For the nine months ended September 30, 2022, revenue was $298.3 million, up from $241.0 million year-over-year, but the net loss widened to $96.0 million from $68.9 million, partly due to $26.6 million in impairment and restructuring charges | Metric (In thousands) | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Revenue, net | $103,875 | $85,432 | | Gross profit | $70,921 | $56,148 | | Loss from operations | $(21,086) | $(23,282) | | Net loss | $(21,451) | $(23,731) | | Net loss per share | $(0.71) | $(0.81) | | Metric (In thousands) | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Revenue, net | $298,304 | $241,021 | | Gross profit | $202,925 | $162,284 | | Impairment and restructuring charges | $26,608 | $0 | | Loss from operations | $(93,086) | $(67,744) | | Net loss | $(95,957) | $(68,870) | | Net loss per share | $(3.22) | $(2.35) | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, net cash used in operating activities was $35.6 million, an increase from $24.7 million in the prior year period. Net cash used in investing activities was $44.3 million, a significant shift from $132.4 million provided by investing activities in 2021. Net cash provided by financing activities was $23.6 million, primarily from new debt proceeds, compared to a $28.9 million use of cash in the prior year. This resulted in a net decrease in cash and cash equivalents of $56.3 million | Cash Flow Activity (In thousands) | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(35,588) | $(24,708) | | Net cash (used in) provided by investing activities | $(44,320) | $132,397 | | Net cash provided by (used in) financing activities | $23,568 | $(28,946) | | Net (decrease) increase in cash | $(56,340) | $78,743 | Notes to Condensed Consolidated Financial Statements The notes detail significant accounting policies, highlighting risks from macroeconomic factors, Medicare reimbursement uncertainty, and the impact of CPT code transitions, alongside details on impairment charges and new debt agreements - The company faces significant uncertainty regarding Medicare reimbursement. CMS did not establish national pricing for key CPT codes for 2022, leaving it to regional MACs. On November 2, 2022, CMS released its 2023 final rule, which the company interprets as reflecting national reimbursement rates of $224 for CPT code 93247 and $213 for CPT code 93243404243 - Revenue from CMS accounted for 26% of total revenue in Q3 2022 and 24% for the first nine months of 2022, a significant increase from 15% and 14% in the respective periods of 202161 - In February 2022, the company initiated a restructuring plan, resulting in $3.4 million in severance costs and a $23.2 million impairment charge on its San Francisco headquarters' right-of-use asset and related property94 - On March 28, 2022, the company amended its loan agreement with SVB, securing a new term loan facility of up to $75.0 million. It borrowed $35.0 million at closing, using part of the proceeds to repay an existing $18.5 million balance112 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, noting revenue growth driven by Zio service volume and CMS rates, but a widening net loss due to increased expenses and one-time charges, alongside details on liquidity and debt facilities Results of Operations Revenue for Q3 2022 increased 22% year-over-year to $103.9 million, driven by higher Zio service volume and better CMS rates. Gross margin improved to 68% from 66%. Operating expenses rose 16%, with R&D up 32% and SG&A up 14%. For the nine-month period, revenue grew 24% to $298.3 million, but total operating expenses increased 29%, including $26.6 million in impairment and restructuring charges, leading to a wider loss from operations | Metric (In thousands) | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $103,875 | $85,432 | 22% | | Gross Profit | $70,921 | $56,148 | 26% | | Gross Margin | 68% | 66% | - | | R&D Expenses | $11,448 | $8,685 | 32% | | SG&A Expenses | $80,559 | $70,745 | 14% | | Loss from Operations | $(21,086) | $(23,282) | 9% | - The nine-month results included $23.2 million in impairment charges related to the San Francisco headquarters and $3.4 million in severance costs from a restructuring plan, which were not present in the prior year180 Liquidity and Capital Expenditures As of September 30, 2022, the company had $71.2 million in cash and cash equivalents and $132.3 million in short-term investments. Management believes it has adequate liquidity for the next 12 months, supported by available term loan facilities of $40.0 million and a $25.0 million revolving credit line. Net cash used in operations for the first nine months of 2022 was $35.6 million, primarily due to a net loss of $96.0 million, offset by non-cash charges, and an increase in accounts receivable - The company's cash and cash equivalents decreased by $56.3 million during the first nine months of 2022188 - Cash used in operating activities increased to $35.6 million for the nine months ended Sep 30, 2022, from $24.7 million in the same period of 2021, largely due to an increase in accounts receivable189191 - The company secured a new term loan facility of up to $75.0 million and an extended $25.0 million revolving credit line through March 2027, enhancing its liquidity position198199 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are related to interest rate and foreign currency exchange rate sensitivity. Interest rate risk stems from its cash equivalents, investments, and variable-rate debt. Foreign currency risk arises from transactions in British Pound Sterling. Management does not consider these risks to be material and states that a hypothetical 10% change in interest rates would not have had a material impact on the financial statements - The company holds $203.5 million in cash, cash equivalents, and investments, which are subject to interest rate risk, though historical fluctuations have not been significant204 - The outstanding debt of $34.9 million carries a variable interest rate tied to the Prime Rate, exposing the company to interest rate fluctuations206 - Foreign exchange risk is primarily from transactions in British Pound Sterling but is not considered material as of September 30, 2022207 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2022, due to a material weakness in the control environment, with remediation efforts underway including key personnel hires - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2022, due to a continuing material weakness in internal controls over financial reporting210 - The material weakness stems from not maintaining an effective control environment, specifically a failure to maintain a sufficient number of professionals with appropriate accounting and internal control expertise211 - Remediation efforts include hiring an IT Compliance Director (Jan 2022), a Chief Risk Officer (May 2022), a Senior Director of Internal Audit (June 2022), and a new Chief Financial Officer (Aug 2022) to strengthen the control environment212218 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in a putative securities class action lawsuit filed in February 2021, which was dismissed by the court in March 2022 but is currently under appeal by the plaintiff. Additionally, the company received grand jury subpoenas from the U.S. Attorney's Office in March and October 2021 related to communications with the FDA and its products, and is cooperating with the request - A securities class action lawsuit alleging violations of the Exchange Act was dismissed on March 31, 2022, but the plaintiff filed a notice of appeal on April 29, 2022. The company believes the action is without merit220 - The company received grand jury subpoenas from the U.S. Attorney's Office for the Northern District of California in March and October 2021 requesting information related to FDA communications and products. The company is cooperating fully221105 Item 1A. Risk Factors The company outlines significant risks including reimbursement uncertainty, macroeconomic impacts, a history of net losses, market competition, intellectual property litigation, regulatory changes, and recent management turnover - Reimbursement Risk: Changes in CMS and MAC reimbursement rates, such as the lower-than-historical rates from Novitas Solutions, could negatively impact profitability and influence commercial payors to reduce their rates223244247 - Operational & Financial Risk: The company has a history of net losses which are expected to continue. The business is also adversely impacted by the COVID-19 pandemic and macroeconomic factors affecting supply chains, costs, and patient/hospital demand223225231 - Market & Competitive Risk: The business depends on broad physician adoption of the Zio service. The ambulatory cardiac monitoring market is highly competitive, with large, well-resourced competitors that could develop more effective or accepted products223232281 - Management & Control Risk: The company has recently experienced significant management turnover, including a new CEO, CFO, and CCO, which creates uncertainty. A material weakness in internal control over financial reporting also persists296297327 - Regulatory Risk: The company must comply with extensive regulations from the FDA and CMS. Failure to maintain regulatory clearances, such as for the Zio AT monitor, or comply with IDTF rules could harm commercial operations352356278 Item 2-6. Other Information Under these items, the company reports no unregistered sales of equity securities, no defaults upon senior securities, and no mine safety disclosures. Item 5 provides general corporate information, including the company's website and social media channels for investor communication. Item 6 refers to the exhibit index filed with the report - The company reported no unregistered sales of equity securities or use of proceeds for the period387 - The company notes that it uses its investor relations website, press releases, SEC filings, and social media channels like Facebook and Twitter to communicate material financial information390