IRHYTHM TECHNOLOGIES, INC.
You should read the following discussion and analysis of our financial condition
and results of operations together with the unaudited financial statements and
related notes included elsewhere in this Quarterly Report on Form 10-Q. This
discussion and other parts of this Quarterly Report on Form 10-Q contain
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. Our actual
results could differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in the section of this Quarterly Report
on Form 10-Q entitled "Risk Factors".
Overview
We are a digital healthcare company redefining the way cardiac arrhythmias are
clinically diagnosed by combining our wearable biosensing technology with
cloud-based data analytics and deep-learning capabilities. Our goal is to be the
leading provider of ambulatory electrocardiogram ("ECG") monitoring for patients
at risk for arrhythmias. We have created a full portfolio of ambulatory cardiac
monitoring services on a unique platform, called the Zio service, which combines
an easy-to-wear and unobtrusive biosensor that can be worn for up to 14
consecutive days with powerful proprietary algorithms that distill data from
millions of heartbeats into clinically actionable information. The Zio service
consists of:
•wearable patch-based biosensors, Zio XT and Zio AT monitors, which continuously
record and store ECG data from every patient heartbeat for up to 14 consecutive
days; Zio AT offers the option of timely transmission of data during the
prescribed wear period;
•cloud-based analysis of the recorded cardiac rhythms using our proprietary,
deep-learned algorithms;
•a final quality assessment review of the data by our certified cardiographic
technicians; and
•an easy-to-read Zio report, a curated summary of findings that includes high
quality and clinically-actionable information which is sent directly to a
patient's physician through ZioSuite and can be integrated into a patient's
electronic health record.
We receive revenue for the Zio service primarily from third-party payors, which
include commercial payors and government agencies, such as CMS, Veterans
Administration , and the military. In addition, a small percentage of
institutions, which are typically hospitals or private physician practices,
purchase the Zio service from us directly. Our revenue in the third-party
commercial payor category is primarily contracted, which means we have entered
into pricing contracts with these payors. Third-party contracted payors
accounted for approximately 63% and 50% of our revenue for the three months
ended March 31, 2021 and 2020, respectively. Approximately, 14% and 27% of our
total revenue for the three months ended March 31, 2021 and 2020, respectively,
is received from Centers for Medicare and Medicaid Services ("CMS"), which is
under established reimbursement codes. Healthcare institutions, which are
typically hospitals or private physician practices accounted for approximately
17% and 18% of our revenue for the three months ended March 31, 2021 and 2020,
respectively. Non-contracted third party payors and self-pay accounted for 7%
and 5% of our total revenue for the three months ended March 31, 2021 and
March 31, 2020 , respectively. We rely on a third-party billing partner, XIFIN,
Inc. , to submit patient claims and collect from commercial payors, certain
government agencies, and patients.
Since our Zio service was cleared by the U.S. Food and Drug Administration
("FDA"), we have provided the Zio service to over three million patients and
have collected over 750 million hours of curated heartbeat data. We believe the
Zio service is well-positioned to disrupt an already-established $1.8 billion
U.S. ambulatory cardiac monitoring market by offering a user-friendly device to
patients, actionable information to physicians and value to payors.
We market our ambulatory cardiac monitoring solution in the United States
through a direct sales organization comprised of sales management, field billing
specialists, quota-carrying sales representatives, and a customer service team.
Our sales representatives focus on initial introduction into new customers,
penetration across a sales region, driving adoption within existing accounts and
conveying our message of clinical and economic value to service line managers
and hospital administrators and other clinical departments. In addition, we will
continue exploring sales and marketing expansion opportunities in international
geographies.
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--------------------------------------------------------------------------------COVID-19 Impact
We cannot currently predict the extent or duration of the ongoing impact to our financial results and have suspended forward-looking guidance. Although we cannot currently predict the extent or duration of the COVID-19 related impact to our financial results, we expect the impact of COVID-19 to be more significant in the near-term. Beginning inmid-March 2020 , we experienced decreasing levels in the Zio service patient registrations which impacted our revenues during the year endedDecember 31, 2020 . This decrease in revenue is due to a variety of challenges associated with the COVID-19 pandemic inthe United States , including, among others:
•reduction in physician prescriptions for our Zio service due to:
•cancellation and reduction of physician attendance at professional medical society meetings and trade shows and our decision not to attend them;
•travel restrictions and changing hospital policies that have limited access of our sales professionals to hospitals where the Zio services are prescribed and where patients have historically been enrolled;
•delays in receiving Zio XT back from patients with some patients not returning the device at all; and
•patients who have lost jobs, been furloughed, have reduced work hours or are worried about the continuation of medical insurance being unable to afford the Zio service. During the second half of 2020, we saw recovery of patient registrations for the Zio service to pre-COVID levels of the first quarter of 2020 and during the three months endedMarch 31, 2021 we experienced increasing levels in the Zio service patient registrations. However, this may be due, in some part, to the re-opening of certain regions withinthe United States and may not represent sustainable levels of patient registrations in future time periods. We are taking a variety of measures to promote the safety and security of our employees and customers. Our response to COVID-19 is focused on: •Protecting and supporting the health and well-being of our employees, our communities and our customers by limiting the transmission of COVID-19. Following recommendations from federal and local government and healthcare agencies, we transitioned employees to a remote work environment beginning in earlyMarch 2020 . For a small number of our employees who continue to support essential operations at our facilities, we have instituted social distancing and other measures to ensure the safety of our employees. We rapidly implemented business continuity protocols and have been able to transition to a remote operating environment while continuing to deliver our Zio service. We will continue to follow local and national guidelines to determine the appropriate time to resume in-office functions. •Delivering uninterrupted patient care for both Zio XT and Zio AT and supporting efforts to monitor COVID-19 patients. While hospital systems and healthcare facilities shift their focus and resources to treating COVID-19 patients and combating the spread of COVID-19, we have adapted our service to meet the immediate needs of our physician customers and patients. Our digital service platform enables physician ordering, results reporting, data curation and patient support independent of location, across virtual or in-office care models. As an example, we have significantly increased the utilization of our "Home Enrollment" service. This service allows patients to receive and wear the single-use Zio monitor without going to a healthcare facility. Physicians can prescribe the Zio service for their patients, either in-office or through a virtual care setting, and we ship the Zio monitor directly to the patient's residence. We pay for the costs of shipping the Zio monitor, which represents additional expense for us. We also guide patients through the patch application process and inform them of instructions for wear. Home enrollment also eliminates clinical staff exposure to patients, as well as application, cleaning or reusing traditional Holter and event monitors that may have been exposed to viruses or other pathogens. In addition, health systems with acute needs to facilitate a reduction in healthcare provider contact or for additional monitoring capacity can deploy Zio AT for in-patient monitoring. The FDA informed us that Zio AT usage for this application is consistent with the FDA COVID-19 Remote Monitoring guidance. •Adjusting our operating plan as appropriate to ensure continued financial strength. We continue to maintain a strong cash position and have taken initiatives to adjust our operating plan to ensure we maintain appropriate liquidity 24 -------------------------------------------------------------------------------- during these uncertain times. We have proactively taken steps to reduce spend, including eliminating or delaying project spend for non-essential programs, and reducing spend on travel and consulting. In addition, we raised$206.8 million in proceeds from a follow-on public offering inAugust 2020 to fund growth initiatives and for working capital and other general corporate purposes Components of Results of Operations Revenue Substantially all of our revenue is derived from sales of our Zio service inthe United States . We earn revenue from the provision of our Zio service primarily from contracted third-party payors, CMS, and healthcare institutions. In addition, a small percentage of institutions, which are typically hospitals or private physician practices, purchase the Zio service from us directly, and a very small percentage of commercial non-contracted payors. We recognize revenue on an accrual basis based on estimates of the amount that will ultimately be realized, which is the difference between the amount submitted for payment and the amount received. These estimates require significant judgment by management. In determining the amount to accrue for a delivered report, and Zio service provided, we consider factors such as claim payment history from both payors and patient out-of-pocket costs, payor coverage, whether there is a contract between the payor or healthcare institution and the Company, historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments. We are subject to seasonality similar to other companies in our field, as vacations by physicians and patients tend to affect enrollment in the Zio service more during the summer months and during the end of calendar year holidays compared to other times of the year. Cost of Revenue and Gross Margin Cost of revenue includes direct labor, material costs, equipment and infrastructure expenses, amortization of internal-use software, allocated overhead, and shipping and handling. Direct labor includes payroll and personnel-related costs including stock-based compensation involved in manufacturing, data analysis, and customer service. Material costs include both the disposable materials costs of the Zio monitors and amortization of the re-usable printed circuit board assemblies ("PCBAs"). Each Zio XT monitor includes a PCBA, and each Zio AT monitor includes a PCBA and gateway board, the cost of which is amortized over the anticipated number of uses of the board. We expect cost of revenue to increase in absolute dollars to the extent our revenue grows. We calculate gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, including increased contracting with third-party payors and institutional providers. We have in the past been able to increase our pricing as third-party payors become more familiar with the benefits of the Zio service and move to contracted pricing arrangements. We expect to continue to decrease the cost of service per device by obtaining volume purchase discounts for our material costs and implementing scan-time algorithm improvements and software-driven and other workflow enhancements to reduce labor costs. Gross margin for the three months endedMarch 31, 2021 was negatively impacted due to the Novitas Medicare price decrease with limited impact of higher Zio AT volumes and COVID-related labor costs offset by volume benefits. Although a large majority of our commercial customers have re-contracted the Zio XT service since the establishment of the Category I codes onJanuary 1, 2021 matching to pre-existing rates, if we are unsuccessful in improving the Medicare rates before calendar year 2022, we believe it is prudent to expect that commercial rates may begin to be more negatively impacted next year which would have a negative impact on margins. Research and Development Expenses We expense research and development costs as they are incurred. Research and development expenses include payroll and personnel-related costs, including stock-based compensation, consulting services, clinical studies, laboratory supplies and allocated facility overhead costs. We expect our research and development costs to increase in absolute dollars as we hire additional personnel to develop new product and service offerings and product enhancements. 25 -------------------------------------------------------------------------------- Selling, General and Administrative Expenses Our sales and marketing expenses consist of payroll and personnel-related costs, including stock-based compensation, sales commissions, travel expenses, consulting, public relations costs, direct marketing, tradeshow and promotional expenses and allocated facility overhead costs. Our general and administrative expenses consist primarily of payroll and personnel-related costs for executive, finance, legal and administrative personnel, including stock-based compensation. Other significant expenses include professional fees for legal and accounting services, consulting fees, recruiting fees, bad debt expense, third-party patient claims processing fees and travel expenses. Interest Expense Interest expense is attributable to borrowings under our loan agreements. Refer to Note 7. Debt, for further information on our loan agreements. Other Income, Net Other income, net consists primarily of interest income which consists of interest received on our cash, cash equivalents and investments balances. Results of Operations Comparison of the Three Months EndedMarch 31, 2021 and 2020 Three Months Ended March 31, 2021 2020 $ Change % Change Revenue$ 74,311 $ 63,535 $ 10,776 17 % Cost of revenue 23,458 16,063 7,395 46 % Gross profit 50,853 47,472 3,381 7 % Gross margin 68 % 75 % Operating expenses: Research and development 8,510 8,415 95 1 % Selling, general and administrative 69,813 48,230 21,583 45 % Total operating expenses 78,323 56,645 21,678 38 % Loss from operations (27,470) (9,173) (18,297) 199 % Interest expense (335) (380) 45 (12) % Other income, net 124 505 (381) (75) % Loss before income taxes (27,681) (9,048) (18,633) 206 % Income tax provision 98 17 81 476 % Net loss$ (27,779) $ (9,065) $ (18,714) 206 % Revenue Revenue increased$10.8 million , or 17%, to$74.3 million during the three months endedMarch 31, 2021 from$63.5 million during the three months endedMarch 31, 2020 . The increase in revenue was primarily attributable to the increase in volume of the Zio services as a result of increased demand from our customers, partially offset by a decrease in revenue recognized from CMS, based on the updated 2021 published rates. Cost of Revenue and Gross Margin Cost of revenue increased$7.4 million , or 46%, to$23.5 million during the three months endedMarch 31, 2021 from$16.1 million during the three months endedMarch 31, 2020 . The increase in cost of revenue was primarily due to increased Zio service volume as well as costs incurred to support a larger cost structure in 2021. 26 -------------------------------------------------------------------------------- Gross margin for the three months endedMarch 31, 2021 was 68%, compared to 75% for the three months endedMarch 31, 2020 . The decrease in gross margin is primarily due to the updated reimbursement rates announced by Novitas inApril 2021 . Research and Development Expenses Research and development expenses increased$0.1 million , or 1%, to$8.5 million during the three months endedMarch 31, 2021 from$8.4 million during the three months endedMarch 31, 2020 . The increase was primarily attributable to a$2.3 million increase in bonus and stock-based compensation, and a$1.8 million reduction of expense due to an increase in costs capitalized to internal use software, as well as a$0.2 million decrease in employee travel expense. Selling, General and Administrative Expenses Selling, general and administrative expenses increased$21.6 million , or 45%, to$69.8 million during the three months endedMarch 31, 2021 from$48.2 million during the three months endedMarch 31, 2020 . The increase was due to$18.6 million increase in stock-based compensation primarily due to increased headcount and a reversal of PRSU expense recorded during the three months endedMarch 31, 2020 ,$8.4 million increase in payroll as a result of increased headcount, and$0.9 million increase in facility expenses, partially offset by a$2.8 million reduction in employee travel expense, and a$2.3 million reduction in temporary consultants. Interest Expense Interest expense was$0.3 million for the three months endedMarch 31, 2021 , compared to$0.4 million for the three months endedMarch 31, 2020 . There were no significant changes in interest expense during the three months endedMarch 31, 2021 compared with the three months endedMarch 31, 2020 . Other Income, Net Other income, net was$0.1 million for the three months endedMarch 31, 2021 , compared to$0.5 million for the three months endedMarch 31, 2020 . There were no significant changes in other income, net during the three months endedMarch 31, 2021 compared with the three months endedMarch 31, 2020 . Liquidity and Capital Expenditures Overview We are continuously reviewing our liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 global pandemic. We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements. As ofMarch 31, 2021 , we had cash and cash equivalents of$137.4 million , short-term investments of$124.9 million , and an accumulated deficit of$332.5 million . Our expected future capital requirements may depend on many factors including expanding our customer base, the expansion of our salesforce, and the timing and extent of spending on the development of our technology to increase our product offerings. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. 27 -------------------------------------------------------------------------------- Cash Flows The following table summarizes our cash flows for the periods indicated (in thousands): Three Months Ended March 31, 2021 2020 Net cash (used in) provided by: Operating activities$ (41,842) $ (22,366) Investing activities 117,035 59,911 Financing activities (26,446) (1,493) Net increase in cash and cash equivalents$ 48,747
Cash Used in Operating Activities During the three months endedMarch 31, 2021 , cash used in operating activities was$41.8 million , which consisted of a net loss of$27.8 million , adjusted by non-cash charges of$34.1 million and a net change of$48.2 million in our net operating assets and liabilities. The non-cash charges were primarily comprised of a change in stock-based compensation of$20.2 million , allowance for doubtful accounts and contractual allowances of$9.8 million , depreciation and amortization of$2.0 million and amortization of right of use assets of$1.6 million . The change in our net operating assets and liabilities was primarily due to an increase of$39.8 million in accounts receivable, a decrease of$6.1 million in accrued liabilities, a decrease of$0.7 million in accounts payable and a decrease of$1.4 million in operating lease liability. We are currently holding a majority of Zio XT claims due to the CPT code transition. Claims are being held due to a combination of negotiations with payors and administrative delays with payors. We expect the level of held claims to remain high through the end of the second quarter of 2021 and potentially beyond. The high level of held claims will delay some second quarter 2021 cash flows into the second half of 2021 or potentially beyond. We expect cash inflows from accounts receivable to improve in the second quarter of 2021 as we make progress on Zio XT claims processing and collections that have been delayed. During the three months endedMarch 31, 2020 , cash used in operating activities was$22.4 million , which consisted of a net loss of$9.1 million , adjusted by non-cash charges of$12.4 million and a net change of$25.7 million in our net operating assets and liabilities. The non-cash charges were primarily comprised of a change in the allowance for doubtful accounts and contractual allowances of$9.2 million and depreciation and amortization of$1.6 million . The change in our net operating assets and liabilities was primarily due to an increase of$10.0 million in accounts receivable as a result of increased revenues and an increase of$9.5 million in accrued liabilities. 28 -------------------------------------------------------------------------------- Cash Provided by Investing Activities Cash provided by investing activities during the three months endedMarch 31, 2021 was$117.0 million , which consisted of$30.1 million in purchases of available for sale investments and$4.2 million of capital expenditures, partially offset by cash received from the maturities of available for sale investments of$151.3 million . Cash provided by investing activities during the three months endedMarch 31, 2020 was$59.9 million , which consisted of cash received from the maturities of available for sale investments of$56.8 million and sales of available for sale investments of$14.5 million . This was partially offset by$8.0 million in purchases of available for sale investments and$3.4 million of capital expenditures associated with leasehold improvements and internal use software. Cash Used in Financing Activities During the three months endedMarch 31, 2021 , cash used in financing activities was$26.4 million , primarily due to$25.1 million in tax withholding upon the vesting of RSUs. This practice will be updated to require employees to sell shares to cover tax liabilities and will not be a company use of cash beginning inJune 2021 . In addition, cash used in financing activities was due to repayment of debt of$2.9 million , partially offset by$1.6 million in proceeds from the issuance of common stock in connection with employee options exercises and our Employee Stock Purchase Program. During the three months endedMarch 31, 2020 , cash used in financing activities was$1.5 million , primarily due to$4.5 million in tax withholding upon the vesting of RSUs, partially offset by$3.0 million in proceeds from the issuance of common stock in connection with employee options exercises and our Employee Stock Purchase Plan. Bank Debt InDecember 2015 , we entered into a Second Amended and Restated Loan and Security Agreement with SVB, (the "SVB Loan Agreement"). Under the SVB Loan Agreement, we could borrow, repay and reborrow under a revolving credit line, but not in excess of the maximum loan amount of$15.0 million , untilDecember 4, 2018 , when all outstanding principal and accrued interest became due and payable. Any principal amount outstanding under the SVB Loan Agreement shall bear interest at a floating rate per annum equal to the rate published by The Wall Street Journal as the "Prime Rate" plus 0.25%. We could borrow up to 80% of our eligible accounts receivable, up to the maximum of$15.0 million . InOctober 2018 , we entered into the Third Amended and Restated Loan and Security Agreement with SVB ("Third Amended and Restated SVB Loan Agreement"). This Agreement amends and restates the Second Amended and Restated Loan and Security Agreement between the Company and SVB datedDecember 4, 2015 , as amended by the First Loan Modification Agreement between the Company and SVB datedAugust 22, 2016 . Pursuant to the Third Amended and Restated SVB Loan Agreement, we obtained a term loan ("SVB Term Loan") for$35.0 million . Total proceeds from the SVB Term Loan were used to pay off the loan agreement withBiopharma Secured Investments III Holdings Cayman LP ("Pharmakon"), totaling$35.8 million . We will make interest-only payments throughOctober 31, 2020 , followed by 36 monthly payments of principal plus interest on the SVB Term Loan. Interest charged on the SVB Term Loan will be the greater of (a) a floating rate based on the "Prime Rate" published by The Wall Street Journal minus 0.75%, or (b) 4.25%. Under the Third Amended and Restated SVB Loan Agreement, we may borrow, repay, and reborrow under a revolving credit line, but not in excess of the maximum loan amount of$25.0 million , which includes an$11.0 million standby letter of credit sublimit availability. InOctober 2018 , a$6.9 million standby letter of credit was obtained in connection with a lease for ourSan Francisco headquarters. Any principal amount outstanding under the Third Amended and Restated SVB Loan Agreement revolving credit line shall bear interest at an amount that is the greater of (a) a floating rate per annum equal to the rate published by The Wall Street Journal as the "Prime Rate" or (b) 5.00%. We may borrow up to 75% of eligible accounts receivable, up to the maximum of$25.0 million . As ofMarch 31, 2021 no amount was outstanding under the revolving credit line. The Third Amended and Restated Loan Agreement requires us to maintain a minimum consolidated liquidity ratio or minimum adjusted Earnings Before Interest, Tax, Depreciation, and Amortization during the term of the loan facility. In addition, the SVB Loan Agreement contains customary affirmative and negative covenants and events of default. We were in compliance with loan covenants as ofMarch 31, 2021 . The obligations under the Third Amended and Restated Loan Agreement are collateralized by substantially all of our assets. 29
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Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities. Contractual Obligations Our contractual obligations as ofDecember 31, 2020 are presented in our Form 10-K filed with theSEC onFebruary 26, 2021 . There have been no material changes. Critical Accounting Policies and Estimates For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year endedDecember 31, 2020 ("Annual Report"). Refer to Note 2. Summary of Significant Accounting Policies, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, for all significant accounting policies. With the exception of the accounting policy described below, there have been no significant changes to our critical accounting policies as described in our Annual Report.
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