Earnings Call: Q2 2021

Aug 5, 2021

Good day, and thank you for standing by. Welcome to the Irhythm Technologies Inc. Q2 2021 Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, There will be a question and answer session. I would now like to hand the conference over to your speaker today, Ms. Leigh Salvo. Please go ahead. Thank you all for participating in today's call. Earlier today, iRhythm released financial results for the Q2 ended June 30, 2021. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact should be deemed to be forward looking statements. All forward looking statements, including without limitation those statements related to the impact of COVID-nineteen on our business, expectations for recovery and processing data, operating trends and our future financial expectations, including revenue, gross margin, profitability and operating expenses are based Understand iRhythm's ongoing business performance. For a list and description of the risks and uncertainties associated with our business, Please refer to the Risk Factors section of our most recent annual and quarterly reports on Form 10 ks and Form 10 Q, respectively, with the SEC. This conference call contains time sensitive information and is accurate only as of the live broadcast today, August 5, 2021. IRhythm disclaims any intention or obligation, And with that, I'll turn the call over to Doug Devine, Interim CEO and Chief Financial Officer. Doug? Thanks, Lee. Good afternoon and thank you all for joining us. During our prepared remarks today, I'll start with a quick review of 2nd quarter highlights And then update you on progress we are making on our key operating priorities. Dan Wilson, EVP of Strategy and Corporate Development will cover reimbursement. And then I'd like to welcome Mark Day, our EVP of R and D to the call to share some of our current Zio platform advancements and initiatives. After that, I'll close with a more detailed review of Q2 results and our outlook for the remainder of the year. We'll then open up the call for your questions. Starting with Q2 highlights. Our results reflected continued demand for our Zio platform As well as solid execution on our operating goals by the entire iRhythm team who are working tirelessly to meet the needs of our physicians and patients. During the Q2, revenue was $81,300,000 representing a year on year increase in revenue of 59.8% and sequential growth of 9.4% over the Q1. Zio AT had a record quarter, reaching approximately 10% of overall company revenue for the first time. Registrations for our Zio services Seeded our capacity, particularly during the March, April and May timeframe, which resulted in processing times extending by approximately a week. This led to a higher than usual number of units awaiting clinical processing at quarter end, which limited reported revenue growth in Q2 2021 and call and I will cover them more a little later. We ended the Q2 with $255,700,000 in cash and short term investments, which highlights the financial strength of the company. Investing for long term growth remains Top of mind and importantly, we have the financial resources to do so. Lastly, we had 2 new 510 clearances during the quarter for our next generation hardware platform and our 4th generation deep learned AI algorithm. 1 for a new and improved design of our Zio monitor and the second for updating artificial intelligence capabilities. Both are key building blocks for our scalability and operational efficiencies. The new Zio monitor is designed to significantly improve patient Notably, our new AI algorithm release is already delivering benefits, including contributing to improvements in our unit processing times and our ability to return to more normalized report turnaround times by the end of Q3. We are pleased with these highlights and also encouraged by progress we're making on focus areas we discussed last quarter. As a reminder, these include driving continued demand for our Zio service, Leveraging our platform to expand both our market share and our addressable market making adjustments Our business model that we believe will provide operating efficiencies that will deliver sustainable profitability and growth and pursuing multiple paths toward reimbursement that are more in line with the benefits and underlying value of our technology. During the second We continue to see opportunity in the United Kingdom, which again outpaced overall company growth. As you may recall, last Timber, iRhythm was the recipient of NHS funding as the winner of its artificial intelligence and health and care award. That award was recently disclosed to be £4,800,000 or approximately $6,800,000 And has enabled us to commence trials of our Zio service in selected sites across the UK. Combined with a nice recommendation last December, We have seen very strong revenue growth in the first half of this year as we brought new grant sites online. As we move into the execution phase and bring fewer new sites online, we expect revenue growth from the UK to be more measured for the remainder of 2021. Further, we are in the process of building out our operational infrastructure within the U. K. That can support this future growth and take our learnings and successes from the U. K. To serve as a playbook to other countries in the future. We are also making progress on our new manufacturing facility, which will house all of our production capabilities starting in 2022 and enable increased scalability and enhanced operating And on product development and innovation, as we've highlighted in the past, iRhythm has long established its ongoing commitment to improving the patient and provider experience demonstrated by our significant investments in next generation capabilities across our diagnostic platform. The 2 new 510 clearances we announced during the quarter are great examples of this work. Overall, we're very pleased with the financial and operating results in the Q2 and remain focused on continuing to make progress on our priorities over the remainder of 2021, including with regard to our priorities on reimbursement, which Dan will discuss. Dan? Thank you, Doug. As part of the reimbursement discussion, I'll cover where we are at with our efforts to establish National Pricing with CMS, discuss our continued engagement with the MAX to establish more appropriate Medicare pricing, provide an update on commercial pricing And then close with a summary of how we are collectively approaching reimbursement. Starting with CMS National As we shared in our press release last month, CMS published the calendar year 2022 Medicare physician fee schedule proposed rule in mid July. In the proposed rule, CMS did not propose national rates for long term ECG monitoring CPT codes. Instead, CMS proposed to continue with contractor pricing for calendar year 2022. The proposed rule followed by an open comment period before CMS issues the final rule in the November December timeframe. In the proposed rule, CMS noted that they continue to seek public comment and information to support future rulemaking to establish comment period. IRhythm intends to provide comments and will continue to work with CMS in support of its efforts to establish national pricing that fairly represents The costs incurred to provide these services, the unique benefits they provide and in consideration of software algorithms and artificial intelligence and recognition that the current pricing methodology employed by CMS does not We are encouraged that CMS is recognizing the difficulty in pricing vertically integrated AI business models like our own within existing pricing methodologies. We will use the open comment period and other channels to provide our representing AI solutions that aim to support healthcare delivery by providing input on possible solutions. In summary, we will be using the open comment period between now mid September to provide comments to CMS's proposed rule and are joining other industry stakeholders to continue support of potential national pricing for calendar year 2022. However, we believe the more likely outcome is that we will remain with carrier pricing in 2022 While continuing to pursue national pricing in the following year cycle for calendar year 2023. Now turning to our ongoing discussions with Novitas and the other regional MAX. Since our last earnings call in May, we met with several other to garner their support for evaluating an alternative pricing model. We understand that the MACs are communicating and will likely work together to evaluate the pricing of the long term ECG codes. We remain encouraged by the willingness of Novitas and the other MAX to explore this alternative pricing model, which we believe is a better representation of the true cost of delivering the service. We, along with other industry Participants will be submitting cost data under this alternative pricing model to an independent third party who will validate the data and submit to the MAX. We currently anticipate the alternative model information will be submitted to the MAX in the September or October We cannot provide any assurances that Novitas or other MAX will update pricing based on this information nor the timing As an update on our commercial payer discussions, nearly all of our commercial payers have Overall, commercial pricing in the Q2 of 2021 was consistent with commercial pricing in the first We currently do not expect commercial pricing to change materially in the second half of twenty twenty one. As we look to We believe that our commercial payers have more flexibility in pricing of services and will consider the overall clinical and economic value of Zio XT. Thus, we are focused on providing the evidence that demonstrates Zio XT's high diagnostic yield, We have a strong health economics and outcomes resource team that is focused on producing these data, and our recent partnership with the National Association of Managed Care Physicians will add to the robust data that we continually share with commercial As mentioned previously, however, we do believe that if we are unsuccessful in improving Medicare rates before calendar year It is prudent to expect that some of our commercial rates may begin to be negatively impacted next To close on reimbursement, we have multiple avenues available to potentially achieve higher Medicare reimbursement, And we are actively pursuing all of them. We believe we have the right strategies in place to achieve this, but recognize that it may take We are confident in the value of our technology platform and the clinical and economic benefits that it delivers to patients, physicians and to the healthcare system. And we are hopeful that the value of the Zio XT platform will ultimately be recognized under the existing Medicare reimbursement system. Regardless, we will continue to pursue other opportunities the value of our platform through new indications such as SILENAF, new products such as Zio AT and the technology we are developing geographic expansion as well as other alternative revenue models that will all incrementally reduce our exposure to Medicare fee for service over time. We look forward to sharing more details on each of these efforts as we make progress. I'll now turn the call over to Mark, who will discuss those recent FDA clearances, how they further bolster our competitive positioning and why we are even more excited about the future of our Zio service. Mark? Thanks, Dan. As In the Q2, we received FDA clearance for 2 new technology platforms that represent iRhythm's future. The first clearance was for the Zio Monitor, our 3rd generation biosensor, while the second was for our next generation of deep learned algorithms. Together, these clearances demonstrate our commitment leading the category we first created over a decade ago, and I'd like to share more details about each. I'll start by describing the Zio monitor, the While the Zio XT device still provides industry leading performance, the new Zio monitor meaningfully improves on it This new form factor is nearly 60% lighter, 25% smaller And 30% thinner and also includes a new breathable and waterproof outer layer, all of which allows our custom adhesive confidently and comfortably secure to all patients. These refinements were designed with our patients in And with the understanding that more comfortable wear improves compliance, which in turn leads to even more complete and accurate diagnostic Again, this is a biosensor platform that will become the cornerstone of our service and we intend to pursue additional product clearances on this platform Next, I'd like to describe the clearance we received for our 2nd generation of deep learning CT detection algorithms, our 4th generation algorithm overall. Since 2018, iRhythm has been a leader in using FDA cleared deep for classifying and characterizing diverse heart rhythms. With this latest clearance, we're now using AI to detect beeps, beep types and heart We have also further enhanced the deep learned rhythm detection capability we previously introduced. This new clearance amounts to a significant improvement in our AIB's Our new deep learning algorithm was recently deployed, and we're already seeing positive impact to both diagnostic accuracy and the scalability of our service. We see this latest clearance as further differentiating us in the And the key step in developing new products and services fundamentally enabled by our AI expertise. We look forward to sharing more about this in the Finally, I'll quickly touch on the meaningful progress we've been making in our partnership with Verily. As a reminder, The context for this partnership is the understanding that silent atrial fibrillation is a key public health challenge, particularly in the United and that detecting this type of asymptomatic atrial fibrillation likely benefits from a long monitoring duration. With that perspective, we're working to build the 1st offering of a medical grade, long term, continuous and non invasive solution to detect and characterize atrial fibrillation. The solution we're developing utilizes Verily's StudyWatch platform in combination with our algorithm analytics, clinical back end and workflow tools. We're on track to submit to the FDA for 510 clearance by the end of When we receive clearance, we'll enter a market evaluation phase to establish the efficacy of the solution through clinical evidence and to explore the optimal business model associated with this potential paradigm shift in monitoring. In many ways, we expect this process to be similar to when we first brought VIZIYA service that is a thoughtful investment into clinical evidence that lays the foundation to change clinical practice. We look forward to sharing updates we progress along this journey. In sum, these 2 new clearances and our ongoing product development efforts represent our commitment Now I'll turn it back to Doug to cover our second quarter results and the second half outlook. Doug? Thanks, Mark. As I noted earlier, total revenue in the 2nd quarter was $81,300,000 reflecting year over year growth of 59.8 and a sequential increase of 9.4% over the Q1. Gross margins were 68%, Down 1.6% year on year and 0.4% quarter on quarter. Adjusted EBITDA, defined as EBITDA less stock based compensation expense was negative $4,600,000 an increase of $4,100,000 year on year and $600,000 quarter on quarter. Cash and short term investments were $255,700,000 at quarter end, down $6,600,000 from Q1 'twenty one. Taking a more detailed look at the Q2 financial results, revenue grew sequentially with quarter on quarter growth of 9.4%. Q2 2021 revenue growth was a mix of volume growth, improvements in collections performance for some contracted and non contracted payers and some favorable pricing adjustments for Zio AT. Approximately $4,500,000 of Q2 'twenty one revenue was due to improved collections prior period revenue and higher adjudicated reimbursement from certain payers and is not expected to reoccur in future periods. Zio XT in the U. S. Drove the majority of our volume growth in the Q2, while Zio AT in the U. S. And Zio XT in the U. K. Outpaced overall company growth on a percentage basis. Zio AT volumes grew significantly quarter over quarter, Crossing 10% of revenue for the first time. We saw strong Zio AT performance continue into July and anticipate it will be a growth driver for the remainder of the year. New account onboarding decreased slightly compared to the Q1 of 2021 With June onboarding down as we delayed account launches to focus on reducing our clinical backlog. Looking at new store, same store mix, New store accounted for 25% of year over year growth, down from 28% in the Q1 of 2021, primarily due to strong rebound and existing account volumes from the COVID impacted Q2 2020. Home enrollment was approximately 20% in the Q2 of 2020 2nd quarter was 68%, a 0.4% decrease compared to a gross margin of 68.4% in Q1 of 2021. The decrease was primarily due to higher overtime costs related to previously discussed capacity shortfalls, offset by volume Benefits. Q222 gross margin benefited from approximately $4,500,000 of revenue not related to q222volumes discussed above and would have been approximately 2 percentage points lower on a pro form a basis. Operating expenses for the Q2 of 2021 were $72,300,000 down 7.7% from Q1 of 2021 And up 30.1 percent year over year. The sequential decrease in operating expenses included a $2,500,000 decrease in bad debt Due to improved collections, a $10,300,000 decrease in stock based compensation offset by an increase in hiring and investments. Both bad debt and stock compensation included one time adjustments and as such should not be considered representative of cost structure moving forward. Comparing year on year OpEx, Q2 2021 OpEx was up 30.1% due primarily to hiring and legal spending, offset by a decrease in Verily milestone expenses. Quarterly adjusted EBITDA of negative $4,600,000 in Q2 2021 was approximately flat to Q1 2021 adjusted EBITDA of negative $5,200,000 Cash and short term investments decreased $6,600,000 from the Q1 of 2021 To $255,700,000 Purchases of property and equipment of $5,900,000 repayment of long term debt of $2,900,000 and EBITDA loss of negative $4,600,000 consumed cash, offset by working capital improvements And proceeds from employee stock purchases. Cash stabilized as claim submissions began to normalize. Accounts receivable increased by $3,400,000 from $60,000,000 in Q1 2021 to $63,400,000 in Q2 2021 still significantly elevated above the Q4 2020 balance of $29,900,000 Accounts receivable is expected to decline in second half twenty twenty one as backlog claims processing becomes fully caught up. Finally, the net loss for the Q2 of 2021 was negative $17,400,000 or a loss of 0.59 We are currently holding approximately 10% of 2021 year to date 0 XT claims, Down from approximately 70% as of Q1 2021 quarter end. We have submitted all Novitas claims, remaining held claims to identify opportunities to scale more efficiently, increasing our revenue conversion per unit and reducing our cost Key strategies include reducing device manufacturing costs through design and automation, Reducing clinical scan times through increased AI and workflow improvement, improving revenue cycle management through reduced contractual allowances, Cost of claims and bad debt and finally examining various go to market options that would reduce sales and marketing costs per unit. Collectively, we identified opportunities where we believe we can drive double digit percentage reductions to our costs served with reductions fully implemented in in the 2023 2024 timeframe and as a result build a strong sustainable operating foundation that can profitably support a range of reimbursement levels. In second half twenty twenty one, Higher costs associated with capacity limitations will exceed the impact of cost structure reductions. We look forward to sharing more details on our cost improvement initiatives as well as our market expansion opportunities later this year. Turning to guidance. For the full year of 2021, we expect revenue to range from $320,000,000 to 325,000,000 Representing year over year growth of 21% to 23%. Revenue guidance for the year does not Any changes to Medicare reimbursement and as previously mentioned discussions with Novitas and the other MACs remain ongoing. We expect revenue in the Q3 of 2021 to grow sequentially over the Q2 by approximately 3%. Registration volumes in the quarter are expected to be approximately sequentially flat with revenue volume growth coming from reducing the clinical backlog of Zio reports offset by non volume related revenue drivers in Q2 2021 not reoccurring in Q3 2021. For the Q4 of 2021, we expect revenue to be approximately flat as compared to Q3 2021 with growth in registration volumes offset by clinical backlog reductions Q3 not reoccurring in Q4. Gross margin in the Q3 of 2021 is expected to decline approximately 3% compared to Q2 2021 due to the non volume related revenue drivers in Q2 not reoccurring in OpEx is expected to increase by approximately $13,000,000 in Q3 2021 as compared to Q2 2021 Due to bad debt and stock compensation not benefiting from the factors that impacted Q2 2021, growth in hiring and investment, Growth in stock compensation due to hiring and retention and increases in legal spending. Additionally, the next Verily milestone is forecast to be achieved in the second half of twenty twenty one. If the milestone is reached in Q3 'twenty one, this will add $3,000,000 to Q3 twenty twenty one OpEx. Additionally, we will continue to pay down debt for our amortization schedule and we'll continue to build out our new manufacturing facility in the second half of twenty twenty one. Facility in the second half of twenty twenty one. As you've heard, work is underway and we believe this quarter's results demonstrate the progress we are making. I would also note that the CEO search is actively underway with healthy interest. We look forward to providing additional The iRhythm team remains focused on and excited about the opportunities we have, and I have the greatest confidence in And with that, we would like to open up the call for questions. Operator? Thank you. Please standby while we compile the CUNY roster. Your first question comes from Robbie Marcus from JPMorgan. Your line is open. Hey, thanks for taking the question. I've got Soren on for Ravi here. Just to sort of have a question on the reimbursement you mentioned. In an unfortunate scenario where Medicare rates don't move this year. What can you quantify or kind of size impact that we would see on commercial rates Heading into next year. Yes. We would this is Doug. I mean, we would be Speculating, as we have said before, if we don't have any further any favorable movement between the MAX and Medicare As we head into the negotiations for 2022 contracts that certainly puts risk into there. At the same time, we have we're in frequent communication with the commercial payers. We have a good story on the clinical benefits and the economic benefits that our product provides. And so we are working to minimize any impacts there. But at the same time, it would be too much speculation to Put a range on what type of impact we could potentially see, if any. Got it. Thank you. And on the guidance that you gave, that was helpful. You gave some helpful commentary there. In terms of what the mix is looking like From new center versus existing center growth, you gave some commentary on the quarter. Any commentary you have for what outlook Looks like for the back half of this year. Well, I think what you're seeing in we saw the lowest number Coming from new store this quarter, but I attribute that to being that the existing stores We're all very depressed in Q2 2020, that being the deepest quarter of impact in COVID. And you still are seeing some very real COVID impacts in Q3 of 2020. And so just the fact that those existing stores are rebounding Significantly is going to make the component of growth that's coming from new store lower, but We've been very happy overall with our new store account openings. And so we're very confident that we continue to make the progress we want to make And new store account openings new store openings. Great. Thank you. Your next question comes from Margaret Kaczor from William Blair. Your line is open. Hi, everyone. This is Brandon on for Margaret. Thanks for taking the question. We're still kind of punching in the numbers here obviously in our model, but It feels like in the beginning of this year or at least year to date so far that the ECG market and patch based ECG specifically is accelerating, especially given the guidance that you gave. So just curious, what if you guys could talk about what you're It seems like the adoption of patch based ECGs is moving along nicely, perhaps even faster than in the past. Is that a fair characterization? And if so, what kind of drivers are making that happen out in the field? Well, I think the biggest thing that I would say is that our new account openings And the interest in new accounts and signing on to our product remains very high, Remains high by historical levels and we continue to work through that. And then we would say this is the clinical efficacy of our product And the economic benefits that our product provides. So I think it's just a continuation of the trends we've been seeing. As we mentioned in the call, we did see in March, April May in particular, we saw Very significant strength in the existing accounts, increasing volumes and we do interpret that to be That is as COVID continues to impact people's behaviors that that was a low point in caseloads and that there was Some acceleration of patients coming back to see their doctors in that time period. Okay. That's helpful. And maybe looking in a longer term and maybe towards TAM expansion, I think it's been something like 10 months now since we saw the presentation of mSToPS, which was all around pretty overwhelmingly positive data. I can appreciate that maybe we'll wait to get more definitive updates on TAM expansion, but any updates that you could provide in terms of What's been going on behind the scenes, engaging with payers? I think Aetna was the one specifically that mSToPS would run with. Anything that they saw intriguing there That maybe leaves you any more or less encouraged for that TAM expansion opportunity? Let me let Dan Take that question. Yes. Thanks, Brandon, for the question. I would say in the early days of our market development and selling Yes, targeted detection programs. We believe the value proposition is resonating with payers and integrated payer providers. So we're very excited about the progress we've made in the last 6 months or maybe the 10 months since MSOPS and our early go to market strategy. We have a great team behind this effort and are pushing it forward. We're certainly looking to build this out even more fully and There's aspects of the service or capabilities that we're adding here to, still leveraging our core Zio XT platform, but building around that. And we look forward to sharing more details as we make progress there. Your next question comes from Cecilia Furlong from Morgan Stanley. Your line is open. Hey, good afternoon. Thanks for taking the question. This is Calvin on for Cecilia. Just one on reimbursement and one on data. The first one is just understanding, you believe next July when the PROS tool comes out, that would be the more Major catalyst versus this November, December. My understanding though was the LatAm update in July didn't necessarily preclude, I guess, a development in the final rule. So I'm just curious, have you seen to date any public comments of Significance either from societies like ACC HRS or other participants. I think last year during the comment period, we saw comments from another Citi is also from some of their competitors as well. So just curious anything to date worth calling out or expect to see perhaps that could make a real impact into the final rule? Yes, Calvin, it's Dan. I can address that. So I would say as it relates to the proposed rule, Yes, we were encouraged and do view the proposed rule this year as positive progress. CMS continues to seek information and Is looking for ways to appropriately price the service. It is clear there are challenges in how best to price Vertically integrated AI based business models like our own, but CMS is actively seeking ways to solve for this, Both specifically with our own code as well as seeking comments from stakeholders around AI based services. So we intend to use the open period between now mid September to provide our perspectives and also work with other industry stakeholders to provide comments that we hope Are helpful to CMS. So we will continue to seek national pricing for calendar year 2022 and that remains Ability, which is encouraging, but we do believe the more likely outcome, as we said in our prepared remarks, that We will remain contractor pricing for 2022 and reenter the cycle next year. Understood. And just one quick one on MS DOS. I think we were Expecting to see some cost effectiveness data either at midyear this year or in the back half. Just wanted to check-in on that. Are we still expecting to see that In the near term and can you maybe just comment on the confidence in how good the data set is going to be? Thanks. Yes, sure. This is Dan. I'll take that one again. So for on mSToPS, the data that was released at last year, We believe the publication around the clinical outcomes data is coming shortly. I don't have any specific timing or details to point you to, but do believe that's in the near term. For the economic data piece, that remains in the works, But delayed a bit from our original thinking that it would be mid this year. I don't have updated timing to give you today, but other than to say that remains in the works. But I would also say that we do believe that having this data and the economic data in particular peer reviewed and Published will be a big boost to our efforts, but we also have our own economic models and can work with payers and integrated payer providers To review their data, their specific data and have a discussion around the economic benefits of a targeted detection program. And That is an element of our go to market strategy today within Silane AF. Got it. Thanks so much. Your next question comes from Bill Dubanek from Canaccord. Your line is open. Thanks. Good evening. So just I'm going to focus on the model. I mean, you guys are really having success in driving revenue. And I'm kind of curious, if you broke that up, You've seen this big increase in the Zio AT business, which I would believe has a pretty significant price premium. So what does the underlying unit growth look like just in patients year over year? I don't know if you shared that and I apologize if you did. Yes. We haven't shared that specific number. We've given you The impact on how to adjust for the quarter of our volume that is Medicare pricing. So I'll let you do the math. 25% Medicare pricing, price went from $311,000,000 gross to $115,000,000 gross. That will get you in the ballpark of how to translate this The magnitude of the revenue growth into closer to a volume growth. And then I mean, obviously, Zio AT has grown significantly. And you are correct that Zio AT, particularly with the decline in Zio XT pricing, it's more than 2x The Xeo XT price at this point. Okay. And then forgive me if you answered this question, but the uptake of the AT, I mean, are you seeing some of the physicians transfer over to that product just because of the pricing on the XT? No, I wouldn't say we have any indication that I think the physicians it doesn't directly impact on what the Medicare Reimbursement level is. When I look at AT, I would point to a couple of factors. First, We're extremely happy with the level of volume growth and the increased adoption that we're seeing on Zio AT. And we definitely highlight that compared to we're still well below 10% penetrated In the MCT market, this is compared to where we are at a higher penetration rate with Zio XT. So there's quite a bit of room For Zio AT to continue to grow at a good clip. But I would say Our sales force is getting steadily longer we have the product in the field, our sales force is getting better And more efficient at selling the product. We've had a very good clip of selling and setting up new accounts. I mean, primarily accounts that currently do Zeo X State, but there is a significantly greater amount of that AT growth is coming from the new store volumes as opposed to on the XT side. Great. Thanks for taking my questions. Your next question comes from David Rasgon from Choois. Your line is open. Hi, guys. It's Sam on for David. Thanks for taking our questions. Just the first one, Going to reimbursement again. With MAC pricing in 2022, how do we think about the potential change we can see there? Is it Possible that the MAX could increase payment at a significant rate? Or are we more likely to see More of a smaller sequential step up. Yes. Hey, Sam, it's Dan. I can take that one and Doug can. Yes, I didn't think he sees a fit. So I would make a couple of comments. Obviously, we're going to stop short of providing guidance on what a potential outcomes, What a potential outcome is. But we'll reiterate a couple of points. One, we remain very encouraged by the willingness of Novitas and the other MAX To explore an alternative pricing model, which again we believe is a better representation of the true cost of delivering the service. And as mentioned previously, the reason it's a better representation of the true cost of delivering the services, It includes historical R and D costs as an example. And remember that the challenge we are facing is that we are a vertically integrated service provider And there are no commercial invoices that CMS can point to and say that this is a commercially validated price of the supplier Or equipment that is used in this service, such as our wearable biosensor and software tools. If there were, one could argue that The historical cost to develop the hardware or software and the cost to produce, the cost to sell and market the product as well as the overhead would all be captured in that commercial price of the hardware or software. So we believe this alternative model solves for a lot of those challenges and Novitas and the other Macs, Yes, while not providing any commitments are willing to review the data. So we're optimistic that this is a viable strategy to more appropriate pricing. Obviously, with caveat, we cannot provide any assurances that Novitas or the other MAX will Ultimately update pricing based on this information nor the timing. But our focus is on presenting them this information and continuing the And again, we remain encouraged that they remain at the table with us to discuss. Great. That's helpful. And just I'll just ask one more on reimbursement And yes, provide whatever, Dario, you can. But if we think about is there maybe a level On MAC reimbursement, say maybe like a $200 or $2.50 reimbursement for MACs, where you feel like commercial payers may be less likely To shift the rates significantly going forward? And just any color you can provide about that differential would be really helpful. Thank you. Yes. So this is Doug. I mean, obviously, the higher the level of MAC pricing is, the less Impact we would expect there to be or the less risk we would expect there to be to commercial payers. But I think we need to be careful Not to speculate here. And then, I mean, the other thing I would say is that while we're still in carrier pricing, I mean, the commercial players are very aware that this is a process that's still underway On the Medicare side. So I do think that national when we achieve national pricing, That is likely to be more impactful and more taken into stronger account by the commercial payers Then a MAC price, which is going to be seen as an intermediate step in a longer process. And that is very much what we have been seeing With this year's MAC pricing development. So I like I said, I would give you the guidance that MAC pricing changes to MAC pricing is going to be less influential to the commercial payers than CMS National pricing would be. Your next question comes from Suraj Kalia from Oppenheimer and Company. Your line is open. Good afternoon, everyone. Doug, did you hear me all right? I can hear you, Suraj. Perfect. So Doug, forgive me if you mentioned this already, just jumping in between calls. What was contractual allowance in the quarter? And I'll just throw my other question also in there. Doug, you mentioned about gross margins being lower. I think Catch the reason for that. And if you could also just expand on your comment about revenue cycle management improvement. How would that just kind of put some additional color on that to help us understand how OpEx could be reduced, margins could So first, Contractual allowances is how we account for the difference between the contractual price that we sign with the commercial payers And the amount that the commercial payer actually pays us. And So during the quarter, we actually had very good performance of improving the collections On past contractual allowances with a number of both with a number of commercial payers, Which resulted in us taking some onetime favorable adjustments to revenue. But anyway, that is what the contractual allowances is. And it's really the difference between when we close each quarter, we have an expected level of what those contractual allowances, I. E. What the contractual what the level of holdbacks that The commercial payers are going to pay us. And then there's always a true up that if we've collected more or Potentially less, but in this case, it was significantly more than was expected over those historical periods and that results in a favorable adjustment. So when you look at revenue cycle, there's 3 components to revenue cycle. One component is exactly what we were saying, most contractual allowances. And when we improve contractual allowances, That's going to result in top line growth. And then the other two components of revenue cycle are bad debt, Which in this case is non payment by the patients. And in the commercial market, we treat bad debt on the patient side As an OpEx charge, an SG and A charge. And then the other component is the actual cost of processing the claim that we have some third party assistance and then we have an internal team That is processing the claims. And so the opportunity here is to reduce that claims, reduce those costs With the largest impact of that being, and we don't disclose the specific numbers, but when we file initial claims, X percentage of those claims will be denied and then we have a claims team that will go in and work those denials and X percentage Will be reduced to y percentage. And so you can see that if we can reduce that initial denial rate by, Pick your number, 25%, 40%, then that's going to result in, 1st, better claim better collections performance. But second, most of my costs in the revenue cycle are based on working those denied claims. And so If I have 25% or 40% less denials upfront, then that's going to cost me significantly less on a per claim basis to work the denials. Doug, forgive me. The contractual allowance was 10% before this quarter. Did it go up, remain the same? We haven't disclosed the exact percentage of contractual allowances In the commercial market, it has historically been in the low teens. Thank you. There is no further question at this time. You may continue. Okay. I would like to thank everyone for joining. We're very happy with the quarter we've had and look forward to sharing more information as we go forward. Thank you. This concludes today's conference call. Thank you all for joining. You may now disconnect.