iRhythm Technologies, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. iRhythm provides the ZIO cardiac-monitoring service, combining a wearable ECG device with cloud-based analysis and clinician-reviewed reports. Revenue is primarily U.S.-based and substantially dependent on the ZIO Service.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $23.9 million | $15.7 million | $45.3 million | $28.6 million |
| Gross profit / margin | $17.1 million / 72% | $10.6 million / 67% | $32.2 million / 71% | $18.8 million / 66% |
| Operating expenses | $23.0 million | $14.3 million | $42.9 million | $27.3 million |
| Operating loss | $5.9 million | $3.7 million | $10.7 million | $8.6 million |
| Net loss | $6.4 million | $4.4 million | $11.7 million | $10.6 million |
| Basic and diluted loss per share | $0.29 | $3.09 | $0.53 | $7.42 |
Per-share losses are shown as losses; the filing reports them as $(0.29), $(3.09), $(0.53), and $(7.42), respectively. Weighted-average shares increased substantially following the October 2016 IPO, so per-share comparisons are affected by the change in share count.
- Cash and liquidity: At June 30, cash and cash equivalents were $16.2 million and short-term investments were $93.6 million, totaling $109.8 million. Current assets were $123.8 million and current liabilities $15.2 million.
- Cash flow: Six-month operating cash use was $7.4 million, investing cash use $30.4 million, and financing cash inflow $2.4 million. Cash and cash equivalents declined $35.4 million from year-end 2016; much of the investing outflow reflected purchases of marketable securities.
- Debt: Balance-sheet debt, net of discounts and issuance costs, totaled $33.1 million, plus $0.5 million accrued current interest. Pharmakon debt bears 9.50% interest and matures in December 2021. No amount was drawn on the SVB revolver; approximately $8.1 million was available to borrow at quarter-end.
- Other: Accumulated deficit was $138.9 million. Stock-based compensation was $2.3 million in Q2 and $4.3 million for the first half.
Changes versus comparable periods
- Q2 revenue grew 52%; first-half revenue grew 58%, primarily from increased service volume and higher average contracted rates.
- Gross margin improved to 72% in Q2 from 67%, and to 71% for the first half from 66%, which management attributed to contracted-payor mix, manufacturing efficiencies, material-cost reductions, and workflow improvements.
- Operating expenses rose 61% in Q2 and 57% for the first half. Higher headcount, professional services, facilities, and stock compensation contributed; SG&A remained the largest operating expense.
- Despite higher revenue and margins, net loss widened in Q2 to $6.4 million from $4.4 million. First-half net loss increased to $11.7 million from $10.6 million.
Outlook, commentary, and risks
- No numerical revenue, earnings, or cash-flow guidance is provided. Management expects revenue to grow with service volume, contracted coverage, sales expansion, and new offerings, while also expecting research, sales, marketing, and public-company costs to increase. The company expects continuing losses.
- The company reported that it met Pharmakon’s minimum net-revenue covenant of $44.7 million for the period ended June 30, 2017. The debt agreement also imposes liquidity and other covenants; defaults could accelerate repayment. Debt is secured by substantially all company assets.
- Revenue estimates and collections are sensitive to reimbursement decisions, contractual allowances, non-contracted payors, patient cost-sharing, and claim denials. The filing identifies significant judgment in estimating reimbursement and reports $5.7 million of first-half revenue from non-contracted claims.
- Key business risks include reliance on the ZIO Service as the principal product, continued physician adoption and payor coverage, competition, dependence on single-source suppliers and one manufacturing location, and the ability to scale operations while maintaining service quality.
- iRhythm recently received FDA clearance for its ZIO AT monitoring system, but adoption and commercial returns are uncertain. A new Houston clinical-center lease runs through September 2027; minimum lease payments disclosed at June 30 totaled $16.8 million.
- The company reported no material legal proceedings and no material changes in internal control over financial reporting; disclosure controls were considered effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether revenue growth and improved margins are sustainable, and whether growth is driven by volume, contracted pricing, or changes in reimbursement estimates.
- Collections, contractual and doubtful-account allowances, claim-denial trends, and the timing of revenue recognition for non-contracted payors.
- Cash burn and liquidity needs relative to continuing operating losses, capital spending, lease commitments, and debt obligations.
- Ongoing compliance with Pharmakon and SVB liquidity and revenue covenants, including the terms and availability of the SVB revolver.
- Execution and adoption of ZIO AT and future products, and whether sales-force growth and operating expansion can be achieved without undue cost or quality issues.