iRhythm Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results; financial amounts below are in U.S. dollars. The filing describes a digital healthcare business centered on its Zio ambulatory cardiac-monitoring service. Substantially all revenue is generated in the United States.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $53.3 million | $35.5 million | $100.5 million | $66.0 million |
| Gross profit / margin | $40.5 million / 76% | $26.0 million / 73% | $76.0 million / 76% | $47.9 million / 73% |
| Operating expenses | $51.8 million | $37.7 million | $95.3 million | $70.3 million |
| Operating loss | $(11.3) million | $(11.7) million | $(19.3) million | $(22.3) million |
| Net loss | $(11.5) million | $(12.2) million | $(19.5) million | $(23.3) million |
| Basic and diluted loss per share | $(0.46) | $(0.51) | $(0.79) | $(0.99) |
- Growth and margins: Revenue rose 50% in Q2 and 52% in the first half. Gross margin increased from 73% to 76%, which management attributed to lower manufacturing costs, fixed-cost absorption, and workflow and algorithm improvements.
- Expenses: Q2 research and development increased 89% and selling, general and administrative expense increased 31% year over year. The company cited product development, increased headcount and stock-based compensation, salesforce expansion, and the new San Francisco headquarters lease.
- Cash flow: First-half operating cash use was $16.8 million, versus $19.6 million a year earlier. Investing activities provided $11.1 million, principally reflecting investment maturities net of purchases and $4.5 million of capital expenditures. Financing activities provided $1.8 million. Cash and cash equivalents declined $3.9 million to $16.2 million.
- Liquidity: At June 30, cash and cash equivalents were $16.2 million and short-term investments were $43.2 million, or $59.4 million combined. Current assets were $95.0 million and current liabilities $35.7 million. Accumulated deficit was $223.0 million.
- Debt and leases: Debt, net of discount and issuance costs, was $34.9 million. No amount was drawn on the $25 million SVB revolving facility; the company was in compliance with loan covenants. Operating lease liabilities totaled $95.5 million. The new San Francisco headquarters lease runs through August 2031.
Changes, outlook, and notable matters
- Revenue growth reflected higher Zio service volume, expanded coverage and payor contracts, physician acceptance, and salesforce growth. Management also cited releases of reserves based on improved collection experience.
- Management expects revenue to grow with broader sales and marketing efforts, increased coverage and contracted lives, and product development. It expects research and development and sales and marketing expenses to rise as it invests in growth, while pursuing lower service costs per device. The filing provides no quantified revenue, earnings, or cash-flow guidance and warns that losses are expected to continue.
- Federal government agencies accounted for approximately 36% of revenue in both Q2 and the first half; CMS reimbursement, commercial payor coverage, and successful contracting remain important. Zio XT’s temporary Category III CPT codes extend through 2022; the company says it must obtain Category I codes by 2023 or seek renewal of the existing codes.
- Revenue and receivables depend on estimates of contractual allowances, collections, and reimbursement. First-half cash flow included a $10.7 million provision for doubtful accounts and contractual allowances; accounts receivable rose to $29.1 million from $22.0 million at year-end.
- The company adopted lease accounting Topic 842 on January 1, 2019, recognizing $10.4 million of right-of-use assets and $10.2 million of lease liabilities at adoption. The San Francisco headquarters lease commenced in May.
- Disclosure controls and procedures were deemed ineffective at June 30, 2019 because three previously identified material weaknesses remained unremediated, involving the control environment and staffing, the financial close and review process, and accounting for revenue and receivables. Management reported no resulting adjustments to the interim or annual statements, but described an immaterial prior-period misstatement from formula errors in contractual-allowance analysis. Remediation efforts include expanding finance staff and improving controls.
- The company reported no material legal proceedings and management was not aware of legal matters expected to materially adversely affect its financial position, results, or cash flows. Key risks include reimbursement changes, ongoing losses, payor collection uncertainty, competition, product and regulatory risks, dependence on suppliers and service partners, and data security.
Investor verification points
- Monitor collections, accounts-receivable growth, bad-debt and contractual-allowance estimates, and the impact of reserve releases on reported revenue.
- Check progress on remediating the disclosed internal-control material weaknesses and whether controls operate effectively over time.
- Verify payor contract expansion and reimbursement rates, including CMS coverage and the path for Zio XT CPT codes after 2022.
- Assess cash burn, investment balances, capital spending, debt covenant compliance, and the effect of the long-term headquarters lease.
- Track whether revenue growth and gross-margin gains can offset rising operating expenses and lead toward profitability; the filing supplies no quantified forecast.