iRhythm Technologies, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. iRhythm provides the ZIO cardiac-monitoring service, combining a wearable ECG device with cloud-based analysis and technician review. Revenue is primarily U.S.-based and substantially dependent on the ZIO Service. The company completed its IPO in October 2016.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $21.4 million | $12.9 million |
| Gross profit / margin | $15.1 million / 70% | $8.2 million / 64% |
| Operating expenses | $19.8 million | $13.1 million |
| Operating loss | $4.7 million | $4.9 million |
| Net loss | $5.3 million | $6.1 million |
| Basic and diluted loss per share | $0.24 | $4.34 |
| Net cash used in operations | $6.4 million | $9.5 million |
| Cash and cash equivalents | $15.6 million | $51.6 million at Dec. 31, 2016 |
| Short- and long-term investments | $93.8 million | $65.4 million at Dec. 31, 2016 |
| Debt, net of discount and issuance costs | $32.7 million | $32.2 million at Dec. 31, 2016 |
At March 31, 2017, total cash, cash equivalents and investments were approximately $109.4 million; current assets were $106.6 million versus current liabilities of $10.7 million. Total assets were $132.8 million, accumulated deficit $132.5 million, and stockholders’ equity $89.3 million. Capital expenditures were $1.2 million. The reported cash decline of $36.1 million includes substantial purchases of investments, not solely operating cash consumption.
Material changes versus Q1 2016
- Revenue rose 67%, primarily from higher ZIO Service volume and improved contracted rates. Third-party payors represented approximately 79% of revenue versus 70%; institutions represented 21% versus 30%.
- Gross margin increased to 70% from 64%, reflecting a more favorable contracted-payor revenue mix, manufacturing and material cost reductions, and operating efficiencies.
- Operating expenses increased 52%, including higher personnel, professional-services, travel and facility costs. Stock-based compensation rose to $2.0 million from $0.4 million.
- Net loss narrowed by $0.8 million. Loss per share comparisons are affected by the post-IPO share base; weighted-average shares were 22.2 million in 2017 versus 1.4 million in 2016.
- Operating cash use improved by $3.1 million. Cash and cash equivalents fell from year-end as funds were shifted into investments; investments totaled $93.8 million at quarter-end.
Outlook, risks, contingencies and unusual items
- Management expects revenue to grow with greater service utilization, expanded payor contracting and sales infrastructure, and product development. It also expects cost of revenue and research and development and selling, general and administrative expenses to rise as the business expands. No numerical revenue, earnings or cash-flow guidance is provided; management expects continued losses.
- Pharmakon debt carries a fixed 9.5% interest rate and matures in December 2021. The revenue covenant begins in June 2017, with a stated minimum net-revenue threshold of $44.7 million for the period ending June 30, 2017; the agreement provides a 45-day equity cure period. Debt is secured by substantially all company assets. The SVB revolving facility had no balance outstanding and approximately $6.5 million of borrowing availability at quarter-end.
- Principal risks include reliance on reimbursement and payor contracts, the potential for collection delays and contractual-allowance estimates, ongoing losses, competitive and adoption risks, regulatory compliance, and reliance on single-source suppliers for critical components. Government agencies accounted for approximately 37% of Q1 revenue; CMS alone accounted for approximately 27%.
- The filing reports no material legal proceedings known to management. The company disclosed no off-balance-sheet arrangements and no material income-tax provision or benefit, with deferred tax assets fully offset by a valuation allowance.
- In May 2017, the company signed a Houston office lease through September 2027, with approximately $4.3 million in total base rent. Future minimum lease payments of $18.0 million include this subsequent lease.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue growth and the improved gross margin persist, including the effect of contracted rates and payor mix.
- Collections, accounts-receivable quality and the adequacy of doubtful-account and contractual-allowance estimates; the filing reports $2.9 million of Q1 revenue from non-contracted payors recognized under its stated policy.
- Compliance with the June 2017 Pharmakon revenue covenant and minimum-liquidity requirements, as well as future debt service and available SVB borrowing capacity.
- Cash generation relative to continuing operating losses and planned investment in sales, staffing, technology and facilities.
- Exposure to reimbursement changes, single-source supply interruptions, manufacturing capacity and regulatory requirements.