iRhythm Technologies, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. iRhythm provides wearable cardiac monitoring and analysis services, primarily through its Zio platform. Substantially all revenue came from U.S. customers. Amounts below are in millions of dollars except per-share data.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $38.1 | $25.0 | $104.1 | $70.3 |
| Gross profit | $28.2 | $18.1 | $76.1 | $50.3 |
| Gross margin | 74% | 72% | 73% | 72% |
| Operating expenses | $37.9 | $24.1 | $108.2 | $67.0 |
| Operating loss | $(9.7) | $(6.0) | $(32.1) | $(16.6) |
| Net loss | $(10.2) | $(6.5) | $(33.6) | $(18.3) |
| Basic and diluted loss per share | $(0.43) | $(0.29) | $(1.41) | $(0.81) |
| Cash used in operating activities | — | — | $(24.7) | $(11.2) |
- At September 30, cash and cash equivalents were $17.3 and short-term investments were $63.8, totaling $81.2. Total current assets were $106.7 versus current liabilities of $22.3.
- Debt was $32.6, primarily Pharmakon term debt; accumulated deficit was $188.8. The company reported compliance with debt covenants at quarter-end.
- Nine-month operating cash use rose by $13.5 year over year. Accounts receivable increased $15.1, which management attributed primarily to revenue growth. Capital expenditures were $3.7.
Changes versus the prior comparable period
- Q3 revenue grew 52% and nine-month revenue grew 48%, attributed to higher service volume, expanded coverage and contracted payors, physician acceptance, and sales-force growth.
- Gross margin improved by 2 percentage points in Q3 and 1 point year to date, reflecting manufacturing efficiencies, lower labor cost per device, and fixed-cost absorption.
- Operating expenses increased 57% in Q3 and 61% for the first nine months. SG&A growth was driven largely by headcount and sales-force support; R&D growth included Zio AT and other product development.
- Net losses widened to $10.2 in Q3 and $33.6 year to date. Management says losses are expected to continue.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. For the nine months, reported revenue was $1.4 lower and net loss was $2.2 lower than under the prior standard; the filing says adoption had no material overall impact.
Outlook, risks and notable items
- No quantified revenue, earnings, or cash-flow guidance was provided. Management expects revenue to grow with broader coverage, sales expansion, increased awareness, and new products; it also expects cost of revenue, R&D, and SG&A to rise in absolute dollars. The filing cautions that losses are expected to continue.
- Key business risks include dependence on Zio service and physician adoption; reimbursement rates, coverage and collection uncertainty; billing complexity and reliance on billing partner XIFIN; and competition, regulatory compliance, product quality, supply-chain, and data-security risks. Federal government agencies accounted for about 38% of revenue in the first nine months of 2018.
- Revenue estimates depend on collection experience and management judgment. The allowance for doubtful accounts was $7.0 and contractual allowance was $8.0 at September 30. Non-contracted payors and patient balances may create delayed or uncertain collections.
- Subsequent debt refinancing: On October 23, 2018, iRhythm obtained a $35.0 SVB term loan, used to repay $35.8 owed to Pharmakon. It incurred a $1.0 prepayment premium and $1.5 of additional prepayment consideration. Interest-only payments run through August 2020, followed by 36 monthly principal-and-interest payments. A revolving facility of up to $25.0 was also established, including an $11.0 letter-of-credit sublimit.
- Subsequent lease: A 12-year lease for approximately 117,560 square feet of San Francisco office space was signed October 4, 2018, with annual rent of $10.0 and 3% annual increases. The lease includes a $2.4 tenant-improvement allowance and a $6.9 letter of credit. The company expects lease accounting changes to materially affect its balance sheet when it adopts the new lease standard in 2019.
- The filing reports no material legal proceedings and no material adverse legal matters known to management. Its risk disclosures refer to an ongoing government investigation into possible FCPA violations; investors should review the filing for details and subsequent developments.
- Management concluded disclosure controls were effective at a reasonable-assurance level. No material change in internal control over financial reporting was reported other than changes associated with ASC 606 implementation.
Important facts for investors to verify
- Whether revenue growth and margin improvements continue, and whether expense growth moderates enough to reduce operating losses and cash burn.
- Receivable aging, collection rates, and the adequacy of doubtful-account and contractual allowances, especially for non-contracted payors.
- Current reimbursement coverage and rates, including the path to permanent CPT codes for Zio XT by 2022 and exposure to government-payor policy changes.
- Final terms, ongoing cost, covenant requirements, and repayment capacity under the October 2018 SVB refinancing, including the stated prepayment costs.
- The cash-flow, balance-sheet, and operating-cost implications of the new San Francisco lease and adoption of lease accounting in 2019.
- Progress and commercial adoption of Zio AT, along with the status and potential consequences of the FCPA investigation referenced in the risk disclosures.