iRhythm Technologies, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company provides wearable cardiac monitoring and cloud-based analysis through its Zio service, primarily in the United States.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $35.5 million | $23.9 million | $66.0 million | $45.3 million |
| Gross profit | $26.0 million | $17.1 million | $47.9 million | $32.2 million |
| Gross margin | 73% | 72% | 73% | 71% |
| Operating loss | $11.7 million | $5.9 million | $22.3 million | $10.7 million |
| Net loss | $12.2 million | $6.4 million | $23.3 million | $11.7 million |
| Basic and diluted loss per share | $0.51 | $0.29 | $0.99 | $0.53 |
- Q2 revenue rose 49% year over year; first-half revenue rose 46%. Management attributed growth to higher Zio service volume, expanded payor coverage and contracts, greater physician acceptance, and salesforce expansion.
- Operating expenses increased 64% in both Q2 and the first half. SG&A growth reflected increased headcount, commissions, stock-based compensation, and professional fees; R&D also increased with staffing and development activity.
- Cash used in operating activities was $19.6 million in the first half, versus $7.4 million a year earlier. The company cited higher net loss and a $11.2 million increase in accounts receivable, partly offset by noncash expenses.
- At June 30, cash and cash equivalents were $19.2 million and short-term investments were $66.7 million, or $85.9 million combined. Total current assets were $109.7 million and current liabilities were $19.7 million.
- Debt was $32.6 million, primarily under the Pharmakon loan, versus $34.0 million at year-end 2017. The company repaid the $1.5 million CHCF note plus $0.2 million accrued interest in May. It reported compliance with debt covenants. SVB revolving-credit availability was $7.4 million; the facility’s stated maturity was December 4, 2018.
- Capital expenditures were $2.2 million in the first half. Cash from financing activities was $2.0 million, including $5.1 million of stock issuance proceeds, offset in part by debt repayment and tax withholding on vested restricted stock.
Material changes, outlook, and risks
- Revenue growth outpaced cost-of-revenue growth, and gross margin improved. Management attributed margin gains to manufacturing efficiencies, better fixed-cost absorption, and algorithm and workflow improvements.
- Losses widened as operating expenses grew faster than revenue. The company reported an accumulated deficit of $178.6 million and stated it expects continued losses while investing in adoption, reimbursement, products, and infrastructure.
- The company adopted ASC 606 on January 1, 2018. Adoption increased Q2 reported revenue by $0.2 million and reduced Q2 net loss by $1.2 million versus the prior method; for the first half, it reduced reported revenue by $1.0 million and reduced net loss by $1.7 million. Prior periods were not restated.
- The company recently received FDA clearance for Zio AT, designed to transmit data during the monitoring period. Its commercial adoption and contribution to results are not yet established in this filing.
- No specific numerical revenue, earnings, or margin guidance was provided. Management expects revenue to grow with broader coverage, sales expansion, and product development; it also expects research, sales, and administrative costs to increase.
- Key risks include dependence on the Zio service, reimbursement rates and payor contracting, collection estimates and billing delays, competition, rapid-growth execution, single-source components and manufacturing concentration, regulatory compliance, data security, and continued losses. Federal government agencies accounted for approximately 38% of revenue in both Q2 and the first half.
- Future minimum operating lease payments totaled $12.2 million as of June 30, 2018. The company reported no material legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether revenue growth continues and whether increasing accounts receivable and collection allowances convert into cash; first-half provision for doubtful accounts and contractual allowances was $6.4 million.
- Whether expense growth moderates enough to improve operating leverage and whether gross-margin gains persist.
- Current status of payor contracts, reimbursement rates, denials, and cash collection experience, including exposure to government payors and non-contracted claims.
- Commercial uptake, costs, and reimbursement for Zio AT, alongside product quality and regulatory compliance.
- Liquidity and financing plans, including the SVB facility’s December 2018 maturity, Pharmakon covenant requirements, and the company’s ability to fund continued operating losses.