iRhythm Technologies, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The company provides wearable cardiac monitoring and analytics through its ZIO Service; substantially all revenue came from U.S. customers. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $25.0 | $16.8 | $70.3 | $45.4 |
| Gross profit / margin | $18.1 / 72% | $11.5 / 69% | $50.3 / 72% | $30.3 / 67% |
| Operating expenses | $24.1 | $14.2 | $67.0 | $41.5 |
| Loss from operations | $(6.0) | $(2.7) | $(16.6) | $(11.2) |
| Interest expense | $(0.9) | $(0.8) | $(2.5) | $(2.4) |
| Net loss | $(6.5) | $(4.1) | $(18.3) | $(14.6) |
| Basic and diluted loss per share | $(0.29) | $(2.80) | $(0.81) | $(10.20) |
Revenue grew 49% in Q3 and 55% year to date, mainly from increased ZIO Service volume and improved contracted rates. Gross margin rose as contracted revenue represented a more favorable mix and the company cited manufacturing efficiencies, lower material costs, workflow improvements, and fixed-cost absorption. Operating expenses increased substantially, driven by hiring and expansion, professional services, facilities, and stock-based compensation. The company remained loss-making; year-to-date stock-based compensation was $7.0 million. Per-share comparisons are affected by the substantial change in weighted-average shares following the 2016 IPO.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $20.4 million at September 30, 2017, compared with $51.6 million at year-end 2016; short-term investments were $87.0 million. Combined cash and short-term investments were approximately $107.4 million.
- Current assets were $122.8 million and current liabilities $16.0 million. Accounts receivable, net, was $12.0 million; the filing also reports material doubtful-account and contractual allowances.
- Nine-month operating cash use was $11.2 million, versus $15.7 million in 2016. Investing cash use was $24.1 million, including purchases and maturities of investments and $2.7 million of property and equipment purchases. Financing provided $4.1 million, principally from employee stock transactions. Cash decreased $31.2 million over the period.
- Balance-sheet debt, including current and noncurrent portions, was approximately $33.5 million, net of discounts and issuance costs. The Pharmakon facility carried a 9.5% fixed rate and matures in December 2021; $32.7 million of Pharmakon principal and interest was reported outstanding in MD&A. No amount was drawn on the SVB revolving line, with approximately $7.7 million available to borrow. The company reported compliance with debt covenants at quarter-end.
Changes, outlook, and material risks
- For the nine-month period, revenue growth outpaced cost-of-revenue growth, improving gross margin by five percentage points. However, operating expenses rose 61%, and net loss increased by $3.6 million.
- Management provided no specific numerical revenue or earnings guidance. It expects revenue to benefit from broader contracting, sales-force expansion, greater adoption, and potential product and indication development, while anticipating higher spending on sales, R&D, and public-company requirements. It expects continued losses and does not assure future profitability.
- The company planned to adopt ASC 606 on January 1, 2018 using the modified retrospective method. Management expected changes to net revenue presentation, including treating $1.7 million of patient-responsibility bad debt for the first nine months of 2017 as a reduction of revenue, and possible timing changes for non-contracted claims.
- Key exposures include dependence on the ZIO Service as the principal offering; reimbursement rates, coverage, collections, and contracting; government payor concentration (about 38% of nine-month revenue); and billing complexity. Single-source suppliers for critical components and reliance on one U.S. manufacturing site create supply and operational risks.
- Other notable risks include scaling manufacturing and clinical operations, competition, product and regulatory compliance, data security and privacy, and the ability to retain personnel. The filing says ZIO AT had recently received FDA clearance. Management reported no material legal proceedings known to it and no material litigation contingency identified.
- A new Houston clinical-center lease was entered into in May 2017, expiring in 2027; disclosed future minimum lease payments were $15.6 million. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and improved contracted rates continue, and how much growth comes from volume versus pricing and payor mix.
- Collections, receivable quality, and allowance assumptions—especially for non-contracted claims and patient responsibility—and the eventual impact of ASC 606.
- Cash burn and liquidity runway, including investment availability, planned expansion costs, and the reconciliation of reported debt and accrued interest amounts.
- Compliance with Pharmakon and SVB liquidity and revenue covenants, and the effect of debt service and secured collateral on financial flexibility.
- Whether margin gains persist as the company expands, and whether operating expense growth can moderate while losses continue.
- Progress in scaling operations and diversifying critical suppliers, and the commercial uptake and reimbursement of ZIO AT and other planned offerings.