iRhythm Technologies, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company provides wearable cardiac monitoring and related analytics, primarily through its Zio service. Substantially all revenue came from U.S. customers. Financial statements are unaudited.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $54.7 million | $38.4 million | $155.4 million | $105.5 million |
| Gross profit / margin | $40.9 million / 75% | $28.5 million / 74% | $116.9 million / 75% | $77.5 million / 73% |
| Operating expenses | $59.1 million | $37.7 million | $153.9 million | $110.1 million |
| Operating loss | $(18.3) million | $(9.2) million | $(37.0) million | $(32.6) million |
| Net loss | $(18.3) million | $(9.7) million | $(37.3) million | $(34.1) million |
| Net loss per share, diluted | $(0.72) | $(0.40) | $(1.50) | $(1.44) |
Revenue grew 42% in Q3 and 47% for the nine-month period, primarily from higher Zio service volume, expanded coverage and payor contracts, greater physician acceptance, and salesforce growth. Gross margin improved, which management attributed to manufacturing-cost reductions, better fixed-cost absorption, and lower labor costs per device.
Q3 research and development expense rose 165% to $13.5 million, including $5.0 million for the Verily collaboration. Selling, general and administrative expense increased 40% to $45.6 million, reflecting hiring and stock-based compensation, higher bad-debt provision, and headquarters rent. The nine-month provision for doubtful accounts and contractual allowances was $17.6 million, versus $9.6 million in the prior-year period.
Cash, liquidity and debt
- At September 30, 2019, cash and cash equivalents were $34.6 million and short- and long-term investments totaled $127.1 million. Combined cash and investments were approximately $161.8 million, as stated in market-risk disclosures.
- For the first nine months, operating cash use was $17.0 million, investing cash use was $76.8 million, and financing provided $108.4 million. Financing included $107.1 million net proceeds from a September public offering.
- Capital expenditures were $8.6 million. Accounts receivable increased $22.8 million, principally with higher revenue.
- Reported debt was $34.9 million. The SVB term loan carries interest-only payments through October 2020, then 36 monthly principal-and-interest payments; no amount was drawn on the separate revolving credit line at quarter-end. The company reported covenant compliance at September 30, 2019.
- Operating lease liabilities totaled $95.1 million, with lease terms extending through 2031. The San Francisco headquarters lease commenced in May 2019; the company moved into the new headquarters in October.
Material changes, unusual items and outlook
- Financial-statement revisions: The company identified errors in historical revenue, contractual allowances, doubtful-account allowances and other items. It said the errors were not material to any prior annual or interim period individually, but that correcting their cumulative effect was significant to 2019 results. It revised previously issued periods and said further revisions would be reflected in later filings.
- Control weaknesses: Management concluded disclosure controls were ineffective at September 30, 2019, citing material weaknesses in the control environment, close and review processes, and revenue and receivables accounting. Remediation was underway; management stated the weaknesses would not be considered remediated until controls had operated effectively for a sufficient period and been tested.
- Verily collaboration: The 24-month agreement targets next-generation atrial-fibrillation products. The company paid $5.0 million upfront and may owe up to $12.75 million more upon development and regulatory milestones. Commercialization would require a later agreement.
- Revenue and reimbursement risks: Government agencies accounted for about 36% of Q3 revenue and 33% for the nine-month period. The company depends on payor coverage and reimbursement, including CMS codes and rates; new Category I CPT codes had been approved by the AMA panel, but reimbursement valuation remained pending. Non-contracted payor collections and estimates can be uncertain.
- Guidance: No specific numerical revenue or earnings guidance was provided. Management expected revenue to grow with expansion of sales, coverage, indications and products, and anticipated continued investment in R&D and sales infrastructure. It also described efforts to improve service costs and margins.
- Subsequent event: On November 12, 2019, the company entered a BMS services agreement with fees of up to $6.8 million under the first statement of work.
- The company reported a history of losses and expected further losses. It also cited risks including reimbursement changes, billing and collection uncertainty, growth and execution demands, supplier concentration, competition, regulatory compliance, and data security. Management said it was not aware of legal matters expected to have a material adverse effect.
Most important facts for investors to verify
- How the disclosed accounting errors and restatements affect comparable results, revenue reserves, receivables and future reporting reliability.
- Progress and independent testing of remediation for the material weaknesses in financial reporting controls.
- Underlying receivables quality, collection trends, bad-debt and contractual-allowance estimates, and exposure to non-contracted payors.
- CMS and commercial reimbursement rates, including final valuation and implementation of the new CPT codes.
- Verily milestone obligations, development progress, and whether the collaboration leads to a viable commercialization arrangement.
- Debt disclosure consistency: the balance sheet reports $34.9 million of debt and the debt note describes a term loan, while a risk-factor passage refers to $34.9 million outstanding under a revolving facility. The filing separately states that the revolving line had no balance; investors should confirm the term-loan balance and the apparent wording inconsistency.