iRhythm Technologies, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results; dollar amounts below are in millions unless stated otherwise. iRhythm sells its ZIO ambulatory cardiac monitoring service, combining a wearable ECG patch with cloud-based analysis and technician review. Revenue was substantially all U.S.-based.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $16.8 | $9.3 | $45.4 | $25.3 |
| Gross profit / margin | $11.5 / 69% | $5.6 / 60% | $30.3 / 67% | $14.7 / 58% |
| Operating expenses | $14.2 | $11.1 | $41.5 | $29.5 |
| Operating loss | $(2.7) | $(5.5) | $(11.2) | $(14.7) |
| Net loss | $(4.1) | $(5.7) | $(14.6) | $(15.1) |
| Basic and diluted loss per share | $(2.80) | $(4.07) | $(10.20) | $(11.07) |
For the nine months, cash used in operations was $15.6 million, versus $12.4 million in 2015; investing cash outflow was $1.8 million versus $1.5 million. Financing used $2.0 million, mainly for IPO-related costs, compared with $12.4 million provided in 2015, principally from preferred-stock proceeds. Cash and cash equivalents fell to $5.8 million at September 30 from $25.2 million at December 31, 2015.
At quarter-end, total assets were $27.4 million, current assets $17.8 million and current liabilities $9.3 million. Accounts receivable was $9.3 million, up from $5.6 million at year-end. Balance-sheet debt, net of discount and issuance costs, was $31.8 million; the filing separately cites $32.8 million of principal and interest outstanding. The company also reported $3.9 million of preferred-stock warrant liabilities and an accumulated deficit of $120.9 million.
Changes and management commentary
- Revenue grew 80% year over year in Q3 and 79% for the nine-month period, primarily on greater ZIO Service volume, expanded payor coverage and contracts, physician acceptance, and sales-force growth.
- Gross margin improved 9 percentage points in both comparison periods. Management attributed the improvement to manufacturing efficiencies, lower technician labor per device from algorithm and workflow improvements, fixed-cost absorption, and a more favorable contracted-payor mix.
- Nine-month SG&A rose 47% to $36.7 million, reflecting higher staffing, professional services, facilities, travel, bad-debt expense and marketing. R&D rose 7% to $4.8 million. Higher debt-related interest and warrant remeasurement expense partly offset improved operating results.
- Management said it expects revenue to increase with broader coverage, sales expansion, greater awareness and product development, and expects absolute R&D and sales and marketing spending to rise. No quantified revenue, earnings or margin guidance is provided.
Capital, outlook, risks and unusual items
- After quarter-end, the IPO closed October 25, 2016: 7,238,235 shares were sold at $17 per share, producing approximately $110.9 million net proceeds. Preferred stock converted into common stock. Management said quarter-end cash, IPO proceeds, operating receipts and borrowing availability should fund anticipated needs for at least 12 months.
- The company reported prior going-concern doubt in the auditor’s 2015 report, citing recurring operating losses and negative cash flows; management considered the subsequent IPO proceeds in its current liquidity assessment.
- Pharmakon term debt included a $30 million Tranche A, bearing 9.5% interest, with 50% of interest added to principal during the first eight quarters. No Tranche B draw had been made. Minimum trailing-revenue covenants begin in June 2017; breaches may trigger remedies or acceleration, subject to an equity-cure provision. SVB’s revolving facility had $5.8 million of borrowing availability at September 30, with no revolver balance reported. Debt is secured by substantially all assets.
- A new San Francisco lease began in September 2016 and runs to February 2020; total base rent is approximately $13.6 million. Minimum lease payments across disclosed leases total $16.6 million. A $3.1 million letter of credit was obtained in connection with the new lease.
- Key risks include continued losses and cash use; reimbursement rates, payor contracting and collection uncertainty; rising receivables and allowances; reliance on the ZIO Service as the main product; competition, execution and scaling challenges; supplier concentration; and healthcare, FDA, privacy and other regulatory compliance. Revenue recognition for noncontracted payors depends in part on notification or cash receipt, adding timing uncertainty.
- The filing reports no material legal proceedings known to management. Potential indemnification payments are not quantifiable, but no material accrual was recorded. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and gross-margin gains persist, particularly as payor and customer mix changes.
- Receivables aging, collection performance, contractual allowances and bad-debt assumptions, given the substantial receivables increase and cash-flow use.
- Post-IPO cash balance, cash-burn trajectory and actual liquidity runway, including compliance with minimum-liquidity and future revenue covenants.
- Debt principal, accrued interest, borrowing availability and the financial impact of lease commitments and the $3.1 million letter of credit.
- Progress in securing payor contracts and reimbursement coverage, and execution of product, sales-force and operational expansion plans.