iRhythm Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The company provides wearable cardiac-monitoring services, principally its Zio XT service, and operates as one segment. Substantially all revenue is generated in the United States.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $47.2 million | $30.6 million |
| Gross profit / gross margin | $35.5 million / 75% | $22.0 million / 72% |
| Operating expenses | $43.5 million | $32.6 million |
| Operating loss | $8.0 million | $10.6 million |
| Net loss | $8.0 million; $0.33 per share | $11.1 million; $0.47 per share |
| Cash used in operating activities | $17.1 million | $13.3 million |
- Revenue grew 54%, primarily from increased Zio service volume, broader coverage, more contracted payors, physician acceptance, and sales-force expansion. Commercial payor revenue rose to $24.3 million from $13.5 million; CMS revenue was $12.7 million versus $8.4 million; healthcare institution revenue was $10.1 million versus $8.6 million.
- Gross margin increased to 75% from 72%, reflecting manufacturing efficiencies, lower technician labor per device, and fixed-cost absorption. Cost of revenue rose 36%, slower than revenue.
- Research and development expense increased 68% to $6.8 million, including costs for Zio AT and other development. Selling, general and administrative expense rose 28% to $36.7 million, driven mainly by hiring and sales-force support; bad debt expense also increased.
- At March 31, cash and cash equivalents were $28.2 million and short-term investments were $30.5 million, totaling $58.7 million. Current assets were $93.3 million and current liabilities $28.5 million. Accumulated deficit was $211.5 million.
- Operating cash use increased year over year, notably as accounts receivable grew by $11.0 million with higher revenue. Investing cash inflow of $26.4 million primarily reflected investment maturities, not operating cash generation. Capital expenditures were $1.6 million.
- Debt was $34.9 million, net of discounts and issuance costs. The $35.0 million SVB term loan has interest-only payments through October 2020, then 36 monthly principal-and-interest payments; the revolving credit line had no balance drawn. The company reported compliance with loan covenants at March 31.
Changes, outlook, and material matters
- Management expects revenue to increase as it expands sales, coverage and contracted payors, and develops products and indications. It also expects operating expenses to rise with hiring and product development. The filing provides no specific numerical guidance or forecast.
- Management expects continued losses while investing in adoption, reimbursement, sales infrastructure, and product development; profitability is not assured. Revenue can be seasonal, with lower use during summer and holiday periods and effects from insurance-deductible resets.
- Third-party payors represented approximately 91% of revenue, compared with 85% a year earlier; federal agencies accounted for approximately 35% versus 37%. CMS reimbursement, payor contracting and collection estimates are important revenue sensitivities. Zio XT temporary Category III CPT codes extend through 2022; conversion to permanent codes and future reimbursement levels are uncertain.
- The San Francisco headquarters lease is expected to commence around Q2 2019, with a 12-year term, annual rent of $10.0 million escalating 3% annually, and a $6.9 million standby letter of credit. The lease includes a tenant improvement allowance of up to $2.4 million.
- The company adopted the new lease standard on January 1, 2019, recording $10.4 million of right-of-use assets and $10.2 million of lease liabilities, with no cumulative-effect adjustment.
- The filing revises certain 2018 interim allowance disclosures: contractual adjustments had been partly classified as doubtful-account provisions. The company said the error was immaterial and did not affect previously issued balance sheets, statements of operations, or cash flows.
- Disclosure controls were not effective at March 31 because of unremediated material weaknesses in the control environment, financial close and journal-entry review, and revenue/accounts-receivable reserve review. Management said the financial statements fairly present the results in all material respects and described remediation efforts, including finance staffing, an internal audit director, and improved controls.
- No material legal proceedings were reported. Key risks include reimbursement and collection uncertainty, continued losses, competition and adoption, scaling operations and supply, product and regulatory compliance, data security, and the disclosed control weaknesses.
Important facts for investors to verify
- Whether revenue growth and improved gross margin persist, and whether increased selling and development spending can translate into sustainable operating leverage.
- Receivable quality, collection timing, and the assumptions behind contractual allowances and doubtful-account reserves, given the $11.0 million quarterly increase in receivables and prior disclosure error.
- CMS and commercial-payor coverage, contracted reimbursement rates, and progress toward permanent CPT codes before the temporary codes expire.
- Cash-burn trajectory, available liquidity, debt-service obligations, covenant headroom, and the financial impact of the new headquarters lease.
- Progress in remediating material weaknesses and whether controls operate effectively for a sufficient period to support management’s conclusion.