iRhythm Technologies, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context
iRhythm is a digital healthcare company whose Zio service combines wearable ECG monitors (Zio XT and Zio AT), cloud-based analytics and technician review to support diagnosis of cardiac arrhythmias. Substantially all revenue came from Zio services in the United States. The company reported more than one million patients served and approximately 400 million hours of curated heartbeat data. Third-party payors provided approximately 88% of 2018 revenue; CMS and other federal agencies accounted for approximately 37%.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $147.3 million | $98.5 million |
| Gross profit / gross margin | $108.7 million / 74% | $70.8 million / 72% |
| Operating expenses | $152.3 million | $98.1 million |
| Loss from operations | $43.6 million | $27.3 million |
| Net loss | $48.3 million | $29.4 million |
| Net loss per share, diluted | $2.02 | $1.30 |
| Cash used in operating activities | $29.1 million | $14.9 million |
| Cash and cash equivalents at year-end | $20.0 million | $8.7 million |
| Short-term investments at year-end | $58.3 million | $93.7 million |
| Working capital at year-end | $76.2 million | $98.7 million |
| Debt carrying value at year-end | $34.9 million | $34.0 million |
Revenue grew 50%, attributed to higher service volume, broader coverage and contracting, increased physician acceptance, and sales-force expansion. Gross margin improved through manufacturing efficiencies, lower technician labor per device and overhead absorption. Operating expenses rose 55%, led by growth-related hiring and sales infrastructure. The company remained loss-making, with an accumulated deficit of $203.5 million.
Fourth-quarter 2018 revenue was $43.2 million versus $28.2 million in Q4 2017; gross profit was $32.6 million versus $20.5 million. Net loss was $14.7 million versus $11.1 million, and diluted loss per share was $0.61 versus $0.48.
Cash used in investing activities was $34.1 million of cash provided in 2018, largely reflecting investment maturities and sales exceeding purchases; capital expenditures were $5.2 million. Financing activities provided $6.3 million, including a $35 million term loan and employee equity proceeds, offset mainly by $31.5 million of debt repayments. Cash used in operations increased year over year. The filing reports $78.3 million of cash, cash equivalents and investments at year-end.
Material changes and notable items
- In October 2018, iRhythm refinanced its Pharmakon debt with a $35 million Silicon Valley Bank term loan. Interest-only payments run through 2020, followed by 36 monthly principal-and-interest payments. The debt is secured by substantially all assets; the company reported covenant compliance at year-end. Its revolving line had no balance outstanding, with $1.7 million then available to borrow.
- The Pharmakon loan repayment resulted in a $3.0 million loss on extinguishment of debt. iRhythm also repaid a $1.5 million California HealthCare Foundation note in May 2018.
- The company adopted ASC 606 in 2018 using the modified retrospective method. Adoption increased opening retained earnings by $1.4 million; reported 2018 revenue was $2.0 million higher and net loss $3.0 million lower than they would have been without adoption.
- In October 2018, iRhythm signed a 12-year San Francisco headquarters lease, expected to commence in 2019. Total operating-lease commitments were $150.5 million, including $98.2 million due after five years.
- The company had 748 full-time employees and 112 sales representatives at year-end, compared with 86 representatives in 2017.
Outlook, risks and contingencies
Management expects to pursue further market penetration, payor contracting and reimbursement coverage, sales-force expansion, product development and additional clinical-use cases. It also expects R&D and selling, general and administrative expenses to increase as it invests in growth. The filing gives no specific revenue, earnings or cash-flow guidance. Management expects continued losses and does not assure future profitability.
Key risks include dependence on the Zio service, reimbursement and CMS policy changes, uncertain collections and estimates for non-contracted payors, competition, the ability to scale service and manufacturing, single-source component supply, regulatory compliance, patient-data security, and product-liability exposure. Management noted seasonal demand patterns and sensitivity to physician and patient vacations and insurance-deductible resets. No material litigation was reported.
Financial reporting controls: Management and the independent auditor identified material weaknesses in the control environment, financial-statement close and revenue/accounts-receivable controls. The auditor concluded internal control over financial reporting was ineffective, while giving an unmodified opinion on the financial statements. The filing also contains a conflicting statement in a later section that management concluded controls were effective; investors should clarify this inconsistency. The company disclosed an immaterial contractual-allowance analysis error and described remediation efforts targeted for 2019.
Important facts for investors to verify
- Whether the material weaknesses and the contradictory internal-control statements were resolved in subsequent filings, and whether remediation was independently tested.
- How much revenue and cash collection depend on CMS and commercial payors, including changes in reimbursement rates, coverage and contract terms.
- Whether accounts-receivable growth, bad-debt provisions and contractual allowances are tracking collections; these estimates materially affect reported revenue and cash flow.
- The pace of operating cash burn and the company’s capacity to service secured debt while funding growth and substantial lease commitments.
- Whether sales-force expansion, Zio AT adoption and cost efficiencies improve operating leverage enough to narrow losses.