iRhythm Technologies, Inc. — Q1 2018 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2018. iRhythm is a digital health company providing cardiac monitoring services, principally its Zio XT service, which combines a wearable monitor with cloud-based analysis. The company recently received FDA clearance for Zio AT. Substantially all revenue is generated in the United States.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $30.6 million | $21.4 million | +43% |
| Gross profit / margin | $22.0 million / 72% | $15.1 million / 70% | Margin +2 percentage points |
| Operating expenses | $32.6 million | $19.8 million | +64% |
| Operating loss | $10.6 million | $4.7 million | Loss increased |
| Net loss / diluted loss per share | $11.1 million / $0.47 | $5.3 million / $0.24 | Loss increased |
| Cash used in operations | $13.3 million | $6.4 million | Cash use increased |
- Revenue growth reflected higher Zio service volume, broader coverage and more payor contracts, physician acceptance, and sales-force expansion. Reported gross-margin improvement was attributed to manufacturing efficiencies, lower technician labor per device, and overhead absorption.
- Selling, general and administrative expense rose 66% to $28.6 million, primarily due to higher payroll and personnel costs, commissions, stock-based compensation, and professional fees. Research and development expense increased 53% to $4.0 million, mainly due to headcount and related costs.
- At March 31, cash and cash equivalents were $16.5 million, short-term investments $74.3 million, and total current assets $111.5 million. The company reported an accumulated deficit of $166.4 million.
- Total debt was approximately $34.0 million, including $32.5 million under the Pharmakon loan and $1.5 million under the California HealthCare Foundation note. Pharmakon debt bears 9.5% interest and matures in December 2021. The CHCF note was due in May 2018. No SVB revolver balance is reported; borrowing availability was $6.4 million at quarter-end, subject to eligibility and covenants.
- Total liabilities were $49.7 million and stockholders’ equity was $72.6 million. Future minimum lease payments were $13.4 million as of March 31, 2018.
Material changes and accounting
- Operating cash use more than doubled year over year, reflecting the larger net loss and working-capital demands, including a $5.5 million increase in accounts receivable and lower accrued liabilities. Receivables growth and collection timing are important to monitor.
- Investing activities provided $21.5 million, primarily because $28.0 million of investments matured; this was partly offset by investment purchases and $1.1 million of capital expenditures. The increase in cash was therefore not generated by operations.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. It recorded a $1.4 million cumulative adjustment to opening accumulated deficit. For Q1 2018, adoption reduced reported revenue by $1.2 million and SG&A by $1.7 million, and reduced net loss by $0.5 million versus amounts calculated without ASC 606. Prior-year figures were not retrospectively adjusted.
- Reported revenue estimates depend on judgments about expected reimbursement and collection. Contracted and non-contracted payor estimates can affect revenue; the company records certain healthcare institution and CMS defaults as bad-debt expense.
Outlook, risks and other matters
- No numerical revenue, earnings, or cash-flow guidance is provided. Management expects revenue to grow with increased coverage and contracting, expanded sales and marketing, greater awareness, and new products or indications. It also expects absolute operating expenses to rise as the company invests in personnel, sales infrastructure, and product development.
- Management expects further cost-per-service reductions through purchasing efficiencies, algorithm improvements, workflow automation, and spreading fixed costs over greater volume. These are expectations, not guaranteed outcomes.
- The company expects continued losses and states it may need additional financing depending on growth, sales-force expansion, and product-development needs. Management cautions that Q1 results may not predict full-year performance; physician and patient vacations and insurance-deductible timing may affect demand.
- Key risks include dependence on the Zio service, reimbursement and collection uncertainty, reliance on single-source suppliers for critical components, scaling manufacturing and clinical operations, competition, regulatory compliance, and privacy and cybersecurity exposure. Federal government agencies accounted for approximately 37% of revenue in both comparative quarters; CMS accounted for approximately 28% of Q1 2018 revenue.
- The company was in compliance with Pharmakon and SVB loan covenants at quarter-end. Debt is secured by substantially all assets; covenant breaches could accelerate repayment, and a change in control may permit Pharmakon to demand repayment. The SVB facility matures in December 2018.
- Management reported no material legal proceedings and stated disclosure controls were effective at a reasonable-assurance level. ASC 606 implementation changed revenue-related processes and controls; no other material quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether reported revenue growth translates into timely collections, given the increase in receivables, contractual allowances, and operating cash use.
- Revenue and loss comparability after ASC 606 adoption, including the effect of the modified retrospective method and the unadjusted prior-year period.
- Progress in expanding payor contracts and maintaining reimbursement rates, particularly for CMS and non-contracted commercial payors.
- Cash runway under continued operating losses, debt service, the May 2018 CHCF note maturity, and the December 2018 SVB facility maturity.
- Ability to scale Zio AT and manufacturing while managing single-source supply, product quality, regulatory, and data-security risks.