Washington, D.C. 20549
Form 10-Q
(Mark One)
For the quarterly period ended June 30, 2020
Commission file number: 001-37918
iRhythm Technologies, Inc.
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
699 8th Street Suite 600
San Francisco,California94103
(Address of Principal Executive Offices)(Zip Code)
(415) 632-5700
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No   
As of July 31, 2020, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 27,401,767.
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, Par Value $.001 Per ShareIRTCThe Nasdaq Stock Market

Page No


This Quarterly Report on Form 10-Q contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

the impact of the COVID-19 pandemic on our operations and financial results;
plans to conduct further clinical studies;
our plans to modify our current products, or develop new products, to address additional indications;
the expected growth of our business and our organization;
our expectations regarding government and third-party payor coverage and reimbursement;
our expectations regarding the size of our sales organization and expansion of our sales and marketing efforts in international geographies;
our expectations regarding revenue, cost of revenue, cost of service per device, operating expenses, including research and development expense, sales and marketing expense and general and administrative expenses;
our ability to retain and recruit key personnel, including the continued development of a sales and marketing infrastructure;
our ability to obtain and maintain intellectual property protection for our products;
our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for, or ability to obtain, additional financing;
our ability to identify and develop new and planned products and acquire new products;
our ability to remediate our material weaknesses over financial reporting;
our financial performance; and
developments and projections relating to our competitors or our industry.
We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the SEC as exhibits to the Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
June 30,
December 31,
Current assets:
Cash and cash equivalents $81,730  $20,462  
Short-term investments33,196  120,089  
Accounts receivable, net of allowances for doubtful accounts of $11,265 and $9,049 as of June 30, 2020 and December 31, 2019, respectively
22,877  23,867  
Inventory4,989  4,037  
Prepaid expenses and other current assets3,743  4,337  
Total current assets146,535  172,792  
Long-term investments  8,030  
Property and equipment, net30,199  26,464  
Operating lease right-of-use assets87,758  90,124  
Goodwill862  862  
Other assets10,870  7,940  
Total assets$276,224  $306,212  
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$5,012  $8,243  
Accrued liabilities25,170  32,714  
Deferred revenue1,197  1,251  
Debt, current portion7,778  1,944  
Operating lease liabilities, current portion8,157  7,914  
Total current liabilities47,314  52,066  
Debt, noncurrent portion27,164  32,989  
Operating lease liabilities, noncurrent portion83,800  85,748  
Total liabilities158,278  170,803  
Commitments and contingencies (Note 6)
Stockholders’ equity:
    Preferred stock, $0.001 par value – 5,000,000 shares authorized at June 30, 2020 and December 31, 2019; and none issued and outstanding at June 30, 2020  and December 31, 2019
Common stock, $0.001 par value – 100,000,000 shares authorized at June 30, 2020 and December 31, 2019; 27,364,151 and 26,682,720 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
25  25  
Additional paid-in capital408,096  395,695  
Accumulated other comprehensive income181  82  
Accumulated deficit(290,356) (260,393) 
Total stockholders’ equity117,946  135,409  
Total liabilities and stockholders’ equity$276,224  $306,212  
The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
Three Months Ended
June 30,
Six Months Ended
June 30,
Revenue, net$50,878  $52,441  $114,413  $100,775  
Cost of revenue15,484  13,012  31,547  24,785  
Gross profit35,394  39,429  82,866  75,990  
Operating expenses:
Research and development12,542  7,833  20,957  14,532  
Selling, general and administrative43,014  42,161  91,244  80,227  
Total operating expenses55,556  49,994  112,201  94,759  
Loss from operations(20,162) (10,565) (29,335) (18,769) 
Interest expense(381) (440) (761) (849) 
Other income, net237  295  742  670  
Loss before income taxes(20,306) (10,710) (29,354) (18,948) 
Income tax provision131  15  148  27  
Net loss$(20,437) $(10,725) $(29,502) $(18,975) 
Net loss per common share, basic and diluted$(0.75) $(0.43) $(1.09) $(0.77) 
Weighted-average shares, basic and diluted27,176,601  24,724,808  27,008,236  24,600,250  
The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
Three Months Ended
June 30,
Six Months Ended
June 30,
Net loss
$(20,437) $(10,725) $(29,502) $(18,975) 
Other comprehensive income:
Net change in unrealized gains (losses) on available-for-sale securities(183) 33  99  76  
Comprehensive loss
$(20,620) $(10,692) $(29,403) $(18,899) 

The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30,
Cash flows from operating activities
Net loss
$(29,502) $(18,975) 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
3,220  1,310  
Stock-based compensation
10,073  11,663  
Accretion of discounts on investments, net and other(66) (357) 
Provision for doubtful accounts and contractual allowances
13,524  12,370  
Amortization of operating lease right-of-use assets
2,986  5,144  
Changes in operating assets and liabilities:
Accounts receivable
(12,994) (19,414) 
(1,015) (743) 
Prepaid expenses and other current assets
592  235  
Other assets
(2,728) (1,156) 
Accounts payable
(4,540) 1,019  
Accrued liabilities
(9,689) (3,257) 
Deferred revenue
(54) (143) 
Operating lease liabilities
(2,326) (3,838) 
Net cash used in operating activities
(32,519) (16,142) 
Cash flows from investing activities
Purchases of property and equipment
(5,586) (5,277) 
Purchases of available-for-sale investments
(8,009) (44,976) 
Sales of available-for-sale investments14,525    
Maturities of available-for-sale investments
88,645  60,550  
Net cash provided by investing activities
89,575  10,297  
Cash flows from financing activities
Proceeds from issuance of common stock9,361  5,409  
Tax withholding upon vesting of restricted stock awards
(5,149) (3,557) 
Other  (46) 
Net cash provided by financing activities
4,212  1,806  
Net increase (decrease) in cash and cash equivalents
61,268  (4,039) 
Cash and cash equivalents beginning of period
20,462  20,023  
Cash and cash equivalents end of period
$81,730  $15,984  
Supplemental disclosures of cash flow information
Interest paid
$796  $836  
Non-cash investing and financing activities
Property and equipment costs included in accounts payable and accrued liabilities
$1,369  $300  
Right-of-use assets obtained in exchange for new operating lease liabilities
$621  $  

The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statement of Stockholders’ Equity
(In thousands, except share data)

Common StockAccumulated Other Total
SharesAmountAdditional Paid-In CapitalAccumulated DeficitComprehensive Income (Loss)Stockholders' Equity
Balances at March 31, 202027,026,975$25  $394,507  $(269,919) $364  $124,977  
Issuance of common stock in connection with employee equity incentive plans, net337,176  —  6,392  —  —  6,392  
Tax withholding upon vesting of restricted stock awards—  —  (687) —  —  (687) 
Stock-based compensation expense—  —  7,884  —  —  7,884  
Net loss—  —  —  (20,437) —  (20,437) 
Net change in unrealized gain on investments—  —  —  —  (183) (183) 
Balances at June 30, 202027,364,151  $25  $408,096  $(290,356) $181  $117,946  

Common StockAccumulated OtherTotal
SharesAmountAdditional Paid-In CapitalAccumulated DeficitComprehensive Income (Loss)Stockholders' Equity
Balances at December 31, 201926,682,720  $25  $395,695  $(260,393) $82  $135,409  
Issuance of common stock in connection with employee equity incentive plans, net681,431  —  9,361  —  —  9,361  
Tax withholding upon vesting of restricted stock awards—  —  (5,149) —  —  (5,149) 
Stock-based compensation expense—  —  8,189  —  —  8,189  
Accounting Standards Codification 326 cumulative effect adjustment upon adoption
—  —  —  (461) —  (461) 
Net loss—  —  —  (29,502) —  (29,502) 
Net change in unrealized gain on investments—  —  —  —  99  99  
Balances at June 30, 202027,364,151  $25  $408,096  $(290,356) $181  $117,946  


Common StockAccumulated OtherTotal
SharesAmountAdditional Paid-In CapitalAccumulated DeficitComprehensive Income (Loss)Stockholders' Equity
Balances at March 31, 201924,628,643$24  $261,672  $(214,075) $27  $47,648  
Issuance of common stock in connection with employee equity incentive plans, net207,528(1) 3,288  —  —  3,287  
Tax withholding upon vesting of restricted stock awards—  —  (298) —  —  (298) 
Stock-based compensation expense—  —  6,807  —  —  6,807  
Net loss—  —  —  (10,725) —  (10,725) 
Net change in unrealized gain on investments—  —  —  —  33  33  
Balances at June 30, 201924,836,171  $23  $271,469  $(224,800) $60  $46,752  

Common StockAccumulated Other Total
SharesAmountAdditional Paid-In CapitalAccumulated DeficitComprehensive Income (Loss)Stockholders' Equity
Balances at December 31, 201824,368,073$23  $257,955  $(205,825) $(16) $52,137  
Issuance of common stock in connection with employee equity incentive plans, net468,098  5,408  —  —  5,408  
Tax withholding upon vesting of restricted stock awards—  —  (3,557) —  —  (3,557) 
Stock-based compensation expense—  —  11,663  —  —  11,663  
Net loss—  —  —  (18,975) —  (18,975) 
Net change in unrealized gain on investments—  —  —  —  76  76  
Balances at June 30, 201924,836,171  $23  $271,469  $(224,800) $60  $46,752  

The accompanying notes are an integral part of these condensed consolidated financial statements.

Notes to the Unaudited Condensed Consolidated Financial Statements

1. Organization and Description of Business
iRhythm Technologies, Inc. (the “Company”) was incorporated in the state of Delaware in September 2006. The Company is a digital healthcare company redefining the way cardiac arrhythmias are clinically diagnosed by combining wearable biosensing technology with cloud-based data analytics and deep-learning capabilities. The Company began commercial operations in the United States in 2009 following clearance by the U.S. Food and Drug Administration.

        The Company is headquartered in San Francisco, California, which also serves as a clinical center. The Company has additional clinical centers in Lincolnshire, Illinois and Houston, Texas and a manufacturing facility in Cypress, California. In March 2016, the Company formed a wholly-owned subsidiary in the United Kingdom. The Company manages its operations as a single operating segment. Substantially all of the Company’s assets are maintained in the United States. The Company derives substantially all of its revenue from sales to customers in the United States.
        On September 10, 2019, the Company issued and sold an aggregate of 1,575,342 shares (the "Shares") of common stock, in a public offering at a price of $73.00 per share. The Shares included the full exercise of the underwriters’ option to purchase an additional 205,479 shares of common stock. Total proceeds received from the offering were $107.3 million, after deducting discounts and issuance costs.
Revision of Prior Period Financial Statements
In 2019, and as previously disclosed in the Company’s Quarterly Report on Form 10-Q for the three and nine-months ended September 30, 2019, the Company identified errors in its historical accounting for revenues, contractual allowances, allowance for doubtful accounts and certain other items. The identified errors impacted the Company's accompanying 2017 annual financial statements, 2018 unaudited quarterly and audited annual financial statements and its 2019 unaudited first and second quarter financial statements. In accordance with SEC Staff Accounting Bulletin No. 99, "Materiality," and SEC Staff Accounting Bulletin No. 108,"Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements;" the Company evaluated the errors and determined that the related impacts were not material to any prior annual or interim period, but that correcting the cumulative impact of such errors would be significant to its results of operations for the three and nine months ended September 30, 2019 and the year-ended December 31, 2019. Accordingly, the Company has revised its previously issued financial statements to correct for such immaterial errors. A summary of the impact of the revisions to our previously issued interim financial statements for the three and six months ended June 30, 2019 is included in Note 13, Revision of Prior Period Financial Statements. The affected balances in the accompanying footnotes to these condensed consolidated financial statements have also been revised accordingly.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2019, and related disclosures, have been derived from the audited consolidated financial statements at that date but do not include all of the information required by GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair statement of the Company’s condensed consolidated financial information. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020, or for any other interim period or for any other future year.
The accompanying interim unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2019, included in the Company’s annual report on Form 10-K, filed with the SEC on March 2, 2020.


Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Risks and Uncertainties

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, contractual allowances, allowance for doubtful accounts, the useful lives of property and equipment, the recoverability of long-lived assets including the estimated usage of the printed circuit board assemblies (“PCBAs”), the incremental borrowing rate for operating leases, accounting for income taxes, the fair value of the Company’s common stock and stock-based compensation. Certain of these estimates are impacted by uncertainties surrounding COVID-19 such as revenue recognition, contractual allowances for revenue, allowance for doubtful accounts, and stock based compensation. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that management believes are reasonable under the circumstances, including assumptions as to future events. Actual results may differ from those estimates.

As a result of the COVID-19 pandemic, the Company has experienced significant business disruptions, including delays in receiving Zio XT back from patients with some patients not returning the device at all, restrictions on its ability to travel, reduction in access to customers due to diverted resources at hospitals, and shortened business hours as governments institute prolonged shelter-in-place and/or self-quarantine mandates.

Governmental mandates related to the COVID-19 pandemic have impacted Company personnel and personnel at third-party manufacturing facilities in the United States and other countries, and the availability or cost of materials, which could disrupt our supply chain and reduce margins. For instance, on or about March 16, 2020, the Health Officers of the counties of San Francisco (where the Company's headquarters is located), Santa Clara, San Mateo, Marin, Contra Costa and Alameda, where many employees are located, issued mandatory shelter-in-place orders and all employees transitioned to a remote work environment. The Company is also subject to orders in Southern California that temporarily shut down its manufacturing and distribution facilities in Cypress, California. For a limited number of employees who continue to support essential operations, including those at our manufacturing facilities, the Company has instituted protective equipment policies and, to the degree practical, social distancing measures to protect the safety of its employees. While the Company has continued to deliver its Zio service by operating with remote employees and essential employees on site, an extended implementation of these governmental mandates could further impact the Company's ability to effectively provide its Zio service, and could impede progress of all ongoing initiatives. Appropriate social distancing techniques and other measures at the Company's facilities have been implemented for the limited number of employees who have returned to work to support essential operations, and will not return until the risk to employee health has meaningfully diminished.

While hospital systems and healthcare facilities shift their focus and resources to treating COVID-19 patients and combating the spread of the coronavirus, the Company has adapted its service to meet the immediate needs of physicians, customers, and patients and significantly increased the utilization of its home enrollment service which allows patients to receive and wear the single-use Zio device without going to a healthcare facility.

Given the disruption in demand and an uncertain length of time to recovery, the Company adjusted its operating plan by taking steps to reduce operating spend. These steps included eliminating or delaying spending on non-essential programs, reducing spend on travel and consulting, implementing a hiring freeze, furloughing approximately 5% of employees, conducting a layoff of approximately 2% of employees and implementing temporary pay reductions from May 2020 to July 2020 for salaried workforce. Furthermore, from May 2020 to July 2020, the Company’s Chief Executive Officer, other named executive officers and other senior executives agreed to base salary reductions and the Board of Directors agreed to a reduction in its fees until business and economic conditions improve. In August 2020, the Company reinstated furloughed employees and removed pay reductions for its salaried employees.

The Company is continuously reviewing its liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 pandemic. The Company believes it will have adequate liquidity over the next 12 months to operate its business and to meet its cash requirements, although current liquidity will constrain the level of growth investments that can be made. As of June 30, 2020, the Company is in compliance with its financial covenants in its debt agreement.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid Relief, and Economic Security Act (the "CARES Act") to support businesses during the COVID-19 pandemic, including deferment of the employer portion of certain payroll taxes, refundable payroll tax credits, and technical amendments to tax depreciation methods for qualified improvement property. The Company is currently evaluating how to avail itself of the benefits of the CARES Act, such as the ability to defer the payroll tax and applying for tax credits, and how it may impact its financial position, results of operations and cash flows.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. This impact is having a material, adverse impact on liquidity, capital resources, operations and business and those of the third parties on which the Company relies, and could worsen over time. The extent to which the COVID-19 pandemic impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions to contain the COVID-19 pandemic or treat its impact, among others. The full extent of potential delays or impacts on the business, financial condition, cash flows and results of operations remains unknown.

Furthermore, capital markets and economies worldwide have been negatively impacted by the COVID-19 pandemic, which may result in a period of regional, national, and global economic slowdown or regional, national, or global recessions that could curtail or delay demand for the Zio service as well as increase the risk of customer defaults or delays in payments. COVID-19 and the current financial, economic, and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to the Company's performance, financial condition, volume of business, results of operations, and cash flows.


Short-term investments consist of debt securities classified as available-for-sale and have maturities greater than 90 days, but less than one year as of the balance sheet date. Long-term investments have maturities greater than one year as of the balance sheet date. All investments are carried at fair value based upon quoted market prices.

The Company periodically assesses its portfolio of debt investments for impairment. For debt securities in an unrealized loss position, this assessment first takes into account the intent to sell, or whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of these criteria are met, the debt security’s amortized cost basis is written down to fair value through interest and other, net. For debt securities in an unrealized loss position that do not meet the aforementioned criteria, the Company assesses whether the decline in fair value has resulted from credit losses or other factors.

The Company evaluates expected credit losses by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. Expected credit losses on available-for-sale debt securities are recognized in other income, net in the condensed consolidated statements of operations, and any remaining unrealized losses, net of taxes, are reported as a component of accumulated other comprehensive loss. The Company did not recognize any credit losses on its available-for-sale securities during the three and six months ended June 30, 2020 and there were no impairment charges for unrealized losses in the periods presented.

The cost of available-for-sale securities sold is based on the specific-identification method and realized gains and losses are included in earnings. Amortization of premiums and accretion of discounts are reported as a component of other income, net.

Accounts Receivable, Allowance for Doubtful Accounts and Contractual Allowances

Accounts receivable includes amounts due to the Company from healthcare institutions, third-party payors, and government payors and their related patients, as a result of the Company's normal business activities. Accounts receivable is reported on the consolidated balance sheets net of an estimated allowance for doubtful accounts and contractual allowances.

The Company establishes an allowance for doubtful accounts for estimated uncollectible receivables based on its assessment of the collectability of customer accounts and recognizes the provision as a component of selling, general and administrative expenses.

The Company records a provision for contractual allowances based on the estimated differences between contracted amounts and expected collection rates. Such provisions are based on the Company's historical experience and are reported as a reduction of revenue.

The Company regularly reviews the allowances by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

The following table presents the changes in the allowance for doubtful accounts (in thousands):
Six Months Ended June 30, 2020Year Ended December 31,
Six Months Ended June 30, 2019
Balance, beginning of period$9,049  $7,296  $7,296  
Add: provision for doubtful accounts5,957  9,129  4,569  
Add: adoption of ASC 326
Less: write-offs, net of recoveries and other adjustments(4,202) (7,376) (3,537) 
Balance, end of period$11,265  $9,049  $8,328  

The following table presents the changes in the contractual allowance (in thousands):
Six Months Ended June 30, 2020Year Ended December 31,
Six Months Ended June 30, 2019
Balance, beginning of period$15,433  $9,205  $9,205  
Add: provision for contractual allowances7,567  15,518  7,801  
Less: realized contractual adjustments(7,245) (9,290) (3,557) 
Balance, end of period$15,755  $15,433  $13,449  
Concentrations of Risk
Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. Cash balances are deposited in financial institutions which, at times may be in excess of federally insured limits. Cash equivalents are invested in highly-rated money market funds. The Company invests in a variety of financial instruments, such as, but not limited to, United States Government securities, corporate notes, commercial paper and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. The Company has not experienced any material losses on its deposits of cash and cash equivalents or investments.

Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company’s customer base and their dispersion across many geographies. The Company does not require collateral. The Company records an allowance for doubtful accounts based on the assessment of the collectability of customer accounts, considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. Centers for Medicare and Medicaid Services (“CMS”), accounted for approximately 27% of the Company’s revenue for each of the three and six months ended June 30, 2020, respectively, and 28% and 27%, of the Company's revenue for the three and six months ended June 30, 2019, respectively. CMS accounted for 22% and 22% of accounts receivable at June 30, 2020 and June 30, 2019, respectively.
Revenue Recognition

The Company’s revenue is generated primarily from the provision of its cardiac rhythm monitoring service, the Zio XT service. The Zio XT is a cardiac rhythm monitoring service that has a patient wear period of up to 14 days and is billable when the monitoring reports are delivered to the healthcare provider, which is also when the service is complete and the Company recognizes revenue. The time from when the patient has the Zio XT device applied to the time the report is posted is generally around 20 days. The Company has concluded that the Zio XT service is one performance obligation on the basis that the customer cannot benefit from each component of the service on its own or together with other resources that are readily available to the customer.

The Zio AT mobile cardiac telemetry monitor, a wearable patch-based biosensor, offers what the Zio XT offers plus the additional capability of transmissions during the wear period to assist physicians in diagnosing and treating the small percentage of the population requiring more timely action. During the wear period, physicians will receive notifications if there are significant events that meet predetermined arrhythmia detection criteria. The Zio AT service revenue is recognized over the prescription period and delivery of an electronic Zio Report with two performance obligations.

The Company recognizes as revenue the amount of consideration to which it expects to be entitled in exchange for performing the service. The consideration the Company is entitled to varies by portfolio, as further defined below, and includes

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

estimates that require significant judgment by management. A unique aspect of healthcare is the involvement of multiple parties to the service transaction. In addition to the patient, often a third-party, for example a commercial or governmental payor or healthcare institution, will pay the Company for some or all of the service on the patient’s behalf. Separate contractual arrangements exist between the Company and third-party payors that establish amounts the third-party payor will pay on behalf of a patient for covered services rendered.

A small portion of the Company’s transactions are covered by third-party payors with whom there is no contractual agreement or an established amount the third-party payor will pay. In determining the collectability and transaction price for its service, the Company considers factors such as insurance claims which are adjudicated as allowable under the applicable policy and payment history from both payors and patient out-of-pocket costs, payor coverage, whether there is a contract between the payor or healthcare institution and the Company, historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments. Certain of these factors are forms of variable consideration which are only included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
A summary of the payment arrangements with third-party payors and healthcare institutions is as follows:
Contracted third-party payors – The Company has contracts with negotiated prices for services provided for patients with commercial healthcare insurance carriers.
CMS – The Company has received independent diagnostic testing facility approval from regional Medicare Administrative Contractors and will receive reimbursement per the relevant Current Procedural Terminology (“CPT”) code rates for the services rendered to the patient covered by CMS.
Non-contracted third-party payors – Non-contracted commercial and government payors often reimburse out-of-network rates provided under the relevant CPT codes on a case-by-case basis. The transaction price used for determining revenue recognition is based on factors including an average of the Company’s historical collection experience for its non-contracted services. This rate is reviewed at least quarterly.
Healthcare institutions – Healthcare institutions are typically hospitals or physician practices in which the Company has negotiated amounts for its monitoring services, including certain governmental agencies such as the Veterans Administration and Department of Defense.
The Company is utilizing the portfolio approach practical expedient under ASC 606 for revenue recognition whereby services provided under each of the above payor types form a separate portfolio. The Company accounts for the contracts within each portfolio as a collective group, rather than individual contracts. Based on history with these portfolios and the similar nature and characteristics of the patients within each portfolio, the Company has concluded that the financial statement effects are not materially different than if accounting for revenue on a contract-by-contract basis.
For contracted and CMS portfolios, the Company recognizes revenue, net of contractual allowances, and recognizes an allowance for doubtful accounts for uncollectible patient accounts receivable. The transaction price is determined based on negotiated rates, and the Company has historical experience of collecting substantially all of these contracted rates. These contracts also impose a number of obligations regarding billing and other matters, and the Company’s noncompliance with a material term of such contracts may result in a denial of the claim. The Company accounts for denied claims as a form of variable consideration that is included as a reduction to the transaction price recognized as revenue. The Company estimates the denied claims which require management judgment. The estimated denied claims are based on historical information and judgement includes the historical period utilized. The Company monitors the estimated denied claims against the latest available information, and subsequent changes to the estimated denied claims are recorded as an adjustment to revenue in the periods during which such changes occur. Historical cash collection indicates that it is probable that substantially all of the transaction price, less the estimate of denied claims, will be received. Contracted payors may require that we bill patient co-payments and deductibles and from time to time we may not be able to collect such amounts due to credit risk. The Company provides for estimates of uncollectible patient accounts receivable, based upon historical experience where judgment includes the historical period utilized, at the time revenue is recognized, with such provisions presented as bad debt expense within the selling, general and administrative line item of the consolidated statement of operations. Adjustments to these estimates for actual experience are also recorded as an adjustment to bad debt expense.
        For non-contracted portfolios, the Company is providing an implicit price concession due to the lack of a contracted rate with the underlying payor, the result of which requires the Company to estimate the transaction price based on historical cash collections utilizing the expected value method. All subsequent adjustments to the transaction price are recorded as an adjustment to revenue.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

        For healthcare institutions, the transaction price is determined based on negotiated rates, and the Company has historical experience collecting substantially all of these contracted rates. Historical cash collection indicates that it is probable that substantially all of the transaction price will be received. As such, the Company is not providing an implicit price concession but, rather, has chosen to accept the risk of default, and any subsequent uncollected amounts are recorded as bad debt expense.

Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers by payor type. The Company believes these categories aggregate the payor types by nature, amount, timing and uncertainty of its revenue streams. Disaggregated revenue by payor type and major service line for three and six months ended June 30, 2020 and June 30, 2019 were as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
Contracted third-party payors $26,544  $24,326  $58,254  $47,045  
Non-contracted third-party payors2,868  2,545  6,244  5,364  
Centers for Medicare & Medicaid13,718  14,546  31,034  27,194  
Healthcare Institutions7,748  11,024  18,881  21,172  
Total$50,878  $52,441  $114,413  $100,775  
Contract Liabilities
ASC 606 requires an entity to present a revenue contract as a contract liability when the Company has an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer, or an amount of consideration from the customer is due and unconditional (whichever is earlier).

Certain of the Company’s customers pay the Company directly for the Zio XT service upon shipment of devices. Such advance payments are contract liabilities and are recorded as deferred revenue on the Condensed Balance Sheets and revenue is recognized when reports are delivered to the healthcare provider. During each of the three and six months ended June 30, 2020, $1.2 million relating to the contract liability balance at the beginning of 2020 was recognized as revenue. Total revenue recognized during each of the three and six months ended June 30, 2019 that was included in the contract liability balance at the beginning of 2019, was $0.1 million and $1.2 million, respectively.
Contract Costs
Under ASC 340, the incremental costs of obtaining a contract with a customer are recognized as an asset. Incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained.
The Company’s current commission programs are considered incremental. However, as a practical expedient, ASC 340 permits the Company to immediately expense contract acquisition costs, as the asset that would have resulted from capitalizing these costs will be amortized in one year or less.
Stock-based Compensation
The Company measures its stock-based awards made to employees based on the estimated fair values of the awards as of the grant date. The fair value of market condition awards is determined using the Monte-Carlo option pricing model and the fair value of stock options is determined using the Black-Scholes option pricing model. Stock-based compensation expense is recognized over the requisite service period using the straight-line method and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, the Company’s stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For restricted stock, the compensation cost for these awards is based on the closing price of the Company’s common stock on the date of grant, and recognized as compensation expense on a straight-line basis over the requisite service period.
The Company recognizes compensation expense related to the Employee Stock Purchase Program (“ESPP”) based on the estimated fair value of the options on the date of grant, net of estimated forfeitures. The Company estimates the grant date

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

fair value, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model for each purchase period. The grant date fair value is expensed on a straight-line basis over the offering period.
Recently Adopted Accounting Guidance

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. ASU No. 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The Company adopted ASC 326 on January 1, 2020, using the modified retrospective transition method through a non-cash $0.5 million cumulative-effect increase to accumulated deficit and the allowance for doubtful accounts. The Company considered the current and expected future economic and market conditions surrounding the novel COVID-19 pandemic and recorded additional reserves that were not individually material to the estimate. Actual results may differ from these estimates.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which amended its guidance for costs of implementing a cloud computing service arrangement to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new standard also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The Company adopted ASU No. 2018-15 on January 1, 2020, using the prospective transition method. The impact of adoption on the Company's consolidated financial statements was not material.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles for income taxes. The Company elected to early adopt ASU 2019-12 effective as of January 1, 2020, and the impact of adoption on the Company's condensed consolidated financial statements was not material.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

3. Cash Equivalents and Investments
The fair value of cash equivalents and available-for-sale investments at June 30, 2020 and December 31, 2019, were as follows (in thousands):
June 30, 2020
Gross UnrealizedEstimated
Fair Value
Money market funds$66,846  $—  $—  $66,846  
U.S. government securities32,014  174    32,188  
Corporate notes1,001  7    1,008  
Total cash equivalents and available-for-sale investments$99,861  $181  $  $100,042  
Classified as:
Cash equivalents$66,846  
Short-term investments33,196  
Total cash equivalents and available-for-sale investments$100,042  
December 31, 2019
Gross UnrealizedEstimated
Fair Value
Money market funds$13,897  $—  $—  $13,897  
U.S. government securities77,329  72  (1) 77,400  
Corporate notes14,955  11  —  14,966  
Commercial paper35,753  —  —  35,753  
Total cash equivalents and available-for-sale investments$141,934  $83  $(1) $142,016  
Classified as:
Cash equivalents$13,897  
Short-term investments120,089  
Long-term investments8,030  
Total cash equivalents and available-for-sale investments$142,016  
The following table summarizes the fair value of the Company’s cash equivalents, short-term and long-term marketable securities classified by maturity (in thousands):
June 30,
December 31,
Due within one year$100,042  $133,986  
Due after one year through three years