UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-37918

iRhythm Technologies, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	20-8149544
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
650 Townsend Street, Suite 500, San Francisco, California	94103
(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 filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller 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 May 3, 2019, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 24,686,878.

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, Par Value $.0001 Per Share	IRTC	The NASDAQ Global Select Market

IRHYTHM TECHNOLOGIES, INC.

TABLE OF CONTENTS

	Page No.
PART I. FINANCIAL INFORMATION	1
Item 1. Financial Statements (Unaudited):	1
Condensed Consolidated Balance Sheets	1
Condensed Consolidated Statements of Operations	2
Condensed Consolidated Statements of Comprehensive Loss	3
Condensed Consolidated Statements of Cash Flows	4
Condensed Consolidated Statements of Stockholders’ Equity	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
Item 4. Controls and Procedures	29
PART II. OTHER INFORMATION	31
Item 1. Legal Proceedings	31
Item 1A. Risk Factors	31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3. Defaults Upon Senior Securities	59
Item 4. Mine Safety Disclosures	59
Item 5. Other Information	59
Item 6. Exhibits	59
Exhibit Index	60
Signatures	61

i

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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:

• 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 financial performance

• 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.

ii

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share data)

	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	28,235		$	20,023
Short-term investments		30,507			58,320
Accounts receivable, net		28,252			21,977
Inventory		2,504			2,062
Prepaid expenses and other current assets		3,810			4,100
Total current assets		93,308			106,482
Property and equipment, net		10,208			9,158
Operating lease right-of-use assets		9,232			—
Goodwill		862			862
Other assets		3,574			3,208
Total assets	$	117,184		$	119,710
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,960		$	2,284
Accrued liabilities		20,099			26,570
Deferred revenue		1,309			1,243
Accrued interest, current portion		129			139
Operating lease liabilities, current portion		5,052			—
Total current liabilities		28,549			30,236
Debt		34,922			34,899
Deferred rent, noncurrent portion		—			153
Operating lease liabilities, noncurrent portion		3,990			—
Total liabilities		67,461			65,288
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value – 5,000,000 shares authorized at March 31, 2019    and December 31, 2018; and none issued and outstanding at March 31, 2019    and December 31, 2018		—			—
Common stock, $0.001 par value – 100,000,000 shares authorized at March 31,    2019 and December 31, 2018; 24,628,643 and 24,368,073 shares    issued and outstanding at March 31, 2019 and December 31, 2018, respectively		24			23
Additional paid-in capital		261,231			257,955
Accumulated other comprehensive income (loss)		2			(41	)
Accumulated deficit		(211,534	)		(203,515	)
Total stockholders’ equity		49,723			54,422
Total liabilities and stockholders’ equity	$	117,184		$	119,710

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

1

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended March 31,
	2019			2018
Revenue	$	47,214		$	30,565
Cost of revenue		11,730			8,611
Gross profit		35,484			21,954
Operating expenses:
Research and development		6,756			4,019
Selling, general and administrative		36,705			28,577
Total operating expenses		43,461			32,596
Loss from operations		(7,977	)		(10,642	)
Interest expense		(409	)		(858	)
Other income, net		379			383
Loss before income taxes		(8,007	)		(11,117	)
Income tax provision		12			—
Net loss	$	(8,019	)	$	(11,117	)
Net loss per common share, basic and diluted	$	(0.33	)	$	(0.47	)
Weighted-average shares, basic and diluted		24,474,308			23,479,955

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

2

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2019			2018
Net loss	$	(8,019	)	$	(11,117	)
Other comprehensive income (loss):
Net change in unrealized losses on available-for-sale securities		43			(20	)
Comprehensive loss	$	(7,976	)	$	(11,137	)

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

3

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities
Net loss	$	(8,019	)	$	(11,117	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		621			548
Stock-based compensation		4,415			3,247
Amortization of debt discount and issuance costs		26			64
Accretion of discounts on investments, net		(227	)		(171	)
Provision for doubtful accounts and contractual allowances		4,709			2,680
Amortization of operating lease right-of-use assets		1,183			—
Changes in operating assets and liabilities:
Accounts receivable		(10,984	)		(5,536	)
Inventory		(442	)		(174	)
Prepaid expenses and other current assets		(169	)		790
Other assets		(365	)		409
Accounts payable		(333	)		(950	)
Accrued liabilities		(6,380	)		(2,977	)
Deferred rent		—			66
Deferred revenue		66			(139	)
Operating lease liabilities		(1,200	)		—
Net cash used in operating activities		(17,099	)		(13,260	)
Cash flows from investing activities
Purchases of property and equipment		(1,635	)		(1,108	)
Purchases of available-for-sale investments		(9,616	)		(5,437	)
Maturities of available-for-sale investments		37,700			28,004
Net cash provided by investing activities		26,449			21,459
Cash flows from financing activities
Proceeds from issuance of common stock, net		2,120			877
Tax withholding upon vesting of restricted stock awards		(3,258	)		(1,274	)
Net cash used in financing activities		(1,138	)		(397	)
Net increase in cash, cash equivalents, and restricted cash		8,212			7,802
Cash, cash equivalents and restricted cash beginning of period		20,023			8,671
Cash, cash equivalents and restricted cash end of period	$	28,235		$	16,473
Supplemental disclosures of cash flow information
Interest paid	$	411		$	787
Non-cash investing and financing activities
Property, plant and equipment costs included in accounts payable and accrued liabilities	$	38		$	80

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

4

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2019			2018
Common stock:
Beginning balance	$	23		$	23
Issuance of common stock upon exercise of options	1				—
Ending balance	$	24		$	23
Additional paid-in capital:
Beginning balance	$	257,955		$	236,184
Issuance of common stock upon exercise of options		2,120			877
Stock-based compensation expense		4,415			3,247
Tax withholding upon vesting of restricted stock awards		(3,259	)		(1,271	)
Ending balance	$	261,231		$	239,037
Accumulated other comprehensive income (loss):
Beginning balance	$	(41	)	$	(65	)
Net change in unrealized losses on available for sale securities		43			(20	)
Ending balance	$	2		$	(85	)
Accumulated deficit:
Beginning balance	$	(203,515	)	$	(156,589	)
Net loss		(8,019	)		(11,117	)
Cumulative effect of accounting changes		—			1,354
Ending balance	$	(211,534	)	$	(166,352	)
Total stockholders' equity	$	49,723		$	72,623

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

5

IRHYTHM TECHNOLOGIES, INC.

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 commenced commercial introduction of its products 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.

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, 2018, and related disclosures, have been derived from the audited consolidated financial statements at that date but does 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. Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to current period presentation. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 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, 2018 included in the Company’s annual report on Form 10-K, filed with the SEC on March 4, 2019.

Revision of Previously Reported Financial Information

During the preparation of the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2019, the Company identified an error in the presentation of the changes in the allowance for doubtful accounts and contractual allowance disclosures in its Quarterly reports for the periods ended March 31, June 30 and September 30, 2018. During these quarters, a portion of the allowance for contractual adjustments was incorrectly presented as a provision for doubtful accounts. The Company concluded that the amounts were not material to any of its previously issued condensed consolidated financial statements. The error impacted the disclosures but did not impact the Company’s condensed consolidated balance sheets, statements of operations or statements of cash flows. The error did not impact the disclosures in the previously issued consolidated financial statements in the Form 10-K for the year ended December 31, 2018.

The following tables presents the impact of the revision on the changes in the contractual allowance and allowance for doubtful accounts balances for the interim periods in the year ended December 31, 2018 (in thousands):

6

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

	Three Months Ended March 31, 2018				Six Months Ended June 30, 2018						Nine Months Ended September 30, 2018
Allowance for doubtful accounts	As reported		As revised (1)		As reported			As revised (2)			As reported			As revised (3)
Balance, beginning of period	$	3,568	$	3,568	$	3,568		$	3,568		$	3,568		$	3,568
Add: provision for doubtful accounts		1,691		325		3,822			1,791			5,917			3,254
Less: write-offs, net of recoveries and other adjustments		5		5		(2,526	)		(2,526	)		(2,514	)		(2,514	)
Balance, end of period	$	5,264	$	3,898	$	4,864		$	2,833		$	6,971		$	4,308

	Three Months Ended March 31, 2018				Six Months Ended June 30, 2018						Nine Months Ended September 30, 2018
Contractual Allowance	As reported		As revised (1)		As reported			As revised (2)			As reported			As revised (3)
Balance, beginning of period	$	7,444	$	7,444	$	7,444		$	7,444		$	7,444		$	7,444
Add: allowance for contractual adjustments		989		2,355		2,618			4,649			3,004			6,256
Less: contractual adjustments		18		18		(3,072	)		(3,072	)		(2,467	)		(3,056	)
Balance, end of period	$	8,451	$	9,817	$	6,990		$	9,021		$	7,981		$	10,644

Note that the above adjustments did not result in any changes to the Company’s total receivables-related reserves for the periods in the table above.

(1) For the three months ended March 31, 2018, the allowance for contractual adjustments was increased by $1.4 million and the provision for doubtful accounts was reduced by the same amount.

(2) For the six months ended June 30, 2018, the allowance for contractual adjustments was increased by $2.0 million and the provision for doubtful accounts was reduced by the same amount.

(3) For the nine months ended September 31, 2018, the allowance for contractual adjustments was increased by $2.7 million and the provision for doubtful accounts was reduced by the same amount. In addition, in the contractual allowances table, contractual adjustments were increased by $0.6 million and the allowance for contractual adjustments was reduced by the same amount.

Accounts Receivable, Allowance for Doubtful Accounts and Contractual Allowance

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

The Company establishes an allowance for doubtful accounts for estimated uncollectible receivables based on its historical experience and recognizes the provision as a component of selling, general and administrative expenses. The Company establishes a contractual allowance when it estimates that consideration to be received will be lower than the contracted rate based on its historical experience and recognizes the provision as a reduction to revenue.

The following table presents the changes in the allowance for doubtful accounts (in thousands):

	Three Months Ended March 31,			Year Ended December 31,
	2019			2018
Balance, beginning of period	$	4,851		$	3,568
Add: provision for doubtful accounts		828			5,826
Less: write-offs, net of recoveries and other adjustments		(1,346	)		(4,543	)
Balance, end of period	$	4,333		$	4,851

7

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The following table presents the changes in the contractual allowance (in thousands):

	Three Months Ended March 31,			Year Ended December 31,
	2019			2018
Balance, beginning of period	$	10,601		$	7,444
Add: allowance for contractual adjustments		3,881			9,392
Less: contractual adjustments		(1,435	)		(6,235	)
Balance, end of period	$	13,047		$	10,601

The following table presents the impact of allowance for doubtful accounts and contractual allowance on accounts receivable (in thousands):

	Three Months Ended March 31,			Year Ended December 31,
	2019			2018
Gross accounts receivable	$	45,632		$	37,429
Less: allowance for doubtful accounts		(4,333	)		(4,851	)
Less: contractual allowance		(13,047	)		(10,601	)
Net accounts receivable	$	28,252		$	21,977

The Company reviews and updates its estimates for the allowances for doubtful accounts and contractual allowance periodically to reflect its experience regarding historical collections. If management were to make different judgments or utilize different estimates in the allowances for doubtful accounts and contractual allowance, differences in the amount of reported selling, general and administrative expenses and revenue could result, respectively.

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, cash equivalents, and investments 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 when it becomes probable that a receivable will not be collected. Federal government agencies, including Centers for Medicare and Medicaid Services (“CMS”) and the military, accounted for approximately 35% and 37% of the Company’s revenue for the three months ended March 31, 2019 and 2018, respectively. Accounts receivable related to federal government agencies accounted for 19% and 18% at March 31, 2019 and December 31, 2018, 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 accounts for contract revenue with a customer when there is a legally enforceable contract between the Company and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. The Company's revenue is measured based on consideration specified in the contract with each customer. 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, like a hospital or clinic, 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 and should be considered in determining collectability and the transaction price for services provided to a patient covered by that third-party payor.

8

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The Company recognizes revenue on an accrual basis based on estimates of the amount that will ultimately be realized. These estimates require significant judgment by management. In determining the amount to recognize for a delivered report, the Company considers factors such as claim 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.

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 rate 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 is based on factors including an average of the Company’s historical collection experience for 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 Veteran’s Administration and Department of Defense.  

The Company is utilizing the portfolio approach practical expedient under ASC 606 for revenue recognition. 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 the healthcare institution, the Company has historical experience of collecting substantially all of the negotiated contractual rates and determined at contract inception that these customers, and or their related third-party payor that pays the Company on their behalf, have the intention and ability to pay the promised consideration. As such, the Company is not providing an implicit price concession but, rather, has chosen to accept the risk of default, and any subsequent impairment of the related receivable are recorded as bad debt expense.

For contracted and CMS portfolios, the Company is providing an implicit price concession because, while the Company has a contract with the underlying payor, the Company expects to accept a lower amount of consideration when claims are adjudicated and allowable claims are determined by the commercial payor. The implicit price concession is recorded as variable consideration to the transaction price and recorded as an adjustment to revenue as a contractual allowance. Historical cash collection indicates that it is probable that substantially all of the allowable claim amount will be received, and hence this amount is recorded as revenue. Any subsequent impairment of the related receivable is recorded as bad debt expense.

For non-contracted portfolios, the Company is providing an implicit price concession because the Company does not have a contract with the underlying payor, the result of which requires the Company to estimate transaction price based on historical cash collections utilizing the expected value method. Subsequent adjustments to the transaction price are recorded as an adjustment to revenue and not as bad debt expense.

9

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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 the three months ended March 31, 2019 was as follows (in thousands):

	Three Months Ended March 31,
	2019		2018
Commercial Payors	$	24,347	$	13,491
Centers for Medicare & Medicaid		12,746		8,432
Healthcare Institutions		10,121		8,642
Total	$	47,214	$	30,565

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, or contract liabilities are recorded as deferred revenue on the Condensed Consolidated Balance Sheets and revenue is recognized when reports are delivered to physicians. Total revenue recognized during each of the three months ended March 31, 2019 and March 31, 2018 that was included in the contract liability balance at the beginning of each respective period was $1.2 million.

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.

Leases

Identifying a lease

The Company determines whether a contract contains a lease at the inception of a contract. If the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration, the Company considers the contract to contain a lease. The Company determines whether a contract conveys the right to control the use of an identified asset for a period of time if the contract contains both of the following terms:

• The right to obtain substantially all of the economic benefits from use of the identified asset

• The right to direct the use of the identified asset

Discount Rate for leases

On January 1, 2019, the rate implicit in the Company’s leases was not readily determinable. As such, the Company used its incremental borrowing rate to calculate its right-of-use assets and lease liabilities. The Company determined the appropriate incremental borrowing rate by utilizing the interest rate obtained in connection with the Third Amended and Restated Loan and Security Agreement with Silicon Valley Bankwhich was finalized on October 23, 2018.

10

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Lease term

The lease term is generally the minimum noncancelable period of each lease. The Company does not include option periods in determining the right-of-use asset and right-of-use liability unless it is reasonably certain that the Company will exercise the option at inception or when a triggering event occurs. As of March 31, 2019, the Company did not include any options to renew in the lease terms of its current lease portfolio.

Recently Adopted Accounting Guidance

In February 2016, the Financing Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), which requires lessees to recognize lease liabilities and corresponding right-of-use assets on the consolidated balance sheet for all leases. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset and, for operating leases, the lessee would recognize a straight-line lease expense. Topic 842 also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The Company has no embedded leases with suppliers. Upon adoption of Topic 842 on January 1, 2019 using the modified retrospective method, the Company recognized right-of-use assets of $10.4 million and lease liabilities of $10.2 million. There was no cumulative-effect adjustment recorded on January 1, 2019. The Company adopted the following practical expedients allowed under Topic 842:

• The package of three practical expedients, which allows entities to make an election that allows them not to reassess (1) whether existing or expired contracts contain embedded leases under Topic 842, (2) lease classification of existing or expiring leases, and (3) indirect costs for existing or expired leases

• Combining lease and non-lease components practical expedient, which allows lessees, as an accounting policy election by class of underlying asset, to choose not to separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component

• Comparative reporting practical expedient, which allows entities to initially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption

For further details, refer to Note 6. Commitments and Contingencies.

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IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

3. Cash Equivalents and Investments

The fair value of securities, not including cash at March 31, 2019 and December 31, 2018, were as follows (in thousands):

	March 31, 2019
	Amortized		Gross Unrealized					Estimated
	Cost		Gains		Losses			Fair Value
Money market funds	$	23,613	$              —		$               —			$	23,613
U.S. government securities		3,476		1	—				3,477
Corporate notes		11,284		2	—				11,286
Commercial paper		15,744	—		—				15,744
Total available-for-sale marketable debt securities	$	54,117	$	3	$	—		$	54,120
Classified as:
Cash equivalents								$	23,613
Short-term investments									30,507
Total cash equivalents and investments								$	54,120
	December 31, 2018
	Amortized		Gross Unrealized					Estimated
	Cost		Gains		Losses			Fair Value
Money market funds	$	10,606	$	—	$	—		$	10,606
U.S. government securities		9,976		—		(1	)		9,975
Corporate notes		16,514		3		(18	)		16,499
Commercial paper		36,331		—		—			36,331
Total available-for-sale marketable debt securities	$	73,427	$	3	$	(19	)	$	73,411
Classified as:
Cash equivalents								$	15,091
Short-term investments									58,320
Total cash equivalents and investments								$	73,411

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):

	March 31,		December 31,
	2019		2018
Due within one year	$	54,120	$	73,411
Due after one year through three years		—		—
Total available-for-sale marketable debt securities	$	54,120	$	73,411

12

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The following tables present the Company's available-for-sale securities that were in an unrealized loss position as of March 31, 2019 and December 31, 2018 (in thousands):

	As of March 31, 2019
	Less than 12 months					12 Months or Greater					Total
Assets	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Corporate notes	$	2,498	$	—		$	—	$	—		$	2,498	$	—
Total	$	2,498	$	—		$	—	$	—		$	2,498	$	—
	December 31, 2018
	Less than 12 months					12 Months or Greater					Total
Assets	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. government securities	$	5,977	$	(1	)	$	—	$	—		$	5,977	$	(1	)
Corporate notes		11,521		(10	)		2,993		(8	)		14,514		(18	)
Total	$	17,498	$	(11	)	$	2,993	$	(8	)	$	20,491	$	(19	)

Available-for-sale securities held as of March 31, 2019 had a weighted average days to maturity of30 days. As of March 31, 2019, the Company had one investment in an unrealized loss position, and no investment has been in an unrealized loss position for more than 12 months. There have been no material realized gains or realized losses on available-for-sale securities for the periods presented.

4. Fair Value Measurements

The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 - Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 - Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. 

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The corporate notes, commercial paper and government securities are classified as Level 2 as they were valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.

The fair value of the Company’s outstanding interest-bearing obligations is estimated using the net present value of the payments, discounted at an interest rate that is consistent with market interest rates, which is a Level 2 input. The carrying amount and the estimated fair value of the Company’s outstanding interest-bearing obligations at March 31, 2019 are $34.9 million and $34.9 million, respectively. The carrying amount and the estimated fair value of the Company’s outstanding interest-bearing obligations at December 31, 2018 were $34.9 million and $34.9 million, respectively.

The Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value.

13

IRHYTHM TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The following table presents the fair value of the Company’s financial assets and liabilities determined using the inputs defined above (amounts in thousands).

	March 31, 2019
	Level 1		Level 2		Level 3	Total
Assets
Money market funds	$	23,613	$               —		$               —	$	23,613
U.S. government securities	—			3,477	—