iRhythm Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS IRHYTHM TECHNOLOGIES, INC. Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except share and per share data) September 30, 2020 December 31, 2019 Assets Current assets: Cash and cash equivalents $ 95,336 $ 20,462 Short-term investments 231,901 120,089 Accounts receivable, net of allowances for doubtful accounts of $ 11,037 and $ 9,049 as of September 30, 2020 and December 31, 2019, respectively 28,955 23,867 Inventory 5,062 4,037 Prepaid expenses and other current assets 4,685 4,337 Total current assets 365,939 172,792 Long-term investments — 8,030 Property and equipment, net 32,775 26,464 Operating lease right-of-use assets 86,247 90,124 Goodwill 862 862 Other assets 11,378 7,940 Total assets $ 497,201 $ 306,212 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 3,838 $ 8,243 Accrued liabilities 32,185 32,714 Deferred revenue 938 1,251 Debt, current portion 10,694 1,944 Operating lease liabilities, current portion 8,211 7,914 Total current liabilities 55,866 52,066 Debt, noncurrent portion 24,252 32,989 Operating lease liabilities, noncurrent portion 82,537 85,748 Total liabilities 162,655 170,803 Commitments and contingencies (Note 6) Stockholders’ equity: Preferred stock, $ 0.001 par value – 5,000,000 shares authorized at September 30, 2020 and December 31, 2019; and none issued and outstanding at September 30, 2020 and December 31, 2019 — — Common stock, $ 0.001 par value – 100,000,000 shares authorized at September 30, 2020 and December 31, 2019; 28,855,261 and 26,682,720 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively 27 25 Additional paid-in capital 629,484 395,695 Accumulated other comprehensive income 68 82 Accumulated deficit ( 295,033 ) ( 260,393 ) Total stockholders’ equity 334,546 135,409 Total liabilities and stockholders’ equity $ 497,201 $ 306,212 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue, net $ 71,944 $ 54,673 $ 186,357 $ 155,448 Cost of revenue 18,232 13,785 49,779 38,570 Gross profit 53,712 40,888 136,578 116,878 Operating expenses: Research and development 8,768 13,499 29,725 28,031 Selling, general and administrative 49,701 45,649 140,945 125,876 Total operating expenses 58,469 59,148 170,670 153,907 Loss from operations ( 4,757 ) ( 18,260 ) ( 34,092 ) ( 37,029 ) Interest expense ( 384 ) ( 409 ) ( 1,145 ) ( 1,258 ) Other income, net 569 396 1,311 1,066 Loss before income taxes ( 4,572 ) ( 18,273 ) ( 33,926 ) ( 37,221 ) Income tax provision 105 20 253 47 Net loss $ ( 4,677 ) $ ( 18,293 ) $ ( 34,179 ) $ ( 37,268 ) Net loss per common share, basic and diluted $ ( 0.17 ) $ ( 0.72 ) $ ( 1.25 ) $ ( 1.50 ) Weighted-average shares, basic and diluted 28,050,210 25,247,831 27,358,096 24,818,482 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net loss $ ( 4,677 ) $ ( 18,293 ) $ ( 34,179 ) $ ( 37,268 ) Other comprehensive income: Net change in unrealized gains (losses) on available-for-sale securities ( 113 ) ( 21 ) ( 14 ) 55 Comprehensive loss $ ( 4,790 ) $ ( 18,314 ) $ ( 34,193 ) $ ( 37,213 ) 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) Nine Months Ended September 30, 2020 2019 Cash flows from operating activities Net loss $ ( 34,179 ) $ ( 37,268 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,922 2,257 Stock-based compensation 27,517 19,064 Accretion of discounts on investments, net and other ( 28 ) ( 565 ) Provision for doubtful accounts and contractual allowances 20,451 17,581 Amortization of operating lease right-of-use assets 4,497 7,452 Changes in operating assets and liabilities: Accounts receivable ( 26,000 ) ( 22,795 ) Inventory ( 1,059 ) ( 1,454 ) Prepaid expenses and other current assets ( 347 ) ( 12 ) Other assets ( 3,438 ) ( 2,366 ) Accounts payable ( 4,700 ) ( 119 ) Accrued liabilities ( 5,365 ) 5,635 Deferred revenue ( 313 ) ( 334 ) Operating lease liabilities ( 3,535 ) ( 4,079 ) Net cash used in operating activities ( 21,577 ) ( 17,003 ) Cash flows from investing activities Purchases of property and equipment ( 11,187 ) ( 8,640 ) Purchases of available-for-sale investments ( 214,889 ) ( 146,026 ) Sales of available-for-sale investments 14,525 — Maturities of available-for-sale investments 96,645 77,900 Net cash used in investing activities ( 114,906 ) ( 76,766 ) Cash flows from financing activities Proceeds from issuance of common stock in connection with employee equity incentive plans 13,682 6,409 Tax withholding upon vesting of restricted stock awards ( 8,712 ) ( 5,111 ) Issuance of common stock in connection with follow-on public offering, net of offering costs 206,387 107,082 Net cash provided by financing activities 211,357 108,380 Net increase in cash and cash equivalents 74,874 14,611 Cash and cash equivalents beginning of period 20,462 20,023 Cash and cash equivalents end of period $ 95,336 $ 34,634 Supplemental disclosures of cash flow information Interest paid $ 1,132 $ 1,246 Non-cash investing and financing activities Property and equipment costs included in accounts payable and accrued liabilities $ 47 $ 2,259 Right-of-use assets obtained in exchange for new operating lease liabilities $ 621 $ 89,170 Offering costs in accounts payable and accrued liabilities $ 356 $ 217 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, except share data) Common Stock Accumulated Other Total Shares Amount Additional Paid-In Capital Accumulated Deficit Comprehensive Income (Loss) Stockholders' Equity Balances at June 30, 2020 27,364,151 $ 25 $ 408,096 $ ( 290,356 ) $ 181 $ 117,946 Issuance of common stock in connection with employee equity incentive plans, net 233,968 — 4,321 — — 4,321 Issuance of common stock in connection with follow-on public offering, net of discounts and issuance costs 1,257,142 2 206,029 — — 206,031 Tax withholding upon vesting of restricted stock awards — — ( 3,563 ) — — ( 3,563 ) Stock-based compensation expense — — 14,601 — — 14,601 Net loss — — — ( 4,677 ) — ( 4,677 ) Net change in unrealized gain on investments — — — — ( 113 ) ( 113 ) Balances at September 30, 2020 28,855,261 $ 27 $ 629,484 $ ( 295,033 ) $ 68 $ 334,546 Common Stock Accumulated Other Total Shares Amount Additional Paid-In Capital Accumulated Deficit Comprehensive Income (Loss) Stockholders' Equity Balances at December 31, 2019 26,682,720 $ 25 $ 395,695 $ ( 260,393 ) $ 82 $ 135,409 Issuance of common stock in connection with employee equity incentive plans, net 915,399 — 13,682 — — 13,682 Issuance of common stock in connection with follow-on public offering, net of discounts and issuance costs 1,257,142 2 206,029 — — 206,031 Tax withholding upon vesting of restricted stock awards — — ( 8,712 ) — — ( 8,712 ) Stock-based compensation expense — — 22,790 — — 22,790 Accounting Standards Codification 326 cumulative effect adjustment upon adoption — — — ( 461 ) — ( 461 ) Net loss — — — ( 34,179 ) — ( 34,179 ) Net change in unrealized gain on investments — — — — ( 14 ) ( 14 ) Balances at September 30, 2020 28,855,261 $ 27 $ 629,484 $ ( 295,033 ) $ 68 $ 334,546 5 Common Stock Accumulated Other Total Shares Amount Additional Paid-In Capital Accumulated Deficit Comprehensive Income (Loss) Stockholders' Equity Balances at June 30, 2019 24,836,171 $ 23 $ 271,469 $ ( 224,800 ) $ 60 $ 46,752 Issuance of common stock in connection with employee equity incentive plans, net 110,838 — 1,001 — — 1,001 Warrants Exercised 2,850 — — — — — Issuance of common stock in connection with follow on public offering, net of discounts and issuance costs 1,575,342 2 107,297 — — 107,299 Tax withholding upon vesting of restricted stock awards — — ( 1,554 ) — — ( 1,554 ) Stock-based compensation expense — — 7,401 — — 7,401 Net loss — — — ( 18,293 ) — ( 18,293 ) Net change in unrealized gain on investments — — — — ( 21 ) ( 21 ) Balances at September 30, 2019 26,525,201 $ 25 $ 385,614 $ ( 243,093 ) $ 39 $ 142,585 Common Stock Accumulated Other Total Shares Amount Additional Paid-In Capital Accumulated Deficit Comprehensive Income (Loss) Stockholders' Equity Balances at December 31, 2018 24,368,073 $ 23 $ 257,955 $ ( 205,825 ) $ ( 16 ) $ 52,137 Issuance of common stock in connection with employee equity incentive plans, net 578,936 — 6,409 — — 6,409 Warrants Exercised 2,850 — — — — — Issuance of common stock in connection with follow on public offering, net of discounts and issuance costs 1,575,342 2 107,297 — — 107,299 Tax withholding upon vesting of restricted stock awards — — ( 5,111 ) — — ( 5,111 ) Stock-based compensation expense — — 19,064 — — 19,064 Net loss — — — ( 37,268 ) — ( 37,268 ) Net change in unrealized gain on investments — — — — 55 55 Balances at September 30, 2019 26,525,201 $ 25 $ 385,614 $ ( 243,093 ) $ 39 $ 142,585 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 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 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 "2019 Shares") of common stock, in a public offering at a price of $ 73.00 per share. The 2019 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. On August 21, 2020, the Company issued and sold an aggregate of 1,257,142 shares (the "Shares") of common stock, in a public offering at a price of $ 175.00 per share. The Shares included the full exercise of the underwriters’ option to purchase an additional 163,975 shares of common stock. Total proceeds received from the offering were $ 206.8 million, after deducting discounts and issuance costs. 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 nine months ended September 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. 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, and various inputs used in estimating 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. 7 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) As a result of the COVID-19 pandemic, the Company has experienced significant business disruptions, 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, and is expected to continue to impact, 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 diminishe d . 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 in the second quarter of 2020 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 for our salaried workforce. From May 2020 to July 2020, the Company’s Chief Executive Officer, other named executive officers and other senior executives agreed to temporary base salary reductions and the Board of Directors agreed to a reduction in its fees until business and economic conditions improve. The Company also increased it’s bad debt reserve in anticipation of a potential increase in uncollectible co-payments from patients using the Zio Service. In August 2020, the Company reinstated furloughed employees, removed pay reductions for its salaried employees, and resumed hiring for most positions. 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. As of September 30, 2020, the Company is in compliance with its financial covenants in its debt agreement. On March 27, 2020, as a result of the COVID-19 pandemic, Congress 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 primary provisions of the CARES Act which are potentially applicable to us include: • certain amendments to the limitations on the deductibility of interest contained in Section 163(j) of the Internal Revenue Code of 1986, as amended, for taxable years beginning in 2019 and 2020; and • an allowance of net operating loss carrybacks for taxable years beginning in 2018 and before 2021. The Company did not qualify for the Paycheck Protection Program under the CARES Act due to the number of employees in our organization. The CARES Act did not have material impact on the Company’s overall consolidated financial statements. 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 8 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) 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. Additionally, while the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing the Company’s ability to raise additional capital through equity, equity-linked or debt financings, which could negatively impact short-term and long-term liquidity and the ability to operate on a timely basis, or at all. 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. Investments 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 nine months ended September 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. 9 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) The following table presents the changes in the allowance for doubtful accounts (in thousands): Nine Months Ended September 30, 2020 Year Ended December 31, 2019 Nine Months Ended September 30, 2019 Balance, beginning of period $ 9,049 $ 7,296 $ 7,296 Add: provision for doubtful accounts 7,231 9,129 6,126 Add: adoption of ASC 326 461 — — Less: write-offs, net of recoveries and other adjustments ( 5,704 ) ( 7,376 ) ( 6,092 ) Balance, end of period $ 11,037 $ 9,049 $ 7,330 The following table presents the changes in the contractual allowance (in thousands): Nine Months Ended September 30, 2020 Year Ended December 31, 2019 Nine Months Ended September 30, 2019 Balance, beginning of period $ 15,433 $ 9,205 $ 9,205 Add: provision for contractual allowances 13,220 15,518 11,638 Less: realized contractual adjustments ( 10,750 ) ( 9,290 ) ( 7,692 ) Balance, end of period $ 17,903 $ 15,433 $ 13,151 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 28 % and 27 % of the Company’s revenue for each of the three and nine months ended September 30, 2020, respectively, and 28 % and 27 %, of the Company's revenue for the three and nine months ended September 30, 2019, respectively. CMS accounted for 22 % and 20 % of accounts receivable at September 30, 2020 and December 31, 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. 10 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) 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 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. 11 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) 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. 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 nine months ended September 30, 2020 and September 30, 2019 were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Contracted third-party payors $ 36,317 $ 25,961 $ 94,571 $ 73,006 Non-contracted third-party payors 4,607 2,686 10,851 8,050 Centers for Medicare & Medicaid 19,978 15,379 51,012 42,573 Healthcare Institutions 11,042 10,647 29,923 31,819 Total $ 71,944 $ 54,673 $ 186,357 $ 155,448 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 nine months ended September 30, 2020, $ 1.2 million relating to the contract liability balance at the beginning of 2020 was recognized as revenue. Total revenue recognized during the nine months ended September 30, 2019 that was included in the contract liability balance at the beginning of 2019 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. 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 12 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) 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 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. 13 IRHYTHM TECHNOLOGIES, INC. 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 September 30, 2020 and December 31, 2019, were as follows (in thousands): September 30, 2020 Amortized Cost Gross Unrealized Estimated Fair Value Gains Losses Money market funds $ 74,786 $ — $ — $ 74,786 U.S. government securities 178,223 71 ( 1 ) 178,293 Corporate notes 26,632 4 ( 6 ) 26,630 Commercial paper 26,978 — — 26,978 Total cash equivalents and available-for-sale investments $ 306,619 $ 75 $ ( 7 ) $ 306,687 Classified as: Cash equivalents $ 74,786 Short-term investments 231,901 Total cash equivalents and available-for-sale investments $ 306,687 December 31, 2019 Amortized Cost Gross Unrealized Estimated Fair Value Gains Losses Money market funds $ 13,897 $ — $ — $ 13,897 U.S. government securities 77,329 72 ( 1 ) 77,400 Corporate notes 14,955 11 — 14,966 Commercial paper 35,753 — — 35,753 Total cash equivalents and available-for-sale investments $ 141,934 $ 83 $ ( 1 ) $ 142,016 Classified as: Cash equivalents $ 13,897 Short-term investments 120,089 Long-term investments 8,030 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): September 30, 2020 December 31, 2019 Due within one year $ 306,687 $ 133,986 Due after one year through three years — 8,030 Total cash equivalents and available-for-sale investments $ 306,687 $ 142,016 The following tables present the Company's available-for-sale securities that were in an unrealized loss position as of September 30, 2020 (in thousands): September 30, 2020 Less than 12 months Assets Fair Value Unrealized Loss U.S. government securities $ 28,270 $ ( 1 ) Corporate notes 18,153 ( 6 ) Total $ 46,423 $ ( 7 ) 14 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) There were no available-for-sale securities that were in an unrealized loss position for more than twelve months as of September 30, 2020. Unrealized losses as of December 31, 2019 were not material. Available-for-sale securities held as of September 30, 2020 had a weighted average maturity of 109 days. At September 30, 2020, six investments were in an unrealized loss position and no investments have been in an unrealized loss position for more than one year. 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 future 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 September 30, 2020 are $ 34.9 million and $ 36.0 million, respectively. The carrying amount and the estimated fair value of the Company’s outstanding interest-bearing obligations at December 31, 2019 were $ 34.9 million and $ 35.2 million, respectively. The Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value. 15 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) The following tables present the fair value of the Company’s financial assets determined using the inputs defined above (in thousands). September 30, 2020 Level 1 Level 2 Level 3 Total Assets Money market funds $ 74,786 $ — $ — $ 74,786 U.S. government securities — 178,293 — 178,293 Corporate notes — 26,630 — 26,630 Commercial paper — 26,978 — 26,978 Total $ 74,786 $ 231,901 $ — $ 306,687 December 31, 2019 Level 1 Level 2 Level 3 Total Assets Money market funds $ 13,897 $ — $ — $ 13,897 U.S. government securities — 77,400 — 77,400 Corporate notes — 14,966 — 14,966 Commercial paper — 35,753 — 35,753 Total $ 13,897 $ 128,119 $ — $ 142,016 5. Balance Sheet Components Inventory and Other Assets Inventory consisted of the following (in thousands): September 30, 2020 December 31, 2019 Raw materials $ 2,248 $ 1,574 Finished goods 2,814 2,463 Total $ 5,062 $ 4,037 The Company uses Printed Circuit Board Assemblies (“PCBAs”), in each wearable Zio XT and Zio AT monitor as well as in the wireless gateway used in conjunction with the Zio AT monitor. The PCBAs are used numerous times and have useful lives beyond one year . Each time a PCBA is used in a wearable Zio XT monitor or Zio AT monitor, a portion of the cost of the PCBA is recorded as a cost of revenue. Each time a wireless gateway is used with a Zio AT monitor, a portion of the gateway is recorded as a cost of revenue. PCBAs which are recorded as other assets, were $ 11.1 million and $ 7.4 million as of September 30, 2020, and December 31, 2019, respectively. 16 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): September 30, 2020 December 31, 2019 Laboratory and manufacturing equipment $ 4,783 $ 4,238 Computer equipment and software 2,452 2,315 Furniture and fixtures 3,822 3,669 Leasehold improvements 9,145 7,597 Internal-use software 25,103 16,277 Total property and equipment, gross 45,305 34,096 Less: accumulated depreciation and amortization ( 12,530 ) ( 7,632 ) Total property and equipment, net $ 32,775 $ 26,464 Depreciation and amortization expense was $ 1.7 million and $ 4.9 million for the three and nine months ended September 30, 2020, respectively, and $ 0.9 million and $ 2.3 million for three and nine months ended September 30, 2019, respectively. Accrued Liabilities Accrued liabilities consisted of the following (in thousands): September 30, 2020 December 31, 2019 Accrued vacation $ 5,504 $ 3,809 Accrued payroll and related expenses 15,931 19,156 Accrued ESPP contribution 2,073 417 Accrued professional services fees 1,131 2,846 Accrued interest 124 128 Claims payable 4,086 2,802 Other 3,336 3,556 Total accrued liabilities $ 32,185 $ 32,714 6. Commitments and Contingencies Legal Proceedings From time to time, the Company may become involved in legal proceedings arising from the ordinary course of its business. Management is currently not aware of any matters that could have a material adverse effect on the financial position, results of operations or cash flows of the Company. Development Agreement On September 3, 2019, the Company entered into a Development Collaboration Agreement (the “Development Agreement”) with Verily Life Sciences LLC ("Verily"). The Development Agreement, which is over a 24 month term, involves joint development and production of intellectual property between the Company and Verily. Each participant has primary responsibility for certain aspects of development and approval, with all processes to be performed at each respective party’s own cost. Costs incurred by the Company in connection with the Development Agreement will be expensed as research and development expense in accordance with ASC 730, Research and Development. The Company and Verily will develop certain next-generation atrial fibrillation (“AF”) screening, detection, or monitoring products pursuant to the Development Agreement, which products will involve combining Verily and the Company’s technology platforms and capabilities. Under the terms of the Development Agreement, the Company paid Verily an upfront fee of $ 5.0 million in 2019. In addition, the Company has agreed to make additional payments to Verily up to an aggregate of $ 12.75 million in milestone payments upon achievement of various development and regulatory milestones over the 24 months of the Development Agreement, which payments will be made in cash to Verily. During the year ended 17 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) December 31, 2019 the Company achieved a milestone resulting in additional expense of $ 1.0 million which was included in accounts payable as of December 31, 2019 and paid in the first quarter of 2020. During the nine months ended September 30, 2020, the Company achieved an additional milestone resulting in expense of $ 3.0 million, which was paid in June 2020. The Development Agreement provides each party with licenses to use certain intellectual property of the other party for development activities in the field of AF screening, detection, or monitoring. Ownership of developed intellectual property will be allocated to the Company or Verily depending on the subject matter of the underlying developed intellectual property, and, for certain subject matter, shall be jointly owned. Indemnifications In the ordinary course of business, the Company enters into agreements pursuant to which it agrees to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including losses arising out of the breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by applicable law. The Company currently has directors’ and officers’ insurance. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions, and believes that the estimated fair value of these indemnification obligations is not material and it has not accrued any amounts for these obligations. 7. Debt Bank Debt In December 2015, the Company entered into a Second Amended and Restated Loan and Security Agreement ("Loan Agreement”) with Silicon Valley Bank ("SVB"). Under the SVB Loan Agreement, the Company could borrow, repay and reborrow under a revolving credit line, but not in excess of the maximum loan amount of $ 15.0 million, until December 4, 2018, when all outstanding principal and accrued interest became due and payable. Any principal amount outstanding under the SVB Loan Agreement shall bear interest at a floating rate per annum equal to the rate published by The Wall Street Journal as the “Prime Rate” plus 0.25 %. The Company could borrow up to 80 % of its eligible accounts receivable, up to the maximum of $ 15.0 million. In October 2018, the Company entered into the Third Amended and Restated Loan and Security Agreement with SVB (“Third Amended and Restated SVB Loan Agreement”). This Agreement amends and restates the Second Amended and Restated Loan and Security Agreement between the Company and SVB dated December 4, 2015, as amended by the First Loan Modification Agreement between the Company and SVB dated August 22, 2016. Pursuant to the Third Amended and Restated SVB Loan Agreement, the Company obtained a term loan (“SVB Term Loan”) for $ 35.0 million. Total proceeds from the SVB Term Loan were used to pay off the loan agreement with Biopharma Secured Investments III Holdings Cayman LP (“Pharmakon”), totaling $ 35.8 million. The Company will make interest-only payments through October 31, 2020, followed by 36 monthly payments of principal plus interest on the SVB Term Loan. Interest charged on the SVB Term Loan will be the greater of (a) a floating rate based on the “Prime Rate” published by The Wall Street Journal minus 0.75 %, or (b) 4.25 %. Under the Third Amended and Restated SVB Loan Agreement, the Company may borrow, repay, and reborrow under a revolving credit line, but not in excess of the maximum loan amount of $ 25.0 million, which includes an $ 11.0 million standby letter of credit sublimit availability. In October 2018, a $ 6.9 million standby letter of credit was obtained in connection with a lease for the Company’s San Francisco headquarters. Any principal amount outstanding under the Third Amended and Restated SVB Loan Agreement revolving credit line shall bear interest at an amount that is the greater of (a) a floating rate per annum equal to the rate published by The Wall Street Journal as the “Prime Rate” or (b) 5.00 %. The Company may borrow up to 75 % of eligible accounts receivable, up to the maximum of $ 25.0 million. As of September 30, 2020, no amount was outstanding under the revolving credit line. 18 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) The Third Amended and Restated Loan Agreement requires the Company to maintain a minimum consolidated liquidity ratio or minimum adjusted Earnings Before Interest, Tax, Depreciation, and Amortization during the term of the loan facility. In addition, the SVB Loan Agreement contains customary affirmative and negative covenants and events of default. The Company was in compliance with loan covenants as of September 30, 2020. The obligations under the Third Amended and Restated Loan Agreement are collateralized by substantially all assets of the Company. 8. Income Taxes The Company recorded a tax provision related to its U.K. subsidiary during the nine months ended September 30, 2020 and September 30, 2019. Due to the uncertainties surrounding the realization of the U.S. deferred tax assets through future taxable income, the Company has provided a full valuation allowance and, therefore, no benefit has been recognized for the U.S. net operating loss carryforwards and other deferred tax assets. 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 the impact of the CARES Act on its condensed consolidated financial statements. 9. Stockholders’ Equity Common stock The Company’s amended and restated certificate of incorporation dated October 25, 2016, as amended, authorizes the Company to issue 100,000,000 shares of common stock with a par value of $ 0.001 per share and 5,000,000 shares of preferred stock with a par value of $ 0.001 per share. The holders of common stock are entitled to receive dividends whenever funds and assets are legally available and when declared by the board of directors, subject to the prior rights of holders of all series of convertible preferred stock outstanding. No dividends were declared through September 30, 2020. The Company had reserved shares of common stock for issuance as follows: September 30, 2020 December 31, 2019 Options issued and outstanding 747,874 1,503,247 Unvested restricted stock units 1,123,299 886,030 Shares available for grant under future stock plans 8,045,772 6,709,235 Shares available for future issuance 9,916,945 9,098,512 19 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) 10. Equity Incentive Plans Equity Incentive Plan Activity A summary of share-based awards available for grant under the 2016 Equity Incentive Plan is as follows: Awards Available for Grant Balance at December 31, 2018 4,717,292 Additional awards authorized 1,218,402 Awards granted ( 649,911 ) Awards forfeited 181,513 Awards withheld for tax purposes 60,836 Balance at December 31, 2019 5,528,132 Additional awards authorized 1,333,928 Awards granted ( 582,322 ) Awards forfeited 149,808 Awards withheld for tax purposes 76,936 Balance at September 30, 2020 6,506,482 During the nine months ended September 30, 2020, 582,322 restricted stock units ("RSUs") were granted, 219,436 RSUs vested, and 125,617 RSUs were forfeited. The following table summarizes stock option activity under the 2006 and 2016 Equity Incentive Plans: Options Outstanding Options Outstanding Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Balance at December 31, 2018 2,094,137 $ 23.20 7.02 $ 97,976 Options granted 20,010 $ 82.77 Options exercised ( 540,307 ) $ 9.59 Options forfeited ( 70,593 ) $ 54.54 Balance at December 31, 2019 1,503,247 $ 27.40 6.43 $ 62,401 Options exercised ( 731,182 ) $ 15.34 Options forfeited ( 24,191 ) $ 66.99 Balances at September 30, 2020 747,874 $ 37.92 6.40 $ 149,719 Options exercisable – September 30, 2020 584,180 $ 31.68 6.16 $ 120,594 Options vested and expected to vest – September 30, 2020 742,666 $ 37.71 6.39 $ 148,827 The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the closing price of the Company’s common stock. During the nine months ended September 30, 2019, the Company granted options with a weighted-average grant date fair value of $ 38.29 per share. The Company did no t grant any options during the nine months ended September 30, 2020. 20 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) 11. Stock-Based Compensation Employee Stock Options Valuation The fair value of employee and director stock options was estimated at the date of grant using the Black-Scholes option pricing model with the weighted average assumptions below. Three Months Ended September 30, Nine Months Ended September 30, 2019 2019 Expected term (in years) n/a 6.1 Expected volatility — % 45.0 % Risk-free interest rate — % 2.39 % Dividend yield — % — % The Company did no t grant stock options during the nine months ended September 30, 2020. Market-based RSU Valuation The fair value of market based RSUs was estimated at the date of grant using the Monte-Carlo option pricing model with the assumptions below. Additional details on the Company's market based RSUs are included below. Nine Months Ended September 30, 2020 Expected term (in years) 0.74 Expected volatility 63.0 % Risk-free interest rate 0.17 % Dividend yield — % Stock-Based Compensation The following table summarizes the total stock-based compensation expense included in the statements of operations and comprehensive loss for all periods presented (in thousands): Three Months Ended, September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Cost of revenue $ — $ — $ — $ 225 Research and development 2,839 1,242 5,785 3,366 Selling, general and administrative 14,605 6,159 21,732 15,473 Total stock-based compensation expense $ 17,444 $ 7,401 $ 27,517 $ 19,064 As of September 30, 2020, there was total unamortized compensation costs of $ 5.0 million, net of estimated forfeitures, related to unvested stock options which the Company expects to recognize over a period of approximately 1.2 years, $ 61.3 million, net of estimated forfeitures, related to unrecognized restricted stock unit (“RSU”) expense, which the Company expects to recognize over a period of 2.5 years, and $ 1.8 million unrecognized ESPP expense, which the Company will recognize over 0.2 years. Performance-based RSUs (“PRSU”) and Market-based RSUs The Company grants PRSUs to key executives of the Company. PRSUs can be earned in accordance with the performance equity program for each respective grant. 21 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) 2019 Awards In February 2019, the company granted PRSU's ("2019 awards") to be earned based on the compound annual growth rate ("CAGR") of fiscal year 2020's revenue compared to fiscal year 2018's revenue, measuring a minimum performance threshold of 75 % to earn 50 % of target, and a maximum threshold of 125 % achieved to earn 200 % of target. The 2019 awards also include a service-based component. Due to the impact of the COVID-19 pandemic, management determined that the Company’s achievement of its performance targets described above, was not probable in the first quarter of fiscal year 2020. PRSU expense of $ 4.8 million recognized in fiscal year 2019 related to the 2019 awards was reversed in the first quarter of fiscal year 2020. On June 19, 2020, the Company modified the terms of the 2019 awards to vest based on the Company’s average stock price for the 60 days preceding January 1, 2021. The modification impacted all active recipients of the 2019 awards, a total of ten employees. The 2019 awards can now be achieved from 77 % of target to 150 % of target, resulting in a maximum number of shares eligible to vest of 119,484 . The total incremental compensation cost resulting from the modification of $ 13.6 million will be recognized ratably through March of 2021. The Company recognized $ 4.6 million and $ 5.1 million of compensation cost for the three and nine months ended September 30, 2020, respectively, in connection with the 2019 awards. February 2020 Awards In February 2020, the company granted PRSU's ("February 2020 awards") for fiscal year 2022's annual unit volume CAGR compared to fiscal year 2019's annual unit volume CAGR, measuring a minimum performance threshold of 19.7 % to earn 50 % of target, and a maximum threshold of 29 % achieved to earn 200 % of target. A total of 133,834 PRSU shares were granted with grant date fair value of $ 11.0 million. The 2020 awards also include a service-based component. Due to the impact of the COVID-19 pandemic, management determined that the Company’s achievement of its performance targets described above, was not probable in the first and second quarters of fiscal year 2020. Compensation cost in connection with the probable number of shares that will vest will be recognized ratably through March of 2021. During the three months ended September 30, 2020, the Company determined that it was probable that the February 2020 Awards would vest and recognized $ 1.3 million of compensation cost in connection with the February 2020 awards. Employee Bonus to be Settled in Shares On April 11 2020, the Company's Compensation Committee of the Board of Directors approved bonus metrics for the employee bonus program and confirmed that the bonus would be paid to employees in RSUs. Actual shares awarded will be based on the Company's revenue, gross margin, and operating expenses for fiscal year 2020 and awarded to employees in February 2021 as a fixed dollar amount converted to fully vested RSUs using the trailing 30 day average stock price. The Company assessed the employee bonus awards as a liability and classified as stock-based compensation with a performance condition. Compensation cost is recorded at fair value based on the probability of achievement at each period end and expensed ratably through March of fiscal year 2021. Non employee Stock-Based Compensation On July 3, 2020, the Company’s Chief Financial Officer (“CFO”) resigned and entered into a Consulting and Professional Services Agreement (“CPSA”) with the Company to provide consulting services through July 2, 2021. Pursuant to the original terms of the awards, the CFO will continue to vest in outstanding awards as long as services are provided to the Company under the CPSA as a non-employee consultant. In accordance with ASC 718, the Company recognized expense related to all awards expected to vest over the duration of the CPSA in the current period as an equity- based severance cost as the consulting services are not substantive. Total expense related to non-employee stock- based compensation recognized for the three and nine months ended September 30, 2020 was $ 1.8 million. 22 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) 12. Net Loss Per Common Share The following table sets forth the computation of the basic and diluted net loss per share (in thousands, except share and per share data): Three Months Ended September 30, Nine Months Ended September 30 2020 2019 2020 2019 Numerator: Net loss $ ( 4,677 ) $ ( 18,293 ) $ ( 34,179 ) $ ( 37,268 ) Denominator: Weighted-average shares used to compute net loss per common share, basic and diluted 28,050,210 25,247,831 27,358,096 24,818,482 Net loss per common share, basic and diluted $ ( 0.17 ) $ ( 0.72 ) $ ( 1.25 ) $ ( 1.50 ) The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per common share for the nine months ended September 30, 2020 and 2019, because their inclusion would be anti-dilutive: Nine Months Ended September 30, 2020 2019 Options to purchase common stock 747,874 1,625,627 PRSUs and RSUs unvested 1,123,299 881,516 Warrants to purchase common stock — 2,006 Total 1,871,173 2,509,149 23 IRHYTHM TECHNOLOGIES, INC. Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)