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.

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):

	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 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

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.

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.

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.

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:

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.

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):

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.

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.

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:

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 Bank which was finalized on October 23, 2018.

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.

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: