Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Basis of Presentation The condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of Livongo Health, Inc. and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The condensed consolidated balance sheet as of December 31, 2019 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP. The accompanying interim condensed consolidated balance sheets as of June 30, 2020, the interim condensed consolidated statements of operations and the interim condensed consolidated statements of redeemable convertible preferred stock and stockholders’ deficit for the three and six months ended June 30, 2020 and 2019, and the interim condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019 are unaudited. These interim condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, include all adjustments necessary to fairly state our financial position as of June 30, 2020, the results of our operations for the three and six months ended June 30, 2020 and 2019 and result of our cash flows for the six months ended June 30, 2020 and 2019. The financial data and other financial information disclosure in the notes to these interim condensed consolidated financial statements related to the three and six months periods are also unaudited. The results for the three and six months ended June 30, 2020 are not necessarily indicative of the operating results expected for the year ending December 31, 2020 or any future period. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in our latest annual report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 24, 2020. We have revised our condensed consolidated statements of operations and cash flows for the three and six months ended June 30, 2019 to reflect the adoption of Accounting Standards Update ("ASU") No. 2014-09 We made other adjustments to our financial results for the first quarter through the third quarter of 2019 to correct errors that consist of (i) a $1.9 million total adjustment for the capitalization and amortization of device costs for Livongo for Hypertension and Livongo for Prediabetes and Weight Management, (ii) a $1.2 million total reduction of sales and marketing expenses for the capitalization and amortization of certain sales commissions, and (iii) a $0.4 million increase in sales and marketing expenses. We evaluated the materiality of these revisions, quantitatively and qualitatively, and determined that these revisions were not material to any of our previously issued condensed consolidated financial statements. In addition, in connection with the preparation of our 2019 Annual Report on Form 10-K, we identified an immaterial error in the condensed consolidated statements of cash flows for the second and third quarterly periods of 2019 included in our 2019 Quarterly Reports on Form 10-Q relating to the release of an escrow deposit for a prior acquisition that was incorrectly classified as a cash outflow within investing activities. We have corrected the error in the accompanying six months ended June 30, 2019 condensed consolidated statement of cash flows by decreasing cash flows used in investing activities by $1.3 million and increasing cash flows used in financing activities by $1.3 million. Comprehensive Loss For the three and six months ended June 30, 2020 and 2019, there was no difference between comprehensive loss and net loss. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Such estimates, judgments, and assumptions include: revenue recognition, allowance for doubtful accounts, the period of benefit for deferred commissions, the period of benefit for deferred device costs, estimated costs for capitalized internal-use software, assessment of the useful life and recoverability of long-lived assets, fair values of stock-based awards, contingent consideration in business combinations, the incremental borrowing rate ("IBR") applied in lease accounting, effective interest rate of the liability component of our Notes, income taxes, and fair value of Notes. Actual results could be different from these estimates. While the COVID-19 pandemic has not had a material adverse impact on our results of operations to date, our estimates for revenue recognition and allowance for doubtful accounts, as well as our other estimates, judgments, and assumptions, may be materially and adversely different from our actual results as a result of the COVID-19 pandemic. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected. Convertible Senior Notes On June 4, 2020 (“Issuance Date”), we issued $550.0 million aggregate principal amount of 0.875% Convertible Senior Notes due 2025 ("Notes") in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. Each $1,000 of principal of these Notes is initially convertible into 13.2329 shares of our common stock, which is equivalent to an initial conversion price of approximately $75.57 per share, subject to adjustment upon the occurrence of specified events set forth in the indenture that governs the terms of the Notes (the "Indenture"). The Notes are general unsecured obligations of Livongo and interest is payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. The Notes will mature on June 1, 2025, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering were $534.6 million after deducting purchasing discounts and issuance costs, of which $0.6 million was paid subsequent to June 30, 2020. See Note 3 for additional details. The Notes are accounted for in accordance with FASB ASC Subtopic 470-20, Debt with Conversion and Other Options. Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument is computed by estimating the fair value of a similar liability without the conversion option using an income-based approach. For the income-based approach, we use a convertible bond lattice model that includes assumptions such as volatility and the risk-free rate. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the Notes. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the contractual term of the Notes using an effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components were based on their relative values. Emerging Growth Company Status We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period and, as a result, we may not adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies until required by private company accounting standards. Concentration of Risk Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, certificates of deposit, accounts receivable and the Capped Call Transactions (Note 3). We maintain our cash primarily with domestic financial institutions of high credit quality, which may exceed federal deposit insurance corporation limits. We invest our cash equivalents in highly rated money market funds and short-term investments in certificates of deposit. We have not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk on cash, cash equivalents, investments and restricted cash and perform periodic evaluations of the credit standing of such institutions. Our sales are predominately to self-insured employers, healthcare providers, and insurance carriers located throughout North America. Accounts receivable are recorded at the invoiced amount, and are stated at realizable value, net of an allowance for doubtful accounts. We perform ongoing assessments of our clients to assess the collectability of the accounts based on a number of factors, including past transaction experience, age of the accounts receivable, review of the invoicing terms of the contracts, and recent communication with clients. We have not experienced material credit losses from our accounts receivable. Significant clients and partners are those which represent 10% or more of our net accounts receivable balance or revenue during the period at each respective consolidated balance sheet date. There were no clients that represented 10% or more of our revenue or accounts receivable balance for the three and six months ended June 30, 2019 or as of December 31, 2019. For each significant client that represented 10% or more of our accounts receivable balance or revenue during the three and six months ended June 30, 2020, revenue as a percentage of total revenue and accounts receivable as a percentage of net accounts receivable were as follows: Revenue Accounts Receivable Three Months Ended June 30, Six Months Ended June 30, June 30, December 31, 2020 2019 2020 2019 2020 2019 (unaudited) Client A 25 % — % 21 — % 12 % — % Our significant client was contracted through a partner, which is not shown below as the only revenue and our accounts receivable balance for such significant partner is from our significant client. For each significant partner that represented 10% or more of our accounts receivable balance or revenue during the periods presented, revenue as a percentage of total revenue and accounts receivable as a percentage of net accounts receivable were as follows: Revenue Accounts Receivable Three Months Ended June 30, Six Months Ended June 30, June 30, December 31, 2020 2019 2020 2019 2020 2019 (unaudited) Partner A 17 % 27 % 20 % 26 % 17 % 23 % Partner B 15 % 24 % 16 24 % 21 % 25 % We utilize a limited number of manufacturing vendors to build and assemble our products. The hardware components included in our devices are sourced from various suppliers by the manufacturer and are principally industry standard parts and components that are available from multiple vendors. Device quality or performance failures or changes in the contractors’ or vendors’ financial or business condition could disrupt our ability to supply quality products to our clients and thereby have a material adverse impact on our business, financial condition and results of operations. Recent Accounting Pronouncements Adopted in Fiscal 2020 Leases: In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02 Leases (Topic 842) and subsequent amendments to the initial guidance (collectively, "ASC 842"), which modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. This ASU is effective for us for the interim periods and year ending December 31, 2020. Early adoption is permitted. We adopted ASC 842 on January 1, 2020 using the modified retrospective approach by electing to use the optional transition method which allows us to continue to apply the previous guidance, including disclosure requirements, in the comparative periods presented. We elected to use certain practical expedients permitted under the transition guidance within the new guidance, which allows us to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. We also elected not to use the hindsight practical expedient in determining the lease term and impairment of the operating lease right-of-use ("ROU") assets and elected not to record operating leases with an initial term of 12 months or less on our condensed consolidated balance sheets. We elected not to separate lease and non-lease components for all classes of underlying assets. Adoption of the new lease standard resulted in the recording of ROU assets and operating lease liabilities of approximately $18.1 million and $18.6 million, respectively, as of January 1, 2020. The difference between the ROU assets and operating lease liabilities primarily relates to deferred rent of $0.5 million recorded in accordance with the previous lease guidance. The adoption had no impact on total cash flows from operations other than a change within operating cash flows. We determine if an arrangement is or contains a lease at inception. Our lease agreements do not contain any material options to extend or terminate leases, any material residual value guarantees, any material restrictions or covenants, or any material variable lease payments. Any variable lease payments consist of common area maintenance, taxes and other costs and are expensed as incurred. We have performed an evaluation of our other contracts with customers and suppliers in accordance with ASC 842 and have determined that, none of our other contracts contain a lease. ROU assets represent our right to use an underlying asset for the lease term, while operating lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at the commencement date. In determining the present value of lease payments, we use our IBR based on the information available at the lease commencement date, including the lease term, for operating leases. The incremental borrowing rate is a hypothetical rate based on our understanding of what our credit rating would be for a secured borrowing in the country where the lease was executed. Upon adoption, the ROU asset was valued at the amount of the operating lease liabilities adjusted for lease incentives, prepaid rent, and deferred rent as of January 1, 2020. The adoption of the new standard resulted in changes to our accounting policies for leases and in additional disclosures. See Note 8. Stock-Based Compensation: In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting . The standard simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns most of the guidance on such payments to the nonemployees with the requirements for share-based payments granted to employees. ASU No. 2018-07 is effective for us for the interim periods and the year beginning January 1, 2020. Early adoption is permitted. We adopted this new standard using a prospective method on January 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements. Disclosure of Fair Value Measurement: In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB's disclosure framework project. The new standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including interim reporting periods within those fiscal years. ASU 2018-13 is effective for us for the interim periods and the year beginning January 1, 2020. We adopted the new standard using a prospective method effective on January 1, 2020. The adoption of this ASU resulted in additional disclosures in Note 7 of our condensed consolidated financial statements. Cloud Computing Arrangements Implementation Costs : 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 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use-software. This ASU is effective for us for the year ending December 31, 2021, and interim periods within the year ending December 31, 2022. Early adoption is permitted. We early adopted this new standard on a prospective method effective on April 1, 2020, which did not have a material impact on the Company's condensed consolidated financial statements. New Accounting Pronouncements Not Yet Adopted Credit Losses: In June 2018, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The standard requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected, with further clarifications made more recently. For trade receivables, loans, and other financial assets, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities are required to be recorded through an allowance for credit losses rather than a reduction in the amortized cost basis of the securities. This new standard is effective for us for the interim periods within and the year ending December 31, 2020. Early adoption is permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements. Income Taxes : In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which simplifies that accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amending existing guidance to improve consistent application. This new standard is effective for our interim periods within and year ending December 31, 2021. Early adoption is permitted. Most amendments within this standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements. |