SEC Filing | Livongo

View:

Download DOC

Download PDF

Download XLS

Download XBRL

Document

Table of Contents

Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________

FORM 10-Q

_________________________________________

(Mark One)



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

For the quarterly period ended September 30, 2019



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

Commission File Number: 001-38983

___________________________________________

Livongo Health, Inc.

(Exact name of Registrant as specified in its charter)

___________________________________________



Delaware		26-3542036
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

150 West Evelyn Avenue, Suite 150

Mountain View, California 94041

(866) 435-5643

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

___________________________________________

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	LVGO	The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



☐	Large accelerated filer	☐	Accelerated filer

☒	Non-accelerated filer	☐	Smaller reporting company

☒	Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 31, 2019, the registrant had approximately 94,482,000 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents

Index to Financial Statements

TABLE OF CONTENTS



		PAGE
	Note Regarding Forward-Looking Statements	2
	PART I - Financial Information
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	6
	Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)	7
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Condensed Consolidated Financial Statements (Unaudited)	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	49
	PART II - Other Information	51
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	90
Item 3.	Default Upon Senior Securities	90
Item 4.	Mine Safety Disclosures	90
Item 5.	Other Information	90
Item 6.	Exhibits	91
	Signatures	92

Table of Contents

Index to Financial Statements

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risk and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:


•	our ability to retain clients and sell additional solutions to new and existing clients;


•	our ability to attract and enroll new members;


•	the growth and success of our partners and reseller relationships;


•	our ability to estimate the size of our target market;


•	uncertainty in the healthcare regulatory environment;


•	our future financial performance, including trends in revenue, costs of revenue, gross profit or gross margin, operating expenses, paying users, and free cash flow;


•	our ability to achieve or maintain profitability;


•	the demand for our solutions or for chronic condition management in general;


•	our ability to compete successfully in competitive markets;


•	our ability to respond to rapid technological changes;


•	our expectations and management of future growth;


•	our ability to develop new solutions, or enhancements to our existing solutions, and bring them to market in a timely manner;


•	our ability to offer high-quality coaching and monitoring;


•	our ability to attract and retain key personnel and highly qualified personnel;


•	our ability to protect our brand;


•	our ability to expand payor relationships;


•	our ability to maintain, protect, and enhance our intellectual property;


•	restrictions and penalties as a result of privacy and data protection laws;


•	our ability to successfully identify, acquire, and integrate companies and assets;


•	the increased expenses associated with being a public company;


•	our anticipated uses of net proceeds from our initial public offering; and


•	the future trading prices of our common stock.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our

Table of Contents

Index to Financial Statements

statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

Table of Contents

Index to Financial Statements

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

LIVONGO HEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)



	September 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	349,820		$	108,928
Short-term investment	50,000			—
Accounts receivable, net of allowance for doubtful accounts of $1,552 and $575 as of September 30, 2019 and December 31, 2018, respectively	40,901			16,623
Inventories	21,274			8,934
Deferred costs, current	12,223			6,022
Prepaid expenses and other current assets	9,350			4,935
Total current assets	483,568			145,442
Property and equipment, net	8,975			5,837
Restricted cash, noncurrent	1,270			179
Goodwill	35,794			15,709
Intangible assets, net	17,165			5,154
Deferred costs, noncurrent	4,586			2,447
Other noncurrent assets	3,547			5,485
TOTAL ASSETS	$	554,905		$	180,253
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	7,636		$	6,377
Accrued expenses and other current liabilities	28,803			16,152
Deferred revenue, current	3,909			1,614
Advance payments from partner, current	1,767			293
Total current liabilities	42,115			24,436
Deferred revenue, noncurrent	670			437
Advance payment from partner, noncurrent	7,754			6,432
Other noncurrent liabilities	3,040			3,825
TOTAL LIABILITIES	53,579			35,130
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock, par value of $0.001 per share; zero and 58,615 shares authorized as of September 30, 2019 and December 31, 2018, respectively; zero and 58,615 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively; aggregate liquidation preference of zero and $237,650 as of September 30, 2019 and December 31, 2018, respectively	—			236,929
Stockholders’ equity (deficit):
Preferred stock, par value of $0.001 per share; 100,000 and zero shares authorized as of September 30, 2019 and December 31, 2018, respectively; zero shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	—			—
Common stock, par value of $0.001 per share; 900,000 and 99,250 shares authorized as of September 30, 2019 and December 31, 2018, respectively; 94,454 and 17,691 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	94			18
Additional paid-in capital	663,761			21,789
Accumulated deficit	(162,529		)	(113,613		)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)	501,326			(91,806		)
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	554,905		$	180,253

Table of Contents

Index to Financial Statements

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

Table of Contents

Index to Financial Statements

LIVONGO HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	46,658		$	18,782		$	119,605		$	47,225
Cost of revenue	12,199			5,558			35,222			13,371
Gross profit	34,459			13,224			84,383			33,854
Operating expenses:
Research and development	17,794			6,804			37,079			16,485
Sales and marketing	23,543			11,026			56,644			24,392
General and administrative	14,182			6,408			41,998			14,848
Change in fair value of contingent consideration	55			—			1,011			—
Total operating expenses	55,574			24,238			136,732			55,725
Loss from operations	(21,115		)	(11,014		)	(52,349		)	(21,871		)
Other income, net	1,409			505			2,056			970
Loss before provision for income taxes	(19,706		)	(10,509		)	(50,293		)	(20,901		)
Provision for (benefit from) income taxes	6			7			(1,377		)	21
Net loss	$	(19,712	)	$	(10,516	)	$	(48,916	)	$	(20,922	)
Accretion of redeemable convertible preferred stock	(13		)	(42		)	(96		)	(119		)
Net loss attributable to common stockholders	$	(19,725	)	$	(10,558	)	$	(49,012	)	$	(21,041	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.27	)	$	(0.64	)	$	(1.34	)	$	(1.29	)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	72,197			16,538			36,636			16,328

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

Table of Contents

Index to Financial Statements

LIVONGO HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

(unaudited)



	Redeemable Convertible Preferred Stock					Common Stock				Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
	Shares		Amount			Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
Balance as of June 30, 2019	58,615		$	237,012		20,890		$	21	$	33,326		$	(142,817	)	$	(109,470	)
Accretion of redeemable convertible preferred stock	—		13			—		—		(13		)	—			(13		)
Conversion of redeemable convertible preferred stock to common stock upon IPO	(58,615	)	(237,025		)	58,615		59		236,966			—			237,025
Issuance of common stock upon IPO	—		—			14,590		14		377,744			—			377,758
Issuance of common stock upon exercise of stock options	—		—			231		—		516			—			516
Issuance of common stock upon exercise of warrants	—		—			90		—		60			—			60
Issuance of common stock upon release of restricted stock units	—		—			56		—		—			—			—
Tax withholding on releasing of restricted stock units	—		—			(18	)	—		(563		)	—			(563		)
Stock-based compensation expense	—		—			—		—		15,725			—			15,725
Net loss	—		—			—		—		—			(19,712		)	(19,712		)
Balance as of September 30, 2019	—		$	—		94,454		$	94	$	663,761		$	(162,529	)	$	501,326

Balance as of June 30, 2018	58,615		$	236,844		17,411		$	17	$	15,722		$	(90,637	)	$	(74,898	)
Accretion of redeemable convertible preferred stock			42			—		—		(42		)	—			(42		)
Issuance of common stock upon exercise of stock options	—		—			142		1		136			—			137
Stock-based compensation expense	—		—			—		—		1,299			—			1,299
Net loss	—		—			—		—		—			(10,516		)	(10,516		)
Balance as of September 30, 2018	58,615		$	236,886		17,553		$	18	$	17,115		$	(101,153	)	$	(84,020	)

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

Table of Contents

Index to Financial Statements

LIVONGO HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

(unaudited)



	Redeemable Convertible Preferred Stock					Common Stock				Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
	Shares		Amount			Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
Balance as of December 31, 2018	58,615		$	236,929		17,691		$	18	$	21,789		$	(113,613	)	$	(91,806	)
Accretion of redeemable convertible preferred stock	—		96			—		—		(96		)	—			(96		)
Conversion of redeemable convertible preferred stock to common stock	(58,615	)	(237,025		)	58,615		59		236,966			—			237,025
Issuance of common stock upon exercise of stock options	—		—			1,957		1		1,958			—			1,959
Issuance of restricted stock awards	—		—			982		1		(1		)	—			—
Issuance of common stock upon releasing of restricted stock units	—		—			547		1		(1		)	—			—
Tax withholding on releasing of restricted stock units	—		—			(18	)	—		(563		)	—			(563		)
Issuance of common stock upon IPO	—		—			14,590		14		377,744			—			377,758
Issuance of common stock upon exercise of warrants	—		—			90		—		60			—			60
Stock-based compensation expense	—		—			—		—		25,905			—			25,905
Net loss	—		—			—		—		—			(48,916		)	(48,916		)
Balance as of September 30, 2019	—		$	—		94,454		$	94	$	663,761		$	(162,529	)	$	501,326

Balance as of December 31, 2017	45,960		$	132,017		17,030		$	17	$	13,806		$	(80,231	)	$	(66,408	)
Issuance of Series E redeemable convertible preferred stock for cash of $104,750 at $4.1484 per share, net of issuance costs of $251	12,655		104,750			—		—		—			—			—
Accretion of redeemable convertible preferred stock	—		119			—		—		(119		)	—			(119		)
Issuance of common stock upon exercise of stock options	—		—			523		1		411			—			412
Stock-based compensation expense	—		—			—		—		3,017			—			3,017
Net loss	—		—			—		—		—			(20,922		)	(20,922		)
Balance as of September 30, 2018	58,615		$	236,886		17,553		$	18	$	17,115		$	(101,153	)	$	(84,020	)

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

Table of Contents

Index to Financial Statements

LIVONGO HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(48,916	)	$	(20,922	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense	2,312			810
Amortization of intangible assets	1,889			368
Change in fair value of contingent consideration	1,011			—
Allowance for doubtful accounts	501			64
Stock-based compensation expense	25,727			2,972
Deferred income taxes	(1,396		)	—
Changes in operating assets and liabilities, net of impact of acquisitions:
Accounts receivable, net	(23,441		)	(7,499		)
Inventories	(12,340		)	(700		)
Deferred costs	(8,340		)	(3,153		)
Prepaid expenses and other assets	(4,052		)	(422		)
Accounts payable	1,041			1,648
Accrued expenses and other liabilities	6,547			5,072
Deferred revenue	1,128			419
Advance payments from partner	2,796			(174		)
Net cash used in operating activities	(55,533		)	(21,517		)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment	(1,334		)	(625		)
Capitalized internal-use software costs	(3,558		)	(2,323		)
Purchase of short-term investment	(50,000		)	—
Acquisitions, net of cash acquired	(27,435		)	(12,268		)
Escrow deposit	434			(7,000		)
Net cash used in investing activities	(81,893		)	(22,216		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock upon initial public offering, net of issuance costs	377,953			—
Proceeds from exercise of stock options, net of repurchases	1,959			412
Proceeds from exercise of common stock warrants	60			—
Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs	—			104,750
Payment of deferred purchase consideration	—			(2,000		)
Taxes paid related to net share settlement of equity awards	(563		)	—
Net cash provided by financing activities	379,409			103,162
Net increase in cash, cash equivalents, and restricted cash	241,983			59,429
Cash, cash equivalents, and restricted cash, beginning of period	109,107			61,523
Cash, cash equivalents, and restricted cash, end of period	$	351,090		$	120,952
Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents	$	349,820		$	120,672
Restricted cash	1,270			280
Total cash, cash equivalents, and restricted cash, end of period	$	351,090		$	120,952
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Accretion of redeemable convertible preferred stock	$	96		$	119
Purchases of property and equipment included in accounts payable and accrued liabilities	$	363		$	19
Contingent consideration liability related to Retrofit acquisition	$	1,316		$	6,204
Contingent consideration liability related to myStrength acquisition	$	3,300		$	—
Unpaid working capital adjustment related to myStrength acquisition	$	119		$	—
Capitalized internal-use software costs in accounts payable and accrued liabilities	$	(95	)	$	110
Unpaid offering costs	$	195		$	—

Table of Contents

Index to Financial Statements

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

Table of Contents

Index to Financial Statements

LIVONGO HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Description of Business

Description of Business

Livongo Health, Inc. (“we”, “us”, “the Company”, or “Livongo”) was incorporated in the state of Delaware on October 16, 2008, under the name of EosHealth, Inc. In September 2014, we changed our name to Livongo Health, Inc. Livongo empowers people with chronic conditions to live better and healthier lives. We have created a unified platform that provides smart, cellular-connected devices, supplies, informed coaching, data science-enabled insights and facilitates access to medications across multiple chronic conditions to help our members lead better lives. We currently offer Livongo for Diabetes, Livongo for Hypertension, Livongo for Prediabetes and Weight Management, and Livongo for Behavioral Health by myStrength. We create consumer-first experiences with high member satisfaction, measurable, sustainable health outcomes, and more cost-effective care for our members and our clients. This approach is leading to better clinical and financial outcomes while also creating a better experience for people with chronic conditions and their care team of family, friends, and medical professionals. Our headquarters are located in Mountain View, California, and we serve customers throughout North America.

Initial Public Offering

In July 2019, we completed our initial public offering ("IPO") in which we issued and sold 14,590,050 shares of our common stock at an offering price of $28.00 per share, including 1,903,050 shares of common stock pursuant to the exercise in full of the underwriters' option to purchase additional shares. We received net proceeds of $377.8 million, after deducting underwriting discounts and commissions of $28.6 million and offering costs of $2.2 million. Offering costs are capitalized and consist of fees and expenses incurred in connection with the sale of our common stock in the IPO, including the legal, accounting, printing and other IPO-related costs. Upon completion of the IPO, these deferred offering costs were reclassified to stockholders’ equity and recorded against the proceeds from the offering. Immediately prior to the closing of the IPO, all 58,615,488 shares of our then-outstanding redeemable convertible preferred stock automatically converted into 58,615,488 shares of common stock at their respective conversion ratios and we reclassified $236.9 million of redeemable convertible preferred stock to additional paid-in capital and $0.1 million to common stock on our condensed consolidated balance sheet.

Reverse Stock Split

In June 2019, our board of directors and stockholders approved a 1-for-2 reverse stock split of our common stock and redeemable convertible preferred stock, which was effected on June 27, 2019 pursuant to an amendment to our amended and restated certificate of incorporation. The par value of the common stock and redeemable convertible preferred stock was not adjusted as a result of the reverse stock split. All references to redeemable convertible preferred stock, common stock, options to purchase common stock, restricted stock awards, restricted stock units, common stock warrants, per share data, and related information included in this Quarterly Report on Form 10-Q have been adjusted to reflect this reverse stock split for all periods presented.

2. 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, 2018 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 September 30, 2019, 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 nine months ended September 30, 2019 and 2018, and the interim condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 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,

Table of Contents

Index to Financial Statements

include all adjustments necessary to fairly state our financial position as of September 30, 2019, the results of our operations for the three and nine months ended September 30, 2019 and 2018 and result of our cash flows for the nine months ended September 30, 2019 and 2018. The financial data and other financial information disclosure in the notes to these interim condensed consolidated financial statements related to the three and nine months periods are also unaudited. The results for the three and nine months ended September 30, 2019 are not necessarily indicative of the operating results expected for the year ending December 31, 2019 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 the final prospectus for our IPO filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (File No. 333-232412) on July 25, 2019.

Comprehensive Loss

For the three and nine months ended September 30, 2019 and 2018, 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, assessment of the useful life and recoverability of long-lived assets, fair values of stock-based awards, contingent consideration in business combinations, and income taxes. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected.

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 will 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, certificate of deposit, and accounts receivable. 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 investment in a certificate 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 and credit evaluations 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.

Table of Contents

Index to Financial Statements

Significant customers 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 customers that represented 10% or more of our accounts receivable balance or revenue for the periods presented. 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 September 30,				Nine Months Ended September 30,				September 30,		December 31,
	2019		2018		2019		2018		2019		2018
					(unaudited)
Partner A	30	%	32	%	28	%	33	%	29	%	28	%
Partner B	22	%	*		23	%	*		25	%	13	%

_________________


*	Less than 10% of total revenue or net accounts receivable

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. Quality or performance failures of the glucometer or changes in the contractors’ or vendors’ financial or business condition could disrupt our ability to supply quality products to our customers and thereby have a material adverse impact on our business, financial condition and results of operations.

Recent Accounting Pronouncements Adopted

Comprehensive Income: In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. This ASU becomes effective for us for the year ending December 31, 2019 and the interim periods therein. Early adoption is permitted. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

Leases: In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 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. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, and ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which affect certain aspects of the previously issued guidance. In December 2018, the FASB issued ASU No. 2018-20, Narrow-Scope Improvements for Lessor, Leases (Topic 842), which provides guidance on sales tax and other taxes collected from lessees. In September 2019, the FASB issued ASU No. 2019-01, Codification Improvements to Topic 842, Leases, which affect certain aspects of the previously issued guidance. Amendments include an additional transition method that allows entities to apply the new standard on the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings, as well as a new practical expedient for lessors. This ASU is effective for us for the year ending December 31, 2020 and interim periods within the year ending December 31, 2021. Early adoption is permitted. We are currently evaluating adoption methods and whether this ASU will have a material impact on our consolidated financial statements.

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 year ending December 15, 2020, and interim periods within the year ending December 31, 2021. Early adoption is permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.

Table of Contents

Index to Financial Statements

Internal Use Software: 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 are currently evaluating the impact of this ASU on our consolidated financial statements.

Revenue Recognition: In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which amends the existing accounting standards for revenue recognition. ASU No. 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU No. 2014-09 will be effective for us for our annual results for the year ending December 31, 2019, and our interim periods beginning after December 31, 2019. Subsequently, the FASB has issued the following standards related to ASU No. 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, which clarifies narrow aspects of ASC 606 or corrects unintended application of the guidance.

We plan to adopt the new revenue standard using the modified retrospective transition method when it becomes effective for us, which is the year ending December 31, 2019 and interim periods beginning after December 31, 2019. We are in the process of reviewing our significant contracts and are evaluating the impact of the new standard. Based on our preliminary impact assessment of the Livongo for Diabetes solution, we believe that the overall promise to our customers is to improve member health results and reduce healthcare costs, and the delivery of this promise would not be possible without the integration of Livongo devices, supplies, access to our web-based platform, and clinical and data services. The promises to transfer the goods and services are not separately identifiable in accordance with ASC 606-10-25-19b, evidenced by the fact that we provide a significant service of integrating the goods and services provided by us (i.e., inputs) into a combined output (i.e., member behavior modifications) that result in the fulfillment of our promise to our customers. We are currently finalizing our assessment of the full accounting impact of the standard; however, we have identified that treatment of variable consideration will be impacted by our adoption. Additionally, incremental costs of obtaining a contract will be recognized as assets to the extent the period of benefit is greater than one year. We continue to evaluate the effect that the standard will have on our consolidated financial statements, including disclosures, and preliminary assessments are subject to change.

3. Business Combinations

Retrofit Inc.

In April 2018, we acquired all of the issued and outstanding shares of Retrofit Inc. (“Retrofit”), a privately-held, Illinois-based entity, and a leading provider of weight-management and disease-prevention programs, through a share purchase agreement (the “Retrofit Purchase Agreement”) in exchange for cash consideration (the “Retrofit Acquisition”). The Retrofit Acquisition provides us with an evidence-based diabetes prevention program that enhances our data science capabilities and our expertise in holistic weight management including nutrition, exercise and mindset.

The total consideration transferred as part of the Retrofit Acquisition consisted of a cash payment on the closing date, adjusted for customary closing adjustments, of $12.4 million. Upon the close of the Retrofit Acquisition, as part of the Retrofit Purchase Agreement, we placed in escrow an earn-out consideration of $7.0 million held by a third-party escrow agent to be released to the former stockholders of Retrofit contingent upon achieving future qualified member targets as determined on December 31, 2018, 2019, and 2020 (the “Retrofit Contingent Consideration”). We recorded a corresponding escrow asset of $7.0 million on our consolidated balance sheet. We estimated the fair value of the Retrofit Contingent Consideration to be $6.2 million as of the acquisition date using a Monte Carlo simulation model, which together with the cash consideration resulted in total purchase consideration of $18.6 million. The Retrofit Contingent Consideration is subject to remeasurement at each reporting date until the payments are released from escrow, with the remeasurement adjustment reported in our consolidated statements of operations. On December 31, 2018, we subsequently reduced the fair value of the Retrofit Contingent Consideration to $5.0 million, with the change in fair value of $1.2 million recorded in our condensed consolidated statements of operations. During each of the three and nine months ended September 30, 2019, the fair value of the Retrofit Contingent Consideration was reduced and we recorded a benefit of $0.3 million and $0.6 million, respectively, within the change in fair value of contingent consideration on our condensed consolidated statement of operations. In April 2019, we released $1.8 million from the escrow deposit, of which $1.3 million was

Table of Contents

Index to Financial Statements

paid to the former stockholders of Retrofit. As of September 30, 2019, the remaining Retrofit Contingent Consideration was $3.1 million.

Additionally, we recognized $0.3 million of acquisition-related costs as general and administrative expense in our condensed consolidated statements of operations during the nine months ended September 30, 2018.

The purchase consideration of $18.6 million was allocated as follows:



	Amount
	(in thousands)
Cash and cash equivalents	$	87
Accounts receivable	409
Inventories	56
Prepaid expenses and other current assets	124
Property and equipment	52
Intangible assets	5,580
Total assets acquired	6,308
Accounts payable	366
Accrued expenses and other liabilities	394
Deferred revenue	212
Total liabilities assumed	972
Goodwill	13,223
Total purchase consideration	$	18,559

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the acquisition date:



	Cost		Useful Life
	(in thousands)		(years)
Customer relationships	$	3,890	10.0
Developed technology	1,650		5.0
Trade name	40		2.0
Total	$	5,580

The fair value assigned to developed technology and trade name was determined using a relief from royalty method, where the owner of the asset realizes a benefit from owning the intangible asset rather than paying a rental or royalty rate for use of the asset. The fair value of customer relationships was determined using the multi-period excess earnings method, which estimates the revenue and cash flows derived from the asset and then deducts portions of the cash flows that can be attributed to supporting assets otherwise recognized.

Goodwill represents the excess of the purchase consideration over the estimated acquisition date fair value of the net tangible and intangible assets acquired and liabilities assumed. Goodwill is primarily attributable to expected post-acquisition synergies from integrating Retrofit’s assembled workforce and developed technology into our product offerings and cross-selling opportunities. Goodwill recorded is not deductible for income tax purposes.

Revenue and net income of Retrofit for the three and nine months ended September 30, 2019 were included in our condensed consolidated statement of operations. Revenue and net loss of Retrofit of $1.1 million and $1.0 million for the three months ended September 30, 2018, respectively, and $2.2 million and $1.8 million for the nine months ended September 30, 2018, respectively, were included in our condensed consolidated statement of operations.

Table of Contents

Index to Financial Statements

Unaudited Pro Forma Financial Information

The following unaudited pro forma information presents the combined results of operations as if the Retrofit Acquisition had been completed on January 1, 2017, the beginning of the comparable annual reporting period prior to the acquisition. The unaudited pro forma results include adjustments primarily related to the following: (i) interest expense related to the legacy debt of Retrofit that was not acquired; (ii) amortization of the acquired intangible assets; (iii) recognition of post-acquisition stock-based compensation expense; (iv) the inclusion of acquisition-related costs as of the earliest period presented; and (v) the associated tax impact of the acquisitions and these unaudited pro forma adjustments.



	Nine Months Ended
	September 30, 2018
	(in thousands)
Revenue	$	48,733
Net loss	$	(22,499	)

myStrength, Inc.

In February 2019, we acquired all of the issued and outstanding shares of myStrength, Inc. (“myStrength”), a privately-held entity based in Denver, Colorado, and a leading provider of digital behavioral health solutions through an agreement and plan of merger (the “myStrength Purchase Agreement”) in exchange for cash consideration (the “myStrength Acquisition”). The myStrength Acquisition will enable us to more fully address the health of the whole person by bringing behavioral health conditions including depression, anxiety, stress, substance use disorder, chronic pain, opioid addiction and recovery, and insomnia to our Applied Health Signals solution.

The total consideration for the myStrength Acquisition was $30.1 million in cash, subject to a closing adjustment of $0.1 million. As part of the myStrength Purchase Agreement, we are obligated to pay an earn-out consideration up to $5.0 million contingent upon satisfying future milestones for the year ending December 31, 2019 (the “myStrength Contingent Consideration”). We estimated the fair value of the myStrength Contingent Consideration to be $3.3 million as of the acquisition date using a Monte Carlo simulation model, which together with the cash consideration, resulted in total purchase consideration of $33.5 million. The myStrength Contingent Consideration is subject to remeasurement at each reporting date until the payments are made, with the remeasurement adjustment reported in our consolidated statements of operations. On September 30, 2019, we increased the fair value of the myStrength Contingent Consideration to $4.9 million and recorded an expense of $0.4 million and $1.6 million for the three and nine months ended September 30, 2019, respectively, in our condensed consolidated statements of operations.

The purchase consideration of $33.5 million was allocated as follows:



	Amount
	(in thousands)
Cash and cash equivalents	$	2,643
Accounts receivable	1,337
Other current assets	140
Property and equipment	114
Intangible assets	13,900
Other assets	34
Total assets acquired	18,168
Accounts payable	173
Accrued expenses and other liabilities	1,787
Deferred revenue	1,400
Deferred tax liability, net	1,396
Total liabilities assumed	4,756
Goodwill	20,085
Total purchase consideration	$	33,497

Table of Contents

Index to Financial Statements

The following table sets forth the components of the identifiable intangible assets acquired and their estimated useful lives as of the acquisition date:



	Cost		Useful Life
	(in thousands)		(years)
Customer relationships	$	4,300	7.0
Developed technology	9,200		7.0
Trade name	400		5.0
Total	$	13,900

The estimated fair values of the intangible assets acquired were determined based on the income approach to measure the fair value of the trade name, customer relationships, and developed technology. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy.

Additionally, during the nine months ended September 30, 2019, we incurred a total of $0.3 million of acquisition-related costs as a result of the myStrength acquisition.

Goodwill represents the excess of the purchase consideration over the estimated acquisition date fair value of the net tangible and intangible assets acquired and liabilities assumed. Goodwill is primarily attributable to expected post-acquisition synergies from integrating myStrength’s assembled workforce and developed technology into our product offerings and cross-selling opportunities. Goodwill recorded is not deductible for income tax purposes.

Revenue and net loss of myStrength of $1.9 million and $0.4 million, respectively, for the three months ended September 30, 2019, were included in our condensed consolidated statement of operations. Revenue and net loss of myStrength of $4.7 million and $1.0 million, respectively, for the nine months ended September 30, 2019, were included in our condensed consolidated statement of operations.

Unaudited Pro Forma Financial Information

The following unaudited pro forma information presents the combined results of operations as if the myStrength Acquisition had been completed on January 1, 2018, the beginning of the comparable prior annual reporting period. The unaudited pro forma results include adjustments primarily related to the following: (i) interest expense related to the legacy debt of myStrength that was not acquired; (ii) amortization of the acquired intangible assets; (iii) fair value adjustment for deferred revenue; (iv) the inclusion of acquisition-related costs as of the earliest period presented; and (v) the associated tax impact of the acquisitions and these unaudited pro forma adjustments.



	Nine Months Ended September 30,
	2019			2018
	(in thousands)
Revenue	$	120,202		$	50,034
Net loss	$	(47,580	)	$	(25,219	)

4. Balance Sheet Components

Inventories

Inventories of $21.3 million and $8.9 million, as of September 30, 2019 and December 31, 2018, respectively, consisted of finished goods.

Table of Contents

Index to Financial Statements

Property and Equipment, Net

Property and equipment consisted of the following:



	September 30,			December 31,
	2019			2018
	(in thousands)
Computer, equipment and software	$	1,961		$	652
Furniture and fixtures	922			730
Capitalized internal-use software	9,293			5,653
Leasehold improvements	886			585
Property and equipment	13,062			7,620
Less: accumulated depreciation	(4,087		)	(1,783		)
Property and equipment, net	$	8,975		$	5,837

Depreciation and amortization expense was $0.9 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively, and $2.3 million and $0.8 million for the nine months ended September 30, 2019 and 2018, respectively.

Intangible Assets, Net

Intangible assets consisted of the following as of September 30, 2019:



	Gross Value		Accumulated Amortization			Net Book Value		Weighted- Average Remaining Useful Life
	(in thousands)							(years)
Customer relationships	$	8,190	$	(977	)	$	7,213	7.3
Developed technology	11,020		(1,428		)	9,592		5.9
Trade name	448		(88		)	360		4.2
Total	$	19,658	$	(2,493	)	$	17,165

Intangible assets consisted of the following as of December 31, 2018:



	Gross Value		Accumulated Amortization			Net Book Value		Weighted- Average Remaining Useful Life
	(in thousands)							(years)
Customer relationships	$	3,890	$	(266	)	$	3,624	9.3
Developed technology	1,820		(329		)	1,491		4.3
Trade names	48		(9		)	39		1.4
Total	$	5,758	$	(604	)	$	5,154

Amortization expense for intangible assets for three and nine months ended September 30, 2019 and 2018 is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands)
Customer relationships	$	251	$	98	$	669	$	179
Developed technology	420		92		1,149		178
Trade names	25		6		71		11
Total	$	696	$	196	$	1,889	$	368

Table of Contents

Index to Financial Statements

The expected future amortization expense related to intangible assets as of September 30, 2019 was as follows:



	Amount
	(in thousands)
Remainder of 2019	$	696
2020	2,769
2021	2,762
2022	2,750
2023	2,494
Thereafter	5,694
Total	$	17,165

Goodwill

Goodwill consisted of the following:



	Amount
	(in thousands)
Beginning balance as of December 31, 2018	$	15,709
Goodwill acquired (Note 3)	20,085
Ending balance as of September 30, 2019	$	35,794

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:



	September 30,		December 31,
	2019		2018
	(in thousands)
Prepaid expenses	$	5,981	$	2,084
Escrow deposit, current	2,100		1,750
Interest receivable	652		—
Prepaid rent	339		227