The Company had product and product-related services revenue consisting of revenue from the sale of RUO and MDx instruments and consumables and the use of the HTG EdgeSeq proprietary technology to process samples and design custom RUO assays for the three and nine months ended September 30, 2019 and 2018 as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Product revenue:
RUO instruments	$	324,023	$	24,844	$	913,551	$	309,711
MDx instruments		90,468		—		187,055		—
RUO consumables		1,026,221		283,635		2,069,497		1,076,888
MDx consumables		32,165		144,264		149,177		196,123
Total product revenue		1,472,877		452,743		3,319,280		1,582,722
Product-related services revenue:
Custom RUO assay development		2,129,251		262,044		3,978,428		565,768
RUO sample processing		708,915		600,057		4,100,208		2,923,212
Total product-related services revenue		2,838,166		862,101		8,078,636		3,488,980
Total product and product-related services revenue	$	4,311,043	$	1,314,844	$	11,397,916	$	5,071,702

Because the Company’s agreements for product and product-related services revenue have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations.

The delivery of each instrument and related installation and calibration are considered to be a single performance obligation, as the HTG EdgeSeq instrument must be professionally installed and calibrated prior to use. Instrument product revenue is generally recognized upon installation and calibration of the instrument by field service engineers, which represents the point at which the customer has the ability to use the instrument and has accepted the asset. Installation generally occurs within one month of instrument shipment.

The delivery of each consumable is a separate performance obligation. Consumables revenue is recognized upon transfer of control, which represents the point when the customer has legal title and the significant risks of ownership of the asset. The Company’s standard terms and conditions provide that no right of return exists for instruments and consumables, unless replacement is necessary due to delivery of defective or damaged product. Customer payment terms vary but are typically between 30 and 90 days of revenue being earned from shipment or delivery, as applicable.

Shipping and handling fees charged to the Company’s customers for instruments and consumables shipped are included in the accompanying condensed consolidated statements of operations as part of product and product-related services revenue. Shipping and handling costs for sold products shipped to the Company’s customers are included in the accompanying condensed consolidated statements of operations as part of cost of product and product-related services revenue.

For sales of consumables in the United States, standard delivery terms are FOB shipping point, unless otherwise specified in the customer contract, reflecting transfer of control to the customer upon shipment. The Company has elected the practical expedient to account for shipping and handling as activities to fulfill the promise to transfer the consumables.

Product revenue includes four categories of instrument and consumable revenue, all accounted for under the policies outlined above. RUO instrument and consumable revenue includes the sale of our RUO profiling products, including instruments, instrument support contracts and RUO assay kits to biopharmaceutical companies, academic research centers and molecular testing laboratories to be used for research use only. MDx instrument and consumable revenue is revenue generated from the sale of CE/IVD labeled diagnostic products and the sale of our RUO instrument and consumable products to customers using these products in their lab-developed tests.

The Company recognized revenue of $0 and $68,820 of product revenue from performance obligations that were satisfied in previous periods for the three and nine months ended September 30, 2019, respectively, compared to $0 for both the three and nine months ended September 30, 2018.

The Company also provides sample preparation and processing services and molecular profiling of retrospective cohorts for its customers through its VERI/O laboratory, whereby the customer provides samples to be processed using HTG EdgeSeq technology specified in the order. Customers are charged a per sample fee for sample processing services which is recognized as revenue upon delivery of a data file to the customer showing the results of testing and completing delivery of the agreed upon service. This is when the customer can use and benefit from the results of testing and the Company has the present right to payment.

The Company enters into custom RUO assay design agreements that may generate up-front fees and subsequent payments that might be earned upon completion of design process phases. The Company measures progress toward complete satisfaction of its performance obligation to perform custom RUO assay design using an output method based on the costs incurred to date compared to total expected costs, as this is representative of the delivery of outputs under the arrangements and the best measure of progress. However, because in most instances the assay development fees are contingent upon completion of each phase of the design project and the decision of the customer to proceed to the next phase, the amount to be included in the transaction price and recognized as revenue is limited to that which the customer is contractually obligated to pay upon completion of that phase, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Changes in estimates of total expected costs are accounted for prospectively as a change in estimate. From period to period, custom RUO assay design service revenue can fluctuate substantially based on the completion of design-related phases.

The Company recognized revenue of approximately $0 and $41,137 of custom RUO assay design revenue from performance obligations that were satisfied in previous periods for the three and nine months ended September 30, 2019, respectively, compared to $0 for both the three and nine months ended September 30, 2018.

The Company follows ASC 606, Revenue from Contracts with Customers and ASC 808, Collaborative Arrangements to determine the appropriate recognition of revenue under our collaborative research, development and commercialization agreements that contain multiple elements. For the three and nine months ended September 30, 2019 and 2018 all collaborative development services revenue was generated from statements of work (each, an “SOW”) entered into under the Company’s Master Assay Development, Commercialization and Manufacturing Agreement with QML.

In November 2016, the Company entered into the Governing Agreement, which created the framework for QML and the Company to combine their technological and commercial strengths to offer biopharmaceutical companies a complete NGS-based solution for the development, manufacture and commercialization of companion diagnostic assays. Under the Governing Agreement, the parties jointly sought companion diagnostic programs with biopharmaceutical companies, with QML entering into sponsor project agreements with interested biopharmaceutical companies for specified projects, and QML and the Company entering into statements of work which set forth the rights and obligations of QML and the Company with respect to each project. During the period of this report there were no significant modifications or financial events relating to the Governing Agreement since the disclosures made by the Company in its Annual Report on Form 10‑K, filed with the SEC on March 7, 2019. See Item 5 of Part II of this Quarterly Report for discussion of subsequent event related to the Governing Agreement.

The Company has determined that SOW One, SOW Two and SOW Three (each defined below) are collaborative arrangements and that QML meets the definition of a customer under ASC 606. Additionally, each SOW is a separate contract with a single performance obligation to provide development services. Under each SOW, QML pays the Company a monthly fee for development work performed by the Company and its subcontractors (collectively, the “Monthly Fee”). The Monthly Fee is based on the employee and materials costs incurred during the month, which is subject to significant variability from period to period and unknown until the costs are incurred. Therefore, the Monthly Fee, which is based on use of hours and costs as a measure of progress, is included in the transaction price and recognized as revenue over time when the costs are incurred, and the Monthly Fee is billed to QML. It is at this time that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company and QML also will share any net profits resulting from performance of the development work as determined pursuant to the Governing Agreement. Such profit-sharing payment(s) is (are) deemed to be variable consideration using the expected value method and is (are) included in the transaction price upon completion of the respective SOW deliverables, acceptance of corresponding deliverables, and the mutual agreement by QML and the Company on the calculation of net profit, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

Because each SOW has an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations for each SOW.

In June 2017, the Company and QML entered into the first statement of work under the Governing Agreement, which has been twice amended in December 2017 and March 2018 (collectively, “SOW One”). SOW One addressed the activities of the Company and QML in support of the development and potential commercialization of a NGS-based companion diagnostic assay that was the subject of a sponsor project agreement between QML and a biopharmaceutical company (“Pharma One”). In May 2018, SOW One was terminated by QML as a result of Pharma One’s termination of the development project. The Company discontinued development activities related to the project following wind down activities completed in the second quarter of 2018.

Revenue of $0 and $2,397,136 relating to SOW One was included in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2018, respectively. Costs relating to development activities conducted by the Company pursuant to SOW One of $0 and $1,716,115 have been included in research and development expense in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2018, respectively. There was no revenue or costs relating to SOW One during the three or nine months ended September 30, 2019, and there were no accounts receivable relating to SOW One as of September 30, 2019 or December 31, 2018.

In October 2017, the Company and QML entered into the second statement of work under the Governing Agreement (“SOW Two”), which was made effective as of June 2, 2017 (“Onset Date”). The Company and QML amended SOW Two twice in August 2018 and two additional times, in September 2018 and in January 2019. SOW Two addresses development activities conducted by the Company and QML since the Onset Date and those expected to be further conducted by the parties in connection with what is expected to be a multi-stage project leading to the potential development and commercialization of an NGS-based companion diagnostic assay in support of one or more therapeutic development and commercialization programs for a third-party biopharmaceutical company.

The initial-phase investigational-use-only (“IUO”) development activities under SOW Two and the first three amendments related to next phases, which include the use of the IUO assay developed in the initial-phase in a retrospective clinical trial and in additional disease indications, have been completed. The fourth amendment of SOW Two, effective as of February 5, 2019, contemplates the use of the IUO assay in multiple biopharmaceutical company clinical trials and additional development activities which could potentially be included in a future companion diagnostic regulatory submission.

Revenue of $627,614 and $2,209,597, inclusive of SOW Two Monthly Fees and $301,690 and $355,310 of SOW Two profit-sharing payments has been included in collaborative development services revenue in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively. Revenue of $2,184,493 and $3,665,311, reflecting SOW Two Monthly Fees and $439,910 and $826,279 of SOW Two profit-sharing payments has been included in collaborative development services revenue in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2018, respectively. Accounts receivable relating to SOW Two of $834,974 and $1,007,950 remained in the accompanying condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively. Costs relating to development activities conducted by the Company pursuant to SOW Two of $244,673 and $1,345,705 have been included in research and development expense in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively, compared to $1,667,303 and $2,431,445 for the three and nine months ended September 30, 2018, respectively.

In January 2018, the Company and QML entered into a third statement of work under the Governing Agreement (“SOW Three”) and amended SOW Three in September 2018. SOW Three relates to development activities for a NGS-based clinical-trial assay (“SOW Three Project”) in connection with a sponsor project agreement between QML and a pharmaceutical company (“Pharma Three”). Initial assay development activities under SOW Three have been completed, and the first amendment to SOW Three provides for the development of an IUO assay, subsequent retrospective testing of clinical trial samples, design verification and, subject to satisfactory achievement of relevant performance and regulatory milestones, regulatory submissions in the United States and European Union necessary for the commercialization of a companion diagnostic for a corresponding Pharma Three drug.

Revenue of $466,137 and $796,425, relating to SOW Three Monthly Fees, has been included in collaborative development services revenue in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively, compared to revenue of $1,207,041 and $2,641,647 reflecting SOW Three Monthly Fees and $209,140 and $355,631 of SOW Three profit-sharing payments for the three and nine months ended September 30, 2018, respectively. Accounts receivable relating to SOW Three of $332,444 and $363,869 remained in the accompanying condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively. Costs relating to development activities conducted by the Company pursuant to SOW Three of $348,167 and $618,613 have been included in research and development expense in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively, compared to $682,295 and $1,536,859 for the three and nine months ended September 30, 2018, respectively.

The Company receives up-front payments from customers for custom RUO assay design services, and occasionally for sample processing services. Payments for instrument extended warranty contracts are made in advance as are payments for certain agreed-upon capital purchases required for collaborative development service projects. The Company recognizes such up-front payments as a contract liability. The contract liability is subsequently reduced at the point in time that the data file is delivered for sample processing services or as the Company satisfies its performance obligations over time for RUO assay design, collaborative development and extended warranty services. Contract liabilities of $563,628 and $410,947 were included in contract liabilities – current and other non-current liabilities in the accompanying condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively. The Company expects approximately $306,155 of deferred revenue to be realized within the next twelve months and the remaining $257,473 to be realized prior to December 31, 2021.

Changes in the Company’s contract liability were as follows as of the dates indicated:

	Product Revenue			Custom RUO Assay Design			Sample Processing			Total Contract Liability
Balance at January 1, 2019	$	116,547		$	50,000		$	244,400		$	410,947
Deferral of revenue		126,425			671,885			463,814			1,262,124
Recognition of deferred revenue		(172,610	)		(707,641	)		(229,192	)		(1,109,443	)
Balance at September 30, 2019	$	70,362		$	14,244		$	479,022		$	563,628

	Product Revenue			Custom RUO Assay Design			Sample Processing			Collaborative Development Services			Total Contract Liability
Balance at January 1, 2018	$	39,426		$	197,606		$	490,536		$	110,317		$	837,885
Deferral of revenue		151,461			336,080			166,291			70,918			724,750
Recognition of deferred revenue		(135,980	)		(453,768	)		(403,677	)		(181,235	)		(1,174,660	)
Balance at September 30, 2018	$	54,907		$	79,918		$	253,150		$	—		$	387,975