Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by delivering the promised goods or service deliverables to the customers. A good or service deliverable is transferred to a customer when, or as, the customer obtains control of that good or service deliverable. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring the Company’s progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the customer obtains control over the promised good or service deliverable. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, the Company considers multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, the Company considers the range of possible outcomes, the predictive value of its past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of the Company’s influence, such as the judgment and actions of third parties.

The Company had product and product-related services revenue consisting of revenue from the sale of instruments and consumables and the use of the HTG EdgeSeq proprietary technology to process samples and design custom RUO assays for the years ended December 31, 2019 and 2018 as follows:

	Years Ended December 31,
	2019		2018
Product revenue:
Instruments	$	1,436,730	$	351,885
Consumables		3,010,094		1,964,499
Total product revenue	$	4,446,824	$	2,316,384
Product-related services revenue:
Custom RUO assay design		4,498,088		964,241
RUO sample processing		5,687,292		5,840,765
Total product-related services revenue		10,185,380		6,805,006
Total product and product-related services revenue	$	14,632,204	$	9,121,390

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

The Company provides instruments to certain customers under reagent rental agreements. Under these agreements, the Company installs instruments in the customer’s facility without a fee and the customer agrees to purchase consumable products at a stated price over the term of the agreement; in some instances, the agreements do not contain a minimum purchase requirement. Terms range from several months to multiple years and may automatically renew in several month or multiple year increments unless either party notifies the other in advance that the agreement will not renew. The Company measures progress toward complete satisfaction of its performance obligation to provide the instrument and deliver the consumables using an output method based on the number of consumables delivered in relation to the total consumables to be provided under the reagent rental agreement. This is considered to be representative of the delivery of outputs under the arrangement and the best measure of progress because the customer benefits from the instrument only in conjunction with the consumables. The Company expects to recover the cost of the instrument under the agreement through the fees charged for consumables, to the extent sold, over the term of the agreement.

In reagent rental agreements, the Company retains title to the instrument and title is transferred to the customer at no additional charge at the conclusion of the initial arrangement. The cost of the instrument is amortized on a straight-line basis over the term of the arrangement, unless there is no minimum consumable product purchase, in which case the instrument would be expensed as cost of product and product-related services revenue upon installation. Cost to maintain the instrument while title remains with the Company is charged to selling, general and administrative expense as incurred.

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 enters into collaborative development services agreements with biopharmaceutical companies for the development of NGS-based companion diagnostic assays in support of and in conjunction with, biopharmaceutical companies’ drug development programs. These collaborative development services agreements may generate upfront fees, and in some cases subsequent milestone payments that may be earned upon completion of certain product development milestones or activities. Collaborative development services revenue for the years ended December 31, 2019 and 2018 was generated through statements of work entered into under the Governing Agreement with QML as discussed below.

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. In November 2019, the Company elected to terminate the Governing Agreement with QML, effective immediately, as a result of QML’s material breach of the Governing Agreement, including QML’s failure to develop an in vitro diagnostic (“IVD”) version of its GeneReader sequencing platform for development of PDP Assays. The Company’s termination of the Governing Agreement did not terminate active statements of work under 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 share any net profits resulting from performance of the development work as determined pursuant to the Governing Agreement. Such profit-sharing payment(s) are deemed to be variable consideration using the expected value method and 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 $2,397,136, inclusive of SOW One Monthly Fees and $99,394 of SOW One profit-sharing payments was included in the accompanying consolidated statements of operations for the year ended December 31, 2018. Costs relating to development activities conducted by the Company pursuant to SOW One of $1,716,115 have been included in research and development expense in the accompanying consolidated statements of operations for the year ended December 31, 2018. There was no revenue or costs relating to SOW One during the year ended December 31, 2019, and there were no accounts receivable relating to SOW One as of December 31, 2019 or 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 February 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. As of December 31, 2019, development activities agreed upon in the fourth amendment are ongoing and expected to continue into the first half of 2020.

Revenue of $2,685,634, inclusive of SOW Two Monthly Fees and $657,000 of SOW Two profit-sharing payments has been included in collaborative development services revenue in the accompanying consolidated statements of operations for the year ended December 31, 2019. Revenue of $5,988,021, inclusive of SOW Two Monthly Fees and $1,779,827 of SOW Two profit-sharing payments has been included in collaborative development services revenue in the accompanying consolidated statements of operations for the year ended December 31, 2018. Accounts receivable relating to SOW Two of $171,298 and $1,007,950 remained in the accompanying consolidated balance sheets as of December 31, 2019 and 2018, respectively. Costs relating to development activities conducted by the Company pursuant to SOW Two of $1,849,088 have been included in research and development expense in the accompanying consolidated statements of operations for the year ended December 31, 2019, compared to $3,625,332 for the year ended December 31, 2018.

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 an 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. As of December 31, 2019, the Company and QML are on hold pending customer decision as to whether to proceed with next phase contract activities.

Revenue of $1,886,050, inclusive of SOW Three Monthly Fees and $720,270 of SOW Three profit-sharing payment has been included in collaborative development services revenue in the accompanying consolidated statements of operations for the year ended December 31, 2019. Revenue of $3,997,346 inclusive of SOW Three Monthly Fees and $355,631 of SOW Three profit-sharing payments has been included in collaborative development services revenue in the accompanying consolidated statements of operations for the year ended December 31, 2018. Accounts receivable relating to SOW Three of $760,274 and $363,869 remained in the accompanying consolidated balance sheets as of December 31, 2019 and 2018, respectively. Costs relating to development activities conducted by the Company pursuant to SOW Three of $983,603 have been included in research and development expense in the accompanying consolidated statements of operations for the year ended December 31, 2019, compared to $2,667,030 for the year ended December 31, 2018.

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 $599,454 and $410,947 were included in contract liabilities – current and other non-current liabilities in the accompanying consolidated balance sheets as of December 31, 2019 and 2018, respectively.

Changes in the Company’s contract liabilities 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		218,802			972,267			529,913			1,720,982
Recognition of deferred revenue		(240,201	)		(956,051	)		(336,223	)		(1,532,475	)
Balance at December 31, 2019	$	95,148		$	66,216		$	438,090		$	599,454

	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		190,703			448,580			197,541			70,918			907,742
Customer deposits		131,864			-			-			—			131,864
Recognition of deferred revenue		(245,446	)		(596,186	)		(443,677	)		(181,235	)		(1,466,544	)
Balance at December 31, 2018	$	116,547		$	50,000		$	244,400		$	—		$	410,947