3. Revenue Recognition

The Company recognizes revenues when, or as, performance obligations in the contracts are satisfied, in the amount reflecting the expected consideration to be received from the goods or services transferred to the customers.

Product Revenues

Product revenues are derived from contracts with insurance carriers, laboratory partners and patients in connection with sales of prenatal genetic tests. The majority of the Company’s revenues is derived from Panorama NIPT, HCS (as defined in Note 1), and to a lesser extent, other genetic tests. The Company enters into contracts with insurance carriers with primarily payment terms related to tests provided to the patients who have health insurance coverage. Insurance carriers are considered as third-party payers on behalf of the patients, and the patients are considered as the customers who receive genetic test services. Tests may be billed to insurance carriers, patients, or a combination of insurance carriers and patients. Further, the Company sells tests to a number of domestic and international laboratory partners and identifies the laboratory partners as customers provided that there is a test services agreement between the two parties.

A performance obligation represents a promise in a contract to transfer a distinct good or service to a customer, which represents a unit of accounting in accordance with ASC 606. A portion of the consideration should be allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company evaluates its contracts with insurance carriers, laboratory partners and patients and identifies a single performance obligation in those contracts, which is the delivery of the test results.

The total consideration which the Company expects to collect in exchange for the Company’s products is an estimate and may be fixed or variable. Consideration includes reimbursement from both patients and insurance carriers, adjusted for variable consideration related to disallowed cases, discounts, refunds and doubtful accounts, and is estimated using the expected value approach. For insurance carriers with similar reimbursement characteristics, the Company uses the portfolio approach to estimate total collections for the Company’s products. The consideration expected from laboratory partners usually includes a fixed amount, but it can be variable depending on the volume of tests performed, and the Company determines the variable consideration using the expected value approach. For insurance carriers, laboratory partners and patients, the Company allocates the total consideration to a single performance obligation, which is the delivery of the test results to the customers.

When assessing the total consideration for insurance carriers and patients, a certain percentage of revenues is adjusted for refunds, which is considered as variable consideration that constrains to ensure that no material reversal of revenues occurs in subsequent periods.

The Company generally bills an insurance carrier, a laboratory partner or a patient upon delivery of test results. The Company also bills patients directly for out-of-pocket costs involving co-pays and deductibles that they are responsible for. Tests billed to insurance carriers and directly to patients usually take an average of nine to twelve months to collect the payments, and for tests billed to laboratory distribution partners, the average collection cycle takes approximately two to three months. At times, the Company may or may not get reimbursed for the full amount billed. Further, the Company may not get reimbursed at all for tests performed if such tests are not covered under the insurance carrier’s reimbursement policies or the Company is not a qualified provider to the insurance carrier, or if the tests were not previously authorized.

Product revenue is recognized in an amount that equals to the total consideration (as described above) at a point in time when the test results are delivered. The Company reserves certain amounts in other accrued liabilities on the balance sheet in anticipation of requests for refunds of payments previously made by insurance carriers, which are accounted for as reductions in product revenues in the statement of operations and comprehensive loss. During the three and six months ended June 30, 2018, $0.9 million and $1.8 million were released from amounts previously held in reserves in other accrued liabilities and recognized as product revenue.

Licensing and Other Revenues

The Company recognizes licensing revenues from its cloud-based distribution service offering, Constellation, by granting licenses to its licensees to use certain of the Company’s proprietary intellectual properties and cloud-based software. The Company also recognizes revenues from Evercord for the collection and storage of newborn cord blood and cord tissue units.

Constellation

The laboratory partners with which the Company enters into a licensing arrangement represent the licensees and are identified as customers. The licensees do not have the right to possess the Company’s software, but rather receive the software as a service. These arrangements often include: (i) the delivery of the software as a service, (ii) the necessary support and training, and (iii) the reagent kits (“IVD kits”) to be consumed as tests are processed. The Company does not consider the software as a service, the support and training as being distinct in the context of such arrangements, and therefore they are combined as a single performance obligation. The software, support and training are delivered simultaneously to the licensees over the term of the arrangement.

The Company provides IVD kits that are customized for its licensees to process tests using its cloud-based software. IVD kits revenues are recognized based on their standalone selling price at a point in time upon delivery to the licensees.

The Company bills the majority of licensees, who process the tests in their laboratories, a fixed price for each test processed. Licensing revenues are recognized as the performance obligations are satisfied over time and reported in licensing and other revenues in the statements of operations and comprehensive loss.

Evercord

The Company recognizes revenues from Evercord for the collection and storage of newborn cord blood and cord tissue units. The patient enters into an enrollment agreement with the Company. According to the agreement, there are two performance obligations: (i) the provision of a collection kit and the processing of newborn cord blood and cord tissue units, which are considered delivered at the beginning of the process (the “processing services”), and (ii) the storage of the cord blood and cord tissue units (the “storage services”), for either an annual fee or a prepayment covering an extended period or the lifetime of the newborn donor.

The Company offers its processing services together with storage services, and each of them is capable of being distinct, and is distinct in the context of the contract, and therefore, represents separate performance obligations. Evercord customers may pay for both processing and storage services over a period of 6, 12, or 18 months. The transaction price for the processing and storage services is calculated as the stated contract price, adjusted for discounts, refunds, and significant financing components. The Company determines that the transaction price represents the standalone selling prices that are observable in the market for both the processing and storage services. The total consideration is allocated between the processing services and storage services based on their standalone selling prices.

Upon the completion of the processing services, the Company issues a certificate of preservation indicating that the cord blood and cord tissue units are ready for storage, and processing revenues are recognized at this particular point in time. Storage revenues are recognized over time, which is the applicable storage period. The Company believes the methodology of recognizing storage revenues over time meaningfully depicts the timing of storage services delivered to customers as it exerts the necessary efforts to deliver such services equally over time. Evercord revenues are reported in licensing and other revenues in the statements of operations and comprehensive loss.

Qiagen

In March 2018, the Company entered into a License, Development and Distribution Agreement (“the Qiagen Agreement”) with Qiagen under which the Company granted Qiagen a license to develop, manufacture, distribute and commercialize NGS-based genetic testing assays and sequencing systems utilizing such assays, which incorporate the Company’s proprietary technology. According to the terms of the agreement, the Company is initially entitled to receive an upfront license fee and prepaid royalties totaling $40.0 million. All or a portion of the prepaid royalties are refundable in limited circumstances. In addition, the Company is entitled to potential milestone payments from Qiagen upon the achievement of certain volume, regulatory and commercial milestones, and tiered royalties. The Qiagen Agreement has a term of 10 years and expires in March 2028, and it may be terminated earlier in certain circumstances. Upon termination of the Qiagen Agreement, the license granted to Qiagen will also terminate, except in certain limited circumstances. The Company provided to Qiagen standard indemnification protections, which is part of an assurance that the license meets the contract’s specifications and is not an obligation to provide goods or services.

The Company identified the following goods and services in the agreement that it concluded were distinct performance obligations:

Technology license. The Company granted the right to Qiagen to use its proprietary intellectual properties (“technology license”) to develop, manufacture, distribute and commercialize genetic testing assays and sequencing systems in certain countries. The technology license was transferred to Qiagen at the inception of this agreement when the license became effective and the technology transfer was completed.

Development services. The Company is responsible for providing certain support services to assist Qiagen in its design and development of the genetic testing assays.

Market development support. The Company is required to support Qiagen’s market development for the genetic testing assays.

Option to expand commercialization to another country. The Company has provided an option to Qiagen to expand the commercialization of its genetic testing assays to another country following all of the necessary regulatory approvals.

The initial transaction price was estimated to be $15.0 million based on the most likely amount approach, which was comprised of the upfront non-refundable fee and a payment associated with the initial milestone under the agreement. The remaining milestone and prepaid royalty amounts were not included in the transaction price due to the uncertainties of research and development and the potential for prepaid royalty refund, as it is not currently probable that the associated revenue, if recognized, would not be reversed later. Royalties, including prepaid royalties, will generally not be recognized until earned. The allocation of the transaction price was performed based on standalone selling prices, which are based on estimated amounts that the Company would charge for a performance obligation if it were sold separately. Future variable consideration such as milestones and royalties is considered associated with the technology license performance obligation. The amounts included in the initial transaction price were allocated to the remaining value of the technology license, as well as development services, market development support and the option to expand commercialization using the relative standalone selling price approach. The amount initially allocated to the technology license was $5.5 million.

For the three and six months ended June 30, 2018, the Company recognized revenue of approximately $0.1 million and $5.6 million, respectively, related to support services provided and the delivery of its technology license to Qiagen.

There were no incremental origination costs associated with entering into the Qiagen Agreement.

The primary source of the Company’s revenues relates to the sale of prenatal genetic tests. The Company also recognizes licensing revenues from its cloud-based software platform, Constellation and other revenues. The following table shows disaggregation of revenues by types of products and services, with sales of genetic tests further disaggregated by test families:


	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
(Amounts in thousands)			(As Revised)				(As Revised)
Sales of genetic tests
Panorama NIPT	$	35,715	$	31,527	$	68,982	$	64,086
HCS		21,421		16,472		39,683		29,425
Other genetic tests		3,217		2,930		5,957		5,812
Product revenues		60,353		50,929		114,622		99,323
Licensing and other
Constellation		1,293		1,045		2,598		2,033
Other		1,423		309		8,189		309
Licensing and other revenues		2,716		1,354		10,787		2,342
Total revenues	$	63,069	$	52,283	$	125,409	$	101,665

The Company measures its performance results primarily based on revenues recognized from the three categories described below. The following table shows disaggregation of revenues by payer types:


	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
(Amounts in thousands)			(As Revised)				(As Revised)
Insurance carriers	$	48,321	$	41,022	$	92,463	$	79,862
Laboratory partners		10,132		9,179		25,020		17,272
Patients		4,616		2,082		7,926		4,531
Total revenues	$	63,069	$	52,283	$	125,409	$	101,665

The following table presents total revenues by geographic area based on the location of the Company’s payers:


	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
(Amounts in thousands)			(As Revised)				(As Revised)
United States	$	56,631	$	46,007	$	106,995	$	89,832
Americas, excluding U.S.		847		785		1,697		1,485
Europe, Middle East, India, Africa		3,756		3,620		13,078		6,836
Other		1,835		1,871		3,639		3,512
Total revenues	$	63,069	$	52,283	$	125,409	$	101,665

In accordance with ASC 340-40, any incremental costs incurred to obtain a contract with a customer are required to be capitalized and amortized over the period in which the goods and services are transferred to the customer. The Company has elected to apply a practical expedient under ASC 340-40 to recognize the incremental costs of obtaining a contract as an expense when incurred provided that the amortization period of such costs, if capitalized, is one year or less.

The following table summarizes the Company’s beginning and ending balances of accounts receivable and deferred revenues:


	Balance at		Balance at
	June 30,		December 31,
	2018		2017
(Amounts in thousands)			(As Revised)
Assets:
Accounts receivable	$	57,002	$	44,089
Liabilities:
Deferred revenue, current portion	$	1,174	$	1,420
Deferred revenue, long-term portion		36,135		—
Total deferred revenues	$	37,309	$	1,420

The following table shows the changes in the balance of deferred revenues during the period:


	Deferred
	Revenues
	(in thousands)
Balance at December 31, 2017	$	1,420
Increase in deferred revenues		36,832
Revenue recognized during the period that was included in deferred revenues at the beginning of the period		(580)
Revenue recognized from performance obligations satisfied within the same period		(363)
Balance at June 30, 2018	$	37,309

During the six months ended June 30, 2018, revenue recognized that was included in the deferred revenue balance at the beginning of the period totaled $0.6 million, of which $0.5 million was related to genetic testing services and the provision of IVD kits, with an insignificant portion of revenue pertaining to undelivered Evercord storage services over the remaining contractual life of such services.

As of June 30, 2018, total deferred revenues were $37.3 million, which were comprised of the current and long-term portions of $1.2 million and $36.1 million, respectively. The current portion pertained primarily to the provision of IVD kits, genetic testing services and Evercord storage services that will be fulfilled within the next 12 months. The long-term portion included $1.7 million of Evercord storage services to be delivered by the Company over the remaining contractual life of such services, and a net amount of $34.4 million associated with the remaining performance obligations from the Qiagen Agreement. Such remaining performance obligations were comprised of development services and market development support, for which revenue will be recognized over time based on the value of services; and the option for Qiagen to expand its commercialization to another country, with revenue recognized at a point in time when such option is exercised or expires. The Company expects to recognize $9.4 million of the amounts reported as long-term deferred revenue as each remaining performance obligation is satisfied.