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 March 31,  2019

OR

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

For the transition period from to

Commission file number: 001-37478

NATERA, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	01‑0894487
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

201 Industrial Road, Suite 410 San Carlos, CA	94070
(Address of Principal Executive Offices)	(Zip Code)

(650) 249‑9090

(Registrant’s Telephone Number, Including Area Code)

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. (Check one):

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  ☒

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, par value $0.0001 per share	NTRA	The Nasdaq Stock Market LLC (Nasdaq Global Select Market)

As of May 2,  2019, the number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, was 69,601,399. 

Natera, Inc.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31,  2019

TABLE OF CONTENTS

		Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Part I — Financial Information
	Item 1.  Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets at March 31,  2019 and December 31, 2018	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31,  2019 and 2018	6
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2019 and 2018	7
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,  2019 and 2018	8
	Notes to Unaudited Interim Condensed Consolidated Financial Statements	8
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	49
	Item 4. Controls and Procedures	50
Part II — Other Information
	Item 1. Legal Proceedings	51
	Item 1A. Risk Factors	52
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	93
	Item 3. Defaults Upon Senior Securities	93
	Item 4. Mine Safety Disclosures	93
	Item 5. Other Information	93
	Item 6. Exhibits	93
	Signatures	95

oa

2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. The forward-looking statements are contained principally in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere in this report. Forward-looking statements include information concerning our future results of operations and financial position, strategy and plans, and our expectations for future operations. Forward-looking statements include all statements that are not historical facts and, in some cases, can be identified by terms such as "believe," "may," "will," "estimate," "continue," "anticipate," "design," "intend," "expect," "could," "plan," "potential," "predict," "seek," "should," "would" or the negative version of these words and similar expressions.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including those described in "Risk Factors" and elsewhere in this report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our beliefs and assumptions only as of the date of this report. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect.

These forward-looking statements include, but are not limited to, statements concerning the following:

· our expectation that, for the foreseeable future, a significant portion of our revenues will be derived from sales of Panorama;

· our ability to increase demand for Panorama, obtain favorable coverage and reimbursement determinations from third-party payers, and expand geographically;

· our expectation that Panorama will be adopted for broader use in average-risk pregnancies and for the screening of microdeletions and that third-party payer reimbursement will be available for these applications;

· our expectations of the reliability, accuracy, and performance of Panorama, as well as expectations of the benefits to patients, providers, and payers of Panorama;

· our ability to successfully develop additional revenue opportunities and expand our product offerings to include new tests, including our recently launched offerings;

· our efforts to successfully develop and commercialize our technology and expertise in prenatal testing into oncology applications and our Prospera test for kidney transplant rejection;

· the effect of improvements in our cost of goods sold;

· our estimates of the total addressable markets for our current and potential product offerings;

· our ability and expectations regarding obtaining, maintaining and expanding third-party payer coverage of, and reimbursement for, our tests, including Prospera;

· the effect of changes in the way we account for our revenue;

· our ability to successfully commercialize our products through strategic or commercial partnerships, such as our agreements with QIAGEN and BGI Genomics Co., Ltd., and our ability to enter into additional such partnerships in the future and achieve the anticipated benefits from such partnerships;

· the scope of protection we establish and maintain for, and developments or disputes concerning, our intellectual property or other proprietary rights;

· competition in the markets we serve;

· our ability to successfully commercialize our cloud-based distribution model;

· our reliance on collaborators such as medical institutions, contract laboratories, laboratory partners, and other third parties;

· our ability to operate our laboratory facility and meet expected demand and to successfully scale our operations;

3

· our reliance on a limited number of suppliers, including sole source suppliers, which may impact our ability to maintain a continued supply of laboratory instruments and materials and to run our tests;

· our expectations of the rate of adoption of Panorama and of any of our other current or future tests by laboratories, clinics, clinicians, payers, and patients;

· our ability to complete clinical studies and publish clinical data in peer-reviewed medical publications regarding Panorama and any of our future tests;

· our SMART study and our ongoing and planned trials in oncology and transplant rejection;

· our reliance on our partners to market and offer Panorama in the United States and in international markets;

· our estimates regarding our costs and risks associated with our international operations and international expansion;

· our ability to retain and recruit key personnel;

· our reliance on our direct sales efforts;

· our expectations regarding acquisitions, other strategic transactions and strategic operations;

· our ability to fund our working capital requirements;

· our compliance with federal, state, and foreign regulatory requirements;

· the factors that may impact our financial results; and

· anticipated trends and challenges in our business and the markets in which we operate.

Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Except as required by law, we disclaim any obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

4

PART I – FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

Natera, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

	March 31,		December 31,
	2019		2018
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	34,281	$	46,407
Restricted cash, current portion		399		4,597
Short-term investments		93,805		107,461
Accounts receivable, net of allowance of $1,794 in 2019 and $1,788 in 2018		60,293		62,223
Inventory		13,748		13,633
Prepaid expenses and other current assets		5,555		6,197
Total current assets		208,081		240,518
Property and equipment, net		23,302		24,336
Operating lease right-of-use assets		27,260		—
Other assets		2,802		3,317
Total assets	$	261,445	$	268,171
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	8,917	$	14,587
Accrued compensation		10,818		12,668
Other accrued liabilities		37,839		32,442
Deferred revenue, current portion		4,928		4,131
Short-term debt financing		50,154		50,153
Total current liabilities		112,656		113,981
Long-term debt financing		73,431		73,357
Deferred rent, net of current portion		—		8,613
Deferred revenue, long-term portion		39,698		40,058
Operating lease liabilities, long-term portion		30,674		—
Total liabilities		256,459		236,009
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $0.0001 par value: 750,000 shares authorized at both March 31, 2019 and December 31, 2018, respectively; 63,340 and 62,083 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively		7		7
Additional paid in capital		613,680		607,236
Accumulated deficit		(608,435)		(574,529)
Accumulated other comprehensive loss		(266)		(552)
Total stockholders’ equity		4,986		32,162
Total liabilities and stockholders’ equity	$	261,445	$	268,171

See accompanying notes to the unaudited interim condensed consolidated financial statements.

5

Natera, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except per share data)

	Three months ended
	March 31,
	2019		2018
Revenues
Product revenues	$	63,364	$	54,269
Licensing and other revenues		3,460		8,071
Total revenues		66,824		62,340
Cost and expenses
Cost of product revenues		41,605		39,055
Cost of licensing and other revenues		1,698		1,537
Research and development		11,435		14,340
Selling, general and administrative		43,832		37,925
Total cost and expenses		98,570		92,857
Loss from operations		(31,746)		(30,517)
Interest expense		(2,724)		(2,389)
Interest and other income		453		137
Loss before income taxes		(34,017)		(32,769)
Income tax expense		(74)		(104)
Net loss	$	(34,091)	$	(32,873)
Unrealized gain (loss) on available-for-sale securities, net of tax		286		(138)
Comprehensive loss	$	(33,805)	$	(33,011)
Net loss per share (Note 13):
Basic	$	(0.54)	$	(0.61)
Diluted	$	(0.54)	$	(0.61)
Weighted-average number of shares used in computing basic and diluted net loss per share:
Basic		62,831		54,132
Diluted		62,831		54,132

See accompanying notes to the unaudited interim condensed consolidated financial statements.

6

Natera, Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

	Three Months Ended March 31, 2018
	Common Stock			Additional Paid-in		Accumulated Other Comprehensive		Accumulated		Total Stockholders' Equity
(in thousands)	Shares	Amount		Capital		Loss		Deficit		(Deficit)
Balance as of December 31, 2017	54,040	$	6	$	472,552	$	(766)	$	(446,375)	$	25,417
Issuance of common stock upon exercise of stock options	145		—		564		—		—		564
Vesting of restricted stock	66		—		—		—		—		—
Stock-based compensation	—		—		3,154		—		—		3,154
Unrealized gain on available-for sale securities	—		—		—		(138)		—		(138)
Net loss	—		—		—		—		(32,873)		(32,873)
Balance as of March 31, 2018	54,251	$	6	$	476,270	$	(904)	$	(479,248)	$	(3,876)

	Three Months Ended March 31, 2019
	Common Stock			Additional Paid-in		Accumulated Other Comprehensive		Accumulated		Total Stockholders' Equity
(in thousands)	Shares	Amount		Capital		Loss		Deficit		(Deficit)
Balance as of December 31, 2018	62,083	$	7	$	607,236	$	(552)	$	(574,529)	$	32,162
Cumulative-effect adjustment upon adoption of ASU 2018-07	—		—		(185)		—		185		—
Issuance of common stock upon exercise of stock options	1,070		—		2,578		—		—		2,578
Vesting of restricted stock	187		—		—		—		—		—
Stock-based compensation	—		—		4,051		—		—		4,051
Unrealized gain on available-for sale securities	—		—		—		286		—		286
Net loss	—		—		—		—		(34,091)		(34,091)
Balance as of March 31, 2019	63,340	$	7	$	613,680	$	(266)	$	(608,435)	$	4,986

See accompanying notes to the unaudited interim condensed consolidated financial statements.

7

Natera, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Three months ended
	March 31,
	2019		2018
Operating activities
Net loss	$	(34,091)	$	(32,873)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,920		1,860
Non-cash lease expense		1,890		—
Stock-based compensation		4,051		3,154
Premium amortization and discount accretion on investment securities		70		144
Amortization of debt discount		98		98
Inventory excess adjustments		101		45
Impairment of assets		—		1,544
Loss on investments		—		32
Loss from changes in fair value of warrants		—		108
Other non-cash charges		8		61
Changes in operating assets and liabilities:
Accounts receivable		2,145		(6,284)
Inventory		(216)		(2,959)
Prepaid expenses and other current assets		(2,135)		2,524
Other assets		201		215
Accounts payable		(5,466)		51
Accrued compensation		(1,850)		333
Other accrued liabilities		1,018		(2,799)
Deferred revenue		437		35,485
Deferred rent, net of current portion		—		307
Net cash (used in) provided by operating activities		(31,819)		1,046
Investing activities
Purchases of investments		(18,628)		(9,985)
Proceeds from sale of investments		—		27,896
Proceeds from maturity of investments		32,500		8,000
Purchases of property and equipment, net		(955)		(852)
Net cash provided by investing activities		12,917		25,059
Financing activities
Proceeds from exercise of stock options		2,578		564
Net cash provided by financing activities		2,578		564
Net (decrease) increase in cash, cash equivalents and restricted cash		(16,324)		26,669
Cash, cash equivalents and restricted cash, beginning of period		51,004		13,021
Cash, cash equivalents and restricted cash, end of period	$	34,680	$	39,690
Supplemental non-cash investing and financing activities:
Obtaining right-of-use assets in exchange for lease liabilities	$	28,191	$	—
Purchases of property and equipment in accounts payable and accruals	$	199	$	209

See accompanying notes to the unaudited interim condensed consolidated financial statements.

8

Natera, Inc.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

1. Description of Business

Natera, Inc. (the "Company") was formed in the state of California as Gene Security Network, LLC in November 2003 and incorporated in the state of Delaware in January 2007. The Company’s mission is to change the management of genetic disease worldwide. The Company operates a laboratory certified under the Clinical Laboratory Improvement Amendments ("CLIA") providing a host of preconception and prenatal genetic testing services. The Company determines its operating segments based on the way it organizes its business to make operating decisions and assess performance. The Company has only one segment, which is the discovery, development and commercialization of genetic testing services, and it has a subsidiary that operates in the state of Texas.

The Company's product offerings include its Panorama Non-Invasive Prenatal Test ("NIPT") that screens for chromosomal abnormalities of a fetus typically with a blood draw from the mother; Vistara (“Vistara”), a single-gene mutations screening test performed to identify single-gene disorders; Horizon Carrier Screening ("HCS") to determine carrier status for a large number of severe genetic diseases that could be passed on to the carrier’s children; Spectrum Pre-implantation Genetic Screening ("PGS") and Spectrum Pre-implantation Genetic Diagnosis ("PGD") to analyze chromosomal anomalies or inherited genetic conditions during an in vitro fertilization ("IVF") cycle to select embryos with the highest probability of becoming healthy children; Anora Products of Conception ("POC") test to rapidly and extensively analyze fetal chromosomes to understand the cause of miscarriage; Non-Invasive Paternity Testing ("PAT"), to determine paternity by analyzing the fragments of fetal deoxyribonucleic acid ("DNA") in a pregnant mother's blood and a blood sample from the alleged father(s), which is marketed and sold by a licensee from whom the Company receives a royalty. All testing is available principally in the United States, and the Company also offers its Panorama test to customers primarily in Europe. The Company also offers Constellation (“Constellation”), a cloud-based software product that allows laboratory customers to gain access through the cloud to the Company’s algorithms and bioinformatics in order to validate and launch tests based on the Company’s technology. The Company also offers Evercord, which is a cord blood and cord tissue processing and storage service; and SignateraTM, a circulating tumor DNA technology that analyzes and tracks mutations specific to an individual's tumor, for research use only by oncology researchers and biopharmaceutical companies. Further, the Company has expanded its Panorama test to now screen twin pregnancies for zygosity and chromosomal abnormalities.

2. Summary of Significant Accounting Policies 

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. The unaudited interim condensed consolidated financial information includes only adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ equity, and cash flows. The results of operations for the three months ended March 31,  2019, are not necessarily indicative of the results for the full year or the results for any future periods. The condensed consolidated balance sheet as of December 31, 2018 has been derived from audited financial statements at that date, these financial statements should be read in conjunction with the audited financial statements, and related notes for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019. 

Effective January 1, 2019, the Company transitioned to the new accounting requirements under the Accounting Standards Update (“ASU”) No. 2018-07,  Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The Company applied the modified retrospective approach upon transition with a cumulative-effect adjustment of $0.2 million recorded to accumulated deficit as of January 1, 2019, and the results in all of the prior period financial statements presented in this Form 10-Q were not retroactively adjusted. See Note 2 under Recently Adopted Accounting Pronoucements for further discussion.

9

On January 1, 2019, the Company adopted the new accounting requirements under ASU 2016-02, Leases, and concurrently elected ASU 2018-11, Leases (Topic 842): Targeted Improvements, which permitted the Company to adjust any cumulative-effect of the accounting change to the balance of accumulated deficit as of the adoption date instead of the earliest period presented by using the modified retrospective approach. None of the prior period financial results in this Form 10-Q were retroactively adjusted as a result of the adoption of ASU 2016-02. See Note 2 under Recently Adopted Accounting Pronoucements for more detail.

Liquidity Matters

The Company has incurred net losses since its inception and anticipates net losses and negative operating cash flows for the near future. The Company had a net loss of $34.1 million for the three months ended March 31, 2019 and recorded a cumulative-effect adjustment of $0.2 million upon the adoption of ASU 2018-07 on January 1, 2019, which increased the accumulated deficit to $608.5 million at March 31,  2019 from $574.6 million at December 31, 2018. At March 31,  2019, the Company had $34.3 million in cash and cash equivalents, $93.8 million in marketable securities, $50.2 million of outstanding balance of the Credit Line (as defined in Note 10) including accrued interest, and $73.4 million of net carrying amount of the 2017 Term Loan (as defined in Note 10). While the Company has introduced multiple products that are generating revenues, these revenues have not been sufficient to fund all operations. Accordingly, the Company has funded the portion of operating costs that exceeds revenues through a combination of equity issuances, debt issuances, and other financings.

The Company continues to develop and commercialize future products and, consequently, it will need to generate additional revenues to achieve future profitability and may need to raise additional equity or debt financing. If the Company raises additional funds by issuing equity securities, its stockholders would experience dilution. Additional debt financing, if available, may involve covenants restricting its operations or its ability to incur additional debt. Any additional debt financing or additional equity that the Company raises may contain terms that are not favorable to it or its stockholders and requires significant debt service payments, which diverts resources from other activities. Additional financing may not be available at all, or in amounts or on terms acceptable to the Company. If the Company is unable to obtain additional financing, it may be required to delay the development and commercialization of its products and significantly scale back its business and operations.

On April 23, 2019, the Company completed an underwritten equity offering to sell 5,263,158 shares of its common stock at a price to the public of $19 per share. On April 26, 2019, the Company sold an additional 789,473 shares of its common stock to the underwriters at the same price upon their exercise of the option to purchase those shares. Before offering expenses of $0.6 million, the Company received proceeds of $108.1 million net of underwriting discount.

Based on the Company’s current business plan, the Company believes that its existing cash and marketable securities will be sufficient to meet its anticipated cash requirements for at least 12 months after May 9,  2019.  

Principles of Consolidation

The accompanying condensed consolidated financial statements include all the accounts of the Company and its subsidiary. The Company established a subsidiary that operates in the state of Texas to support the Company’s laboratory and operational functions. All intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions about future events that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Significant items subject to such estimates include the allowance for doubtful accounts, the operating right-of-use assets and the associated lease liabilities, deferred revenues associated with unsatisfied performance obligations, accrued liability for potential refund requests, stock-based compensation, the fair value of common stock and warrants, income tax uncertainties, and the expected consideration to be received from contracts with customers. These estimates and assumptions are based on management's best estimates and judgment. Management regularly evaluates its estimates and assumptions using historical experience and other factors,

10

including contractual terms and statutory limits; however, actual results could differ from these estimates and could have an adverse effect on the Company's financial statements. 

Fair Value

The Company discloses the fair value of financial instruments for financial assets and liabilities for which the value is practicable to estimate. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and money market deposits with financial institutions.

Restricted Cash

The Company discloses both short-term and long-term restricted cash. As of March 31, 2019, short-term restricted cash totaled  $0.4 million cash deposits held as collateral for the settlement of foreigncurrency transactions and deposit per credit card terms.  

In March 2019, the Company paid the final quarterly installment of $1.4 million in connection with the settlement agreement relating to reimbursement-related claims, and accordingly, the restriction imposed on the $4.2 million cash deposits to secure the letter of credit required under the settlement agreement was released.

Restricted cash is currently presented as a separate line item in the Company’s balance sheet. In the statements of cash flows, it is included together with cash and cash equivalents and considered as part of the total ending cash balance. The following is the reconciliation between how restricted cash is presented in the balance sheet and the statements of cash flows for all periods presented:

	March 31,		December 31,
	2019		2018
	(in thousands)
Cash and cash equivalents in balance sheet	$	34,281	$	46,407
Restricted cash, current portion in balance sheet		399		4,597
Restricted cash in other assets in balance sheet		—		—
Total cash, cash equivalents and restricted cash in statements of cash flows	$	34,680	$	51,004

Investments

Investments consist primarily of debt securities such as U.S. Treasuries, U.S. agency and municipal bonds. Management determines the appropriate classification of securities at the time of purchase and re-evaluates such determination at each balance sheet date. The Company generally classifies its entire investment portfolio as available-for-sale. The Company views its available-for-sale portfolio as available for use in current operations. Accordingly, the Company classifies all investments as short-term, even though the stated maturity may be more than one year from the current balance sheet date. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity.

Risk and Uncertainties

Financial instruments that potentially subject the Company to credit risk consist of cash, accounts receivable and investments. The Company limits its exposure to credit loss by placing its cash in financial institutions with high credit ratings. The Company's cash may consist of deposits held with banks that may at times exceed federally insured limits. The Company performs evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any one institution.

11

The Company bills third-party payers for certain tests performed. The amount that is ultimately received from the payer for the Company’s claim and the timing of such payments are subject to the determination of the payer based on the nature of the test performed and their view of the Company’s business practices with respect to collections of plan deductibles and co-payments from patients and other activities. This determination can impact both the amount and timing of when the Company’s invoices are collected. Payers may also withhold payments and request refunds of prior payments if the payer asserts that the Company has not performed in accordance with the policies of these payers.

The Company performs evaluations of financial conditions for insurance carriers, patients, clinics and laboratory partners and generally does not require collateral to support credit sales. For the three months ended March 31,  2019 and 2018, there were no customers exceeding 10% of total revenues on an individual basis. As of March 31,  2019 and December 31, 2018, there were no customers with an outstanding balance exceeding 10% of net accounts receivable. 

Revenue Recognition

The Company adopted the new revenue recognition guidance, Accounting Standards Codification (“ASC”) Topic 606, beginning January 1, 2018. ASC 606 mandates revenue recognition to be evaluated using the following five steps:

· Identification of a contract, or contracts, with a customer;

· Identification of the performance obligations in the contract;

· Determination of the transaction price;

· Allocation of the transaction price to the performance obligations in the contract; and

· Revenue recognition when, or as, the performance obligations are satisfied

See Note 3, Revenue Recognition, for detailed discussions of product revenues, licensing and other revenues, and how the five steps described above are applied.

Cost of Product Revenues

The components of cost of product revenues are material and service costs, impairment charges associated with testing equipment, personnel costs, including stock-based compensation expense, equipment and infrastructure expenses associated with testing samples, electronic medical records, order and delivery systems, shipping charges to transport samples, third-party test fees and allocated overhead including rent, information technology costs, equipment depreciation and utilities. Costs associated with the performance of diagnostic services are recorded as tests are accessioned.

Cost of Licensing and Other Revenues

The components of cost of licensing and other revenues are material costs associated with test kits, engineering costs incurred to improve and maintain the Constellation software platform, and amortization of Constellation software development costs. Costs also include collection kits consumed during the processing of cord blood samples, processing service and storage of the cord blood samples, and freight charged to transport the samples to the storage facility.    

Stock‑Based Compensation

Stock‑based compensation is related to stock options and restricted stock units (“RSUs”) granted to the Company’s employees and is measured at the grant date based on the fair value of the award. The fair value is recognized as expense over the requisite service period, which is generally the vesting period of the respective awards on a straight-line basis. No compensation cost is recognized when the requisite service has not been met and the awards are therefore forfeited.

The Company also recognizes stock-based compensation from option awards and RSUs granted to non-employees. Prior to January 1, 2019, the fair value of non-employee awards was subject to remeasurement at the end of each reporting period until the vesting date of such awards, and the resulting change in fair value was recognized in the Company's statements of operations and comprehensive loss during the period that the related services were rendered.

12

On January 1, 2019, the Company adopted ASU 2018-07, which allows the accounting for non-employee awards to be treated the same as for employee awards. The fair value of non-employee awards is now determined based on a one-time measurement at the grant date, and it is no longer subject to periodic remeasurement. The Company continues to recognize stock-based compensation expense as services are rendered by the non-employees over the vesting period, which is accounted for on a straight-line basis. See further discussion under the Recently Adopted Accounting Pronouncements section within this footnote, as well as the election of certain accounting policy as a result of the adoption.   

The Company uses the Black‑Scholes option‑pricing model to estimate the fair value of stock options issued to employees and non-employees. The model requires the input of the Company's expected stock price volatility, the expected term of the awards, and a risk-free interest rate. Determining these assumptions requires significant judgment. See further discussion on the valuation assumptions used under Note 9. 

Warrants

The Company accounts for warrants to purchase shares of its common stock as a liability at fair value on the balance sheet date because the Company may be obligated to redeem these warrants at some point in the future. The warrants are subject to re-measurement at each balance sheet date, with changes in fair value of the warrants recognized as a gain or loss in interest and other income in the statements of operations and comprehensive loss. Further adjustments resulting from changes in fair value are no longer required as the warrants were fully exercised in June 2018.

Capitalized Software Held for Internal Use

The Company capitalizes salaries and related costs of employees and consultants who devote time to the development of internal-use software development projects. Capitalization begins during the application development stage, once the preliminary project stage has been completed. If a project constitutes an enhancement to previously developed software, the Company assesses whether the enhancement is significant and creates additional functionality to the software, thus qualifying the work incurred for capitalization. Once the project is available for general release, capitalization ceases and the Company estimates the useful life of the asset and begins amortization. The Company periodically assesses whether triggering events are present to review internal-use software for impairment. Changes in estimates related to internal-use software would increase or decrease operating expenses or amortization recorded during the reporting period. See Property and Equipment, net under Note 6 for more detail regarding an impairment charge recorded to write off certain project development costs during the first quarter of 2018. 

The Company amortizes its internal-use software over the estimated useful lives of three years. The net book value of capitalized software held for internal use was $1.9 million and $1.7 million as of March 31, 2019 and December 31, 2018, respectively. Amortized expense for amounts previously capitalized for the three months ended March 31,  2019 and 2018 was $0.3 million and $0.4 million, respectively. 

Accumulated Other Comprehensive Loss

Comprehensive loss and its components encompass all changes in equity other than those with stockholders, and include net loss, unrealized gains and losses on available-for-sale marketable securities.

	Three Months Ended March 31,
	2019		2018
	(in thousands)
Beginning balance	$	(552)	$	(766)
Net unrealized gain (losses) on available-for-sale securities, net of tax		286		(170)
Reclassifications of losses realized from sale of available-for-sale securities		—		32
Increase (decrease) in other comprehensive loss		286		(138)
Ending balance	$	(266)	$	(904)

13

Net Loss per Share

Basic net loss per share is calculated by dividing net loss by the weighted-average shares outstanding during the period, without consideration for potential dilutive shares. For purposes of the diluted net loss per share calculation, outstanding common stock options, RSUs, ESPP, and warrants are considered potential dilutive shares but are excluded from this calculation as the result becomes anti-dilutive, unless the consideration of any one of them gives a dilutive effect.

Property and Equipment

Property and equipment, including purchased and internally developed software, are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which are generally three to five years. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets or the remaining term of the lease, whichever is shorter.

Impairment of Long-lived Assets

The Company periodically evaluates the carrying value of its long-lived assets for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company then compares the carrying amount of the long-lived assets with the future net undiscounted cash flows expected to be generated by such asset. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value determined using discounted estimates of future cash flows. See Note 6 for more detail regarding assets impairment. 

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) under its accounting standard codifications or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed below, the Company believes that the impact of accounting standards update recently issued that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

Recently Adopted Accounting Pronouncements

Leases

On January 1, 2019, the Company adopted ASU 2016-02 and concurrently elected to adopt ASU 2018-11, which are collectively known as ASC 842, Leases (“ASC 842”). ASU 2018-11 provides an alternative transition method such that the initial application of the new lease accounting standards can be completed as of January 1, 2019 using the modified retrospective approach instead of the earliest period presented. The financial results in the statement of operations and comprehensive loss for the three months ended March 31, 2018 and the balance sheet as of December 31, 2018 were not retroactively restated. As a result of electing the transition guidance as described above, on January 1, 2019, the Company recorded operating right-of-use assets of $28.2 million, including the derecognition of deferred rent of $9.5 million and prepaid rent of $0.7 million, with the corresponding lease liabilities totaling $37.0 million. There was no material impact to the Company’s statements of operations and comprehensive loss upon adoption.

Upon transition, the Company has elected the package of practical expedients available under ASC 842, which allows the Company not to reassess (i) whether any expired or existing contracts as of the transition date are or contain a lease, (ii) lease classification for any expired or existing leases as of the transition date, and (iii) intial direct costs for any existing leases as of the transition date.  The Company has decided not to elect the practical expedient on applying hindsight in determining the lease term and the impairment of the right-of-use assets. See Note 7, Leases, for more detail information regarding the accounting for operating leases.

14

Non-employee stock-based compensation

Effective January 1, 2019, the Company transitioned to the new accounting requirements under ASU 2018-07 for non-employee stock-based awards using the modified retrospective approach. The new guidance aligns the accounting treatment for both the employee and non-employee stock-based awards, which simplifies the fair value measurement process by requiring a one-time valuation of the non-employee stock options as of the grant date. Upon transition, the Company performed the final fair value remeasurement for its existing unvested non-employee stock-based awards, which included stock options and restricted stock units, up until the transition date,  and adjusted the amount of the cumulative stock-based compensation expense accordingly by $0.2 million. The Company recorded this amount as a cumulative-effect adjustment to the opening balance of accumulated deficit in its balance sheet.    

Under the new guidance, the Company is permitted to carry over the method over which stock-based compensation expense is recognized from the non-employee awards, which is accounted for on a straight-line basis as services are rendered over the vesting period. However, there are certain accounting options available for election in connection with estimated forfeitures and the valuation input for the expected term or remaining contractual term.  The Company has elected to account for the actual forfeitures upon the cancellation of the awards, and also the use of the same expected term valuation input as for its employee awards.       

Reclassification of tax effects from accumulated other comprehensive income

The Company adopted ASU 2018-02 on January 1, 2019, which was established as a result of the Tax Cuts and Jobs Act passed in December 2017 and provided an opportunity for entities to reclassify residual income tax effects from accumulated other comprehensive income to retained earnings due to the reduction of the corporate income tax rate. Upon adoption, the Company had the option to apply this new guidance using either the full retrospective approach or to record the reclassifications as of the adoption date.  As of January 1, 2019, the Company had a full valuation allowance reserved against its deferred tax assets, and as a result, there was no restatement or reclassification required. 

Statements of stockholders’ equity

In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. One of the amendments applicable to the Company was the presentation of the analysis of changes in stockholders’ equity in its first interim financial statements following the effective date of the amendments in November 2018, which would be included in the Form 10-Q for the quarter ended March 31, 2019. As such, the Company has added the presentation of its consolidated statements of stockholders’ equity for the three months ended March 31, 2019 and 2018 under Item 1 of this Form 10-Q.   

New Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13,  Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets by requiring an allowance to be recorded as an offset to the amortized cost of such assets. For available-for-sale debt securities, expected credit losses should be estimated when the fair value of the debt securities is below their associated amortized costs. ASU 2016-13 will become effective for the Company in the first quarter of 2020, with early adoption permitted beginning the first quarter of 2019. The modified retrospective approach should be applied upon adoption of this new guidance. The Company is currently evaluating the impact of adopting ASU 2016-13 on its financial statements. 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 proposes new disclosure requirements for unrealized gains or losses recognized in other comprehensive income that are attributable to fair value changes in assets and liabilities categorized within Level III of the fair value hierarchy, as well as quantitative information about significant unobservable inputs used to value such assets and liabilities. It eliminates the requirement to disclose the reasons for the transfers of assets and liabilities measured in fair value on a recurring basis between Level I and Level II. ASU 2018-13 is effective for the Company for fiscal years beginning after December 15, 2019, including interim

15

periods within that fiscal year, with early adoption permitted. The Company is currently assessing the impact of this standard on its consolidated financial statements. 

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, Topic 808 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This guidance will be effective for the Company beginning January 1, 2020. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

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

16

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 months ended March 31,  2019 and 2018,  $0.5 million and $0.9 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 six,  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

17

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 months ended March 31, 2019 and 2018, the Company recognized revenue of $0.2 million and $5.5 million, respectively, related to support services provided and the delivery of its technology license to Qiagen.

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.

18

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.

BGI Genomics

In February 2019, the Company entered into a License Agreement with BGI Genomics Co., Ltd. (“BGI Genomics”) to develop and commercialize NGS-based genetic testing assays for clinical use. The agreement has a term of ten years and expires in February 2029. According to the agreement, the Company will receive a total of $50.0 million, comprising of $35.0 million in upfront technology licensing fees and prepaid royalties, and $15.0 million in future milestone payments. The Company will prepay BGI Genomics $6.0 million for sequencing services in connection with this partnership, as well as $4.0 million to another supplier. This Agreement is currently subject to customary closing conditions, including partner government approval.

For the three months ended March 31, 2019, the Company did not recognize any revenue from the License Agreement with BGI Genomics.

Disaggregation of Revenues

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
	March 31,
	2019		2018
(Amounts in thousands)
Sales of genetic tests
Panorama NIPT	$	37,246	$	33,267
HCS		22,749		18,262
Other genetic tests		3,369		2,740
Product revenues		63,364		54,269
Licensing and other
Constellation		1,332		1,305
Qiagen		148		5,500
Other		1,980		1,266
Licensing and other revenues		3,460		8,071
Total revenues	$	66,824	$	62,340

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
	March 31,
	2019		2018
(Amounts in thousands)
Insurance carriers	$	50,201	$	44,142
Laboratory partners		10,023		14,888
Patients		6,600		3,310
Total revenues	$	66,824	$	62,340

19

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

	Three months ended
	March 31,
	2019		2018
(Amounts in thousands)
United States	$	60,283	$	50,364
Americas, excluding U.S.		818		850
Europe, Middle East, India, Africa		4,004		9,322
Other		1,719		1,804
Total revenues	$	66,824	$	62,340

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

	Balance at		Balance at
	March 31,		December 31,
(Amounts in thousands)	2019		2018
Assets:
Accounts receivable	$	60,293	$	62,223
Liabilities:
Deferred revenue, current portion	$	4,928	$	4,131
Deferred revenue, long-term portion		39,698		40,058
Total deferred revenues	$	44,626	$	44,189

As of March 31, 2019, accounts receivable of $60.3 million included trade receivables, as well as receivables from Evercord customers who selected certain prepayment plans for storage services to be delivered over the duration of lifetime or 18 years. Evercord customers have the option to either prepay for storage services in full upfront or finance their prepayment plans over the period of six,  12, or 18 months. Generally, prepayments collected by the Company for the lifetime or 18-year storage plans are non-refundable unless the storage service agreement is terminated. However, Evercord customers who choose the financing option will be obligated to make the remainder of their payments pursuant to the terms of the financing plan, and this represents the Company’s unconditional right to the consideration from its customers. Total receivables pertaining to the financing options was $3.9 million, of which $0.2 million was related to financing over the period greater than 12 months. The Company reclassified $0.2 million to other noncurrent assets in its condensed consolidated balance sheet as of March 31, 2019.       

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

	Deferred
	Revenues
	(in thousands)
Balance at December 31, 2018	$	44,189
Increase in deferred revenues		2,422
Revenue recognized during the period that was included in deferred revenues at the beginning of the period		(492)
Revenue recognized from performance obligations satisfied within the same period		(1,493)
Balance at March 31, 2019	$	44,626

During the three months ended March 31, 2019, revenue recognized that was included in the deferred revenue balance at the beginning of the period totaled approximately $0.5 million, of which $0.2 million was related to genetic testing services, $0.1 million pertained to undelivered Evercord storage services over the remaining contractual life of such services, and approximately $0.2 million was related to the Qiagen Agreement.  

20

As of March 31,  2019,  total deferred revenues were $44.6 million, which were comprised of the current and long-term portions of $4.9 million and $39.7 million, respectively. The current portion was comprised of $0.6 million relating to the provision of IVD kits and genetic testing services, $0.5 million associated with undelivered tests from the cloud-based Constellation software to the licensees, $1.2 million of Evercord storage services that will be fulfilled within the next 12 months, and $2.6 million of unsatisfied performance obligations from the Qiagen Agreement. The long-term portion included $3.3 million of Evercord storage services to be delivered by the Company over the remaining contractual life of such services, and $36.4 million resulting from 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 $9.0 million of the amounts reported as long-term deferred revenue as each remaining performance obligation is satisfied.

4. Fair Value Measurements

The Company's financial assets and liabilities carried at fair value are comprised of investment assets that include money market and investments, and a liability for common stock warrants.

The fair value accounting guidance requires that assets and liabilities be carried at fair value and classified in one of the following three categories:

Level I: Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access.

Level II: Observable market‑based inputs or unobservable inputs that are corroborated by market data, such as quoted prices, interest rates, and yield curves.

Level III: Inputs that are unobservable data points that are not corroborated by market data.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis

The following table represents the fair value hierarchy for the Company’s financial assets and financial liabilities measured at fair value on a recurring basis:

	March 31, 2019								December 31, 2018
	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
	(in thousands)
Financial Assets:
Money market deposits	$	588	$	—	$	—	$	588	$	26,539	$	—	$	—	$	26,539
U.S. Treasury securities		57,632		—		—		57,632		75,685		—		—		75,685
U.S. agency securities		—		12,938		—		12,938		—		12,891		—		12,891
Municipal securities		—		23,235		—		23,235		—		18,885		—		18,885
Total financial assets	$	58,220	$	36,173	$	—	$	94,393	$	102,224	$	31,776	$	—	$	134,000

21

During the three months ended March 31,  2019, the Company did not make any transfers between Level I and Level II assets.

5. Financial Instruments

The Company elected to invest a portion of its cash assets in conservative, income earning, and liquid investments. Cash equivalents and investments, all of which are classified as available-for-sale securities, consisted of the following: