Revenue Recognition

9 Months Ended

Sep. 30, 2024

Revenue Recognition

Revenue Recognition

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 by performing genetic testing services and the Company’s performance obligation is complete when test results are delivered to a laboratory or patient (each a customer).

Additionally, the Company enters into agreements with pharmaceutical companies to utilize the Company’s Signatera tests typically to study new cancer treatments or to validate the outcomes of clinical trials for which the pharmaceutical companies are identified as customers. Such arrangements generally involve performing whole exome sequencing services and the testing of patient samples to detect cancer mutations using its Signatera test. In addition to performing Signatera tests, these agreements typically include certain activities to fulfill the contract, such as customer data setup and management and ongoing reporting. Each test result is billable to customers upon delivery and the personalized cancer profile also makes each test distinct within the context of the contract as customers can exercise control over the test results upon delivery. Accordingly, the Company recognizes test processing revenue as individual test results are delivered to customers.

For certain contracts with pharmaceutical companies where the Company is developing a companion diagnostic test in addition to performing regular testing services, revenue is primarily recognized proportionally as services are performed and/or tests are delivered.

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 performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. The Company considers a performance obligation satisfied once the Company has transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. 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 laboratory partners and patients and identifies the performance obligations in those contracts, which are the delivery of the test results.

The total consideration 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, percent of patient responsibility collected, refunds and reserves, and is estimated using the most likely amount method. For insurance carriers and product types with similar reimbursement characteristics, the Company uses a portfolio of relevant historical data to estimate variable consideration and total collections for the Company’s products. The Company constrains the estimated variable consideration when it determines it is probable that a significant reversal in the amount of cumulative revenue recognized may occur in future periods. 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 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 expected to be received from insurance carriers and patients, a certain percentage of revenues is further constrained for estimated refunds.

The Company enters into contracts with insurance carriers with primarily payment terms related to tests provided to patients who have health insurance coverage. Insurance carriers are considered third-party payers on behalf of the patients, and the patients are considered 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.

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. 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 equal to the total consideration (as described above) expected to be received at a point in time when the test results are delivered. Approximately 90% of cash collections attributable to such product revenue occurs within nine months with the remaining collections generally taking an additional six months. During this time, management routinely reassesses its estimates of actual to expected cash collections, which are based on historical collection rates and adjusted for current information and trends. To the extent cash collections for tests delivered in prior periods are trending higher than expectations, the Company will increase revenue recognized when sufficient evidence is obtained to conclude the additional revenue will not result in a reversal of revenue in a future period. Given the historical uncertainties with respect to the timing and extent of cash collections for test services provided, sufficient evidence is obtained once cash collected exceeds the amount of revenue recognized during a given period. If cash collections for tests delivered in prior periods are trending below expectations, the Company will reduce revenue to the amount expected to be collected based on the latest information and expectations. Increases or decreases to the amount of cash expected to be collected for tests delivered in prior periods are recognized in product revenue with a corresponding impact to accounts receivable during the period such determination is made. During the three months ended September 30, 2024 and 2023, the Company increased revenue by a net of $34.5 million and $2.2 million, respectively, for collections related to tests delivered in prior periods that were fully collected (including an estimate of unapplied receipts). The increased revenue and decreased net loss resulted in a corresponding decrease in loss per share by $0.28 and $0.02 for the three months ended September 30, 2024 and 2023, respectively. During the nine months ended September 30, 2024, the Company increased revenue for collected cash in excess of initial revenue recognized by a net of $108.1 million for collections related to tests delivered in prior periods that were fully collected (including an estimate of unapplied receipts). The increased revenue and decreased net loss resulted in a corresponding decrease in loss per share by $0.88 for the nine months ended September 30, 2024. During the nine months ended September 30, 2023, the Company reduced revenue by a net of $3.7 million for a reduction in expected collections related to tests delivered in prior periods. The decreased revenue and increased net loss resulted in a corresponding increase in loss per share by $0.03 for the nine months ended September 30, 2023.  

As of September 30, 2024, the Company had $26.9 million in cash receipts which had not yet been applied to specific accounts receivables. The Company reviewed the historical unapplied payment trends, and, within the unapplied cash receipts of $26.9 million, the Company estimated approximately $2.5 million was related to tests delivered in prior periods that were fully collected.  Additionally, as overpayments were not material in prior years, the Company accounted for temporary unapplied balances as of September 30, 2024, as contra accounts receivable on the Balance Sheet. As of December 31, 2023, the unapplied accounts receivable balance was $1.3 million.

Product revenue is constrained for refunds estimated to be paid to insurance carriers. Certain refunds are recognized in accrued liabilities until they are either paid to the respective insurance carrier or it is determined the refund will not ultimately be paid, at which time the related accrual is reduced with a corresponding increase to revenue. During the three months ended September 30, 2024 and 2023, the reserves for refunds to insurance carriers were reduced and product revenue increased by $0.7 million and $1.2 million, respectively, for amounts the Company determined would not be refunded to insurance carriers. The increased revenue and corresponding decreased net loss resulted in a decreased loss per share by $0.01 for both the three months ended September 30, 2024 and 2023, respectively. During the nine months ended September 30, 2024 and 2023, the reserves for refunds to insurance carriers were reduced and product revenue increased by $4.5 million and $7.7 million, respectively, for amounts the Company determined would not be refunded to insurance carriers. The increased revenue and corresponding decreased net loss resulted in a decreased loss per share by $0.04 and $0.07 for the nine months ended September 30, 2024 and 2023, respectively.

In addition, certain other refunds are recognized as a reduction to accounts receivable until they are either paid to the respective insurance carrier or it is determined the refund will not ultimately be paid, at which time the related reserve is reduced with a corresponding increase to revenue. During the three months ended September 30, 2024, the reserves for refunds to insurance carriers were reduced and product revenue increased by $2.9 million for amounts the Company determined would not be refunded to insurance carriers. The increased revenue and corresponding decreased net loss resulted in a decreased loss per share by $0.02 for the three months ended September 30, 2024. During the nine months

ended September 30, 2024, the reserves for refunds to insurance carriers were reduced and product revenue increased by $7.1 million for amounts the Company determined would not be refunded to insurance carriers. The increased revenue and decreased net loss resulted in a decreased loss per share by $0.06 for the nine months ended September 30, 2024. There was no such adjustment in the three and nine months ended September 30, 2023.

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 and in vitro diagnostic (“IVD”) kits. The Company also recognizes revenues from its strategic collaboration agreements, such as those with BGI Genomics Co., Ltd. (“BGI Genomics”) and Foundation Medicine, Inc. (“Foundation Medicine”). The Company recognizes licensing and other revenues through agreements with pharmaceutical companies in support of potential clinical trials managed by the pharmaceutical companies.

Constellation

The laboratory partners with whom 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 services through the cloud software. These arrangements often include: (i) the delivery of the services through the cloud software, (ii) the necessary support and training, and (iii) the IVD kits to be consumed as tests are processed. The Company does not consider the software as a service, the support or the training as being distinct in the context of such arrangements, and therefore, these items 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 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 (i.e., upon the delivery of each test) and reported in licensing and other revenues in the Company’s statements of operations and comprehensive loss.

BGI Genomics

In February 2019, the Company entered into a License Agreement (the “BGI Genomics Agreement”) with BGI Genomics to develop, manufacture, and commercialize next generation sequencing-based genetic testing assays for clinical and commercial use. The BGI Genomics Agreement has a term of ten years and expires in February 2029. Pursuant to the BGI Genomics Agreement, the Company licensed its intellectual property to and provided development services for BGI Genomics. Following completion of development services, the Company began providing assay interpretation services over the term of the agreement.

According to the BGI Genomics Agreement, the Company is entitled to a total of $50.0 million, comprised of upfront technology license fees, prepaid royalties relating to future sales of licensed products and performance of assay interpretation services, and milestone payments. Due to uncertainties in achieving certain milestones, $6.0 million of the $50.0 million was constrained. A net of $44.0 million has been collected by the Company in cash, which includes $20.0 million in prepaid royalties.

The Company concluded that the license is not a distinct performance obligation as it does not have a stand-alone value to BGI Genomics apart from the related development services; therefore, license and related development services for each of the non-invasive prenatal tests (“NIPTs”) and Oncology products, represents two separate performance obligations, to which $24.0 million of transaction consideration was allocated. This performance obligation was fully satisfied in March 2023 and no further related amounts will be recognized as revenue.

As of December 31, 2023, the Company's performance obligation to provide ongoing NIPT assay interpretation services was removed. Therefore, the Company now has a single remaining performance obligation related to Oncology assay interpretation services, to which $20.0 million of transaction consideration was allocated and prepaid by BGI Genomics. During the nine months ended September 30, 2023, the Company recognized $1.1 million related to oncology assay interpretation services, of which $0.7 million was recognized against deferred royalties. During the nine months

ended September 30, 2024, the Company recognized $1.5 million related to oncology assay interpretation services, of which $1.4 million was recognized against deferred royalties. The Company currently has $17.4 million in deferred revenue related to this agreement as of September 30, 2024.

As required by the BGI Genomics Agreement, in June 2019 the Company prepaid $6.0 million to BGI Genomics for future sequencing services and $4.0 million for future sequencing equipment. These advance payments are for equipment and services to be received in future periods, which was assessed as a standalone transaction that did not reduce revenue, aggregated to $10.0 million and was originally recorded in long-term assets on the Company’s Consolidated Balance Sheet and will be periodically assessed for impairment. During both the three and nine months ended September 30, 2024, $0.4 million in equipment and services was received.  During the three and nine months ended September 30, 2023, $1.4 million and $4.0 million, respectively, in equipment and services was received. As of September 30, 2024, the remaining advanced payments were $1.0 million recorded in prepaid expenses and other current assets and $3.4 million recorded in other assets.

Foundation Medicine, Inc.

In August 2019, the Company entered into a License and Collaboration Agreement (the “Foundation Medicine Agreement”) with Foundation Medicine to develop and commercialize personalized circulating tumor DNA monitoring assays, for use by biopharmaceutical and clinical customers who order Foundation Medicine’s FoundationOne CDx. The Company and Foundation Medicine will share the revenues generated from both biopharmaceutical and clinical customers in accordance with the terms of the Foundation Medicine Agreement. The Foundation Medicine Agreement had an initial term of five years that expired in August 2024. There was an option for automatic renewals thereafter for successive one-year terms, unless the Foundation Medicine Agreement is terminated in accordance with its terms. The Company and Foundation Medicine have elected not to renew the agreement beyond the initial term.

Pursuant to the Foundation Medicine Agreement, the Company provided development services that are required to customize its proprietary Signatera test to work with Foundation Medicine’s FoundationOne CDx in conjunction with granting the use of the Company’s intellectual property. Following completion of those development services, the Company was currently providing assay testing services over the term of the agreement. The intellectual property had been licensed to Foundation Medicine for the customized test. In addition, the Company was responsible for delivering clinical study plans in order to demonstrate efficacy of the customized test which commenced in the second quarter of 2021.

The Company is entitled to a total of $32.0 million, comprised of upfront technology license fees, prepaid royalties relating to future sales of licensed products and performance of assay interpretation services, and milestone payments. $7.7 million is constrained due to uncertainties in achieving certain milestones. A net of $24.3 million has been collected by the Company in cash, which includes $5.0 million of prepaid royalties.

The Company concluded that the license is not a distinct performance obligation as it does not have a stand-alone value to Foundation Medicine apart from the related development services. Therefore, license and related development services, for Oncology products, represent a single performance obligation, to which $19.3 million of transaction consideration was allocated. Of this amount, $0.2 million was recognized in the three months ended March 31, 2023. This performance obligation was fully satisfied in March 2023 and no further related amounts will be recognized as revenue.

Royalties related to assay interpretation services represent separate performance obligations for Oncology products, to which $5.0 million of transaction consideration was allocated and prepaid by Foundation Medicine. During the three and nine months ended September 30, 2023, the Company recognized ($0.1) million and $0.3 million, respectively, related to oncology assay interpretation services. During the three and nine months ended September 30, 2024, the Company recognized $0.1 million and $0.3 million, respectively, related to oncology assay interpretation services. The Company currently has $3.0 million in deferred revenue related to this agreement as of September 30, 2024.

Disaggregation of Revenues

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				Nine months ended
	September 30,				September 30,
	2024		2023		2024		2023
	(in thousands)
Insurance carriers	$	405,208	$	239,780	$	1,130,364	$	676,680
Laboratory and other partners		27,622		21,731		70,152		71,985
Patients		6,928		6,795		20,334		22,801
Total revenues	$	439,758	$	268,306	$	1,220,850	$	771,466

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2024		2023		2024		2023
	(in thousands)
United States	$	426,274	$	259,870	$	1,190,559	$	746,420
Americas, excluding U.S.		2,002		1,288		5,084		3,652
Europe, Middle East, India, Africa		7,722		5,255		18,339		16,071
Asia Pacific and Other		3,760		1,893		6,868		5,323
Total revenues	$	439,758	$	268,306	$	1,220,850	$	771,466

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

	Balance at
	September 30,		December 31,
	2024		2023
	(in thousands)
Assets:
Accounts receivable, net	$	306,876	$	278,289
Liabilities:
Deferred revenue, current portion	$	17,886	$	16,612
Deferred revenue, long-term portion (1)		16,916		19,128
Total deferred revenues	$	34,802	$	35,740

(1) – The deferred revenue, long-term portion is included within the “Deferred revenue, long-term portion and other liabilities” line item on the condensed consolidated balance sheets.

The following table summarizes the changes in the balance of deferred revenues during the nine months ended September 30, 2024 and 2023:

	Balance at
	September 30,
	2024			2023
	(in thousands)
Beginning balance	$	35,740	$	30,778
Increase in deferred revenues		23,968		24,553
Revenue recognized during the period that was included in deferred revenues at the beginning of the period		(12,102)		(9,610)
Revenue recognized from performance obligations satisfied within the same period		(12,804)		(9,676)
Ending balance	$	34,802	$	36,045

During the nine months ended September 30, 2024, revenue recognized that was included in the deferred revenue balance at the beginning of the period totaled $12.1 million. This balance consisted of approximately a net $1.7 million related to BGI Genomics and Foundation Medicine and $10.4 million related to genetic testing services. The current portion of deferred revenue includes $14.4 million from genetic testing services, $0.5 million from BGI Genomics, and $3.0 million from the Foundation Medicine Agreement as of September 30, 2024. The non-current portion of deferred revenue consists of $16.9 million from the BGI Genomics Agreement as of September 30, 2024.