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 June 30, 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 001-34899

Pacific Biosciences of California, Inc.

(Exact name of registrant as specified in its charter)

Delaware	16-1590339
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1305 O’Brien Drive Menlo Park, CA	94025
(Address of principal executive offices)	(Zip Code)

(650) 521-8000

(Registrant’s telephone number, including area code)

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 $0.001 per share	PACB	The NASDAQ Stock Market LLC

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, a 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.

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☒

Number of shares outstanding of the issuer’s common stock as of July 31, 2019:  152,964,532

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TABLE OF CONTENTS

	PAGE No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	4
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and 2018	5
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018	6
Condensed Consolidated Statements of Cash Flows for the SixMonths Ended June 30, 2019 and 2018	7
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3. Quantitative and Qualitative Disclosures About Market Risk	33
Item 4. Controls and Procedures	33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	35
Item 1A. Risk Factors	35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3. Default Upon Senior Securities	59
Item 4. Mine Safety Disclosures	59
Item 5. Other Information	59
Item 6. Exhibits	59

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PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

	June 30,		December 31,
(in thousands, except per share amounts)	2019		2018
Assets
Current assets
Cash and cash equivalents	$	30,358	$	18,844
Investments		36,486		83,510
Accounts receivable		12,123		8,595
Inventory		17,404		17,878
Prepaid expenses and other current assets		2,538		2,832
Total current assets		98,909		131,659
Property and equipment, net		33,457		34,073
Operating lease right-of-use assets, net		34,175		—
Long-term restricted cash		4,000		4,500
Other long-term assets		41		43
Total assets	$	170,582	$	170,275
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	8,011	$	6,736
Accrued expenses		14,107		12,823
Deferred service revenue, current		6,707		6,537
Operating lease liabilities, current		3,631		—
Notes payable, current		15,233		—
Other liabilities, current		1,764		788
Total current liabilities		49,453		26,884
Deferred service revenue, non-current		1,454		890
Operating lease liabilities, non-current		43,921		—
Deferred rent, non-current		—		13,765
Notes payable, non-current		—		14,659
Financing derivative		—		16
Total liabilities		94,828		56,214
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.001 par value:
Authorized 50,000 shares; No shares issued or outstanding		—		—
Common stock, $0.001 par value:
Authorized 1,000,000 shares; issued and outstanding 152,959 and 150,244 shares at June 30, 2019 and December 31, 2018, respectively		153		150
Additional paid-in capital		1,112,610		1,096,053
Accumulated other comprehensive income (loss)		17		(36)
Accumulated deficit		(1,037,026)		(982,106)
Total stockholders’ equity		75,754		114,061
Total liabilities and stockholders’ equity	$	170,582	$	170,275

See accompanying notes to the condensed consolidated financial statements.

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PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except per share amounts)	2019		2018		2019			2018
Revenue:
Product revenue	$	21,250	$	18,485	$		34,707	$	34,767
Service and other revenue		3,371		3,093			6,339		6,173
Total revenue		24,621		21,578			41,046		40,940
Cost of revenue:
Cost of product revenue		11,980		9,858			20,598		18,877
Cost of service and other revenue		3,028		2,858			5,718		5,905
Total cost of revenue		15,008		12,716			26,316		24,782
Gross profit		9,613		8,862			14,730		16,158
Operating expense:
Research and development		14,910		15,664			30,395		31,975
Sales, general and administrative		19,083		14,943			38,849		29,877
Total operating expense		33,993		30,607			69,244		61,852
Operating loss		(24,380)		(21,745)			(54,514)		(45,694)
Interest expense		(644)		(598)			(1,269)		(1,179)
Other income (expense), net		428		(197)			863		154
Net loss		(24,596)		(22,540)			(54,920)		(46,719)
Other comprehensive income (loss):
Unrealized income on investments		11		22			53		16
Comprehensive loss	$	(24,585)	$	(22,518)	$		(54,867)	$	(46,703)
Net loss per share:
Basic and diluted net loss per share	$	(0.16)	$	(0.17)	$		(0.36)	$	(0.37)
Shares used in computing basic and diluted net loss per share		152,776		131,882			152,029		127,847

See accompanying notes to the condensed consolidated financial statements.

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PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

						Accumulated
				Additional		Other				Total
				Paid-in		Comprehensive		Accumulated		Stockholders'
(in thousands)	Common Stock			Capital		Income (Loss)		Deficit		Equity
For the three months ended June 30, 2019
Balance at March 31, 2019	152,672	$	153	$	1,107,121	$	6	$	(1,012,430)	$	94,850
Net loss	—		—		—		—		(24,596)		(24,596)
Other comprehensive income	—		—		—		11		—		11
Issuance of common stock in conjunction with equity plans	287		—		1,400		—		—		1,400
Stock-based compensation expense	—		—		4,089		—		—		4,089
Balance at June 30, 2019	152,959	$	153	$	1,112,610	$	17	$	(1,037,026)	$	75,754
For the three months ended June 30, 2018
Balance at March 31, 2018	131,872	$	132	$	1,006,367	$	(38)	$	(903,723)	$	102,738
Net loss	—		—		—		—		(22,540)		(22,540)
Other comprehensive income (loss)	—		—		—		22		—		22
Issuance of common stock in conjunction with equity plans	16		—		30		—		—		30
Stock-based compensation expense	—		—		5,224		—		—		5,224
Balance at June 30, 2018	131,888	$	132	$	1,011,621	$	(16)	$	(926,263)	$	85,474
For the six months ended June 30, 2019
Balance at December 31, 2018	150,244	$	150	$	1,096,053	$	(36)	$	(982,106)	$	114,061
Net loss	—		—		—		—		(54,920)		(54,920)
Other comprehensive income	—		—		—		53		—		53
Issuance of common stock in conjunction with equity plans	2,715		3		8,087		—		—		8,090
Stock-based compensation expense	—		—		8,470		—		—		8,470
Balance at June 30, 2019	152,959	$	153	$	1,112,610	$	17	$	(1,037,026)	$	75,754
For the six months ended June 30, 2018
Balance at December 31, 2017	116,277	$	116	$	965,752	$	(32)	$	(879,733)	$	86,103
Net loss	—		—		—		—		(46,719)		(46,719)
Other comprehensive income (loss)	—		—		—		16		—		16
ASC 606 adoption effect									189		189
Issuance of common stock in conjunction with equity plans	1,236		2		2,515		—		—		2,517
Issuance of common stock from ATM equity offering, net of issuance costs	14,375		14		32,848		—		—		32,862
Stock-based compensation expense	—		—		10,506		—		—		10,506
Balance at June 30, 2018	131,888	$	132	$	1,011,621	$	(16)	$	(926,263)	$	85,474

See accompanying notes to the condensed consolidated financial statements.

6

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
(in thousands)	2019		2018
Cash flows from operating activities
Net loss	$	(54,920)	$	(46,719)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation		3,586		3,611
Amortization of operating lease right-of-use assets		1,289		—
Amortization of debt discount and financing costs		574		486
Gain on derivative		(16)		(143)
Stock-based compensation		8,470		10,506
Accretion from investment discount		(677)		(194)
Changes in assets and liabilities
Accounts receivable		(3,528)		5,987
Inventory		(40)		(560)
Prepaid expenses and other assets		388		337
Accounts payable		685		(4,765)
Accrued expenses		1,284		(1,683)
Deferred service revenue		734		75
Other liabilities		(701)		(208)
Net cash used in operating activities		(42,872)		(33,270)
Cash flows from investing activities
Purchase of property and equipment		(1,866)		(1,700)
Purchase of investments		(36,748)		(44,500)
Sales of investments		—		2,442
Maturities of investments		84,410		48,200
Net cash provided by investing activities		45,796		4,442
Cash flows from financing activities
Proceeds from issuance of common stock from equity plans		8,090		2,517
Proceeds from issuance of common stock from underwritten public equity offering, net of issuance costs		—		32,862
Net cash provided by financing activities		8,090		35,379
Net increase in cash and cash equivalents and restricted cash		11,014		6,551
Cash and cash equivalents and restricted cash at beginning of period		23,344		21,007
Cash and cash equivalents and restricted cash at end of period	$	34,358	$	27,558
Cash and cash equivalents at end of period		30,358		23,058
Restricted cash at end of period		4,000		4,500
Cash and cash equivalents and restricted cash at end of period	$	34,358	$	27,558
Supplemental disclosure of non-cash operating activities
Inventory transferred to property and equipment	$	1,427	$	492
Inventory transferred from property and equipment	$	(966)	$	(343)

See accompanying notes to the condensed consolidated financial statements.

7

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1. OVERVIEW

We design, develop and manufacture sequencing systems to help scientists resolve genetically complex problems. Based on our novel Single Molecule, Real-Time (SMRT®) sequencing technology, our products enable: de novo genome assembly to finish genomes in order to more fully identify, annotate and decipher genomic structures; full-length transcript analysis to improve annotations in reference genomes, characterize alternatively spliced isoforms in important gene families, and find novel genes; targeted sequencing to more comprehensively characterize genetic variations; and real-time kinetic information for epigenome characterization. Our technology provides high accuracy, ultra-long reads, uniform coverage and the ability to simultaneously detect epigenetic changes. PacBio® sequencing systems, including consumables and software, provide a simple and fast end-to-end workflow for SMRT sequencing.  

On November 1, 2018, we entered into an Agreement and Plan of Merger with Illumina, Inc. (“Illumina”) and FC Ops Corp., a wholly-owned subsidiary of Illumina (the “Merger Agreement”) pursuant to which Illumina will acquire us for $8.00 per share of our common stock in an all-cash transaction and FC Ops Corp. will be merged with and into us (the “Merger”), with us surviving the Merger and becoming a wholly-owned subsidiary of Illumina. Completion of the transaction is subject to terms and conditions set forth in the Merger Agreement, including expiration or termination of any waiting periods applicable to the consummation of the Merger under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and clearance under the antitrust laws of certain non-U. S. jurisdictions. At a Special Meeting of Stockholders held on January 24, 2019, our stockholders, among other things, approved the adoption of the Merger Agreement. The Merger has been notified to the United States Federal Trade Commission (“FTC”) and to the Competition and Markets Authority of the United Kingdom (“CMA”) and is under review by both the FTC and the CMA. We and Illumina will continue to work cooperatively with the FTC and the CMA. We and Illumina currently expect the Merger to be completed in the fourth quarter of 2019, at which time we will become a wholly-owned subsidiary of Illumina and will cease to be a publicly-traded company. No assurance can be given that the required regulatory approvals will be obtained or that the required conditions to closing will be satisfied, and, even if all such approvals are obtained and the conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the approvals. Under certain circumstances specified in the Merger Agreement, Illumina may be required to pay us a termination fee of $98.0 million (the “Reverse Termination Fee”).  For more information about the effects of our agreement to be acquired by Illumina please see Risk Factors under the section “Risks Related to Our Business”.

The names “Pacific Biosciences,” “PacBio,” “SMRT,” “SMRTbell,” “Sequel” and our logo are our trademarks.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

In the opinion of management, our accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) have been prepared on a consistent basis with our December 31, 2018 audited Consolidated Financial Statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth herein. The Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and, as permitted by such rules and regulations, omit certain information and footnote disclosures necessary to present the statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). These Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the entire year or any future periods.

The consolidated financial statements include the accounts of Pacific Biosciences and our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the financial statements. Our estimates include, but are not limited to, the valuation of inventory, the determination of stand-alone selling prices for revenue recognition, the valuation of a financing derivative and long-term notes, the valuation and recognition of share-based compensation, the expected renewal period for service contracts, the useful lives assigned to long-lived assets, the

8

computation of provisions for income taxes and the determination of the internal borrowing rate used in calculating the operating lease right-of-use assets and operating lease liabilities. Actual results could differ materially from these estimates.

Fair Value of Financial Instruments

The carrying amount of our accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses and other liabilities, current, approximate fair value due to their short maturities.

The fair value hierarchy established under U.S. GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:

· Level 1: quoted prices in active markets for identical assets or liabilities;

· Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

· Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We consider an active market as one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, we view an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our non-performance risk, or that of our counterparty, is considered in determining the fair values of liabilities and assets, respectively.

We classify our cash deposits and money market funds within Level 1 of the fair value hierarchy because they are valued using bank balances or quoted market prices. We classify our investments as Level 2 instruments based on market pricing and other observable inputs. We did not classify any of our investments within Level 3 of the fair value hierarchy.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability.

9

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of June 30, 2019 and December 31, 2018 respectively (in thousands):

	June 30, 2019								December 31, 2018
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents:
Cash and money market funds	$	17,124	$	—	$	—	$	17,124	$	18,844	$	—	$	—	$	18,844
Commercial paper		—		10,386		—		10,386		—		—		—		—
U.S. Treasury securities		—		2,848		—		2,848		—		—		—		—
Total cash and cash equivalents		17,124		13,234		—		30,358		18,844		—		—		18,844
Investments:
Commercial paper		—		29,592		—		29,592		—		53,469		—		53,469
Corporate debt securities		—		5,497		—		5,497		—		10,214		—		10,214
US government & agency securities		—		1,397		—		1,397		—		19,827		—		19,827
Total investments		—		36,486		—		36,486		—		83,510		—		83,510
Long-term restricted cash:
Certified deposits		4,000		—		—		4,000		4,500		—		—		4,500
Total assets measured at fair value	$	21,124	$	49,720	$	—	$	70,844	$	23,344	$	83,510	$	—	$	106,854
Liabilities
Financing derivative	$	—	$	—	$	—	$	—	$	—	$	—	$	16	$	16
Total liabilities measured at fair value	$	—	$	—	$	—	$	—	$	—	$	—	$	16	$	16

The estimated fair value of the Financing Derivative liability was determined using Level 3 inputs, or significant unobservable inputs.

During the three months ended June 30, 2019, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis and our valuation techniques did not change compared to the prior year.

Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis

We determined the fair value of the Notes from the debt facility that we entered into during the first quarter of 2013 using Level 3 inputs, or significant unobservable inputs. The value of the Notes was determined by comparing the difference between the fair value of the Notes with and without the Financing Derivative by calculating the respective present values from future cash flows using 8.8% and 9.6% weighted average market yield at June 30, 2019 and December 31, 2018, respectively. Refer to Note 5. Notes Payable for additional details regarding the Notes. The estimated fair value and carrying value of the Notes are as follows (in thousands):

The estimated fair value and carrying value of the Notes are as follows (in thousands):

	June 30, 2019				December 31, 2018
	Fair Value		Carrying Value		Fair Value		Carrying Value
Notes payable	$	16,019	$	15,233	$	15,915	$	14,659

10

Net Loss per Share

The following outstanding common stock options, restricted stock units, or “RSUs”, with time-based vesting and RSUs with performance-based vesting, were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect. See Note 7. Stockholders’ Equity for detailed information on RSUs with time-based vesting and RSUs with performance-based vesting.

	Six Months Ended June 30,
(in thousands)	2019	2018
Options to purchase common stock	23,414	28,601
RSUs with time-based vesting	1,121	355
RSUs with performance-based vesting	138	652

Concentration and Other Risks

For the three and six months ended June 30, 2019, one of our customers, Gene Company Limited, accounted for approximately 23% and 20% of our total revenue, respectively. For the three and six months ended June 30, 2018, one of our customers, Gene Company Limited, accounted for approximately 33% and 31% of our total revenue, respectively. Gene Company Limited is our distributor in China. 

Going Concern

Cash, cash equivalents and investments, excluding restricted cash, at June 30, 2019 totaled $66.8 million, compared to $102.4 million at December 31, 2018. Our net cash used for operating activities for the six-month period ended June 30, 2019 was $42.9 million.  Due to our continued losses and operating cash needs as well as significant legal expenses we have incurred and continue to incur in connection with the Merger Agreement, we believe that the timely receipt of the Reverse Termination Fee or other remedies we may receive if the Merger Agreement is terminated under certain circumstances will be necessary to alleviate substantial doubt about our ability to meet the repayment obligation of approximately $16.0 million in aggregate principal amount of our Notes, as defined below, that mature in February 2020 and to fund our projected operating requirements for at least twelve months from the date of filing of this Quarterly Report on Form 10-Q. 

The Merger Agreement provides for the payment to the Company of the Reverse Termination Fee in connection with a termination of the Merger Agreement by either the Company or Illumina after November 1, 2019 (subject to (i) the satisfaction of conditions that the Company reasonably believes to be within its control; (ii) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement); and (iii) the non-occurrence of specified legal restraints). However, the Company’s right to receive the Reverse Termination Fee is not conditioned on the receipt of applicable antitrust or competition law approvals. The Reverse Termination Fee will not be available in all instances in which the Merger Agreement is terminated, and no assurance can be given that it will be received by the Company.  For more information about the risks and uncertainties associated with the Merger, please see Risk Factors under the section titled “Risks Related to Our Business”. However, if the Merger Agreement is terminated and we are unable to obtain sufficient funds pursuant to the Merger Agreement, or if such funds are not received on a timely basis, we will need to raise additional capital or may be unable to meet our debt repayment obligations for our outstanding Notes discussed above. If we are unable to repay our indebtedness when due and payable, debt holders could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our property and interests in property, including our intellectual property, as collateral under our existing debt.

To the extent we raise additional funds through the sale of equity or convertible debt, the issuance of such securities will result in dilution to our stockholders. There can be no assurance that such additional capital will be available on favorable terms, or at all, particularly in light of restrictions under our debt agreement and the Merger Agreement.  If we are unable to raise additional capital on favorable terms, or at all, we may have to reduce our cash burn rate and may not be able to support our commercialization efforts, or to increase or maintain the level of our research and development activities. If we are unable to generate sufficient cash flows or to raise adequate funds to finance our forecasted expenditures, including our debt payment obligations in February 2020, we may have to make significant changes to our operations including delaying or reducing the scope of or eliminating some or all of our development programs. We also may have to reduce sales, marketing, engineering, customer support or other resources devoted to our existing or new products, or we may have to cease operations.

Significant Accounting Policies

Except as noted below relating to our adoption of lease related accounting, there have been no material changes to our significant accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2018.

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Recent Accounting Pronouncements

Recently Issued Accounting Standards

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2018-13 on our consolidated financial statements and disclosures.

In June 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. We plan to adopt ASU 2016-13 on January 1, 2020. However, we are still in the process of assessing the impact of the new standard on our results of operations and financial position.

Recently Adopted Accounting Standards

Adoption of ASU 2018-07

In June 2018, the FASB issued Accounting Standards Update, or ASU, 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of Accounting Standards Codification, or ASC, Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods, with early adoption permitted. We adopted this standard beginning on January 1, 2019 and the adoption of this standard did not have a material impact on our condensed consolidated financial statements for the three and six months ended June 30, 2019.

Adoption of ASU 2018-02

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that allows for an entity to elect to reclassify the income tax effects on items within accumulated other comprehensive income resulting from U.S. tax reform to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. We adopted this standard beginning in January 1, 2019 and the adoption of this standard did not have a material impact on our condensed consolidated financial statements for the three and six months ended June 30, 2019.

Adoption of ASC 842

On January 1, 2019, we adopted the FASB Accounting Standards Codification, or ASC, Topic 842, Leases, or ASC 842, which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the condensed consolidated balance sheet. As permitted by ASC 842, we elected the adoption date of January 1, 2019, which is the date of initial application. As a result, the condensed consolidated balance sheet prior to January 1, 2019 was not restated, continues to be reported under ASC Topic 840, Leases, or ASC 840, which did not require the recognition of operating lease liabilities on the condensed consolidated balance sheet, and is not comparative. The expense recognition for operating leases under ASC 842 is substantially consistent with ASC 840. As a result, there is no significant difference in our results of operations presented in our condensed consolidated statements of operations and comprehensive loss for each period presented.

We adopted ASC 842 using a modified retrospective approach for leases existing at January 1, 2019. The adoption of ASC 842 had a substantial impact on our balance sheet. The most significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases. Accordingly, adoption of this standard resulted in the recognition of operating lease right-of-use assets of $35.5 million and operating lease liabilities of $49.2 million comprised of $3.4 million of current operating lease liabilities and $45.8 million of non-current operating lease liabilities on the condensed consolidated balance sheet as of January 1, 2019.

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As permitted under ASC 842, we elected several practical expedients that permit us:

· to not reassess whether a contract is or contains a lease;

· to not reassess the lease classification;

· to not reassess the initial direct costs as of the adoption date;

· to not recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less; and

· to not separate non-lease components for real estate leases.

The application of the practical expedients did not have a significant impact on the measurement of the operating lease liabilities.

Service and other revenue can include some revenue from instrument lease agreements. Instrument leases are generally classified as operating-type leases and revenue from these leases is recognized on a straight-line basis over the respective lease term. Lease income was not material in fiscal 2018 or for the three and six months ended June 30, 2019.

Disclosure related to the amount, timing and uncertainty of cash flows arising from operating leases are included in “Leases” section of Note 6.Commitments and Contingencies.

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NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS

The following tables summarize our cash, cash equivalents and investments as of June 30, 2019 and December 31, 2018 (in thousands):

	As of June 30, 2019
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	Cost		gains		losses		Value
Cash and cash equivalents:
Cash and money market funds	$	17,124	$	—	$	—	$	17,124
Commercial paper		10,388		—		(2)		10,386
U.S. Treasury securities		2,848		—		—		2,848
Total cash and cash equivalents		30,360		—		(2)		30,358
Investments:
Commercial paper		29,590		4		(2)		29,592
Corporate debt securities		5,481		16		—		5,497
US government & agency securities		1,396		1		—		1,397
Total investments		36,467		21		(2)		36,486
Total cash, cash equivalents and investments	$	66,827	$	21	$	(4)	$	66,844
Long-term restricted cash:
Certified deposits	$	4,000	$	—	$	—	$	4,000
	As of December 31, 2018
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	Cost		gains		losses		Value
Cash and cash equivalents:
Cash and money market funds	$	18,844	$	—	$	—	$	18,844
Total cash and cash equivalents		18,844		—		—		18,844
Investments:
Commercial paper		53,493		—		(24)		53,469
Corporate debt securities		10,223		3		(12)		10,214
US government & agency securities		19,830		—		(3)		19,827
Total investments		83,546		3		(39)		83,510
Total cash, cash equivalents and investments	$	102,390	$	3	$	(39)	$	102,354
Long-term restricted cash:
Certified deposits	$	4,500	$	—	$	—	$	4,500

The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of June 30, 2019:

(in thousands)	Fair Value
Due in one year or less	$	49,720
Total investments	$	49,720

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.

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NOTE 4. BALANCE SHEET COMPONENTS

Inventory

As of June 30, 2019 and December 31, 2018, our inventory consisted of the following components:

	June 30,		December 31,
(in thousands)	2019		2018
Purchased materials	$	7,988	$	6,222