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Summary of Significant Accounting Policies | 6 Months Ended
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Jun. 30, 2018
Summary of Significant Accounting Policies [Abstract] |
Summary of Significant Accounting Policies | 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, 2017 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, 2017. The results of operations for the three- and six- month periods ended June 30, 2018 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. Translation adjustments resulting from translating foreign subsidiaries’ results of operations and assets and liabilities into U.S. dollars are immaterial for all periods presented. 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, revenue valuation, 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, and the computation of provisions for income taxes. 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 carrying value of our other liabilities, non-current, approximates fair value due to the time to maturity and prevailing market rates. 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. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. 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. 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, 2018 and December 31, 201 7 respectively (in thousands): ﻿ ﻿
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﻿ | June 30, 2018 |  | December 31, 2017
﻿(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 | $ | 16,438 |  | $ | — |  | $ | — |  | $ | 16,438 |  | $ | 14,858 |  | $ | — |  | $ | — |  | $ | 14,858
﻿Commercial paper |  | — |  |  | 6,620 |  |  | — |  |  | 6,620 |  |  | — |  |  | 1,649 |  |  | — |  |  | 1,649
﻿Total cash and cash equivalents |  | 16,438 |  |  | 6,620 |  |  | — |  |  | 23,058 |  |  | 14,858 |  |  | 1,649 |  |  | — |  |  | 16,507
﻿Investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
﻿Commercial paper |  | — |  |  | 22,062 |  |  | — |  |  | 22,062 |  |  | — |  |  | 20,394 |  |  | — |  |  | 20,394
﻿Corporate debt securities |  | — |  |  | 4,369 |  |  | — |  |  | 4,369 |  |  | — |  |  | 9,034 |  |  | — |  |  | 9,034
﻿US government & agency securities |  | — |  |  | 14,002 |  |  | — |  |  | 14,002 |  |  | — |  |  | 16,937 |  |  | — |  |  | 16,937
﻿Total investments |  | — |  |  | 40,433 |  |  | — |  |  | 40,433 |  |  | — |  |  | 46,365 |  |  | — |  |  | 46,365
﻿Long-term restricted cash: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
﻿Cash |  | 4,500 |  |  | — |  |  | — |  |  | 4,500 |  |  | 4,500 |  |  | — |  |  | — |  |  | 4,500
﻿Total assets measured at fair value | $ | 20,938 |  | $ | 47,053 |  | $ | — |  | $ | 67,991 |  | $ | 19,358 |  | $ | 48,014 |  | $ | — |  | $ | 67,372
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﻿Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
﻿Financing derivative | $ | — |  | $ | — |  | $ | 40 |  | $ | 40 |  | $ | — |  | $ | — |  | $ | 183 |  | $ | 183
﻿Total liabilities measured at fair value | $ | — |  | $ | — |  | $ | 40 |  | $ | 40 |  | $ | — |  | $ | — |  | $ | 183 |  | $ | 183
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The estimated fair value of the Financing Derivative liability was determined using Level 3 inputs, or significant unobservable inputs. ﻿ ﻿ During the six-month period ended June 30, 2018, 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 9.3% and 10.3% weighted average market yield at June 30, 2018 and December 31, 201 7, 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): ﻿ ﻿ ﻿ ﻿
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﻿ | June 30, 2018 |  | December 31, 2017
﻿ | Fair Value |  | Carrying Value |  | Fair Value |  | Carrying Value
﻿Notes payable | $ | 15,939 |  | $ | 14,121 |  | $ | 15,664 |  | $ | 13,635
﻿ 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 “N ote 7. S tockholders’ Equity” for detailed information on RSUs with time-based vesting and RSUs with performance-based vesting ﻿ ﻿
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﻿ |  | Six Months Ended June 30, |  |
﻿(in thousands) |  | 2018 |  | 2017 |  |  |  |
﻿Options to purchase common stock |  | 28,601 |  | 25,592 |  |  |  |
﻿RSUs with time-based vesting |  | 355 |  | — |  |  |  |
﻿RSUs with performance-based vesting |  | 652 |  | — |  |  |  |
﻿ Concentration and Other Risks For the three- and six- month periods ended June 30, 2018, one of our customers, Gene Company Limited, accounted for approximately 33% and 31% of our total revenue, respectively. For the three- and six- month periods ended June 30, 2017, the same customer, Gene Company Limited, accounted for approximately 26% and 28% 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, 2018 totaled $63.5 million, compared to $62.9 million at December 31, 2017. We believe that our existing cash, cash equivalents and investments will be sufficient to fund our projected operating requirements for at least twelve months from the filing of this Quarterly Report on Form 10-Q; however, we may need to raise additional capital in the future. Our view regarding sufficiency of cash and liquidity is primarily based on our operating plans and financial forecast for 2018, which includes various assumptions regarding demand for our products. Factors that may affect our capital needs include, but are not limited to, slower than expected adoption of our products resulting in lower sales of our products and services; future acquisitions; our ability to obtain new collaboration, distribution and customer arrangements; the progress of our research and development programs; initiation or expansion of research programs and collaborations; litigation costs, including the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; the purchase of patent licenses; and other factors. To the extent we raise additional funds through the sale of equity or convertible debt securities, the issuance of such securities will result in dilution to our stockholders. There can be no assurance that such funds will be available on favorable terms, or at all, particularly in light of restrictions under our debt agreement. If adequate funds are not available, we may be required to obtain funds by entering into collaboration, licensing or debt agreements on unfavorable terms. If we are unable to raise funds 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, 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 cease operations. If our cash, cash equivalents and investments are insufficient to fund our projected operating requirements, and we are unable to raise capital, it would have a material adverse effect on our business, financial condition and results of operations. ﻿ Significant Accounting Policies Except as noted below relating to our adoption of ASC 606, 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, 2017. ﻿ Recent Accounting Pronouncements Recently Issued Accounting Standards In June 2018, the Financial Accounting Standards Board, or 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 expect to adopt this standard beginning in 2019. While we continue to assess the potential impact of this standard, we do not expect the adoption of this standard to have a material impact on our condensed consolidated financial statements. 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 are currently evaluating the impact of this standard on our Consolidated Financial Statements and whether we will make the allowed election. In February 2016, the FASB issued ASU 2016-02, Leases. The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements. We expect to adopt this standard beginning in 2019. We do not expect that this standard will have a material impact on our operating results, but we do expect that upon adoption, it will have a material impact on our assets and liabilities. The primary effect of adoption will be the requirement to record right-of-use assets and corresponding lease obligations for current operating leases. We are currently quantifying the impact of adoption. Recently Adopted Accounting Standards In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires restricted cash to be presented with cash and cash equivalents on the statement of cash flows and disclosure of how the statement of cash flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet. ASU 2016-18 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We adopted this standard effective January 1, 2018 using the retrospective transition method by restating our condensed consolidated statements of cash flows to include restricted cash of $4.5 million in the beginning and ending cash, cash equivalents, and restricted cash balances for all periods presented. As a result of adoption, n et cash flows for the six months ended June 30, 2017 did not change as a result of including restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts presented on the statements of cash flows. In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively ASC 606). ASC 606 superseded existing revenue recognition standards with a single model unless those contracts are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. The revenue recognition principle in ASC 606 is that an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. On January 1, 2018, we adopted ASC 606 using the modified retrospective method with the cumulative effect of adoption recognized as an adjustment to our accumulated deficit on January 1, 2018. Prior period financial statements and disclosures have not been restated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 606 did not have a material impact on our condensed consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the three-and six- month periods ended June 30, 2018. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Upon adopting ASC 606, the incremental direct costs of obtaining a contract are now deferred and amortized over the period of contract performance or a longer period if renewals are expected and the renewal commission is not commensurate with the initial commission. We classify deferred commissions as current and included it in “Prepaid expenses and other current assets” in our condensed consolidated balance sheets. The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASC 606 was as follows (in thousands): ﻿
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﻿Balance Sheet | Balance at December 31, 2017 |  | Adjustments Due to ASC 606 |  | Balance at January 1, 2018
﻿Assets |  |  |  |  |  |  |  |
﻿Prepaid expenses and other current assets | $ | 2,249 |  | $ | 189 |  | $ | 2,438
﻿Liabilities and Stockholders' Equity |  |  |  |  |  |  |  |
﻿Accumulated deficit |  | (879,733) |  |  | 189 |  |  | (879,544)
﻿ In accordance with ASC 606, the disclosure of the impact of adoption on our condensed consolidated statement of operations and comprehensive loss, condensed consolidated balance sheets, and condensed consolidated statements of cash flows for the three- and six- month periods ended June 30, 2018 was as follows (in thousands): ﻿
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﻿ | For the three-month period ended June 30, 2018 |  | For the six-month period ended June 30, 2018
﻿Statement of Operations and Comprehensive Loss | As Reported |  | Balances Without Adoption of ASC606 |  | Effect of Change Higher/(Lower) |  | As Reported |  | Balances Without Adoption of ASC606 |  | Effect of Change Higher/(Lower)
﻿Operating Expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
﻿Sales, general and administrative | $ | 14,943 |  | $ | 14,963 |  | $ | (20) |  | $ | 29,877 |  | $ | 29,912 |  | $ | (35)
﻿ ﻿
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﻿ | As of June 30, 2018
﻿Balance Sheet | As Reported |  | Balances Without Adoption of ASC606 |  | Effect of Change Higher/(Lower)
﻿Assets |  |  |  |  |  |  |  |
﻿Prepaid expenses and other current assets | $ | 2,035 |  | $ | 1,812 |  | $ | 223
﻿Liabilities and Stockholders' Equity |  |  |  |  |  |  |  |
﻿Accumulated deficit | $ | (926,263) |  | $ | (926,040) |  | $ | 223
﻿ ﻿ ﻿
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﻿ | For the six-month period ended June 30, 2018
﻿Statement of Cash Flows | As Reported |  | Balances Without Adoption of ASC606 |  | Effect of Change Higher/(Lower)
﻿Cash Flows from Operating Activities |  |  |  |  |  |  |  |
﻿Net loss | $ | (46,719) |  | $ | (46,754) |  | $ | 35
﻿Adjustments to reconcile net loss to net cash used in operating activities |  |  |  |  |  |  |  |
﻿Prepaid expenses and other current assets | $ | 337 |  | $ | 302 |  | $ | 35
﻿ At June 30, 2018, we had $0.2 million of deferred commissions included in “Prepaid expenses and other current assets” which will be recognized as the related revenue is recognized. Additionally, as a practical expedient, we expense costs to obtain a contract as incurred if the amortization period would have been a year or less. A summary of our revenue by category for the three-and six-month periods ended June 30, 2018 and 2017 is as follows (in thousands): ﻿
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﻿ | Three-month periods ended June 30, |  | Six-month periods ended June 30,
﻿(in thousands) | 2018 |  | 2017 (1) |  | 2018 |  | 2017 (1)
﻿Instrument revenue | $ | 8,525 |  | $ | 7,119 |  | $ | 15,669 |  | $ | 19,752
﻿Consumable revenue |  | 9,960 |  |  | 9,429 |  |  | 19,098 |  |  | 18,090
﻿Product revenue |  | 18,485 |  |  | 16,548 |  |  | 34,767 |  |  | 37,842
﻿Service and other revenue |  | 3,093 |  |  | 3,525 |  |  | 6,173 |  |  | 7,146
﻿Total revenue | $ | 21,578 |  | $ | 20,073 |  | $ | 40,940 |  | $ | 44,988
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| (1) |  | As noted above, prior period amounts have not been adjusted under the modified retrospective method.
﻿ A summary of our revenue by geographic location for the three- and six-month periods ended June 30, 2018 and 2017 is as follows (in thousands): ﻿ ﻿
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﻿ | Three-month periods ended June 30, |  | Six-month periods ended June 30,
﻿ | 2018 |  | 2017 (1) |  | 2018 |  | 2017 (1)
﻿North America | $ | 9,204 |  | $ | 10,227 |  | $ | 17,015 |  | $ | 21,012
﻿Europe (including the Middle East and Africa) |  | 3,687 |  |  | 2,909 |  |  | 7,700 |  |  | 7,233
﻿Asia Pacific |  | 8,687 |  |  | 6,937 |  |  | 16,225 |  |  | 16,743
﻿Total | $ | 21,578 |  | $ | 20,073 |  | $ | 40,940 |  | $ | 44,988
﻿ ﻿
| (1) |  | As noted above, prior period amounts have not been adjusted under the modified retrospective method.
﻿ Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of our instruments and related consumables; Service and other revenue consist primarily of revenue earned from product maintenance agreements with some additional revenue from instrument lease agreements and grant revenue. We account for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Taxes we collect concurrent with revenue-producing activities are excluded from revenue. Our instrument sales are generally sold in a bundled arrangement and commonly include the instrument, instrument accessories, installation, training, and consumables. Additionally, our instrument sale arrangements generally include a one-year period of service. For such bundled arrangements, we account for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. Our customers cannot benefit from the system without installation, and installation can only be performed by us or qualified distributors. As a result, the system and installation are considered to be a single performance obligation recognized after installation is completed except for sales to qualified distributors, in which case the system is distinct and recognized when control has transferred to the distributor which typically occurs upon shipment. The consideration for bundled arrangements is allocated between separate performance obligations based on their individual standalone selling price (“SSP”). The SSP is determined based on observable prices at which we separately sell the products and services. If an SSP is not directly observable, then we will estimate the SSP by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, internal costs, profit objectives, pricing practices and other observable inputs. We recognize revenues as the performance obligations are satisfied by transferring control of the product or service to the customer or over the term of a product maintenance agreement with a customer. Our revenue arrangements generally do not provide a right of return. Contract liabilities and contract assets - Contract liabilities primarily consist of deferred revenue. We record deferred service revenues when cash payments are received or due in advance of our performance for product maintenance agreements. Deferred service revenue is recognized over the related performance period, generally one to three years, on a straight-line basis as the Company is standing ready to provide services and a time-based measure of progress best reflects the satisfaction of the performance obligation. As of June 30, 2018, we had a total of $7.5 million of deferred service revenue from our service contracts, $6.4 million of which was recorded as “deferred service revenue, current” to be recognized over the next year and the remaining $1.1 million was recorded as “deferred service revenue, non-current” to be recognized in the next 2 to 4 years. Revenue recorded in the six months ended June 30, 2018 includes $4.2 million of previously deferred revenue that was included in “deferred service revenue, current” and “deferred service revenue, non-current”, respectively, as of December 31, 2017. Contract assets as of December 31, 2017 and June 30, 2018 were not material. 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, once the lessee takes (or has the right to take) control/possession of the property under the lease. Effectively, this occurs once the installation is complete and control of the instrument is transferred to our customers. Other practical expedients and exemptions - Customers generally are invoiced upon acceptance of the system, which is also the start of the one-year service period. As such, there is typically not more than a one-year difference between the receipt of cash and the provision of services. Therefore, we apply the practical expedient and do not account for any potential significant financing benefit. However, it is noted that some customers will pre-order extended service periods at the time of the initial system sale. These customers may choose to make quarterly or annual payments or prepay multiple years of service upfront but there is no pricing difference between these different payment options. As such, no significant financing component is believed to exist with any of our existing arrangements. ﻿

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