10x Genomics, Inc.: Form 10-Q for the period ended Sep 30, 2022

You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed financial statements and the related notes and other financial information included elsewhere in this Quarterly Report and our audited consolidated financial statements and notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on February 18, 2022 (our "Annual Report"). As discussed in the section titled “Special Note Regarding Forward Looking Statements,” the following discussion and analysis, in addition to historical financial information, contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” in this Quarterly Report and Part I, Item 1A of our Annual Report.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

Overview

We are a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. Our expanding suite of offerings leverages our cross-functional expertise across biology, chemistry, software and hardware to provide a comprehensive, dynamic and high-resolution view of complex biological systems. We have launched multiple products that enable researchers to understand and interrogate biological analytes in their full biological context. Our commercial product portfolio leverages our Chromium Controller, Chromium Connect and Chromium X Series, which we refer to as “Chromium instruments,” our Visium CytAssist, an instrument designed to simplify the Visium solution workflow by facilitating the transfer of analytes from standard glass slides to Visium slides, and our proprietary microfluidic chips, slides, reagents and other consumables for our Chromium and Visium solutions, which we refer to as “consumables.” We bundle our software with these products to guide customers through the workflow, from sample preparation through analysis and visualization.

Our products cover a wide variety of applications and allow researchers to analyze biological systems at fundamental resolutions and on massive scales, such as at the single cell level for millions of cells. Customers purchase instruments and consumables from us for use in their experiments. In addition to instrument and consumable sales, we derive revenue from post-warranty service contracts for our instruments.

Since our inception in 2012, we have incurred net losses in each year. Our net losses were $41.9 million and $148.8 million for the three and nine months ended September 30, 2022 and $17.2 million and $39.8 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, we had an accumulated deficit of $1.0 billion, and, cash, cash equivalents and marketable securities totaling $452.4 million. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

• attract, hire and retain qualified personnel;
• scale our technology platforms and introduce new products and services;
• protect and defend our intellectual property;
• acquire businesses or technologies; and
• invest in processes, tools and infrastructure to support the growth of our business.

Operational Effectiveness in the COVID-19 Environment

We continue to closely monitor developments surrounding the COVID-19 pandemic including, among other developments, the potential impacts of variants. Many of our customers continue to navigate COVID-19 related challenges that we believe have affected our customers’ productivity. Such challenges include COVID-19 related protocols and restrictions, difficulties hiring, training and retaining laboratory and other personnel, constraints on logistics, shipping and other distribution operations and impediments to procuring materials, equipment and components required for their experiments. For example, we believe COVID-19 related lockdowns in China have continued to negatively impact our revenues in the quarter ended September 30,

2022. We, our suppliers and our other partners also have encountered COVID-19 related challenges, including difficulties procuring equipment, materials and components necessary to develop, manufacture and distribute our products, but to date we have not experienced any material impacts as a result of such challenges.

There is considerable uncertainty about the duration of the ongoing impacts of COVID-19. We expect COVID-19 to continue to impact our operating results, however, the extent of the financial impact and duration cannot be reasonably estimated at this time. For further discussion of the risks relating to the impacts of the COVID-19 pandemic, see the section titled “Risk Factors,” generally, and “Risk Factors—The impacts and potential impacts of the COVID-19 pandemic continue to create significant uncertainty for our business, financial condition and results of operations,” specifically, under Part I, Item 1A of our Annual Report, which is incorporated by reference into this Quarterly Report.

Results of Operations

(in thousands)

Comparison of the Three and Nine Months Ended September 30, 2022 and 2021

Revenue

(dollars in thousands)

Revenue increased $5.8 million, or 5%, to $131.1 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Instruments revenue increased $3.8 million, or 22%, to $20.9 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to higher volume of instruments sold. Consumables revenue increased $2.0 million, or 2%, to $108.1 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily driven by growth due to the addition of new customers, partially offset by unfavorable currency fluctuations.

Revenue increased $13.2 million, or 4%, to $360.2 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. Instruments revenue increased $4.9 million, or 11%, to $50.1 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 primarily due to higher volume of instruments sold. Consumables revenue increased $7.6 million, or 3%, to $304.0 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 primarily driven by growth due to increased usage by existing customers and the addition of new customers, largely offset by decreased demand due to limited laboratory productivity arising from the continued impact of the global COVID-19 pandemic, including lockdowns in China, delayed purchases by customers impacted by a previously disclosed process breakdown in our logistics cold-chain, execution challenges and unfavorable currency fluctuations.

Cost of revenue, gross profit and gross margin

(dollars in thousands)

Cost of revenue increased $5.9 million, or 24%, to $30.4 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The increase was primarily driven by higher manufacturing costs of $4.2 million due to increased sales and higher costs of newly introduced products, $0.9 million of higher warranty costs and $0.9 million of loss on a purchase commitment.

Cost of revenue increased $37.1 million, or 80%, to $83.6 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase was primarily driven by a one-time reversal of $14.7 million of accrued royalties resulting from the Settlement and Patent Cross License Agreement (the "Bio-Rad Agreement") with Bio-Rad Laboratories during the nine months ended September 30, 2021, $15.4 million from higher manufacturing costs due to increased sales and higher costs of newly introduced products, $3.3 million of higher royalty expenses, $2.4 million of higher inventory scrap and excess and obsolete inventory charges, and $1.7 million of higher warranty costs.

We expect our gross margin will trend lower due in part to change in product mix with newly introduced products and the impacts of inflation and increased supply chain costs.

Operating expenses

(dollars in thousands)

Research and development expenses increased $12.7 million, or 23%, to $67.3 million for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021. The increase was primarily driven by an increase in personnel expenses of $8.2 million, including $3.3 million in stock-based compensation expense and $1.4 million in restructuring expense, $2.1 million of higher costs for facilities and information technology to support operational expansion, and higher costs of laboratory materials and supplies of $2.1 million used to support our research and development efforts.

Research and development expenses increased $52.2 million, or 35%, to $202.1 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. The increase was primarily driven by an increase in personnel expenses of $30.6 million, including $11.2 million in stock-based compensation expense and $1.4 million in restructuring expense, higher costs of laboratory materials and supplies of $10.1 million used to support our research and development efforts, $8.9 million of higher costs for facilities and information technology to support operational expansion, higher consulting and professional services of $1.4 million for product development, and $0.9 million of higher depreciation.

Selling, general and administrative expenses increased $11.3 million, or 18%, to $73.4 million for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021. The increase was primarily driven by increased personnel expenses of $11.3 million, including $3.9 million in stock-based compensation expense and $2.5 million in restructuring expense, $1.7 million of higher outside legal expenses, and $1.0 million of higher costs for facilities and information technology to support operational expansion, partially offset by decreased marketing expenses related to conferences and seminars of $2.4 million.

Selling, general and administrative expenses increased $31.7 million, or 17%, to $219.4 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. The increase was primarily driven by increased personnel expenses of $41.0 million, including $14.1 million in stock-based compensation expense and $2.5 million in restructuring expense, $3.0 million of higher costs for facilities and information technology to support operational expansion, partially offset by decreased outside legal expenses of $11.0 million and $3.0 million of consulting and professional services.

We expect our operating expenditures to continue to increase in the fourth quarter of 2022 and beyond as we increase our investment to support new and existing research and development projects and incentivize and retain key talent, which we expect to result in increased stock-based compensation expense in future periods.

Other expense, net

(dollars in thousands)

Interest income increased by $2.0 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Interest income increased by $3.7 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increases for the three and nine ended September 30, 2022 as compared to the corresponding prior year periods were primarily due to interest income generated from our cash equivalents and marketable securities during the three and nine months ended September 30, 2022 and an increase in interest rates.

Interest expense decreased by $0.1 million, or 48% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Interest expense decreased by $0.3 million, or 46% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The decreases for the three and nine months ended September 30, 2022 were driven primarily by lower interest expense recognized on accrued license fees.

The change in other expense, net for the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021 was driven by realized and unrealized losses from foreign currency rate measurement fluctuations.

Provision for Income Taxes

The Company's provision for income taxes was $1.9 million and $3.2 million, respectively, for the three and nine months ended September 30, 2022 and $0.5 million and $2.1 million, respectively, for the three and nine months ended September 30, 2021. The provision for income taxes consists primarily of foreign taxes. Deferred tax assets related to our domestic operations are fully offset by a valuation allowance.

Liquidity and Capital Resources

As of September 30, 2022, we had $234.0 million in cash and cash equivalents which were primarily held in U.S. bank deposit accounts and money market funds and $218.4 million in marketable securities. Short-term restricted cash of $0.5 million and long-term restricted cash of $7.1 million primarily serves as collateral for outstanding letters of credit for facilities. We have generated negative cumulative cash flows from operations since inception through the nine months ended September 30, 2022, and we have generated losses from operations since inception as reflected in our accumulated deficit of $1.0 billion.

We currently anticipate making aggregate capital expenditures of between approximately $80 million and $90 million during the next 12 months, approximately two thirds of which we expect to incur for construction costs of the facilities on our property in Pleasanton, California, as well as other global facilities and equipment to be used for manufacturing and research and development.

Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, investments in or acquisitions of complementary or enhancing technologies or businesses, the impacts of the COVID-19 pandemic, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities and the introduction of new products. We take a long-term view in growing and scaling our business and we regularly review acquisition and investment opportunities, and we may in the future enter into arrangements to acquire or invest in businesses, real estate, services and technologies, including intellectual property rights, and any such acquisitions or investments could significantly increase our capital needs. We regularly review opportunities that meet our long-term growth objectives.

While we expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make, we believe that our existing cash and cash equivalents and cash generated from sales of our products will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We intend to continue to evaluate market conditions and may in the future pursue additional sources of funding, such as mortgage or other financing, to further enhance our financial position and to execute our business strategy. In addition, should prevailing economic, financial, business or other factors adversely affect our ability to meet our operating cash requirements, we could be required to obtain funding though traditional or alternative sources of financing. We cannot be certain that additional funds would be available to us on favorable terms when required, or at all.

Sources of liquidity

Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible preferred stock and common stock, revenue from sales of our products and the incurrence of indebtedness. In September 2019, we completed our initial public offering for aggregate proceeds of $410.8 million, net of offering costs, underwriter discounts and commissions. In September 2020, we completed a public offering of our Class A common stock for aggregate proceeds of $482.3 million, after deducting offering costs, underwriting discounts and commissions.

The following table summarizes our cash flows for the periods indicated:

(in thousands)

Operating activities

The net cash used in operating activities of $47.3 million for the nine months ended September 30, 2022 was primarily due to a net loss of $148.8 million, net cash outflow from changes in operating assets and liabilities of $20.1 million, partially offset by stock-based compensation expense of $95.9 million, depreciation and amortization of $18.8 million, amortization of leased right-of-use assets of $5.7 million, amortization of premium and accretion of discount on marketable securities, net of $0.7 million, and loss on disposal of property and equipment of $0.5 million. The net cash outflow from operating assets and liabilities was primarily due to an increase in inventory of $19.8 million due to ramp-up of inventory for anticipated demand and supply chain management, a decrease of $4.6 million due to payment of operating lease liabilities, a decrease in accrued compensation and other related benefits of $3.2 million due to the prior year annual bonus payments, a decrease in other noncurrent liabilities of $3.0 million, and an increase in prepaid expenses and other current assets of $2.5 million. The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $6.1 million due to timing of vendor payments, an increase in accrued expenses and other current liabilities of $2.9 million, an increase in deferred revenue of $1.8 million, and a decrease in accounts receivable of $1.7 million due to timing of collections.

The net cash used in operating activities of $27.2 million for the nine months ended September 30, 2021 was due primarily to a net loss of $39.8 million, net cash outflow from changes in operating assets and liabilities of $77.5 million, partially offset by adjustments for stock-based compensation expense of $69.1 million, depreciation and amortization of $15.3 million and amortization of leased right-of-use assets of $5.6 million. The net cash outflow from operating assets and liabilities was primarily due to a decrease in accrued contingent liabilities of $44.2 million, of which $29.4 million was paid as cash settlement arising from the Bio-Rad Agreement, an increase in accounts receivable of $27.2 million due to increase in sales and timing of collections, an increase in inventory of $21.3 million due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand, a decrease in accrued expenses and other current liabilities of $2.5 million due to the timing of payments including license fees, a decrease in other noncurrent liabilities of $4.1 million, an increase in prepaid expenses and other current assets of $1.2 million and a decrease of $2.5 million due to payment of operating lease liabilities. The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $12.2 million due to timing of vendor payments and an increase in accrued compensation and other related benefits of $11.9 million.

Investing activities

The net cash used in investing activities of $317.7 million in the nine months ended September 30, 2022 was due to purchases of marketable securities of $282.9 million and property and equipment of $91.9 million, and payment of acquisition-related holdback cash of $1.5 million, partially offset by proceeds from sales and maturities of marketable securities of $41.4 million and $17.2 million, respectively.

The net cash used in investing activities of $79.1 million in the nine months ended September 30, 2021 was due to purchases of property and equipment of $73.7 million including the purchase of land for $28.1 million, and cash paid for the acquisition of Tetramer Shop ApS of $5.5 million.

Financing activities

The net cash provided by financing activities of $10.8 million in the nine months ended September 30, 2022 was primarily from proceeds of $16.2 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of $5.4 million.

The net cash provided by financing activities of $26.4 million in the nine months ended September 30, 2021 was primarily from proceeds of $31.4 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of $5.0 million.

Critical Accounting Estimates

Our condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the applicable rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes in our critical accounting policies and estimates during the three and nine months ended September 30, 2022 as compared to the critical accounting policies and estimates disclosed in the section titled

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K filed with the SEC on February 18, 2022, except as set forth below.

Stock-Based Compensation

In the three months ended September 30, 2022, we started to issue market-based performance stock awards ("PSAs") comprising of performance stock options and performance restricted stock units. The PSAs each vest in equal installments upon the achievement of escalating stock price thresholds of $60, $80 and $105, respectively, calculated based on 20 consecutive days of trading at each respective threshold. The escalating stock price thresholds can be met any time prior to the fourth anniversary of the date of grant. We estimated the value of the PSA awards granted in the three months ended September 30, 2022 to be approximately $16.0 million using a Monte Carlo simulation model, using assumptions including volatility, risk-free interest rate, cost of equity and dividends. We will recognize the compensation expense over the derived service period using the accelerated attribution method commencing on the grant date. The derived service period is the median duration of the successful stock price paths to meet the escalating stock price thresholds as simulated in the Monte Carlo valuation model. If the related market condition is achieved earlier than its estimated derived service period, the stock-based compensation expense will be accelerated, and a cumulative catch-up expense will be recorded during the period in which the market condition is met.

For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report. Our exposure to market risk has not changed materially since December 31, 2021 except as shown below.

Interest Rate Risk

During the three and nine months ended September 30, 2022, we invested in debt securities which were designated as available-for-sale. Our marketable securities as of September 30, 2022 was $218.4 million.

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio comprising of marketable securities. We invest in a number of securities including corporate bonds, U.S. agency notes, asset-backed securities, commercial paper, U.S. treasuries and money market funds. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in high grade investment securities. The fair market value of our fixed rate securities may be adversely impacted by increases in interest rates while income earned may decline as a result of decreases in interest rates. A hypothetical 100 basis-point (one percentage point) increase or decrease in interest rates compared to rates at September 30, 2022 would have affected the fair value of our investment portfolio by approximately $1.9 million.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to our risk factors that we believe are material to our business, results of operations and financial condition from the risk factors previously disclosed in our Annual Report, and any documents incorporated by reference therein, which is accessible on the SEC's website at www.sec.gov (http://www.sec.gov).