10x Genomics, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. 10x Genomics develops life-sciences instruments, consumables and software for biological research. Most revenue comes from consumables used with its Chromium platform; Visium is a newer product line.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $71.9 million | $53.6 million | +34% |
| Gross profit / margin | $56.8 million / 79.0% | $39.6 million / 73.9% | Margin +5.1 percentage points |
| Operating expenses | $76.7 million | $42.6 million | +80% |
| Operating loss | $19.9 million | $3.0 million | Loss increased |
| Net loss | $21.1 million | $3.6 million | Loss increased |
| Net loss per share, diluted | $0.22 | $0.25 | Loss per share narrowed |
| Operating cash flow | $(2.6) million | $9.3 million | Swung to use of cash |
| Capital expenditures | $8.1 million | $9.4 million | Decreased |
Consumables contributed $61.4 million (85% of revenue), instruments $9.1 million (13%), and services $1.3 million (2%). Consumables growth was principally attributed to the expanding instrument installed base, with sales also coming from Visium consumables. Instrument revenue rose on higher unit volume, partly offset by lower average selling prices.
R&D expense increased 74% to $26.0 million, primarily from personnel and development costs. SG&A rose 87% to $50.4 million, including higher legal and personnel expenses; the legal expense increase included a $5 million success-fee milestone. Gross margin improved mainly because accrued Bio-Rad royalties were $3.5 million lower year over year, partly offset by costs associated with a second manufacturing facility and $1.8 million of additional scrap.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $372.4 million; restricted cash was $59.5 million. Cash, cash equivalents and restricted cash totaled $431.9 million.
- Current assets were $429.7 million and current liabilities $59.1 million. Total assets were $610.4 million; total liabilities were $201.3 million.
- The company prepaid its remaining term loan in February, paying approximately $30.5 million and recording a $1.5 million extinguishment loss. No term-loan balance or revolving-credit borrowings remained at quarter-end. A borrowing-base-dependent revolving line of credit of up to $25 million remained available through December 2022.
- Restricted cash includes collateral for Bio-Rad litigation and facility letters of credit. The company had deposited $45.4 million as collateral for a litigation bond and placed $8.1 million of royalties into escrow.
- Management expected existing cash and cash generated from product sales to meet anticipated needs for at least 12 months. It estimated capital expenditures of approximately $40–$50 million over the next 12 months.
Material changes, outlook and risks
- COVID-19: By quarter-end, many academic and government laboratories had suspended or sharply reduced research activity. Management expected this to affect results but said the magnitude and duration could not be reliably estimated. Production, shipping and customer service were reported operational, with no material supply issues experienced at the time of filing; inventory purchases increased partly in anticipation of potential supply-chain disruption. Management expected lower demand could leave manufacturing below normal capacity and pressure future gross profit and margins.
- Guidance: On April 9, 2020, the company withdrew its previously issued 2020 annual revenue guidance because of uncertainty from the pandemic. No replacement revenue guidance was provided in the filing.
- Bio-Rad litigation: A patent judgment and related estimated royalties and interest resulted in a recorded contingent liability of $73.3 million in the financial-statement note as of March 31. The filing elsewhere cites $73.7 million, so the reported accrual is not fully consistent. The company continued to accrue a 15% royalty on certain legacy GEM sales pending appeal. Adverse outcomes could require further payments or restrict product sales. A German court ruling and injunction were stayed on appeal after the quarter-end upon payment of a €2.8 million bond; the merits decision was expected around year-end 2020.
- Other litigation: Multiple Bio-Rad patent disputes remained active. Separately, the ITC issued orders in February 2020 finding that certain Bio-Rad products infringed 10x-licensed patents; appeals were expected. Litigation outcomes and timing remain uncertain.
- Cybersecurity: The company disclosed a March 2020 attempted ransomware attack in which intruders accessed its IT systems. Operations were restored without material day-to-day disruption, but the company believed confidential information may have been stolen. Potential disclosure, regulatory and litigation consequences were uncertain.
- Other outlook: Management expected continued operating losses in the near term and planned to manage expenses while continuing strategic investment, including R&D, manufacturing and product development. It identified dependence on research-lab activity, litigation, the transition from GEM to Next GEM chips, competition, suppliers and execution of new products as significant risks.
Key facts for investors to verify
- Whether laboratory reopening and research spending recover, and the resulting effect on revenue, capacity utilization and gross margins.
- Progress and outcomes of Bio-Rad appeals and other patent cases, including the final amount of the accrued liability and ongoing 15% royalty exposure.
- Whether the Next GEM transition and U.S. manufacturing expansion sustain product quality, supply and customer adoption.
- Cash use against the $40–$50 million capital expenditure plan, and whether management’s stated 12-month liquidity expectation remains supportable.
- Whether the ransomware incident leads to confirmed data loss, customer impact, claims or regulatory action.