10x Genomics, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. Filed February 27, 2020. 10x Genomics develops life-sciences research tools, including Chromium single-cell and Visium spatial-analysis platforms, with instruments, recurring consumables and accompanying software. Its Class A shares began trading in September 2019.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $245.9 million | $146.3 million |
| Gross profit / margin | $184.9 million / 75.2% | $117.7 million / 80.4% |
| Operating loss | $30.6 million | $110.8 million |
| Net loss | $31.3 million | $112.5 million |
| Net cash from (used in) operations | $34.6 million | $(76.4) million |
| Cash and cash equivalents at year-end | $424.2 million | $65.1 million |
| Working capital at year-end | $417.8 million | $73.9 million |
- Revenue grew 68%. Consumables generated $206.9 million, up 92%, and accounted for 84% of revenue; instruments generated $34.9 million and services $4.1 million. Instrument sales declined 4% as lower average selling prices more than offset unit growth.
- Gross margin fell about 5 percentage points, primarily reflecting increased Bio-Rad-related royalty accruals and inventory reserves. Cost of revenue included $29.2 million of royalty accruals in 2019.
- Research and development expense rose 75% to $83.1 million; selling, general and administrative expense rose 49% to $130.8 million. The 2018 comparison included $62.4 million of acquired in-process R&D and a $30.6 million litigation charge, contributing to the larger prior-year loss.
- Operating cash flow turned positive, but included substantial working-capital inflows, notably the $30.7 million increase in accrued contingent liabilities. Investing cash outflow was $42.8 million, mostly property and equipment purchases. Financing cash inflow was $414.6 million, mainly net IPO proceeds of $410.8 million.
- At year-end, the company had $30.0 million of term loans outstanding and no revolver borrowings; it prepaid the term loan in full on February 20, 2020. Cash included $52.3 million of restricted cash, including collateral and litigation-related escrow.
Fourth quarter: Revenue was $75.3 million versus $50.6 million in Q4 2018; gross profit was $58.7 million versus $35.7 million; net loss was $7.1 million versus $75.5 million. The prior-year quarterly loss included significant litigation-related charges.
Material changes and business developments
- Consumables became a larger share of sales as the installed base grew to 1,666 instruments from 1,021. Annual Chromium consumable pull-through per instrument increased to $158,000 from $148,000; the company cautions that halo users and Visium sales limit comparability of this metric.
- The company sold 645 instruments in 2019, up 22%, while the Chromium Controller’s average selling price declined 21% following a list-price reduction and adoption discounts.
- Visium Spatial Gene Expression launched in late 2019 and had high initial demand. Chromium Next GEM chips were introduced for several solutions; management expected them to comprise substantially all Chromium consumables sales by the end of 2020.
- The September 2019 IPO generated $410.8 million in net proceeds. The company reported $420.1 million of stockholders’ equity at year-end, compared with a $220.0 million deficit in 2018, following the IPO and conversion of preferred shares.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects continued investment, increased operating expenses and operating losses in the near term, while stating that cash and expected product-sale proceeds should fund anticipated needs for at least 12 months.
- Management anticipated $55–$70 million of capital expenditures over the following 18 months, principally for facilities and manufacturing and R&D equipment. It also expected gross margin to benefit through 2020 from the transition away from royalty-bearing GEM products, subject to litigation outcomes and capacity-related costs.
- Material litigation exposure: In the Bio-Rad 2015 Delaware action, a final judgment was approximately $35 million; the company had accrued $68.7 million for the judgment, estimated royalties and interest at year-end. It posted a $52 million bond and placed collateral and royalty amounts in restricted cash/escrow. Appeals and other Bio-Rad patent cases remained pending. The ITC’s December 2019 determination restricted importation and sale of certain GEM chips, while finding the Next GEM chips non-infringing in that action; the ruling and related appeals remained subject to further proceedings.
- A separate Bio-Rad case in Germany resulted in an injunction and recall requirements concerning specified legacy GEM-related products; the company was appealing. The filing describes other pending patent litigation and uncertain potential damages.
- A 2019 Becton Dickinson settlement resolved that parties’ patent litigation and granted cross-licenses. 10x agreed to pay $25 million in four annual installments beginning January 2020. A $5 million legal-counsel milestone payment was triggered in Q1 2020.
- Other key risks include dependence on Chromium and Gene Expression consumables, academic research funding, product-transition and manufacturing execution, certain single-source suppliers, competition, international trade and currency exposure, and continued dependence on licensed intellectual property. Products were labeled for research use only, not diagnostic procedures.
Important facts for investors to verify
- Progress and final outcomes of Bio-Rad litigation, including accrued exposure, royalties, injunctions and appeals, and any effect on product sales or margins.
- Whether Next GEM production, customer adoption and performance meet expectations, and whether the transition is completed without supply disruption or inventory write-downs.
- Consumables growth and pull-through trends, including the contribution of halo users, Visium and newer assays, alongside instrument placements and average selling prices.
- Underlying operating cash generation after accounting for litigation accruals and other working-capital movements; planned capital spending and cash runway.
- Execution of expansion plans and ability to scale manufacturing, customer support and international distribution while controlling costs.
- Voting structure and potential dilution: Class B shares carry ten votes per share; share-based compensation expense rose to $13.3 million in 2019.