10x Genomics, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless stated otherwise, amounts are in U.S. dollars. The company sells Chromium and Visium instruments, consumables, and related services for life-sciences research. It completed its IPO in September, selling 11.5 million Class A shares at $39 per share and reporting approximately $410.8 million in net proceeds.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $61.2 million | $36.6 million | $170.6 million | $95.8 million |
| Gross profit | $45.7 million | $31.4 million | $126.2 million | $82.0 million |
| Gross margin | 74.7% | 85.7% | 73.9% | 85.6% |
| Operating loss | $(9.1) million | $(14.9) million | $(22.5) million | $(35.8) million |
| Net loss | $(9.6) million | $(15.3) million | $(24.1) million | $(37.0) million |
| Net loss per share, basic and diluted | $(0.33) | $(1.13) | $(1.21) | $(2.80) |
Q3 revenue rose 67% year over year; nine-month revenue rose 78%. Consumables drove growth, increasing 86% in Q3 to $49.7 million and 105% for the nine months to $142.1 million. Instrument revenue was $10.4 million in Q3, up 13%, and $25.5 million for the nine months, up 2%; lower average selling prices partly offset higher unit volumes. Service revenue remained small.
Gross margin fell year over year, primarily due to accrued Bio-Rad royalties: $7.2 million in Q3 and $23.1 million for the nine months. R&D expense rose 100% in Q3 and 60% year to date; SG&A rose 71% and 51%, respectively, reflecting personnel, facilities, technology and public-company costs. The 2018 comparison included $16.1 million of Q3 and $22.3 million of nine-month in-process R&D acquisition expense; there was no comparable expense in 2019.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $427.4 million; total cash, cash equivalents and restricted cash were $477.5 million. Restricted cash included $45 million collateral for the Bio-Rad judgment bond and approximately $5 million securing a letter of credit.
- For the first nine months, operating cash flow was positive $27.9 million, versus negative $25.4 million in 2018. The 2019 inflow included a $24.5 million increase in accrued contingent liabilities and a $12.8 million increase in deferred rent; inventory increased $4.7 million.
- Investing cash outflow was $36.2 million, primarily property and equipment purchases, versus $3.9 million in 2018. Management anticipated $45–55 million of capital expenditures over the following 18 months.
- Term-loan principal outstanding was $30 million; the balance-sheet carrying amount was $29.7 million. No revolver balance remained at quarter-end, though $25 million of revolving capacity was available subject to borrowing-base limits. A further $20 million term-loan tranche was available subject to conditions through December 31, 2019.
- Management said available cash, product cash generation and potential use of existing credit or deferred capital spending were expected to cover needs for at least 12 months. The company nevertheless expected near-term operating losses and significant expenses.
Material developments, outlook and risks
- Bio-Rad patent litigation: The company reported a roughly $35 million final judgment in the 2015 Delaware action and a $62.5 million total accrual at September 30, including estimated royalties and interest. It posted a $52 million bond, secured by $45 million of restricted cash, while appealing. The injunction effective August 28 generally limited sales of certain GEM products, while allowing specified sales for the installed base subject to a 15% royalty paid into escrow. The appeal and related proceedings remained unresolved in the filing.
- Product transition: The company introduced Next GEM chips in 2019 and said all Chromium instruments sold since August 28 operated exclusively with Next GEM solutions. It expected Next GEM-based products to represent substantially all Chromium consumables sales by the end of 2020. Management anticipated gradual gross-margin improvement as customers transitioned away from royalty-bearing GEM products, partly offset by manufacturing and distribution investment. Product performance, supply, adoption and further litigation remained material uncertainties.
- Other legal matters: The ITC was expected to issue a determination in December 2019 in a Bio-Rad case that could affect imports of GEM chips; the judge had found Next GEM non-infringing in an initial determination, subject to review. Bio-Rad’s other patent cases remained ongoing. Separately, an October 2019 settlement with Becton, Dickinson resolved that litigation, with 10x Genomics obligated to pay $25 million in four annual $6.25 million installments beginning January 2020.
- Outlook: No specific revenue or earnings guidance was provided in the supplied filing text. Management expected continued investment in R&D, sales, hiring, manufacturing capacity and infrastructure, and near-term operating losses. Chromium Connect was targeted for release in 2020; Visium was an additional planned product platform.
- Key risks: Continued dependence on consumables and academic research funding; patent outcomes and royalties; successful and timely Next GEM transition; reliance on a contract instrument manufacturer and limited suppliers for key consumable components; product demand and seasonal purchasing variability; and execution of planned facilities expansion and a new ERP system. The loan agreement included a minimum-revenue covenant and other restrictions; the company reported compliance at September 30.
- Capital structure: Class A shares carry one vote each and Class B shares ten votes each, concentrating voting control with Class B holders. The filing also notes potential dilution from equity awards and future share sales.
Important facts for investors to verify
- Updates on the Bio-Rad appeal, injunction, escrowed royalties, ITC proceedings and the adequacy of the $62.5 million litigation accrual.
- Next GEM adoption, sales mix and manufacturing capacity, including whether margins improve as management anticipated.
- Underlying operating cash generation after considering litigation accruals and other working-capital movements, alongside planned capital expenditures and the BD payment schedule.
- Revenue growth and customer demand by consumables, instruments and geography, including exposure to academic budgets and seasonal purchasing.
- Compliance with the loan agreement’s revenue covenant and availability or use of the additional term-loan tranche.