10X Genomics, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company develops instruments, consumables and software for life-sciences research, including its Chromium and Visium solutions. Amounts below are in USD millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $42.9 | $55.8 | $114.8 | $109.4 |
| Gross profit | $32.9 | $40.8 | $89.7 | $80.4 |
| Gross margin | 76.6% | 73.1% | 78.1% | 73.5% |
| Operating expenses | $72.3 | $51.2 | $149.0 | $93.8 |
| Operating loss | $(39.4) | $(10.4) | $(59.3) | $(13.4) |
| Net loss | $(40.2) | $(10.9) | $(61.3) | $(14.5) |
| Basic and diluted loss per share | $(0.41) | $(0.70) | $(0.63) | $(0.96) |
Revenue mix: Q2 revenue comprised $34.2 million of consumables, $7.3 million of instruments and $1.5 million of services. For the first half, consumables were $95.6 million, instruments $16.4 million and services $2.8 million.
Cash flow: First-half operating cash flow was $(32.1) million, versus $13.4 million provided in the prior-year period. Investing cash flow was $(14.8) million, primarily property and equipment purchases; financing cash flow was $(25.8) million, primarily debt repayment and financing-arrangement payments. Cash, cash equivalents and restricted cash declined $72.8 million to $403.7 million.
Balance sheet and debt: At June 30, cash and cash equivalents were $339.8 million; restricted cash was $63.9 million, including $57.8 million pledged in connection with Bio-Rad litigation and $6.0 million for facility letters of credit. Current assets were $451.6 million and current liabilities $122.2 million. The company prepaid its term loan in February and terminated its $25 million revolving credit facility in June; no term-loan balance remained at quarter-end. Stockholders’ equity was $391.3 million and accumulated deficit was $323.7 million.
Material changes versus the prior comparable periods
- Q2 revenue fell 23% year over year, primarily because customer laboratory closures and reduced activity during COVID-19 lowered consumables revenue by 27%. Instrument revenue declined 12%, including the effect of strategic discounts on placements supporting COVID-19 research.
- First-half revenue increased 5%, as installed-base growth supported consumables sales and instrument volume rose; second-quarter demand weakness offset some of that growth.
- Gross margin improved year over year, but the principal driver was lower accrued Bio-Rad royalties: $6.5 million lower in Q2 and $10.0 million lower for the first half. Lower sales, product mix, instrument pricing and idle manufacturing capacity were offsets. Management said underutilized production could continue to pressure margins until demand normalizes.
- Operating expenses rose substantially: R&D increased 53% in Q2 and 62% for the first half; SG&A increased 36% and 59%, respectively. Increases reflected hiring and stock-based compensation, facilities and IT, and legal costs; first-half SG&A included $13.0 million of outside legal expense, including $5.0 million of success fees.
- First-half cash from operations swung from positive to negative. The company also repaid its term loan, recording a $1.5 million extinguishment loss, and ended its revolving credit arrangement.
Outlook, commentary and key risks
- Guidance: On April 9, 2020, the company withdrew its previously issued 2020 revenue guidance because the duration and impact of COVID-19 were uncertain. It did not provide updated revenue guidance in this filing.
- Demand outlook: Management reported modest laboratory reopenings and an uptick in sales activity in June, and expected further gradual reopening in Q3 absent renewed COVID-19 closures. It could not reliably estimate the pandemic’s impact on demand, revenue or margins; reopened labs might still operate below capacity.
- Spending and liquidity: Management expected continued operating losses and significant expenses, while stating existing cash and cash equivalents and anticipated product-sale cash flows were expected to cover needs for at least 12 months. Planned capital expenditures were approximately $60–$80 million over the next 12 months, including expansion, equipment and a potential real-estate purchase. A proposed Pleasanton property purchase for $29.8 million remained subject to due diligence and other conditions.
- Bio-Rad litigation: The company had accrued $75.2 million at June 30 for the 2015 Delaware action. In August 2020, after quarter-end, the Federal Circuit affirmed infringement of one patent and the damages award, vacated infringement findings on two other patents for a new trial, and affirmed the injunction for certain legacy GEM products while vacating it for Single Cell CNV and Linked-Read products. The company said it intended to appeal further; final payment and any additional royalties remained subject to litigation outcomes. Restricted cash of $57.8 million serves as collateral and could partially satisfy the liability. Other Bio-Rad patent cases also remain pending, including litigation involving Next GEM products.
- Other risks and unusual items: Business performance depends heavily on research institutions’ ability and funding to conduct research, customer adoption of Next GEM and new products, manufacturing and supply continuity, and successful product development. The company disclosed a March 2020 attempted ransomware attack in which it believes confidential information may have been stolen, although normal operations were restored without material day-to-day impact. Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
- The company launched four products in 2020, including Targeted Gene Expression, Single Cell Multiome ATAC+Gene Expression and an updated Immune Profiling solution. Its cloud-based ERP system went live at the beginning of Q3. It expected to cease qualifying as an emerging growth company on January 1, 2021.
Important facts for investors to verify
- Progress and outcomes in the Bio-Rad cases, the adequacy of the $75.2 million accrual, the status of restricted cash and the potential for additional royalties or damages.
- Whether laboratory reopenings translate into sustained consumables demand, and how COVID-19 or renewed closures affect quarterly revenue and manufacturing utilization.
- Whether the improved reported gross margin is sustainable apart from the reduction in accrued royalties, and the effect of product mix, discounts and idle capacity.
- Cash burn, planned $60–$80 million capital expenditures, the potential property purchase and management’s expectation that liquidity will cover at least 12 months.
- Execution of the Next GEM transition, new-product adoption, supply-chain resilience, and the financial and control implications of the new ERP system and the disclosed cyber incident.