10x Genomics, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2020; it was signed November 12, 2020. 10x Genomics sells instruments, consumables and services for biological research. Consumables accounted for 84% of revenue in both periods, with instruments contributing 13% in Q3 and 14% year to date. The company operates as one reportable segment.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $71.8 million | $61.2 million | $186.6 million | $170.6 million |
| Gross profit | $57.4 million | $45.7 million | $147.1 million | $126.2 million |
| Gross margin | 79.9% | 74.7% | 78.8% | 73.9% |
| Operating loss | $65.3 million | $9.1 million | $124.6 million | $22.5 million |
| Net loss | $65.8 million | $9.6 million | $127.2 million | $24.1 million |
| Net loss per share, diluted | $0.65 | $0.33 | $1.28 | $1.21 |
Q3 revenue grew 17%, principally on 22% growth in consumables to $60.6 million; instrument revenue fell 7% to $9.7 million. Nine-month revenue rose 9%, driven by consumables growth of 10% and instrument growth of 2%. Management attributed consumables growth to a larger installed instrument base, partly offset by reduced customer demand during laboratory closures.
Gross margin improved year over year, primarily because royalties accrued in the Bio-Rad litigation were lower, partly offset by new-product costs, manufacturing expansion, and inventory charges. Operating expenses rose 124% in Q3 and 83% year to date. They included $40.6 million of acquired in-process research and development expense for CartaNA, as well as higher R&D, personnel, stock-based compensation and legal costs.
For the first nine months, operating cash flow was negative $87.7 million, compared with positive $27.9 million in 2019. Investing cash outflow was $16.1 million; financing provided $461.2 million, mainly from the September follow-on offering. Cash and cash equivalents were $768.8 million at September 30; restricted cash was $64.9 million, bringing cash, cash equivalents and restricted cash to $833.7 million. The company had no term-loan or revolver balance after repaying its term loan and terminating its credit facility. Current assets were $900.5 million and current liabilities $145.6 million. Accumulated deficit was $389.5 million.
Material changes, outlook, and risks
- COVID-19 and demand: Management estimated about 80% of customer labs were open for general research as of September 30, versus about 60% at June 30; approximately 85% were open by the first week of November. Many remained below normal capacity. The company could not reliably estimate pandemic effects on Q4 and later demand, revenue or margins.
- Guidance and spending: No specific revenue or earnings guidance was provided. Management expected continued operating losses in the near term and anticipated $80–$100 million of capital expenditures over the next 12 months, including a planned $29.8 million land purchase. It believed existing cash and expected product-sale cash flows would cover anticipated needs for at least 12 months, while cautioning that assumptions could prove incorrect.
- Litigation contingency: The company accrued $77.6 million for the Bio-Rad 2015 Delaware Action. Following an appellate ruling and denial of rehearing, it expected to pay a $34.5 million judgment plus about $0.8 million interest in December 2020; additional post-judgment royalties or other amounts were expected to be determined in the first half of 2021. Restricted cash of $59.4 million was collateral for the bond and royalties and could partially satisfy the payment. Other patent disputes and appeals remain pending; outcomes and exposure are uncertain.
- Acquisitions and commitments: CartaNA was acquired in August for approximately $41.8 million, with its $40.6 million acquired R&D asset expensed immediately. After quarter-end, the company completed the ReadCoor acquisition for $350 million: $100 million in cash and the balance in stock, including 1,901,402 shares issued. It also entered a lease for approximately 145,000 square feet, expected to entail $60.8 million of payments over a term beginning January 2021.
- Other items: The Federal Circuit affirmed infringement and the 15% royalty for certain legacy GEM products, while vacating parts of the prior ruling and remanding issues for further proceedings. The injunction remains relevant to legacy products; management said Next GEM products were not implicated in the 2015 action. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track Bio-Rad judgment payment, the later royalty determination, restricted-cash use, and outcomes of other pending patent cases and appeals.
- Assess whether laboratory reopening and customer research activity support consumables growth, and whether COVID-19 or renewed closures weigh on demand and factory utilization.
- Separate underlying operating trends from the CartaNA in-process R&D charge, litigation-related costs and royalties, and rising stock-based compensation and legal expenses.
- Review the cash and dilution effects of the ReadCoor acquisition, planned capital spending and property commitments, and the company’s stated 12-month liquidity assessment.