10X Genomics, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. 10X Genomics develops life-sciences instruments, consumables and software, with revenue primarily from its Chromium and Visium platforms.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $105.8 million | $71.9 million | +47% |
| Gross profit / margin | $88.8 million / 83.9% | $56.8 million / 79.0% | Margin +4.9 percentage points |
| Operating expenses | $99.0 million | $76.7 million | +29% |
| Operating loss | $(10.2) million | $(19.9) million | Loss narrowed |
| Net loss | $(11.6) million | $(21.1) million | Loss narrowed |
| Net loss per share, diluted | $(0.11) | $(0.22) | |
| Cash used in operating activities | $4.1 million | $2.6 million | Use increased |
| Cash, cash equivalents and restricted cash at period end | $644.0 million | $431.9 million |
Revenue growth was led by consumables: $93.1 million, up 52%, versus instrument revenue of $11.1 million, up 22%, and services revenue of $1.6 million. Consumables represented 88% of revenue. China revenue rose to $23.6 million from $11.0 million; North America revenue was $51.8 million, EMEA $19.2 million, and Asia-Pacific excluding China $11.2 million.
Gross margin improved primarily because of lower Bio-Rad-related royalties, as well as higher revenue. Research and development expense rose 61% to $41.9 million; selling, general and administrative expense rose 13% to $56.9 million. Stock-based compensation was $16.2 million, compared with $6.7 million a year earlier.
At March 31, 2021, cash and cash equivalents were $617.2 million; restricted cash totaled $26.8 million. Current assets were $745.7 million and current liabilities $120.5 million. The accumulated deficit was $816.6 million. The company prepaid its term loan in February 2020; the filing reports $5.0 million of payments on financing arrangements in Q1 2021, but does not provide a clear ending balance for those arrangements.
Cash used in investing activities was $44.3 million, including $38.9 million of property and equipment purchases (including $28.1 million for land) and $5.5 million of net cash paid for the Tetramer Shop acquisition. Financing activities provided $3.5 million, primarily from option exercises, partly offset by financing-arrangement payments.
Material changes and business developments
- Revenue increased $33.9 million year over year, principally from consumables and a larger installed instrument base. Management attributed the comparison in part to laboratory reopenings that began in mid-2020 after COVID-19 closures and restrictions affected Q1 2020.
- The company acquired Tetramer Shop, a Denmark-based reagent developer, on January 8, 2021. Cash consideration was $8.5 million, net of cash acquired and including estimated contingent consideration; acquired revenue to date was not material.
- Property and equipment increased to $107.3 million from $72.8 million at year-end, reflecting investment that included land purchases. Inventory rose to $38.5 million from $30.0 million.
- The company recorded a $44.8 million current liability for the 2015 Bio-Rad patent matter. This compares with $44.2 million of accrued contingent liabilities at December 31, 2020; the filing describes the Q1 balance as including estimated royalties and interest.
Outlook, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management expects continued operating losses in the near term and significant spending on personnel, R&D, products, intellectual property and infrastructure. It anticipates capital expenditures of approximately $120–$130 million over the next 12 months and believes current cash and expected product-sale cash generation will cover anticipated needs for at least 12 months, subject to uncertainty.
- Demand and COVID-19: Management reported a recovery in customer activity as laboratories partially reopened, but noted many labs remained below full capacity and it could not reliably estimate pandemic effects on demand or margins beyond Q1. The company carried higher inventory and monitored possible supply shortages and price increases.
- Litigation: Bio-Rad matters remain significant. In the 2015 Delaware Action, the Federal Circuit affirmed infringement of one patent and the royalty damages, vacated findings on two other patents for a new trial, and upheld an injunction affecting certain legacy products. The company paid the $34.5 million judgment plus about $0.8 million interest in December 2020; further post-judgment royalties or amounts remained to be determined, expected in the second half of 2021. The company had $44.8 million accrued at quarter-end, with $17.6 million of restricted cash serving as partial collateral. Other Bio-Rad cases include appeals and patent claims involving Next GEM products. The PTAB’s April 26, 2021 decisions invalidated most challenged claims in two patents but left some claims valid. The company’s separate ITC case against Bio-Rad was affirmed by the Federal Circuit on April 29, 2021. These developments are subject to litigation outcomes and are not guarantees of recoveries or liabilities.
- Other contingencies: A German court ruling involving legacy products remains under appeal; a €2.8 million bond stays enforcement, and the company says additional potential exposure beyond accrued statutory costs cannot be estimated. The filing also reports a May 6, 2021 patent suit against NanoString, after quarter-end.
- Key risks: Dependence on academic and government research spending; continuing COVID-19 disruption; reliance on single- or sole-source suppliers; manufacturing capacity and quality; dependence on Chromium and consumables; competition and product adoption; and substantial intellectual-property litigation. The company also disclosed a March 2020 attempted ransomware attack and said it had reason to believe confidential information was stolen.
Most important facts for investors to verify
- Whether consumables growth and instrument utilization persist as research laboratories return to normal activity, and how China’s contribution develops.
- Whether gross margin remains strong after the benefit of lower Bio-Rad royalties and as manufacturing capacity and demand change.
- The timing and amount of any additional Bio-Rad royalties, damages, injunctions or other litigation outcomes, including the $44.8 million accrual and restricted-cash collateral.
- Execution of the planned $120–$130 million capital expenditure program and its effect on cash, manufacturing capacity and future operating costs.
- Whether supply-chain constraints, COVID-19-related disruption, or the disclosed cybersecurity incident result in material operating, legal or financial effects.