10x Genomics(TXG) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited financial statements reveal decreased assets and equity, increased net loss, and a shift in investing cash flow Condensed Consolidated Balance Sheets Balance Sheet Summary | Metric | Dec 31, 2022 (in thousands) | Sep 30, 2023 (in thousands) | Change (in thousands) | | :----- | :-------------------------- | :-------------------------- | :-------------------- | | Total Assets | $1,028,980 | $948,540 | $(80,440) | | Cash and cash equivalents | $219,746 | $311,264 | $91,518 | | Marketable securities | $210,238 | $45,643 | $(164,595) | | Total current assets | $635,035 | $562,348 | $(72,687) | | Total Liabilities | $223,237 | $203,324 | $(19,913) | | Total Stockholders' Equity | $805,743 | $745,216 | $(60,527) | Condensed Consolidated Statements of Operations Statements of Operations Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (3 Months) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (9 Months) | | :-------------------- | :-------------------------- | :-------------------------- | :---------------- | :-------------------------- | :-------------------------- | :---------------- | | Revenue | $153,644 | $131,072 | $22,572 | $434,748 | $360,177 | $74,571 | | Cost of revenue | $58,115 | $30,377 | $27,738 | $141,217 | $83,559 | $57,658 | | Gross profit | $95,529 | $100,695 | $(5,166) | $293,531 | $276,618 | $16,913 | | Research and development | $66,507 | $67,290 | $(783) | $205,065 | $202,053 | $3,012 | | In-process research and development | $41,402 | $— | $41,402 | $41,402 | $— | $41,402 | | Selling, general and administrative | $82,415 | $73,401 | $9,014 | $257,205 | $219,413 | $37,792 | | Loss from operations | $(94,795) | $(39,996) | $(54,799) | $(210,141) | $(144,848) | $(65,293) | | Net loss | $(92,986) | $(41,914) | $(51,072) | $(206,147) | $(148,785) | $(57,362) | | Net loss per share, basic and diluted | $(0.79) | $(0.37) | $(0.42) | $(1.77) | $(1.31) | $(0.46) | Condensed Consolidated Statements of Comprehensive Loss Statements of Comprehensive Loss Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss | $(92,986) | $(41,914) | $(206,147) | $(148,785) | | Other comprehensive income (loss), net of tax | $292 | $(1,527) | $3,658 | $(5,514) | | Comprehensive loss | $(92,694) | $(43,441) | $(202,489) | $(154,299) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' Equity Summary | Metric (in thousands) | Dec 31, 2022 | Sep 30, 2023 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total Stockholders' Equity | $805,743 | $745,216 | $(60,527) | | Additional Paid-in Capital | $1,839,397 | $1,981,359 | $141,962 | | Accumulated Deficit | $(1,029,321) | $(1,235,468) | $(206,147) | - Net loss for the nine months ended September 30, 2023, was $(206.1) million, contributing to the accumulated deficit[27] - Stock-based compensation contributed $128.0 million to additional paid-in capital for the nine months ended September 30, 2023[27][91] Condensed Consolidated Statements of Cash Flows Cash Flow Summary | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | | Net cash used in operating activities | $(40,955) | $(47,329) | $6,374 | | Net cash provided by (used in) investing activities | $120,394 | $(317,715) | $438,109 | | Net cash provided by financing activities | $8,056 | $10,816 | $(2,760) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $87,385 | $(354,523) | $441,908 | | Cash, cash equivalents, and restricted cash at end of period | $314,738 | $241,550 | $73,188 | - Investing activities shifted from a net outflow of $317.7 million in 2022 to a net inflow of $120.4 million in 2023, primarily due to proceeds from sales and maturities of marketable securities[139][140] Notes to Condensed Consolidated Financial Statements Note 1. Description of Business and Basis of Presentation - 10x Genomics offers integrated solutions including Chromium X Series and Chromium Connect instruments, Visium CytAssist and Xenium Analyzer (Spatial instruments), and proprietary microfluidic chips, slides, reagents, and consumables[34][105] - The company's products enable researchers to analyze biological systems at fundamental resolutions and massive scale, such as single-cell level for millions of cells[106] Note 2. Summary of Significant Accounting Policies - No material changes in significant accounting policies occurred during the nine months ended September 30, 2023[37] - Revenue is recognized from product sales (instruments and consumables) upon transfer of control, and from extended warranty service agreements ratably over the term[38] Note 3. Asset Acquisition - The company acquired certain intangible and other assets for an intellectual property license, with initial payments totaling $20.0 million by July 2023[45] - As of September 30, 2023, $21.3 million has been paid for development milestones, with up to $15.0 million additional cash consideration due for future technology development milestones[45] - A $41.4 million in-process research and development intangible asset was recognized as an expense during the three months ended September 30, 2023, as it had no alternative future use[46][47] Note 4. Other Financial Statement Information Available-for-Sale Securities Fair Value | Category | Sep 30, 2023 Fair Value (in thousands) | Dec 31, 2022 Fair Value (in thousands) | Change (in thousands) | | :------- | :----------------------------------- | :----------------------------------- | :-------------------- | | Money market funds | $296,315 | $163,184 | $133,131 | | Corporate debt securities | $12,324 | $151,030 | $(138,706) | | Government debt securities | $30,981 | $52,889 | $(21,908) | | Asset-backed securities | $2,338 | $6,319 | $(3,981) | | Total available-for-sale securities | $341,958 | $373,422 | $(31,464) | - Gross unrealized losses on available-for-sale securities as of September 30, 2023, are related to market interest rate changes, not credit risk[51] Inventory Breakdown | Category | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :------- | :-------------------------- | :-------------------------- | :-------------------- | | Purchased materials | $35,829 | $34,497 | $1,332 | | Work in progress | $23,245 | $24,650 | $(1,405) | | Finished goods | $21,843 | $22,482 | $(639) | | Total Inventory | $80,917 | $81,629 | $(712) | Property and Equipment, Net | Category | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :------- | :-------------------------- | :-------------------------- | :-------------------- | | Total property and equipment | $378,881 | $358,158 | $20,723 | | Less: accumulated depreciation and amortization | $(93,873) | $(68,830) | $(25,043) | | Property and equipment, net | $285,008 | $289,328 | $(4,320) | Accrued Compensation and Related Benefits | Category | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :------- | :-------------------------- | :-------------------------- | :-------------------- | | Accrued compensation and related benefits | $28,477 | $32,675 | $(4,198) | Accrued Expenses and Other Current Liabilities | Category | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :------- | :-------------------------- | :-------------------------- | :-------------------- | | Accrued expenses and other current liabilities | $36,256 | $59,779 | $(23,523) | Goodwill Balance | Metric | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | End of period | $6,435 | $1,968 | $4,467 | Revenue by Category and Instrument Type | Category | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | Change (3 Months) (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (9 Months) (in thousands) | | :------- | :--------------------------------------- | :--------------------------------------- | :------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------- | | Total instruments revenue | $34,942 | $20,899 | $14,043 | $85,073 | $50,064 | $35,009 | | Total consumables revenue | $114,373 | $108,107 | $6,266 | $339,239 | $303,991 | $35,248 | | Services | $4,329 | $2,066 | $2,263 | $10,436 | $6,122 | $4,314 | | Total revenue | $153,644 | $131,072 | $22,572 | $434,748 | $360,177 | $74,571 | - Spatial instruments revenue significantly increased by 281% for the three months and 616% for the nine months ended September 30, 2023, driven by sales of Xenium instruments[63][110][111] - Chromium instruments revenue decreased by 18% for the three months and 15% for the nine months ended September 30, 2023, due to lower volume and product mix changes[63][110][111] - Total Americas revenue increased by 27% for the three months and 29% for the nine months ended September 30, 2023[63] - Total Asia-Pacific revenue decreased by 12% for the three months and 5% for the nine months ended September 30, 2023, primarily due to a decline in China revenue[63] Note 5. Commitments and Contingencies Operating Lease Liabilities | Metric | Sep 30, 2023 (in thousands) | | :----- | :-------------------------- | | Total lease payments | $123,684 | | Present value of operating lease liabilities | $98,473 | | Operating lease liabilities, current | $10,005 | | Operating lease liabilities, noncurrent | $88,468 | - The company recognized a $2.8 million impairment loss on long-lived assets during the nine months ended September 30, 2023, due to vacating leased office space[66] - The company filed suit against NanoString in the U.S. District Court for the District of Delaware (GeoMx Action and CosMx Action) and in Germany and the UPC, alleging patent infringement[68][71][76][77] - On May 17, 2023, the Munich Regional Court found NanoString's CosMx products infringe the EP928 patent and issued a permanent injunction in Germany[76] - On September 19, 2023, the UPC granted a preliminary injunction against NanoString for the EP782 patent, requiring them to stop selling CosMx instruments and reagents for RNA detection in all 17 UPC member states[79] - The company is also involved in patent infringement lawsuits against Vizgen (MERSCOPE Platform) and Parse Biosciences (Evercode products) in the U.S. District Court for the District of Delaware[81][86] Note 6. Capital Stock Common Stock Outstanding | Class | Shares Outstanding (as of Sep 30, 2023) | | :---- | :-------------------------------------- | | Class A common stock | 104,140,884 | | Class B common stock | 14,056,833 | - 4,610,422 shares of Class B common stock were converted to Class A common stock during the nine months ended September 30, 2023[90] Note 7. Equity Incentive Plans Stock-Based Compensation Expense | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total stock-based compensation expense | $40,235 | $33,514 | $128,032 | $95,874 | - Restricted stock units outstanding as of September 30, 2023, were 5,698,984, with 2,069,494 granted during the nine months ended September 30, 2023[92] - Stock options outstanding as of September 30, 2023, were 6,465,828, with 357,457 granted during the nine months ended September 30, 2023[94] - Market-based performance stock awards (PSAs) were granted in March 2023, subject to stock price thresholds of $72.14, $96.19, and $120.24. None of these thresholds had been met as of September 30, 2023[95][96][98] Note 8. Net Loss Per Share - Potentially dilutive shares of common stock are not included in diluted net loss per share calculations when the company reports net losses, as their effect would be anti-dilutive[44] Potentially Dilutive Common Stock Equivalents | Category | Number of Equivalents (as of Sep 30, 2023) | | :------- | :--------------------------------------- | | Stock options to purchase common stock | 6,465,828 | | Restricted stock units | 5,698,984 | | Shares committed under ESPP | 105,292 | | Total | 12,270,104 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, highlighting Spatial instrument revenue growth, increased net loss, and liquidity Overview - The company's integrated solutions include Chromium and Spatial instruments, proprietary microfluidic chips, slides, reagents, and consumables, bundled with software[105] - Since inception in 2012, the company has incurred net losses annually, with an accumulated deficit of $1.2 billion as of September 30, 2023[107] - The company expects continued significant expenses and operating losses in the near term due to investments in R&D, technology scaling, IP protection, potential acquisitions, and infrastructure[107][108] Results of Operations Key Financial Highlights | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | YoY Change (%) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | YoY Change (%) | | :----- | :--------------------------------------- | :--------------------------------------- | :------------- | :--------------------------------------- | :--------------------------------------- | :------------- | | Revenue | $153,644 | $131,072 | 17% | $434,748 | $360,177 | 21% | | Gross profit | $95,529 | $100,695 | (5)% | $293,531 | $276,618 | 6% | | Gross margin | 62% | 77% | (15) pp | 68% | 77% | (9) pp | | Total operating expenses | $190,324 | $140,691 | 35% | $503,672 | $421,466 | 20% | | Net loss | $(92,986) | $(41,914) | 122% | $(206,147) | $(148,785) | 39% | Revenue Revenue by Product Category | Category | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | Change ($) (in thousands) | Change (%) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change ($) (in thousands) | Change (%) | | :------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :--------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :--------- | | Total instruments revenue | $34,942 | $20,899 | $14,043 | 67% | $85,073 | $50,064 | $35,009 | 70% | | Spatial instruments | $22,711 | $5,963 | $16,748 | 281% | $48,357 | $6,755 | $41,602 | 616% | | Chromium instruments | $12,231 | $14,936 | $(2,705) | (18)% | $36,716 | $43,309 | $(6,593) | (15)% | | Total consumables revenue | $114,373 | $108,107 | $6,266 | 6% | $339,239 | $303,991 | $35,248 | 12% | | Spatial consumables | $14,091 | $10,239 | $3,852 | 38% | $37,067 | $23,796 | $13,271 | 56% | | Chromium consumables | $100,282 | $97,868 | $2,414 | 2% | $302,172 | $280,195 | $21,977 | 8% | | Services | $4,329 | $2,066 | $2,263 | 110% | $10,436 | $6,122 | $4,314 | 70% | - The sales of Xenium instruments contributed to the significant increase in Spatial instruments revenue, as there were no Xenium instruments sold in the comparable 2022 periods[110][111] Cost of revenue, gross profit and gross margin Cost of Revenue and Gross Margin Analysis | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | Change ($) (in thousands) | Change (%) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change ($) (in thousands) | Change (%) | | :----- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :--------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :--------- | | Cost of revenue | $58,115 | $30,377 | $27,738 | 91% | $141,217 | $83,559 | $57,658 | 69% | | Gross profit | $95,529 | $100,695 | $(5,166) | (5)% | $293,531 | $276,618 | $16,913 | 6% | | Gross margin | 62% | 77% | (15) pp | - | 68% | 77% | (9) pp | - | - The increase in cost of revenue was primarily driven by higher manufacturing costs ($24.8 million for three months, $49.8 million for nine months) due to increased sales and higher costs of newly introduced products, particularly the Xenium instrument which currently has a significantly lower margin[112][113][114] - Higher warranty charges ($1.8 million for three months, $3.7 million for nine months) and inventory write-downs ($1.7 million for three months, $4.5 million for nine months) also contributed to the increase in cost of revenue[112][113] - Gross margin is expected to continue trending lower due to changes in product mix with newly introduced products, inflationary impacts, and increased supply chain costs[114] Operating expenses Operating Expenses Summary | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | Change ($) (in thousands) | Change (%) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change ($) (in thousands) | Change (%) | | :----- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :--------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :--------- | | Research and development | $66,507 | $67,290 | $(783) | (1)% | $205,065 | $202,053 | $3,012 | 1% | | In-process research and development | $41,402 | $— | $41,402 | 100% | $41,402 | $— | $41,402 | 100% | | Selling, general and administrative | $82,415 | $73,401 | $9,014 | 12% | $257,205 | $219,413 | $37,792 | 17% | | Total operating expenses | $190,324 | $140,691 | $49,633 | 35% | $503,672 | $421,466 | $82,206 | 20% | - The $41.4 million in-process research and development expense in Q3 2023 was related to an asset acquisition where the intangible asset had no alternative future use[118] - Selling, general and administrative expenses increased due to higher outside legal expenses ($4.0 million for three months, $12.3 million for nine months) and increased personnel expenses, including stock-based compensation[119][120] Other income (expense), net Other Income (Expense), Net | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | Change ($) (in thousands) | Change (%) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change ($) (in thousands) | Change (%) | | :----- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :--------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :--------- | | Interest income | $4,300 | $2,025 | $2,275 | 112% | $12,269 | $3,832 | $8,437 | 220% | | Other expense, net | $(1,248) | $(1,950) | $702 | (36)% | $(4,268) | $(4,193) | $(75) | 2% | | Total other income (expense) | $3,051 | $(39) | $3,090 | (7923)% | $7,976 | $(712) | $8,688 | (1220)% | - The significant increase in interest income was due to higher interest rates on cash equivalents and marketable securities[124] - Other expense, net, decreased for the three-month period due to lower net realized and unrealized losses from foreign currency fluctuations[125] Provision for Income Taxes Provision for Income Taxes | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Provision for income taxes | $1,242 | $1,879 | $3,982 | $3,225 | - The provision for income taxes primarily consists of foreign taxes, with domestic deferred tax assets fully offset by a valuation allowance[126] Liquidity and Capital Resources - As of September 30, 2023, the company held $356.9 million in cash, cash equivalents, and marketable securities[127] - The company has an accumulated deficit of $1.2 billion and has generated negative cumulative cash flows from operations since inception[127] - Anticipated capital expenditures for the next 12 months are between $20 million and $25 million, primarily for manufacturing and R&D equipment[128] - The company expects existing cash and cash generated from sales to be sufficient for the next 12 months, but may pursue additional funding for growth or acquisitions[132][133] Sources of liquidity - Primary funding sources include sales of convertible preferred stock and common stock, product revenue, and indebtedness[135] - The company raised $410.8 million from its 2019 IPO and $482.3 million from a 2020 public offering of Class A common stock[135] Operating activities Net Cash Used in Operating Activities | Metric | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash used in operating activities | $(40,955) | $(47,329) | $6,374 | - The net cash used in operating activities was primarily due to a net loss of $206.1 million, partially offset by $128.0 million in stock-based compensation expense and $25.8 million in depreciation and amortization[137] - Changes in operating assets and liabilities resulted in a net cash inflow of $0.3 million in 2023, compared to a net outflow of $20.1 million in 2022[137][138] Investing activities Net Cash Provided by (Used in) Investing Activities | Metric | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash provided by (used in) investing activities | $120,394 | $(317,715) | $438,109 | - Proceeds from sales and maturities of marketable securities totaled $166.4 million in 2023, significantly higher than $58.6 million in 2022[139][140] - Purchases of property and equipment decreased from $91.9 million in 2022 to $45.2 million in 2023[139][140] Financing activities Net Cash Provided by Financing Activities | Metric | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash provided by financing activities | $8,056 | $10,816 | $(2,760) | - Proceeds from common stock issuance from stock options and ESPP purchases were $13.9 million in 2023, compared to $16.2 million in 2022[141][142] Critical Accounting Estimates - No significant changes in critical accounting policies and estimates occurred during the nine months ended September 30, 2023[144] Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk exposure, including interest rates and foreign currency, remains materially unchanged since December 31, 2022 - No material changes to market risk exposure (interest rates, foreign currency) since December 31, 2022[145] Item 4. Controls and Procedures Disclosure controls and procedures were effective, with no material changes to internal controls reported for the quarter Evaluation of Disclosure Controls and Procedures - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of September 30, 2023[146] Changes in Internal Control over Financial Reporting - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023[147] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 5 of the unaudited condensed consolidated financial statements for detailed information regarding legal proceedings - Legal proceedings information is detailed in Note 5 to the financial statements[149] Item 1A. Risk Factors The company reports no material changes to its risk factors since the disclosures in its Annual Report - No material changes to risk factors since the Annual Report[150] Item 5. Other Information CEO Serge Saxonov adopted a Rule 10b5-1 trading arrangement for Class A common stock, expiring December 31, 2024 - CEO Serge Saxonov adopted a Rule 10b5-1 trading arrangement on September 13, 2023, to sell up to 152,000 shares plus 40,000 carryover shares, expiring December 31, 2024[151] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and Inline XBRL documents - The report includes certifications from the Principal Executive Officer and Principal Financial and Accounting Officer (Exhibits 31.1, 31.2, 32.1, 32.2) and Inline XBRL documents[153] Signatures The report is formally signed by the Chief Executive Officer and Chief Financial Officer on November 2, 2023 - The report was signed by Serge Saxonov (CEO) and Justin J. McAnear (CFO) on November 2, 2023[156]